Welcome back to The Rate of Change with York Wealth Management.
As advisors to some of the wealthiest families in the country, The Rate of Change is a podcast
designed to help you in the pursuit of building long-term wealth through the insights of some
of the brightest minds in asset management.
I'm your host Murdoch Gaddi and in today's broadcast, I'm speaking with John Forward,
the Chief Investment Officer at Lowell Resources Management.
Lowell manages roughly 50 million Aussie under management.
It's a listed investment trust which invests in junior domestic and global mining companies.
They currently allocate roughly 13% to new pre-IPO opportunities, have greater than 10%
cash and the remaining is invested in listed mining companies across uranium, copper, natural
gas, oil, nickel, lithium and a large percentage currently in gold.
And they currently run a top-down bottom-up strategy.
So that percentage allocation is constantly changing.
As of recording, the Lowell Resources Management Fund has averaged over 10 years, 14.2%, over
five years, 27.9% per annum, averaged over three years, 8.4% and 12 months, 14.1%.
In relation to the S&P ASX small resources accumulation index, they've consistently outperformed
them in that period and most interestingly in the past 12 months, while small resources
accumulation index has been down 9.8%, they've been up 14.1%.
So please everyone remember that this is a podcast for entertainment purposes only.
Please listen to the disclaimer at the end of the broadcast.
If you want to learn more about the fund, please reach out to them directly or speak
to your advisor.
So with that being said, I hope you enjoy this conversation as much as I did.
So sit back, relax and enjoy it.
John Forward, welcome to the Rate of Change with York Wealth Management.
Murdoch, thanks.
Great to be here.
Thanks very much for inviting me on.
Whereabouts in the world are you right now?
I'm actually in North America.
I'm sitting in a hotel room in Toronto, Canada.
What's over there right now?
What are you heading over there for?
Look, I'm doing a bit of a swing through.
I've been to Vancouver, which is the home of North American small cap miners.
And now I'm in Toronto, which is the home of perhaps larger North American miners.
And then I'm heading down to Miami for a mines and money conference in Florida in a couple
of days.
And then I'll follow that up with a brief side trip to look at a copper project in South
America.
So making a good trip.
That sounds like fun.
Hopefully you get a nice hockey game in.
Well, look, John, I'm just interested in where you were.
But why don't we start off by telling everyone a little bit about who is John and how you
got into the wild world of financial markets?
Sure.
Look, I think I have to blame my father.
He's a geologist and had me doing field work with and for him from a pretty young age.
And it didn't put me off.
So I became a geo, worked around the place, Australia, Africa, Indonesia for a few years,
and then joined a group.
I went to the dark side, got into the financing side of things and joined a group out of South
Africa called RAND Merchant Bank, which was a fantastic experience.
It was there for more than 15 years in a group called RMB Resources.
And we did across the financing spectrum.
So we did equity, quasi, what we call quasi equity and project financing and hedging for
the junior resources space.
So had some fantastic experience there.
It was a very successful shop.
Finished up there in 2015 and then 2016 joined Lowell Resources Fund and I've been the CIO
there for the past eight years.
So what exactly does Lowell Resources Fund do?
Look, it's an unusual beast.
There's not many institutions, if you like, that do what we do, which is really focus
almost solely on the junior resources space.
So we're quite broad in a very niche sector.
We do pretty much any commodity in terms of metals and mining and oil and gas that you
can think of.
But we really try and focus on the junior sector where we see the biggest upside potential
is.
So when you say you're only focusing on the juniors, does that mean you're trying to get
into them seed or pre-IPO or were you looking to allocate to these companies when they're
listed?
Yeah, both.
And what's the percentage in the portfolio?
Yeah, so we've got a fairly broad mandate in that sense.
Most of our portfolio is ASX listed, but we have a number of stocks listed in the Northern
Hemisphere on particularly the Toronto's TSX Venture Exchange.
We've got one or two on the London Stock Exchange.
And then we've got a number that are coming through at various stages, pre-IPO, so seed
investments.
We've got a reasonable exposure to seed investments, even though in general we allocate less cash
to them because they are illiquid and much, much harder to get out ahead of a listing.
So at the moment, we're around 13% to 14% in seed or pre-IPO investments, some of which,
and I think we might discuss this later, relatively close to a liquidity event.
So yeah, it's an interesting space at the moment.
Well that is definitely going to be the fun part of the chat.
What are your thoughts on commodities?
What stocks are you looking at?
Because it's been a wild world of commodities the past five years.
But before we dig into that, let's just get through the mechanics and how the funds are
structured.
How is the fund structured and why did they choose to be listed compared to an unlisted
structure?
Yeah, look, the funds structure has evolved over time.
It's got a long history, the Lowell Resources Fund.
As I understand it started way back in the 1980s as an unlisted unit trust for National
Mutual.
And then when AXA took over the National Mutual organization, it decided this fund was basically
moribund.
