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Mining
MoneyTalks is Stockhead’s regular recap of the ASX stocks, sectors and trends that fund managers and analysts are looking at right now.
Today we hear from Rusty Delroy, the iconically mulleted founder and investment manager of boutique Cottesloe firm Nero Resources Fund.
Everything about Russell ‘Rusty’ Delroy speaks a man who goes against the grain, and the investment manager based by one of Perth’s famous beaches in Cottesloe strikes a unique figure in Australia’s mining investment game.
He still has the traditional investment banker puffer vest for site visits, but with his party-at-the-back hair and conviction in value investment he’s not afraid to take a contrarian stance.
It comes across in his confidence on the oil and gas sector, where a severe misalignment between company valuations, investor sentiment and actual supply-demand metrics could be brewing.
The fact conventional energy stocks are the largest exposure in the Nero fund, nestled in the heart of WA’s currently battery metals mad western suburbs, speaks volumes of Delroy and Co.’s determination to look for hidden value in the resources investment market.
“Oil and gas is our biggest exposure by sector at present. And interestingly, you know, a lot of the things we’ve been buying are bigger cap offshore names,” he said.
“I know that sounds weird. But stocks, like BP (LON:BP), for example.
“We see a lot of value in oil and gas. We don’t see the sector going away in terms of relevance anytime soon and you’ve got some pretty pristine balance sheets in diversified majors.”
Distinctions could easily be made between fossil fuel suppliers and companies positioned to compete with them by focusing squarely on renewables and new energy metals.
But Delroy says the reality is the two aren’t as mutually exclusive as many investors believe.
“BP for instance, and a number of these other — particularly European — oil and gas majors, they actually have very substantial renewable businesses as well,” he said.
“They’re not out there waving the arms talking about future industries in decarb, they own decarb industries today and they’ve been building up for long periods of time.
“So I don’t think that’s well appreciated by the market and the offshore names trade at big discounts to some our local names in Woodside (ASX:WDS) and Santos (ASX:STO), on our analysis anyway.”
Where is the market missing a trick? Delroy agrees there’s an ESG overlay to the attractive valuations he sees in firms like the $174 billion BP.
“I think there’s a perception around that perhaps there’s some sort of terminal nature to hydrocarbons or to oil and gas and we disagree with that,” he said.
“So our view is this sector’s here and relevant for a long time to come. We agree with decarb and those sorts of things as well. They’re all very important, I don’t want to discount that.
“But they’re going to take a lot of time and capital to pull off and in the interim there’s certainly a very clear role for gas in the energy mix and we still have a huge number of transportation consumers of oil.
“Even on some of the more conservative forecasts, we’re still forecast to grow oil consumption through to towards the end of the decade.”
The market could be missing the “geostrategic element” to oil and gas supply as well, Delroy said. OPEC+, where ‘questionable jurisdictions’ like Russia and Saudi Arabia have built a stronghold on oil supply could stoke risks of continued price spikes.
“I feel like we’re kind of making the same mistakes again and OPEC’s concentration of supply is increasing, therefore their pricing capacity is increasing, and first world production of oil in particular is constantly becoming more difficult,” Delroy said.
“I feel like the oil market is fundamentally supported from a cost curve perspective. Also I don’t think it’s anywhere near pricing the optionality that it has on event driven price spikes.”
They’re chalk and cheese in terms of market valuation, but the other major oil and gas position Nero holds is in $270 million capped Carnarvon Energy (ASX:CVN).
It hasn’t been smooth sailing for CVN in recent years, with its shares falling 60% over the past five trips round the sun, and Top-10 holder Nero’s active clashes with management have been well-documented.
Back in 2020 when banker and dealmaker Debra Bakker was appointed to Carnarvon’s board, Nero led an unsuccessful campaign to have geologist Doug Jendry appointed instead.
But its portfolio includes a 10% stake in the Dorado oil discovery off the WA coast. At 162 MMbbl oil recoverable, the 2018 find in the Bedout Sub-Basin remains one of the largest in the North West Shelf in recent memory and is set for a 2024 FID from a JV led by Australian energy major Santos.
It also holds a 20% stake in the nearby Pavo oilfield which hosts 43 MMbbl recoverable.
The JV is targeting 100,000 barrels a day in its first phase of operations but delayed the decision to enter production due to inflation and supply chain pressures in August last year.
Delroy said Nero remained disappointed in management, but that Carnarvon “is an example of extremely deep value.”
“You are literally trading below the effective cash backing and when I say effective cash backing, that is cash at bank plus the committed free carry expenditure that they have still to come,” he said.
“I think in total that sits around 17 cents a share or something of that nature.
