Buy Hold Sell: 5 stocks for the energy transition

It's certainly a poignant time to be talking about energy. After all, the world's leaders, including Prime Minister Scott Morrison, are currently going head to head in Glasgow, Scotland, fighting to meet the Paris Agreement. 

Joined by scientists, academics, and activists, some real decisions on climate action will be made over the coming days, covering everything from limiting emissions and deforestation, to cutting coal (or not, in Australia's case), future sources of energy, and electric cars. 

But even before this week's COP26 Climate Change Conference, companies associated with the energy transition were looking particularly positive to Australia's investors, with many charging ahead over the last 18 months.

So in this episode of Buy Hold Sell, Livewire's Ally Selby was joined by Argonaut's David Franklyn and Eley Griffiths Groups' Tim Serjeant for their thoughts on three stocks for the energy transition.

Plus, they both name their number one pick from the sector for the months to come. 

Note: This episode was filmed on Wednesday, 27 October, 2021. You can watch, listen or read an edited transcript below.  

Edited Transcript

Ally Selby: Hello, and welcome to Livewire Buy Hold Sell. I'm your host, Ally Selby. And if there's one thing that we've witnessed over the past 18 months, it's a shift away from old-world energy companies to those that are leading the transition to a cleaner future. And to discuss some of these leaders of tomorrow, I'm joined by Tim Serjeant Eley Griffiths Group and David Franklin from Argonaut.

First up, we have 29Metals, which is a copper and precious metals miner. David, I might start with you. Is it buy, hold, or sell?

29Metals (ASX: 29M) 

David Franklyn (HOLD): Thanks, Ally. We rate it as a hold. We own it in the portfolio, we bought it in the recent IPO and added to it after that. It's got copper assets in Australia. What we like about it is it's got a long mine life, good relative valuation compared to other copper stocks and the outlook for copper and zinc is very good. It has a strong balance sheet and stable management. We did think that the September quarter results were mildly disappointing and on that basis, we have it as a hold.

Ally Selby: Tim, over to you. It has a market cap of $1.2 billion. And since it was listed in July, its share price has risen nearly 27%. Is it a buy, hold, or sell?

Tim Serjeant (SELL): Sell, Ally. It's been a good IPO, but I think there are two issues I have with it. One is it's been bucketed as a copper stock, but I think Golden Grove, which is the main asset historically, is a zinc asset. And I think that's where a lot of the future production growth comes from. And that has ramifications for its multiple, which you pay given the preference of the market for copper over zinc. I also think that the free cash flow expectations will continue to underwhelm - I think the market's going to be disappointed. And they're both relatively mature assets and more capital intensive than people might forecast.

Mincor Resources (ASX: MCR)

Ally Selby: Next up, we have nickel producer Mincor Resources. It has a market cap of $661 million. Tim staying with you. Is it a buy, hold, or sell?

Tim Serjeant (HOLD): Hold. Cassini is a good ore body and I think it can continue to grow. I think the valuation's probably fair for once it's ramped up over the next 12 months, you've got two corporates on the register in Wyloo Metals and Independence Group (now rebranded as IGO) which gives you a decent backstop. But ultimately I think you have to be bullish nickel to be bullish Mincor and I'm not, hence the hold.

Ally Selby: David over to you. Twiggy's backing Mincor, are you? Its share price has risen around 44% over the last 12 months. Is it a buy, hold or sell?

David Franklyn (BUY): We've got it as a buy. Mincor is moving towards production from March next year and should be producing around 15,000 tonnes per annum. And it's low CAPEX. So, it's leveraging off BHP infrastructure around Kambalda to get into production pretty cost-effectively. I think the upside comes from expiration around their Durkin North and Long mine deposits and also through their Hartley prospect, which offers the potential to grow their mine life.

Lynas Rare Earths (ASX: LYC) 

Ally Selby: Next up, we have reader favourite Lynas Rare Earth, which has been described by one of our contributors in the past as one of the most valuable strategic assets in Australia. David, what do you think, is it a buy, hold or sell?

David Franklyn (HOLD): We've got it as a hold on valuation grounds. No doubt it is a strategic asset. It's the only large scale producer of separated rares outside China. Mount Weld is a tier-1 high-grade resource. So, as far as quality of the asset, it gets a tick, but valuation, we're not there.

Ally Selby: Tim, over to you. It recently reported a record annual net profit after tax of $157 million. Is it a buy, hold, or sell?

Tim Serjeant (HOLD): Hold Ally. I agree with all the comments regarding the strategic optionality in the business, and it's very well managed, but I think that's all known. Pricing's at the upper end - at sort of a $100 a kilo for NdPr and there's little volume growth in the near term, and we're going through a pretty capital intensive period. So, I would bide your time there with Lynas.

Ally Selby: We asked our fundies to bring along one stock that they're backing for the energy transition. David, I'll start with you first. What have you brought for us today?

David's pick for the energy transition: OZ Minerals (ASX: OZL) 

David Franklyn: My buy is OZ Minerals. It's obviously one of the bigger resource companies, but I think one of the better quality ones too. We rate their management team very highly. They've got a great portfolio of assets. They brought Carrapateena on stream without a hiccup and that's producing well. Prominent Hill is a long term asset. Both those projects have brownfield expansion opportunities. They bought West Musgrave cheaply, and they've got a foothold in Brazil. So, we just think it's really a blue chip in the energy transition space. And it's a stock you should own.

Tim's pick for the energy transition: Iluka Resources (ASX: ILU)

Ally Selby: Tim, can you beat OZ Minerals? What stock are you backing for that energy transition and why?

Tim Serjeant: I've got Iluka Resources, the ticker code is ILU. It's not a battery material stock yet per se, but I think it could become one. And that's why it's of interest. It's best known for being a market leader in the zircon and titanium feedstock markets and trades on a valuation of about five to seven times earnings, depending on where you are in the given cycle. But I think if they can grow the rare earth piece of their business - which is currently selling a lowish grade, monazite concentrate to third parties in China. If they can progress further downstream, which I think they can, and for that to become a higher value, potentially up to a third of their business - we've seen the valuations that the specialty materials and chemicals companies trade on at 15 to 20 times - and if they can have a third of their business attracting that sort of multiple, I think it's a material rewriting opportunity for Iluka.

Ally Selby: Well, we hope you enjoyed this electric episode of Buy Hold Sell. If you did, why not give it a like, and remember to subscribe to our YouTube channel, we're adding new content every week.

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