Mining's next super cycle will be low carbon Jemima WhyteSenior reporter
Aug 31, 2020 – 12.00am
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Over their long careers working both as geologists and investors, Acorn Capital's Rick Squire and Karina Bader have developed a few rules of thumb about investing in the resources sector.
If a financier, accountant or lawyer is running a junior explorer, be concerned. And someone who has made a discovery has a better chance of doing it again – but still needs funds, persistence and luck.
Acorn Capital's Melbourne-based Rick Squire has a Zoom meeting with Karina Bader. Josh Robenstone
That knowledge has helped them navigate the small and mid-cap mining sector. But increasingly, Mr Squire says, he expects it will be deep technical knowledge that will allow investors to pick the right early-stage bets.
That's because the two are readying for the next so-called super cycle – an energy-led boom – and extracting minerals that will power this shift to battery-dominated energy is trickier than mining iron ore or gold.
Companies that mine lithium, copper and nickel are where the fund will hunt for the next Fortescue Mining Group, Mr Squire says. RELATED QUOTES ACQAcorn Capital Investment Fund
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"The next super cycle is not about the urbanisation of China, it's about the switch to a low carbon economy – and lithium, nickel, rare earths and copper will do that," he says.
"The mineral deposits that contain a lot of those deposits are very complex mineral systems and there can be all sorts of problems in processing and mining. Contrast that with coal and iron ore, where you can set up one big mine and it runs for several decades. We're looking at something very complex and different."
Anaconda Nickel, Orocobre and Lynas Corporation are some examples of how resources companies and their investors can underestimate technical challenges, Mr Squire and Ms Bader say, noting that lithium has proved particularly challenging sector.
Lynas Corp is one company that has been through the wringer, and emerged with $1 billion of tax losses and better understanding of the process.
"It's now an incredible company with a great outlook," Mr Squire says. "So much money was poured into it … after five years, they've finally got the process down and it's going nicely. The thematic is fantastic, but you have to be very careful where you go." Stand-alone resources fund
Technical difficulties have derailed any number of resources companies, and Mr Squire says new technology introduced to process nickel laterite hurt some explorers in the last boom. "For some companies, it ended in tears because of that technical difficulty. The same thing could happen with EV and energy storage metals … we're excited but we're also wary," he says.
Mr Squire and Ms Bader have worked together since October 2016 and will manage Melbourne-based fund manager Acorn's latest offering and its first standalone resources fund, the NextGen Resources Fund, which is in the midst of raising up to $100 million.
Ms Bader has worked at Acorn since 2009 and spent eight years as a fly-in, fly-out geologist, mainly for Australian gold companies. She moved to funds management because she says "decision makers were most often accountants or lawyers".
Mr Squire joined Acorn later, after working at Deutsche Bank and a mining finance house. Before that, he worked as a senior research fellow at the University of Melbourne and Monash University, examining formations of gold and base-metal deposits. He found his way to geology after ditching an arts degree, then moving to Kalgoorlie for a year, before returning to university to study science.
The new fund will focus on between 25 and 40 resources companies in the portfolio. The focus will be on investing in stocks outside the ASX top 100, although the fund will be able to invest up to 25 per cent of the portfolio offshore and hold up to 20 per cent cash. Of those investments, between 10 per cent and 40 per cent can be in what Acorn calls "early first stage".
Gold stocks make up more than half of their investable universe and will always be a major focus, though both managers stress that they do not assemble the portfolio from a sector thematic.
So after gold's recent run, and accounting for 50 per cent of the portfolio, is this really a good time to enter a resources fund? "We've had a good three to four months from gold, we're starting to look into those companies that are outside of the gold sector," Mr Squire says.
Among the non-gold companies the fund is invested in are Victorian copper explorer Staveley Minerals; NSW copper, zinc and lead explorer Peel Mining; and Sunstone Metals, which owns 25 per cent of a copper development in Sweden.
"It is not easy to discover a new high-grade copper resource, and even if you find it, it takes over 10 years to develop. We believe COVID-19 is making that even worse – companies are pulling back either on exploration spend or capital spend, and on top of that you've got interruptions, specifically in South America, one of largest providers of copper and iron ore," Ms Bader says.
The two say they were already using Zoom and Microsoft Teams to talk to geologists well before the arrival of COVID-19 and do not expect it to curb their ability to check the technical details.
"Prior to the COVID-19 lockdown, we'd done Zoom and Teams meetings with geologists on site in Sweden, Canada, the US and Peru. We like to speak to the geologists at the coal face ... it's all good to speak to the MD, but the engineer or geologist on site knows most," says Mr Squire.
In particular, they nominate Dacian Gold, which started a gold operation in 2018, as a recent technical success. The company initially forecast about 200,000 ounces of gold a year.
"We looked closely at the resources of the main underground mine and identified potential issues that could make it difficult to achieve the forecast rates of production," Ms Bader says, noting production rates are now about half the original forecasts.
And, in the aftermath of Rio Tinto blowing up the historic Juukan Gorge, how does environmental, social and corporate governance feature in the process?
Ms Bader says there is no doubt that remuneration metrics drive behaviour and the fund wields its vote to encourage awareness about that, affecting local communities and setting aside funds for rehabilitating old mines.
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