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Trump's brashness on trade belies US dependence on global mines

Nexstar Buys WGN For A Song; Divestiture Of WGN, Stakes In Food Channels Likely

2018 US Insurtech Report

Ondeck Now Open To Exploring Deals, CEO Says

Broadband Only Homes Log Record Gains In Q3


Trump's brashness on trade belies US dependence on global mines

SNL Image

Pro-China demonstrators display a placard with the Chinese words meaning "Crazy man step down" while protesting President Donald Trump's trade policies Oct. 1 outside the U.S. consulate in Hong Kong.
Source: Associated Press

This is part one of a two-part series on critical minerals. This installment looks at the United States' reliance on other countries for materials that are scarcely mined domestically, while part two examines possible solutions.

Where other eras of human civilization may have been primarily defined by one element — think the Bronze Age or the Copper Age — today's technology-driven economy depends on a delicate balance of global trade of nearly all of the elements on the periodic table.

Because those elements are not found in abundance everywhere and are obtainable more cheaply in some places than others, rising trade tensions between an import-dependent U.S. and its global trading partners pose a potential threat to national security and supply chains throughout the U.S. economy.

The U.S. is highly reliant on other countries for materials not mined domestically, many of which are vital to technology, defense, construction and other sectors.

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The U.S. relied on other countries for more than half of its consumption of 50 nonfuel mineral commodities in 2017, the U.S. Department of the Interior's U.S. Geological Survey reported in a 2018 publication. The country relied 100% on imports for 21 of those minerals. This reliance on other countries has the attention of the Pentagon, which is reportedly preparing a report that says the nation is vulnerable because of its dependence on imported minerals.

U.S. reliance on other countries for critical minerals has increased over the past several decades: In 1978, the U.S. relied 100% on imports for just seven mineral commodities and was only 50% reliant on about 25 mineral commodities, according to the National Mining Association.

Net importation of a material may not necessarily be a bad thing, particularly if it provides cheaper manufacturing inputs for higher-value products, but it can present a problem if geopolitical conflicts interrupt a supply chain with limited alternatives. Since taking office, President Donald Trump and his administration have made aggressive moves, at times aggravating important trading partners, including top exporters of critical materials such as Canada and China.

While recent trade spats between the U.S. and Canada and Mexico have shown signs of cooling off, dealings with several countries holding the power to limit U.S. access to important materials, including China, remain tense.

China has continued to respond to U.S. trade actions with rapid-fire escalation of tariffs of its own. In its recently revised list of $200 billion in tariffs, the U.S. hinted at challenges the country faces in limiting goods from one of its top trading partners when it spared rare earth minerals — a material in which China dominates global production.

"It seems to me a pretty obvious threat or lever that other countries could use," said William Shughart, an economics professor at Utah State University and research director at the Independent Institute, a nonpartisan think tank. "If you want to put us over a barrel, [China] could do so very easily by threatening to withhold shipments of the stuff we're buying from them."

A growing reliance

The path leading to America's reliance on other countries for mined materials has been complicated and systemic, said Joe Balash, assistant secretary for land and minerals management at the Interior Department. He pins the blame on decades of policies reducing the availability of public lands. The Trump administration is reviewing public land use plans, but Balash said that will only address some of the country's import-reliance problems as a fast-moving economy outpaces slow-moving shifts in policy.

"There are some commodities on the list that have only become important in the last few years," Balash said. "The speed with which technology is moving makes a very slow and deliberate process (land use planning, mineral exploration, and mine plan permitting) seem out of step with what the economy demands."

While manufacturing and mining became progressively more expensive in the U.S with an increase in regulations and wages over the past few decades, companies from places like China wedged themselves into the supply chains of critical minerals that would later become invaluable economic building blocks. "The Middle East has its oil, China has rare earth," Deng Xiaoping, a prominent Chinese politician, reportedly said in the early 1990s.

