The Outlook for Battery Metals, Royalty Companies and Opportunities in Energy

• Commodities like uranium, silver, and fossil fuels are attractively priced for long-term investors. Patience is key.
• Battery metals present opportunities but lithium supply is increasing so be selective. Nickel and copper are still attractive.
• Royalty and streaming companies offer great risk/reward with high margins, predictability, and less exposure to costs.
• Biggest mistakes are owning too many speculative stocks without proper due diligence and being impatient. Stay focused.
• Energy and mining lending being abandoned by big banks presents huge opportunities for smaller players like Battle Bank.

Investing With Patience and Selectivity in Out-of-Favor Commodities

Patience, selectivity, and deep research are key to finding value, especially when entire sectors fall out of favor.

We are seeing challenging circumstances currently for investors with delayed impacts from higher interest rates worldwide. Nervousness persists around the war in Ukraine and Middle East tensions. Capital markets also face a malaise from higher rates and bond market disintermediation spilling into equities. However, difficult equity markets represent a buying opportunity, with quality assets eventually correcting to attractive prices. Patience is required but strong value purchases will emerge for long-term investors.

Commodities Outlook

Undoubtedly, the current equities darling is uranium, passing into a bull market as global demand increases and supply has dried up. New investors still have time to capture gains with advanced-stage developers. Deeply hated silver may also be an opportunity, allowing investors to buy stocks when no one else loves them. Confusion in Mexico as to the impact of the government's new mining reforms may result in silver equities elsewhere being the beneficiaries. Some looking to the US.

Precious metals will start to see more love in 2024 due to highly inflationary policies anticipated by governments worldwide. These inflationary efforts should focus on reducing real debt burdens. So precious metals equities are appealing, despite possible near-term volatility.

For industrial materials, expect strong long-term demand from population growth and improving living standards globally. However, near-term economic softness may weigh. We are bullish on oil, gas, and coal, despite societal/political headwinds. Fossil fuels will remain strong for decades contrary to popular narratives.

Gold Equities Outlook

Unlike some other prominent investors, we remain attracted to gold mining equities despite potential headwinds from rising interest rates. Investors with longer time horizons are allowed to play with cyclical opportunities.

Competing Timeframes

Many gold equity investors have shortened timeframes, trying to maximize monthly or quarterly returns. This requires more trading and hesitation in volatile environments. Operating in 3 to 5-year increments, letting cycles play out based on fundamentals, is easier, less stressful and often delivers better results. But you must do your homework first. Research the macro, the company and its business plan before allocating your hard-earned capital.

A longer-term horizon allows you to embrace volatility when assets get mispriced. Focus on value. Having done your homework and analysed the fundamentals, focus on what is cheap and what is currently mispriced. This focus on the 'when, not if' scenario allows you to stomach some interim pain for superior long-term gains. However, it must be based on analysis, not gut feelings about the value proposition. Whatever your value metric, make the effort to apply the same rule across a group of peers for comparison. It will give you perspective and improve your likely chance of success. If you don't want to, or can't find the time, to make the effort, then maybe it's time for an honest conversation with yourself as to whether investing is for you!

Gold miners appear cheap fundamentally despite macro headwinds. Having certainty around cheap valuations makes timing the market a secondary consideration.

Sit Tight in Bull Markets

Instead of chasing every headline, investors do better sticking with quality assets as the sector rises. Adding positions into strength usually backfires. Raging markets get overheated and correct. Selling prematurely also hurts returns. Volatility gets smoothed by time in the right assets. Let bull markets mature, based on supply and demand, not changing course on every gyration. Timing rarely works but patience and discipline do.

Energy Equities Outlook

Despite economic recession worries that could hit oil and gas demand, we are very bullish on energy equities due to excessive bearishness already reflected in valuations. Energy stocks have already experienced massive declines in anticipation of falling demand. The market is pricing in a severe recession crushing consumption. This sets up a substantial upside when the economy stabilizes and recovers.

Much like gold miners, energy companies now appear fundamentally cheap. Their upside doesn't require a perfect scenario, just better-than-dismal demand trends. Even modest movement in consumption will spur outsized gains after excessive pessimism.

Despite the environmental lobbying and negative PR facing oil and gas companies, the economics remain robust. Plus capital discipline keeps driving returns higher which cushions some hostility. We've been saying it for the last 2yrs, the future still looks bright for oil and gas.

Royalties and Streaming

We like royalties and streaming companies, and would advocate having a royalty company in your portfolio. Some investors could even consider constructing entire portfolios solely from royalty and streaming companies. Let's explain the value proposition of the model and key analysis factors.

Royalty Model

Royalties involve purchasing economic interests in mineral deposits. Investors get a percentage of production proceeds without any operating or capital commitments. The avoidance of costs provides high margins and inflation protection should be attractive to all. Cash flows become highly predictable and repeatable at scale.

Streaming Model

Streaming entails pre-buying rights to future outputs from a mine at fixed contracted prices for defined periods. Again, no operating or capital costs get imposed. Only the negotiated streaming terms require fulfillment. High predictability results, uncorrupted by external variables. Again, very nice for those who like an uncomplicated investing strategy.

