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- Mining experts say gold, battery metals and energy could provide safe havens
- Liam Twigger: stocks with ‘clear pathway’ to production and funding will benefit
- Minelife’s Gavin Wendt and Argonaut’s George Ross give us seven small caps for tough times
Gold, battery metals and energy are the mining sectors most likely to hold their value as inflation and rising interest rates send shockwaves through equity markets, mining gurus say.
Australian investors have been shielded from a bear market emerging at quickening pace in the US, where the tech-centric NASDAQ has blown up in the wake of 40-year highs in inflation.
But those chooks finally came home to roost on Tuesday as the local bourse lost $90 billion of value as a rare double-whammy of economic news throttled the ASX 200.
On one hand the losses that circled clockwise through the drain in North America went the other way down the dunny pipes Down Under.
On the other the prospect of rising metals demand from China that had kept our mining heavy major indexes afloat last week dissipated as word emerged of new localised Covid restrictions in Shanghai.
While the local indexes are not quite in bear market mode, some are well down in 2022.
The ASX 200 is off 11.47% year to date but the sell-off in small caps has been more savage, with Small Ordinaries down 23.72%, while the All Ordinaries Gold sub-index is down 8.27%.
Despite that the ASX 200 Resources and ASX 300 Metals and Mining Indices have been resilient, up 8.02% and 3.33% respectively and the ASX 300 Energy index is up a crazy 29.72% on rampaging coal, oil and gas prices following Russia’s invasion of Ukraine.
‘In 600BC an ounce of gold bought 350 loaves of bread, and I don’t know what your price of a loaf of bread is these days but it still holds true’
Argonaut deputy chairman and WA mining doyen Liam Twigger says the pullback in equity markets has come from heightened concerns about inflation globally.
“What’s spooked the market I guess is an accelerated push by various federal reserves and monetary authorities to push up interest rates to combat inflation,” he said.
“The governments were asleep at the wheel in terms of the the uptick in inflation, and now they’re fighting a rearguard action to try and bring it under control.”
But he says there are areas where small cap investors can head for safe haven.
“What we should see is a reallocation of money away from tech stocks, industrials, into where people feel there’s a safe haven from inflation and traditionally that’s been commodities and housing.”
As good as gold
Rising interest rates have set a negative tone and the sector has had its struggles over the last 18 months, but Twigger continues to like gold as a safe haven against inflation.
“You’ve got the long term historic protection against inflation being gold. In 600BC an ounce of gold bought 350 loaves of bread, and I don’t know what your price of a loaf of bread is these days but it still holds true,” Twigger said.
“There’s not many assets that you can go back over that period of time and say it still holds value and gold will always have a place in an environment where there is inflation.”
Twigger also likes metals linked to the decarbonisation narrative, with the shift from internal combustion engines to electric vehicles prompting a paradigm shift for demand in copper, nickel and lithium.
“Then you have this decarbonisation push, which if the world really wants to decarbonise and meet the thresholds set by 2050, you’re going to have a bucketload more copper for starters, and a bucketload more nickel and lithium,” he said.
“So the key commodities will be probably be copper first, lithium, and then nickel and to an extent iron ore.”
While last year’s rosy market conditions saw an astonishing 106 resources IPOs list on the ASX as Australia became the place to be for risk capital, Twigger says small caps likely to succeed now are those with established resources and a pathway to production.
“I think the chances of an exploration play going back to the market to raise money would need to be exceptional, but where the market will focus will be on anything that’s got a clear pathway to production and clear value,” he said.
“So a mineral inventory, a resource and a pathway to production and ideally using existing infrastructure.”
GAVIN WENDT – MINELIFE SENIOR RESOURCE ANALYST
Minelife senior resource analyst and founding director Gavin Wendt says the sectors he sees the most value in as safe havens are energy and gold.
He has one pick in each.
STRIKE ENERGY (ASX:STX)
Market Cap: $568 million
Strike Energy is up 27.27% year to date and is the operator of the West Erregulla gas JV in the Perth Basin.
“Strike Energy should weather the market storm pretty well, as it’s developing badly needed new gas supplies in Western Australia at a time of escalating energy demand,” Wendt says.
