Talking Money To Us | Peter O’Conner – Metals & Mining research analyst at Shaw and Partners

Candice: [00:00:04] Hello and welcome to talk money to me. This is your need to know financial podcast. Thanks for joining us. I'm Candice Bourke and apologies upfront, guys, if my voice sounds a little bit off. I'm currently in isolation dealing with Covid, 

Felicity: [00:00:18] and I'm Felicity Thomas and I've already had Covid over New Year's Lucky Me. Today we are joined by one of the best resource analysts in the Australian market. He has over four decades of experience. Peter O'Conner. Actually commonly referred to as Rocky. So welcome, Peter. 

Peter O'Conner: [00:00:37] Thank you. Great to be here. 

Candice: [00:00:40] So Peter is an experienced equities analyst specialising in the metals and mining sector. We're going to hear a lot about that in today's episode, and he's previously held positions as head of Australian metals and mining at Deutsche Bank, head of global metals and mining at Credit Suisse in their research department. And also, he held held a similar role in Macquarie Bank prior to his roles in covering research equity. Sorry. Prior to his roles within financial services as a research analyst, Peter previously held operational roles both at Rio Tinto for five years and BHP for five years also. But today, his current role is head of metals and mining research team here at Shaw and Partners. And you have a Bachelor of Engineering in mining and Mineral Engineering. So clearly, you are the expert when it comes to rocks, right? 

Peter O'Conner: [00:01:32] Yeah, that's sort of been spending a lot of time on. So yeah, I'm deep into that a bit. I must say you missed one of my my jobs. I did Bank of America as well, head of the global money team ahead of the global money team. And you make me sound old with all those jobs that I didn't start work straight out of school with BHP. Oh, good on you. 

Candice: [00:01:47] Apologies for that. And it's such a long resume going to be one thing. 

Felicity: [00:01:50] Let's see. Now you would also see his face all over Sky News channel, as well as Aussies as a viewer favourite because he's just that good. 

Peter O'Conner: [00:01:59] Thank you. 

Candice: [00:02:00] Always through our episodes, we're going to talk a lot about companies and stocks and investment ideas. This is not personal advice, so please don't take this podcast as personal advice, even though we are registered advisers at Shriram Partners. Please go out and seek a professional financial adviser for any of your actual investment decisions. 

Felicity: [00:02:18] So the first question I want to ask you Can you please give us a brief rundown of the current ASX recent resource market sector? What's been going on in the past few weeks, which you think is really important for investors to take note in their portfolio? 

Peter O'Conner: [00:02:33] Can I just start by say it is a crazy, crazy world we live in right now? And the obvious things, the headlines and things that we read about every day coded. And it's been going for two years now, and I'm just a victim of Covid myself. I'm at home working. But also the Ukraines mean, obviously we're deeply saddened by what's happening there, but that's extremely topical and driving markets as well. But inflation as well as been a key to mitigate the loss of the wealth. So there the headline factors there. What's usually driving the press every day and occupy most investors minds? But behind that, there's a few important factors, and it's all to do with the inflation side. It's about interest rates. We're at the end of a 40 year interest rate cycle. Interest rates are starting to go back up and in many of our careers or life times, that hasn't happened. So it's a big deal and it's driving sector performance, equity performance, global share my performance, but it's also driving well. I'll come to you later at what I call a great rotation, and there's a rotation underway from what I call the long duration or the tech side of the market, to the metals and mining or the value side of the market. So that's a big deal and that's playing out at the moment. We're right at the infliction of that. So other things in the background very, very near term. Important to note, and one is because commodity prices have been quite buoyant of the last few weeks or few months, particularly in the most recent time with the Ukraine driving spikes in some commodities. There's a lot of talk about big upgrades coming in the resource sector. Earnings is going to be a lot higher. And that is right. I turn and begrudging upgrades because there are two types of upgrades in the market ones where as an analyst or as a firm like Sean Times, we're ahead of the curve. We're telling everybody what's about to happen with the company. And sometimes you're just catching up. And unfortunately, things have been moving so, so fast in the last couple of weeks and months. But going back to that crazy world analogy, we as an industry are all just catching up. So a lot of this is already priced in. So be careful when you read headlines about Hey, whilst so-and-so companies just had a big upgrade, sometimes that's already been priced by the market. And secondly, I talk about a term information asymmetry. Just be careful as an investor, as a professional investor or as a private investor, always try and look at both sides of the equation and don't get caught up in looking at just the good news. And at the moment, we're starting to see a lot of good news coming out in equity markets and particularly in this sector. But always just keep one eye open. Don't get blinded by the light and just check out if there is anything not so, quite so positive and interest rates I've already mentioned. And commodity prices you've no doubt heard or seen. There's been some squeezes in commodity prices, most in nickel worth a nickel price do things that we've never seen price or quoted a week ago at twice the highest level ever. So I'm just a lot of noise out there as well, which gets back to that crazy old analogy, and it's important for us in this conversation to get to the bottom of what is actually happening and make some key recommendations.

