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Why gold and copper miners remain front and centre for Victor Smorgon Group’s stockpickers
Mining
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- Gold prices are running hot, and Victor Smorgon Group’s Cameron Judd says now’s the time to buy miners “printing cash”
- Decarbonisation strategy portfolio manager Ben Salter is “conservatively bullish” on copper prices
- North American mining names also worth a look
Victor Smorgon Group’s equities team, which manages in excess of $500 million in funds across its equities strategies for members of the Smorgon family and private investors out of South Yarra in Melbourne, has quickly made a name for itself as a stockpicker in the resources space.
Two of the seven limbs of its global multi-strategy portfolio include a gold and decarbonisation strategy, managed respectively by former operators Cameron Judd and Ben Salter.
VSG’s two big commodity bets have been playing out over the past seven years in gold and three in decarbonisation, which counts its primary exposure as copper miners.
Judd and Salter came into VSG from their transaction with the Stawell gold mine in Victoria, a private operation which exposed the gulf between the profitability of well-run gold mines and the valuations seen in equities.
The gold strategy has expanded significantly under Judd’s management.
“It started as a million-dollar portfolio, it’s over $100 million now,” co-chief investment officer Joseph Sitch said.
“In terms of performance, we track it against other gold funds and the gold price. I think gold equities has been a pretty difficult market for the last 10 years.
“But he’s outperformed it every year versus the gold price by about 10% and significantly versus the equities, and it’s because they’re operators.”
Who’s printing cash?
Even with the massive rise in prices to US$2650/oz ($4080/oz) and recent pullback post election win of Donald Trump in the US, Judd remains bullish on the fundamental outlook for gold.
“I know we’ve had a decent run in price, but the fundamentals for gold are very strong and I think will continue to get stronger,” Judd said.
While it can hold bullion, shorts and a limited number of pre-IPO opportunities, Sitch said VSG was happy going long on gold equities and investing in miners over physical gold given inflationary pressures had eased and gold miners are currently growing their margins.
Judd said the main things VSG looks for in its gold equity portfolio is liquidity, low jurisdictional risk and, especially, cash flow.
“In the near term we’re happy with development stories but we want to be able to see growth in the near term not a long way out,” he said. “Not to cast aspersions on others.
“One of those investments was Red 5, now Vault Minerals (ASX:VAU). We started off back in 2018, looked at all the developers at the time, and Red was the one we thought had the most meat on the bones.
“Developers are notoriously volatile but it had more fat in that it could absorb any hiccups along the way.
“That’s still a fairly large position for us, it’s definitely a lot smaller than it was, but the way it’s performing now and what we think it’s going to be in the next 12 months, we’re still very happy with that as cash generation and that’s where we’ve positioned the portfolio.”
That investment involved looking at fundamentals, Sitch said. A number of the fund’s entry points for the then Red 5 were in the low teens, with Sitch pointing to two moments in time when its value was trading at less than replacement value and then less than the value of its mill at the King of the Hills gold mine.
After a merger with Silver Lake Resources, VAU is now trading at 34c with a market cap of over $2 billion.
Other names that fill a similar mould to Vault for Judd include Regis Resources (ASX:RRL) and Ramelius Resources (ASX:RMS).
“A gold mine should be printing cash, especially at these margins, so that’s where we’re positioned at the moment,” Judd said.
“We like Regis for the moment – it printed $85 million in free cash in the last quarter and it should do a similar or more amount in this next quarter.
“Then we’ve also got the North American exposure. Calibre Mining Corp (TSX:CSB) is one of those that we like that will significantly increase their production of gold in the second quarter, they’re saying, of next year, but we think a little bit earlier.
“The CEO Darren Hall is an Australian with a significant amount of experience and we think that it’s an interesting project, it’s going to keep growing but also generating good cash, fully funded with a strong balance sheet.”
Copper growth
The decarbonisation strategy has grown from 3% of the overall portfolio weighting in the global multi-strategy fund to 18% today.
Most of that is in copper, with VSG side-stepping the opaque and volatile lithium market that surged to record highs in 2022 before crashing to loss-making levels this year.
Substitution from aluminium and scrap could cap hopes from red metal optimists that copper could surge beyond the US$5/lb record prices seen earlier this year to US$6, $8 or even US$10/lb. But portfolio manager Ben Salter remains cautiously upbeat that supply will struggle to keep pace with demand as the electrification trend continues.
“We’re probably conservatively bullish I would say,” Salter said.
“I’d say the market will be balanced next year but tight, so not a lot of room for error. You can look at what happened in Panama (where the government suddenly closed First Quantum’s Cobre Panama mine last year).
“It took 400,000t of copper out of the market and that had a positive impact on everyone.
“Over time, we think with the electrification of everything that probably the use of copper in grid spending especially helped by data centres (and) China electrification, we think copper will be in demand more than can be met by supply.
“Over the medium to long term there’s a strong case for copper prices’ escalation, but not immediately or not spectacularly.”
Salter said that should facilitate good margins for producers and developers with good projects, with current prices around US$9000/t.
In Australia, VSG likes the recently renamed MAC Copper (ASX:MAC), which owns the soon to be 50,000tpa Cobar mine in New South Wales.
Internationally, NGEx Minerals (TSX:NGEX) is also on the fund’s radar. Part of the Lundin Group that recently dealt half of the Filo Del Sol and Josemaria projects in Argentina to BHP for over US$3bn, C$2.7bn NGEx owns three large copper projects in Argentina’s Andes.
“It’s very early days, but the early stage drilling puts NGEx ahead of where Filo was at a similar point in time,” Sitch added.
The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead.
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