Report From the Resources Roadshow
Recently I flew up to the Gold Coast to attend the annual Resources Rising Stars conference.
This is a forum for small junior exploration firms to present their investment case to investors.
It was my first time at the event. I’d like to share some thoughts that I gleaned from the conference with you.
The headline speakers were mainstream economist Saul Eslake and Peter Switzer. I was primarily there to hear fund manager Hedley Widdup present.
He’s a trained geologist, and now works as an investment manager with Lion Selection Group, specialising in the resource sector.
Hedley made the point that commodity stocks have seen a very strong recovery out of the 2016 low. But he’s confident that there’s more upside to come.
One reason relates to something I’ve stressed since 2017 — that junior explorations firms were totally cut off from funding for a long time.
That means there’s plenty of catching up to do for the industry as a whole. And make no mistake — it is junior exploration companies that carry the burden of finding new resources. The major miners only account for about 10% of new discoveries.
The good news is that sentiment around the whole sector is much improved. Junior miners are raising money to go out and look for new deposits.
Insight from a resource insider
Hedley made the point that with this amount of spending going on, they’re going to start making discoveries. This could put a rocket under the whole sector, as these stocks often surge when they hit something.
Hedley’s favourite way to capitalise on the current merger and acquisition cycle is with mid-tier resource stocks, focusing less on the majors. That’s because there are few deals that make sense to a company the size of BHP or Rio Tinto.
But companies with a good production profile and cashflow can make strategic plays by acquiring juniors with good assets, or by entering into joint ventures.
This suggests my strategy in Small Cap Alpha of acquiring potential targets looks a good one.
Hedley also made the separate point that there’s still a lot of interest from Chinese investors for good projects.
China’s appetite for raw materials remains enormous. This gives us plenty of scope to profit from demand in the Middle Kingdom if we can find the right junior stocks that stand to benefit.
There’s also going to be much more money spent on exploration, and more capital raisings in the junior mining sector.
Lion Investment Group has a ‘resource clock’ that depicts the historic mining cycle.
Hedley says we’re at the exploration phase of the cycle (8 o’clock – still in the rising period) and may be for years, which is great news for subscribers of Small Cap Alpha.
Hedley’s presentation confirmed we’re mostly on track with my general assessment that there’s a lot of potential money to be made from opportunities in mining in the coming years.
Let’s now touch on some other things I took away from the conference.
Be a little wary of these two sectors in general
Naturally, all the companies at the conference presented a bullish scenario for their stock.
Gold stocks and ‘battery mineral’ related companies dominated the platform. Ironically, neither of these sectors particularly excites me at the moment.
One reason is that the electric car theme, while genuine, is widely known now. The best breakout moves tend to happen when widespread understanding is low and facts are obscure.
The ‘best’ time to buy lithium exploration stocks was in 2016 — not now.
Don’t get me wrong; I’m still excited for the lithium exposed stocks on the Small Cap Alpha buy list.
But momentum here will now be based on genuine production and cashflow, as well as industry development.
The hype phase of lithium has passed. Cobalt has also run hard now, in my view, which makes me wary.
As for gold, I don’t see any major price surge. The Aussie dollar’s drop has been a tailwind for the Aussie gold sector recently. North American gold stocks are not enjoying the same benefit.
The industry bellwether in the US is the HUI Gold Index. It’s down for the year.
This Aussie-dollar tailwind might just be ready to phase out. I think the strong exports of coal, LNG and iron ore that we’re seeing now will prevent the Aussie dollar dropping much further.
So we need gold to show strength, but I’m too positive about the global economy to expect any sort of ‘chaos’ surge.
But I don’t expect gold stocks as a sector to break out in a big way anytime soon. Of course, I’m always open to being proved wrong.
So that’s my ‘big picture’ assessment on lithium and gold junior explorers.
All in all, I am very pleased I attended the conference.
I’m keeping all the companies I saw present on a watchlist, and will track how they progress.
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