This is not investment advice. Do your own research before taking a position in any of the securities mentioned in the post below.
As a rule of thumb, I do not invest in most resources companies because
Commodities businesses are price takers and in most instances they have limited capacity to obtain a moat (see exceptions below)
It takes a lot more skill to pick the commodity cycle than it does to assess the future margins of a non-resources business
Before I delve into it, I do acknowledge that the resources sector makes up a large amount of the ASX (17% Base Metals & 5% Energy & Utilities) and there is capacity to obtain significant outperformance if you can understand how to invest in junior miners (understanding their management, resource size, resource quality, access to infra etc).
That being said,I do not believe most retail investors should play in this space & even some fund managers get it very wrong too.
Ok - so that is the pessimistic viewpoint. Where's the upside?
Less ESG-friendly options
Top-tier oil produces such as Chevron or Woodside offered deep value when oil dropped significantly (e.g. when oil dropped $20bboe). Yes, it is likely that fuel stocks will struggle as we move to EVs, however, I consider there is +10yrs of cash runway until that happens for oil stocks
More ESG-friendly options:
For the ASX, I think there are three options for more ESG-friendly commodity companies
Production stage copper: Australia's copper production is 6x smaller than Chile's and aside from investments by BHP, Rio, Freeport, Anglo & Antofagasta... the majority of the big Chilean copper mines are owned by state-owned Cedelco. My preferred operators in copperare:
$OZL: Whilst currently trading a +15% premium to my valuation the upside for OzMinerals is expansion options at both Prominent Hill and Carrapateena (and to a lesser extent other mines). Most importantly, it offers longer mine term and less M&A risk compared to $SFR.
In the US, Freeport McMoRan (NYSE:FCX) is one of the more pure-play ways to get exposure to copper, however, the companies share price is also dictated by the cobalt/moly price
Production stage lithium: There are a number of players such as $MIN, $PLS, $ORE. Generally this sector is incredibly hot right now and whilst I consider the outlook for lithium to be strong, however, I would recommend people consider the following for these companies
$ORE has an integrated battery value chain (through its partnership with Toyota and PPES). This is operationally beneficial, however, it means the company closely tracks Lithium pricing which is very high atm.
$MIN - the majority of its cash flows are generated from iron ore and services. Once Wodgina reaches meaningful production (+150kt in 2024) it will be a more meaningful lithium operator however for now it is too heavily driven by services & iron ore.
Hydrogen investments: None of these have reached strong levels of commercialisation and hence are more speculative in nature. That being said, Mineral Resources does have a meaningful holding in Hazer
Diversified miners:
This area that starts to get more complicated, are diversified miners (e.g. BHP, RIO etc)
Personally, for these companies I do borrow some sell-side research to do calcs on which commodity drives their business most, where they are allocating future capital and most importantly whether there is a 'non-event' which leads to a reduction in share price. A summary of RIO vs. BHP is shown below
In conclusion, I do not invest in commodity businesses because they are price takers & judging the commodity cycle is very difficult. However, my opinion is:
Top-tier oil production companies will be highly cash generative in medium term & despite the fact that EVs are the future; they should not be completely written off today
Copper, Lithium & Hydrogen will be the building block of a lot of clean energy, with the former providing most production stage investment ops today
Sure, a lot of copper production is controlled from Codelco, however, the majors (inc. Freeport) and to extent OzMinerals are good ways to gain exposure to copper
On the local exchange, Mineral Resources and Orecobre offer meaningful production levels of Lithium; however the former is predominantly driven by iron ore & the latters valuation is also very elevated
Finally, Hydrogen is another major fuel source which has gained a lot of attention however, there is limited producers at scale on our local exchange. Mineral Resources holding in Hazer is likely one option, however, it is relatively inconsequential for their investment overall.
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