Welcome to Ten-Bagger, where Lowell Resources Fund chief investment officer John Forwood gives us his take on a sector of the ASX resources market full of value.
This month, John tells us why gold and copper runs could be turning into an ‘everything rally’.
The last time optimism around commodities felt so high was 2021.
Those were innocent days as the initial fear over the Covid outbreak washed away, governments pumped obscene levels of stimulus into their economies (inflation be damned) and metals like copper, nickel, zinc, aluminium and iron ore rummaged their way to record highs.
Reality set in as China’s helium balloon economy popped in the stratosphere, Russia invaded Ukraine, reserve banks hit the big red rate hike panic button and technological advancements put battery metals in the doghouse.
We started to see the end of the pessimism late last year as gold prices responded to the end of the inflation peak and rising geopolitical tensions with a rally to all time highs, and early this year as supply shortages prompted an earlier than forecast bull run for copper.
Oh, and decades of under-investment merged with suddenly friendly government policy towards nuclear power to make uranium a commodity to watch.
Lowell Resources Fund (ASX:LRT) CIO John Forwood, whose fund prospered largely due to backing Azure Minerals (ASX:AZS) through last year’s junior lithium boom, says we are now getting closer to the next ‘Everything Rally’.
“There’s gold, copper, uranium, but when you look across the board there’s so many metals and oil and gas which are up since the start of the year,” he said.
“That’s interesting particularly in light of the strong US dollar. Normally gold in particular performs better when the US dollar is weaker.
“It’s got people scratching their heads as to why this is occurring. The two best performing commodities this year amongst what I’ve been looking at are silver, up 17% compared to gold up 13%, and tin up 27% compared to say copper which is up just under 10%.
“Even things like oil, which is the biggest market of all, is up nearly 20% this year, but other things that have been hammered like lithium, nickel, rare earths have bounced back and even iron ore has bounced back.
“It’s really interesting to see that and all these different metals or commodities have different dynamics but you see them moving almost in sync now.”
Does that mean the uptick in the cycle is here?
It took around six years from the bottom of the last bust in 2015-2016 to hit a crest in 2021-2022. Could the market be turning faster this time around?
It’s a little early to say, with Forwood noting gold’s strong run for instance could be real or it could well have thrown the commodity off the edge of the cliff.
Notably, strong US jobs data that came out last week was batted off by seemingly impervious commodity markets like Mario with a star in his stomach, despite suggesting interest rate cuts are further away than the market has hoped.
But Forwood says the is glass half-full right now.
“There’s a lot of strength in the gold market and we’re seeing continued transfer ownership of gold from the West to the East. It’s interesting to look at the ETFs,” he said.
“Gold ETFs in the US are net sellers of gold or have been net sellers of gold, whereas in China there’s a gold ETF which is trading at apparently a 30% premium to its underlying net asset value.
“So the Chinese have been piling into gold, and I think that’s one of the big reasons not just the central bank, but one of the big reasons for putting the strength in the gold price.”
Follow the mo … commitment of traders’ data
That is a gold specific example, but it touched on a phenomenon being seen more broadly across the metals landscape.
Institutional investors and traders are ditching their shorts and doing net long on commodities at rates not seen in a long time.
“When you look at the commitment of traders, which is data out of the Commodity Futures Trading Commission in the US, they’re hitting multi-year high net long positions,” Forwood said.
“Last month brent oil hit net long position which was its highest since October ’21, gold highest since July ’20, silver a two-year high, copper highest since October ’21.
“My interpretation is this could be a bit of a rotation by investment houses looking to say OK we’ve had a fantastic run in equities, we’ve done really well out of AI and fintech and Magnificent Seven.
“Maybe we should be looking to generate returns elsewhere, maybe that run in equities is running out of steam and we should be looking at hard assets.
“And perhaps there are some generalist traders putting money back into commodities. Certainly in the last few years we’ve heard the opposite.”
That could mean upside in resource equities, whose movements in the past year have substantially trailed commodity prices. Historically the rise in equities tends to be 2-3x a lift in the underlying commodity price.
