Over the last 12 months, the world has gone through one of the most defining moments of human existence. We were living in chaos. However, if you are an investor or trader within the Australian Stock Exchange (ASX), you would have experienced one of the greatest shows in 30 years.
Will the show go on?
Figure 1: The recent GameStop squeeze in the US market is an example of how retail investors are swamping markets all over the world.
From an investing point of view, this has been the best time to take that punt in a stock. Did we know that this was going to be like this? I was doubtful. Some may say that they did, but I would say that there would be very few out there in the real world who knew.
Figure 2: Stock Exchange Index (source: www.igmarkets.com).
When you look at the charts in Figure 2, you can understand why the equity markets have been a spectacular place to make money. The trend is still going up but in the last couple of weeks, the gold sector has been taking a battering.
When you look at the charts in Figure 4, you can see that the gold companies are almost at the same level as 12 months ago. As many people would remember, that was the whole COVID-19 pandemic rearing its head up.
My views on gold
For the precious metals, there is a definite pullback for gold equities, but when you look at the physical gold price, it has not pulled back that much (Figure 3). The gold price in AUD may have dropped, but the producers are still making a lot of margins. At the most expensive AISC, they are still looking at a margin of around AUD$800 per ounce. Let's face it, even at AUD$500, they are making good money.
Figure 3: Price of spot gold since 2019.
My take on gold is that its movement is going to be dependent on how the market views all the stimulus that has been given out and what else is in store in the coming years. The pandemic has made free-flowing money seem like an everyday occurrence.
For the traditionalist, this is a sure sign of inflationary issues. If this is the case, then you would hedge your bet that the gold price should rise.
Figure 4: The share price journey of mid-tier Australian gold producers and a near-to-production company.
Gold has been the darling of the market for the last 12 months and it would be no surprise that it would take a retreat. As one technical trader once told me, sometimes the markets need to take a breather before trying to break the new high. Assuming that is the case, this would be a great time to look for good positions.
Hence, for those who missed out on stocks that had taken a run previously, this will be a great opportunity to position yourself for the next run. There are still many companies with real value and were unloved by the market. Currently, I can see a few companies that have a great story with discoveries but the market made them unloved.
As the experts always say, invest from the top down. That means bet on the bigger 'safer' counters first, like the producers, and work down.
Figure 4a: The share price journey of Lefroy Exploration Limited (ASX:LEX).
In saying that the precious metal has taken a backward step, what is good to see is that exploration successes are still being rewarded. Many companies that are explorers now and have discovered some great intercepts are being rewarded (See Figure 4a).
One such company at the time of writing is Lefroy Exploration Ltd (ASX:LEX). They have recently announced, ‘Outstanding High-Grade Gold and Copper Mineralisation Intersected at Burns’ and this has done wonders for their investors. This is another clear case of good management and good projects and the trust of their investors.
As Rick Rule pointed out recently in a Coffee with Samso he made with me in 2020, entitled, Markets and Commodities with Rick Rule he mentioned that gold is sought after as insurance and when people start talking about silver, greed is in the air. Now if you take that as a basis for your investment, you have to feel that the precious metal will continue to be in your favour.
What commodities would be in demand?
This one is very simple. We all know that we are looking at the next industrial revolution, with the introduction of electric vehicles. I call this the "Green Evolution" i.e. to have all matters of manufacturing and mining for us resource people, to be green.
Green mining is the new catchphrase.
So, what is needed with this EV Revolution is lithium, graphite, nickel, copper, tin, tungsten, and wait for it ... uranium. I must point out that this list is just what is in the bright lights. I feel that the mining of these metals is the lowest form of EV Revolution. I believe that the main players would be the ones with processes that make whatever the EV Revolution requires.
And they are, for example, Andromeda Metals Ltd (ASX:ADN) with their halloysite, Altech Chemicals Ltd (ASX:ATC) with their HPA applications, EcoGraf Ltd (ASX:EGR) with the graphite recycling, FYI Resources Ltd (ASX:FYI) with their HPA applications, taking a lot of the bright lights.
Before I am swamped with emails and messages for not mentioning many others, let me say that these companies are what is rolling out of my brain space now. I am sure there are many more out there which I have not learned enough to know at this point in time.
Figure 5: Share price chart of EGR and FYI. (source: commsec.com.au)
Companies like EcoGraf and FYI Resources (Figure 5) have created so much attention that their share prices have taken a run and whether this trend will continue depends on how well their business plans are executed. What is obvious is that they represent another part of this EV Revolution that does not involve assays, drilling and geologists.
