MoneyTalks: Precision's Dermot Woods says the worm could be turning for resources

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 Precision Funds Management executive director Dermot Woods.

Since the fund rate began moving up in March 2022, tech stocks at the top of the S&P 500 in America have shot the lights out, vacuuming the cash splashed in equity markets with a 44.9% gain.

At the same time resources, and especially small resources, have been the hardest hit. As of September 30, the ASX 300 resources index added a relatively tepid 8% but emerging companies dropped 11% and ASX small resources tumbled 18.7% even as the ASX 200 rose 22.2%.

Virtually every major commodity barring gold (+35.9%) and uranium (+39.9%) has also been sapped of life.

Iron ore is off 28.4%, lithium carbonate has been throttled 84.8% lower, natural gas 48.7% off and thermal coal 47.1% lower. Oil markets are down over 30%, with nickel 48.3% poorer and copper an outlier with a fall of just 4.9% in a tightly constrained market.

With US rates seeing their first 50bps cut in September since the hiking cycle began, Precision Funds Management’s Dermot Woods believes at some point the money pumping air into the tyres of the Magnificent Seven will flow into commodities.

“The big money hasn’t been buying the resources sector, but also in small cap resources the private client money, the retail money, has just evaporated because it’s been tough,” he said.

“So you’ve got two big cohorts of buyers that will boost it going forward. And the third thing, interrelated to those two things, is small cap fund managers have been getting no influence, so they’re just not topping up even their existing portfolios.

“And then the other thing is the rarity value, there’s some really decent companies that have moved out of small resources and into the Top 100 so there’s a big cohort of fund managers, and arguably some ETFs that can no longer hold those stocks.”

Making the gains

Despite a tough market Precision, led by a string of ex-Macquarie and Euroz fund managers including Woods, Tony Kenny, Tim Weir and Andy Clayton and counting mining titan Bill Beament as a non-exec director, has seen outsized gains in its Precision Opportunities Fund, adding 30.5% in the past year and 177% since its inception in October 2016, against 18.8% and 60% gains, respectively, for the S&P/ASX Small Ordinaries Accumulation Index.

Most recently, Precision has seen wins from the mining services sector, with SRG Global (ASX:SRG), Austin Engineering (ASX:ANG), Macmahon Group (ASX:MAH) and Emeco Holdings (ASX:EHL) accounting for around 22% of the POF portfolio.

On the mining and exploration side, gold and copper juniors have shone. Precision made a well-timed investment in Spartan Resources (ASX:SPR) before its Never Never discovery in WA turned the once battling junior into a $1bn+ market darling.

Copper bolter FireFly Metals (ASX:FFM) and pragmatic African gold miner Perseus Mining (ASX:PRU) also count as winners.

The volatile upwards movement of the resources space in response to recent Chinese stimulus news may have served to overheat the sector and inflate valuations in the short term, but Woods still thinks there are strong long-term outlook in a number of commodities.

“You’ve got to be thinking at some point that rebounds, because there hasn’t been a huge influx of supply in most commodities. So we’re starting to look at that space, and then it’s just matter of setting prices and having preferred commodities,” Woods said.

“It’s always almost impossible to call which commodities are going to go up. I remember at the bottom of the last commodity cycle just going well, you know, it’s going to be horses for courses and I wouldn’t buy thermal coal, (but) that probably went up more than anything else.

“The commodities we’re looking at are lithium, because it’s down 90% and nearly everybody’s losing money. Once you include sustaining capex, everybody I’ve looked at in the industry this year, at this price, goes backwards.

“Copper, because there’s just no new supply, coking coal because there’s no new supply, and the cost curves of all these things have gone up, so I think you’d be willing to pay more for them than you used to be, because the rarity value and the inherent value of all the sunk infrastructure, it’s just so much higher than it was.”

Large cap stocks to watch

As rates come off and cash is doing less work for investors by just sitting in the bank, that money could help get retail money back in the market, Woods said.

When it comes to resources, he thinks a number of stocks both at the smaller end of the spectrum and pushing into the ASX 100 have good reasons for investors to be excited.

At the upper end of the market, copper miners with established operations are piquing the interest of fundies.

“I look at copper and I find it hard to look beyond something like Sandfire Resources (ASX:SFR),” Woods said. “We want things we’re looking at buying a decent chunk of as big liquid stock that will move with the commodity price

“There’s a real dearth of companies to buy in that sector and that’s well run company, the balance sheet’s getting into really good condition and they’ve done really good job getting getting (the Motheo) mine up and running.

“We are in Metals Acquisition Corp (ASX:MAC)

“It’s only a single asset, but if you’re bullish in the copper price, which we are – who knows when it moves or how much it moves by, but over time, we just don’t see much copper supply coming on.

“In MAC we’ve got operating leverage and financial leverage, so you’ll get a big boost if the price moves, and then obviously their called Metals Acquisition Corp so hopefully they’ll actually have a crack and buy some assets.

“And ultimately, we want companies that are going to do that.”

Woods said Whitehaven Coal (ASX:WHC) was also attractive among the large caps. It paid US$4.1bn, including future instalments for BHP and Mitsubishi’s Daunia and Blackwater met coal mines in Queensland this year, before clawing back over US$1bn in a partial selldown of 30% of Blackwater alone to two Japanese steelmakers.

“We like the commodity, big profitable operations, sensible M&A and they de-risked it a bit by by selling a big chunk of it for a reasonable price, arguably a very reasonable price, given what happened to the commodity over the period where I where from when they bought it to when they sold,” Woods said.

Small cap stocks to watch

Further down the totem pole and Precision has just made a significant investment in gold explorer Solstice Minerals (ASX:SLS), which is trading effectively at cash backing to its $19.5 million market cap after selling a small resource in the WA Goldfields to Kalgoorlie’s major player Northern Star Resources.

Its management team previously led Apollo Consolidated into a $181m takeover by Ramelius Resources.

“They’ve just got that critical mass of equity capital in terms of $15-20 million bucks on the balance sheet, and a team who’ve been there done it before, and lots of tenements that they can get on to and explore without doing a lot of pre-approval work,” Woods said.

In the lithium sector, Woods said it’s all about quality orebodies.

“What we’re looking for is proper ore bodies. I think there are some very, very average ore bodies that attracted some very high valuations two years back and that made us wary of the whole space,” he said,

“When you’ve got two or three stocks coming on a week, and dozens of things with billion dollar valuations, we’ve been looking at mining game for 20 something years, and getting a mine up and running and maintaining a billion dollar value is pretty difficult.”

Wildcat Resources (ASX:WC8), which put out some more significant intercepts from the Tabba Tabba project in the Pilbara, is one that has strong credentials.

“They’ve definitely got a very good ore body to start off with, they haven’t put out the resource yet, but the first three to five years there look really, really good,” Woods said.

“The grade’s not as spectacular as some things, but just the consistency and the shape of that ore body and location of it.”

Woods said Wildcat’s big cash pile was also insurance against a prolonged lithium winter.

“Somebody who’s got the cash to go a year or two from now, they’re the sort of things we’re looking at,” he said.

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