ASX fertiliser stocks, Concierge performance verified and why we like Property stocks once more! Investor Webinar 9 August 2023

 

ASX fertiliser stocks, our Concierge performance verified and why we like Property stocks once more … All in this week’s Investor Webinar:

• It’s official: Concierge delivered 16.8% in Year 1 !!! The results were verified by an independent accountant. The market (ASX200) was essentially flat in the same time period.
• Another potassium brine player bites the dust: Here are a few much safer ASX fertiliser stocks for you.
• Why we like Property stocks again!

Full transcription below.

 

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Transcription

 

Marc: Good morning. It’s the 9th of August, and we have a lot to talk about. One of the potash companies listed on ASX fell over earlier this week. We’ll talk about fertilizer, in general, because, yeah, it’s a risky area, right, Stuart?

Stuart: Right.

Marc: So, we’ll talk about that. We’ll talk about property because that’s making a comeback. And especially with lower interest rates expected early next year or starting from early next year, property is probably a good place to start looking now. But what we wanted to do first is have a real quick look at what we just got back from our accountant, Stuart, because now it’s official. We’ve been talking about the performance for Stocks Down Under Concierge for a little while, and we had an accountant review those results, and they come back…

Stuart: You didn’t tell me that Eddie Murphy was our accountant, Marc.

Marc: Yeah. It’s Axel Foley, actually. He’s been a registered accountant for a long time. But, yeah. So, we let an accountant look at our numbers that we recorded over the last year, from May last year to May this year, first year of concierge in action, and he verified with a few small tweaks regarding opening and closing prices, but he basically verified what we did, a performance of 16.8% in year one, and we’re really happy with that, especially the fact that it’s now verified by someone, an outsider, not us. I think that’s really important. So, we started concierge on the 17th of May last year. So, the first year wrapped up 17th of May this year. Across all trades, we did 16.8% on average. If you look at the trades that we closed prior to May 17, we did 7.5%, but that included three trades where our stop loss was triggered.

And this is an excellent tool in terms of risk management. Right? So, our losses were capped basically. So, those stop losses kicked in, we got rid of the trades, they didn’t work out. But then, we also had a lot more trades that did work out. The average performance there was 7.5%. And then the trades that were still open for the 17th of May this year, those were doing 27.7% on average. So, we’re really happy with that. And if you then look at the broader market, and I think we’ve talked about this before, the ASX 200 in the same timeframe was up just 0.3%, right? So, basically, flat. So, in that environment, the performance of concierge is something that we wanna write home about. And we’ve done that. And our accountant approves with that. So, yeah, we’re really, really happy with that performance. So, I just wanted to get that out there, Stuart.

Stuart: Well done, Marc. We couldn’t have done it without you.

Marc: And without you, Stuart. So, let’s move on to fertilizer. So, earlier this week, or was it late last week? I think late last week, some news hit the wires that KLL had appointed an administrator, Stuart. But take us through that story and why this sector is so risky.

Stuart: Right. So, the context, it was Kalium Lakes was gonna be the next producer of potash in Australia. They had some problems, teething issues getting the project to work. And recently, it was placed in administration. That follows in the footsteps of another company that was placed in administration a while ago. But the broader background, which will come to these failures in a little while, the world needs a heck of a lot more fertilizer. There’s the world population going back in time. We’ll probably live to see something close to 10 billion people on the planet. And when you’ve got 10 billion people, many of whom has middle-class appetites, the world’s productive capacity to produce more food is gonna be strained. In that environment, you need more fertilizer. So, a very strong growth industry going forward and a pretty receptive environment for any fertilized project that can successfully come into production.