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"It's a misunderstood technical, financial and policy matter by the United States," said Corby Anderson, a professor at the Colorado School of Mines. Chinese industry can hold prices of vital commodities lower, he said, thanks to a combination of abundant capacity and state backing.

"Making money is important," he said. "But maintaining market share can be equally important, even if you lose money, to drive your competition out."

Meanwhile, U.S. policy can be a drag on development.

"While the U.S. is rich in mineral resources, we lack the common-sense policy required to make best use of them," Ashley Burke, a spokeswoman for the National Mining Association, told S&P Global Market Intelligence. The economic implications, Burke stressed, are real. She said that in 1993, the U.S. attracted 20% of global mining exploration dollars, a figure that eroded to just 7% as Canada and Australia continue to attract more mining investment.

One of the greatest obstacles, Burke said, is much longer permitting times that can stretch out over a decade instead of two to three years in places like Canada or Australia.

"The longer the wait, the more the value of the investment is eroded, even to the extent that the project ultimately becomes an unviable investment," Burke said. "Even a large high-grade deposit will remain unmined if the balance between costs, revenue and timetable [is] unfavorable."

In March 2017 testimony to the U.S. Congress, Rio Tinto Aluminium Ltd. CEO Alf Barrios said a recent USGS finding that the U.S. was highly import reliant for nearly "half of the naturally occurring elements on the periodic table" should set off alarm bells in the White House and Congress.

"This drift away from greater self-sufficiency for the basic building blocks of our economy compromises our economic and national security and ignores North America's rich reserves of metals and minerals that are the front end of the manufacturing supply chain," Barrios told the U.S. Senate Committee on Energy and Natural Resources.

Those building blocks are used across the economic spectrum. For example, in 2017 the U.S. imported about 92% of the potash used in agricultural fertilizer products, primarily from Canada, Russia, Chile and Israel. While the administration is supporting research seeking ways to extract rare earths from coal, a commodity the U.S. exports in abundance, the U.S. remains 100% reliant on imports of rare earth materials, vital feedstocks for the technology sector.

"Rare earths make supercomputers work. They make drones fly. They're involved in health services," Jim McKenzie, president and CEO of rare earths explorer Ucore Rare Metals Inc., said in an interview. "You find them right across the technological spectrum, and without them you basically are going to be dead in the water in terms of competing internationally in the technology arena."

Threats to national security

As an example, about 47% of imported beryllium consumed in the U.S. in 2017 came from Kazakhstan, and there is essentially no sustainable source of the mineral outside the U.S., said John McCloskey, vice president of global communications for Ohio-based Materion Corp., which operates the nation's only beryllium mine in Utah. Other countries have explored options for the commercial mining of beryllium, but volumes are not near sufficient for global demand.

"When it comes to national security, the implications of this can be troubling," McCloskey said of a shift toward U.S. import reliance. "In terms of specialty materials with relatively small markets, it is not hard to see how a nation-state can disrupt or distort the global market relatively easily. Reliance on a small number of overseas suppliers can then become risky very quickly, either because of affirmatively bad actions by a foreign actor or due to inadvertent changes in global availability or supply routes."

SNL Image

Beryllium is a critical mineral used in consumer electronics, industrial components, automotive electronics, defense applications, telecommunications infrastructure, energy applications and medical applications. Without the material's unique properties, many military, industrial and consumer electronic systems would either not work or be much larger and heavier, McCloskey said.

The U.S. saw about 200 tonnes of apparent consumption of the material in 2017, with about 49 tonnes of the material being imported in the period. While the U.S. is not as reliant on imports for beryllium as it is for other materials, a slow permitting process at home and few options elsewhere is a similar story told across the spectrum of critical minerals essential to most areas of the U.S. economy.

Recognizing a potential national security threat, the Pentagon is reportedly preparing a report that concludes the U.S. is too dependent on vital materials. Officials familiar with the forthcoming report have said it will recommend a guaranteed profit for those mining niche materials critical to developing U.S. weaponry, Foreign Policy recently reported.