My views on nickel and copper
Nickel and copper are two metals that have been threatening to show a strong supply shortage for many years. In fact, I even wrote an article 'Is the Commodities Shortage a Mirage?' highlighting this issue but it still had not happened. I followed it up with another article nine months later with 'Shortages in Metals'.
Figure 6: Copper price chart.
The recent run in copper and nickel will keep many companies like Hot Chili Ltd (ASX:HCH), Blackstone Minerals Ltd (ASX; BSX), Galileo Mining Ltd (ASX:GAL), Cyprium Metals Ltd (ASX:CYM) and even the likes of aspiring explorers such as Adavale Resources Limited (ASX:ADD) in the spotlight.
What will drive this market is the introduction of the Environmental, Social and Governance (ESG) factors. There is now a major requirement or a growing requirement for projects to have a 'Green' flavour. This will create more work to make things happen and as end-users push for this, I cannot see how you can make this happen without a rise in CAPEX and OPEX. To facilitate all of these requirements, the metal price has to be at a level that is consistent with the demands of the users.
My views on zinc
It seems that this is slowly coming to fruition and my other favourite metal, zinc, is also looking to break new highs (Figure 7). This metal has been touting a global shortage for at least the five years that I have been following it. When you look at the chart, it is not as impressive as the others that I have mentioned but it appears to be moving. For those that look at charts, prior to the breakout, the pattern tends not to be overly impressive. I guess that is why they call it a breakout.
Figure 7: Tin and zinc price chart.
My views on tin
Tin is another metal that is taking a run. My recent Coffee with Samso with Venture Minerals Limited (ASX:VMS) entitled 'Time for Critical Metals - Tin and Tungsten: Venture Minerals Limited (ASX:VMS)' explains how this can become impactful for its shareholders if they are allowed to mine their Mount Lindsay Tin and Tungsten Project in Tasmania, Australia.
How tin positions itself with the EV Revolution will determine how durable this price rise is but it does not take a genius to realise that something may be brewing. A durable run like this will make a company like Venture Minerals re-rate easily by the markets. What may be a double benefit for Venture Minerals is that historically, tungsten prices have followed the rise in tin. That could be a dark horse in this sector.
Currently, I do not see the market slowing down. A near-term correction may happen, but I feel that for the long-term visionaries, it will be a good story. As I mentioned, even though the gold sector has slowed down, there are still lots of opportunities that are being rewarded. We all know that the ASX growth is not restricted to commodities. Everything is flying and there are lots of professional information that would support the buoyancy that is being experienced in world markets.
In my humble opinion, like everything else, caution is the key aspect of investing in this market. The fund management concept of a balanced portfolio at this time could make a lot more sense to all levels of investors, especially the retail investor.
Do what the pros do!
For many years I have been watching the likes of Warren Buffett telling us how to invest and what is the safest way to do things. This is a great time for the small retail players to adopt this same policy for investing in the small-cap industry. The professional investors look for good management, good business models and the rising sector, so we should also look for similar things in the small-cap sector.
Warren Buffet has said many times that if he does not understand what the business is and how they're generating the appreciation in capital he does not get into the stock. I think this is a good addition to our style.
That thinking would stop people from getting into too many ‘Casino Investments’ with the FOMO (Fear of Missing Out) factor that drives all the bad investing decisions into those ‘Hot Stocks’. Many years ago, a very smart man, Geoff Donahue, had this same attitude. For me, this has been the game-changer in how I look at this market.
Will the great show in commodity markets continue?
I think this run over the last 12 months has more legs to come. The EV Revolution is going to drag even more money into the sector, at least for the next 12 months. The uncertainty in the supply of nickel and the EV metals will create concerns from producers and end-users of these metals.
Scott Williamson in one of our Coffees with Samso mentioned that during his conversations with end-users that they were uncertain about the supply equation. End-users were not sure if the upcoming demand was going to be a walk, a run or on a rocket. If it comes on a rocket, there are going to be major problems. What his people are telling them is that they are feeling, the rocket version may be a likely scenario.
The current rise in copper pricing, the ever-reliable Dr Copper, seems to be pointing to a buoyant world economy. As the good Doctor is an indicator of world economic growth, it is looking like exciting times for all industries, are here to stay. Personally, the apparent sudden tin price rise may be the clue that the so-called new economy is going to drag all metals back in fashion.
This is based on the fact the new world has to be more efficient and slimmer in costings. The pandemic has made some clear references to having economies be less dependent on human interaction. Robotics and AI are going to be the focus which will mean more innovative thinking on raw materials used.
The isolation of China may bring down the monopoly on metals such as REE, tungsten and tin. If this is the case, there are many companies that will benefit. The effect of this is that the sector will get a continued injection of cash which will continue the resurgence in the mineral resource sector.
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