Fertilizer was a good area in 2022 because Russia and Belarus were major producers of various fertilizer products. They had to go offline because of the sanctions. And you saw prices jumping as a result. That’s the price there on the right of diammonium phosphate. Since then, producers outside of Russia have stepped up their production. But as you can see, prices are still above the level that were prevailing for many years before 2020. So, as a result of that, it’s still good to be in fertilizer, and this is a thing that will play itself out over time. So, when people talk fertilizer, they’re talking three products, N, P, and K, nitrogen, phosphorus, and K. The K stands for potassium, but the Latin name for it is kalium. And you might’ve seen me present this slide before. There were various ways to play the fertilizer opportunity a year ago, one of them was Kalium Lakes, which, obviously, now is in administration. Danakali’s had its assets sold to another party. Australian Potash is still working on those projects as is PhosCo. So, every now and then, fertilizer plays get listed on the ASX. It’s worthwhile knowing what’s going on because if they work, they work in a serious way.

Let’s talk about potash. When you produce potash, you either produce the premium product, which is sulfate of potash or the generic variety called muriate. You need sulfate of potash to produce quality crops such as fruit, vegetables, coffee, tea, etc. And so, most players who’ve discovered phosphate wanna produce sulfate of potash. But beware, when you come back with the DFSs on these things, the value is in the hundreds of millions or sometimes in the billions. But Salt Lake Potash that went into administration in 2021, it’s just gotten taken off the boards because the stock’s been in suspension for the last two years while management works out what to do. Kalium Lakes, as I say, with their Beyondie project, just went into administration in the last week or so.

So, these projects have a habit of blowing up a lot of shareholder value. And the reason is every potash project, and I think I mentioned this on the next slide, is different. Actually, go back because we’ll talk about phosphates in a second. Every potash project is slightly different. And so, you’ve got a unique set of challenges when you bring a project into production. Once you understand the chemistry of the potash project you’re dealing with, particularly it’s in brines, these are profitable multi-decade projects in many cases. There’s one in the state of Utah that’s been going for something like 50 years. But you’ve gotta have deep pockets.

And in the case of both these companies, they ran out of project financing before they were able to crack that puzzle. Now, it’ll be very interesting to see what buyers of those projects can do with them with a bit of extra capital. In the case of Kalium Lakes, it came with about $300 in brand-new equipment. It was just a matter of optimizing the production process to understand exactly how to get maximum value there. And possibly, it takes the first players going broke before the second players make all the money. Having said that, Marc, it’s fair to say that people will be very scared if they hear the word potash in a company name again. It’ll be very difficult for these companies to raise any sort of money on ASX in the future.

Marc: Yeah, I agree. I think the risk premium for those stocks is incredibly high. So, if you wanna raise any sort of decent amount, that would be…devaluation discount is my gut feeling.

Stuart: Right. Right. Now, let’s talk about phosphates because that’s a little bit different. Any rock with high phosphorus content is very useful in fertilizer. And the opportunity here is what we call peak phosphorus. There’s very little of it around. You find plenty of it in China, the United States, and Morocco. Morocco has got about 70% of the mineable phosphorus, but there haven’t been many new mines come on stream in recent years. So, there’s a potential if a company has something to really hit the lights out on a decent project.

When I think phosphates, I think Centrex, which we’ll talk about in a moment. I also think PhosCo. I mean, there are various others listed on the screen. Centrex, I believe over the next few years, will grow into a pretty successful and low-cost producer of phosphate rock. It’s just in the early stages of getting that up and running. Share price hasn’t responded all that well to the progress the company is making, but the underlying fundamentals of that story are particularly good. PhosCo is a different story, again, which I’ll talk about in a moment.

Marc: So, Stuart, just before you do that, in two bullets, how are the risks for these phosphate players different from the Kalium Lake-type stocks?

Stuart: In a nutshell, you shovel the stuff off the ground, process it a little bit, and put it on a boat. With potash, you had to do all sorts of things in terms of flushing the potassium out of brines. And brines have a habit of mucking things around. So, it’s a much more straightforward mining process when you’re dealing with phosphates. So, here’s an interesting little opportunity. The North African country of Tunisia has a project called Chaketma, and PhosCo based in Melbourne, actually, has the potential to get a hold of this and turn it into a decent phosphate mine. They’ve been mucked around by the fact that they need to get half the project back from a former joint venture partner. They’ve been successful in that regard, but then they need to talk to the government in Tunis about getting their mining concession granted, which was pulled at the start of the year.

