The 2021 financial year will be remembered as the year in which global equity markets recovered after the initial shock of the COVID-19 pandemic.
The co-ordinated global commitment to economic stimulus, followed by the release of effective vaccines, enabled the market to not only recoup the COVID-induced losses, but also surge to new highs.
The Green Transition
The 2021 financial year will also be remembered as the “tipping point” in the discussion on climate change and the urgency to reduce greenhouse gas emissions.
It was the year in which the common mindset moved from awareness and speculation to action.
The lingering question of “Is this really necessary?” was answered with governments enacting tangible policies and companies committing to specific corporate actions to make it happen. This trend is further accelerating, driven by a voting public and investor base that demand immediate action.
By year end, the European Union had committed to cease producing internal combustion vehicles by at least 2035, the UK had committed to phase them out by 2030, and the US, under the Biden administration, plans to have EVs account for over half of all vehicles produced by 2030.
The green transition is good politics. Most global auto manufacturers have also begun to shift their vehicle mix to EVs with Volkswagen, General Motors, Mercedes Benz and Volvo all announcing ambitious EV growth objectives.
Accelerating EV Adoption
In a recent research report on the lithium sector, Canaccord Genuity estimated that EV sales would increase from around 2.5 million vehicles in 2020 to almost 40 million by 2030, with the European Union having an EV penetration of over 60% by 2030.
Transportation and power generation are estimated to account for between 50% – 60% of global greenhouse gas emissions. As such, the shift to EVs is a good step in addressing a major carbon emissions source. Power generation remains heavily reliant on coal and gas as feedstocks.
While good progress has been made with renewable energy sources such as wind, solar and hydro building market share, technology advances are still required in battery storage to enable these intermittent energy sources to take over base load supply.
Non carbon producing fuels, such as uranium, also offer potential but again, technological advancements are necessary if this is to become a core baseload fuel. Thermal coal is no longer a preferred choice for new power stations in first world countries and gas has been positioned as a transition fuel – likely to be used for power production until a better alternative is found.
Commodities of the Future
This decarbonisation transition in both the transport and power sectors will have a profound impact on the resources sector. Demand for commodities such as copper, nickel and lithium will be supercharged as a large and rapidly expanding demand source kicks in.
Consistent with this theme, Fitch Solutions produced a report titled, “Which Are The Commodities Of The Future?” in mid-April 2021. The report sought to identify those commodities with the best outlook over the next twenty years. Along with copper, nickel and lithium, they also named tin, aluminium, rare earth and cobalt among the “Commodities of the Future”.
Fitch had a “Stable to Upbeat” rating for natural gas and a “Stable to Downbeat” outlook on oil, iron ore, steel, lead and zinc. Commodities on the decline included coking and thermal coal.
The question then is how you should position your portfolio to gain exposure to these future commodity outperformers.
The leading resource companies in Australia tend to be aligned to iron ore (BHP, Rio Tinto, Fortescue) or oil and gas (Woodside, Santos and Oilsearch), so we have looked beyond the normal passive resources portfolio favourites and identified the 5 resource stocks best aligned to the commodities with the strongest growth outlook.
These five companies are the larger market capitalisation companies that already have existing production assets aligned to the expected commodity outperformers. All have produced outstanding results over the past 12 months.
The ‘Big Five’
Oz Minerals (OZL) – Market Capitalisation $7.4b
Arguably the best managed resource company in Australia, Oz Minerals operates two major copper projects in South Australia (Prominent Hill and Carapateena) and has a smaller operation in Brazil.
The company has significant brownfields expansion opportunities at its existing mines and is also considering developing the West Musgrave nickel/copper project in Western Australia.
Oz Minerals share price has risen by 61% over the past 12 months.
IGO Ltd (IGO) – Market Capitalisation $7.4b
IGO have been busy on the corporate front over the past year, selling out of its 30% interest in the Tropicana Gold mine for $900 million and spending $2 billion on a 25% interest in the Greenbushes lithium mine in Western Australia and a 50% interest in the downstream lithium processing facilities.
With its existing low cost Nova nickel mine in WA the group has the ideal future facing commodity mix of lithium and nickel.
IGO’s share price has risen by 109% over the past 12 months.
Pilbara Minerals (PLS) – Market Capitalisation $6.7b
Pilbara Minerals is a major Western Australian based lithium company poised to significantly lift its production of spodumene concentrate following the expertly timed acquisition of Altura Lithium Project. The group is moving towards nameplate production of 330,000 tonnes per annum spodumene concentrate with an aim to lift this to 580,000 tonnes per annum by mid calendar 2022. Pilbara is ramping up volumes just as expanding demand is driving product prices higher.
Pilbara Minerals share price has risen by 604% over the past year.
Galaxy Resources / Orocobre – Market Capitalisation $5.9b (combined)
The two lithium companies are in the process of merging their operations which will create a large global player in the lithium space. Production will span from hard rock spodumene to lithium brines and downstream processing. The enlarged group will have a strong balance sheet and an abundance of growth opportunities.
Galaxy Resources share price has risen by 344% over the past year, whilst Orocobre’s share price is up 217%.
Lynas Rare Earths – Market Capitalisation $6.8b
Lynas is the world’s second largest producer of separated rare earth materials and the largest outside China. Rare earths are used in the production of magnets for use in electric vehicles and wind turbines, among other uses. The core asset is the tier 1, high grade, long-life rare-earth deposit at Mt Weld, Western Australia. It owns and operates a cracking and leaching, solvent extraction and product finishing operation in Malaysia and is progressing a heavy rare earth opportunity in the US. Further it has committed to build a rare earths processing facility in WA.
Lynas’s share price is up 192% over the last year.
Argonaut Funds Management launched its Argonaut Natural Resources Fund in January 2020 and currently holds Oz Minerals, IGO Ltd and Galaxy Resources in its portfolio. In the year to 30 June 2021, the Fund delivered a return of 56% and outperformed its benchmark index (S&P ASX 300 Resources Index) by 31%. The Fund is now open for investment.
*David Franklyn, Executive Director & Head of Funds Management, Argonaut. Franklyn has over 25 year’s financial markets experience including almost 10 years as head of research at a leading small company’s stockbroker and 10 years as managing director of a boutique funds management business. He is an experienced business executive, having held senior roles in listed and unlisted companies.
The information provided in this article is general in nature and should not be taken as specific investment advice. Readers should discuss their personal financial circumstances with their investment advisor before making any investment decisions. Past performance is not indicative of future results.
