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Insiders are taking advantage of the Chalice Mining (ASX:CHN) crash! Investor Webinar 13 September 2023

September 13, 2023

APM, APM Human Services, Chalice Mining, CHN, Copper


In this week’s Investor Webinar: Insiders are buying Chalice Mining

See full transcription below.


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Marc: Good morning. It’s the 13th of September. And it’s time for our weekly webinar. And as you can probably hear, my voice is basically gone. Coming down with the flu. So, Stuart, you’ll be doing most of the talking today if that’s all right with you.

Stuart: Frank, look, this is just me, but I actually think you sound a bit sexy today, Marc.

Marc: All right, it’s time for me to shut up then.

Stuart: Right. Let’s talk about APM Human Services International. Marc, I bet you’ve never heard of that company except when I started talking about it last week, right?

Marc: I heard about it, but I’m not really sure what they do. So, enlighten me, Stu.

Stuart: All right. So, what’s interesting to me about this one is outta the top 200, this is the stock that’s dropped the most over the last 12 months, leaving aside the other one that I like at the right price, which is The Star Entertainment Group. It’s a disability and other human service provider. Created by the lady on the right there, Megan Wynne in Perth in 1994. It’s grown into a monster of a company now that did its IPO in the ASX in November of 2021. Market cap is now A$1.7 billion, but it was actually capped a lot more than that. The offer price in the IPO from private equity was A$3.35. The stock is now A$1.85. So, it’s been doing no one any favors at the moment.

Having said that, I think there’s a bright future for this company. For one thing, the international in this name is not just branding. This company is genuinely international. It’s created a platform here in Australia. It’s now exported that to Europe and North America as well as Asia. So, the sky’s the limit in terms of where they can grow this company. They did A$1.9 billion in FY23 revenue, A$365 million in EBITDA. So, it’s a reasonably-sized company throwing off a lot of cash flow. Megan Wynne owns 21%, and she was in the market recently buying another 1.1 million shares, which is a considerable-sized transaction, and that’s what made me sit up and take notice. So, let’s talk about why this company is headed for better days. Well, there’s the chart. A chart performance there in a nutshell. Pretty much held up till about this time a year ago, and then things began to take a turn for the worst for no reason at all, because business has been pretty good for this company.

There’s the numbers. Basically, decent-sized earnings growth in the current financial year we’re in in ’25. ’26 on consensus numbers, things slow down a bit, but anything can change between now and FY26. As I said, this company’s been growing quite strongly internationally and growing by acquisition. So I think that FY26 number will end up looking better by the time we get closer to that one. Meantime, I think the multiples there are quite reasonable given the growth profile, and so worth paying attention to as a decent growth story that the market’s not paying for.

So, what do they do? Disability employment services, disability and aged care services. About 17% of the Australian population is disabled in some way, some mildly, some severely. The nation set up the National Disability Insurance Scheme in order to better provide for those people. And the big breakthrough there was it’s a market-friendly reform. The beneficiary of the government services gets to choose what their care package is. So, the media’s been full of how much the National Disability Insurance Scheme is costing. What interests me is how much money is out there for companies like APM to be able to benefit from. Now, then there’s disability employment services. You get a disabled person into work, potentially you save the taxpayer a ton of money on unemployment and other benefits. So, this company is benefiting from serious amounts of public largesse, not just in Australia, but right around the world.

I noted before, the FY23 numbers were pretty good. They represent a pretty strong growth from FY22. The model’s global. APM expanding by acquisition. Look, I just think it’s not well-known, and therefore has languished in an environment where only a select portion of the ASX 200 has actually been holding up in this environment. I think Megan’s vote of confidence in this company makes it worth paying attention to. And remember, it started from nothing. So, Megan was there at the beginning to grow this thing up from a relatively small team doing vocational services for rehab in Perth. They’ve now grown into a pretty significant company, and we’ll be hearing more about that company in the year ahead. So, put it on your radar screen.

Marc: Pretty impressive. Growing it from zero to, what was it? A$1.7 billion market…

Stuart: Well in excess of a billion dollars, and I think there’s more where that came from.

Marc: All right. Good stuff. Well, then, Stuart, something completely different. China’s woes have pushed this commodity around quite a bit over the last year or so. You’ve got a distinct view on copper, Stuart.

Stuart: Right. You may have seen me use the title of this presentation before, copper – still gotta love the red metal. I’m bullish on the long-term prospects of copper because basically, the world does not have enough of it if it wants to achieve the next stage of its growth industrially over the next decade or so, and that’s electrification and electric vehicles.

