The EV metals super cycle is coming, and the funds are eyeing the juniors

Acorn Capital believes Elon Musk has kickstarted what could be the ‘EV metals super cycle’ with his big Battery Day ambitions, which has made way for a new investment fund strongly focused on EV metals.

While the last mining boom was centred on the bulk commodities like iron ore and coking coal due to China’s rapid rate of urbanisation and accompanying construction boom, the new age battery and renewable energy metals are set to be the stars this time around.

“Urbanisation is expected to continue in China, but China is actually entering a transitional phase from urban growth to more urban consolidation, and so the next super cycle in resources is going to require a very different mix of commodities to what we saw in the last super cycle,” Acorn Capital portfolio manager Rick Squire said.

“What we’re seeing is there’s a growing public awareness of climate change risk, call it the Greta Thunberg effect, where people are just seeing this risk and they’re wanting to do something about it.

“There’s also mandatory government policies that are coming in that are being implemented for emission standards. These include a ban on all new petrol, diesel and hybrid vehicles in the UK from 2040 and in London from 2035.”

Europe in particular is injecting trillions of dollars into its economy to encourage the uptake of electric vehicles and a rapid shift to renewable energy, as well as secure its supply chain and reduce its reliance on China.

Earlier this year the European Commission unveiled a historic, one-off €750bn ($1.2 trillion) package to help aid the EU’s economic recovery.

Called Next Generation EU, this cash injection could fast-track the nascent electric vehicle ramp up in Europe, one of the world’s biggest car markets.

“What it’s reflecting is there’s a real switch to these important metals, such as lithium, nickel and the rare earth elements,” Squire said.

The US and Australia have also been vocal about their efforts in securing critical minerals supply.

Earlier in October, US President Donald Trump handed down an executive order aimed at boosting the domestic supply of critical minerals, while Australia has been stepping up its efforts to position the country as one of the leading suppliers of critical minerals.

Supply is only getting tighter

Acorn Capital analyst Karina Bader pointed to Tesla’s move into upstream mine production as a key indicator of the looming supply crunch.

“Now that’s very unusual, it’s not unknown, but it’s very uncommon and I think that tells you [Musk is] seeing a whirl of supply problems coming in the next three years as he tries to ramp up his production to meet potential future demand,” she said.

“So he’s trying to do everything he can to simplify the supply chain, make it more efficient, make it more cost effective, and reduce those risks of the supply being outside of his control.

“[Musk’s] commentary around lithium we felt was really interesting … it sort of felt a lot like he tried to dampen the market’s expectations – there’s more lithium in America than Americans need, but then at the same time he’s signing offtakes behind the scenes.

“So I think that gives you an indication that if nothing else, supply is definitely front and centre of these manufacturers minds’, whether you’re a wind turbine manufacturer or whether you’re an automobile manufacturer.”

This has seen growing interest from end users in ASX-listed explorers like emerging rare earths producer Arafura Resources’ (ASX:ARU), which is one of the closest to production.

The company revealed in September that customers in Europe, China and Japan had all confirmed that its final rare earth oxide products from its Nolans project in the Northern Territory were within their specifications, paving the way for the company to escalate commercial negotiations.

The key rare earths from Arafura’s Nolans project are neodymium and praseodymium, which are used in the manufacture of neodymium-iron-boron permanent magnets used in practically all offshore wind power turbines and are also common in the motors of electric vehicles.

Nolans, which Lockyer says is essentially “shovel ready” having secured all the necessary approvals, has a 33-year mine life on a reserve of 29.5 million tonnes grading 2.9 per cent total rare earth oxides. High demand and valuable NdPr makes up 26.4 per cent of the rare earths content.

“Japan has earmarked $2.2bn to assist companies ship production back home to Japan, and just two weeks ago President Trump signed an executive order declaring a national rare earth supply chain emergency and that things needed to be done, and we’re seeing this globally,” managing director Gavin Lockyer said.

“The EU in particular has been extremely vulnerable, particularly with COVID, and COVID has only highlighted an issue that was already there — that they are 100 per cent dependent on China for supply of their rare earth magnets.

“The Europeans are very animated at the moment about looking for initiatives to remove supply chain risk for the future because they’re fearful that they’ll lose all their manufacturing capacity, and the auto sector in particular employs about 15 per cent of the workforce in the EU, which is obviously significant.”

This perfect storm of rising demand and tightening supply has prompted Acorn Capital to launch its new NextGen Resources Fund, which is focused strongly on the EV metals.

The new fund will have financial capacity of between $50m and $100m for investment into 25-40 Australian and global equities with a minimum market cap of $10m. The fund, which also has some allocation for start-up/pre-IPO companies, has a three to five-year investment timeframe and will be benchmarked against the S&P ASX Small Resources Accumulation index.

More opportunities at the junior end

Acorn Capital is focused on ASX-listed companies outside of the ASX100 because there is a much bigger opportunity for exposure to battery minerals.

“What you see is a very different compositional mix in terms of the dominant mineral exposure for all those companies and that mix actually better reflects what we think are going to be the growth commodities for the future,” Squire explained.

“There are nearly 300 companies to choose from in that sector whereas from the ASX100 there’s only 10 companies to choose from.

“The obvious one is the battery minerals comprise nearly a quarter of that sector by market cap.”

The key factor Acorn looks for when deciding which companies to invest in, according to Squire, is the quality of the project.

“We take a really detailed look at the quality of the assets. So regardless of whether it’s gold, nickel, rare earths we’re looking for the best quality assets and then we look at that stage of development,” he said.

Acorn Capital takes what Bader describes as a “bottom up” approach to investing.

“Fundamentally, what we try to do through our quantitative process is identify undervalued assets by the market at any particular stage, whether it’s at the early stage, expansion stage or production stage, and then that’s what triggers us to do more work — if an asset is undervalued compared to its peers,” she said.

“And that’s really where a bottom up investor will look to determine the value of the asset at the outset, and if we think it’s a good quality asset and through the cycle of commodity prices we believe it’s got economic value, then we’ll look to invest in it and put it in the portfolio and then that builds up the actual commodity mix of the portfolio.”

Acorn Capital will weight its portfolio according to the stage rather than a particular commodity.

“When we look at rare earths, for example, at the moment we have Lynas in the top five companies that we invest in,” Squire explained.

“So we’ll have one producer and then we’ll be looking at other opportunities, but we would look ideally not for another producer, we’d look for something that is maybe in that earlier part of the cycle, whether it’s that discovery phase if they’re out there drilling trying to look for something, or maybe they’re going through that final part of their feasibility stage.”