As I understand it had exposure to the big end of town in terms of mining at that time,
CRA, BHP, Western Mining, and likes of those companies were in the portfolio.
From that point, the current management group bought the management company from AXA and
really turned it around completely and started to look at the junior sector, where we see
the upside is.
From that point to 2003 to 2018, we ran it as an unlisted unit trust.
In 2018, we decided to list it.
The real driver for that was the fact that we could then have permanent capital.
As an unlisted trust, you were subject to redemptions and subscriptions.
In a real market downturn, that can really hurt.
If you're getting redemptions in a falling market and you're having to sell your portfolio
to realize cash in a falling market, that can be very tough.
Now that we're listed, the way to trade in and out of the units is on the market.
It's listed on the ASX.
If you want to buy a unit, you can just do it through your broker.
I think we're currently trading around $1.30 a unit.
The downside of that, of course, is we're not of course, but most listed investment
vehicles trade at a discount to their underlying NAV.
Typically, we're trading at about a 10% discount to our underlying net asset value.
I'm glad you covered that because I was just about to ask that.
We've had many fund managers in liquid or unliquid assets.
One thing which I find quite interesting about your structure is considering commodity prices
whip around so much, it gives the ability to obviously see council speaks to your advisor,
but it gives the ability if you have a view on the particular commodities to potentially
come in and purchase something at a discount when people are being fearful and then take
advantage of when people are being greedy, which is not exactly normal when looking at
the fund managers deal in the resources space.
The majority of them are currently unlisted and then do deal with heavy redemption cycles
when the wind isn't necessary and the commodity cycles sail, which I definitely find quite
interesting.
Yeah.
Well, we think it's a good structure for a volatile sector.
We avoid those redemptions, particularly down points in the cycle, which can be very painful
and not just for investors in the fund, but for the fund investments that see their share
price crater as a result.
The flip side of that is that if share prices are getting smashed, then if we've got cash
up our sleeve, we have the ability to take advantage of that when the old Warren Buffett
be greedy when everyone else is fearful adage.
That's an opportunity that comes around every cycle.
Yeah, I can definitely see why it's happened.
It's an interesting structure to be able to deal with that volatility.
With the fund, what's currently the size of the fund?
How much money is currently in the fund?
Yeah, look, it's a small fund.
It's got roughly $50 million of assets under management.
We've grown that from probably less than $20 million since I've been there.
Net of paying out distributions.
That's probably another aspect of the structure that I should mention.
There are a lot of list investment, allies list investment companies out there, which
do pay dividends, but that's discretionary, obviously, as a company.
As a trust, we're a listed investment trust, which is a little bit more unusual.
We don't have any discretion.
All our taxable profits have to be paid out to our unit holders.
We've done paid distributions over the last four years.
The outlook for this year is we'll pay a historically relatively high distribution again in 2020
and 2024.
Had a couple of other questions, but let's touch on the performance and the dividends.
What's the dividend been since you just mentioned the distribution?
Yeah, look, this past year, we pay a distribution in July, August.
Every year, we paid roughly a seven cent distribution.
This coming year, it looks like it could be significantly more than that as a result of
some significant profits that we've been able to take in this financial year.
Yes.
And the performance of the fund, and obviously it's volatile.
So let me phrase it this way.
When you have an uplift of free money being pumped in, COVID, that type of thing, how
does that perform correlated with the markets and the resource space?
And then when commodity cycles come off, how correlated is that?
Just because the thing is, if we look at, say, the performance as an average over five
years, it's very, very difficult.
It's probably misleading as well, I'd say.
So how would you explain the performance and how it performs with the cycles?
Yeah, look, I think because we invest in companies with significant expiration potential and
a real expiration success can happen at any point in the cycle.
And we aim to, well, we hope to have exposure to that success with at least one or two companies
per annum.
And it means that we're actually fairly uncorrelated to the rest of the market.
Obviously, a rising tide will lift all boats.
But for example, last year, the small resources index fell by nearly 10% on the ASX and we
were up 14%.
So strongly uncorrelated to the market, which I think is a really good attribute.
Over the last five years, we've done 28% per annum net of inclusive distributions, but
net of fees.
And I'd just like to, that's actually the best performance of any listed investment
vehicle in Australia over five years.
Sorry, this is the best of all of them across the board.
Well, according to Bell Potter and Ordmanet universe that they cover, it's strongly outperformed
any other listed investment vehicle in their coverage.
Well, the only other one which I could think that would be in the echelon would probably
be that would be, say, Hyperion Global because they've got the magnificent seven in the tech
space and that's been Poltar.
So that's probably up there as well.
I've never been, but look, I just, sort of not to brag too much, but it just demonstrates
the potential that returns that can be made in the resources space.
In many areas, resources is very much the ugly duckling.
It's not sexy.
Everyone's piling into AI or whatever, but the fact that we've had such strong performance
shows that there can be some fantastic returns to be made from this space.