Felicity: [00:05:19] Yeah, definitely. Those are some really, really key important insights now. I do have a follow up question from that. You know, everyone's talking about gold. Where do you see the gold price ending up by Christmas 2022? 

Peter O'Conner: [00:05:31] That's the hardest question to answer. I find gold very difficult to come up what I will say, and this is an absolute fact. Gold price will be volatile because that's the obvious thing between now and Christmas. It's going to try to show what I'm going to do. I'm going to shape the debate and I'm going to give you a range. And within that, I'll give you the probabilities where it should end up. Gold will look to trade. It's now sort of nineteen hundred and fifteen US dollars per ounce between now and Christmas. It's probably likely to touch a 7500 number 1750 1790 y as the US Federal Reserve starts to tighten to the interest rates the US that will have a negative near-term impact on gold price and the doomsayers I call that they'll say, Hey, gold's now not worth as much because I can get a higher interest rate elsewhere. So good question for. And on that basis, I drift back and probably more than a drift is probably a bit of a slide back to seventeen hundred is what I think. That's the low range. But I wanted to highlight again, not been in this asymmetrical world. We only look at the good things. That's the downside. But where does it go from here? Again, going back to the comment about the great rotation, we're also in a feud with gold. Price may dramatically change as a store of wealth or we're calling it the US dollar worry is likely to lose its reserve currency status. Gold will become more important. It could be because Russia starts selling to anybody who wants to buy gas from them. We want to get paid in gold, right? And if you start to a gold to oil ratio, gold price at $2000 starts to be very reasonable and it could go to three thousand dollars. So if I'm giving the upper bounds, it could be three thousand. It could be 750. But more realistically, trading around the $2000 range, nineteen hundred twenty one hundred is probably likely. But if we do start, it's probably more a multi quarter, maybe multi-year event. But the US dollar is losing its reserve currency status, not least because what's happening in the Ukraine and Russia? That's a big deal. So I'm thinking about where gold goes from here. Gold price could go substantially higher and again, three thousand dollars. That could be a very low increment for me. 

Felicity: [00:07:28] So that's interesting. So for our listeners, really, they need to take their own view on gold, whether they're a bull or erect, essentially, because you've given us both sides. 

Peter O'Conner: [00:07:37] The bear case is not really giving you a 750 loan number, but I'd also put out there another key indicator is that goes a store of wealth. And over time, as a US principal money, the value of gold will increase over time. And over the last two years, the US has printed more money in any one year than they ever have, in fact, going back to 2020 to 25 percent more paper than they had ever. There's a great correlation going back 60 years, a gold price vs. the US money supply, and that sets a base for the gold price going forward, and that, based on that analogy, should be around about the nineteen hundred level. So give me a 1750 low. Yes, that may be bearish. And again, looking at all sides of the equation, we should think about that. But that would be more a volatile spike down, not a long term trading range. And I think that $900 level looks well supported. But this change in the reserve status of the US dollar, that's a big it's a big deal. So an upside from here, but it always volatile. That's why I find it hard to call, but a positive bias without question. 

