Battery metals power up ‘cautious recovery’: resources expert
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Tim Weir, executive director of Precision Funds Management, sees a possible rebound in the Small Resources Index of 30 to 50 per cent — though there will be volatility along the way.
Welcome to Stockhead’s ‘Experts Q&A’. Please describe your job.
Basically, I manage a pool of money on behalf of investors who are looking to achieve above-average returns and have an appetite for risk via investment into ASX-listed securities, primarily with a focus on the resources sector.
What would you describe as your areas of expertise?
Being West-Australian based, we primarily have a focus on resource and mining services companies. This ranges from junior resource companies, which would include exploration, through to resource stage development and commissioning and full production.
Then on the mining services side, we focus on a range of companies that provide services to resource companies, from drilling through to construction, earth works and full operation. We do have a mandate to invest outside of resources as well, so we’re not just limited to the resources sector.
Do you agree that the resources sector is recovering at the moment? What signs are you seeing of recovery?
We think there’s definitely some positive signs that the industry as a whole, which has been in a sort of three-to-four-year lull as evidenced by the Small Resources Index, is starting to emerge. What is driving that is a bit of stabilisation of economic growth globally and emergence of some regions that have been in what could be described as the doldrums for a period of years.
This has been evident in recent times in the re-emergence of the zinc, copper and nickel prices, which have all, just in the last three to four weeks, rallied in the vicinity of 5 to 10 per cent, back to levels which we haven’t seen for some time. The zinc price has been particularly strong.
Also, you have seen again a resurgence in the iron ore price back to just under 73 dollars a tonne, so it’s largely been driven by confidence the market has gained from the re-emergence of these commodity prices — albeit subdued. We’re in what we believe to be the very early stage of a cautious recovery cycle.
Where do you see resources headed over the next 12 months? What evidence are you seeing to support that view?
If you just look at a simple chart of the S&P ASX Small Resources Index, you will see a picture where it’s been hovering along a trough for some time. Normally when you do see a recovery in this sector it tends to be fairly volatile – fairly rapid, but also fairly volatile.
We think this cycle will have its hiccups along the way; there’s no two ways about it. But we think it could be in the early stages of a significant recovery which could see a rebound for the Small Resources Index in the vicinity of 30 to 50 per cent. I emphasise there will be volatility along the way — it’s the nature of the sector, that’s for sure.
What particular metals or minerals do you think will do well in the coming year?
We think the battery-grade metals still have a strong future. It’s still early days in their evolution. But throughout this period of uncertainty the battery-grade metals have been the shining light — as evidenced by the ramp-up in the price of lithium and the contract prices that the producers are now receiving.
Also, the spot cobalt prices are particularly strong, we’ve seen the avalanche of small exploration companies pursuing cobalt opportunities which we hadn’t seen before. We prefer the traditional grade metals, as in copper, zinc and nickel as the ones that will really start to re-emerge again, and we expect the gold price to remain fairly robust as it has during this period.
You also help small companies list on the ASX. How would you explain your role with pre-IPO companies?
We see a lot of smaller companies that are looking for funding to conduct exploration. Our role is to evaluate the risk of these companies prior to them being listed and come up with an appropriate valuation. We conduct a due diligence on the people, the projects, the prospects for the metal that they’re in. Then we go out and source the funding for the company to pursue their activities. Then we facilitate a listing on the ASX, either via an initial public offering (IPO) or what we call a reverse take-over where the company is back-door listed into an existing listed company. We assist with the total process.
What is the general outlook for the IPO market?
I think it’s improving. It’s been a tough environment to raise money, full stop. So, we’ve seen a raft of IPOs and listings that haven’t made it to market because there simply hasn’t been the demand there. But we’re now seeing that cautiously start to change. There’s starting to be some risk money that has appetite for these type of investments.
It’s important to note that if you look at all the listed junior companies out there, it’s the minority that make the crucial step into production and being a profitable enterprise. So, it’s a high-risk game.
