BHP at $100? This fund manager says it’s possible

Tribeca’s portfolio manager Ben Cleary says now is the time to buy dirt cheap mining stocks or risk missing out on the next sector rally.

Alex GluyasMarkets reporter

May 15, 2023 – 5.00am

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For Tribeca Investment Partners’ Ben Cleary, there’s rarely been a better time to top up exposure to resources companies than now.

He says supply constraints are ubiquitous across commodity markets following a decade of underinvestment in new projects, while demand is continuing to build amid the transition to a decarbonised world. This is allowing companies to deliver robust shareholder returns through dividends and buybacks.

“Resources stocks are trading cheap”: Ben Cleary at Tribeca’s new office in Brisbane. Jamila Toderas

At the same time, valuations across the sector remain depressed due to fears that a looming global recession will hurt demand for raw materials.

But if there’s one thing Cleary has learned during his 20 years monitoring commodity markets, it’s that equities typically price in an event long before it takes place, meaning the market will soon be looking beyond the current economic slowdown.

So bullish is he on the broader commodities market that he believes, over the longer-term, BHP’s share price will more than double to $100 in the current commodity cycle.

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“Resources stocks are trading cheap, particularly against the broader market and there’s all these categories of potential catalysts like M&A that could spark a rally,” says the portfolio manager of Tribeca’s Global Natural Resources Fund.

“We just think it’s a great time to be adding exposure to the sector, and we have been, despite the uncertain environment we’re in. I think people will look back and think they should’ve been topping up their exposure to resources stocks during the last couple of months.”

Tribeca’s fund is a long-short strategy and invests in global equities, credit and commodities with a focus on mining, energy and soft commodities.

The unlisted fund has returned 14.3 per cent in the current financial year to date, outperforming the MSCI Global Commodity Producer Index’s 13 per cent. Over the past decade, it has returned 18.1 per cent per annum with an average funds under management of over $500 million during that period.

A head-scratcher

Cleary started adding to the fund’s long exposure in May and June last year as central banks began their aggressive policy tightening which triggered a brutal sell-off across the resources sector. Since then, the portfolio manager has been selectively adding and trimming holdings.

Around 50 per cent of the fund is invested in the base and battery metals sector. Within that, the portfolio manager is particularly bullish on copper given supply of the metal is likely to remain extremely tight.

The fund owns some of the largest copper miners in the world including Glencore, Teck Resources and Freeport-McMoRan, which Cleary says are trading at such depressed levels that he finds baffling.

“To think you can buy all these world leaders at five and six times earnings considering what the rest of the market is trading on, it’s a bit of a head-scratcher,” he adds.

While Tribeca’s resources fund benefited from the powerful rally in lithium stocks in 2021 and 2022, the portfolio manager sold most of its exposure to the sector around a year ago, which he admits was probably too early.

But Cleary believes the sector is looking more appealing now following the swift decline in lithium prices over the past five months, and has added major producers Pilbara Minerals and Allkem in 2023. Both companies have surged more than 30 per cent on the ASX so far this year, the latter in the midst of a $US10.6 billion ($15.7 billion) merger.

“In many cases, lithium stocks have pulled back to levels that are now discounting prices well below long term, consensus forecasts, so the sector is now screening much more attractively,” Cleary says.

Around 20 per cent of the natural resources fund is allocated to the clean energy sector which includes a large, long-standing position in uranium companies.

Cleary highlights that since Japan’s Fukushima nuclear disaster in 2011, there has been very little capital spent on new supply of uranium. In fact, there’s been a growing number of mines being placed into care and maintenance.

Cleary estimates that uranium prices need to at least double to encourage enough supply to come online. Meanwhile, demand for the commodity is poised to surge over the next decade as countries such as China, the US and Japan increasingly turn to nuclear energy.

“Uranium stocks are still under-owned, but uranium will be a major beneficiary of all these policies around the world looking to decarbonise and reduce the market share away from fossil fuels to other base loads,” the portfolio manager says.

Golden opportunity

“We’re still a very long way away from a peak, so I think the price can rise a lot and stocks can rise even more.”

Tribeca has been one of the major shareholders of ASX-listed Boss Energy for more than five years, it also owns Paladin Energy and Deep Yellow. Globally, Cleary likes Cameco and Energy Fuels.

Around 20 per cent of Tribeca’s resources fund is also allocated to precious metals made up largely of gold and silver stocks.

With gold prices nearing or even breaching record highs in multiple currencies, Cleary believes it’s only a matter of time before the price is fully reflected in the earnings of the producers.

The portfolio manager points out that gold stocks haven’t performed as well as the price of the precious metal because many producers have been struck by inflationary pressures such as higher labour and diesel costs.

But with cost pressures starting to roll over, Cleary says gold companies are starting to experience a pick-up in profit margins for the first time in years.

There has also been an increase in deal activity in the sector, with the world’s largest gold producer Newmont lobbing multiple takeover bids at ASX-listed Newcrest. The world’s second-largest gold producer, Barrick Gold, has also openly stated it’s on the hunt for takeover targets.

The pick-up in M&A speaks to a broader “buy versus build” mentality pervading the sector, Cleary says, where companies are more willing to bet on synergies rather than exploring and developing new projects.

“The confidence of boards to allocate capital to greenfield projects versus capital returns or M&A seems pretty low, and I can’t see that mentality changing anytime soon,” he says.

Tribeca’s resources fund holds ASX-listed Genesis Minerals, while globally, it has positions in Agnico Eagle and Greatland Gold.

One of the key drivers of the volatility across commodity markets this year has been China’s stuttered reopening from three years of strict COVID-19 lockdowns.

Bullish on China

While Cleary acknowledges that some economic data has been underwhelming, he believes the world’s second-largest economy is strengthening, having visited the country three times already this year.

“Activity in China is as strong as I’ve ever seen it – there’s no doubt domestic travel is as strong as it’s even been in the last 20 years, and commuting numbers are as strong as we’ve seen,” Cleary says.

Cleary adds that property prices are rising in almost all cities for the first time in three years, while sales volumes are almost back to pre-COVID-19 levels. Domestic home builders are also issuing bonds to foreign investors – a scenario which was “unthinkable” just 12 months ago after the default of Evergrande in late 2021.

The portfolio manager expects China’s strong credit growth this year to continue which bodes well for the manufacturing sector and subsequently, iron ore.

While prices of the steel-making raw material have softened this year, partly due to destocking by Chinese steel mills, Cleary says this isn’t unusual for this time of year.

He remains bullish on iron ore heading into the second half of this year, and describes his bold call on BHP as a “proxy” for how bullish he is on the broader commodity market. He says that implies that the valuations of some base metal producers will increase by a lot more than double.

Cleary recently moved back to Brisbane to set up Tribeca’s new office after spending the past 20 years working in Hong Kong, Singapore and London.

While he admits that there aren’t too many fund managers in Brisbane, he is extremely bullish on the economic prospects for the city, as well as Queensland, over the next 10 years.

“You’ve got this big run into the Olympics, there’s going to be all this capital needed for infrastructure and mining,” he says.

“A lot of Australia’s metal is mined in Queensland, so there will be a requirement for quite a bit of asset management and investment into the state.”