Prospecting for value in resources

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Commodities have been on a wild ride of late. It was only on Friday that iron ore had rallied above $70US/t; overnight another big fall had prices back below $63US/t. Not all commodities are moving in unison, as gold, silver and nickel have all held up well this week. Many resource commentators and experts alike have begun to call a bottom in the resources cycle, so for those brave enough to take a dip in the resources pool, where are the most attractive spots to look? John Robertson, Director of EIM Capital Managers, thinks ‘soft’ commodities offer the best equity investment prospects. “I would emphasise agriculturally oriented commodities like phosphate and potash,” he said exclusively to Livewire. Russell Delroy, Director at Nero Resource Fund, favours a more high-tech approach. “We have held a significant portion of the fund in lithium exposures for some time now. It clearly has the best demand dynamics of any commodity globally at present,” he shared with Livewire.

This comes with an important caveat; “careful attention needs to be paid to actual demand vs. forecast, though, and we expect a supply response will eventuate within the next three years,” Mr. Delroy said.

The supply response mentioned goes some way to explaining Mr. Robertson’s differing view on lithium. “I will always be most bearish on commodities that show the largest deviation from their production costs. At this point in the cycle and contrary to market sentiment, that is lithium.”

Bulk commodities remain out of favour, with both Mr. Delroy and Lion Selection Group’s Hedley Widdup, identifying thermal coal as one of the least attractive places to invest.

Commodity market fundamentals are just one factor when considering a resources investment, so what do our resources experts have to say about individual equities?

“Based on skill and prospectivity rather than where leverage is greatest, St George Mining, Impact Minerals and Enterprise Uranium stand out at the exploration end of the market,” Mr. Robertson said. However, he points out that a portfolio approach is necessary, rather than looking at individual stocks. At the time of receiving these comments, St George Mining was sitting at 13c per share; upon the announcement of significant new results, the share price shot up over 60% today to over 20c. “At the development stage, Potash West, Australian Vanadium, Danakali and, among the gold miners, Blackham Resources offer strong underlying returns on invested capital,” he added.

If you like energy, Mr. Delroy has a couple of suggestions. “Sino Gas and Energy Holding (SEH) is an unloved gas producer with a healthy risk/return profile in our view. They are well capitalised with a growing production profile and operating in a healthy gas price environment (Chinese domestic gas market). The project is of scale and located onshore, so development costs are relatively low.” For the less adventurous, there’s still value to be found in the sector; “if you’re feeling more risk averse but looking for a contrarian exposure to the oil sector then Karoon Gas Australia is compelling given the substantial discount to cash.”

Offering a very different option, Mr. Widdup suggests an opportunity outside the more traditional commodities. “There’s a tin company within our portfolio, Kasbah Resources, which looks to be turning the corner. It’s come up with a very attractive, small project, start up option, which looks quite viable at current prices.”

View John Robertson's profile: (VIEW LINK)

View Russell Delroy's profile: (VIEW LINK)

View Hedley Widdup's profile: (VIEW LINK)

Disclaimer: The information contained in this article is general in nature and should not be relied upon. Before making any investment or planning decisions, you should consult a licensed professional who can advise you whether your decision is appropriate for you. The author and contributors may have commercial or financial interests in the companies mentioned. Views expressed are those of the contributors and not Livewire Markets.


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