MoneyTalks: Supply shortages, EV demand and the world’s green-energy transition keeps resources burning
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MoneyTalks 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 VP Capital portfolio manager Tom Lambeth.
Lambeth says his eyes are fixed on the resources sector, where particularly in Australia, tailwinds are aplenty with supply shortages (like oil, coal, nickel, copper, graphite, and lithium) driven by the adoption of electric vehicles and the battery materials required to facilitate the transition (like lithium, graphite, nickel, and copper).
“We think that higher commodity prices could persist for some time,” Lambeth says.
“Australia, because of the dollar, can sometimes benefit from a risk off environment (falling A$) but higher commodity prices so there’s a scenario where an Australian based company with A$ costs but US$ revenue does quite well,” he said.
Although the trends are esoteric for each commodity, Lambeth thinks it’s worth pointing out two long term macro trends.
“The first is monetary inflation (in the Milton Friedman sense) will eventually drive price inflation (CPI),” he says. “Whether that’s now, or in coming years as economies recover post pandemic.”
“Given the political dynamic, governments are likely to keep debt high, and central banks, while jawboning inflation down with higher rates rhetoric are unlikely to be able to raise interest rates over the medium term enough to offset the expansion in the money supply.
“It therefore seems more likely than not that the valve will be higher prices, including high commodity prices.”
Companies operationally leveraged to this dynamic should prove to be sensible investments, Lambeth explained.
“Whether that’s in the gold space (as it was in the 1970s), or more broadly into bulks and other industrial metals.”
The second is the changes in the energy supply chain, most notably the transition from traditional fossil fuels into green energy.
“We hold two views here – firstly, we don’t view this bet as one way,” he said.
“It’s likely to have peaks and troughs, and there will be opportunities to own out of favour and sentiment stocks, like oil & gas and coal equities.
“As a direct example we are seeing some of these companies trade on comical valuations like 1x earnings (at spot commodity prices).
“It’s difficult to transition a supply change quickly, and because of this, we think there’s always an element of cyclicality in investor psychology, particularly short term.”
That said, Lambeth reckons investing in battery minerals, which will power the green energy transition, is attractive (it’s all a matter of price and timing).
“Right now, commodity prices for some of these battery inputs such as lithium, nickel, copper are at all-time highs, so there presents an opportunity to look at equities in this space which haven’t yet ‘caught up’,” he said.
This event has added uncertainty to the world and has driven volatility in equity markets, Lambeth added.
“The resources sector has been a good hedge to this risk as Russia supplies much of the world with raw materials; oil & gas in particular.
“We think the markets are pricing in longer term sanctions for Russia which would mean further dislocation of supply chains and higher price inflation for commodities short to medium term.”
A vertically integrated ore mining and pig iron producer with scale.
The company in recent times has been busy building scale by acquisition having bolted on the Angel Nickel and Oracle Nickel projects, with ambitions now to become one of the top 10 nickel producers globally.
“We like it because of its high margin production, and low valuation multiple (we estimate 4x EBITDA pro-forma for acquisitions).
“We also acknowledge there are some risks around operating jurisdiction but see Tsingshan’s backing as a positive to offset some of this risk.”
Lambeth says for those seeking good exposure to the nickel price, NIC offers that.
A lithium and gold developer in Mali, one could be forgiven for passing this by simply on the basis of screening for geo-political risk, he said.
However, the quality and scale of the assets mean a second look is warranted.
“The lithium asset, Goulamina looks like a tier 1 global lithium asset, with production targeting 506ktpa of spodumene and ramping higher from there,” Lambeth said.
“The project NPV is A$4.1bn post tax, and looks majority funded by parter Gangfeng (a major Chinese lithium battery manufacturer).
“These two assets (Morila gold and Goulamina Lithium) could equally stand on their own in separate companies, which is exactly what FFX plans to do via a spin-off (expected sometime this half).”
A rare earth producer based in Australia and with processing facilities in Malaysia. Rare earths have most notably been used for consumer electronics, but in recent years this has shifted to uses in the green technology revolution.
This includes EVs and wind turbines to name a couple.
“One million EVs, for instance will require 600t of NdPr (Lynas produced a little over 5,000t of NdPr in 2021, so you can see the relative scale),” Lambeth said.
“Incremental demand is expected to be large and there is a certain strategic element to Lynas.
“Producing NdPr is a complex process, and one only needs to look at Lynas’ own history to see that.
“The majority of NdPr production occurs in China.
“With the increasing geopolitical rivalry between allied groups of countries, owning a key resource such as rare earths will prove strategically useful.”
Lynas is one of the few rare earths companies outside China and Lambeth said VP Capital expects the company will benefit from this as competition and demand grows in the coming years.
“Additionally, at 20x earnings (spot NdPr) we don’t see this as a stretched multiple given the coming years of growth,” he said.
Stockhead does not provide, endorse, or otherwise assume responsibility for any financial product advice contained in this article.