Candice: [00:08:37] We've just had obviously the Aussie reporting season, just rap recently. Did any of the gold companies that you do have coverage in in in the resource sector signal that? I guess what were the key takeaways from your perspective in your sector because we're hearing a lot about supply chain issues caused by COVID? Was that reflected, do you think in your sector? 

Peter O'Conner: [00:08:56] Okay. Key statement on a make is that the gold sector locally and globally is cheapest of all the sectors that I cover without question. Okay, on a valuation, on any metric you choose to look at. So it stands out to me as a value biased investor. Gold looks really interesting, so I've got a look for what are the drivers, what's going to make this turn. And to your point, from last reporting season, companies don't like to forecast gold price because they find it just as hard as I've just articulated, and they just like to run their business. And I enjoy the benefit of what are the gold price they get. But the themes from the the last reporting period were, not surprisingly, whether one miner. I mean, it's been causing problems globally, but particularly in the southern hemisphere. So that was evident across iron ore, gold and coal and other sectors in the market, also coded as just the impact of border closures, rosters, the cost of that and what that means for the business. But that's more a near-term factor and flows La Nina and then the inflation that you rise to inflation is a problem for everybody, and I'm afraid you and I as a consumer, the companies as well, the supply chains are tight. Fuel cost is obviously going through fuel lately. $200, if you're my take on the weekend, which is the most ever stunned me, so that's an important input to mining companies as well as labour, and it's not just the cost unit cost of labour, which it's having more people on site to cover Covid shortages and running different rosters. And those factors have said that the last reporting season had some call warts on it. It wasn't perfect across the entire sector and goal was just the same category. But importantly, the balance sheets look very good. And what I mean by that most are a net cash position. Minimal debt and all companies are generating cash, so they're in a financially well-placed position going forward. Key messages The sector is healthy, free cash flow yields are good. Balance sheets are strong in most cases and still able to churn cash to shareholders in the form of dividends. And that suggests the sector which going into a market with a bit of price behind it, what I call a tailwind will start coming out of the valuation sheet colonial, starting up to a level which is more unrealistic now.

Felicity: [00:10:55] How many stocks within the ASX fall within your sector coverage and of those, how many? And now in your research coverage, please see. 

Peter O'Conner: [00:11:03] My research is extraordinarily broad, and I don't mean that to brag, but just to cover this space? Well, you've got to know the moving parts. It's a global industry. So to answer your question within my Bryce locally there are 30 companies, the top 30. So I think from BHP, the top 30 companies below that, they cover BHP, Rio Tinto, all the gold, major gold names and all the silos of nickel, copper energy, aluminium, mineral sands and some of the emerging battery style minerals as well. So that's why it's a local coach. But I also track 200 companies globally, not in deep detail, but I watch them. I got a watching brief on them. I get a lot of emails every day, but I'm just trying to understand what are the moving parts globally because what happens in an industry offshore is likely to happen here. If not, we drive, then they drive us. But I've also got a look at the macro and also the commodity environment. And in terms of macro Equity Mates, global economics, what's happening in the US, what's have Russia, what's happening in China, who's buying, who's selling and who's growing, who's not? And that feeds through to commodity prices in that rats. That's how I kind of digest all of that into the 30 companies I cover, but specifically my research Covid is 17 companies. And again, that's the top 17 out of that 30 list. So there's a lot of thought that goes into that 17 companies to get recommendations and views. 

Felicity: [00:12:16] Yeah, and I guess that's why your calls have been so good. I know you did have a big call with regards to iron ore as well over the last year, which has been interesting. 

