Investor Webinar 3 May 2023 … the non-woke edition!

 

Today’s investor webinar is not for the woke of heart…

 

– We talk about oil and the hidden gem that is Hartshead Resources (ASX:HHR). We did an interview with their MD this week!

– We also talk about coal and why that will be around for a long long time. Whitehaven Coal (ASX:WHC) is our favourite play in this space.

– Lastly, we discuss the Healthcare sector and our favourite Healthcare play on ASX, ResMed (ASX:RMD)!

Full transcription below.

 

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Transcription

 

Marc: Good morning and welcome to our weekly webinar. Stuart, today, it’s the 3rd of May. Today, it’s the anti-woke version. So, for all the wokies out there, you should switch off right now because we’re talking about coal, we’re talking about oil and…

Stuart: We’re talking about healthcare which the wokies…

Marc: … and healthcare.

Stuart: … and non-wokies can agree is nice, right?

Marc: Yeah. But we’ll do that at the end, just to annoy the wokies. Anyway…

Stuart: All right. All right. So, yeah, a trigger warning here. We’re gonna talk about some stuff that the wokies don’t like.

Marc: Yeah. So, coal is gonna be around for a long, long time. So talk us through what’s happening in coal at the moment, Stuart.

Stuart: Right. Long-term, there’ll be less demand for coal in most economies around the world. As coal declines, renewables will step up. That’s for real. But the message I have to the folks out there that think that coal is dead now is watch out because it has a way of jumping around. And at the moment, the coal stocks are looking very attractive. Let me talk you through my reasoning here. Thermal coal use rose 1.2% per annum 2022, 8 billion tons, which was a pretty much an all-time record. It’ll stay around these levels till 2025, falling off in mature markets like Europe and North America, while strong demand continues in Asia.

So, basically, we could be talking about peak coal, but peak coal is not followed by no coal at all, it’s followed by a heck of a lot of coal, and someone’s gotta dig that stuff out of the ground. And, well, 0.8 is not zero either. So, we’re talking flat, but there’s still a lot demand for it. Now, one of the benchmark prices for coal around the world is Newcastle Coal prices. I’m from Newcastle, so, I grew up listening to those coal trucks rattling down the railway near where I grew up. So, when you get to the port, Newcastle Coal has been 400 a ton. It’s 280 at the moment, but that’s not to be sneezed at for companies with production costs, well, underneath that level. And the important thing here is that China isn’t ready to step up to renewables at anywhere near the pace that the rest of the world is. So, thermal coal’s gonna be important to keep powering their economy in the near term. So, basically, times remain good after a pretty good 2022 for the coal producers.

Marc: So, Stuart, when you grew up in Newcastle, near airway tracks, was that the good or the bad side of the tracks?

Stuart: The bad side of the tracks.

Marc: The bad side.

Stuart: And one of the reasons we wanna hustle up money in a sinful product like coal, is to get onto the good side of the tracks.

Marc: Right. Okay. That’s a good motivator.

Stuart: So, that’s the Newcastle Coal prices there. Big spike in 2022, when we had the terrible energy shock that followed the shooting war that started in Ukraine. And China’s inventories of coal started to run short. It’s got some pretty poor-quality coal. In fact, a lot of the world’s poor-quality coal is going offline. There’s something we don’t have in Australia, and that’s poor-quality coal. The hard coke and coals you get from the Bowen Basin and from the Hunter Valley, not to mention the Gunnedah Basins are some of the best in the world, just in terms of the calorific content. So, as part of this peak coal theme, I’m predicting that a lot of the good coal, like we produce here will step up.

That’s another reason to take notice of the companies I’m about to tell you about. You’ll recall from a week ago, we were talking about the massive dividend yields you can get outta these stocks. That’s because no one wants to own these stocks. Sentiment’s terrible towards them, but the cash is just piling in. TerraCom, mainly focused on Queensland, Yancoal, on the Hunter Valley, Coronado got some big Bowen Basin assets, and then there’s New Hope, which I think is Bowen Basin plate as well. But the one I want to talk to you about in particular today is Whitehaven, which produces some of that coal that used to rattle past my place. Four mines in the Gunnedah Basin of New South Wales. So Gunnedah is up in the Northwest of New South Wales, pretty much drive out of the Hunter Valley and head Northwest, and you’re in the next big producing coal basin, which is Gunnedah.

They actually had a drop in coal production in the March 23 quarter, only 4.3 million tons. But their average price that they’re doing it at was 400 a ton. That was down on the previous quarter, but still well up on a year ago. And the sales have actually produced coal have only gone down about 5%. So basically, this company’s got a fair bit of life still left in it in terms of where it can sell. Maules Creek will be producing the next part of 40 years if there are markets. So, well after you and I have retired and are driving around in Teslas, Marc, those mines will still be producing. Meanwhile, Whitehaven’s cashed up, $1.2 billion in cash from operations just in that quarter, $2.7 billion net cash position.

