RIU Explorers: Investors urged to take in the big picture as opportunity knocks for bargain hunters
With the ASX sitting around all time highs, you’d be forgiven for thinking we were in some sort of boom.
But at the junior end of the resources market, a flight of liquidity has seen explorers fail to receive the wave of support that flooded towards the sector in the aftermath of the Covid pandemic and short-lived battery metals boom.
The negativity is heavily influenced by price movements.
Lithium prices have cratered between 80-90% with both Australia spodumene and downstream chemicals in Asia tumbling from record highs to cyclical lows in under a year.
Nickel prices have halved since the start of last year due to a tidal wave of supply from Indonesia, while weak demand for consumer products in China and record domestic mining quotas have seen rare earths prices fall more than two-thirds from 2022 highs of US$175/kg.
That has come alongside mine closures and deferred investments in new production that appear to be putting paid to Australia’s hopes its future mining industry will be centred on its supply of electric vehicle materials.
Does this mean the electric vehicle narrative is done and all the gains have been made?
Not according to Canaccord Genuity senior mining analyst Tim Hoff, who followed up his recent stock picks for Stockhead by telling the RIU Explorers Conference in Fremantle today that investors need to appreciate the big picture when it comes to battery metals.
Hoff said supply is yet to be seriously curtailed in response to the price fall. But the long term — and near term — demand outlook remains strong for lithium.
“Demand is actually really strong. The mainstream media likes to say that demand has peaked, no demand was incredibly strong. It was 200 gigawatt hours stronger than what we anticipated,” he said.
“But what we’re looking at is forward demand, right? And that’s where it’s really important. So we’re seeing in Europe and the US push back their plans a little bit. They haven’t quite executed where they should.
“But you still have to take a longer term view on this market. Nothing happens overnight, as we all know. And we still look at the thematic and so we’re still watching that very closely. We think that it is still in place.
“You look at the mainstream media and they’re sitting there saying that lithium prices are down, the EV revolution is dead. It couldn’t be further from the truth.”
Hoff sees the price of lithium being suppressed through the year for a period of between 9-15 months.
Chinese exports and pricing will be key things for investors to watch. But he said EV penetration was on the rise even in late adopter markets like Australia.
“Tesla was the number eight selling car brand. The model Y was the number six selling car,” Hoff said.
“And it might interest you to know that Tesla was under 50% of all EVs sold in Australia last year. So we’ve got these other brands like NEG, which is a Chinese owned business now and BYD another Chinese owned business.
“But we’ve also got the Koreans — Hyundai and Kia — releasing new models all the time. And we’re seeing these models sell and people try these cars and they’re really enjoying them.”
Hoff said support for lithium could come from big non-Chinese players looking to source supply, especially from Japan and Korea, while he is also getting more optimistic on copper. Canaccord recently raised $325 million for the Australian IPO of Metals Acquisition Corp — owner of the Cobar project.
Fellow Canaccord analyst Tim McCormack meanwhile told delegates to watch gold closely, noting that a gap had emerged in the traditional link between the price of gold and the US debt pile.
“I think the macro does paint a reasonably strong picture for it to remain supported and a potentially reach new highs this year,” he said.
“There’s a million different arguments and macro data points you can pick to kind of sculpt that. But I’m relatively simple as a human and … the easiest ones I keep circling back to is just the simple US debt to gold price chart.
“That has been linked since about 1980 and anyone can put it into Google and have a look at it and you’ll feel good that the gold price will keep going up as long as the US debt keeps going up.
“There’s a little disconnect at the moment, which bodes quite positively for gold moving up again. I think we can all pick that the likelihood of US debt going down anytime in the short term is low.”
With rates appearing to have peaked, there is also positivity that gold could run higher after briefly touching a record of US$2078/oz at the end of last year.
Over the past 25 years, gold has typically accelerated when the rate cutting emerges, McCormack said. Equities are trailing moves in the gold price as well.
“If we rewind 12 months, the Aussie dollar gold price at this conference last year was about $2600 and the Aussie dollar gold price today is $3100/oz,” he noted.
“Have a look at the equity prices over 12 months, Northern Star, Evolution, De Grey, Bellevue are all flat to down. And you kind of scratch your head about that a little bit.
“Similarly, in a US and offshore sense, the US dollar gold price is up ~US$200 over the same time period but Barrick is down 20%, Newmont down 30%.
“There’s a huge disconnect which is at odds to history at the moment and I think it paints a really clear picture for some of the acceleration that we could see in equity prices to catch up to the gold price.”
McCormack has another piece of advice for investors, telling them not to be concerned if they’re a little late to the party.
If you can identify a great discovery with a solid management team or strong rationale for a takeover by a bigger player, there will still be gains to be made down the track.
“Obviously I’d love to walk in and go find five Tier 1 assets with projects that no one else knows about in this conference, run back to my office and tell the world about it, look like the smartest guy ever,” he said.
“The reality is the Gruyeres, the Tropicanas, they don’t come around very often, they’re rare.
“When you find them in general you are going to be late to that party.”
One exception for McCormack was De Grey Mining’s Hemi, which he first developed an interest in at the Explorers Conference before it rerated into one of the largest gold stocks in the ASX 200 with over 12Moz in resources.
“So there is the instances of it, but … they’re pretty rare to happen. I think as a mindset what’s important, when you do find them is not to feel like you’ve missed the boat when the share price has gone up to three times,” he said.
“Don’t be fooled by that if it is a true Tier 1 asset because the market is very efficient.”