“And it’s trading today at 14 and a half to 15 (14.5c at the time of publication). So you’re getting your interest in Dorado effectively thrown in for free.”
Met coal is another area where Nero has been building a “pretty reasonable position”.
Much like oil and gas, Delroy views steelmaking coal as a misunderstood part of the resources investment market.
“So we own Coronado (ASX:CRN) and Arch Resources out of the US. They’re two good-sized positions for us. We like both,” he said.
“We like met coal because it’s hard to find quality assets and even harder to get them developed.
“Met coal seems to be getting caught in the same ESG constraints as thermal coal when it has a very different application and substantial challenges in trying to replace it in terms of steel production.
“So there’s an argument with thermal coal to say, well there are options in the energy mix to replace thermal coal.
“There really isn’t a viable option today to replace metallurgical coal from the steelmaking process. It most likely will come over time but here and now there isn’t one.”
Delroy said using high quality met coal was also the best way currently for steelmakers to reduce carbon emissions.
READ: Bulk Buys: Green steel is turning real as Fastmarkets launches Asian green steel premium index
Gold is another space where Nero is holding. From a macro perspective, Delroy says, the fund continues to expect interest rates to trail long run inflation, making an asset like gold less flimsy than cash.
“We see an erosion of purchasing power and gold being a place for protection in that regard and there’s also some value around the gold sector now,” he said.
Two big picks for Nero are Westgold Resources (ASX:WGX), owner of a ~250,000-260,000ozpa network of underground mines and processing plants in WA’s multi-million ounce Murchison Goldfields, and Spartan Resources (ASX:SPR), the former Gascoyne Resources, which is up 250% YTD after mothballing the low grade Dalgaranga gold project to focus on exploring for high grade ounces at the exciting Never Never discovery.
READ: Davids and Goliaths: Is this the year the gold sector’s mid-tier wins?
“Very different companies in very different places,” Delroy said.
“Westgold, we like management and the culture that they’re setting. So we really like the way (MD) Wayne (Bramwell’s) going about it.
“Comparable value analysis against peers, just clearly value. This year there’s still some growth capital to come out into next year.
“We see an environment where they should be able to generate pretty substantial cashflow and the balance sheet is pristine. They have net tangible assets of a few $100 million and no debt really.
“And the hedge book’s rolled off as of June 30, I think.
“Unhedged production, and I think one of the things that gets missed as well is they’ve got a lot of latent production capacity.
“If you do get a big run in gold, these guys have a huge amount of leverage. They do have capacity to turn idled assets back on should they wish to.”
As for Spartan, Delroy calls Never Never — currently 721,000oz at 5.85g/t — a “game changer”.
“They’re not in production, we’re not encouraging them to go into production anytime soon,” he said.
“They have a fantastic mill. A really well built mill and GR Engineering’s from all accounts built that very well.
“It operates at a very low cost per tonne basis but historical ops were pretty marginal at a gram per tonne type grade.
“The discovery at Never Never is an absolute game changer for them in terms of their capacity to put decent grade through the mill.
“We’re keen to see them continue to thump the drilling into the ground and add inventory before really looking at turning that back on.”
Delroy thinks the milling infrastructure means each ounce added at Never Never is worth more to Spartan than a comparable undeveloped gold miner.
We couldn’t leave without a lithium pick, and Delroy has his eye on Chilean brine play Lithium Power International (ASX:LPI), owner of the Maricunga solar evaporation project in Chile.
The $141 million capped junior is down almost 44% YTD — largely influenced by concerns about Chilean plans to nationalise lithium assets — but Delroy thinks it is “just ridiculously deep value”.
“It’s one of the most unknown and underrated lith stocks in the market,” he said.
“It has the world’s highest grade undeveloped brine asset that we’re aware of, fully permitted.
“But it’s in Chile, and Chile has carried stigma.
“We’re value driven guys so these are the kinds of places we land. It may require some patience, but an outcome of some sort is inevitable, given the quality of the asset and the depth of the value.”
The country’s lithium sector is dominated by the world’s two biggest producers, US-based Albemarle and Chile’s SQM, but its national copper miner Codelco could be lining up a move into the sector.
“So Codelco is probably the complicating factor in all of that. I think the government’s been clear that they want the lithium sector to grow,” Delroy said.
“This is the only asset that we’re aware of in Chile outside of SQM and Albemarle that can be brought into production under the current framework.
“And I think government are clear that they want to see more of these things brought into production. Something has to give at some point is what I would say.”
At Stockhead we tell it like it is. While Spartan Resources is a Stockhead advertiser at the time of writing, it did not sponsor this article.
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