So this company is not weighted down with debt and can pretty much afford to fund any of its expansions if it wants to. Brought down its guidance a little bit, but it’s gotten to 15 or 16 million tons of coal. And I think the market’s undervaluing the long way, the long-term cash flow potential of this company, in the peak coal and immediately post-peak coal era that we’ve moved into, could be worth a look. A friend of mine who is a big fan of the coal sector bought the stock way below the current share price, and he was fully expecting a five-bagger for his throw. And a lot of that started to come through last year, but I think there’s still momentum in this one.

Marc: All right. Just a slight correction, Stuart. If and when the internal combustion engine dies and goes to heaven, I’ll be driving an electrified Audi, not a Tesla.

Stuart: Right. I can appreciate that, Marc, you’re a European. You can’t quite get your head around the fact that there are cars produced in other parts of the world.

Marc: But I’ll keep driving internal combustion engines for as long as I can, because when I fill up, I like the range on my car. It’s like almost 1,200 kilometers, whereas with the Tesla right now, you still get less than 500, I think. And then, yeah, talk about a range anxiety, that’s what I suffer from.

Stuart: Right, right. So, yeah, consider some of those coal stocks as fuel for electric cars.

Marc: All right. So, more in non-woke stuff, oil, Stuart.

Stuart: Oh my goodness, we’re really [crosstalk 00:06:29].

Marc: Still strong? But wait a while, is what you’re saying with this one?

Stuart: Right. So, price of oil, I was pretty bullish on oil coming out of the 2020 markets that actually saw West Texas intermediate crude go negative for a while. Oil is pretty strong, but 2023 has not been kind to the markets as the next chart will show. That’s Brent, which is the benchmark for Europe, peaked at about $120 a barrel, sometime around the time that the war in Ukraine started. It’s now down at a very respectable $80 a barrel. You can make great money across a range of oil and gas projects that are based off Brent. But the trend there is not your friend, Marc, I think you’ll agree. We are not seeing the bottom of this current downswing in oil at the moment.

Now, I think if it stabilizes around this level, oil and gas would very good. But this is the reason why you wanna wait, because, through the summer months in Europe, oil, and as with most commodities, tend to be a little bit weak, and we could see that phenomena play itself out in this particular commodity. Now, the good news is, OPEC, we hear less about OPEC than we used to because it’s not as powerful in a world where shale gas and other alternative sources of oil have really surpassed OPEC’s traditional strong position in the market. OPEC is not as effective as it used to be, but it can still play some short-term havoc in the market. And when they tell their members and their allies such as Russia to choke back production, that tends to have the effect of stabilizing things, at least in the near term.

So, watch out for what these production cuts that they’ve just bought in might do to the commodity as we move through the northern summer. And I also think as well, from all I’m seeing, China’s economy is not nearly as weak as what people are afraid of. And if that’s the case, then their demand for oil stays strong. So, what to do, watch and wait. I’m a big fan of Santos and Woodside. We put the logo of Woodside up twice just to emphasize that this is a stock you want to be in for the long haul. Some of the LNG projects that this company’s got in train are gonna be huge producers. In a world that was taught last year about the importance of energy independence, and in particular using liquified natural gas that you can transport rather than relying on someone else’s pipelines that you can shut off, Woodside is gonna be a strong player.

I can see the day when this stock goes over $50 a share. And it’s got more than enough fire power to get there in the near term. Plus, it took BHP’s oil assets off its hands at a bargain basement price. So, Woodside is my preferred outta these two, but Santos is pretty good too. What both these companies have is expansion ethics, where they’re laying their hands on assets fairly cheaply. And when the commodity turns, I think the stock price turns with them. And there’s another one I wanted you to draw your attention to. We’ve just done an interview with Hartshead Resources, HHR, which we’ll be putting up on our website shortly. Marc, I bet before you heard me talking about this, you’d never heard of Hartshead Resources.

Marc: No, I was surprised, Stu, to hear of this company, and also this massive undervaluation that you talk about in that interview. Actually, it’s up on the website already.

Stuart: Right. Do yourself a favor, if there’s nothing else you do today in terms of looking at your portfolio, go take a look at the interview that I conducted last Friday with Chris Lewis of Hartshead Resources. This is a company run out of the U.K. The diagram you can see on the slide is the four gas fields that this company controls, in the southern part of the North Sea offshore. And so, in the English part, not the Scots part. There’s plenty of gas and oil in the North Sea markets. You can attest because it funded a lot of your childhood prosperity, the original ad discovery of the Groningen gas fields back in the mid-60s, to keep this whole thing off. Then there was the Ekofiskdiscovery in Norway sector that Phillips Petroleum did in ’69. 1970, the first big oil discoveries made in the North Sea. Well, North Sea has been the gift that keeps on giving.