There’s the price of copper. Took a pretty steep dip for the first four or five months of the year. Has stabilized since about June, and it’s bumping around between $3,500 and $4,000 a ton in a relatively narrow range. Now, ordinarily, when the commentators are talking about copper, inevitably they’re talking about China. The Chinese economy is slowing down. It’s building industry is in a mess. And it’s fair to say that demand for copper, at least from one of the world’s larger economies is going down. That doesn’t mean the world doesn’t need more copper as we’ll see in a second. But China’s woes may have an impact on this thing. Watch carefully if it goes below about $3500 a ton. But that sort of behavior in spite of China slowing down, tells you that copper has some fundamentals that extend well beyond China, some favorable fundamentals. And no surprises for alluding where a lot of that copper will come from.

A regular car with an internal combustion engine like what Mr. Benz invented back in the 19th century, that will need about 23 kilograms of copper to wire it up. If you’re using a hybrid, it’s 40 kilometers. Plug-in hybrid, 60 kilograms that is. Go all the way up to the Teslas of the world. That’s 83 kilograms worth of copper. Magnify that across an economy that is electrifying, and I’m talking about the Western world generally in a serious way. And we’re talking about a lot more copper demand in the years ahead to fulfill the world’s ambitions to clean carbon outta the atmosphere. So, copper is a big beneficiary of what’s going on in terms of our general transition towards net zero. And no surprises that BHP has seen this. One of the best ways for them to expand their copper exposure was to buy OZ Minerals. OZ Minerals owns two major copper mines in South Australia, Prominent Hill and Carrapateena.

They’re in the same Gawler Craton region in the northern part of the state that hosted the famous Olympic Dam mine. Olympic Dam was the gift that kept on giving for BHP, although there were concerns about its cost base. Prominent Hill and Carrapateena labored under no such disabilities. So as a consequence of that, BHP has now seriously expanded its copper exposure. And they’re willing to pay up. They originally logged in a bid for $25 a share, if you recall. They upped that to $28 in order to complete the transaction, and now have increased their copper exposure. We’re gonna see more transactions like that at the right time. But this is the giveaway that copper is headed for a reasonably rosy future.

I came across some interesting work by McKinsey from a few months ago. They’ve estimated at the end of the decade, or beginning of the next, the world will need about 36.6 million tons of copper. Then they look around for all the mines that are either idle or could get underway in the next few years, or where you could recycle copper from old uses. And they’re finding there’s still a deficit, even when you scrape around the world and dig up copper all over the place, you’re still looking for another 6 million tons. Now, those projections might prove to be rosy, but we’re talking McKinsey here.

And the thing to be aware of with copper, as I’ve said before, and I’ll say again, a lot of copper mines are old. They’ve been around, in the case of Chuquicamata, since the ’80s in Chile. The older a mine gets, the more difficult it is to work the remaining copper, and so the cost of producing that copper goes up. Takes an average of about seven years to develop a new copper mine soup to nuts. So, if we’re gonna get enough copper for supply to meet demand, if this electrification trend is gonna continue, there’s room for all sorts of new copper mines that are gonna be part of the solution. Which brings us to a report that we did for Pitt Street Research a couple of months ago.

Take a look at Coda Minerals. There’s Chris Stevens, their managing director underneath the company’s logo, ASX:COD. They own a copper-cobalt project in the same region as Olympic Dam, Carrapateena, Prominent Hill. They’ve called it Elizabeth Creek. Zambian Copper Belt-style deposit. And underneath that, potentially IOCG. Now, Marc, have you and I ever talked about IOCG during one of our many lunches?

Marc: Don’t recall that. No. So…

Stuart: Right. Iron oxide copper gold. It’s one of the new sources of copper.

Marc: I knew it. Yeah.

Stuart: When you find one of these things, often they’re monsters. But it’s a relatively recent style of mineralization for copper that the geologist have identified. And BHP just discovered one not far from Coda called Oak Dam West. So, Zambian Copper Belt-style deposit for the original deposit. And they’ve done a scoping study on just that deposit alone, showing that you’ve potentially got half a billion dollar project without trying too hard, and potential to increase the resource there. And now they’re nosing around in their ample exploration grounds looking for IOCG. They’ve discovered one called Emmie, and they think it can turn out to be a whole lot bigger. And if it is, this stock is headed for bigger and better things.

So, do your background reading on the Coda Minerals research we did a while ago. There’s also an interview that we did with Chris Stevens where he talks about the opportunity. I think this one could be interesting as a potential future copper play that everyone will be talking about.

