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MoneyTalks: Touchstone reckons ASX resources will be standout sector for next decade and offers four top picks
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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 Touchstone Asset Management portfolio specialist Ron Sargeant.
What’s hot right now?
Sargeant said at its core investment comes down to buying companies with the best risk/reward trade-offs. He said Touchstone’s investment process delivers this by building an optimal portfolio of quality stocks at a reasonable price.
“We call the process QARP and use qualitative and quantitative inputs to objectively and consistently assess quality – which is an excellent proxy for risk – and price relative to value, which is a key input for returns,” he said.
Sargeant said such a focus on quality would not normally draw you to the resources sector, however at the present moment it is interesting for a number of reasons.
“Firstly, looking longer term, there are good reasons to think resources will be a standout sector in the coming decade,” he said.
“This is due to decarbonisation driving elevated demand, supply growth becoming far more difficult to deliver and the potential for a protracted weak US dollar which would support commodity prices more broadly.”
Sargeant said in the near term however, we need to first navigate a global economic slowdown and potential US recession.
“While such a slowdown would undoubtedly be negative for commodity demand, prices have already come down a long way,” he said.
“Some of the more opaque markets such as lithium have experienced falls of 50% or more, however even the copper price has declined by more than 20% from its 2022 highs.
“Metals like aluminium are already trading well into the cost curve with any further weakness potentially creating attractive levels for buying the stocks which can enjoy the cyclical recovery and then structural growth longer term.”
Top Picks
The big Australian is Sargeant’s preferred long-term investment within the sector given its favourable commodity exposures – principally iron ore and copper, high-quality asset base and low level of debt.
He said iron ore provides a large degree of stability and cashflow, while copper (along with potash and other commodities) represents the future of the business.
“Despite its significant size and rock-solid fundamentals, the stock price does periodically get impacted by short term weakness in either equity markets, China macroeconomic conditions and/or commodity prices,” he said.
“This can create attractive and relatively low risk buying opportunities.”
Still at the large end, but with slightly higher risk, Sargeant said, is S32.
“It offers the growth opportunities that we see in the base metals as a result of decarbonisation, however without the risk that comes with being in smaller, single asset or single commodity stocks,” he said.
“The company’s projects can be thought of as a portfolio of smaller operations across various commodities and geographies.”
“The portfolio is being repositioned over time towards future-facing metals and is primarily exposed to the aluminium value chain.”
Sargeant said S32 also has meaningful copper, nickel, manganese, and met coal operations.
He said the company has a good balance sheet, strong returns, and is conducting a long-running buyback.
Bout of risk aversion
Sargeant said it is also worth noting that in the short term any global economic slowdown would likely lead to a bout of risk aversion with capital flows driving the USD higher and commodity prices pulling back.
“Following that however, we think a bear market in the US dollar will resume which will be supportive of the gold price,” he said.
He said a bear market in the USD would also be positive for the copper price which is a key by-product of many of the gold miners, which leads to Sargeant’s next favourite stock.
In the gold space Sargeant likes EVN, which he acknowledges has been through a tough period with its Red Lake asset.
“We feel those risks are well understood and largely discounted in the share price,” he said.
“The more significant upside however, comes from simply delivering on Cowal followed by Mungari and Ernest Henry.
“These are quality assets with notable life extensions recently delivered.”
Sargeant said EVN held an investor day and two days of site visits at its NSW Cowal and Queensland Ernest Henry mines which Touchstone attended.
“The opportunity in the Ernest Henry operation was plain to see with a highly prospective geology and what looks to be conservative grades,” he said.
“There is clearly a strong culture on site with the operation efficiently run and well-capitalised.
“Evolution Mining has restructured its debt and smoothed its capex profile which has given the company flexibility around its capital management program.”
Sargeant said in some respects LYC is risker as it has a single mine with a single commodity exposure and can be subject to geopolitical risk with a problematic asset based in Malaysia.
“That said, the company is involved in the extraction and processing of rare earth minerals which are vital for electrification and decarbonisation,” he said.
“Demand is expected to grow substantially over the coming decade with limited new supply likely to lead to a significant supply deficit.”
Sargeant said LYC is the world’s largest producer of REE outside China and has an excellent tier 1 asset.
“Management have done a great job and the balance sheet is very strong,” he said.
“The stock looks reasonably priced following a pullback associated with the ramp up of the new Kalgoorlie plant which will lower operational risk over the medium term.”
The BHP,S32,EVN & LYC Share price today:
READ:Lynas boss on building a rare earths powerhouse and why diversity is good business
The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.
