Since the last supercycle about a decade ago, financings in the mining space have been down, but the tide seems to be turning now with capital raisings back to levels seen in the last exploration boom and with more small and mid-tier companies coming through with financings, according to Matt Griffin, Co-Portfolio Manager, Small Caps at AMP Capital.
Luke Smith, Portfolio Manager, Global Resources at Ausbil Investment Management launches into this discussion noting that we’ve now entered a much more supportive environment for commodities. David Franklyn, Head of Funds Management at Argonaut agrees that we’re seeing the capital markets open for the resources sector and that money is flowing in and projects being funded. The investors coming into the mining space now are looking at a broader range of commodities and companies compared to the last few years, notes Hedley Widdup, Manager at Lion Selection Group.
The panel of investors notes that investors in the space are focused more on themes than on value. As we come out of the COVID-19 pandemic, ESG and Decarbonization/Electrification are the top themes which will define the next decademoving forward. Franklyn explains that there is a lot of money flowing around that is not necessarily driven by fundamental analysis. The major theme, not surprisingly, is the shift we’ve seen this year towards battery materials, though we do need to navigate around the supply/demand dynamics in this space. Griffin notes the situation we’ve seen with lithium over the past few years, where we’ve had a short-term shortage and spiking prices. Now we’re seeing capital raisings coming into this space and so the supply is coming on and should be able to satisfy demand in the medium term.
The major theme, not surprisingly, is the shift we’ve seen this year towards battery materials
On the batteries/EV thematic, Smith notes the recovery of Chinese demand and EV consumption over the past year as well as the green stimulus across Europe that we saw in the wake of COVID-19 and the growth of those markets. Franklyn notes that green investments are politically popular, environmentally necessary, and economically stacking up and that we may just see this push towards EVs and the green economy coming from the U.S. now with the new Biden administration. The big issue going forward is whether the supply can keep up with the demand outlook. Widdup explains how as demand grows, we should start to see supply kick in as a key drover of prices and the boom that we’re in now will be defined by supply being slow to catch up due to the lack of investment that has taken place over the last decade.
In looking at risk appetite, the panel of investors evaluate their decisions based on avariety of criteria. Widdup has seen the risk appetite towards the smaller miners improving over the past few years, seeing exploration being funded, larger capital raisings, and a re-rating of capital in the junior space across the global exchanges. Griffin, who manages a generalist small-cap fund looks more towards the company’s internal drivers beyond the broader commodity cycle to evaluate the risk.
As we look at the growth of ESG in this space, gender diversity and board structuresare key internal factors to pay attention to. Investors are also noting the strong intersection of ESG with the decarbonization thematic, as companies are under significant pressure now to set high targets for carbon-neutrality as the money flowing into the sector becomes more and more focused on ESG.
Hedley Widdup, Manager, Lion Selection Group
Matt Griffin, Co-Portfolio Manager, Small Caps AMP Capital
Luke Smith, Portfolio Manager, Global Resources, Ausbil Investment Management
David Franklyn, Head of Funds Management, Argonaut