So, here’s four, as you know, undeveloped fields in the southern part of the North Sea that are controlled by Hartshead. When I first met this company last year in Perth, what they were talking about was looking for a development partner to actually fund in a phased way, the development of these assets. Well, they’ve just landed that in terms of a U.K. company called RockRose, which is backed by a privately held Italian company called Viaro. They’re expanding when a lot of people are getting out of oil and gas. And they’ve funded the development of this by taking 60% of it in return for the equivalent of about A$200 million.

Now, what’s remarkable about that is that the transaction actually values Hartshead remaining share of the fields at about 22 cents a share. At the moment you can get them… Well, they closed yesterday on ASX at 3.4. So, potentially, there’s a six or seven bag here if the market gets around to properly pricing these assets. I think that sentiment has gone out on oil and gas due to the price weakness we’re seeing everything is being thrown out. So, people have probably not discovered the bonanza that Hartshead Resources are sitting on. In the interview, I talked with Chris Lewis, who was a pom. Now he may be a pom, but he spent seven years working in Perth. So he knows the way we think. He has a track record of developing assets, in some cases, with these sort of returns. And he describes one of them in the Rift Valley Basin in Kenya that he was involved in for a TSX-listed company earlier in his career, “This one could be Next.” So take a look at that interview and see if it makes sense.

Now, there’s some project financing gotta be raised in their final investment decision, that’ll be coming up later this year. But if they get to that point, then potentially you’ve got some serious shareholder value coming the way of Hartshead Resources shareholders.

Marc: All right. Well, that video, you can see that on the video page of the Stocks Down Under website. So check that out. Finally, Stuart, for the wokies, oh, not wokies, but in general.

Stuart: For all of us. It’s good for all of us.

Marc: Exactly. Moving away from the non-woke stuff, healthcare. So, as you’ve talked about previously on this webinar and also on [inaudible 00:12:57], for instance, is the massive bear market last year, but it looks like we’re sort of coming out of that phase, right? Things are starting to look up again.

Stuart: Right. The thing about healthcare was it got a bit to unrealistic levels during the COVID period. Because the nurses and doctors were keeping some of us alive, the expectation was that healthcare was gonna be at high multiples forever. Well, the pandemic’s gone away more or less, and with it, a lot of the premiums washed out of the stocks. But I’m seeing recovery, not just in the biotech and medical device developers, but in the big guys as well. Now, Marc, just as an aside, I’ll be talking about a lot of this in a presentation I’ll be giving in Sydney on the 15th of June to the Australian Investors Association.

We’ll put the invitation to that meeting up on our website if the AIA gives us permission, but I think it’ll be a great warning. And I’ll be sharing a lot of my insights gained over the years as a healthcare analyst at that meeting. So, the message for investors looking at healthcare again, is healthcare is a sector that’s never in recession, because populations everywhere are aging, people are getting more and more unhealthy. At the same time, new treatments are getting developed, the tech’s getting better, and particularly the information technology. Feasibly, that could cut back the cost of healthcare, but the trade off is always people want more healthcare, and better quality healthcare if it’s available.

And healthcare is turning into a bit of a funding issue. If you cut back the healthcare budget, then people are coming after you with pitchforks, basically, and will punish you seriously at the ballot box to the point where your electoral prospects are in hospital, if not your own physical person. And the final thing is most healthcare systems are opaque, very difficult to navigate, and in an environment which makes it easy to maintain pricing. I mean, Marc, we can talk another time about the experience you had trying to get your leg fixed a little while ago. It was not easy finding the right treatment for the knee injury that you had, right?

Marc: Yeah. And insanely expensive, but we’ll talk about that another time. By the way, Stuart, these numbers on here, is this the U.S.? I’m seeing $4 trillion. It must be the U.S.

Stuart: That’s the U.S. healthcare system there. And yeah, there’s $4 trillion around healthcare spend stretching out to, and I’m just leading up close to the screen here, just a sec. Yeah, that’s, 2020 figures. But what impresses me is the momentum there from the chart. That chart is for as long as you and I have both been alive, Marc. And look at that, the cost increases in healthcare have just been relentless in the U.S. through that period. America is just more expensive, but the trend is the same just about everywhere you go. And to that point, Australia’s no exception to the healthcare world. Our healthcare budget across the board is about $200 billion, and it grows at three or 4% a year, which is well ahead of population growth.

Health spending is about 10% of GDP, that’s about average across OECD countries. America, it’s about double that. And the government picks up the lion share of it, which if truth be told, probably it adds a lot of the inefficiencies into the system in terms of pricing. The good news is for private sector operators that know how to work that system, it’s good pricing for them as well. Now, one stock I want… We might talk about this in the next few webinars, but one healthcare opportunity I wanna draw your attention to coming outta the quarterly reporting season is ResMed. Most of you will know ResMed, they’ve pretty much pioneered the market for devices to treat obstructive sleep apnea.