Now, this company is actively working with the relevant authorities to get that to happen. And the Tunisian government wants the project, but it’s proving a little difficult to get there. But the company is optimistic that in the new future, it’ll get both its mining concession and 100% control of the project. It’s had about a decade to learn a fair bit about this opportunity. And potentially, there’s 30 years worth of phosphate rock very close to European markets in Tunisia. So, I’m encouraging investors to look at this one carefully. They might have to wait a while, but the day will come, I believe, when this company is in a position to actually develop a real-life mine.

And then there’s Centrex back here in much, much safer Australia. It’s run by Robert Mencel, who knows a fair bit about phosphates because he used to run RONPHOS, which is the Republic of Nauru’s phosphate company. Little Nauru in the Pacific Ocean used to be a major producer. This company’s Ardmore project was sold to them by Incitec Pivot for just about nothing. The company did a definitive feasibility study on an 800,000 tonne per annum operation. Then they built a pilot plant and discovered that the pilot plant worked so well that they didn’t even have to spend the capex to build the 800,000-tonne plant. They could go with what they’ve called Ardmore version 1.5, I could put it like that, where you just take the pilot plant and expand it. The goal now is about 650,000 tonnes for Ardmore 1.5, which is pretty good, given they originally intended to build an 800,000-tonne-a-year operation. And they’re targeting for the calendar 2024 year, which isn’t that far away, about 440,000 tonnes.

So, steady progress in terms of getting this project up and running. I think what’s holding the stock back is the fact that fertilizer prices aren’t as strong in 2023 as they were in 2022. It doesn’t mean that this company won’t make some decent money. For one thing, it’s got a fair bit of offtake in place for the project in Ardmore. And the other thing is they know a fair bit about the economics of this project, which are pretty good. So, investors, if they don’t own this one, ought to look fairly carefully because I think it’s headed for bigger and better things. We’ve been targeting 21 cents a share on this one based on the DFS value. And it’s not unreasonable that this company could get there in the medium term.

Marc: Right. So, we’re pretty big centric rules. One of the other things, too, what I think is important to mention here is that in terms of offtake where typically Australia needs to import this sort of stuff, this project can actually deliver domestically, but also to New Zealand and to near Asia, sort of Southeast Asia, where most of these economies would typically have to get it from Morocco, right? So, in terms of transportation, is a big plus for them as well, and in addition to more certainty around deliveries. Is that what you’re saying?

Stuart: Yeah. It’s ideally located to grow into a pretty good mine, aiming 100% for import replacement from Morocco. Morocco is a fairly dependable supplier, and I don’t anticipate there’d be a revolution in Morocco anytime soon, but it’s an awful long way to bring your phosphates to Australia when you’ve got a decent-sized project right in the backyard. I call it the other Ardmore, by the way, because Ardmore is a really nice whisky, which I suspect we’ll break open a bottle or two once the stock gets to 21 cents.

Marc: All right. Looking forward to that, Stuart. All right. Then property. We recently put a property stock on Stocks Down Under Concierge. Actually, we did that this week. And there’s a number of reasons for that particular stock, but in general, Stuart, we’re starting to become more bullish on property, right? So, talk us through why that is.

Stuart: Okay. Property tends to go down when interest rates are going up and vice versa. But it does have intrinsic value in terms of as the economy grows, people need more buildings to put things in. And so, when interest rates started to increase last year, the property sector was not in great shape, as you can see from that chart there. What interests me is that the S&P/ASX 200 real estate index bottomed in September of 2022, so close to a year ago now, and it’s up 12% since then. So, I admit, not shooting the lights out, but not going down any further than it was at that stage. So, that’s telling you that the bulls can start to come back to this sector in a serious way.

The chart on the right, I think, illustrates that. Go back a year or so, the vacancy rate for commercial property in the CBD where Marc and I have our office was a little over 10%. That vacancy rate has now crept up to 11.5%. Now, if you’re a landlord, you wanna stay at 10%, obviously. But if you compare that to the predictions that were made during COVID where none of us would ever go to the office ever again, I think that’s a pretty good outcome. And what it shows you is that the death of the office has been greatly exaggerated. Everyone I talk to has to go to the office at least part of the week, and the office properties that are leased are generally well-used.

