Lion Selection is famous for its Resources Clock. Can you give us a quick overview on what this is and where we are on it now?
The Lion Resources Clock is a concept which is around three decades old. It’s a cartoon used to explain liquidity, which is money being invested in or taken out of the mining space. This causes share prices to fluctuate and leads to the boom/bust shape of mining cycles. So, when the mining boom is at its absolute peak, that’s midnight. When the crash starts, it goes down the other side to one, two, three o’clock. The new boom starts when fresh liquidity starts to come back into the sector properly again at six o’clock (the bottom). It doesn’t move rhythmically or regularly as it can move very quickly through some parts and slow down in others.
In 2022, it was set at midnight. When we were aligning the clock at that time, we’d already passed peak share prices, but what we weren’t sure of was whether this was going to be a sharp peak with an equally sharp equity market correction on the back of it. And we thought, well, you won’t really see the trouble start until the equity market starts to panic. We haven’t seen that. We’ve seen a lot of volatility, but I think we can say very, very certainly now that an awful lot of liquidity has left the mining space.
We’ve seen share prices in most cases halved. For most, it’s a median measure, but for others it’s much worse than half and some are just okay. This has led to an inability to raise money. So, we’re sure that it’s past 12. What we haven’t done is come up with an accurate read on the time. My feeling is that it’s probably somewhere between two and three o’clock coming down the other side, but I think what we really want to get our heads around is how much further the equity market and the impingement of inflation, interest rates, and the Chinese economy will have on the resource equities space before we make a confident call on that.
What’s your outlook overall for commodities? Are there specific resources that are standing out to you right now?
Longer term, I think the fundamentals for just about everything are wonderful. Some of the things we’re looking at in the market are cheap. The commodity price and long-term fundamentals are great. It might get a bit cheaper in the meantime, but these are opportunities which we can take advantage of. And equities are driven very strongly by a commodity price lead. So, in the spaces where we’ve put money so far, we see that as having a play out, which makes sense for us. These long-term fundamentals are great, but commodity prices generally are being impinged by things like the Chinese economy.
Copper has had a much stronger feed through to copper producers and iron ore has had a much stronger feed through to iron ore producers. In the lithium space, we’ve seen M&A activity. We’ve seen a continued market sentiment, which is very, very enthusiastic towards lithium. Whilst lithium price guidance has softened pretty reasonably, I would say the lithium equities still hold up. We still see deals where an explorer acquires a piece of ground which is highly prospective for lithium, and they get a share price reward for it. So, long-term outlook is good. Short-term, I’m not so sure because of the Chinese economy.
As for favourites, lithium had been a great place to be able to find something because you get an instant reward. But longer term, my favourites are more along the lines of gold and copper as they’re both fairly low risk as far as separation and marketing of the product.
One of the biggest stories is the looming lack of supply for a lot of the battery metals. Part of this is further exploration, but financing is a huge factor. Do you find Australian juniors are bearing well compared to others in the market? Geographically speaking, is the money coming into Australia and Australian projects?
Australia is still an attractive jurisdiction. If you want to explore for gold, copper, or lithium, your pathway towards production is far more certain than it is in places like Africa or Asia. Just look what happened with Leo Lithium (ASX: LLL) recently. It’s a great example of how foreign jurisdiction or nationalization risks can impinge quite strongly on project developments, the value of assets, and rewards to shareholders. Those kinds of things are unheard of in Australia.
We’ve seen new legislation towards Aboriginal heritage protection in Western Australia, which I think was well-meaning, but was extremely heavy-handed in the way that it was aimed at the scale of activity that would provoke the necessity of a heritage clearance. It was aimed at miners, farmers, private landholders, property developers, you name it. And in a lot of cases, it was to the extent where you could almost certainly say that there was not going to be anything that was necessary to assess, still required an assessment. So, that has become a problem. I think in Australia that legislation was repealed, but it just shakes confidence and at a time when the market is weak, it doesn’t bode well for money coming into Australia.