So the other thing which doesn't get talked about a lot, but I want to get into it is
with the fund size.
Since you're dealing with a huge amount of small caps, some of these raises, which people
are familiar with, some of these companies might only be raising $2 million, $4 million.
It's not like someone's going asking for $50 million.
And then the problem is, as we've seen time and time again, from my background, being
a broker on these transactions is whenever you get a good one, everyone wants it and
then you get no allocation.
And then when it's not too certain, you get way too much.
So position sizing is always interesting on the unlisted staff.
But the other question I had is what's the fund size's capacity or it becomes way too
big to manage and you can't get the allocation sizes you want?
Yeah, look, $50 million fund, the average investment size is probably somewhere between
half a million to a million dollars.
So we do have a reasonable portfolio and spread the risk.
And I think that's important that the average investor in the street might hear about one
or two interesting resources stocks, but they are extremely risky.
So I think that's what we offer is a portfolio approach to a high risk but high return sector.
In terms of allocations, when the market's strong, I think you need to be nimble and
the investment process allows us to be nimble and make sure that we can react quickly to
opportunities.
And I think most brokers that we deal with through the cycle recognise that we are there
through the cycle.
We're there in the good times, but we're also there in the bad times when no one else is
answering the phone.
So yeah, they tend to try and give us our allocation, particularly in companies that
we've supported over a number of years.
And we do tend to do that.
One of our best stocks has been a company called Predictive Discovery, which we backed
all the way from IPO, I think in 2012.
And it's still one of our significant holdings.
And we participate in pretty much every placement through to its major discovery a couple of
years ago.
So yeah, we try and support our existing portfolio.
So since we're discussing portfolio, I definitely want to get into how the cake is baked.
What is the percentage weightings?
Let's discuss the commodities first and then the companies.
What is the percentage weightings towards specific commodities?
And in answering that question, do you find yourself looking forward and going, you know,
lithium's had its run.
It might be a while before the lithium comes back.
So you decrease the allocation in the lithium or do you just diversify and have it?
And then essentially, one performs, one's not.
And then it's like, how do you manage what's the percentage weightings in the portfolio?
Yeah, look, we do.
We have a sort of a top down and a bottom up approach.
So we do try and manage the portfolio to increase exposure to sectors, which we strongly positive
on and decrease exposure to sectors where we think going is going to be tough.
So for example, we're 20% into base metals, not including nickel at the moment.
And most of that base metal would be copper.
And nickel is only 1% of our portfolio.
And that's because, you know, not unlike many people, we're positive on copper.
And we think that nickel, you know, is having, obviously is having an extremely tough time
and probably will continue to do so for at least the next six months and possibly longer.
But it's, you know, nickel is a very interesting space and we might be able to touch on that
a bit further.
So, you know, we're at 34% exposed to gold and precious metals at the moment, including
PGMs.
And that will, look, that will always be a substantial part of the portfolio because
we are, you know, in junior resources and gold will always be a major feature of what
junior companies target because it's relatively easy or not easy, but the exploration process
is well known for gold.
And the capital costs are not immense for gold companies.
You know, you don't have to build a railway, you don't have to build a port, you know,
like you might have to do for coal or iron ore or something like that.
So yeah, it's, you know, it can be within the capacity of a junior company to develop
a 100,000 ounce per annum gold operation from scratch.
So yeah, so that's 34%.
We are pretty cashed up at the moment.
We've got about 16% in cash, which is historically high for us.
We, you know, we're not unhappy with that.
We see that times are tough and apart from a couple of sectors, a couple of commodities
getting tougher at the moment.
So we see opportunities both to support our existing portfolio companies and to add new
positions at relatively deep, deeply discounted valuations.
And that's part of the reason why I'm in here in North America at the moment is to follow
up on and find some new North American opportunities.
So yeah, and then, you know, battery, you know, we did have a very substantial exposure
to lithium last year.
We've sold down a lot of that position and battery, primarily lithium, but also graphite,
you know, that's 8% of the portfolio at the moment.
So that's been reduced substantially.
There's another one perhaps just touch briefly on, you know, we got 4% of the funds by value
exposed to uranium.
We think there's a lot of upside there through some of those stocks, which we might be able
to touch on.
And yeah, we're looking to add to our uranium positions.
And finally, oil and gas is something that the fund has always had an exposure to.
We've got some exposure to both oil and gas in Australia and offshore.
I think in a lot of times, you know, it does, we've got about 10 or 11% exposure to oil
and gas.
A lot of time it does provide a bit of a counter foil to the gold price.
You can see gold and oil moving in opposite directions reasonably often.
So yeah, we do like to keep keep exposed to oil and gas as well.
This is the type of conversation that I can have just a couple of drinks with and be for
the next three hours.
It's like, it's like, where do we begin?
I think it's closer to beer o'clock for me than it is for you.
Nine AM in the morning.
What's the time there?
Are we coming up to 20 past five?