Peter O'Conner: [00:12:26] Yeah. Look, it's sometimes it's really obvious because it's stand out and sometimes it's incredibly hard and there are moments where I get that incredible clarity. Iron ore was one of those 2019. There was a dam failure in Brazil, and I remember walking to a morning meeting saying that, you know, firstly, with all due respect to the loss of life and are very cognisant of that, but thinking about what does this mean? Beyond that, it was the starting point of a two year journey in iron ore. And that was, I'm saying, this is a big deal which is going to go substantially higher. So that's why that goal was last year. Gold and interest rates were the key play. And right now, this is quirky one with the energy space. Who would have thought energy would be doing as well as is, there are different factors behind that. We can talk about that, but that's been one of my key calls lately, as well as kind of counter cyclical. That's been the key call as well. 

Felicity: [00:13:14] That's it. The poison and the cure with regards to energy. Now a follow up question. Tell us the process and what's involved when you actually find a compelling business. How did you locate them? Walk us through your due diligence in evaluating if the business is a buy and one that you actually want to add to your research coverage. 

Peter O'Conner: [00:13:32] Okay, so look, I firstly on the value biased investor, a deep value biased investment classic. Our personal investors want to make money not to buy things cheap and sell them high. I understand the concept of momentum, and there are a lot of momentum traders out by professional and personal. I get that and I can do that, but my my strength is in value, so I look for value. I have a high level four point criteria to answer your question, and the full points are firstly, you've got to have a piece of dirt and that it's got to have something you could have. Gold was going to call what's going on. And that sounds really flippant. But we've all been spooked in the past by people who don't have actually doing anything in the ground. I talk about it, so I have to do it, have something in it. There's a value. Secondly, it's got to be in a location that's actually worthwhile. So it's going to be infrastructure. It's going to be a year later. It's going to be in a country with the right financial framework, so location becomes important. Thirdly, it's got to be able to be financed and again in the current world with low interest, that's been quite easy and equity looks to be quite willing to lend money. But it's got to be financial. And it's fine that I just make the note that 80 per cent of feasibility studies that are done in the metals and mining market do not work. Okay, I stress that 80 per cent do not work so. Cautionary note When you hear somebody come out with, Hey, we've got this great feasibility study, you've got to do a bit more digging. And the last one is management. And that's the really touchy feely one where you've got to have bit the history, you've got to do a bit of digging and you've got to find out, has it? Right to being somewhere else, what did the director do before? What's that management team whereby they what have they done and try and piece that together? And those four factors will start to filter out a lot of companies and then I get the valuation tools if I have to say, look. So my point there would be you've got to look as many variables as possible. Some investors like the price to earnings ratio. Some love the toy video. I know in the tech sector my colleagues talk about sales price to sales, which I find phenomenally, extraordinarily unusual to use. But they do. And in its dividend yield is free. Cash flow yield is the one I enjoy most of my value. When is net present value or the value of a company based on his future cash flows? Warren Buffett model You don't have cash, you don't really have anything out there. So I get to that. Then I start going off piece to start looking at, Okay, that's fine. I've probably filtered all this, but most people are probably doing the same. What is out there that catches my eye? So I try and steer off piece. That's why I picked up gold about two years ago, $30, which is fascinating because of interest rates, energy this year, because of where the fanatic was driving with ESG as one of the moving parts. And then I also I like to look when people aren't looking, so I'm usually looking. I have what I call a two dimensional valuation metrics, and I have value on one side of share price performance on the other axis. And it comes up with a matrix of where companies sit on the left hand corner is called the naughty corner, and I'm usually deep in the naughty corner looking for companies and then I know they're cheap, but then I'm just trying to justify what would make them turn. What tailwind do they need? And that's what I look for. To that, in a nutshell, is my valuation framework and how I identify opportunities. How do they get out? Companies are in the naughty corner for a reason. The marks are always right, but it's what will make them get out and terribly. People get super bearish at the bottom. And I miss those opportunities. That's where I'm a bit of a bottom dweller, I guess. 

Candice: [00:16:44] And so once you've gone through all of this due diligence and you've gone through your checklist in your four points, you've just gone through, you know? Walk us through, I guess, a typical day for you. How does it start? Are you sitting down with the important decision makers of these businesses that you do cover, I guess. Talk us through the story and it's almost like a marriage, right? You're really knowing these businesses like the back of your hand. 

