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A recession in Australia? So what? Stocks Down Under Investor Webinar 7 June 2023

June 7, 2023

BDG, Black Dragon Gold, Cauldron Energy, CXU, Deep Yellow, DYL, Finbar, FRI, PUR, Pursuit Minerals, recession, Strike Energy, STX, TOE, Toro Energy


Are we getting a recession in Australia or not? Should investors even care?

This week in our Investor Webinar:

Full transcription below.


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Marc: Good morning. It’s the 7th of June and it’s wintertime in Sydney, Stuart. Are you cold yet?

Stuart: Freezing.

Marc: Freezing, yeah. It will be getting hotter is my view. Let’s talk about today. So, a new boss in WA. Let’s talk about that and what it means in our opinion for certain sectors. We’ll have a look at all this talk about recession and what we think of it, and where we see the markets going.

Stuart: It should be our word, Marc.

Marc: Yeah, but as I’ll explain, I’m not so negative, actually. We’ll have a look at that. And you did a couple of videos this week, too. We’ll have a look at that as well. But let’s kick it off with WA. What’s going on there?

Stuart: Yeah, so the State of Excitement, at least that was its nickname once, so, usually called the Wildflower. Western Australia is probably the most important part of the Australian continent, and the reason is there’s just so much activity there. It’s pretty much kept the whole country afloat now for the best part of 20 years. Now, there are times when Western Australia is lagging because the resource sector is down, and then we carry them. But by and large, if there was no Western Australia, Australia as a whole would be a much poorer place to be.

So, they’ve just changed their premier. Mark McGowan suddenly announced that he was stepping down, and that’s very interesting to me. The new premier is a guy called Roger Cook, who I barely had heard of. He’s the member for Kwinana, which is the industrial area just south of Perth, relative unknown outside Western Australia. He’s been the deputy premier for a long time since the Labor Party took office in 2017. But he’s a bit of an unknown in terms of what’s gonna happen. Now, here’s what I think, the big news is that the Liberals and Nationals are now back in play. In the March 2021 election, Labor absolutely walked all over the opposition. The National Party was left with just four seats, and the Liberals with just two. They’re not informal coalition over there generally like they are in the rest of the country, but 56 to 6, that’s not much of an opposition, Marc. Would you agree?

Marc: It’s no opposition at all, and I was surprised back then to see Labor get that many seats.

Stuart: Right, that’s got a lot to do with the personal popularity of Mark McGowan. With him gone, suddenly the Liberals and Nationals are back in play. [crosstalk 00:02:28]

Marc: We’re talking about hermit Mark, right, back during COVID time?

Stuart: That’s right, the hermit kingdom. Look, true confession, I hate Mark McGowan. Soon as I get a dart board for my garage, I’m putting Mark McGowan’s picture on there to throw darts at it because he locked out the rest of the country while Western Australians were able to move around freely. Now, that made them popular, but really had knock-on effects for the rest of us. So, next state election, March, 2025, I think the Liberals and Nationals are contenders, and that’s got important. There’ll be important considerations for that coming over the next couple of years. Let’s talk about three of them.

The first of them is the no-uranium policy is gonna end sooner rather than later. The McGowan government campaigned in 2017 on a ban on new uranium mines. Now, they exempted four projects. Cameco, the big global uranium company had two projects on the board they spent about a billion dollars on. WA didn’t wanna run the risk of being perceived to be a sovereign risk. So, those projects were exempted. And there were also two decent-sized uranium projects that were also exempted. One was Mulga Rock, belonged at the time to Vimy Resources. It’s now gone to Deep Yellow under the legendary John Borshoff. So, that could be Western Australia’s next uranium mine.

The other one was a project called Wiluna, owned by Toro Energy. Now, we talked about uranium last week. Anything in a first-world country like Australia is got to be worth looking into as uranium price lifts and as investors move their focus away from Namibia. Western Australia obviously, no new mines allowed beyond those, but I think that’ll change. There had been a ban previously. When the Liberals won in 2008, they reversed that ban. So, I suspect coming back into office, if that happens in 2025, they’d reverse the ban again. One of the key beneficiaries is stock that I reckon no one has heard of, Cauldron Energy (ASX: CXU), they own a uranium project called Yanrey up near Onslow. There’s about 31 million pounds of uranium. So, it’s a half-decent resource and open all the way. So, all you’re gonna do is go drill a bit more, and you can end up with a much bigger and relatively easier-to-process uranium project right near where all the infrastructure is you’d need to build something like this. We’re just waiting for a public policy change.

So, yeah, Western Australia and the uranium it producers is probably important given what’s happened last week. Let’s talk about two other things that are important. One is housing. Try renting a property in Perth and you’ll be sorely disappointed. The rental vacancy rate is down to just half a percent, and that’s only gonna get worse because of all the new labor flooding into the state. New housing sales are going up. There are skill shortages, so it’s a little bit difficult to build a new house. Look at the stock price there of Finbar, a leading developer of apartments for Perth. It’s back at levels last seen near the Corona crash. In a run where people are gonna be buying a lot of Finbar’s projects, management are regularly buying the stock of this company. They reckon it’s seriously undervalued, and I think it’s a prime beneficiary. Depending on what the government wants to do to speed up the rate in which new properties get developed, this could be a strong beneficiary.

