Andy Clayton and Dermot Woods say the time is right for a bit of 'portfolio medicine'. Pic: Supplied/Stockhead
Precision Points: Why it’s the right time for a bit of portfolio medicine
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In Precision Points, Precision Funds Management executive directors Dermot Woods and Andy Clayton draw on insights from two decades on the front lines of equity markets to share their expertise with Stockhead readers.
The market seems like it’s in correction mode with the tech led Nasdaq 100 down 12% in the past month and Aussie financials sector more than 10% down in the same period.
It appears the scene could be set for an unwind in the aforementioned trades that boomed over the past year and back to undervalued commodities.
But general market resentment has kept resources stocks unloved as well, outside of those operating in booming commodities like gold and copper.
Precision Funds Management executive director Dermot Woods sees the opportunity in a crisis though. He thinks now is the perfect time for investors to deliver a bit of ‘portfolio medicine’.
In short, market dips provide the opportunity to shift cash out of illiquid stocks with weaker fundamentals into high quality performers discounted by market forces.
“It’s all about return unit for risk unit and liquidity tends to get sort of very undervalued when a market is running hot,” Woods said.
“We all always fall into that trap of going down the liquidity curve too much.
“The advantage of a very soft market is everything gets soft, nobody’s really buying anything.
“It makes it easier to swap out and get a more attractive return for less risk.”
Copper intrigue
While metal prices have been subdued in recent months, the breakout only seen previously in gold is starting to make it across to base metals.
Undersupplied but still in demand, copper and even nickel prices have begun to move up appreciably.
Tariff fears have no doubt played a role, with US futures of over US$5/lb coming in at a big arbitrage against London Metals Exchange prices (currently US$9900/t or US$4.50/lb).
But Woods says commodity prices are finally starting to reflect physical shortages.
“The interesting thing is on the equity markets, there are not very many ways to play these things,” he said.
Even the largest capped miner – BHP (ASX:BHP) – has some intrigue at current prices, Woods mused.
“The interesting one that hasn’t moved is BHP –it’s a copper and iron ore company,” he said.
“Iron ore is flat, copper’s up a lot, coking coal is into the cost curve and BHP hasn’t moved because a fair percentage of people that buy and sell every day do it on the trailing dividend yield.
“So I think that one looks interesting from a –slightly – contrarian point of view.”
MAC Copper (ASX:MAC)
MAC Copper, owner of the soon to be 50,000tpa Cobar copper mine in New South Wales, continues to be one of Woods’ favourite copper plays, given the dearth of producing assets on the ASX.
“They’re not having their best quarterly, they’ve flagged that to people and the first quarter is usually softer, that’s one of the reasons why it hasn’t run away,” Woods said.
“But they’re going to start producing some serious cash flow and they’ve done most of the heavy lifting on their balance sheet.
“They had to take on a lot of debt and liabilities to get the deal done and buy the asset in the first place, and they’re the most important way through derisking that balance sheet, I think.
“The copper price makes a big difference for them. And they’re well off their previous highs.”
Cygnus Metals (ASX:CY5)
$90m capped Cygnus Metals is one speculative stock Woods is keeping tabs on.
It recently completed a merger with TSX-V listed Dore Copper to acquire the Chibougamau copper and gold project in Quebec to complement its James Bay region lithium deposits.
Led by former Western Areas and Mincor executive Dave Southam, Cygnus is part of the Richardson Street Group of companies which includes Bellevue Gold (ASX:BGL) and FireFly Metals (ASX:FFM).
“Cygnus is interesting, it’s early stage. and you’re paying for a proven board and management team,” Woods said.
“I suspect they can backfill that (value) with some interesting drilling in an historic project.
“They put out some OK drill results yesterday. They haven’t really got into it yet. They only took ownership of the asset in January.
“That could be an interesting one because it hasn’t been drilled out yet and it probably has more potential for size than some of the smaller local things.”
Chibougamau has a non-JORC foreign indicated resource of 3.6 million tonnes at 3% copper equivalent and inferred resource of 7.2 million tonnes at 3.8% copper equivalent, with a 900,000tpa mill onsite.
Petratherm (ASX:PTR)
Fellow portfolio manager Andy Clayton likes the look of small cap titanium explorer Petratherm, which is unfurling a large heavy mineral sands discovery at Muckanippie in South Australia’s northern Gawler Craton.
Petratherm has become the talk of the town among fundies and investors, who view the $91 million capped explorer as a potential takeover target for the likes of Iluka Resources (ASX:ILU), Tronox Minerals or even Rio Tinto (ASX:RIO).
Muckanippie is yet to host a resource estimate and unlike Iluka’s nearby Jacinth Ambrosia mine is not expected to be a major zircon producer, but early drill hits suggest it’s rich in titanium dioxide bearing material that Clayton says should translate to a premium basket price.
Titanium dioxide is a key material for paint pigments, but is also a critical mineral used in welding, aerospace, aviation and defence.
“It’s a really interesting discovery because you can see from very limited drilling that they’ve got size,” Clayton said.
“They have over 6-7km already. So you can see resource potential really in that plus 300 million tonnes (area) so it’s not going to be a resource question.
A second phase drill program began at Muckanippie, where some tenements are partly owned by fellow ASX junior Narryer Metals (ASX:NYM), following an $8.1m placement, with 6000m of aircore holes to be sunk.
It’ll extend known mineralisation beyond known limits and provide material for metallurgical testwork.
Clayton says key answers have been delivered in recent rounds of assays and testwork, including the composition of heavy minerals.
“Importantly, the heavy mineral suite looks like it is hot. There’s a good blend of high TiO2, where you get the premium product – they’re calling it sort of a rutile type product and then a pseudo rutile product,” Clayton said.
“With mineral sands, it’s all about the in situ value and the valuable heavy mineral content rather than just the heavy mineral content.”
The other was the grind size, before testing this month found 90% of the product was greater than 75 microns in size, positive for its processing potential.
“I think the question the market was sort of concerned on grain size because a lot of those Wim deposits in the Murray Basin are very fine grained and they’ve been known about for 40 years, the one’s that Rio had,” Clayton added.
“They answered that question three weeks ago … The grain size is really good.”
For perspective on the potential of discoveries of this nature, Clayton noted the success so far of Sovereign Metals (ASX:SVM), which has a $580 million market cap and Rio Tinto on board as a 20% holder. Sovereign’s Kasiya deposit is in Malawi and will have a large graphite by-product, so there are distinctions, but the fact it’s a couple years further down the line when it comes to development bodes well for Petratherm if it can keep growing Muckanippie.
At Stockhead, we tell it like it is. While Petratherm and Sovereign Metals are Stockhead advertisers, they did not sponsor this article.
