7 stocks for the next commodities supercycle (and how a mining veteran spots them)

Tim Gerrard is one of the lucky ones, having spent his early years fly fishing in the majestic fiords and rushing rivers of the pristine "deep south" of New Zealand. Those that have visited the island will remember it as a magical place, known for its spectacularly bright night skies, turquoise blue glacial lakes, and enchantingly rugged rainforests. I sure do. 

After a degree in mining and accounting, Gerrard spent a year "overland" travelling through Australia, Indonesia, Scotland, "and every country in-between". Those trips opened his eyes to the pollution, overpopulation, and environmental concerns he did not experience in his childhood. 

This was in 1975, long before the environmental catastrophes and extreme climate events that we are seeing today. 

For these reasons and more, Gerrard is incredibly passionate about the planet. Now, having spent a good half of a century working within mining and related investments, he's leading the team at the Janus Henderson Net Zero Transition Resources Active ETF (ASX: JZRO)  to identify the natural resources companies making strides to reduce the world's carbon footprint. 

He's adamant now is the perfect time to put money to work, arguing that we're at the start of a very compelling cycle for decarbonisation-linked commodities. 

"It's metals and mining. It's renewable energy. It's hydrogen. It's sustainable agriculture. It's recycling. All of those things are going to reduce our carbon footprint," Gerrard said.

"This is not a speculative trade. This is not a penny dreadful in Kalgoorlie that's going to make 1,000 times overnight. If you're day trading, go and do your day trading. But if you're a long-term investor and want to get involved in decarbonisation, then I think you should take notice." 

In this interview, Gerrard outlines some of the most exciting themes (and stocks) within this rapidly developing area of the market - including copper, precision agriculture and hydrogen. He also names his favourite locally listed darlings, as well as the red flags investors need to watch out for when investing in this space.   

Note: This interview took place on Wednesday 14th September 2022. You can watch the video or read a summary below. 

We're at the start of the next major cycle 

While the last major commodities cycle was led by the industrialisation and urbanisation of China, Gerrard believes the next will be driven by the electrification of the world. 

"Back in the '90s, we thought it was a big deal when Japan produced 90 million tonnes a year of steel," he recalled. 

"By 2018 or 2019, China was 1.1 billion tonnes of steel. The next largest country was still Japan at 90 million. So China has really driven the last big cycle in commodities.

The next cycle is going to be a lot broader, he added. Instead of being reliant on China, it's the entire world that needs these crucial resources. 

So which companies will benefit from this new commodities cycle? Gerrard points to sectors like metals and mining, renewable energy and agriculture. But it won't cut it to just be in an "exciting" sector, and of course, valuation matters too. 

"We want companies that are low cost. They have to survive in the tough times," he explained.

"For the same reason, we want companies that are low in debt. We want companies with proven management. And then we want companies where we can trust management, as they can say one thing and do another... So ESG overlay is very important." 

How to identify winning companies within this thematic 

The JZRO team splits market opportunities into five "buckets". These include: 

1. Sustainable mobility

The first, mobility, covers natural resources related to electric vehicles (and not just cars – it also includes motorbikes, trucks and buses).

"EVs need about five times as much copper as a traditional combustion engine vehicle. This is a big deal for copper, and EVs are likely to go from five million units to 30 million units by 2030," Gerrard said.

"Australia's well-positioned with its lithium. There's cobalt required, there's graphene required, and more copper required."

Gerrard believes that decarbonisation is only possible today because wind and solar are now economical. 

"30 years ago, no way! The right policies, the right money being invested, the right leadership from Europe. These things are making a difference," he said. 

He points to renewable energy companies within this bucket, as well as hydrogen. 

People often underestimate this area of the market, Gerrard said, as recycling can be "boring". 

"We can avoid a lot of carbon by recycling. I'd rather recycle a tonne of steel at 0.5 tonnes of carbon, than a new tonne of steel that would cost two tonnes of carbon," he said. 

"The same applies to recycling your aluminium cans or recycling cardboard boxes." 

4. Sustainable agriculture

Perhaps thanks to his upbringing in New Zealand, Gerrard has a particular fondness for this area of the decarbonisation market. This "bucket" includes low-carbon foods like salmon, alternative proteins like soy, plant-based foods, and other agriculture-related stocks. 