The third thing to look at is gas. Mark McGowan was generally pro-mining, but they did their damnedest to try and discourage new gas projects. That’s reversed a historic surplus that Western Australia had with gas thanks to the North West Shelf and other projects, And thanks to all the logistics that just shown up in the Perth Basin in recent years, there’s predictions out there that gas prices could double. They’re kicking around at about $4 a gigajoule, could be double that with continuing demand but supply shortages. No surprises then, Gina Rinehart went and bought Warrego Energy so she could get hold of the West Erregulla gasfield. Gina is a very patient investor, and not very woke. So, she’s happy to run lots of gas resources. The other beneficiary, that is Strike. So, take a look at that one. So, a number of companies are potentially set to do quite well out of the change of government in Western Australia.

Marc: All right, good stuff. And so elections are next year, you said?

Stuart: Not till 2025. So, that gives the Liberals enough time to get their act together. It’s fair to say that they’ll get back a lot of the seats they lost. Can they go all the way and knock off Labor? That depends on how badly performing Roger Cook and his team are over the next two years, and given the speed of the transition. And I suspect Cook lies to the left of McGowan. So, you might see that the economy a bit mismanaged over there in the next couple of years, which would be good for the Liberals. But in the meantime, there’ll be beneficiaries like Finbar that we were talking about.

Marc: All right, well, when it comes to liberals and their position on the political spectrum, same here as in Europe, I think, they’re moving to the left more and more. So, with liberals like that, you don’t need socialists, right? All right, let’s talk about recession. So, there’s a lot of talk about that, but what does it really mean? Should we care about this? I think we don’t really have to care about this given, you know, a few… Well, what’s the word here? If things stay the way they are now, so if there’s no black swan stuff happening and if we don’t see interest rates spike another three, four percentage points, I think, yeah, all this fear of recessions is overdone. But let’s jump in and see what’s going on here. So, the doomsayers, there will be a recession. And when I say doomsayers, it’s a bunch of economists out there, some big brokers calling for increasing their likelihood of their expectations of if a recession will actually happen. There’s some journalists as well. But what is a recession, really, and should you care about that? And what does it do for your stock? So, we think it will do relatively little for your stocks, even if we get one in the U.S. and/or Australia. So, if you look at the guy on the right there, this is Christopher Joye. He’s been one of the permanent, the perma-bears, always negative on housing prices on [crosstalk 00:08:41]

Stuart: I don’t read his stuff, just in case I jump out the window, Marc. So, what’s Christopher thinking about?

Marc: Well, he’s always negative. He thinks these interest rates spikes or increases will have a very devastating effect on the housing market. Personally, I’ve been here now in Australia for 10 years, and I used to share his opinions on the Australian housing market, but Australia’s got this really great way of migrating its way out of recessions or preventing them through migration. And the same thing is happening now, we see this massive influx of migrants driving up rental prices, vacancy rates go down, so people start to move to the property market earlier than they would. Like ourselves, you know, we got here, we first rented for the first bunch of years before we actually bought, but now it’s more and more, you know, people coming here and moving straight to [crosstalk 00:09:30].

Stuart: So, you helped to drive up house prices here in Sydney, Marc?

Marc: Yeah, two years ago. And believe it or not, we’re actually up on where we started out. So, again, that goes against what this guy’s been saying for a while. Anyway, there’s people like that, but also some brokers, they’re negative on the market. But what is a recession? It’s two consecutive quarters of negative economic growth. But I think the market, if you look at it, is much more efficient than a lot of these journos and economists. So, even though we might see a recession in the U.S. and/or Australia, I don’t think Australia actually, but it could happen, what does that mean? I think not much for your shares because it’s been largely priced in. And I think it will be really mild as well, so unless there’s a black swan event like, you know, China invading Taiwan, or, you know, another Russia versus Ukraine or something else, you know, where you have say, a subprime issue like we had 15 years ago, stuff like that is a black swan event. Or we see, you know, the interest rates going up much more than we are forecasting now. So. another 2-3% from where we are now. So, let’s say 7-8%. Unless that happens, I don’t think we are gonna see a massive, you know, very painful recession. It will be negative growth for two consecutive quarters, and it’s business as usual from there.

