I expect a challenging market in 2021 with a potential ‘bubble-burst’ on the horizon but that doesn’t mean there will not be opportunities !
With markets booming and shooting to new all time highs across the board, it’s easy to get caught up in the euphoria. Now more than ever in my opinion, investors need to have strict focus on where the value in the market will be given the forward effects of the Covid-19 pandemic and unprecedented stimulus.
I’m in no doubt the bubble will burst given the US Federal Reserve have limited tools available to further stimulate the stock market, yields at historic lows meaning an upwards trajectory is likely, inflation rising and pressure on company earnings given they’ll need to ‘rob Peter to pay Paul’ in the form of increased corporate taxes.
Are we Toppy?
US tech stocks particularly are trading at record price to earnings ratios, an alarming number of Americans indicating they’ll be putting their stimulus checques into the stock market, celebrities and influencers promoting SPACS and the Reddit retail army are all signs of what is becoming a dysfunctional and euphoric market in my opinion – the signs are there so how will I be positioning my portfolio to not just weather the storm and probable fall-out but hopefully extract value from it?
You may not be surprised to learn that I have already been transitioning my portfolio to where I want it given the above. I’ve increased cash position to c.70% and I’ve slimmed down higher risk positions to increase exposure in cash flow generating resource based companies including an allocation for Gold and PGM’s and a smaller pot for some crypto related exposure, as I type, Bitcoin has tagged $60k !
Here’s how it looks:
Green-Energy Focused Resource Stocks
As I’ve written in recent blogs, the core of my invested portfolio exposure will be targeted towards base and battery metals. The emphasis will be on commodities that will benefit from the green-energy narrative as this is where I believe a lot of the money will flow. The likes of copper, nickel, tin, aluminium, vanadium, cobalt, uranium to name a few should benefit greatly.
Many of these are moving into structural supply deficits due to lack of historic investment just as the market is going to need more than ever to meet carbon reduction and stimulus initiatives – a prefect storm with a weakening dollar at the same time! For this reason, I believe certain commodity based investments will out-perform the wider market by some margin!
Central Asia Metals
Rationale: Leveraged exposure to copper, zinc and lead. Producer
Summary: Central Asia Metals offers direct exposure to copper (13.5k/t, zinc (24k/t and lead (30k/t) per annum (2020), The company are rapidly reducing their remaining debt. The strong cash-flow and debt reduction mean a new acquisition maybe on the cards to extend reducing mine life. Strong dividend payer.
Rationale: Potentially huge copper resource in Zambia, Anglo American commercial transaction likely.
Summary: Arc Minerals have been exploring their licenses in Zambia for copper in the highly prospective Lufilian Arc domes region amidst a number of producing copper mines. Drilling results have been highly encouraging and it looks as if they are sitting on a world class copper deposit such that they are now in commercial discussion with Anglo following due-diligence to potentially close a commercial transaction. This could be either a JV or direct project buy-out.
Rationale: Globally significant Tier 1 Nickel projects with Class 1 (EV battery grade) Nickel potential, Production in next two years subject to closing finance.
Summary: The company have spent the last few years progressing their nickel assets with the flag-ship Araguaia nickel asset at financing stage. The project itself exhibits robust economics even at lower nickel prices than today due to its lower quartile C1 costs. The second project Vermelho is targeting the ev battery market an the company are planning to either JV this or develop it once cash flow positive from Araguaia. You can read more in my detailed Horizonte Minerals Research Note
Rationale: High grade, High Purity, Low Capex Graphite project in Tanzania at Financing stage with a short lead time to production. Low Market Cap.
Summary: Somewhat a hidden gem in my opinion, the Mahenge graphite project separates itself from other listed peers by the higher purity of the graphite which in turn will command premium pricing. The company have already confirmed by independent testing the suitability of the graphite for use in ev battery anodes. The exceptionally low capex makes the project highly likely to be financable with a little over a year capital pay back. Read more in my Armadale Capital research Note.
Rationale: The only pure-play tin exposure listed on the London market. Significant high grade lithium resource. Increasing leverage to Tin and Lithium
Summary: Large tin, lithium, tantalum resource at its maiden V1/V2 project location with high portion of M&I resource. Lower grade but open pit low strip low cost mining with low capex expansion plan to 5000/t pa (Tin trading $30k/t) $150m revenue pa target. Huge potential upside with another 180 similar V1/V2 pegmatites with higher grade zones. Nameplate production achieved 2020. Lithium resource could provide additional significant upside. Read more in my Afritin Research Note
Rationale: Unique to the London market, Advanced lithium-ion battery cell developer. Maiden revenue generation and established business. Huge growth potential via IP
Summary: A particularly exciting and unique investment opportunity in my opinion. The company have an established business with development/production facillities along with IP that in my opinion largely back the Market Cap on listing. The company have three projects in development and targeted for first distribution H2 2021 including advanced high-power ev batteries, battery cells for the oil and gas sector and very exciting sodium-ion batteries for the energy storage sector. This is going to fit many a green investing narrative and I expect big take up. The company are also in discussion with the UK Govt on building a UK gigafactory! Research Note coming soon!
Rationale: Multiple commodity exposure, base metals, battery materials, uranium, iron ore by way of royaltty streaming agreements. Strong dividend payer and commodity leverage
Summary: A good way to get exposure to a basket of commodities as we enter what is expected to be a super-cycle. The company are transitioning the portfolio to be base and battery metals/green energy centric as their coal royalties run-off. Somewhat a recovery play as the earnings were hit by the pandemic and one-off re-investment in 2019/2020 however with commodities such as copper an iron-ore having sky rocketed in the last 9 months this in my opinion along with the recent nickel and cobalt streams should be a gem and high growth play.