“Strike is also building an integrated, low-carbon energy and fertiliser business, based on access to its Perth Basin gas and geothermal resources.”
Strike is also dipping its toes into the water when it comes to green energy.
“It will also take that gas and add value to it through Project Haber, its 1.4Mtpa urea fertiliser production development planned for Geraldton, in WA’s Mid-West region,” says Wendt.
“Strike is also developing Perth Basin’s geothermal resources, which will supply dispatchable green power to Western Australia.”
CAPRICORN METALS (ASX:CMM)
Market Cap: $1.32 billion
Capicorn Metals has emerged as one of the ASX’s fastest growing gold stocks since former Regis Resources (ASX:RRL) and Equigold chieftain Mark Clark came on board as executive chairman.
Capricorn successfully opened its 110,000ozpa Karlawinda gold mine in the Pilbara on time and on budget last year.
“Capricorn is an emerging Western Australian gold producer, which should see market resilience as its exposure to the precious metals grows in line with its production ramp-up at its flagship Karlawinda project in the Pilbara region,” Wendt said.
“The project has been operational since June 2021, and is on track to achieve the top end of FY22 guidance of 110,000–120,000 ounces, with life-of-mine AISC costs of $1100-$1200 per ounce making Karlawinda a high-margin project.
“Upside comes from the +2,000sqkm tenement package, where like much of the Pilbara region, little meaningful modern gold exploration has been undertaken.”
Capricorn has a second option at Mt Gibson, a nearly 2Moz mothballed gold mine bought for just $40 million last year.
“Capricorn should generate strong cashflows and operating margins in a robust A$ gold price environment, which will enhance its attraction at a time of increasing corporate activity within the gold sector,” Wendt said.
GEORGE ROSS – ARGONAUT METALS AND MINING RESEARCH ANALYST
Argonaut mining analyst George Ross says he likes battery metals, and looks for a few key things in tough markets.
“In uncertain times companies with high-quality assets, manageable expenditures and strong cash balances are best positioned to weather the storm,” he said.
Market cap: $412.6 million
Centaurus owns the Jaguar nickel sulphide project in Brazil, and recently raised $75 million for development studies on the mine.
“CTM hopes to produce a low carbon footprint nickel sulphate product suitable for NCM lithium batteries. The company is well funded after raising $75m in January,” Ross says.
Market cap: $82.4 million
Lunnon Metals is a Kambalda nickel explorer which recently reported a maiden resource containing 15,000t of nickel at its new Baker deposit.
It is the only ASX-listed owner of WMC’s historic Kambalda mines outside of $2 billion-capped Mincor Resources (ASX:MCR).
“The KNP (Kambalda Nickel Project) hosts ex-WMC mines: Foster, Jan, Silver Lake and Fisher,” Ross said.
“These deposits missed out exploration and development during the last nickel boom due to being locked up in the St Ives Gold Mine tenements.
“LM8 holds approximately $33m in cash and can fast track development if high nickel prices are maintained.”
Market cap: $168 million
Ross says AIC is one of Argonaut’s favourites in the domestic copper producer space.
“The Eloise copper-gold mine is a quality producing asset and is backed by a superior management team,” he said.
“A1M should end the June quarter with more than $30m cash to fund ongoing exploration and operational activities.”
Market cap: C$2.42 billion
Ross is also interested in the uranium space, but is looking further afield at an up and coming Canadian developer as his pick.
“The world desperately requires more low carbon electricity, and nuclear power will be part of the solution to this problem,” he said.
“In the uranium space I like NexGen Energy, owner of the Rook I development project in Canada. Arrow is a high-grade uranium deposit which will produce upwards of 30Mlbs of uranium per year at less than US$10/lb of U3O8. NXG holds ~C$160m cash at bank.
Market cap: $11.5 million
Black Canyon is exploring for manganese, something Ross regards as a “forgotten battery metal”.
“Manganese is the forgotten battery metal and is a key ingredient for NCM cathode,” he said.
“Black Canyon are a WA manganese minnow who have established an impressive Resource inventory at the Flanagan Bore Project.
“Recent first pass metallurgical tests delivered excellent results. BCA holds approximately $5m cash at bank.”
The analyst quoted publishes research on CTM, LM8, A1M and NXG and owns stock in A1M, BCA and CTM
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