How to play the commodity cycle | Australian Markets

Yesterday we touched on the notion that commodity producers can generate enormous money move when costs are high.

Right now, that’s occurring in the gold sector.

Case in level is Genesis Minerals ($GMD). They launched their quarterly replace this morning.

Gold in Aussie {dollars} is round $5000 an ounce. Their value to produce is about $2,500. GMD simply put in a document June quarter in phrases of manufacturing too.

Put all collectively, and GMD made $125 million in free cashflow from operations in the final 3 months. Nice work if you will get it.

Now, it have to be stated, on this occasion, that GMD are spending huge money on acquisitions and exploration.

That money got here in, and was already earmarked to exit the door.

However, the broader level stands: there are huge money flows flowing by means of the gold sector at present.

Now, it’s time to take into consideration the downstream results of this…

For instance…

One is the mining service firms.

They will keep successful contracts as the gold miners keep ramping up manufacturing to money in on high gold costs. That helps their share costs.

Another is gold builders and explorers.

The huge producers will help finance exploration as they hunt for more gold.

The high gold price is signalling to the market to present more provide. Gold miners additionally need to replenish their useful resource base.

It’s additionally possible that huge gold corporations will gobble up smaller gamers with potential ground.

One candidate I noticed bandied about is Antipa Minerals ($AZY).

Antipa is a very early stage gold project out in Western Australia.

One broker suggests Greatland Resources ($GGP) will go for it.

GGP is a new stock to the ASX. I don’t know a lot about it. I requested Hedley Widdup, CEO of useful resource fund Lion Selection Group ($LSX), for his ideas…

He inform us…

“Antipa has a huge ground position, and the crown jewel is a multi-million ounce resource less than 50kms from an operating process plant. 

“That plant used to be tired and unloved but has recently fallen into the hands of Greatland Gold, who have listed on ASX and given it a new life.  The formula for new life for Telfer has a lot to do with adding ore.”

Thank you, Hedley.

That stated, I don’t need to maintain a stock simply as a result of it may very well be a takeover offer. You run the risk of getting stranded.

It’s occurred to me earlier than, with a stock known as Carnavon Energy ($CVN).

It owns an offshore power project in WA waters. There’s oil and fuel there, and plenty of it.

But CVN doesn’t have the financial muscle to convey it into manufacturing alone. It’s counting on a three way partnership.

As it stands, CVN is caught, as is the share price…

CVN was rumoured to be a takeover goal a whereas in the past. But nothing’s occurred in the meantime.

You ought to know one factor about me, at the very least in the stock market.

I’m impatient.

I additionally like to have a identified “catalyst” up forward every time I can discover out.

CVN may get a takeover bid (the money and belongings do make it compelling)…however we simply don’t know when or if in any respect.

It may nonetheless be drifting alongside in a yr…or 2…or 3.

It’s superb how many commodity stocks truly do that.

So…

For any takeover concept, I like to know if the project can get going, if a bid by no means materialises.

Gold initiatives like AZY are higher positioned on this entrance than power initiatives.

Oil and fuel costs are okay, however not enough for juicy wealthy earnings like we are able to see with gold at present.

That means there may be more for potential traders and financiers to slobber over when it comes to gold, and long time period structural tailwinds to go along with it.

Energy is a more difficult story, as a result of of climate change issues and the encroachment of renewables and now nuclear into the power combine.

There are additionally more gold producers in Australia to gobble up juniors than there are huge power corporations.

If you’re eager to discover merger and acquisition alternatives, I recommend specializing in gold. That simply appears the highest probability thematic at present.

After that may come copper, if yow will discover a respectable project, which is the exhausting half. Rare earths are tough for that reason too.

However, fact be advised, I’m not the best man to information you right here.

That honour goes to my colleague James Cooper, geologist and all spherical mining guru over at our useful resource advisory, Diggers and Drillers.

It appears to be like like the current surge in commodity stocks (suppose Lynas!) has his cellphone ringing off the metaphorical hook. His inbox is exploding with consumer enquiries.

That tells me investor curiosity is heating up right here. I’d urge you to suppose alongside the similar traces.

You can try James’s work right here.

Best needs,

Callum Newman,
Editor, Small-Cap Systems and Australian Small-Cap Investigator

The chart above is evaluating the returns in the S&P/ASX Small Ordinaries Index [ASX:XSO] to the S&P/ASX 200 Index [ASX:XJO] since the small ordinaries peaked in late 2021.

We have seen a critical underperformance of the Small Ordinaries since the crash in smaller stocks scared off traders from the speculative finish of the market.

But that state of affairs is altering.

With the ASX 200 at a new all-time high, we’re beginning to see the smaller finish of the market play catch up.

The massive hole between bigger and smaller stock efficiency stays, however there may be now a strong uptrend in place in smaller stocks and they’re beginning to outperform.

As long as the ASX 200 can preserve present energy, I feel the massive hole between smaller and bigger stock efficiency will proceed to shrink.

Regards,

Murray Dawes,
Editor, Retirement Trader and Fat Tail Microcaps