Commodity predictions for 2023 – Part Two

In January, I shared two predictions for commodity stocks in 2023.

If you missed that article you can read it here.

The first prediction was for broad upbeat sentiment coming back to the mining industry in a big way in 2023.

While this  seems to be at odds with recession fears in the US and a generally poor economic global outlook…the key point is this, with recession comes lower interest rates.

This could be a very bullish for stocks later in the year.

As absurd as it may sound right now, I think you should be ready to accept new all-time highs across juniors and majors…

This will mark a new phase in a secular bull market for the mining industry.

The second prediction from my "Part 1" article rests on the dire need for more EV battery raw materials.

We know how this played out for lithium stocks in 2022.

With around 300 gigafactories under construction, most car manufacturers are now entirely committed to EV production.

Yet, to date, lithium has been the only beneficiary of this major industry shift.

As I highlighted last week, batteries need more graphite (by weight) than any other raw material, including lithium.

However, deposits for this critical metal are scarce and held mostly within China’s borders.

To date, investment has been fixated on lithium; this has been at the expense of developing new projects for virtually all other critical minerals needed in battery production.

For EV manufacturers to have any chance of meeting global demand, investment will need to go beyond lithium stocks.

Its why I believe adding stocks leveraged to graphite production (in particular) could offer handsome rewards in 2023.

So, with that, let’s cap off this two-part series on what I believe will be the big themes for 2023…

Prediction #3

While some of the world’s major problems may start to fade in 2023… I’m thinking inflation and rising interest rates, there’s one problem which won’t be solved… Energy.

Lack of oil and gas production, depleted US oil reserves, ongoing war in Europe and Russian gas supply threats, and a decade of record low investment in the fossil fuel industry ensures the world will need to rapidly find alternatives to maintain energy stability.

Unfortunately, renewables won’t be the saviour everyone hopes for.

While I’m bullish on the critical metals needed for this ‘new age’, there’s simply not enough medium term reserves of raw materials available to build the solar panels, batteries, and wind turbines needed to provide massive base load power for the global economy for the timelines set out by our political leaders…. Whether that’s 2030 or 2050.

But what happens when the world wakes up to this harsh reality? Will fossil fuels still be available if the timelines get pushed out?

Well, unfortunately, unlike water, fossil fuels can’t be turned on like a tap when its needed.

It takes decades of intensive capital expenditure to explore, discover and develop.

Yet, according to Rystad Energy, global spending on exploration has tanked in recent years as oil and gas companies seek to limit risk.

In fact, some sources indicate that 2022 recorded the lowest level of oil and gas discovery in 75 years.

Not surprising really, with many governments firmly fixed on the idea of net zero they’ve halted O&G leases and discouraged investment into new wells.

ESG pressure is having its affect too… Just like the tobacco industry of the 1980’s, fossil fuel compnanies are losing access to important sources of institutional funding.

Its a trend we are seeing in Australia too.

As you can see from the chart below, onshore and offshore petroleum exploraton expenditure is sitting at multi-year lows.

Without meaningful discovery in oil and gas NOW we won’t have sufficient reserves to call upon should the need arise in the FUTURE.

Thanks to a severe underappreciation of the timelines involved in scaling up mine production, coupled with similar multi-decade underinvestment in mineral exploration... It means we've turned our back on fossil fuels far too quickly. 

That's a major problem for global energy security... One that could prove rather unsettling for leaders in the west.

After all energy is the backbone of the global economy and the lifeblood for modern civilisation.

So herein lies the only TANGIBLE solution to solve what could be humanity's biggest challenge...

Ensuring the global economy does not run short on base load power means we need something far, far greater than any solar, tidal, hydro, or wind power generators could ever achieve.

It brings me to the only feasible alternative for our future energy needs... nuclear.

Love it or loathe it, as an investor, you can’t ignore the potential of nuclear energy in helping to avert what would otherwise be an energy transition nightmare.

Governments have either knowingly (or unknowingly) all but guaranteed that at some point in the near future, we’ll need to accept nuclear as our staple source of global base load energy.

They’ve signed the death knell for fossil fuels… They are blind-sided by the issue of critical metal supplies.

It means we’re slowly walking into a new nuclear age.

While the 2011 Fukushima nuclear disaster in Japan still hangs large over the industry, the world has never faced the potential for global energy shortages on the scale that’s likely to hit over the coming years.

It comes down to lack of supply.

That’s why I believe nuclear will become a focus in 2023… Uranium stocks will, of course, surge if this situation plays out.

Uranium is heating up

Turning our attention to the world’s largest publicly traded uranium company, Cameco [NYSE:CCJ], shows us that momentum is building in this sector.

CCJ, accounting for around 18% of global supply, has well and truly broken out of its decade-long downturn, suggesting interest is returning to this once very unloved commodity:

From its all-time low in 2020, the stock topped-out in early 2022…since then, prices have held firm against market turmoil over the last nine months.

CCJ’s price action is typical for the uranium industry at large, including many Australian producers.

Long downtrends that have transpired over a decade or more, followed by a sudden change in momentum in 2021.

Uranium could be in for a multiyear run, meaning investors have years of potential growth by getting into the right companies.

2023 could be a stand-out year for uranium stocks as the full impact of the impending energy crisis starts to unravel.

This brings me to my final forecast…the type of stock to own in 2023.

Prediction #4

Typically, for my own portfolio, I like to focus on late-stage explorers or early producers.

Stocks siting in this part of the mining lifecycle offer less risk.

They hold a known ore body, eliminating discovery risk.

With capacity for years of future production, there is no immediate need to replace depleting reserves… The thorn that sits in the backside of every mature mining company.

As I’ve explained to past readers, late-stage explorers/early producers offer the sweet spot for long-term investment.

But is there any value in adding more speculative stocks to your portfolio in 2023? I’m talking about the early-stage explorers that gain multiples in value within a few short weeks.

Locating a success story among the hundreds of listed small-cap explorers is generally fraught with danger.

At best, it means owning a handful of small caps, which move sideways for years… At worst, when commodity prices drop and the industry turns, it results in losing the bulk of your investment.

80% or 90% losses are certainly not unusual for these types of companies.

But does that mean you should steer clear?

For the most part, yes…but at certain times it does pay to allocate small positions across several small-cap explorers.

Let me explain…

You see, at specific stages in the mining cycle, there is value in allocating risk capital toward the small end of town.

The key is understanding where we are in the investment cycle for mining.

Getting in too early means holding small caps that trend sideways offering little value for investors.

But jumping in too late exposes you to rapid price declines as the secular bull market unwinds.

That’s what we witnessed for crypto and speculative tech stocks in 2022.

As I discussed last week, I believe the latter part of 2023 will mark the beginning of a new phase in this mining cycle…a multiyear secular bull market for commodities.

Over the last boom, this was an excellent time to add small explorers to your portfolio.

2023 could very well be the beginning of a new era for the juniors, something I haven’t seen since the frenzied activity during the last commodity super cycle from the early 2000’s.

We’ll see how these predictions play out and of course revisit them at the end of the year.

If you're interested in staying up-to-date on the latest developments in the Australian Commodities space, click this link now to get insights from James Cooper in his publication Diggers and Drillers.