Peter O'Conner: [00:17:07] You've got to live it and you've got to be switched on all the time. The key point I'd make is that this job has no closure. Your job, my job, everything we do changes every day and you can never sit there and leave their jobs with closure and those that have got like a finite goal. I never have that feeling like I've done everything because something will change tomorrow. The day I walk into work thinking I'm on top of it, something's going to happen, so I don't do that. And that's part of the thing I like about this job is that every day it's different on Ukraine. Covid interest rates, gold price, Federal Reserve comments on anything so closure so you don't even need closure. And a lot of people that would like that closure feel this is not the job. But what does that mean? So every time I come in, I need to get on top of what's happened overnight. So sadly, I usually sleep on my phone in the morning. I just check the news what's happened? So I cycle the works, that's my commute. So as I'm writing to work on, usually thinking about where I'm going to be looking that day. So when I get to work, I'm ready to go and I start doing a bit of a filter about what's happened overnight. Now that sounds like everybody does that. It's pretty obvious, but it's amazing what you can pick up if you draw what's out there and trying to join the dots up. So I get it early and I've got to be ready for morning meetings with two. I have one with our professional investors, our institutional team and what we call the proper morning meeting with our international partners team. And they're important parts of the day for me because I'm pitching ideas to you, which will then go out to the broader investment community and I have to try and come up with an idea. But I call it a proposition to act and I've got to deliver you a message which is succinct. It's hopefully in point form that you can pick it up. It's got a hook so I can get you on board, and it's able for you to translate to somebody else and those propositions, sometimes they just aren't there. Sometimes they're fantastic. So we have this roll off the tongue, so I spend a lot of time in the morning getting ready for that 90 minutes. I sometimes I get out there nine o'clock right, I'm just done. I'll be there for a coffee and just have a bit of a chill out. So you can't see me downstairs when my I just chilling out going through Facebook or something just to have a bit of a break. But then you've got to get into the Deep Dive and keep yourself up to date and a lot of times speaking time thinking about stuff. If you don't think you don't do, if you just get on a treadmill, all you do is keep spinning at the same idea. So I try to in that think times, you know, just joked about being downstairs, sitting on my iPod, watching Facebook, but I'm actually thinking about stuff. What's going on? Where do we go? Then I get back upstairs and it's contacting people, contacting companies, contacting contacts in industry, find out what's going on and every phone call I make, I get an idea and it could just be ring up a gold case, say, Hey, what's going on? What's up with? Told what you think that gold price? Invariably I get a snippet and that snippet. I get another one and then I call the round robin. Every phone call creates another idea, and then I'll contact investors, personal investors, professional investors and try and create that loop. And obviously, given the proposition strike, so they actually do act. That's part of our job. 

Felicity: [00:19:59] So a lot of research and connecting people, really connecting thoughts. Yeah. 

Peter O'Conner: [00:20:04] And then and then pulling all that together into a in the morning, maybe it's about presentation, so it's about delivering. And then we have to have a product, which is a written product. So we then have to do a research piece. And that's again, a lot of thought goes into that how to write that so that you can read it and you get that bang idea and then investigate, pick it up and decide. I get that. That's that's totally fine. On top of it, so it's I don't make it sound like it's hard. Actually, my job is not hard. My job is just there's a lot of it. So it just takes a lot of time to be on top of. 

Felicity: [00:20:35] It seems pretty hard to me. 

Peter O'Conner: [00:20:37] Well, I had another column I only do enough to not make mistakes, but to not make mistakes. You've got to do a lot of work, so it's not hard or just takes time.

