MoneyTalks: Here are 3 stocks leveraged to the biggest thematic in the world right now – energy scarcity
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Money Talks is Stockhead’s regular drill down into what stocks investors are looking at right now. We’ll tap our extensive list of experts to hear what’s hot, their top picks, and what they’re looking out for.
Today we hear from Perennial Value Management portfolio manager and resources analyst Sam Berridge.
The biggest thematic in the world right now is energy scarcity, which underlies other large investor themes like inflation and decarbonisation.
“Right now, there are energy shortages in Europe, Asia and India. It looks increasingly likely shortages will also be felt in Australia and the US in the near to midterm,” Berridge said.
“To give some granularity on this and focusing closer to home, last week Origin announced the closure of Australia’s largest power station, Eraring, in 2025 – seven years earlier than planned.
“Eraring generates roughly 20% of NSW power supply and will not be easily replaced; suggestions that a 700MW battery can fill the void left by a 2880MW power plant are ridiculous.”
One issue with renewables revolves around the grids’ ability to absorb more intermittent supply, Berridge said.
“There are already solar projects which are periodically limited to supplying as little as 70% of power generated, as the grid can’t handle it,” he said.
“Renewable projects are low returning assets and usually carry a lot of debt.
“So, to have 30% of your revenue removed is going to be an issue for current and future projects.”
On the other hand, there is a structural gas shortage on the east coast and it looks like – according to Berridge – “the domestic gas price will move towards the LNG import price, then stay there for the foreseeable future.”
“This means eastern Australia will eventually become exposed to the same gas prices being paid in Europe and Asia,” he said.
Berridge believes this example is a microcosm of the problem being faced the world over as we try to decarbonise the global economy.
Then comes an inflation problem as the ramifications of higher energy prices are broad-based, and not easily resolved.
“Primarily due to higher gas prices, the UK is experiencing acute price inflation for a broad spectrum of goods. Further, consumers will see their energy bill rise by a minimum of £693 ($1307) per year in 2022,” he said.
“These price rises are disproportionately impacting lower-income households and I don’t think the prospect of civil unrest can be ruled out.
“Back in Australia, petrol prices are already touching $2/L and I think there’s a real chance they could exceed $2.50/L by year end, as OPEC+ struggles to meet surging post-COVID demand and the rest of the oil industry remains subject to capital constraints, thanks to decarbonisation initiatives by the investment and banking industries.”
Elevated energy prices will accelerate the transition to electric vehicles, but again inflation is being felt here, Berridge added.
“Due to surging demand, elevated lithium, nickel, and copper prices have ended the trend lower in battery prices and lithium battery prices are now increasing.
“So that’s a high-level overview of a big global problem, but it’s an issue I think about daily and sculpt our investment portfolios around.”
Berridge believes the following stocks are leveraged to this energy scarcity thematic with Perennial’s preferred lithium stock being Green Technology Metals.
“We’ve been involved with GT1 since its IPO (November 2021) and it is still one of our largest holdings,” he said.
“GT1 has three rigs turning on its Seymour and Aubry projects in Canada and is paying for expedited assay turnaround so news flow should be plentiful over coming months.
“Historical and recent drill intersections, plus rocks chips point to a large, high-grade lithium resource being announced at the end of the June quarter.”
Development hurdles look reasonable, with access to hydro power in the region indicating zero carbon production is possible, he said.
Circling back to the challenges faced by the Australian grid mentioned above, Berridge reckons GenusPlus is highly leveraged to an immanent increase in grid-spend.
“GNP is a high-voltage power line construction and maintenance business, which has seen revenue grow at a CAGR of 198% over the past three years, driven by demand for expanded power networks in the Pilbara as the major miners see to decarbonise their operations,” he said.
“The company has since expanded to the east coast, picking up a key infrastructure project with HyperOne, and is well placed for a what we see as a substantial pipeline of east coast power infrastructure work over the years ahead.”
A metal which feeds into both the battery and power infrastructure themes is copper, and for copper exposure Berridge picks AIC Mines.
“The company recently acquired the Eloise copper mine in Queensland and had a great first quarter of production, generating $11 million in free cash flow from just two months of ownership,” he said.
“Funds are being re-invested into extending mine life, which we consider a likely outcome.”
The views, information, or opinions expressed in the interviews in this article are solely those of the interviewee and do not represent the views of Stockhead.
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