Rationale: Iron Ore producer trading on a very compelling PE ratio with high growth upside and high leverage to iron ore
Summary: Huge, high grade (up to 67%Fe) iron ore resource with various locations across the globe. Strong H1 2020 results that should be followed through into H2 2020 with a significant uplift from the stellar run in iron ore prices seen H2 2020. Like Central Asia Metals, signifiant debt reduction expected.
Rationale: Recovery play copper producer with exploration upside, compelling market cap vs future production and leverage to copper
Summary: Rambler Metals is somewhat a turn-around story. The company operate a producing copper project in Canada. The company have brought in new management and have re-structured debt. The focus now is to enhance existing production and mine operations and expand resource. If management execute the cash flow curve becomes incredibly steep in just a few years such that the current market cap would be dwarfed by earnings. Of course further upside in copper will accelerate this.
Rationale: Large coking coal resource with short time to production with additional Mali Gold assets. Strong cash-flow projection vs Market Cap with near-term dividends policy
Summary: Contango are planning to bring their LUBU coal project in Zimbabwe into production this year. The resource is large and upon successful contracts should yield strong margins. The pandemic has clearly delayed progress but we should be hearing from the company soon. In addition the company have acquired a gold project in Mali (1.8moz non JORC) with a view to bringing this into production near-term, Both the coal and gold project are expected to bring in revenue of $1m each per month. I have a smaller de-risked position here now which I will look to increase on confirmation of initiation of production of either one of the projects. You can read more in my Contango Research Note
Gold & PGM’s
I think with higher inflation on the horizon it’s worth having some gold and PGM exposure in the portfolio. The counter argument will be that further down the line we could see rate increases, not so good for gold however a weaker dollar and higher gold price makes gold miners highly lucrative and late stage development and near-term producing projects will be my focus.
Rationale: PGM’s and Base Metals tailings, unique technology to extract value, significant YoY production growth, huge PGM resource, working up 25k/t pa copper assets.
Summary: An excellent example of a junior resources company hitting the ‘big-time’. The company through their tailings processing technology have progressively ramped up their chrome tailings production. The company has a huge 70moz PGM resource potential with one of the largest un-developed platinum mines in the world. The company are also developing their copper project targeting 25k/t pa copper concentrate.
Rationale: Direct exposure to gold, expecting first production Q2 2020. Two 100% owned gold projects in mining friendly Ghana Homase and Akrokeri the latter 24g/t head grade.
Summary: Another hidden gem in my opinion, I see little chatter on this company and in my opinion its hugely undervalued and under-estimated. Why? because the company have quietly gone abut their business and got to the point where they will start producing in Q2 2021 and the company is backed by a solid shareholder register of gold mining professionals. The Homase project has had a number of resource increases and we can expect to see an updated JORC resource and DEP. The initial Phase 1 Homase project economics are exceptional in terms of 382% IRR. The Homase trend just keeps on going so along with Akrokeri which had gold zones up to 51g/t (yes you heard right and all within a few km of the Ashanti 70Moz Obuasi mine) the upside potential is HUGE in my opinion! You can read more in my in-depth Goldstone Research Note
Rationale: Large gold projects in Canada with significant expansion upside of 2M+oz. Excellent jurisdiction, accomplished management.
Summary: Landore are developing their gold projects in Canada with an existing 1Moz+ JORC resource, Further drilling is underway with pending assays, with the company targeting a 2M+oz resource. The company also have some interesting nickel projects too, Notably Sprott Investments have taken a stake in the company. At the current Market Cap of c.£30m I believe significant upside on offer. You can read my recent Landore Blog here
Cash is King
I mentioned earlier that I had increased my cash position. There are two reasons for this:
I’ve learnt the hard way having been on the investing circuit for a while that amazingly markets don’t always go up! Jokes aside, after a solid portfolio performance the last nine months (despite being overly cautious) now feels about the right time to focus more on capital protection. Essentially I don’t want to give back hard earned gains. The Cash level is independent of the investments above which account for roughly 25% of my portfolio. and will remain in place for the reasons I have stated, i.e. I see them as value accretive even in a wobbly or declining market over the medium-term. The heavy cash balance however allows for re-deployment and that leads me on to Opportunity…
I can remember at least two significant cycles in my earlier investing where the market declined and I was heavily invested. Not only did this lose me money on my investments (at least on paper) but more importantly I couldn’t take advantage of either: stocks I owned that got cheaper and I could have increased position size in or the inevitable opportunities that arrive daily on the markets.
So in summary it’s sensible in my view after a good run to build up the cash pot providing flexibility to take advantage of any of the scenarios above but above all if the bubble does pop and pops quickly you wont suddenly find your portfolio worth a fraction of what is was!
Lastly, I am always looking at how I will develop my portfolio. This blog in itself is a development from how my portfolio looked over the last two years where I held more Oil and Gas and other positions.
The above list of resource focused stocks is not exhaustive of my complete portfolio, I hold a couple Pharma stocks and Crypto related positions too and this is an area of the portfolio I am looking to develop along with some further green energy focused stocks including Uranium, hydrogen, Solar and REE for example which I’ll blog as and when.
Hence the cash pot allows for further careful development and expansion of my portfolio which will remain dynamic as it has to be in an ever-evolving and slightly mad market!
Research materials prepared based upon my own analysis and research. Accuracy cannot be guaranteed and research notes should not be taken as investment advice. Please always do your own research.
2 thoughts on “Positioning my Portfolio for 2021”
thanks for such an in depth summary i found them very interesting id be interested in what you think of kmr or associated or similar companies