I think that's all right then.
Where do we begin?
All right, well, let's let's begin with the uranium story because uranium store I found
so fascinating.
Like there's a particular people I followed a couple of years ago that said you need against
uranium because these stockpiles that have been built up on the yellow commodity have
been sitting there for you slowly depleting.
And now they've depleted and please, I don't remember the numbers.
I kind of know them offhand.
But isn't there something like about 180 or 190 million tons of demand?
There's only about 140 or 150 million worth of supply.
So literally 40 to 50 million of the yellow commodity short.
And over the years, you know, which and I would love actually to interchange this with
the concert, the discussion of, you know, people just don't want to stick money into
building mines when they don't feel like that commodity is running.
And then everyone kind of rushes into the last moment, as we saw with lithium and then
pushes everything up and you have an overslept power problem.
It's just like this self-fulfilling prophecy that happens every single cycle of the commodity.
So what's happening with uranium?
And do you want to give an example of the couple of maybe one or two in Australia and
then what's happening offshore and international companies?
Yeah, look, you're right, Murdoch.
It is a bit of a broken record, I guess.
And you see it, it's frustrating that you see it across commodities and it's happened
again here in uranium where, you know, you could see the situation coming from a long
time away.
And, you know, a lot of the uranium bulls like Johnny Bush or whatever, you know, did
start to sound like a broken record post-Fukushima.
You know, there's not enough new supply, there's growing demand, there's no alternative, you
know, the alternative sources of supply like, you know, the reprocessed highly enriched
uranium that might have come out of the former Soviet Union, you know, back in the 90s and
2000s is not there anymore.
But at the same time, the power utilities who have got nuclear energy reactors weren't
supporting new supply to any great degree.
And so the problem is just build up and build up.
And finally, you know, we've had push came to shove last year and the uranium price jumped
over 100%, you know, and now it's over 100 bucks, 100 bucks a pound.
So yeah, look, you're right, there's a massive shortfall, massive supply deficit at the moment.
And you've got the two big guys, two elephants in the room, which is Kamiko out of Canada,
which is the second biggest producer in the world.
And then you've got Kazatomprom out of Kazakhstan, which is the OPEC of, in fact, it's, you know,
double OPEC, it's, or triple OPEC, it's more than 30% of world supply.
So OPEC came out in January and earlier this month and said, look, you know, those expanded
production targets that we talked about last year, we're not going to get there.
They've got problems with supply of reagents.
And I think they've got other problems in terms of well-fueled ISR performance.
So they're going to be well short of what they said they would be able to do in terms
of ramping up their production.
Kamiko, you know, have actually said, look, we think we're still going to hit our targets,
which was a surprise to everybody.
But they're actually buying in the spot market.
So, you know, second biggest producer in the world is actually buying uranium rather than,
you know, selling, you know, having enough production to meet its, so, you know, all
the uranium at the moment is, as I understand it, is spoken for.
And new supply is not available just at the flick of a switch.
It's a very long, very tortuous process to bring a new uranium mine online.
So yeah, that supply deficit and, you know, we're talking about 50 new reactors in China
over the next, I think it might be decade or so, which is a massive amount of new reactors.
And then you're seeing, you know, pronouncements out of COP26 that countries like France and
the US want to triple their nuclear energy production through to 2050.
Yeah, you know, the forces there are, you know, sort of almost inexorable that the price
is going to drive, grind higher.
It's a relatively small market in commodity terms.
So that leads to potential volatility.
And we saw a significant jump from 80 bucks a pound to over 100 bucks a pound late last
year.
And, you know, the pundits are saying, well, we could easily see it go from 100, 120 in
a matter of weeks.
And, you know, then there's blue sky beyond that.
Yeah.
Everything you're saying is so interesting.
Like what was that?
13% cut to the world's largest uranium producer, which is nuts.
And then I heard another fund manager say that when they were studying commodities,
that what it is when they get a wind behind them have a tendency to from the absolute
bottom to the peak top, like lithium go up 10x.
So I'm just looking at a chart from uranium, which was peak bottom in 2016.
I think that was about $20.
So now it's at about $18.
So now it's at $103.
So a bit, you know, depending where you take that from, so the average peak bottom's been
roughly $25.
Now it's, you know, 4x from the bottom.
Yeah, it's quite interesting.
And the other thing which is quite interesting on the uranium story as well is with the war
with Russia and Ukraine, seeing it probably one of the main reasons why lithium and car
batteries are kicked off is the European Union and NATO are trying to wean everyone off Russian
gas.
And as a byproduct of that, well, you know, that's the gas side to get batteries, but
can't just go straight to everyone's electricity by 2050, you need gas for various things.
So the best solution is essentially nuclear plants and the technology is improved.
So I can't remember the numbers, but how many, is it France and the UK as well that are bringing
nuclear reactors online to kind of solve that problem?
The UK definitely have got a new one gigawatt reactor on the drawing board.
