It's been 11 months since this portfolio manager invested in Pilbara Minerals and Lynas. This is what’s next

Back in July last year, Eiger Capital's Stephen Wood likened the upswing in lithium and rare earth prices to the market for iron ore back in the early 2000s, as China embarked on its infrastructure spending journey. 

"Like Fortescue from 2008 onwards, we believe that two companies, Lynas Rare Earths (ASX: LYC) and Pilbara Minerals (ASX: PLS) in the advanced materials space in Australia have “threaded the needle” and have achieved a low unit cost, profitable, scalable position in rare earths and lithium respectively," he wrote. 

"Both are now generating significant cashflow and can fund ongoing refinements and growth in their operations." 

Since then, Pilbara Minerals has seen its share price rise 104%. Lynas Rare Earths, on the other hand, has fallen 5%. 

To find out what the future may hold for these stocks, Livewire sat down with Wood for an interview covering everything from his outlook on various battery material-related commodities (including lithium, copper, nickel, and graphite), as well as his top picks within these sectors. 

Plus, he also names his highest conviction holdings within the critical materials thematic right now. 

Note: This interview was recorded on Thursday 25th May 2023. You can watch the video or read an edited transcript below.

Edited Transcript 

LW: Are Pilbara Minerals and Lynas Rare Earths still "threading the needle"? 

Then all of a sudden, the production or volumes of electric vehicles, in particular, have really started to pick up pace. Obviously, with Tesla (NASDAQ: TSLA) disappearing off into the distance, and particularly a couple of Chinese manufacturers hot on their heels now, and some European manufacturers a little bit further behind. They now are in production, in scale, and lithium prices are way up and they're making a fortune. And every time now a new mine comes out and says, "We're going to do this," or, "We're going to do that," or, "We're building this. We want to be like Pilbara." Yet three years ago, it was just all bad. So the strategy they've executed, they have 100% threaded the eye of the needle.

Lynas (ASX: LYC) hasn't been as dramatic as that. But in rare earths, processing is extremely complicated. It has taken Lynas more than 10 years to be the world leader in separating and processing rare earths. And so they have been at it for a long period of time. Now, politically rare earths are so in focus. You're reading about them all the time. So we would argue that in continuing to execute the strategies, they have now landed themselves in a spot where they are also the "eye of the needle" in terms of where they currently find themselves. And a lot of people are trying to catch up to them. But more so than lithium, the timeframes required to understand how to separate and process rare earths are incredibly long. It's 50% mine and 50% a chemical company. And that intellectual property is hard to replicate.

LW: Where are you looking to deploy capital within the critical minerals space? 

Stephen Wood: We're bullish on all of the critical materials - the ones that are going to participate in the electrification of, let's just say, everything. However, just because you're bullish on critical minerals and materials, you've actually got to back that up with a company and a mine and a plan, that you think is actually going to work. Because while you can be bullish on the demand and the outlook and all the rest of it, we know, for example, if you look back at the iron ore boom of 2004, 2005, 2006, as everybody talked about the industrialisation of China, which was then going to be followed by the industrialisation of India, then every single iron ore mine that was around back then should be now big and making a fortune.

In fact, what has happened is we literally have Fortescue Metals (ASX: FMG), and trainwreck after trainwreck after trainwreck. We can go back over those names another time. So we think the same thing is going to happen here. We're bullish on the demand for the minerals and the materials, but we have to make sure that we back that up with the Fortescues of this space at this time. And we absolutely believe Lynas and Pilbara are there. The question is, as we look to deploy more capital, what to put it into next? 

Just because volume and price might well go up, doesn't mean all these companies are going to succeed.

LW: Where have you redeployed your capital from Pilbara Minerals? 