Greg Gregory, president of Matrion subsidiary Materion Natural Resources, told S&P Global Market Intelligence that the country needs a "whole-of-government approach" across department and agency lines to ensure the security of supply of critical minerals and address concerns about mining on public lands and long permitting delays.

"First, mining is a heavily regulated industry, and rightfully so. Our facility is regulated by over half a dozen state and federal agencies," Gregory said. "However, some federal agencies with little expertise in mining seek to promulgate new regulations that do nothing to increase safety or improve the environment, but only serve to increase the cost of mining in the United States and make it difficult to compete with foreign competitors, even in countries such as Canada and Australia."


Technology, Media & Telecom
Nexstar Buys WGN For A Song; Divestiture Of WGN, Stakes In Food Channels Likely

Dec. 10 2018 — Walt Disney Co.'s pending acquisition of much of 21st Century Fox Inc. certainly raised the bar for cable network valuations — at 15.4x cash flow — and the divestiture of the regional sports networks may see another double-digit-multiple transaction with Amazon.com Inc. in the mix of buyers. Another deal, Nexstar Media Group Inc.'s pending acquisition of Tribune Media Co., sees stakes in three cable nets going to the buyer for single-digit multiples (6.9x).

The deal follows the collapse of Sinclair Broadcast Group Inc.'s deal to buy the company, which is now being litigated. We think that Nexstar is getting quite a deal on the cable network assets and will likely flip them for a quick profit.

When Discovery Inc. agreed to buy Scripps Networks Interactive Inc. in July 2017, the domestic cable networks were valued at $10.14 billion, or 10.5x cash flow, with Food Network (US) valued at $4.5 billion (Scripps owned 68.7%) and Cooking Channel (US) (also at 68.7%) valued at $525 million.

In the current transaction, the valuations come to $3.47 billion and $323 million, respectively. Thus, if Nexstar can get Discovery Communications to pay at least what it paid in the Scripps transaction, Nexstar may make a quick profit. Granted, minority interests typically trade at a discount. Scripps Networks Interactive, however, has tried for years to cut a deal to buy out the minority stake and it may be willing to strike a deal at a higher price to put this issue behind it.

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Insurance
2018 US Insurtech Report

Highlights

S&P Global Market Intelligence’s 2018 US Insurtech Market Report projects that U.S. private auto insurance premiums written via the direct-to-consumer channel will exceed $90 billion by 2022. The report also examines startup funding trends and identifies other business lines that could be ripe for insurtech disruption.

Nov. 30 2018 — U.S. insurance technology startups are numerous and still very much in their early years. As is common with an emerging fintech segment, investor and public interest in the space is high despite the risky nature of startup investing. The insurtech space had a recent gauge of public investor interest with the IPO of lead aggregator EverQuote. While the IPO priced above its expected range, the stock’s performance since then has been lackluster, a disappointing sign for others looking to go public. But many startups are still many years away from that goal, and there might be more investor appetite for different business models. Unlike Netflix and other companies that have caused wholesale disruption in various industries, many insurtech startups are working with incumbents rather than trying to replace them. Incumbents are avid investors in insurtech companies, and the digital agency model relies heavily, for now at least, on partnerships with established underwriters. Of the different insurtech business models, digital agencies and underwriters continue to attract the most funding and therefore form the focus of our report. Though many facets of their business model are not revolutionary, they have added meaningful innovation in some key areas. Certain business lines appear more ripe for innovation than others. In private auto, for instance, the direct distribution model already has a firm foothold and therefore seems less vulnerable to disruption by startups. S&P Global Market Intelligence projects that premiums written in the direct response channel will exceed $90 billion by 2022 and that they will account for more than 30% of overall U.S. auto premiums. But if the direct model can be applied to other lines, such as small business insurance or life insurance, that might produce a more dramatic challenger to the incumbent writers of those lines.