Are some sectors performing better or worse than others in IPOs?
If a company has real earnings — be it in any sector — and a solid growth profile, and the IPO is priced accordingly from a valuation perspective, those IPOs are still performing particularly well. In the area we operate in, which is resources from juniors to producers, the IPOs have been a little bit limited. The success of those has been mixed, I think it’s fair to say.
What are the key things investors should take note of in an IPO prospectus?
I think it comes down to quality of management, quality of the projects and the commodities that they are investing in and the jurisdiction in which they operate. A classic example of a high-risk jurisdiction is Tanzania following their recent changes to their mining legislation. It’s gone from a country that’s deemed to be a great place to operate to an impossible place to operate, effectively overnight. So, that sovereign risk scale needs to be evaluated. There are a lot of junior companies that are guilty of perhaps not using the funds they raise in the best possible areas to maximise value for shareholders. So, it really comes back to quality of people, projects and how they are going to get the best bang for their buck out of the funds that they have raised.
Which stock market trend are you following closely, and why?
Definitely of interest to us is the battery-grade metals market because it’s an emerging one and the theme seems to be really strong with the move to battery-powered vehicles. So, that’s the most interesting and revolutionary trend I have seen in quite some time, the emergence of these commodities. What I find is that they usually get ahead of themselves and there’s a lag for these sorts of metals commercialising and the electric-vehicle market changing the culture from petroleum to electric based. It’s a real revolution that we haven’t seen for quite some time and that’s something that we would definitely look to have some exposure to – battery-grade metals.
What small cap stock picks are you most proud of?
I have been in the industry for 20-25 years and from a simple success perspective, it was the company we were involved in a back-door listing of which became Aurora Oil & Gas and was taken over for $2.4 billion. We were there from inception when it was a $5 million to $10 million company and it was a 10-year process. We were there from 2004 till 2014 and the company got taken out at a valuation of $2.4 billion. No businesses are built overnight and it’s a classic example of selling the project at the right time of the cycle, but if I had one stand-out success, that’s it.
Small and micro cap companies often lack an earning history or other conventional data. What are the other key financials to study when considering such stocks?
All junior companies have to put out their quarterly financials, so you want to look at their quarterly burn rate and just see how much money they have spent during the previous quarter, how much money they’ll spend in the upcoming quarter.
Look at their cash position which is all disclosed there, because, invariably, if the company is running low on cash or is spending too much, obviously they have to go back to market.
Placements of shares in junior companies are done predominantly at a discount to the prevailing market price and you have got an issue of new shares coming on the market and, unless it’s an outstanding story, it usually puts the share price under pressure. So, I would be monitoring quarterly reports before I went into the company.
The first thing I look at is their cash position and their spend, and also the breakdown of that spend. Is that money going into the ground or is it being gobbled up in corporate overheads?
We love rocking up to companies and they’re in a dark and dingy office with three people in the office, versus going to some grandiose place where they have four times the space they need and a massive boardroom. It speaks volumes right away.
Is there a book, movie or TV you’re particularly passionate about at the moment?
I really like The Deadliest Catch. It’s a fishing show. It’s about Alaskan crab fishing out in the Barings Sea, which is just a wild ocean. It’s a high-risk profession, which I suppose is what I’m in – although not physically!
Tim Weir is Executive Director of Precision Funds Management. Tim has 20 years of experience in investment and capital markets. He began his stockbroking career with Porter Western in 1993 and served as a partner of the business until it was acquired by Macquarie Bank in 1999. In August 2016 Tim and colleague Tony Kenny launched Precision Funds Management and successfully raised just under $25m.
Precision Opportunities Fund (POF) is a specialist investment manager with a focus on identifying opportunities and undervalued companies listed on the ASX. POF’s principals have significant diversified investment experience in the small and mid-cap sectors of the ASX, both from an investment and operational standpoint. Tim is also on the Board of newly established Corporate Advisory Firm Chieftain Securities.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.