The sleep apnea machines, you probably know people who actually use these machines, help keep the upper airway standard open so that people can breathe properly at night and don’t get these micro sleeps that are really damaging to their health. ResMed’s gone to strength to strength ever since its founding about three decades ago. And diagnosis of sleep apnea is getting a whole lot better. So there’s more market for them. I’ve always admired this company. They’re always innovating, always spending a fair bit of their free cash on R&D.

And the only thing you’ve gotta watch out for, and this is the opportunity, every now and then they’ll miss their quarterly earning guides, or the quarter will look bad compared to the previous quarter. The trend is always up. But if you combine them just after a bad quarter, inevitably you can participate on the snapback as this company continues to go from strength to strength. And there’s another reason to look at ResMed right now, and that is that Phillips is out of the game. They had to do a product recall. Phillips are in the business… Marc, you used to cover Phillips back in the Netherlands, right?

Marc: Yep, that’s right.

Stuart: Right. So, Phillips bought a big U.S. company called Respironics to become what they hoped would be the number one player in CPAP, only they didn’t reckon with the innovation potential of this little Aussie startup that they were going head-to-head with. Phillips is now a poor number two to ResMed. And they’ve struggled because of a recall that they had to perform. Here’s a little resume taking advantage of that in a serious way. Latest EPS, a buck 68, up from a buck 32, and better than consensus. Now, I say, consensus is a two-headed sword. If you miss consensus by a couple of cents, the market will punish you on the day. But this one was a particularly good quarter.

So, strong momentum, supply chain’s better now. Like all the healthcare companies, they’ll bug it around by bad supply chains. So that’s not an issue. And pricing is very good. That picture is Dr. Mick Farrell, who I’m a big fan of. Mick is the son of ResMed founder, Peter Farrell. I once said to Peter, “Peter, you know, do you practice nepotism in this company?” And he looks at me with a straight face and said, “No, Stuart, we do not. I told Mick, if he wants to come and work at my company, I wanna see a PhD, and not just from any university, but from a quality institution like MIT, which Mick subsequently got, and I wanna see an MBA, and Mick’s got one of those as well.”

So, Mick then joined the company, initially to run the America’s business of ResMed. They advanced him to be CEO of the whole thing in 2013. So, he’s been running this company for 10 years now pretty successfully. And just like Watson, father and son building IBM back in the day, Farrell Jr. has picked up the ball from Farrell Sr. and run with it pretty hard. So, if you get a chance to meet, Mick, well worth paying attention to what he’s got to say, because he’s got some great insights as to how to take a great company and build it even more. Now, the bugger is, Mick Farrell has lived in San Diego for a long time, but he’s probably lost his Australian accent, but he’s one of us.

Marc: Right. Look, I think in the longer-term, things are looking up for ResMed or will continue to look up because Phillips, that recall keeps getting worse and worse. So they keep finding new issues with the devices. And originally, the problems were tiny bits of plastic in the air channel sort of breaking off. And there’s a risk of those ending up in your lungs, actually. But that problem keeps expanding, so they’re finding more and more issues with those machines. And it’s already cost Phillips’ CEO his neck. So, they kicked him out a little while ago. So, this is not something that… And you’ll notice better than I do, Stuart, but in the medical world, this is not something that you can resolve easily, and especially getting confidence back from customers, from the hospitals, right?

Stuart: Absolutely.

Marc: So, I think ResMed will be enjoying that Philip’s headwind or their own tailwind for a lot longer than many people think, I believe.

Stuart: Right. And it reminds me as well, many, many years ago when I used to cover the stock as a broker, the company was trying to introduce a lower-cost item in their range, and they went looking for Chinese manufacturing, and then canceled that. Now, this was about the time… Now this is going way back, Marc, but you might recall, Mattel, the toy maker, got in serious trouble because it discovered that there was some toxin that was in the paint on the toys being made in China. So ResMed decided strategically that it couldn’t afford the quality risks of having any manufacturing in China. Now remember, at the time I rolled my eyebrows saying, “What a ridiculous company this is.” Well, you know, the ResMed’s not the one doing the recall at the moment because, you know, their manufacturing is always first class.

Marc: Yeah. There you go. Some stuff you can have manufactured in China, but not all of it, especially when it comes to this sort of thing. All right. So, we had something for everyone, for the wokies, for the non-wokies, and for the rest of us. We’ll wrap it up here. We’ve been going for more than 21 minutes, but we’ll definitely, we’ll hope to catch you next week. Stuart, thank you very much for your contribution today.

Stuart: Go take a look at that Hartshead Resources interview, it’s a knockout.

Marc: Absolutely. And we’ll see everyone next week.

Stuart: All right. Stay well.