Early days

Interest in the U.S. insurtech space has spiked in recent years, fed by a large crop of startup companies. It is too early to assess how successful most insurtech startups and their investors will be as many companies are only a few years old at this point. In S&P Global Market Intelligence’s coverage universe, the median age of U.S. insurtech companies — based on the year they were founded — is seven years. But the recent spate of startups is even younger than that. The years 2015 and 2016 were a particularly bountiful time; companies founded in those two years alone account for roughly 22% of the coverage universe.

Appetite for disruption

One of the textbook examples of industry disruption is Netflix, which drastically reshaped the distribution of entertainment, first through its DVD mail service and again through its on-demand streaming service. These changes brought about the demise of in-store video rental giant Blockbuster, which reportedly had the chance to buy Netflix for only $50 million in 2000.

We do not foresee the same kind of seismic changes coming for much of the U.S. insurance industry, since the fundamental distribution model is not changing. The startups covered in this report — both digital agents and fullstack companies — are proponents of the direct distribution model, selling policies directly to consumers via their websites and/or mobile apps. But this is far from a novel concept. Areas of the insurance industry have embraced online, direct-to-consumer distribution for some time.

S&P Global Market Intelligence client? Click here to login and read the full 2018 US Insurtech Market Report

The projections reflect various assumptions regarding premiums, losses and expenses. They are a product of a sum-of-the-parts analysis of individual business lines that is informed by third-party macroeconomic forecasts, historical trends and recent market observations that include first-quarter 2017 statutory results and anecdotal commentary about market conditions. Projected results are displayed on a total-filed basis and are not intended for application to individual states, regions or companies. S&P Global Market Intelligence reserves the right to update the projections at any time for any reason.

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Ondeck Now Open To Exploring Deals, CEO Says

Highlights

OnDeck has never done an acquisition, but M&A is a possibility now that the company is generating cash, Chairman and CEO Noah Breslow said.

Breslow expects there to be consolidation across online lending companies in the near future.

OnDeck plans to launch a new product line, such as a business credit card or an equipment financing product, by year-end.

Nov. 30 2018 — Noah Breslow has been at the helm of On Deck Capital Inc. since June 2012, overseeing the company's initial public offering and several profitable quarters. The online lender has originated more than $10 billion in small-business loans and is one of the largest players in the industry.

In addition to originating its own loans, OnDeck recently launched ODX, a new subsidiary focused on a platform-as-a-service product for banks. OnDeck has operated that sort of white-label partnership with JPMorgan Chase & Co. for several years and will launchoperations with PNC Financial Services Group Inc. in 2019.

Now, the lender is open to doing deals, Breslow said. He sat down with S&P Global Market Intelligence in Las Vegas to talk about his company's future product plans and the broader online lending marketplace.

The following is an edited transcript of that conversation.

OnDeck CEO Noah Breslow
Source: OnDeck

S&P Global Market Intelligence: How do you view the current state of the online lending marketplace?

Noah Breslow: What you're seeing in that market is a bit of survival of the fittest. Many smaller companies are probably going to be sold in the next couple of years.

The advantages in the business go to those with scale: You can raise capital on the best terms, you collect the most data, so you can make the best decisions when you build your models, and you can reach more small-business owners more efficiently.

That being said, do you foresee being an acquirer?

We're open to it. We haven't acquired a company in 11 years of doing business. One of the advantages of now being profitable and generating cash is we can look around the market.

But we're designing our core business model so we don't need to acquire to hit our targets. Anything we do in the M&A sphere will be additive, and it will not be aggressive M&A. It's going to be reasonable bets to have a nice return or nice synergies, if we do it.

Is OnDeck considering starting other products outside of small business lending?

Not at this time. We focus on trying to be the best small-business lender in the world, but that can mean a lot of different products over time.