I'm not quite sure exactly what stage that is at.
But yeah, look, there's many countries who are talking about adding nuclear capacity
to their power fleets, their electricity fleets.
How long does it take to build a reactor like say that one in the UK?
I don't generally don't know, right?
Because everyone goes, you hear the headlines, okay, we're building one.
Okay, that's great that you're building one.
But how long does that actually take?
Oh, man, you know, it's coming along.
The last reactor that got built in the US, it took a lot, you know, I think something
like 10 years from permitting and there were some massive cost overruns.
So that is the downside to this that, you know, in the Western world, permitting is
very, very difficult.
And, you know, with cost escalation, we've seen in projects of any sort recently, you
know, and these are massive projects.
So yeah, you've got to be very wary of cost overruns.
That may or may not apply so much in China.
And China is definitely the country which is building out its reactor fleet faster than
anybody else.
So I think the my expectation is that we'll see much more reactor capacity put in place
in China than anywhere else over the next 10 years.
So interesting.
So if everyone wants to go, you know, clean by 2050, which I don't think is probably going
to happen, or pipe drain, the well the gas is, as everyone says, the transition point,
but even gas shortages, right?
You know, what origin energy?
You know, front sold all our Ford Ford contracts, what $9, whatever the contract was, and, you
know, offshore.
So we're kind of running out supply even on the East Coast.
So you're seeing places like the Beedaloo Basin being built up, right?
But the problem is you get greenies and everyone's saying we don't like it, you know, fracking's
bad.
But so I'd love to hear your thoughts of what's happening in the gas market.
And I suppose maybe one thing also to cover as well.
The Australian gas exploration is completely different to the Americans, say, within Masilla's
Basin.
But people hear, oh, it's the same.
But people don't understand that the ownership of the land is different in America than it
is in Australia.
So I'd love to hear your thoughts on what's happening in that volatile space.
And for listeners out there, the gas price has kind of gone from like $2 to $9 and then
back down again.
So it's another incredibly volatile commodity with a shortage.
So I'd love to hear your thoughts.
It's very regional, right?
So the gas price in WA, which is a market unconnected to the East Coast, is quite different
to the gas price and gas market on the East Coast of Australia.
And then the gas market in the US is quite different, quite different again.
And the drivers are quite different.
We're seeing the US become in a pretty short space of time the largest LNG exporter in
the world.
And then Joe Biden has now sort of put a pause on any new permits for gas export plants in
the US.
In Australia, on the East Coast, definite massive squeeze.
And one of the big drivers as that has been the Bass Strait gas production absolutely falling
off a cliff.
It used to be one of the mainstays of East Coast gas.
And in the next few years, it's just depleting at an extremely rapid rate.
So the gas price in Eastern Australia, you're hearing $12, $14, even sometimes more than
that, a gigajoule of contracts being written recently.
And in WA, they've got the gas reservation policy for onshore gas, which is a real hot
political potato.
But as you said, they've gone from two bucks to nine bucks in a relatively short space
of time.
They used to, Mark McGowan used to sit there like a cheesier cat and say, oh, look, our
system's fantastic.
And it's protected local consumers.
And then it all came back and I bet he regrets saying that.
So look, just on your point, the ownership of minerals in the US is quite different to
Australia in general.
Australian minerals are owned by the Crown in the form of the individual states.
In the US in general, the minerals and gas is owned by individual private ownership,
which may or may not be the same as the owner of the surface rights.
So look, each system has its challenges.
There's possibly greater resistance to new gas projects in parts of Australia than there
are in parts of the US.
But you can have very, very disparate ownership of minerals in the US and have to chase down
dozens of people who've got small percentage ownerships in various gas fields to tie up
the rights.
Whereas in Australia, in general, there's only one owner and that's the state.
And the other big difference, I think, is infrastructure.
The US has got gas pipelines running all over the place.
Whereas Australia, there's a number of projects which would be online already if they had
better access to pipelines.
So putting in new pipelines is really critical to developing new gas, particularly on the
East Coast.
The infrastructure spent on some of these projects is so extensive.
I often wonder whether or not Australians building out these large gas projects would
be better off just using bonds, like $300 and a half billion bonds and just get it done
and continuously going back to the market and devaluing the shareholders' value with
raise after raise coming into like F, TF raises and dilution and dilution and completely destroying
the value of people before.
So people with massively deep pockets out of the states just sit back and relax and
just keep taking the stock.
With gas, do you have much offshore in Australia?
And are you owning producers or are you in the exploration side?
Look, we've got to get a bit of both.
You'll see in our portfolio recently, we've got back into, well, sorry, Karoon is a, Karoon
Engie is an oil producer mainly.
But we do have offshore, we've got interesting CBM play in Mongolia called TMK, which has
got what we think are some of the best coals in the world for gas production.
And they're on the not far from the Chinese border.
So there is potentially a ready market for their gas.
