MoneyTalks: How Canaccord's Tim Hoff hunts for explorers in a market sapped of confidence

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 Canaccord Genuity senior mining analyst Tim Hoff

Last time Tim Hoff graced the MoneyTalks stage he delivered a sermon on investing in explorers making real discoveries, and his picks did not disappoint.

Yes their discoveries were all made, but he still saw the value yet to be crystallised in lithium driller Azure Minerals (ASX:AZS), niobium hopeful WA1 Resources (ASX:WA1) and gold digger Spartan Resources (ASX:SPR) when we caught up with the mining boffin from Canaccord Genuity at last year’s Diggers and Dealers Mining Forum in August.

Since our chat in the big tent next to the Goldfields Arts Centre in Kalgoorlie, Azure is up 36% (assuming your shares in the Andover project JV owner are sold into the $3.70 a share takeover from Hancock Prospecting and SQM), WA1 is 82.5% higher on its Luni niobium discovery and Spartan has stampeded a massive 83.3% after bolstering its high grade Never Never resource in WA to almost 1Moz.

This, unfortunately, isn’t the way the world works and early investors in the three stories (aside from the recapped Spartan depending on your entry point) were already sitting on solid gains when Hoff made those picks.

But if you had decided to chuck $10,000 on those bets evenly at the time, you would be holding around $16,700 right now.

We are in an altogether different market now though, and Hoff says investors may have to show more patience in current conditions where sentiment is not floating all boats like it did during the 2021-2023 boom in battery metals.

“I’m reasonably commodity agnostic when it comes to exploration because by the time you find something and develop it, the cycle will be completely different,” he said.

“So pro-cyclical exploration very rarely pans out.

“In the case of Azure it did, that was a discovery at about the point where prices were pretty punchy.”

Stay a little longer

Instead, it’s about finding companies with the management teams and geology to capitalise on long-term trends.

A case in point is lithium, where raw material supply growth suddenly overtook demand growth last year as battery makers piled up inventory and China’s economy failed to pick up as many punters had hoped.

Hard rock lithium prices have slid from over US$8000/t at the start of 2023 for 6% Li2O spodumene concentrate to US$850/t, while downstream chemical prices are down from over US$80,000/t to the low US$10,000s over the same time period.

That has seen Core Lithium (ASX:CXO) halt mining at its Finniss project in the NT, the owners of the Greenbushes mine scale back production, Sayona Mining (ASX:SYA) eat losses at its North American Lithium operation in Quebec and Liontown Resources (ASX:LTR) scale back expansion plans for its upcoming Kathleen Valley mine.

But long term demand forecasts for EVs remaining strong, and great discoveries are ones with the capacity to succeed regardless of the price environment.

“We’re seeing a lot of people concerned obviously with the price falling — a lot of pessimism around that,” Hoff said.

“I think we’re trying to be realistic around it. And we’re saying, hey, look, prices could stay subdued for some time.

“But the thematic is in place. We’re seeing some value start to emerge across the space, but the kicker there is who’s got a strong cash balance and a management team that has played these sorts of cycles before because cash preservation will be important.”

Regardless of the cycle, those three things — management, cash and geology — will define which companies will be long term successes or which simply ride the waves.

“They remain to be keys at all times at the top or the bottom and we’re closer to the bottom today than we are the top,” Hoff said.

“There’s not a strong amount of support for lithium companies right now. That being said, it is still the number one topic of inbound communication that we get.”

Majors investing in battery supplies

Nickel companies are also suffering from weak sentiment after a halving of prices linked to an oversupply of nickel from Indonesia.

But Hoff sees some green shoots for the long term outlook for battery metals facing structural market changes like nickel and graphite. Notably, a wave of investment could be coming from Japanese and South Korean battery players aiming to stock up on future supply.

Just last week Alliance Nickel (ASX:AXN) revealed a non-binding MoU on nickel and cobalt sulphate supplies from its NiWest nickel laterite project in WA to Samsung and Novonix (ASX:NVX) announced plans to supply synthetic graphite from a proposed US plant to Panasonic.

“That’s very interesting that at this stage nickel is being looked at by those majors, and it tells us that they still have problems to solve in the late 2020s,” he said.

“We might be at the bottom of cycle pricing, but these companies that have plans to build battery factories need material for them.

“I’m probably on the record for saying I don’t necessarily buy into the IRA supply chain and that it’s going to make a massive difference. And my attitude on that has been we’ve seen a complete lack of interest of inbound investment — hard dollars in the ground. This is the first little sniff we’ve got.

“Indonesia’s had $14 billion of investment in its nickel industry, and how much have we invested in our nickel industry? They’ve changed the dynamic through investment and we just haven’t matched that.

“Don’t buy into this calling it dirty nickel … the auto industry wants low priced bulk nickel units and Indonesia is giving it to them. The signalling we get from a Samsung coming into the picture says okay, well maybe they are going to care a little bit about this.”

For thematics like this, investors may need to look past the easy gains they saw in the hot battery metals market of the past couple years.

“You may have to stretch your investment horizon and look at what will this industry be doing in five years time and know it’s not going to be a linear return,” Hoff said.

“You might have nothing for a long time. And then you might have a lot at a really sudden moment.

“So it’s certainly one way when we’re out looking for names we’re looking for a guy who can survive that long period, put their project into a position of some kind of strength and then when we see those upticks or we see those agreements, they’re the ones front and centre.”

Who’s got a bit of potential?

Hoff’s comments come on the eve of tomorrow’s RIU Explorers Conference in Fremantle, where dozens of junior explorers will meet to provide a barometer of how the small end of town is travelling.

He says there are still gains that be found in junior resources, but the focus will shift to companies who have already made discoveries realising value through their resource estimation and study phases.

“We’re still following those stories like Meteoric (ASX:MEI), like WA1, like Brazilian Rare Earths (ASX:BRE), which floated at the start of this year,” Hoff said.

“Those are all still very much early stage exploration stories, we’re still finding out about those deposits.

“In some of those cases, there’ll be value crystallisation as they go through the process.”

Among the other companies with an exploration story to tell, Hoff mentioned two in particular is tracking.

One is Hillgrove Resources (ASX:HGO).

The company restarted bulk mining from underground at its Kanmantoo mine in South Australia in January, where it plans to produce 43,500t of copper in concentrate over an initial four-year period.

The mine plan is based off a JORC resource of just 6.4Mt at 1.09% copper and 0.12g/t gold.

But an exploration target of 60-100Mt at 0.9-1.2% Cu and 0.1-0.2g/t Au suggests a larger prize is waiting to be found.

“They’ve got established infrastructure, an established mining area, if they discover that it changes that company from having a five-year profile of 15,000 tonnes per annum of copper, to potentially pushing out to 20 years at 30,000t,” Hoff said.

“We don’t have too many of those stories.”

Along with WA1’s success in the frontier West Arunta region, Hoff is also watching neighbour Encounter Resources (ASX:ENR), which has shown early signs it could find something of note at its nearby Aileron project.

“Encounter resources is another name that could stand out,” he said.

“The results that they’ve had, they’ve got a few sniffs around the niobium.

“Obviously they don’t have quite the scale that WA1 has got right now, but they’ve got some ground up there with some targets that I think people could probably have a look at and have a think about.”