There are other ways to play the copper theme. We’ve talked about Sandfire with MATSA in Spain and Motheo down in Botswana. So, it’s a serious deal. 29Metals owns the Capricorn mine up in Queensland and Austral Resources’ Lady Annie. So there are a lot of smaller players that are coming along here. And as we said before, copper is gonna whip this metal around a little bit, but possibly not as much as people are afraid of. So, yeah, I remain bullish on this despite what the Chinese folks are doing.

Marc: Yeah. So, lastly, Stu, Chalice Mining. That stock came crashing down hard recently. So talk us through that one.

Stuart: Right. Many of you may have heard of Chalice. Chalice came from nothing in 2020 when they discovered a major nickel and platinum group elements deposit at a place called Julimar. Julimar is so close to Perth, you can almost walk there. It’s about 70 kilometers up the road. And the discovery of nickel when none had ever been suspected, although the geology in the ultramafic intrusions in the neighborhood kind of looked like what you get in Norilsk in Russia or Jinchuan up in China. In other words, if you did your homework, you could suspect that there was nickel there. But no one had ever thought that this was a new nickel project that was sitting in Perth’s backyard.

So, that rerated from March 2020 into a top 200 company that everyone was talking about, helped make Tim Goyder, who was their chairman, a billionaire. Tim Goyder was also the genius behind Liontown Resources. So, between Chalice rerating and Liontown getting bid for, suddenly everyone wants to go to dinner at Tim Goyder’s place. Well, the trouble with mining is that anything that can happen will happen. And as you can see in that chart there, something did happen Chalice stock was at $5.04 on the 29th of August. Suddenly crashes to $3.77. It’s now $2.92. So, Marc, I bet you’re glad you didn’t have Chalice in your portfolio at $5 a share.

Marc: Yeah, definitely. So, what happened there?

Stuart: All right. Well, so there’s Tim there on the left.

Marc: He still seems pretty happy though in that picture.

Stuart: You would be after… Now, he had to sit on the board of this company for a long time. The really successful people in the mining industry have enormous reserves of patience because it’s very rare that you just get in the game and drill a few holes and suddenly you’re rich, and Tim is one of those statesmen who understands the timeframes involved.

So, yeah, what happened? The core deposit at Julimar is called Gonneville. And they did the first scoping study on Gonneville. Market took a look at the scoping study and didn’t like some of the assumptions that went into that deposit. Now, what’s interesting to me is Tim has gone and bought some more stock now. He only owned about 8.8% of Chalice late last year. He now owns 10.4%. I guess when you’re a billionaire, you can afford to top up your stock on market and just wait for the rest of the market to stop being irrational, and that’s what Tim has chosen to do.

Should we pay attention? Well, if you’ve got some patience, I would say yes. That scoping study puts a value for just Gonneville at $2.8 to $4.2 billion. It’s gonna take a lot of CapEx to get there, but we’re talking nickel in a two-one jurisdiction. So, the bankers would wanna capitalize this kind of project given how easy it is to get up and running. Like, 70 kilometers to Perth, you’ve got all the infrastructure right there to get whatever product you want out of the Port of Fremantle or wherever you’re shipping from. On that CapEx, you still get a payback in only two years, and the cash flow just rolls in a serious way pretty much once that CapEx has been paid off.

What did not the market like then? Problem is that the commodity price has been whipped around a little bit. And the directors of this company have chosen to use some prices that are slightly above spot. An example of that is they use nickel at U.S.$24,000 a ton. It’s a reasonable bet that nickel can average U.S.$24,000 a ton over the timeframe that you’d be developing Gonneville. At the moment, I looked just this morning, it’s just over U.S.$20,000 a ton. So, the market said, well, look, it’s not really worth the numbers in the scoping study, and so we don’t really trust this company, and that’s why the stock got sold down.

So, I’m saying, should you pay attention? It’s a scoping study. The scoping study is your first pass at trying to understand the value of the project. You then go back and do a pre-feasibility study where you sharpen the pencils a bit on some of the assumptions. You then do a bankable feasibility study, the sort of study that you take to project financiers to talk turkey about them actually funding this project. So we’re talking a very early stage attempt to put some value around what has been a really significant discovery of nickel and platinum group elements. And so once the selling stops on this one, I think it could prove to be quite valuable given that most commodities are not retreating at all at better rate. I just think a lot of speculative money was in this. Remember, there are some people who owned this thing at the start of 2020 who have now gotten rich just because they were willing to punt on this unusual exploration project just north of Perth.

Marc: All right. Good stuff, Stuart. So, yeah, plenty to digest for the rest of the week. We’ll leave it here, and we’ll see you all next week.

Stuart: See you next week.