Here in Australia, we've got exposure to things like Comet Ridge in Queensland with the Mahalo
Project, which is in joint venture with Santos and their Mahalo North Project, which they
own 100%.
So that has a relatively quick timeframe to production if they choose to take it.
I think it's about 17K tie into the nearest pipeline.
But for a big add development, they're going to need to put in a much larger diameter and
longer pipeline to connect to the down south to the major East Coast network.
What else?
3D Energy is one that's exploring offshore Victoria in joint venture with Conoco.
That's a pure exploration play, but yeah, some relatively high chance of success on
some fairly substantial targets, which hopefully will be drilled in 2025.
So yeah, look, we have a mix of exposure to oil and gas, and that's just a couple of examples
of our investments.
That's quite interesting.
I noticed you didn't mention the Betelgeuse Basin, and you probably know the history of
that a little bit more than I do.
But to my understanding, the four largest gas deposits in the entire world are Russia,
Saudi Arabia, and Mosella Basin.
And I think the Texas guys came over in the 70s and identified the Betelgeuse Basin, but
everyone was like, no, no, it's too dry.
There's no gas there.
But recently, it's been incredibly expensive.
It's been a political nightmare with the greenies and all that type of business.
So I can understand why investors have shied away from the chaos.
But I'm just curious in your thoughts on what's happened to Betelgeuse, because it was the
last year the government gave them one of the companies up there a $1.5 billion grant
to essentially build out a port right next to the Japanese giant up there as well.
Is it impacts?
Impacts.
Yeah.
And then as you were discussing with the infrastructure spend, people don't understand the cost and
the amount of money associated required to get this gas piped into the Northern Territory
then down to Queensland.
So I'd love to...
So two questions there.
I'd love to hear your thoughts on the Betelgeuse.
And then secondly, why aren't you in the Betelgeuse or is it more of a situation how you like
the Betelgeuse but you just don't think due to the cost of something that the timing's
right?
I'm very interested to hear your thoughts on the Betelgeuse basin.
Yeah, look, Murdoch, I think perhaps the short answer is we think that the Betelgeuse is
for the big boys.
And we're focused on the juniors.
And as you touched on, the reason for that are the costs are very high.
The drilling costs are extremely high.
And then the infrastructure costs are also extremely high.
And generally, we want to invest in things which can be within the reach of a junior
company that might only have a market cap of less than 200 million.
So it's just what we do.
Because that's what I was asking, because Tan Bourne, as an example, pre-raise had what,
250 million market cap.
So you're saying $200 million is the...
Yeah, look, it's not hard and fast, obviously.
And hopefully, all our investment companies will blast through the 200 million market
cap valuation and go to a couple of billion.
And we may or may not hang on to that point.
But yeah, we're generally looking in what you might call the micro cap space.
But the Betelgeuse, look, there's no doubt, is fantastically endowed with gas.
It's just, as I touched on earlier, the US has got fantastic infrastructure in place.
And the Betelgeuse is generally devoid of it.
Yeah.
So I hear what you're saying, as Ian, it's a great opportunity.
It's going to take a long time.
So the point you're making is if you go find something, then there's no infrastructure
around, then you have to go get the money to build that and it's become such a long.
And the question is, do you want to play that game?
Now that makes a lot of sense.
Okay, well, since you mentioned gas and oil, what are your thoughts on what's happening
in the oil?
Yeah, look, it's a pretty interesting one.
And as I touched on, it's an interesting sort of counter foil or in some cases can be decorrelated
to the rest of the commodities market.
So for example, oil prices obviously has a big feed into inflation and inflationary costs.
So if you see the oil price jumping, then you may see inflation jumping and then you
may see or you're likely to see interest rates rising and you're likely to see in that case,
pressure on non-yielding stocks, such as the speculative sector that we're in.
And you're also likely to see pressure on things like the gold price.
So that's why I like to have exposure to both gold and oil for that reason.
So we're seeing China is now I think the biggest consumer of oil, 13, 14 million barrels a
day out of a total of around 100.
We're seeing US production rose or didn't, rose last year, despite the recount actually
being flattened down.
So there's been a lot of efficiencies extracted in the permian in the US and the US is I think
one of the biggest producer in the world now, which almost matches the Chinese consumption
just sort of coincidentally.
So you've seen, I think the Chinese economy, and this is my perception based on the iron
oil price and the record imports of iron ore, the copper TCRCs and the record imports of
copper, the record amount of electricity consumed in China last year.
I think the Chinese economy is actually going pretty well and added to that the record imports
of oil.
So I think you may see, and OPEC are actually forecasting this, that you could see growth
in oil demand this year.
Russia as a major producer is not forecasting it will add any production this year, may
come off slightly.
So you may see the oil price and we've seen it rise.
I think it was WTI was 79 bucks on Friday or thereabouts a barrel.
You've seen it rise.
If OPEC continue to have production discipline, and in particular the Saudis, then you could
see the oil price continue to strengthen.