Stephen Wood: We've had to more or less sadly say goodbye to Pilbara because it's grown up and turned into an ASX 50 company. It's been a real success story. But as a small and mid-cap manager, we are tasked with finding newer, smaller, developing businesses, not businesses that are making hundreds of millions of dollars a quarter, which Pilbara now is. We have redeployed our lithium investment. Funnily enough, one of our commandments is all about the quality of management. We've redeployed our Pilbara investment into a company called Patriot Battery Metals (ASX: PMT). It has Ken Brinsden backing it. He was the CEO that built Pilbara from nothing to what it is now. It's a very early-stage lithium mine in Quebec in Canada. We also like investing in places like Australia and Canada, where in the mineral space you have just a lot less sovereignty risk than in a lot of other jurisdictions, particularly in this space in Latin America.

So we think it's a big resource. It's in a great place. In Quebec, there's a lot of cheap electricity with hydro to help with processing costs. And importantly for Patriot, Canada is a full participant, Australia's trying to be, in the Inflation Reduction Act, and all the subsidies and benefits that come with that. And not only that but if you go and draw yourself a little line on a map, it's not that far from the enormous US car industry. So whether it's location, sovereignty risk, management, or size of the resource, it's early stage, but that's our current best idea for where to try and find the next emerging lithium miner.

LW: What is your outlook on copper, nickel and graphite (and can you provide your top picks within these sectors)? 

COPPER

Well, copper is difficult, because copper as an industry is dominated by the elephants - like BHP Group (ASX: BHP). The copper industry is buried in amongst those ginormous companies, so trying to actually get yourself some copper exposure in BHP is just utterly dominated by iron ore. However, a mid-capper that we don't mind is Evolution Mining (ASX: EVN). It's known as a gold miner. And the curious thing about gold miners is they actually produce quite a lot of copper. And in the case of Evolution, a lot of copper. But the way people look at these companies, it's kind of like there's my gold revenue, there's my cost per ounce, and they build the copper in as a byproduct, and analysts typically then just lower the cost of production and focus on the gold margin. Well, in Evolution's case, there is a large copper business in there. So particularly with gold, which is probably likely to do quite well, should the interest rate cycle peak and start falling, we don't mind that. And in the case of Evolution, you actually get quite a lot of copper that comes along for the ride. So if that's what you're looking for, that's our best idea at the moment.

NICKEL

With respect to nickel, once again, a lot of the world's nickel production is tied up in the super majors in the mining industry. And nickel in terms of volume is a step lower than copper. However, once again, one mid-sized business that has got some very, very good nickel exposure, particularly after a recent buyout of a business in WA called Western Areas, is IGO (ASX: IGO). IGO has a stake in probably what is the world's best lithium mine in Greenbushes in WA. They've also got substantial nickel mining and refining interests. So if you're looking for a bit of a mixture of lithium and nickel exposure that's not buried in the bowels of a super-major, then IGO would be our best bet.

GRAPHITE

With respect to graphite, it's interesting. It is critical, it is necessary for the manufacturer of batteries. However, at the moment, we are just struggling to find a business that actually will give us the sort of quality exposure that we want. Once again, just because the mineral is critical, you've actually got to marry that up with a business that you don't get a year or two down the track and the mineral's in demand and your business just doesn't work.

LW: What is your highest conviction position within this space? 

Stephen Wood: I think I'm going to have to answer that question this way. We've just discussed our enthusiasm for Patriot Battery Metals. However, it's worth just reminding ourselves that this is very, very early stage. It is a mine that still needs approval and it's got a fair journey to go to get itself into production. So our conviction there is high, but obviously, our holding has to be measured because that is a higher-risk investment. So to answer your question, I think what I would have to say is a combination of that and Lynas. Lynas is in production, it's profitable. It's got some great expansion plans both in Kalgoorlie as well as in Texas. It is a much bigger holding in our portfolio because the volatility of outcomes, Lynas versus Patriot, is materially less. So we have conviction on both. One is more of a core holding, one is an early-stage investment. And obviously one is a bigger holding, one is smaller, and there is more risk in the latter.

Digging deeper to find the best opportunities

Eiger Capital is an active boutique Australian equities investment manager specialising in small companies. For further information, please visit their website or fund profile below. 

Managed Fund

Eiger Australian Small Companies Fund

Australian Shares

View