Candice: [00:20:45] And I think a good analogy, we always say there's lots of noise. Everything is quite busy in the in the markets, in the news and the media scrolling on Facebook. And it's our job when you're in financial services and research in particular. Your role, Peter, is to really minimise and cancel out that noise and focus on what's actually important coming back to the business model, right? So that's that's a really good insight into your typical day, and we're just going to switch tactics ever so slightly. So in a moment, we're going to be hearing more thoughts by Rocky on on China and in particular the relationship here in Australia because we are a big commodities market. The rise of ESG investing and of course, what we're all about here took money to me, his top pick in the sector. Everyone loves a good stock pick, so stick around for the interesting, compelling insights into that particular business. Now, before we hear anything further from Rocky, we're just going to take a quick break to hear from our sponsors. So, Rocky, I'm keen to hear your thoughts on China and Australia. You know, we're quite blessed here in Australia with a right with a wide range of natural resources. But where do you see this is going to be a big question? Where do you see the relationship going in the next three, five, 10 years with China? 

Peter O'Conner: [00:21:59] The short answer is the relationship is strained. That's the only way I could put it. It's not a relation, which I think is is doing particularly well. It manages and I think the corporates are doing a better job at managing the relationship than perhaps the political top down approach is. So that becomes a bit of a muddle. The push about is important, and China is a huge buyer of our products and we are unfortunately a quarry. You would have heard that Australia is a coy phrase. It used to be Japan and Korea and Taiwan, and about 2003 we became the quarry for China, and that's fine. But we've become quite dependent on that under the terms of trade trade partners, et cetera. So what you see at the moment and it's not just happening with us, but it's happy with almost every country and security of supply and looking at your counterpart. So there's going to be a very big move where possible to start diverging or differentiating your supply. US supply channels, for example, rare earths commodities and some of the commodities, the willingness for people to look for countries other than China will be important. So Australia's got a chance now to break out and do things differently. But the baseload commodities, coal, iron ore, China still the biggest market. So we need to have a relationship with China, which works. I said strange, but it needs to be more workable. Will it be perfect? Probably never. But it just needs to be a working relationship that can see trade occur and Candace continue because we sell to the biggest supplier of iron ore to China. That's a big part of our terms of trade. And can we sell it somewhere else? Probably not. So it's important that from a political perspective, we line up with corporates. We try and manage that so that China's key, I don't think it's negative, but it's certainly not perfect, either.

Candice: [00:23:38] Here in Australia, it's very similar to a lot of Commonwealth countries. We politically align ourselves with the US and the UK, but financially we're down here in the corner of the of the globe where we're Australasia, right? So you've nailed on the head. We can't we can't ignore China, but we need to make it a working relationship on both sides, correct? And possibly the key is the renewable energy market, right? There's an opportunity there. 

Peter O'Conner: [00:24:02] There is that the you see that emerging now with the lithium market, the graphite market and particularly the rare earth market. And China controls 80 per cent of rare earths. And that's something which I think every country the world's going. That's probably not a good number. We need to reduce that. So. And Australia is in a position where we could supply a lot more. And with government support recently, we are on the cusp of perhaps potentially setting up an industry which is not just a quarry, which typically would have been. We may actually be going further downstream, and I think that's important. So we've not been known for our industrial capacity beyond mining. So to do that, it's going to be not without risk, but it's certainly important it's where we're heading towards 

Felicity: [00:24:38] now, given the rise of ESG investing, alternative and green commodities and the renewable energy market. When do you think, if ever, we'll actually see the end to traditional fossil fuel burning businesses? You know, as a research analyst in resources, how do you actually navigate the ESG investment space? 