And yeah, obviously that would be good for oil producers.
And just as a side comment, the oil market or the development of new oil fields and capital
spend on the oil business has really, really been a laggard in the last decade.
We're seeing big boys like BHP and Shell start to reinvest, but they did have a number of
years there where they were saying, oh, we're going to spend our capex on solar farms rather
than our own core business.
But we've seen that start to change over the last 18 months or so.
So yeah, but that can take a while to flow through.
So I think as we stand today, we may see more upside than downside to the oil price.
Yeah, that's very interesting.
And last one I just wanted to get into is what's happening with Dr. Copper.
And then I would love to discuss how the IPO markets kind of slowed down and when do you
think it's going to be back again?
But first of all, what's happening with Dr. Copper?
Yeah, look, Dr. Copper, it's been a bit of a head scratcher.
It's really been range bound between sort of US $3.50 and $3.80 a pound for what feels
like quite a long time, most of 2023.
And we're still stuck there today.
Whereas all forecasts are saying there's a copper squeeze coming and it could come.
A lot of forecasts have said, oh, it's going to be 2025, but it could actually be accelerated.
We could see that this year.
So why hasn't the price jumped out of its range bound trading?
It's a substantial market, 25 million tonnes of copper a year.
There must be some stockpiles that are off warehouse that we can't see that are being
consumed.
But warehouse stocks are generally pretty low.
So look, the fundamentals are very, very good for copper.
I'm not telling people anything that they don't know.
It's really interesting.
I saw an analysis last week of two of the largest new sources of copper production out
of South America, Cuy of Echo and QB2.
Both of those, if you're looking for it as an investor by the companies that have built
them, if you're looking for say a 15% IRR return, both of those are under water.
One needs $4.50 a pound and one needs six bucks a pound to hit that 15% IRR.
So at current levels, the incentivisation for new copper production is really lacking.
And I say this all the time, every project that gets delayed or deferred adds to the
future deficit.
So yeah, it's something that we, along with many, we like the sector.
So that comment there is fascinating.
Any project that gets delayed or postponed adds to the problem of supply.
So we've seen this everywhere where pre-COVID and then run up, money was pouring in, everyone's
finding new projects, doing raises, everyone feels rich.
But now speaking to clients, investors, institutions, family offices, everyone's kind of feeling
poor to an extent.
So where that may have risked capital before, they're finding safer houses, higher property
lending or property developments or something of the equivalent back there.
And then the other thing which I'm finding very crazy is across the board in most asset
classes, some of my colleagues have said that the deals they're seeing right now are the
best that they've seen from a valuation standpoint.
And I heard a fund manager say the other day that last year or the IPO's from last year,
so the year before have all come off like on average, like 48% was 58%, something quite
large.
So valuations is very, very interesting.
Bit of a statement there, but I suppose my question on the back of that is what is happening
in IPO land?
I read an article you wrote that said, what was it?
Last year saw little to no IPO action with only three junior minor companies listing on
the ASX in the past month or two.
One was gold, one was rare earths and one was lithium, Kali metals.
So my question after all that as well is what do you think is going to get the IPO market
going again?
Look, probably Jerome Powell.
You reckon?
That's a flippant comment, but interest rates are a major factor in support for speculative
investment.
If you can stick your money in the bank and make 5% versus, as you mentioned, IPO's which
you're actually going to lose money on from the 2022, one of the 2022 IPO's, why wouldn't
you put your money in the bank and earn a very safe 5% or something like that?
If and when interest rates come down, particularly in the US, then you will see, in my view,
you will see increasing support for the more speculative investments and in particular,
as an example, the junior resources exploration sector.
So yeah, look, hopefully that's right.
That second half of 2024 is going to see moderating.
Well, the first half of 2024 will see continued moderation in inflation and then second half
of 2024 will see interest rates start to fall.
And yeah, so in that case, we could see a much stronger IPO market on the ASX in H2
2024.
So if any IPO's are coming out with what we discussed with the commodities, I suppose
what is your outlook on if a deal came out, what's the commodity to be in?
Yeah, look, I think we've touched on a few of them.
Uranium looks good, particularly on the more exploration side of things.
I think a number of the advanced developer uranium companies perhaps ran ahead of themselves
a bit in 2022 and 2023 was more a consolidating year.
Copper obviously is something that everyone is interested in and we're definitely seeing
a bit of a groundswell, both in North America and Australia, of interest in copper.
Copper will always be there and I think that also would benefit from falling interest rates.
Other sort of more esoteric ones, I think PGMs look pretty interesting in 2024.
The prices have fallen a lot.
The big producers in South Africa and Nureilsk in Russia, particularly for palladium, supply
is falling.
There's a deficit there and if EVs or if hybrids and plug-in hybrids are preferenced over pure
EVs, then that needs autocatalysts and PGMs are, that's a major consumer of PGMs.
So platinum palladium look pretty interesting.
