BHP’s appetite for OZ just an hors d’oeuvre in the coming degustation for battery metals assets

Plus, the latest list of up-and-coming projects gives investors plenty to mull while MinRes and Pilbara respond to lithium market rumours with simple facts.

BHP’s re-engagement with OZ Minerals on a takeover bid says a lot about where it thinks the copper and nickel markets are headed.

After failing to win over OZ first time with a $25 a share bid, BHP did a lot of talking about how OZ would be nice to have, but not a must have as it had organic growth options (which it is yet to detail).

It also talked about how it would remain disciplined – a short-hand way of saying it would give up if the price for success was too high.

But now there has been re-engagement, it can be said that BHP’s intent on increasing its exposure to the two future-facing metals is deeper than many observers suspect.

OZ’s assets are just part of a bigger picture in which BHP sees demand for the metals taking off in a couple of years’ time.

The prices of both metals are weaker than they were earlier in the year on short-term economic concerns and China’s COVID lockdowns . But both are critical to the multi-decade clean energy transition proceeding as planned.

Without them there is no decarbonisation, and on BHP’s own reckoning, demand for copper could double over the next 30 years compared with the last 30. For nickel it could be four-fold.

There are serious doubts that the required supply response will take place, making dreams of eventual net zero by 2050 just that, a dream.

The fix of course is sharply higher copper and nickel prices to encourage more investment . BHP doesn’t disclose its price expectations, but it has talked openly about a take-off in copper come 2025.

Billionaire mining entrepreneur Robert Friedland reckons the world is dreaming if it thinks the demand for critical metals can be met.

Speaking on the sidelines of a Bloomberg “New Economy’’ conference in Singapore, the industry sage said there has been decades of under-investment in mining.

“So you can create a recession, you can raise rates, you supress economic activity, but the minute our Chinese friends come out of their lockdown, the minute their world goes back to normal economic activity, we are going to have a sustained long-term shortage of critical metals for the new economy,” Friedland said.

When the BHP-OZ situation is looked at through that lens, the re-engagement by BHP comes back to a question of timing. The copper and nickel take-off is coming. Not next week, or even next year. But it is coming, and quarries like OZ will be taken out one by one.

Argonaut’s Best Undeveloped Projects:

The main pitfall when investing in the junior mining and exploration space is the ever-lurking threat of buying rubbish.

It’s much better then to only proceed when there is some certainty that there is quality to what is being acquired.

That’s why Argonaut’s annual research report into the junior market’s “Best Undeveloped Projects” (BUP) is always a welcome addition to the knowledge base.

To arrive at its annual BUP list, Argonaut scans the space for projects of interest across the commodities suite and then applies a series of filters.

To make the list – there are 13 of them this year – the projects must sit between the scoping and pre-commercial production stage, show the potential for an IRR of more than 25%, demonstrate they could be profitable through the market/commodity cycles, and show a strong likelihood of achieving a $100m-plus project valuation within 24 months.

Importantly, the quality of such projects enables a broader range of financing options, as well as increased M & A appeal.

Those that made the list this year are Bellevue (BGL, gold), Berkeley (BKY, uranium), Centaurus (CTM, nickel), De Grey (DEG, gold), Leo (LLL, lithium), Liontown (LTR, lithium), NexGen (NXG, uranium), Nico (NC1, nickel), OreCorp (ORR), Peak Rare Earths (PEK, rare earths), Perseus (PRU, gold), Sovereign (SVM, rutile) and West African (WAF, gold).

From that it can be seen that existing producers, Perseus and West African, are included for their new projects in the Sudan and Burkina Faso.

Buying a company with a BUP is no guarantee of investment success, not initially at least. This year has been particularly tough on the juniors, the exception being the lithium stocks.

Argonaut noted that the share prices and market caps of stocks in its 2021 BUPs list fell 17% and 5% respectively over the 12 months to the end of October. In comparison, the broader ASX Small Resources Index and the ASX 200 were down 8% and 6% respectively.

It was a tale of two halves from a share price performance perspective, with the BUPs performing strongly in to the second quarter of 2022. At peak pricing, the BUPs were supporting gains of 46%.

But then the broader market took a hit, with the widespread “risk off” sentiment – and falling gold and commodity prices (other than lithium) – hurting explorers and developers in particular.

Projects exposed to gold, copper and nickel fared worst (down on average more than 30%), while lithium (unsurprisingly) delivered the only positive share price returns.

As mentioned here recently, sentiment towards the juniors is on the improve thanks to the gold price punching back through $US1,750/oz and the base metals complex coming alive on lower interest rate/inflation fears.

So the 2002 class of BUPs can look to enter 2023 with some optimism. And while the BUPs of 2021 did it tough along with everything else, it can be said that overtime, companies owning BUPs have outperformed.

Argonaut said the average annual return was 16% over an 8-year performance period.

Lithium:

The lithium space suffered some share price indigestion during the week in response to some big name investment banks reading too much into a one day fall in an obscure futures contract in China.

They were put straight later in the week by both Mineral Resources (MIN) and Pilbara (PLS). Think of it as real world experience versus desktop analysis.

MIN’s straight-talking boss Chris Ellison told the group’s AGM that all we need to know is that there is “way more demand than supply”.

The following comments by Ellison were reported by Stockhead’s Josh Chiat:

“You read in the paper now and then someone coughed up in China the other day, and the market dropped 5% which is amazing, I hope the audience bought shares in us,” he said.

“We get the odd commentary out in the market. Goldman Sachs seemed to have a thing about getting it right one day and I’m sure in the next 30 years, one of the years they’ll be right.’’

And then there was the news from Pilbara that the latest auction of spodumene on its BMX platform had gone off at a record $US7,805/t (5.5% lithia). The first sale on the platform in July last year was $US1,250/t.

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