Peter O'Conner: [00:24:56] So east is probably that I should mention that, right? In fact, it's one of the key curveballs as well when I talk about Ukraine and Covid and inflation. So that's clearly in the background. Ironically, in the last few months, that's changed quite a lot. So let me set the framework for this discussion. So on the fossil fuels, they are on a pathway to exploration and I call it the slippery slope, whether it's oil, gas or coal. There's a journey which is finite, the angle or the speed at which that goes. That's debateable. A year ago, I would have said it was a lot longer, but the speed of change and the speed of commitment to ESG investing, but also the technology suggests that that is going to be quicker. I would have said a year ago that that curve or that trend line for fossil fuels would have been multi decades 20, 30 40. Now it's looking less one way to frame that it will likely last as a minimum the life of the duration of the life of power stations across Asia and across Europe. So, for example, as a bunch of power stations be Taiwan, Japan, Korea, which will run for the next 25 years as a line in the sand, that's probably a starting point. So other peripheral products and fossil fuels, they'll decline sooner as other power stations decline. But that's probably the longevity. South Australia is a supplier of fossil fuels will still be in that game for a while, but it's not going to be a one or two years. It's definitely decades, but it's on. It's not three or four decades, which I would have thought previously. But importantly, within that we do offer the best quality coal in the world, which is to a lot of people. That doesn't mean a lot of that. It probably doesn't. But in the near term, we need an energy supply. That's not a bad outcome. But the long energy question is that with China and India being the two fossil fuel burners in the world, it's really reliant upon them and. How quickly they do this in China burns. The number is staggering nearly four billion tons of coal per year. That's disturbing. Four billion. So it's really in their hands, not ours, but the VA given us we're on a slight slippery slope, probably two or three decades away. They could hasten it and be quicker in the short term. And again, the speed of technology change is extraordinarily this pace. So on giving disruption in other sectors. You know, it's likely to be quicker. So we'll all be driving the truck vehicles quicker than you think. 

Felicity: [00:27:07] I hope so. It's part of a situation with the price of petrol now. It makes you want to switch earlier, doesn't it, 

Peter O'Conner: [00:27:13] just as long as you don't plug that electric vehicle into your power? Well, I think you're getting a clean, clean air because, you know, there are a bunch of people who think they are just getting from the Hunter Valley coal fired power station, so that needs to change as well. 

Felicity: [00:27:23] Yeah, exactly. So it's not as easy as just getting a car, really, is it? 

Peter O'Conner: [00:27:27] It's part of it, but not all of it. 

Candice: [00:27:28] That's really interesting insight because last week we caught up with Tim Samura, the chairman of Hyperion, right? And he was saying very similar to what you're saying, Rocky. We can't just turn off burning fossil fuels tomorrow because a lot of markets and economies heavily rely on it. And I think the Australian opportunity here and hopefully our politics and the private sector and everyone jumps on board is the renewable play right? You still need rare earth materials, metals and mining of some degree to do the place. So that's where I'm going to sort of switch it back to you and ask you that question. If you let's say I got a million bucks and I'm I want to invest only in the Australian market, I guess pitch to me why it's important we still got two or three decades, like you saying, to not ignore the metals mining sector. Why do you think it's still important? Is it that opportunity and the renewable supply chain? Do you think, 

