Thematic investing is a forward-looking investment approach that seeks to capitalise on megatrends.

Thematic investing can focus on short-term, more cyclical themes or can focus on structural, long-term themes.

We believe playing thematics potentially creates another opportunity for outperformance. The key benefits of long-term thematics are:

• Significant growth associated with a structural theme.
• Entry timing is also less important as growth should be less dependent on the business cycle over the medium-term (although some thematic stocks may be more cyclical than others)
• Spreads portfolio risk as these returns tend to be less correlated to the general volatility of the market.
• Investors can tailor their portfolio to match their philosophy or values by tilting their portfolio towards a particular theme.

In the Focus Portfolio, we are exposed to a few thematics at present, such as New Infrastructure (NXT, CWY, TLS), Global Reopening (QAN, TAH, ALL) and the Energy Transition (AKE, OZL, STO/WDS).

With a significant increase in demand for EV’s comes a significant increase in demand for lithium-ion batteries. We expect demand for lithium to grow by 6-8x between now and 2030.

We don’t believe lithium supply can keep up with this level of demand growth. Lead times for lithium mines (from discovery to production) can take 5+ years, so there is no quick fix. If demand can grow at the market’s expected pace, this could lead to large supply deficits from 2025 onwards.

While we expect the price of lithium to fade over time, the forecast price profile seems inconsistent with the forecast supply/demand balance. We believe there could be significant upside to the forecast long-term price if there is a supply/demand imbalance and the current price profile (in Figure 4) looks too pessimistic.

What about other types of battery technology?

When looking at the mineral mix in batteries, all roads still lead to lithium as the core base of battery technology over the next decade. We do not see an alternative to the lithium-ion battery (and hence lithium) in decarbonising the global auto fleet.

There is more uncertainty for graphite, nickel and cobalt in relation to the battery mix; all could be used with lithium as standalone options for battery technologies.

The Focus Portfolio has exposure to lithium through pure-play Allkem (AKE) (3% position).

AKE remains our preferred lithium exposure given:

• AKE is one of the world's top 5 lithium producers, with operations in brine, spodumene, and hydroxide.
• Business operations are spread across Argentina, Australia, Canada and Japan.
• The company has deep brine and hard rock lithium resources and a depth of experience in these fields.
• AKE brine production is low cost relative to the Western Australia spodumene (hard rock) mines.
• We believe consolidation is likely in the pipeline for AKE, one of the biggest players in South America's ‘Lithium Triangle’. The company could acquire smaller explorers to increase its capacity.

Are lithium miners still reasonably priced?

We think so. The AKE share price has gone up ~27% since we increased our weighting to 3% on the 10th August. However, we still think there is value in this name at the current price ($15.34 – 19/09/2022 close price).

While we do not expect lithium prices to remain elevated at these levels over the next 12 months, we believe they will be significantly higher than consensus, which is currently pricing at ~US$36,000/t (vs. spot of US$73,500/t).

If this is the case, there should still be significant upside to AKE’s earnings, leading to analyst upgrades.

Longer term, if the supply deficit is to be believed, we think consensus long-term lithium prices are far too low, and this is also a bullish scenario for AKE’s earnings and cash flow.

We prefer lithium miners, like AKE, who are currently producing lithium. We are more sceptical about the small-cap non-producers. We believe there is more exuberance in the non-producers, and valuations may have overshot fair value.

Copper is a popular base metal that is favoured for its electrical conductivity and its low reactivity. The metal is widely used in building construction, infrastructure, electronics and wiring, transportation equipment, consumer products and machinery.

While demand for copper is cyclical in nature, given its wide range of industrial uses, decarbonisation is set to underpin structural growth in demand for the metal. Large quantities of copper will be needed to modernise electrical grids and energy infrastructure, build new solar and wind energy generation capacity and manufacture a growing fleet of electric vehicles (EVs).

EVs typically require around 3x more copper than comparable conventional internal combustion engine vehicles. Solar and offshore wind require an estimated 2x and 5x, respectively, more copper per megawatt of installed capacity than popular fossil fuel energy sources. Therefore, we expect there to be an abundance of demand for copper over the long term. By 2035, copper demand is expected to nearly double to 50m metric tons. By 2050, the demand for coal will exceed 53m mt. Putting this figure in perspective, that's more copper than the world consumed over the last 120 years.

Increased copper demand is expected to outpace new supply given the shortfall of existing production volumes and committed projects in the pipeline.

There is a long lead-time involved between discovery and production, with lead times averaging 17 years according to the IEA.

OZ Minerals (OZL) our preferred copper exposure

The Focus Portfolio has exposure to copper through OZ Minerals (OZL) (2% position); and indirectly via BHP Group (BHP) (6% position), which generates ~20% of its EBITDA from the metal.

OZL remains our preferred copper exposure given:

• OZL is one of the purest large cap exposures to copper on the ASX, with ~70% of revenues being attributable to the metal.
• The miner has a quality portfolio of long-life, low-cost assets in stable jurisdictions. OZL’s Carrapateena mine in South Australia has a mine life of 23 years and is in the first quartile of the global cost curve.
• There is a clear pathway to more than doubling production volumes through both brownfield expansions and greenfield projects.
• OZL has been a prudent manager of capital over time, delivering an average return on invested capital of ~9% over the past 5 years.

M&A interest

OZL recently rejected an indicative takeover proposal from BHP at A$25 per share. We remain optimistic that further bids will emerge at a larger premium.

Lowering emissions is a complex long-term global issue. The outlook for turning emissions around is likely to be a mix of energies, not one solution.

Renewable energies, increased efficiency, and a variety of innovative technologies are all needed.

Natural gas is also required. Gas burns more efficiently than coal or oil and emits significantly fewer greenhouse gases than other fossil fuels while being a reliable source of energy. Gas will play a key role in providing reliable ‘baseload’ power to supplement more intermittent solar and wind during the transition, at least until energy storage improves. Typically, global infrastructure is better prepared to transition to gas than renewables at present, making it more cost-effective for countries in the short-term. Thus, it can play a crucial role in supporting the transition to renewable energy.

According to the International Energy Agency (IEA), natural gas will have a greater share of the global energy mix in the future as oil and coal's relative share declines and renewables increase.

By the mid-2030s, the IEA predicts natural gas will replace coal as the world's second most important energy source. The gas supply will need to grow significantly to meet current commitments.

Oil and gas capex has fallen over the last 8 years, we think the current demand-supply dynamics are favourable for oil and gas prices over the medium-term, especially in an environment where demand can remain steady through the transition.

In the Focus Portfolio, our key exposures are to Santos (STO) 4% and Woodside Energy (WDS) 3%.