Critical metal confusion, but here’s a small stock starter guide

Everyone knows (or should know) that critical and energy transition metals are one of the great investment themes of the decade but not everyone knows where to start building a portfolio of small stocks with growth potential.

One of the problems in tackling a group of metals which have suddenly hit the headlines after lying dormant for years is that they are thinly traded in opaque markets, which means they can be subject to wild price swings.

Cobalt’s rocket run to US$82,000 a tonne at this time last year followed by its crash to last sales at US$35,000/t is a prime example of the risks associated with all critical metals.

Conflicting advice

Another issue is conflicting advice, even from big name investment banks with no better example than one of the local lithium stars Pilbara Minerals (ASX: PLS).

If, for example, you read the research notes of Macquarie Bank, Pilbara could almost double over the next few months from its current $3.96 to $7.70.

But, if you follow the work of Morgan Stanley then Pilbara could slide back to $3.15 – less than half the price tipped by Macquarie.

UBS, another leading bank, has sent a mixed message – upgrading its advice on Pilbara from neutral to buy while trimming its future price tip from $4.65 to $4.60.

Into this cocktail of confusion can be found one of the more sensible recent comments on junior miners and explorers active in the critical metals sector from Brisbane-based stockbroking firm Morgans.

Discovering new mines

As a starter guide to gaining exposure to quality small cap critical metal stocks the Morgans note published late last week is a useful tool, first by explaining why the sector is hot (and will get hotter) and then by putting some names to the commodities mentioned.

Top of the reasons for increasing exposure to metals such as copper, nickel, lithium, rare earths, tungsten and tin, is the money being thrown at those elements by the US and Europe as they try to break China’s stranglehold.

The US, alone, has committed to spend US$370 billion through its Inflation Reduction Act, which will drive investment in strategic minerals. Europe is following with its own Critical Minerals Act.

What both the US and Europe are likely to discover is that the process of discovery and developing new mines can be long and tortuous which means commodity prices will be pushed higher by supply shortages.

The accelerating hunt for critical metals, along with gold, another metal star, has already lifted exploration spending in Australia to an eight year high at more than $1 billion a quarter.

Copper explorers

The first metal mentioned in the Morgans note on junior miners is copper which is being driven by traditional markets in transport and construction and new markets such as electric vehicles, wind turbines and the solar panels.

“We see continued merger and acquisition focussed towards copper producers and developers with long, greater than 10-year mine lives, and those in tier one jurisdiction,” Morgans wrote.

Three small players in the copper sector are named by the broker as speculative buys: Rex Minerals (ASX: RXM), Aeon Metals (ASX: AML) and KGL Resources (ASX: KGL).

Tin and tungsten minerals to watch

Tin, which has seen its price lifted by 20% over the past month as shortages bite, is the second critical metal on the Morgans list, along with its close associate, tungsten.

An estimated 85% of the world’s tungsten comes from China with Russia the third largest producer which build on the fears of the US and Europe that they could be held to ransom by dictatorial countries.

The tungsten stock on Morgans speculative buy list is EQ Resources (ASX: EQR), which operates Australia’s only tungsten mine at Mt Carbine near Cairns in north Queensland with the broker tipping a $0.10 price on the stock which last traded at $0.068.

Rare earth elements, which have been on a roller coaster ride since late last year, are a key part of a critical metals portfolio with four mentioned by Morgans: Lynas (ASX: LYC), Arafura (ASX: ARU), Northern Minerals (ASX: NTU) and Iluka (ASX: ILU).

Nickel in high demand

Nickel, which is high in the growth plans of BHP (ASX: BHP) and iron ore billionaire, Andrew Forrest, is becoming a metal with fewer entry points for investors with an eye on small cap opportunities following the takeovers of Western Areas and Mincor.

Two of the remaining small nickel stock opportunities mentioned by Morgans are Panoramic (ASX: PAN) and Poseidon (ASX: POS).

“Critical metal focussed juniors remain our key picks in 2023,” Morgans said.

“Governments are shifting their focus towards securing the raw material supply of critical materials to meet net-zero (carbon emissions) targets.”

“Recent M&A (merger and acquisition) activity and investment from global downstream players (such as car makers) in Australian critical mineral projects underpin the country’s status as a tier one investment and mining jurisdiction.”

“Despite a soft start to the year for junior mining equities, we remain optimistic about a stronger second half as M&A activity picks up and sentiment shows signs of rebuilding across the broader sector,” Morgans added.