Can you start by giving us some background into Lowell Resources Fund’s investment objectives?
We are a long-only fund, focused on investing in junior resources companies. Typically, we look at companies that have less than A$200M market cap, as an entry point. We’re trying to focus on the pre-developers, companies with a substantial amount of exploration upside, and we’re looking for that ‘mythical ten-bagger’. Exploration is very high risk, so we need to see the potential for substantial returns.
Are there specific industries, commodities, or jurisdictions that you’re most focused on?
We are based in Australia, so we naturally gravitate to management teams that we already know. Most of our investments are listed on the ASX, but we do have several companies that are listed offshore, particularly on the TSXV. We also have several unlisted investments. We have a lot of investments in Australia, but in terms of niche geographies, we’ve got quite an exposure to Guinea in West Africa. Companies like Predictive Discovery (ASX: PDI) have done well there and that’s been a great investment for the Fund.
We’re prepared to invest in more far-flung sovereign risk jurisdictions. We’re agnostic in terms of geography, so long as the potential returns are appropriate for the risk, and we cover the commodity spectrum. At the moment, we’re about 30% in gold, 30% in battery minerals, and then we do pretty much everything else as well, right through to oil and gas.
One of the big themes in the industry right now is the supply shortages across commodities, particularly in battery metals. Where do you see some of the most critical supply gaps in the space right now?
It’s interesting because in our battery minerals exposure, lithium is dominating at the moment, although the lithium prices have really come off substantially. But, anecdotally, there’s still strong demand for lithium into China. We are hearing that the Chinese are still importing lepidolite (an abundant lithium-bearing mineral), which is really at the breakeven point on the cost curve at the moment. It might even be slightly below what analysts say is breakeven price. So, for China to still be importing something like that, which is relatively more difficult to process, it means that there’s still decent demand for lithium in China. We’re also hearing that manganese is highly sought after and has a good outlook in terms of battery chemistry.
Longer term, we like copper, pretty much like everyone else, but we do see from now, through to the end of 2024, that there could be a surplus in the copper market, due to new production coming through (and perhaps a relatively soft demand out of China). But post 2024, we see copper as being an attractive fundamental commodity.
If we can have higher gold prices and trend up rather than down, that will change the sentiment for the junior gold explorers.
There’s been a bit of a disconnect between metals prices and junior sector equity valuations. Do you have any insight into why this is and if there’s any potential fixes for this?
Yeah, absolutely. If you look at gold, the junior gold explorers have been forgotten and very unloved as of late, despite gold prices being relatively high. Today, the gold price is over A$3,000/oz. The US dollar gold price has bounced back from around US$1,820 earlier in October, and is now around US$1,925-US$1,930/oz. So, a very healthy price. The producers are making good money and they’re the ones sitting back and going, “Okay, well, we can almost pick and choose the juniors that we want to acquire,” because on the M&A side, there’s not a lot of urgency or competition at the moment.
The solution for better valuations for gold explorers is obviously a higher price. In early May, we saw the gold price jump to over US$2,000/oz. There was a resurgence of interest, albeit brief in the junior sector, but that fell away as the gold price came back below US$2,000/oz.
What’s going to drive a higher gold price? I think it’s a change in the US interest rate regime and real interest rates. If we can have higher gold prices that trend up rather than down, the sentiment for the junior gold explorers will change.
Let’s talk about some of the key hurdles or challenges for explorers in this market, specifically the juniors. How can these issues be addressed moving forward?
The main ingredients for junior exploration are geologists, drilling, and assays. We’re certainly seeing that drill rigs are becoming more available, and several companies are actually organizing drill for equity, where drilling companies won’t be paid all of their invoices in cash. They’ll instead be paid a portion of their costs in shares. So that’s one challenge which has been minimized. I think geologists are still relatively hard to find and, anecdotally, the cost of a good geologist is not falling at all. We’re also seeing that assay turnaround times have shortened and there’s more capacity.
The big challenge, and the one that is getting worse, is permitting and access. Western Australia is held out to be one of the best places to explore and mine in the world, but there are parts which are virtually locked up. Companies can wait literally years for a new tenement to be granted and then get the access and do the heritage agreements.
That puts a premium on projects that are drill ready, which isn’t reflected in the market for some of these junior explorers.
Are companies finding a lack of funding to be a barrier to further exploration?
With exploration, there certainly are exceptions, particularly uranium, rare earths to a lesser extent, and obviously lithium. But gold, which is still the preferred go-to target commodity for many junior companies, has been very hard to raise funds for over the course of 2023. We have seen some substantial raisings in gold, for example De Grey Mining (ASX: DEG) raised US$300M recently, but that’s a much more advanced project and probably one of the best gold discoveries in Australia in the last 20 years. So, that’s an exception to the rule. It’s been tough, but by the same token, there’s some fantastic value out there for investors.
Finally, is there anything that you’re finding particularly exciting about the industry right now, or things that you would suggest that we look out for?
One thing that is perhaps evening out, but has been quite marked, is a differential in valuation between ASX explorers and TSX explorers. On average, you expect to see higher valuations in North America than you do in Australia, but that’s really reversed at the moment. So, for someone like me, it’s almost like being a kid in a candy shop looking at those valuations in North America and seeing companies sitting on fantastic projects with valuations that are next to nothing.
The problem is there’s so many of them. You can’t invest in them all, which one do you choose? In particular, there’s some interesting opportunities in North American companies with projects in North and/or South America.
