Buy Hold Sell: 5 stocks for the run in resources

In this episode, Merlon Capital Partners' Neil Margolis and Totus Capital's Ben McGarry analyse five topical resource names right now.
Buy Hold Sell

Livewire Markets

Last year, metals, mining and energy stocks performed spectacularly well. Scan a list of the best performers from 2022, and it's really only coal, lithium, and oil and gas exposures that took out the top spots. 

Think names like Whitehaven Coal, New Hope, Core Lithium, Woodside Energy Group, Coronado Global Resources, Stanmore Resources, and Yancoal - these resources plays delivered double-digit, and in some cases triple-digit returns in a year when the rest of the market fell flat. 

But can resource stocks continue to run over the year ahead? In this episode, Livewire's Ally Selby is joined by Totus Capital's Ben McGarry and Merlon Capital Partners' Neil Margolis for their analysis of three topical resource names right now. 

Plus, they also name their top pick within the mining and energy sectors for the year ahead. 

Note: This episode was filmed on Wednesday 8 February 2023. You can watch the video, listen to a podcast, or read the edited transcript below. 

Edited Transcript 

Ally Selby: Hey, how are you doing? And welcome to Livewire's Buy Hold Sell. I'm Ally Selby, and if there's one sector you are absolutely loving at the moment, it's resources. So today we're joined by two of the top-performing fund managers from 2022 to analyse some of the best of them. To do that, we're joined by Ben McGarry from Totus Capital, and Neil Margolis from Merlon Capital. 

First up, we have Newcrest Mining. It's been in the news over the last few days. Its share price has jumped 14% on the back of the recent takeover approach from Newmont. Neil, I might start with you. Is it a buy, hold, or sell?

Newcrest Mining (ASX: NCM)

Neil Margolis (SELL): It's a sell. And to be open, I would've said that a week ago before the takeover offer. We struggle a bit with gold here. I mean, gold went up a lot when the Federal Reserve's balance sheet went from US$1 trillion to US$9 trillion. The world seems to have changed last year. Real interest rates have gone from -1% to +1%, and typically gold falls in that environment. So gold should be quite a bit lower. And if it was, everyone would say that makes sense. So we think gold looks high relative to where real interest rates are. And then the second reason is that they've got a great mine in Cadia, but the Lihir mine has actually got similar production, doesn't have the copper offsets, and is not as valuable in our view.

Ally Selby: Okay, over to you Ben. Is Newcrest a buy, hold, or sell?

Ben McGarry (HOLD): It's a hold for us. I don't have a strong view on gold or whether the takeover will go ahead. These things do fall over from time to time, so no strong view. Hold.

Whitehaven Coal (ASX: WHC)

Ally Selby: Okay. Next up, we have a darling from 2022, it's Whitehaven Coal. Ben, back to you. Is it a buy, hold, or sell?

Ben McGarry (BUY): Whitehaven's a buy. I know it had a great run last year, but it's returning a ton of capital to shareholders in the form of dividends and buybacks. Last year, they bought 10% of the shares back. This year, they've got authorization to buy a quarter of the shares back. They don't have any approved expansions ready to go, so all of the capital comes back to shareholders, and at current prices, that's super attractive. So it's a buy.

Ally Selby: Speaking of that run, it rose a whopping 195% over the last 12 months. Neil, can it go even higher? Is it a buy, hold, or sell?

Neil Margolis (SELL): It's a sell. It was one of our best stocks last year and the year before. But ultimately, you have to work out what's factored in. Coal prices are at around three times long-term levels. Quite simply, the market is pricing in that the coal price will stay high for about 12 months. So if you thought they could stay high for two years, it's a buy. If you thought they could stay high for six months, it's a sell. And as I said, prices are at three times the long-term levels. Coal's down 40% this year, it's quite volatile, and I just think you want to be investing in these industries when they're hurting and losing money. And times are just too good at the moment, but we could be a bit early.

Santos (ASX: STO)

Ally Selby: Okay, next up we have Santos. It really underperformed its larger peer, Woodside, last year. Neil, do you think this one's a buy, hold, or sell?

Neil Margolis (SELL): That's also a sell. We did very well out of oil stocks in the last two or three years. My colleague Ben was right on top of the underinvestment in the recovering demand. We've never liked Santos' assets. We liked Oil Search. We bought it in the middle of COVID-19. We think Santos shareholders got a better deal there. That's their best asset. They've just sold some of it. And while they've got a lot of cash flow, their assets are short-duration, high-cost - other than the one they've got from Oil Search. And they've guided to $3 billion in CapEx. So how do you even work out a free cash flow yield if they're expanding at this rate? So we'd prefer to be a sell on that one.

Ally Selby: Okay. Over to you, Ben. Its share price is down around 7% over the past 12 months, is that one a buy, hold, or sell?

Ben McGarry (HOLD): Yeah, we like the energy theme. Santos is a hold for us. The share price is down since COVID and the oil price is up nicely since pre-COVID. But we think there are better ways to play the energy thematic offshore. So Santos is a hold for us.

Stanmore Resources (ASX: SMR)

Ally Selby: Okay. We asked our fundies to bring along their top resources pick for the year ahead. Ben, what have you brought for us?

Ben McGarry (BUY): We like Stanmore Coal in the met coal space. It's only covered by one broker. It bought the BHP assets last year. Most of the major met coal producers have got declining production. It's a scarce resource geologically and globally. We need met coal to make steel for the green energy transition. Stanmore is puking cash and the BHP assets transform it from a short mine life, single asset company, into a reasonably long mine life (about 14 years) multi-asset producer. So Stanmore Coal is one we really like in the resources space.

Origin Energy (ASX: ORG)

Ally Selby: Okay. Over to you Neil. What's your top resources pick for the year ahead and why?

Neil Margolis (BUY): I was almost going to pass because we've significantly reduced our energy, coal exposure, and our gold. So I actually will go with Origin Energy, which is not 100% resources. Although, it does have upstream oil and gas. And what I like about it is they're not spending CapEx. Woodside is slated to spend US$17 billion on CapEx in the next five to 10 years. So how do you even work out a yield? I like the fact that Origin's just passing that cash through to shareholders. They also have a 4.5 million customer retail book, which I think is being undervalued. They've got a gas fire generation portfolio, which is a good transition opportunity. And, of course, they've got the takeover on the table. Now, I'm not an M&A expert. I don't know whether it'll proceed or not. And if it doesn't proceed, I think the management will continue to unlock the value in those separate assets.

Ally Selby: Okay. Well, that's all we have time for today. I hope you enjoyed that resources special of Buy Hold Sell. If you did, why not give it a like? Remember to subscribe to our YouTube channel. We're adding so much great content every week.

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