Australia is a few years ahead of Canada in developing new mines and producing lithium. Canada has very similar geology; granites that intrude old rocks and the pegmatites that carry spodumene, which are one of the mining markets’ favourite sources of lithium. In Australia, you need to provide your own power. So, grid power in Perth might cost a commercial user US$0.09/kWh. However, it might cost US$0.30 – US$0.40/kWh depending on how you generate it and where you are in the world.
Diversity and inclusion, climate change, and supporting local communities will remain our key areas of focus in 2023
In several areas of Canada, the same sort of projects are often able to access grid power, which is hydro produced. So, it’s not only green, but also about US$0.03 to US$0.04/kWh. It’s about half of the Australian power rate. So, there’s a push and pull there, and I think that we’ll probably see some capital drag towards the greener solutions for some of these new world metals. There’s going to be a premium to be paid for those kinds of things but investors globally are far more concerned about nationalization etc., which still favours Australia as a top jurisdiction.
Do you see that push for nationalization as making more investors focus on Australia?
Yes, I think over the past decade or so (probably a bit longer), we saw a lot of money come out of the mining market. It found its way into other sectors, but as that money has come back, I think some of the places where it had been burned was where it had invested in jurisdictions that were a little bit edgy. Whether nationalization via tax, royalties, project shares, or blockages (which stand in the way of permitting) lead to wholesale transfer of value. These things are all uncertainties, which investors are very nervous about. And they’ve become far more common in many parts of Africa in particular.
Australia is also highly rated for its transparent rule of law. It may be a little bit heavy-handed and over-applied in some cases, but it tends to be pulled back when it overshoots. And that’s something which still attracts investors. Between Canada, the rest of North America, and Australia, they are by far the best jurisdictions for mining.
In terms of making a potential investment in this space (ASX or Australian juniors) what are some of your key criteria you focus on when looking at projects?
We’ve exited a couple of fairly significant investments in the last two or three years, which have netted us about A$95M. We’ve divided a small amount of that out. So, Lion has a reasonable amount of cash to invest. Our mentality is not to deploy all of it at once. There’s a degree of diligence and care which needs to be employed over the choosing of those investments.
I only mention that because it sort of pushes those criteria right to the top. If we were replacing one thing out of the portfolio with another, you might go looking for something similar, to fill a gap. But currently, the whole portfolio is a gap if you look at it that way. We want to develop a portfolio which is commodity diverse, focused in Australia, and has a spread of exposures from early stage where you can get exploration upside as a form of reward and value add in the portfolio, right through to project development where the return of value is shorter term, and a possibility of turning into a cashflow and possibly a dividend stream to the fund.
What we’re looking for is diversity across commodities, which are obtainable or can be developed as greenfield projects by standalone companies. We’re firmly focused on projects where the degree of development risk, carries far less metallurgy and marketing risk, like gold, which are easy to separate and sell.
Copper and nickel concentrates are traded globally and frequently. There’s a very broad and liquid market for concentrates and such. Lithium is a growing market, but currently quite high margins are available for the sale of concentrates. That’s an attractive business to us, although it’s not one that we want to rush into, we still want to understand the qualities of the projects.
Next, we want to see a reasonable size of inventory. Whether that’s defined in a resource or otherwise. We also want to see the sorts of people who can make the transformative steps to take something from a dream through to an operating reality.
Another part of it is what sort of capital investment is going to be required to take it from the stage that we’re at to the point where it would become a development reality. There’re some very interesting things that get pedaled as potential projects inside of junior companies, but if you are capitalized at A$25M and you’re talking about a project which will have a billion dollar capital spend, where’s that money going to come from? You can make all sorts of postulations about how it’ll be raised, but trying to raise money off that very small capital base is incredibly difficult. We look to match reality with the amount of money which needs to be raised.
