How to unearth the next major resources stocks

The decarbonisation of the power sector is well underway, according to one expert, and is no longer a question of "if", but a question of "when" and "how fast". 

David Franklyn, of Argonaut Funds Management, says he and his team are focusing all their resources on the commodities essential to this transition. Namely, copper, nickel, lithium, and other battery materials. The overall resources sector, in comparison, is dominated by iron ore, oil and gas, and coal. 

This focus on the future of energy is undoubtedly paying off. The Argonaut Natural Resources Fund has returned more than 66% since its inception in January 2020. Meantime, its benchmark - the S&P/ASX 300 Resources Index - has delivered a 4.8% return over the same time period. 

In the below interview, David shares how he built the fund from scratch, what sets it apart from its peers, and where he is currently seeing opportunity in the local market.  

The interview below is part of our Fresh Fundies series, focusing on newly launched funds (and their portfolio managers) with a less than three-year track record.

Click the link here to view the other profiles featured in this series, including: 

• Emanuel Datt, Datt Capital
• Heath Behncke, Holon Global Investments
• Omkar Joshi, Opal Capital Management
• Jesse Moors and Nicholas Quinn, Spatium Capital
• Ben Rundle, Hayborough Investment Partners
• Michael Frazis, Frazis Capital
• Scott Williams, Fiftyone Capital

Fund at a glance: Argonaut Natural Resources Fund

Fund Manager: David Franklyn

• Asset class: ASX listed resource companies 
• Objective: To outperform the ASX Resources 300 Index 
• Minimum investment: $50,000
• Investment outlook: 3-5 years
• Suitable for: Wholesale and sophisticated investors 
• Launch date: January 2020
• Performance since inception: 52.8% p.a. (as of 31 April)
• Management fee: 1% + GST
• Performance fee: 20% of outperformance, subject to a high watermark 

Take us through how you built your fund from scratch to set it up for long-term success?

I had been living in Melbourne for over 12 years and was looking to come back to my hometown of Perth. My background includes 10 years as head of research at a leading small companies/resources broker in Perth, 10 years as a fund manager for a small-cap fund and time in industry working in the energy and mining services sectors.

Argonaut is a Perth-based resources-focused investment house. It is technically driven with corporate, stockbroking, research and special situations financing capabilities. I got chatting to Glen Colgan, Argonaut’s Managing Director, who I had known for over 20 years and we discussed the idea of building the Argonaut funds management business. 

I joined Argonaut in mid-2019 and we launched the Fund in January 2020. The plan was to get started using seed funds from Argonaut Directors, build a track record based on a disciplined and scaleable investment process and then seek to raise external funds. With good investment results, we are now starting to invite external investors into the fund.

Being a global mining centre, Perth is the logical location for a resource sector fund manager. Western Australia has an incredible resource endowment and associated with that it is the home of many major mining companies and boasts a high level of mining sector skill and expertise. 

What are the strategies and techniques that set you apart from other fund managers?

We believe that having access to technically skilled people who are experienced in building mines and assessing projects is fundamental to investing success and represents a significant point of difference that provides us with a tangible competitive advantage. This includes access to external industry experts and members of our investment committee such as experienced mining sector analyst and company director Cathy Moises. Additionally, while we operate largely independently from the broader Argonaut Group, we are a client and have access to their highly-rated mining research team.

Our key investment theme is that the world has reached a critical environmental tipping point, with the decarbonisation of the power generation sector and the electrification of the transport sector underway. It’s not a question of “if”, but a question of “when” and “how fast”. 

This structural shift will drive long term demand for key commodities such as copper, nickel, lithium and other battery materials. As such we have focused our investment on these key commodities. We also see gold as a “must-have” exposure given the tensions and uncertainties in the world. It represents a defensive element to our portfolio. We note that this commodity mix is very different from the overall resources sector which is currently dominated by iron ore, oil & gas and coal.

We describe our investment approach as “top-down meets bottom-up”. We identify the key commodities we want exposure to and then commit to rigorous company analysis to identify the best investment opportunities to achieve that level of exposure. 

Investments must offer either great management, compelling value or a be premium quality project in terms of size or grade. Ideally, they are all three, but this is rare.

We are high conviction and low turnover with the fund holding between 10 and 25 separate investments. Our best investments are bought countercyclically, such as entering the lithium stocks twelve months ago and gold stocks three months ago.

Where are you seeing opportunities right now?

The big question that is not fully appreciated by the market is whether supply can keep up with demand in the core commodities supporting the energy transition over the next decade. 

We have come out of a decade of low exploration expenditure and an associated dearth of new discoveries. 

Governance and environmental overlay are making it more difficult to move a project into development and many of the major mining jurisdictions in South America, Asia and Africa have high levels of political and investment risk. The deterioration in the Australia / China relationship is also highly concerning.

We see good value in some of the mid-tier gold producers such as Gold Road Resources (ASX: GOR) and Ramelius Resources (ASX: RMS). Both are well off their highs and generating strong levels of cash. The nickel sector has come off its peak on the back of supply concerns, but we see opportunity in the low-cost nickel sulphide developers with Mincor Resources (ASX:MCR) and Poseidon Nickel (ASX:POS) representing value at current levels.

Want to learn more about other newly launched funds?

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If you know of a newly launched fund that you think should be covered in this series - or if you are a portfolio manager who has recently launched a fund yourself - send us an email at content@livewiremarkets.com.

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