MoneyTalks: It’s getting harder to find good ASX resources stocks but here’s one fundie’s picks
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MoneyTalks is Stockhead’s regular recap of the ASX stocks and sectors that fund managers and analysts are looking at right now and in this edition we’re looking at resources picks.
Today we hear from Joshua Baker, portfolio manager at Capital H Management.
Baker is bullish on commodities overall but thinks it’s getting harder to find “good value commodities” and warns when looking for ASX resources picks you have to take a longer term view.
“If you want to get bigger returns without necessarily taking over-sized risks you have to start going down the value chain, maybe small producers that can bring assets, then find guys with PFS [or] DFS that are shovel ready, all the way down to exploration,” he said.
“We don’t do pure-play explorers. Normally we look for [stocks at the stage] when you’ve found something – how big is it and what’s the [payoff]?”
Baker also warns geopolitical risk cannot be ignored by investors. He pointed to rising popularism in the politics of Peru and Chile as something which might have ramifications for broader markets.
“Those two countries account for over a quarter of the world’s copper supplies and if both get up they kill they supply side,” he said.
“There’s geopolitical risk in a lot of these commodities at the moment, particularly with environmental payments.”
Talisman is an iron ore play that makes money by developing projects and selling them off – sometimes returning capital to their shareholders – eerily similar to Chalice (ASX:CHN) before it stumbled across Julimar.
And Baker names Talisman as an ASX resources pick because of one particular product it sold for over $40 million million a decade ago – the Wonmunna Iron Ore Project.
While the project has changed hands a few times, Talisman has been receiving a 1 per cent royalty ever since. Wonmunna is currently in the hands of Mineral Resources (ASX:MIN) which began production in March, expecting an initial run rate of 5 million tonnes per annum.
Baker says if current iron ore prices hold up, Talisman could get $9 million per annum, and potentially more than that if either the run rate or iron ore prices increase further. And this will help fund exploration activities at Talisman’s NSW gold-copper projects.
“Iron ore can’t stop, won’t stop no matter what the Chinese try to do at the moment,” he said.
“I look at sum of the parts [and at the] current price of 25 cents we haven’t seen the full value reflected based on weighted sum of various scenarios.
“You’re getting paid for the market to wait to price the rate accordingly and get paid for its two tenements in NSW for copper and gold.
“[There are] some good indications they’re on the right path and bringing in $9 million for a $4 million project exploration budget.”
Lithium plays are exciting investors but North American companies such as Jindalee (whose McDermitt project lies in Oregon) are doing particularly well – ever since Piedmont Lithium (ASX:PLL) won a contract with Tesla.
But Baker thinks Jindalee stands out as an ASX resources pick – even amidst lithium stocks – because McDermitt has a lithium clay project and because it is utilising attrition scrubbing as an exploration technique.
Scrubbing, which is far more common in mineral sands processing, cleans the clay and removes larger sized carbonate and analcime minerals (which don’t contain lithium and are acid consuming) from the clay ore prior to going into the leaching circuit
“It upgrades the ore by 60 per cent and you remove 20-30 per cent of acid consuming minerals,” Baker said.
“So that’s probably the key attraction, the scrubbing…turns a reasonable asset into a true, low cost tier asset.
“They’re a company that’s only raised capital three times, [there’s the] option to sell it early rather than build and it comes down to the right price at the right time. But the current size and resource could be multibillion dollar NPV dependant on what lithium price you use.
“Those prices could be high relative to the current market cap that currently sits under $100 million.”
While America is hailed as an electric vehicle leader by being the home of Tesla, Baker argues the US hasn’t sorted out its supply chain for EVs in the same way that China and Europe have.
“It’s going to be integral for them to secure that and the only way you can do this is clay deposits,” he said.
Rounding out Capital H’s ASX resources picks is copper play Caravel which has held its current project (named after the company) since 2013 and has a resource of 662Mt grading 0.28 per cent copper for 1.86Mt.
While 0.28 per cent may seem a low grade for copper, Baker thinks it’s “not too bad” for a porphyry discovery.
While the company has $17 million cash (topped up with a $7.5 million capital raising earlier this month), moderate capex and a PFS due in early 2022, Baker is looking even further ahead.
“My thinking is it gets better or someone will buy it out eventually and that’s common with these projects in WA,” he said.
“The management have already been open to the idea that you find a company to help you out, come in for 10 to 20 per cent of the equity, take a fair chunk of off-take and get equity funding, that’s a way they can get into production.”
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