The beginning of 2016 saw the bottoming in commodity prices and also resources stocks, after a long downturn which began in 2011 with the fall in commodity prices of 50 per cent to 75pc.
Since 2016 we have seen a sharp pick up in commodity prices and resource stocks with the likes of BHP rallying from $15 to $27 and RIO Tinto rallying from $40 to $70 per share.
Given the strong recovery that we have seen, the question now becomes where to from here?
We believe that there is still value in the resource sector; however it is getting harder to find it now with the majority of resource industries having reached peak cost-out levels and with valuations having reached multi-year highs.
However we still see value in two areas:
- Those companies already holding value-accretive volume growth options, and
- Resources companies with earnings in an upgrade cycle, where spot commodity prices are above current consensus forecasts.
Oil Search (OSH) – volume growth standout
Now our number one overall pick across resources, Oil Search boasts both short and long-dated volume growth, which is all economical at current low prices of oil.
Oil Search’s long-term growth profile is global-scale and includes brownfield development of two to three new LNG trains from three or more undeveloped gas fields.
The next major milestones for this growth will be the submission of a formal cooperation agreement from the joint venture partners to the PNG government (expected at year end) and further updates to reserve/resource estimates.
The staggering potential of copper and the electric vehicle revolution
OZ Minerals is the best placed pure copper producer. The construction of an electric vehicle consumes 3-4 times the copper consumed by a traditional Internal Combustion Engine (ICE) vehicle.
Electric vehicle build-out alone has potential to underwrite the next 20 years of copper market growth at historical rates. This is even more stunning when you consider that copper in light vehicles currently only comprises about 10 per cent of current copper market consumption, with power reticulation networks and construction the largest demand drivers.
OZ Minerals remains our preferred copper pick for its copper endowment, strong balance sheet and excellent cash flow leverage to compelling medium term copper dynamics.
- Justin Still, Investment Adviser (Authorised Representative: 000279726), Morgans Financial Limited | ABN 49 010 669 726 | AFSL 235410