Last year was a bloodbath for mining stocks tied to the green energy transition.
But with markets rallying in the early part of 2024, ‘green miners’ continue to lag.
Unfortunately, that doesn’t bode well for a sharp turnaround in 2024!
Dampening that outlook further is the recent insider selling activity…
Lithium developer Liontown [ASX:LTR] and its chief executive, Tony Ottaviano, sold around 820,000 shares last month for a value of $1.2 million.
Meanwhile, lithium producer Pilbara Minerals and its CEO, Dale Henderson, offloaded around 1.2 million shares following the company’s latest earnings results.
That represented a value of more than $5.7 million.
The list goes on.
Off course, we don’t have a complete handle on WHY these directors sold stock but it does undermine the prospects of any near-term recovery.
But to get a handle on what 2024 may look like, we should first clarify why green metal stocks sold down so heavily last year.
You see, mega renewable energy projects are capital intensive.
So too are themining developments which supply the raw materials for these metal intensive projects.
Given we’ve just embarked on one of the most hawkish monetary regimes in modern history, it explains why the sector plummeted last year.
But if forecasters are correct and we begin to experience moderate rate cuts in 2024…could that unleash a new wave of investment in the sector this year?
That’s a question I tried to answer last week with my premium subscribers as we developed a strategy for our portfolio in 2024.
I’ve shared part of that update below and hope you find it useful…
‘According to the former Chief of Commodities at Goldman Sachs, Jeff Currie ‘green’ metals could return with a vengeance in 2024.
That’s based principally on expected rate cuts this year.
Obviously, rising rates diminished the public’s appetite for extravagant renewable mega-projects.
It’s perhaps one of the reasons, crude came back into focus last year…
Fossil fuels are energy dense, making them a relatively CHEAP option.
We could also add uranium to the list, another energy-packed commodity that can supply reliable, cheap base load power.
But the key point from Currie is this…in a high-cost environment, traditional energies reign.
He labels them the ‘brown’ commodities.
So why could 2024 see a major pivot BACK to ‘green’ metals?
It’s simple really…
The idea of capital-intensive green energy projects becomes a difficult pill to swallow in an economy struggling against the rising cost of living.
This observation seems rather obvious in hindsight, just look at 2023…
As the narrative of ‘higher for longer’ took effect last year, brent crude surged to $94 per barrel and uranium erupted into multi-year highs.
Meanwhile metals tied to the green energy transition like lithium, rare earths, and graphite, fell through the floor, eliminating most of the gains that emerged during the early 2020s.
But, with rate cuts looming, could the narrative from 2023 make a dramatic U-turn?
In other words, will investment flood out of the brown commodities back towards the green?
It’s certainly possible.
We saw oil and gas stocks tumble in the final weeks of 2023 as expectations of rate cuts grew in the US.
Meanwhile, large-cap lithium producers started to emerge from heavily sold-off levels.
But don’t expect a smooth recovery in the green metal market.
We’re living through a period of historically elevated geopolitical tension.
Right now, the Middle East situation is ripe for escalation.
Meaning crude oil prices could erupt, bringing an inflationary spike.
We’ve already seen several prominent shipping companies divert vessels away from the Red Sea following Houthis attacks on foreign cargo vessels and oil tankers in December.
With ships re-routing around Cape of Good Hope, on the southern tip of Africa, delivery times have increased by up to two weeks.
With that comes higher freight costs AND more inflationary pressures for the global economy.
Geopolitics is a key reason why we could see a continuation of the arm wrestle between inflation versus deflation this year.
There’s no clear path that signals one will win over the other.
That’s why I’ll be keeping our portfolio DIVERSE with exposure to several types of commodities.
But despite the geopolitical risks, there are potentially huge opportunities on offer for commodity investors this year.
A weakening US dollar and a strong dose of China stimulus remain on the cards…
Both factors could set off a broad rally across commodity markets.
According to the Economist, 2024 is also set to be the BIGGEST election year in history.
Almost half the world’s population is lining up to vote, from India to the US, this is going to be a colossal year in politics.
With incumbent governments looking to extend their time in office, expect EXTRAVAGENT infrastructure announcements this year.
Again, potentially inflationary but a major tailwind for higher commodity prices.
So, how do we prepare our portfolio for potential BOOM conditions in a year that promises plenty of geopolitical instability?
Focus on beaten-down sectors in the commodity market.
Right now, that includes the green critical metals…lithium, rare earths, graphite.
On the flip side, it also includes oil and gas explorers.
But a falling US dollar, China stimulus, and major infrastructure announcements could bode well for iron ore, aluminium, copper, and some of the lesser-known industrial minerals.
Capitalising on pullbacks maximises our potential return as stocks return to favour.
Of course, there is a risk of jumping in too early…that’s why we’ll maintain a much tighter stop-loss on all our positions in 2024.
Another important strategy for our portfolio will be a focus on small-cap ‘service stocks’.
Companies with diversified clients across mining AND energy.
This is a rich, untapped sector that offers an abundance of opportunities.
From the traditional drilling companies to the innovators delivering new technologies set to boost efficiency across mining and exploration.
Systems that could address the coming SHORTAGE in future mineral supply.
No doubt, 2024 is shaping up as an exciting year…but being SELECTIVE is key.
That’s because the BROAD commodity bull market is not upon us YET.
The tide that lifts all boats is perhaps something we could expect towards the end of the year IF key commodities like gold, silver, and copper break into all-time new highs.
So, get ready for unique opportunities in 2024.
Opportunities that will set us up very well should the commodity cycle play out as expected into next year and beyond.’
If you’d like to access all of my insights and stock recommendations, you can do so here.
Until next time,
Editor,Mining: Phase One
and Diggers and Drillers
James Cooper has been a working geologist in mines across Australia, Canada, and Africa since the early 2000s. He’s led the operations of tiny explorers through to huge producer outfits. He’s seen booms and busts firsthand and he also understands the cyclical nature of individual commodities. For example, James was right there when Barrick Gold launched an enormous $7.5 billion takeover bid for Equinox. That was the peak of the last cycle.
With his background as a geo and finance professional, he brings a unique insight and experience to Fat Tail Investment Research. He writes the broader resource-focused investing letter Diggers and Drillers and the ultra-speculative explorer-focused trading service Mining: Phase One.