So, I think actually the market is already looking beyond any potential recession because if you look at what’s… For instance, the NASDAQ composite, as you know, this is one that we track quite closely. If you remember, a couple of weeks ago we talked about this, Stuart, where the NASDAQ was still sort of, you know, moving against that resistance line, that horizontal line there that I marked with that circle. But, you know, since then, driven by the massive push in technology AI, especially with NVIDIA leading the charge and a few other mega caps there, NASDAQ is now a lot higher and actually looking beyond what might be ahead in the next sort of six to nine months. I think the market is looking beyond recession, and at some point will start to price in actual rate declines. I don’t think that’s happened yet, but in my view, that will be the next step in say, you know, three, four or five months because we think that’s coming. Lower interest rates late 2023, probably earlier next year, that’s more likely I think. But we’re looking through that. So, if and when that happens, you need to look at high-beta stocks like Tech, Life Sciences. Yeah, so our specialty, Stuart. But also the market in general will be supported by lower interest rates, and of course, you need to be mindful of the sort of defensive stocks because they may take a backseat to any sort of broader market recovery.

So, our message, but don’t get spooked by people talking about recession. If it happens, it’s not the end of the world. And it will probably be mild given the strength of the labor market, for instance, at the moment. And I think the impact on your stocks will be fairly modest, if anything, really, Stuart.

Stuart: Right. Good. That’s good news. I feel a whole lot better.

Marc: All right, I’m glad you feel better, Stu. Lastly, you actually did a few interviews this week that just got published. We got a few more coming later this week, but let’s have a quick look, Stuart, at the ones that you recorded earlier this week.

Stuart: So, regular readers of “Stocks Down Under” know that we provide a lot of content. I’ve started stepping up to the plate and interviewing more interesting people in the capital markets. And so usually if you come back to, every week there’ll be a whole lot of video interviews with me around the country. And I wanted to highlight two of them. First one was we recorded an interview with Aaron Revelle, who’s the chief operating officer of Pursuit Minerals. Now, the reason I enjoyed talking to Aaron is, a lot of the lithium plays on ASX are hard rock lithium plays, uranium to mine pegmatites to produce spodumene, from which you can obtain lithium.

The really low-cost way to produce lithium is from brines, and the lithium triangle in Northwestern Argentina, Northern Chile, Southern Bolivia is the place to be. Aaron and his colleagues have just laid their hands on the Rio Grande Sur Lithium Brine Project in the Argentine province of Salta. They picked up off a Canadian company. They’ve got a non-JORC resource, which they believe is in the order of 2.1 million tonnes of lithium carbonate equivalent. The team’s now looking to build out the resource and they’re gonna switch it over to JORC. And not long after I talked to Aaron…not long before I should say, he just bought a pilot plant to start studying the nature of the lithium brines on the Rio Grande Sur with the aim of moving quickly towards some sort of a scoping study for that project.

So, I get the sense that the brine projects are coming back. Argentina will go to the polls shortly and probably elect a more market-friendly government. So, that’s also helpful. But in the meantime, whoever’s in charge in Argentina, they just know that lithium is an important part of their future economic success. And Pursuit has some great neighbors there. Big American lithium producer called Livent has an operation called Fenix there. You would have heard of Allkem with Olaroz, their lithium mine’s not far away. So, they’re in great company, but not known at the moment that Pursuit’s transitioning over to lithium brines. So, I encourage people to go take a look at that interview to get a sense of what’s going on in the brine part of the lithium space.

The other video that I’d like to draw people’s attention to is Black Dragon Gold, ASX: BDG. I talked with Gabriel Chiappini, who’s the managing director of that company. A very interesting situation. They’ve got the Salave Gold Project in the Asturias mining region of Northwestern Spain. People mined gold in Salave since the Romans were running Spain two millennia ago. So, there’s 1.6 million ounce resource, which is really not properly valued in the share price. They’ve even done…well, a private previous owner has even done a preliminary economic assessment on Salave. Environmental approvals are very strict in Spain, so they’re waiting for the appropriate approvals before they can proceed for further development of that mine. I think it’s a case of when, not if. Black Dragon Gold has been very careful in terms of complying with best practice on the environment, that is, waiting back for the relevant civil servants in Spain to say yes. That’s not holding Black Dragon back. As you’ll see in my interview with Gabriel, he talks about a gold project in the northern part of the Yilgarn Craton called Padbury that’s had some pretty good drilling results lately and probably some near-term excitement before we wait for the big money in Asturias. So I encourage people, go take a look at that interview. Gabriel’s quite a good presenter and been around the capital markets for a long time. We also spent some time looking at some of the other companies he’s been involved in, including one we like called Black Rock Minerals. So, go take a look.

Marc: All right, good stuff. Yeah, and there’s plenty of video content on there. I remember a couple of weeks ago, Stuart, we recorded six or seven just in a couple of days ago.

Stuart: Right in this room, I spent all day just recording videos. It’s a lot of fun. And if you’re watching this and you run an ASX-listed company, get in touch. You know, I love talking to interesting people. I don’t like talking to uninteresting people. But there’s very few of those in Australia’s capital market.

Marc: I think none of us do, Stu. All right, well, let’s wrap it up here. Thanks everyone for watching, and we’ll see you next week.

Stuart: See you next week.