When we touched on Nickel earlier, I think there's probably no rush, but the major use
of Nickel steel is not batteries, it's stainless steel.
And Chinese production of stainless steel was a record last year and I think it's going
to be strong again this year based on how we're seeing the iron ore price.
So while there's still a surplus of supply coming out of Indonesia through the new technology
and nickel laterites, I think there's a chance that in the second half of 2024, for what
is historically the most volatile of metals, we could see nickel start to rebound.
So that's an interesting one to watch.
Yeah, that's very interesting.
I suppose I was just thinking to myself then, from what you said before, all these plays
in Australia and the resources sound fantastic, you find a side.
But again, the problem comes down to the ability to finance them.
So I spent a bit of time in the past couple of years speaking with German bankers regarding
corporate bonds.
So I'm just wondering, there's a thing happening over in Saudi and Europe where they're using
essentially bonds where you can forecast the life of a mine 30 to 50 years and they're
essentially reverse engineering it, right?
So they know exactly the money required to get it out, what's essentially there, and
then they just get the job done instead of having A, B, C, D, E, F, G on all the raises
coming through, which anyone listening that's doing the brokering probably is going to shoot
me for this.
But from your position, who's been doing this for a long time and seeing it, I'm just very
curious to hear your thoughts on the relationship of say, corporate bonds in resource companies
because I've had conversations with people over the years in Australia, either they're
not familiar with it or they're familiar with it and they've really seen one work in Australia.
But I keep seeing all these large, capital intensive projects that look fantastic where
shareholders go into it.
It sounds exciting two, three years and then it falls over because I don't know, rivers
run dry.
So do you think a dead option via a bond, a corporate bond is appealing for Australian
miners here or do you think, I don't know, what's your opinion?
Is it balanced?
For some, look, that's what Twiggy Forest did with FMG, access the junk bond market
out of the US to finance Fortescue into its first production.
And it was a nail biting thing when the iron ore price fell.
But he has become the third force in iron ore and hats off to him.
So for substantial projects, as you mentioned with 30, 50 year mine lives, I think it can
work.
You've got to get the interest rate right.
Obviously.
I should say as well, these bonds begin at either euro or US dollar at half a billion
dollars because the cost of building one for 50 million US is the same as half a billion.
So the projects aren't small.
Well, the life cycle is not small.
I guess that the issue is a lot of mining projects, they start out with relatively short
lives of maybe five to 10 years, but a lot of them do keep going for decades.
They find more and more reserves, keep on exploring.
So that's not ideal for putting in place a long term bond, unfortunately.
And you're right.
Look, development capital is very, very hard to find at the moment.
In fact, there's a number of developers that I can mention that are sitting on, they've
got a feasibility study tied up with a bow.
They've got their permitting all done.
They might have a strongly positive NPV.
They can't get the development finance because providers of that capital have seen massive
cost overruns and scheduled blowouts in many projects over the last few years due to cost
escalation and also due to a shortage of labour that's linked, a shortage of labour in the
industry.
Come back to that point before, every project that gets delayed or deferred is fading into
the future deficits.
And we're seeing a lot of that at the moment.
Well you're definitely going to be seeing a lot in your trip from top to bottom with
hopefully a stop in Miami and hopefully you're trying to find the high end cigars running
around that beautiful city.
Yes, I've got that on my list.
If I've got a bit of spare time, I've got some cigars to buy from a friend of mine who's
a cigar aficionado back in Melbourne.
So hopefully we'll be sharing a Monte Cristo together when I get home.
Fantastic.
Last question I'd like to finish on is what keeps you up at night and what gets you out
of bed in the morning?
Look, I think the thing that keeps me up at night is the, if you like, the bets we've
placed on what look like really good expiration prospects.
But as a very good geologist, I know Chris Cairns like to say, mother nature's a bitch
and she's had a lot of time to move the furniture around downstairs.
So even the best drilling targets can come up dry.
So that's something that keeps me awake at night.
And what gets me up in the morning?
I think it's probably the same thing, the excitement of the potential for one of our
portfolio companies to make a big discovery.
Well, the only constant in life is change.
So with that being said, so if anyone out there wants to learn more or change up what
they're doing, what's the best way they can reach out to you to, I don't know, broaden
their minds or learn more.
Sure.
Look, if people are interested, please contact us via our website.
Get on the mailing list for the monthly report that covers our individual portfolio, but
also tries to address what's happening in commodities markets.
So yeah, hopefully people have a read that.
What's your website?
It's lrfm.com.au.
Lowell Resources Funds Management, LRFM.
Fantastic.
All right, John, well, it's a pleasure having you on and time for either a drink or to head
to bed in your side of things.
And my day is just getting started.
I think the market's opening in two minutes.
So we'll see what the ASX has in store for us today.
All right.
Fingers crossed.
Thanks a lot, Murdoch.
Good fun.
Enjoy it.
Cheers.