Is there unrealised value in the majors? This Bridge Street guru suspects so

The metals narrative of recent times has done plenty to favour the small cap companies in search of the world’s next great mineral deposits.

That makes sense – to power a battery future you need some raw materials in quantities beyond those which are currently available. As an investor, it’s easy and right that you would get excited by that narrative.

But the commodities and companies on which generational fortunes have been built continue to operate, so it would be remiss of investors to ignore them.

This was the view of Bridge Street Capital analyst Chris Baker in recent conversation with Stockhead.

Baker said the cashflow yields of the major miners – particularly those in iron ore – made a compelling case for investment, even as the iron ore price retreats from record highs.

“Even though the likes of BHP and Rio have doubled over the last 12 months or so, I just wonder whether they’ve still got some legs,” he said.

“I’ve been saying it for ages – the iron ore price is going to come down. It’s had a bit of a correction, but it still looks very, very attractive.

“These guys are making so much money. Rio Tinto, according to numbers from one of the brokers, is on a 16% free cashflow yield – extraordinary numbers.”

Rio’s unit cost of production in the first half of 2021 was US$17.90 per tonne. Iron ore prices peaked at more than US$230/t earlier this year.

Baker said while these sorts of numbers were not sustainable, he didn’t feel that the value realised had been fully priced into company values at the larger end.

Among the benefits of buying large? Liquidity.

“The issue sometimes if you get focused on the small cap space, which we all do during small cap rallies, is you think you’ll be able to get out of them easily but that’s not always the case,” he said.

“When things start turning over liquidity becomes a big problem, and you can lose your ability to sell. It’s something to be mindful of.

“I think it’s probably not a bad idea to lock in a few profits and then look around for some stocks that haven’t performed quite as well so far. Those are the ones we’re looking around now.”

Where should you look?

Back to the smaller side. Of all the base metals, nickel is the one which stands out most to Baker.

He pointed to BHP’s recent offer to buy Canadian nickel explorer Noront Resources for US$258 million, along with its deal to supply Tesla, as a sign to the broader market.

“The big guys are buying explorers, which is something we haven’t seen in a very long time,” Baker said.

“I think that’s a very strong sign. BHP is so strongly focused on nickel, they have nickel expertise, they’ve been nickel miners since they merged with Billiton and bought Western Mining.

“That means they know nickel very, very well, and I think that means there’s some strong lessons to be had from what they’re doing there.”

When it comes to small cap nickel plays, Baker said Solomon Islands-focused Pacific Nickel Mines (ASX:PNM) was worth a look as it moves towards mining lease applications.

“It’s modelling well, and the guys are there on the ground drilling holes and coming up with the goods,” he said.

Another stock of interest was Carawine Resources (ASX:CWX) – an explorer with a package of 100% owned ground in the Fraser Range.

With Independence Group’s (ASX:IGO) appetite for satellite deposits in the region strong, Baker said Carawine was in prime position.

“They’ve come up with some very good geophysics recently, and have set some drill targets,” he said.

“Who knows what might be there, but good exposure to the Fraser Range is something I think makes a lot of sense.”

Battery demand goes beyond nickel, and while the lithium space has had its fair share of strong performers, Baker said it was worth looking at other materials which could be in short supply.

“To me, the graphite space looks interesting,” he said.

Marvel Gold (ASX:MVL) was flagged for its graphite assets. Though Mali and gold focused, the company holds the Chilalo graphite project in Tanzania.

“The graphite assets are sitting right next to Walkabout and others – these are companies worth substantially more than Marvel alone, and Marvel also has the best part of a million gold ounces sitting in Mali,” Baker said.

China’s dominance of the rare earths market has made more noise lately than a neighbour’s lawnmower on a dusty Sunday morning.

The world’s need to diversify its supply of rare earth elements – the name given to a collection of minerals critical to the technologies of today and the future – is obvious.

The US has been particularly vocal on this point, and ASX-listed beneficiaries include Lynas (ASX:LYC) and Hastings Technology Metals (ASX:HAS).

Baker said RareX (ASX:REE) presented an interesting value proposition in the space, with its Cummins Range project in Western Australia offering a high-grade resource – great value in his opinion.

“The way rare earths prices are going, I think that’s one which looks really interesting,” he said.

Cummins Range has a high-grade resource which currently comes in at 13Mt at 1.13% total rare earth oxide, including high neodymium and praseodymium content of 22.1%.

The last of the commodity spaces to catch Baker’s eye was mineral sands – another in which we’ve seen substantial activity of late.

In mineral sands, he backed in Sheffield Resources (ASX:SFX), which is currently in the process of confirming its debt to develop the Thunderbird project in WA’s Canning Basin.

The company has offtake agreements in place for zircon from Thunderbird and has been on Bridge Street’s radar for some time.

“In our view, and for the past five years it’s been our view, this is a very special project and most certainly a tier-one mineral sands asset,” Baker said.

“If you have some patient money it’s very easy to put in the bottom drawer, knowing that at some point the market will realise the value of the asset and pay up for it.”

At Stockhead, we tell it like it is. While RareX and Pacific Nickel Mines are Stockhead advertisers, they did not sponsor this article.

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.