“Investment could be going into the metals or commodities themselves and not so much into the equities and that’s a theme that we’ve seen over a number of months,” Forwood said.
“Obviously the equities have moved. The GDX today is up 10%. But you would have expected them to move more and hopefully that means that there’s more upside in the equities and perhaps there’s a slingshot effect — touch wood.”
COT on #commodities covering the week to April 9.
Highlights:
Brent +304k, Oct 2021 high
RBOB +85k, Jan 2021 high
Gold +179k, Jul 2020 high
Silver +38.5k, a two-year high
HG Copper +51k, Oct 2021 high
Arabica coffee +68k, record
Lean Hogs +93k, a 10-year high
More in our Monday… pic.twitter.com/Bj2q2ATVHb
— Ole S Hansen (@Ole_S_Hansen) April 14, 2024
What companies is Forwood tracking this month?
Gold and copper have stolen the headlines in recent months, but it is the aforementioned minor markets of tin and silver where John Forwood has cast his gaze in April.
Silver is currently paying US$28.47/oz, having hit a decade high of US$29.03/oz on April 12.
“Silver usage is different to gold and it’s got about 40-50% industrial usage versus investment demand,” Forwood said.
“There’s certainly growing use of PV cells — solar panels use a lot of silver and the growth in that has been exponential, and also EV chargers use a lot of silver so there’s a growing industrial demand for silver.”
Currently the price appears to be investment driven, given it has been in lockstep with gold.
But there are only a handful of places on the ASX to find primary silver exposure, Forwood noted. The largest operation in Australia for instance, South32’s (ASX:S32) Cannington mine, is a smaller portion of a large diversified portfolio of assets.
“We like Mithril Resources (ASX:MTH) for silver,” Forwood said.
“It’s got a project in Mexico, which is the world’s largest silver producer, and I think Mithril is the only ASX company active in Mexico.
“It’s sitting on half a million ounces in gold equivalent (at Copalquin), basically 140g/t silver and 4.8g/t gold.”
Minnow Mithril is currently planning a consolidation to improve the liquidity of its stock. Forwood also likes the fact that John Skeet was a key figure in Bolnisi Gold, which cultivated the Palmarejo silver and gold mine in Mexico ahead of a $1.4b takeover by Coeur Mining.
It’s now the New York listed miner’s largest contributor, accounting for 64% of its silver and 32% of its gold production in 2023.
“The MD in particular was GM at Palmarejo and really knows his way around Mexico. So the management gets a tick. That one’s very cheap, and great exposure to silver,” Forwood said.
Forwood also likes the look of $43m capped Unico Silver (ASX:USL), which boasts 92Moz of silver equivalent resources at Cerro Leon, up the road from AngloGold Ashanti’s 9Moz gold and 137oz silver Cerro Vanguardia mine.
“In that equivalence there is a reasonable amount of zinc and a bit of gold as well,” Forwood said.
“They’re in Santa Cruz province in Argentina, just 30-odd km from Anglo’s hydro grade epithermal Cerro Vanguardia gold mine so it is a province where you can you can develop mining assets.”
Forwood said tin, largely represented on the ASX through Metals X (ASX:MLX) and its 50% stake in Tasmania’s world class Renison Bell tin mine, was also a commodity to watch.
At ~US$32,000/t on the LME, three-month tin contract prices have risen almost 30% this year so far.
“Probably our main exposure would be Flynn Gold (ASX:FG1) which is mainly focused on gold in Tasmania, but it does have the Laffa tin project in northeast Tassie,” Forwood said.
“Tassie’s the place to be if you want to chase tin in Australia given that it’s home to the Renison operation. Laffa is getting grab samples of over 3% tin as cassiterite so that’s really good grade.
“If you take a 3:1 copper equivalence just based on price then that’s like 9% copper grab samples, which is pretty nice.
“But it’s early days — that project hasn’t been drilled and Flynn is focusing on its gold. But I guess they might consider putting a bit of money towards the tin with the price running so strongly.”
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