Marc: Stuart, I think even Zoom this week announced that it wants… Zoom of all companies, right? Zoom wants its employees back in the office…

Stuart: Back in the office.

Marc: …at least 50% of the time.

Stuart: Hilarious.

Marc: So, there you go.

Stuart: So, basically, the death of the office has been greatly exaggerated. Our grandchildren will still be going to the office, basically, for part of their working lives. Retail property has been doing okay, I think. I go to the local shopping centers and traffic is still pretty busy. Industrial property is still doing reasonably well, particularly those leveraged to increased logistics demand, for example, throwing the fact that interest rates seems to have peaked and the fact that it’s hard to find a mismanaged REIT. REITs are generally run by sober-minded property people who don’t over-gear their REITs.

So, if you’re looking for a sector where the management is uniformly professional, it’s got to be in the property sector. Throw in COVID, which makes it easier to get properties building or maintained, and now is the time when people need to come back to look at property in a serious way. The key is diversity. And, Marc, I don’t mean diversity in the sense that the wokeys mean it, I mean just diversity in the property portfolio that you own. And to illustrate that, take a look at Charter Hall Long WALE REIT. WALE is just Weighted Average Lease Expiry. So, a long WALE means that you’ve got properties that lease out, in some cases, well over 10 years. And that’s a particular REIT that the major property organization for Charter Hall has listed. It did very well coming out of COVID because, obviously, long WALEs mean that you’re not vulnerable to sudden changes in the situation like what we saw during COVID.

So, the value of that property, as per the results that were just out this week, came down 5%. So, value everything in that particular REIT, it’s less valuable than it was a year ago. But what saved the bacon for these people was the industrial logistics properties they had. Offices came down 9%, retail came down 5%. So, it’s not like property is shooting the lights out like it’s a new phosphate project in Queensland, for example. But it’s not going down as fast as many people expected. You wouldn’t know that from the way the share prices were. The net tangible asset backing for Charter Hall Long WALE REIT right now is $5.63, but you can buy the stock for $3.80. Marc, how did you like that kind of discount on a reasonably quality, diversified portfolio of long-dated assets?

Marc: Looks pretty attractive. Of course, you don’t want that NTA to come down further due to revaluations and stuff, but, yeah, like you said, if most of the decline in that is behind us, and with interest rates next year looking to come down, yeah, this sector is looking pretty good.

Stuart: Now, REITs will generally trade at a discount. It’s the level of the discount. And if you look at a lot of REITs, they’re trading at much, much lower than they should be. So, how do you play the recovery in property? Go look at the big guys for a start, Goodman, Stockland, Dexus, Scentre Group, the owner of the Westfield Properties, for example, that’s a good place to start because the management of these companies is exceptionally good. And then for the REITs, start looking at what the NTA is compared to where the stocks are trading at.

And what woke me up to the potential opportunity here is going to visit recently a company called GDI Property Group. They own a whole bunch of Perth properties. And the Perth property market has been hit badly on the expectation that the resources sector will come back and the market will get oversupplied. Now, the guys who know Perth well know that things are still pretty brisk on the Perth property market, but you can buy GDI with some really good quality stock at about half price, but based on their reasonable analysis of where their properties are at. And that’s typical for what’s going on in property at the moment. So, yeah, good times for the sector, well worth paying attention to, and, obviously, some reliable kind of dividend income from those REITs is always a good mainstay in any portfolio.

Marc: Good stuff, Stuart. By the way, what’s wrong with the diversity? You’re not turning bogan on me, are you?

Stuart: Look, I’m so diverse. I invited a migrant to Australia to come into my newly formed company several years ago, Marc. So, yeah, I’m a big believer in diversity.

Marc: Oh, you invited me, right?

Stuart: Who’s gonna wear the dress out of the two of us? That’s the question.

Marc: That would be you, Stuart. All right. On that note, we’ll sign off before this escalates any further. We’ll see you next week.

Stuart: See you next week.