Argonaut Algorithm: Volatility doesn’t mean it’s time to jump ship, it’s about buying quality

Argonaut Funds Management’s David Franklyn joins Stockhead to share investing secrets from the high-conviction resource sector investing fund, including his junior stock pick of the month.

Choppy seas have emerged in global markets with the US Government shutdown, a gold pullback, fears that interest rate cuts are stalling, slowing Chinese economic growth and concerns about an AI bubble all leading to volatility in the broader stock market.

But we’ve been here before – just seven months ago, when a wave of tariff announcements by US President Donald Trump shock markets to their core.

Investors are always liable to jump ship at times like these.

Yet the lessons of recent dips show those with confidence in a thesis may be well placed to ride out the storm.

Redemptions from Argonaut Funds Management’s Natural Resources Fund have been rare, David Franklyn says, but two were requested when Trump spooked investors in April.

Since that point, the fund has grown 35-40%.

“Where you get them is at the very bottom of the market and where you get a lot of inflows tends to be, in hindsight, at the very top of the market,” Franklyn said.

“Whatever you’re thinking you probably should be doing the opposite … and it kind of comes back to that Warren Buffett quote, which is “be greedy when others are fearful and be fearful when others are greedy.””

That doesn’t necessarily mean a hot market is the time to sell and a cold market is a buying signal, in and of itself.

But Franklyn says those who run from the chaos miss out on the opportunity to buy high quality businesses at a cheaper price.

“It should be seen as an opportunity, and you’ve got to recognise that you’re being torn by fear and greed, but just stand back, look at it rationally, and often that’s where you’ll get your best opportunities, is when others are selling and being irrational,” he told Stockhead.

Tailwinds for resources

Franklyn views the rotation out of those large caps dominating the market – the Magnificent 7 tech stocks in the US and big banks in Australia – as a positive for resources companies.

“I think what you’re seeing is at the macro level, you’ve got technology stocks in the US, you’ve got banks in Australia that have had a big run over the last couple of years, valuations got stretched, and they seem to be rolling over a bit, there’s people looking for better value,” he said.

“So they’re rotating into small caps, and they’re also starting to look at resources as well. So, we think that’s sensible, and we think ultimately that trend can continue.

“So we see that the resource market is a real beneficiary.

“Commodities are generally still undervalued, and resource stocks, we think, still have a long way to run.”

That rotation has been seen most clearly in recent weeks in the run-up in lithium stocks, with stronger than expected demand for the battery metal leading commodity prices and equities higher.

Copper is another commodity where Argonaut likes exposure, Franklyn said.

Argonaut’s stock of the month

Which takes us to Argonaut’s pick of the month, FireFly Metals (ASX:FFM).

The copper developer, which owns the Green Bay project in Canada’s Newfoundland region, climbed to an all time high of $1.90 at the end of October before suffering a pullback.

That came despite copper prices, spurred on by recent supply shocks like a fatal mudslide at the Grasberg mine in Indonesia, sitting near record levels.

There have been positive stock specific catalysts, including a resource upgrade on Wednesday which took its Green Bay deposits to 863,000t measured and indicated copper and 546,000oz of measured and indicated gold resources – +113% and +174% respectively – as well as 566,000t of inferred copper and 563,000oz of inferred gold.

All up the measured and indicated resource sits at 50.4Mt at 2% copper equivalent, with 29.3Mt in the inferred resource at 2.5% CuEq.

For the first time, FFM has established a high-grade core zone of 8.8Mt at 3.9% CuEq measured and indicated and 10.9Mt at 3.8% CuEq inferred.

“Basically they’ve increased their resource from 60 million tonnes to 80 million tonnes and increased grade from 2% to 2.2% copper equivalent. So, that’s 1.74 million tonnes of contained metal, which is a significant scale asset,” Franklyn said.

Eight rigs are still operating, with super-high grades from the edge of the high-grade core including a hit of 49m at 6.1% CuEq.

That stepout hole, the deepest drilled at the primary Ming mine, is driving conviction in further upside to the resource.

“Now it’s reasonably deep, about 800m, but it just shows that at depth, feasibly, grade is improving. There’s still more work to be done there. So as a potential high-grade copper deposit it’s looking increasingly interesting,” Franklyn said.

Franklyn puts some of the stagnation in FireFly’s share price down to the broader macro environment, with caution from investors prompting some to take cash off the table.

“I don’t think the pullback in the price is really linked to anything company-specific and copper prices have also been pretty resilient at around $5 a pound,” he added.

Argonaut Funds Management is a high conviction resource sector investor managing the Argonaut Natural Resources Fund and the Argonaut Global Gold Fund. David Franklyn is the Fund Manager for the Argonaut Natural Resources Fund.

The views, information, or opinions expressed in  this article are solely those of the interviewee 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.