Today we have a term loan and a line of credit product. We've talked about four other products that our customers use: equipment financing, invoice factoring, Small Business Administration lending and small-business credit cards. Those are all fair game for us over the next couple of years.

We're on track to announce our third major product by the end of the year. One of those four will probably be picked.

Why is OnDeck focusing on small business lending rather than other offerings?

It's where underwriting is not commoditized. Student lending and personal lending are based on FICO. You can go to 10 different websites and get identical products.

In small business lending, the intellectual property around the OnDeck score is unique.

I like being able to differentiate in that way. It creates a sustainable advantage for our business, whereas if we were just using FICO to underwrite, anyone can buy that and get into the market.

OnDeck's white-label product lets banks use its technology to streamline their own lending process. In those partnerships, do you face regulatory restrictions with the use of alternative data in underwriting models?

When we're partnering with banks, it's critical that the bank has a lot of control over the credit model and the data being used for decisioning.

The model we use with JPMorgan Chase was jointly developed between OnDeck and Chase, so obviously Chase was very comfortable data. The model we're using with PNC is more of PNC's design, and we're advising on its creation. In both cases, we're using data that's right down the middle of the fairway — business credit, business cash flow and evaluating the business owner — but nothing too esoteric.

In our own business at OnDeck, we can use more alternate data because we don't have the same modeled governance that a bank might have.

Are you using machine learning to synthesize data sources and create new models based on alternative data?

Some players out there have tried to go purely digital and almost let the computer decide how to make the decision. We don't believe in that.

We have a hybrid model, where people with a lot of commercial underwriting experience are working in concert with advanced modeling techniques to get the result.

OnDeck's charge-off rates have declined year over year in 2018. Is there correlation between these lower rates and your updated models using more alternative data?

Our credit models have improved over the last year, and alternative data definitely contributes.

Many of our improvements in the last year have been structural or operational. I view the modeling improvements as even more upside potential from here.

We noticed after we loaned our first billion dollars that our credit models got a step-function better. Now, with $10 billion under our belts, it's again happening. We can do a lot of data-driven decision-making about who we approve and who we decline on many years of history now.

It starts to become more powerful. That's why you see these scaled-up companies like American Express or Discover Financial or Capital One. They're reaping the benefits of decades of lending, and hopefully we'll be in the same place.

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Technology, Media & Telecom
Broadband Only Homes Log Record Gains In Q3

Highlights

23% of wireline broadband households did not subscribe to traditional multichannel in the third quarter.

Nov. 29 2018 — The segment of U.S. broadband households not subscribing to traditional multichannel soared in the third quarter, with its ranks swelling sequentially by 1.2 million. This is the household subset's largest quarterly gain since we began tracking the metric.

Kagan estimates 23% of broadband households serviced by either cable or telco did not subscribe to legacy multichannel at the end of the third quarter, up 8.5 percentage points in the last three years.

The streaming plebiscite is reverberating virtually through the entire media and telecommunications universe, as underscored by the following select year-to-date, as of Sept. 30, domestic metrics:

  • Traditional multichannel subscribers, - 2.8 million, including a 1.1 million drop in Q3 alone.
  • Virtual multichannel customers, +2.1 million.
  • Wireline broadband subscriptions, +2.0 million.
  • Netflix Inc. paid subscribers, +4.1 million.

The feedback loop that has led to the streaming revolution is now spinning full speed, compelling venerable media and telecommunications household names such as AT&T, Comcast and Walt Disney to embrace, or at least take steps toward, over-the-top video.

With Disney's direct-to-consumer service slated for a launch in 2019, talks of a Netflix-competitorrollout by AT&T the same year and the rumored Comcast streaming device potentially not far behind, our year-ahead segment forecast could prove quite conservative in about 13 months.

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Top US ISPs Expand Gigabit Internet Availability To 49 States

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5-Year Virtual Multichannel Revenue Forecast Underscores Segment's Opportunities

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