What's ahead for lithium, iron ore and uranium producers?

Janus Henderson’s Darko Kuzmanovic expanded on his bullish outlook for several parts of the global commodities sector during a webinar on Wednesday.

Kuzmanovic, senior portfolio manager of Janus Henderson’s global natural resources team, has a 40-year track record in the space. His experience spans that of both a professional investor and a hands-on expert, with a metallurgical engineering background.

Decarbonisation is the overarching thesis of his view, with the push toward clean energy a multi-generational movement that’s only just beginning to play out.

“It will impact various sectors differently but it’s reducing the carbon footprint of the individual sectors and businesses. That will manifest in various ways, whether that’s energy transitions such as electric vehicles and fuel cells, clean energy, or sustainable farming,” Kuzmanovic said.

Within this, the phenomenon of deglobalisation is also driving demand for commodities, as the Western developed world shifts its supply chains away from the long-held reliance on China.

“China dominates many of the technologies and resources that are essential to this transition – including lithium, rare earths, graphite, nickel – and to avoid being dependent on China alone, the US and Europe is looking to develop new supply chains,” Kuzmanovic said.

How will this happen?

The US Government, the European Union and the Australian Government are putting in place programs to incentivise the production of core materials over the next decade. 

As a recent example, Kuzmanovic pointed to the Australian Government’s $1 million of debt funding for mineral sands producer Iluka Resources (ASX: ILU) for the development of a rare earths conversion facility in Western Australia.

Urbanisation and industrialisation

Another key driver of the materials sector, we’ve already seen urbanisation play out across much of China across the last 30 years.

“We’re now starting to see the Indian economy perform and steel infrastructure being built. In four or five years, production has grown from around 100 million tonnes with plans to get to 300 million tonnes by the end of this decade,” Kuzmanovic said.

“We’re also starting to see a lot more of that growth also happen in other parts of the world like Africa and central Asia.”

Kuzmanovic adopts a lifecycle approach to investing, looking at companies that didn’t even exist four or five years ago, but which are now evolving into significant competitors. He pointed to Pilbara Minerals (ASX: PLS) as one local example.

“Six years ago, it had a market cap of $50 million but peaked at over $14 billion about nine months ago and is still valued at close to $10 billion,” he said.

“This is a company that didn’t exist on the ASX…but through the discovery and development of a material that the world needs, it has added significant value to both investors and itself. We see a lot more of that going forward.”

Far from disappearing, Kuzmanovic expects lithium demand will grow at 20% CAGR. 

"We don’t think the thematic is destroyed, it’s just been impacted by a number of variables that coalesced to put pressure on short-term price," he said.

Some of the other miners Janus Henderson holds include:

• Ivanhoe Mines (TSE: IVN) – A Canadian-based copper miner
• Adriatic Metals (ASX: ADT) - A UK-based producer of precious base metals
• Sandfire Resources (ASX: SFR) – An Australian copper miner.

“The best resource industry in the world”

Kuzmanovic emphasised the lacklustre view that much of the market currently holds on iron ore, with price outlooks hovering at long-term lows of around US$75 to $85 a tonne – well below its recent peak of $135.

“Everyone's been expecting this market to peak and fall, mainly driven by the peak and fall in steel production in China,” he said.

But it simply hasn’t happened. China’s massive industrialisation phase may have peaked but the much-anticipated crunch in demand hasn’t materialised. That’s because China has also begun exporting iron ore to other markets.

“That’s surprised everyone on the upside and that's likely to continue over the short term, and at the same time, we've got India now starting to develop its steel industry at a pretty fast rate.”

Kuzmanovic also pointed out the supply side fundamentals, where the iron ore industry is an oligopoly: “We all know iron ore is plentiful, but it’s not plentiful in the grade that’s required. The barrier to entry is very high.”

That’s why we’ve only seen one new entrant to the space in the last 20-odd years, which was the Andrew Forrest-founded Fortescue Metals (ASX: FMG).

“So, with barriers to entry, an oligopoly, market structure, and strong demand from markets that don't have iron themselves…have created a very robust and well-performing sub-sector of the resource space,” Kuzmanovic said.

“And even at $85 a tonne as the long-term price, it’s still one of the most profitable businesses in resources. All that will happen is that the EBITDA margin goes from 75-80% to 65-70%, but it's still good. I don't see it collapsing anytime soon.”

Janus Henderson also maintains a bullish outlook on gold, Kuzmanovic describing it as “deep value" with some very defensively-positioned businesses whose share prices haven't performed in line with the gold price.

He noted De Grey Mining (ASX: DEG) holds one of the best gold deposits of the last 30 years, with "a lot of optionality, opportunity and value".

Other gold miners in the portfolio include:

• Northern Star Resources (ASX: NST)
• Agnico Eagle (NYSE: AEM)
• K92 Mining (TSE: K92).

What’s driving uranium demand?

Kuzmanovic also discussed his long-term view on uranium, naming a couple of factors driving this part of the commodities sector.

1. The collapse of prices in the wake of the Fukushima, Japan nuclear disaster of 2011. This has since seen a recovery from the lows of $20 a pound of uranium, as “loose inventory” has been exhausted.
2. Ongoing demand, which is reverting to the mean.

"The price has gone from below US$20/pound to $100/pound and has doubled in the last 12 months. The question is what now?" said Kuzmanovic.

He said the recent COP28 summit was significant for the nuclear sector, with around 20 countries committing to tripling their nuclear fleet by 2050.

“That’s a significant impact on the amount of uranium that needs to be produced. Today, we’re at around 180 to 200 million pounds a month, of which about 150 million is produced from current mining operations."

“The gap is inventory that has been available from nuclear facilities in Japan, for example, being offline. All of that has disappeared and a supply gap has emerged, even within the very modest growth environment,” he said.

Kuzmanovic suggested the market could easily grow to around 400 million pounds of uranium production by 2040 – “and there is no uranium project at all that could deliver into that market for the foreseeable future.”

“Uranium takes a long time to permit, around five to seven years, alongside all the other studies. So, the uranium market is inflecting to a demand-driven and supply-constrained scenario – it’s phenomenal.”

“The issue with nuclear…it’s becoming apparent the world needs to replace base load, high-density energy sources like coal with something similar. The high capital cost and time to build is what has held uranium back.”

A partial solution to some of these challenges may lie in the evolution of small and modular reactors (SMRs). Around 80 different models are being trialled by various countries.

“If these become economic, that could be the renaissance of nuclear fuel development,” Kuzmanovic said.

“As with everything in commodities, prices can be volatile, but prices are heading to the right and upwards.”

Learn more about the future of resources

Darko and the team at Janus Henderson invest in high quality mining, energy and agriculture companies with flexibility to invest across the supply chain, taking advantage of price shifts between upstream and downstream sectors and across industries. To learn more, visit the Janus Henderson website or the fund profile below.

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