Advantages

By avoiding the vagaries of running mining operations, royalty and streaming companies offer:

• Durable, recurring cash flow streams
• Ability to model values more precisely
• Less risk from cost inflation or input factors
• Significant leverage to upside in commodity prices
• Management focused on capital allocation, not operations

Portfolio Construction

Given these attributes, constructing entire portfolios from royalty and streaming companies has merit for certain investors. While the upside in speculative surges gets capped, protection from operating volatility can outweigh this many times over. Remember what we said above about investment returns over time.

Downside mitigation and predictable base cash flows allow leveraging other assets aggressively while anchors limit risks. Combining speculative assets with royalty foundations manages overall risk-reward scenarios. For conservative investors or income-focused objectives, portfolios of royalty and streaming companies contain many advantages. Their high margins and diversified exposures provide excellent inflation protection as well. Those returns need to come back to shareholders in the form of dividends and/or share buy backs.

Analysis Process

In analyzing specific royalty and streaming companies, look at:

• Asset values based on discounted cash flow models across commodity price scenarios
• Track record of management redeploying capital into additional royalties/deals

The first provides estimates of intrinsic value based on the existing portfolio. The second gives confidence in the business’s growth prospects. Disciplined capital allocation is crucial for royalty companies to compound gains long-term.

Battery Metals Analysis

While optimistic about electrification trends, we urge caution on the narrative-driven aspects of battery metals investing. It is important to focus analysis on core supply/demand fundamentals. These are the drivers that can be, to a larger extent, relied on. Narrative-driven and promotional rhetoric without reference to supply-demand is a red flag.

The lithium sector is one which has seen volatility in pricing over the last 5 years. Yes, there have been a couple of spikes but also followed by rapid downturns. The sector is trying to settle into a more predictable pattern without the EV demand hype and fevered excitement. Some development companies will do better than others with this technical metal and will attract the funding required. High-grade lithium on its own is not enough. Scale, location, technical solutions and as always, economics matter. Likewise with some investors stay focused. Rapid price appreciation led to a supply response debottlenecking existing production and enabling new projects. This will likely drive an oversupplied market long-term. Cost inflation may also spur new production techniques, if proven feasible. Think Direct Lithium Extraction.

Caution on Narratives

Broad electrification will drive battery metal demand. Expanding access to electricity for underserved populations is a key driver, not just electric vehicles. Distributed renewable energy solutions also require storage. However, investors need to filter narratives and speculate carefully.

Favorable Battery Metals

Given current dynamics, nickel and copper exposures seem eminently sensible. Their markets appear more robust to absorb projected demand with less risk of oversupplied conditions. Technologies are improving battery efficiency and chemistry too which affects metal intensities. However, broad electricity access and storage trends will continue driving growth.

Focus on Fundamentals

Overall analyze battery metal opportunities based on supply/demand fundamentals and production costs rather than aspirational narratives. Market economics ultimately determine viability and price levels regardless of policy desires. Solar didn't scale until reaching grid parity. Investors should remember limits matter more than hopes.

The Most Common Investor Mistakes

Over-Speculation

The most common mistake is people speculating too aggressively. In raging bull markets, resource stocks substantially outperform broader markets already. Chasing extra leverage through excessive speculation is unnecessary and risky. Sticking with quality majors and mid-tier miners provides enough upside with far more safety.

Yet most portfolios are littered with small, illiquid names all trying to hit home runs. If describing your entire investment portfolio as prospective '10 baggers' sounds sounds exciting to say, again you need to remember that this is your hard-earned money, and perhaps you are not being realistic. Have a strategy. The first question when formulating that strategy should be 'How do I not lose my money?'. People get caught up in bull market euphoria, taking on excessive risk. But the big beta boost happens regardless at the sector level. Individual stock picking doesn't drive the immense spreads during bull runs. Patience and prudence offer better risk-adjusted outcomes.

Owning Too Many Stocks

The vast majority of investors own far too many small positions. Portfolios often contain 40, 60, or even 100 different stocks. With this breadth, no one can sufficiently research each pick. Competent securities analysis requires many hours of researching financial filings, mineral data, and company specifics.

Owning more stocks than hours available to dedicate to analysis each month is a recipe for disaster. Yet this remains extremely common. Investors chase tips from newsletters or brokers without any due diligence. The excitement of finding an entry point for a stock is negatively outweighed by the lack of a plan for the exit point. This "bet a bunch" mentality destroys capital.

Famously, Rick Rule says "Sizing positions to the time spent researching and understanding each company is crucial. Otherwise, speculation becomes gambling."

Lack of Patience

Trying to time markets leads to mistakes. No one can predict short-term fluctuations. No-one. But investors repeatedly bail on positions prematurely after some volatility or on the first sign of trouble. Investing should be based on fundamentals, not emotion. And if the chatrooms are anything to go by there are a lot of investors who are too emotionally charged to be in charge of their own money. ETf's might be a better idea.

With deeply undervalued assets, the certainty that something is cheap outweighs imagining that you can precisely time entries and exits. A focus on "when" not "if" scenarios preserve gains and avoids erratic market movements. If something is inevitably going higher but the timing is uncertain, patience wins out. Avoid panic selling. Manias and blow-offs get corrected, and quality assets revert upwards.