"With precision agriculture, if you put the right fertiliser on at the right place and at the right time, you can save a lot of excess carbon emissions," he said. 

Last but not least, carbon reduction can include forestry companies but also those companies involved in carbon capture utilisation and storage (or CCUS). 

"You capture the carbon from existing fossil fuel operations and sequester it. That's a fancy word for saying store it underground in geological formations," Gerrard explained. 

There are only around 20 of these projects around the world at the moment, he said. 

"Because of decarbonisation, we're probably going to need 10,000," he added. 

The most exciting commodities for the short (and long) term

Short term: Fertiliser

Over the short term, Gerrard believes the outlook looks bright for fertiliser prices. This is mainly due to the fact that Russia was previously a major supplier of fertiliser globally but has now been sanctioned - and for good reason. 

He points to Nutrien (NYSE: NTR) as a compelling opportunity within the space. 

"It's a big fertiliser supplier, a good ESG company, and an excellent business in Brazil. That's one that we've been adding to recently in the short term," he revealed. 

Long term: Copper and Hydrogen

Over the medium to long term, Gerrard is excited by the outlook for copper, naming Freeport-McMoRan (NYSE: FCX) as a clear winner in the space. 

"I've got to admit, this is not a new story. But we're very positive on copper. We believe that there'll probably be at least four million tonnes a year of copper shortages by 2030," he said. 

"It's not clear where the new copper is going to come from. It takes 15 years to develop a new mine, and existing mines are gradually depleting. So we've got a double whammy, depleting copper production, slow new mines coming to production, and demand going through the roof because of renewables and EVs."

He's also bullish on hydrogen, for the most part, thanks to the recent Inflation Reduction Act out of the US. 

"That's got big policy shifts that make hydrogen economical. Basically, what that's going to mean is massive new projects all around America," Gerrard said.

"And there are some companies, like Air Products and Chemicals (NYSE: APD), that are better equipped with a first mover advantage to take advantage of that." 

So I'd say Nutrien, and then you've got Freeport-McMoRan, and then you've got APD in those three examples.

Red flags to keep on your radar

While Gerrard acknowledges that identifying red flags is a difficult task, he points to two signs that investors can use: PE ratios that are just too good to be true (read: very, very low) and overly optimistic management teams. 

"One red flag is, if iron ore is at $120 a tonne and you've got a PE of four, sometimes the PEs are just too good to be true. Be very alert to an unusually low PE," he said. 

"Another red flag - Beyond Meat (NASDAQ: BYND) is a company that we invested in... Sometimes, the companies can just be too optimistic.

"If a company, like Beyond Meat, thought they were going to get compound revenue growth of 30% per annum, and there's a couple of quarters in which they miss that, then you have to be very quick to appreciate that that could be an ongoing trend." 

Don't give management teams the benefit of the doubt that they'll hit their targets, he added. 

Tim's favourite local darlings

Gerrard said there are many Aussie stocks with impressive track records, such as iron ore, copper, coal and nickel miner BHP Group (ASX: BHP), lithium darling Allkem (ASX: AKE) and lithium and nickel producer IGO (ASX: IGO). 

"But the one that we really like at the moment - and I've just finished telling you about red flags on iron ore - is dual-listed in Australia and Canada and is called Champion Iron (ASX: CIA)," he said. 

"Why is it a big deal? Its iron ore is low carbon. It has a low carbon footprint." 

The business was built off the back of a low capital base. In fact, "the previous guys went broke", Gerrard said. But it can be expanded two or three times. 

"Even if iron ore prices come off, it can be expanded... And the key catalyst for us is that they are increasing the grade of the iron ore they produce," he said. This means it can be used in electric arc furnaces in neighbouring America. 

"There's plenty of catalysts and it's deep value," Gerrard added. 

Capitalise on the transition to net zero

Tim and the team believe high quality natural resources companies that are contributing to the net zero transition can generate attractive long-term returns. To learn more, please visit their website or the Fund Profile below. 

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Janus Henderson Net Zero Transition Resources Active ETF (Managed Fund)

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