SUNDAY ROAST: The stocks that lit a fire under our experts this week

Lithium has a lot to answer for.

Namely, its prolonged inability to halt the slide in prices and stock values. It’s been a rough 12 months for ASX investors.

Garimpeiro suspects a medium-sized “V” shaped recovery is taking shape. But right now he’s more interested in how that huge confidence hit has killed your average investor’s appetite for resources stocks in general.

In particular, gold, where stocks are lagging noticeably out of whack with gold price. Especially explorers and those on the development side of things.

Which is a good thing because while that recovery is simmering, there’s a bit of a “double-tap” going on right now that makes gold look like a solid parking option. The yellow metal’s already tracked 8% higher in 2023 largely due to conflict in the Middle East, and a further 5% in 2024. Add to that a decent tailwind picking up as rates look to unwind and potential slide into recession ahead.

It’s in this space Garimpeiro has gone looking for stocks “poised to benefit when investors put away their Chicken Little books”, and found a couple in Bellevue and Spartan.

“Gold price, tick. Newsflow from projects, tick. Cheaper than they were, tick.”

Bellevue Gold (ASX:BGL – $1.29, $1.58bn MC): Down 22% on its starting point for (calendar) 2024.

BGL is not strictly a developer – first production was in October – but it is still in the ramp-up phase in WA’s Northern Goldfields.

It’s on its way to annual production of 200,000 ounces at sector-leading costs. This is one of Australia’s cheapest producers.

Keep this up and the market will shift from valuing the stock on a discounted cashflow basis to a free cashflow multiple basis. Read “candidate for a substantial re-rating”.

Spartan (ASX:SPR – 45c, $429m MC): Spartan caught Garimpeiro’s eye in July last year when it was an 18c stock sitting on a game-changing Never Never discovery in WA’s Murchison region.

Sitting on and parked next to a 2.5Mtpa processing plant struggling to make money processing less than 1g/t feed.

Not for much longer. That Never Never resource now stands at 950,000oz at an impressive high grade 5.74g/t. Five rigs are whirring away ahead of a mid-2024 resource update.

That current resource is based on depths down to 500m. Some of the holes are planned to be pushed down to 900m, and a possible plant restart could lead to first production of high margin ounces as soon as the second half of FY2025.

Romano Sala Tenna
Portfolio manager, Katana Asset Management

Small caps have now underperformed the ASX200 by ~20% over the past three years. Time, according to Sala Tenna, to don the small cap sunnies, because some of the signals he looks for in a small cap comeback are starting to glimmer.

The best option, he says, is to choose a mix of quality emerging companies. “And remember – if you’re hunting small caps – you’re going to require a shotgun, not a rifle.”

Here’s a couple in Katana’s crosshairs lately.

Pepper Money (ASX:PPM – $1.47, $646m MC): “One of the best risk-return opportunities across our entire stock universe,” Sala Tenna says.

The awards certainly stack up – Best Specialist Lender for the past 11 years. Best Non-Bank Lender in 2017, 2019 and again in 2021 and 2022. In 2023 alone, PPM won a total of 11 awards.

Also key – Sala Tenna’s “channel checks” show PPM “is known for fast turnaround times, consistency, and great customer service”.

“This has led to more than 20,000 brokers distributing their product – and this figure is growing by the month.”

Before the RBA’s 13 rate rises, PPM averaged an AUM growth of 21.3% per annum for 8 years “and considerably more at the bottom line”.

Sala Tenna blames “hysteria around cyclical fluctuations in net interest margin and loan volumes” for seeing the stock sold down from its IPO price of $2.89 to today’s levels.

West African Resources (ASX:WAF – 84c, $862m MC): More gold, this time with the tagline of, as the name suggests, an “African discount”.

More importantly for Sala Tenna though, “we’re not aware of any 200,000 ounce per annum low-cost gold producers trading on a market capitalisation of less than $1 billion”.

Last calendar year the Burkina Faso operation produced 226,000 ounces from its Sanbrado mine at US$1,126 per ounce. That equates to “significant paper profit, but more importantly, strong operating cashflow.”

According to Sala Tenna, this factor alone justifies a notably higher valuation.

Worried about risk? West Africa is the largest gold producing region globally. And Burkina Faso itself is ranked #1 globally for permitting times and construction costs.

WAF is also rapidly developing another gold project south of Sanbrado with a 19-year mine life averaging 220kozpa – and first production slated for the late 2025.

The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.

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