Ten Bagger: Smart money flows into resources despite short term pain

Welcome to Ten-Bagger, where Lowell Resources Fund chief investment officer John Forwood gives us his take on a sector of the ASX resources market full of value.

This month, John looks at how corporate activity shows long term confidence in the sold off resources sector from the big end of town.

Sans gold, silver and bauxite, prices may be down across the commodity complex in 2024 with lithium, nickel and other battery metals in a hole and uranium failing to live up to its promise.

The obvious conclusion to draw for retail investors is a negative outlook on resources, which have been heavily sold off by the market in a rally that has favoured banks and tech to the point of absurdity.

But digging a bit deeper, corporate activity suggests a belief from the smart, established money at the big end of town that a revival is on it’s way, it’s just a matter of when.

Take the evidence from law firm Allens, for example, which revealed the value of critical minerals dealmaking had lifted, extraordinarily, from $14.8 billion, compared to only $5.3 billion in 2023, even though the volume of deals in the Australian market more than halved from 49 to 24.

It’s commonly noted by fundies that where corporate money leads, equity follows, with cashed up majors and strategics filling the void created by risk adverse capital markets.

Lowell Resources Fund (ASX:LRT) CIO John Forwood recently went on a whirlwind trip of the northern hemisphere, including Canada where equity markets have grown even more pessimistic of mining and natural resources than Australia.

He says the evidence suggests corporate activity continues to rise as majors bolster their growth pipelines for the next boom.

“I think it’s definitely a positive sign that the guys who should know most about the markets and the industry are putting their money where their mouth is and looking to access growth through junior companies,” he said.

“Gold, uranium, lithium, just to name a few, are commodities I’ve come across with disclosed or undisclosed corporate investors at the 10-19% shareholder level.”

Cashed up Canadians

That’s especially notable in the gold scene, where record prices this year have bolstered the balance sheets of the largest players at the same time as a gap in equity support hurts those not producing.

That means there are lots of undervalued ounces or exploration positions the giants of the industry are happy to pick up at a premium or via longer-dated farm-ins.

“For example, Agnico Eagle have gone into a company called ATEX, which is a TSX-V listed company in Chile with a massive gold-copper porphyry,” Forwood said.

“B2 Gold (which owns the ~450,000ozpa Fekola mine in politically risky Mali) are in a number of companies – Founders Metals in the Guiana Shield (Suriname), AuMega Metals (ASX:AAM) in Newfoundland for example.”

Well-heeled individual investors are also growing their holdings, Forwood noted.

“A name that pops up on every second register is Eric Sprott, he’s another one who’s continuing to invest through the downturn and putting his money where his mouth is,” he said.

As for where the smart money is going, Forwood said fundies up north appeared to be pivoting from the consensus theme of copper into the less well publicised silver market.

“Copper seems to be a bit in the doldrums, it’s not really attracting a lot of attention from fund managers. But silver is something fund managers and investors are very interested in,” he said.

“China is apparently paying a premium for silver ounces – there’s demand from the solar panel industry – and there’s a similarity drawn to the uranium industry five years ago that there’s a shortage but the price hasn’t really moved because stockpiles have been drawn down.”

When funds like Sprott and Yellow Cake PLC started buying physical uranium, it short-circuited the market, sending spot prices three times higher between late 2021 and early 2024.

It’s an example of what can happen when physical markets get tight, even if a break in contracting from utilities has since moderated uranium. A number of investors are betting on a silver market which has been in deficit for the entirety of the 2020s so far.

“As the market tightens up, and if silver starts trading as a precious metal rather than as more of an industrial commodity, it could go from an 85:1 gold ratio down to 30:1 ratio, and if so I think that’s what (bulls) are looking for as the stockpiles draw down,” Forwood said.

Stock read

Forwood says his travels uncovered a number of Canadian listed companies, especially on the TSX-V exchange, are seriously undervalued based on the gold resources they have in the ground.

“There’s a company called Tudor Gold, and it’s sitting on 34Moz at 1.2g/t, this is in British Columbia,” he said.

“It’s completely under the radar at a C$200m market cap.

“There’s another called STLLR Gold (backed by Eric Sprott) sitting on 18Moz across two project and a C$100m market cap.

“A lot of these resources are very deep, we’re talking more than a kilometre depth, so the market gives a discount on the cost of developing resources like that.

“But still if you had a resource like that in Australia you’d be scratching your head going why isn’t that being developed like say Hemi.”

Forwood said a number of TSX gold stocks remain discounted to Australia peers, predicting they will continue to look at dual listing on the Aussie exchange.

As far as ASX companies are concerned, Forwood said the tungsten market would be one to watch, having completed a trip to EQ Resources’ (ASX:EQR) Barruecopardo mine in Spain.

“Tungsten is a very interesting market. The EQ guys say there’s much more demand than supply for their concentrate,” he said.

“Traders are ringing up saying … we’ll take anything.

“But the price really hasn’t moved, so there’s a bit of a disparity there between what we’re seeing on the Metal Bulletin price and what’s being said in the market.

“It’s a turnaround story and I think EQR are doing a brilliant job in terms of increasing production and having wins across the board in terms of better recoveries of metal and more metal sales.”

EQR also owns the Mt Carbine mine in North Queensland and is planning to merge in a $13.5m deal with Vietnam ferrotungsten refiner Tungsten Metals Group, which pulled an IPO this year.

Other tungsten stocks on the ASX include Tungsten Mining (ASX:TGN), which owns the Mt Mulgine project in WA containing 259Mt of ore at 0.11% tungsten oxide and 270ppm molybdenum for 290,000t of WO3 and 71,000t of molybdenum metal. It also has 1Moz of gold among a host of metal by-products.

Group 6 Metals (ASX:G6M) reopened the Dolphin mine on King Island this year, but was forced into a recapitalisation earlier this month after losing $6.2m across its operations in the September quarter.

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