Peter O'Conner: [00:28:19] oh yes, let's turn that question down. So metals and mining is going to be here forever? OK. The segment, which is fossil fuels, that's got a finite life, so let's just pass that off to the side in looking at that space, and I talked about my my video, I should frame it before that fair value of the company. All the companies in that sector were trading deep discounts to fair value a few months ago. The prices of commodities were low and all of the strains recently as senior commodity prices move higher. So that tailwind they needed to get to the naughty corner. They all got it. So they're all trading higher. So that's that's Covid off and say you're on a slippery slope, but they're going to try it. So it's going to be a cycle down that slippery slope, if I could put it that way. So we were at a low three months ago. We're getting to us to a high at the moment. There will be more journeys on the way. So if you're a trader or a momentum player, you know, lots of opportunities are next 30 years just to play that opportunity. But if you're a value investor, they'll be less obvious. But on metals and mining, we need that. And this is where I have debated with my own kids about your iPhone. What does it contain? It contains a bunch of metals which you need to get from the ground your car. It's got a bit of steel and aluminium. It's got some organisms and manganese. It's got a bunch of stuff. Know we're all on the internet now. How does internet work, copper? What do we need? We need copper mines, nickel. I'm guaranteeing plenty of kitchens. It'd be stainless steel products in there and you get stainless steel nickel. So the key word is metals. So the key point metals mining will be forever, and I make that thought. I make the point lightly, but it needs to be sustainable. And that's the key shift is that companies are learning they need to be more sustainable, the way they explore, the way they mined, the way they return mining properties back to the original state and how we try and reuse commodities as well. So there's far more effort put into that. So that is important going forward. And companies have really as part of their ESG framework, they're embracing that far more so the metals mining sector critical from iron ore to make steel aluminium to make gains in the auto sector copy go into the internet. It's needed. And I talk about the sector maybe forever, and I meant that. But I want to add a really important point. I said this at the very start and I call it the great rotation, and that is so important right now. So on the technology for this panel, everything up, it's not. Mine is called technology. The long duration hype stocks. Those stocks have been the place to be for 10 years. Why it's been easy money. And over the last 10 years, that group of stocks has outperformed metals and mining group globally by about 300 per cent. So a 10 year period of outperformance, 300 per cent easy money free liquidity. Last time I did something as that extreme was back in '97 through 2001 ahead of the technology boom. And that outperformance was about 65 per cent over three years. So this period and there'll be people in the market today who have never seen anything other than technology goes up, mining goes down. So I want to make that really clear. So the SEC is here and it's been here. It's been a driving part of Australia as a nation is important bedrock of how we grow globally. So it's going to be here. But from a valuation perspective, this is rotation so high PE long duration stocks are getting squeezed and it's been under way for a few months. And the so-called Rust Belt commodity companies, which nobody like, they're starting to get some attention want because they actually make money, they generate cash. The free cash flow is actually real and they're on PE multiples that people go, Wow, you're talking about 10 and we buy stocks on 30 times. That's where we are. And we think that from 2015 post the whole China boom, the resource market had a low back in 2015, so we've been on a seven year journey already in absolute terms. Now got this relative trade on top of that as well. So the SEC is looking for place from a whole bunch of external factors as well. 

Felicity: [00:31:50] It's very important to have the right asset allocation diversification within your portfolio. So I think it is good for listeners to not just have a full portfolio of tech, right, and actually do have your metals in mining in there. We are all about giving our investors and listeners compelling investable ideas which display solid growth outlooks for the years to come. So within your coverage, what would be your number one stock pick right now and why 

Peter O'Conner: [00:32:15] it's going to be BHP? But I'll give you some qualifiers for that. So these are important factors about any stock you like. Never buy resource stocks for dividend yield. You probably heard me say that many, many meetings. Why? Because it's a cyclical sector and usually very high dividend yields are a warning sign that the cycle is about to turn out. That's the first point I'd make. And next, you talked about a multi-year journey and something I should mention upfront as well. I like buying things for the long term. I don't trade, so I want to buy that opportunity. But my sector, even with all that glowing commentary, is going about the great rotation. It's still a cyclical sector. It follows a commodity and economic cycle. Economic cycles don't go for decades. I go for three five years. So within your question is this issue of cyclicality and some of the stocks I could have talked about will go up, but they'll probably come back down again as well. So I talked earlier about the fossil fuel space that stocks have had this incredible run loss through six months, the likely rollover. So I think BHP because it's got this incredibly exciting story. Happy right now. But the right here, right now, it's got this very nuanced special situation where it's about to divest its petroleum business and it's going to be this windfall. For BHP investors, that's the first I say right here right now you need to be in BHP as we speak. Secondly, they need term. They're enjoying the tailwinds of all their PE group economic cycles, going to say that they have copper, they have iron ore, they have coal unless prices are higher. The drilling an enormous amount of cash, that's quite a tick that I can take every stock and sector for the same reason. Then if I look at where do they get longer term, they've actually got a great and it's not just a cyclical tale of growth. They actually grow over time at pretty much the rate of global domestic production. And that's an important number. So any company anywhere in the world can grow for multiple decades at equal to the gross domestic product of the western world. That's a big deal. And they do. So it's not a sexy, it's in the short term stuff. Some companies I could put you would be, you know, three times four times the GDP growth globally, but they'll deliver that over the long term. So they've got the tail, they've got the very near term attractive factor, which I'll talk a little bit more to and I've got a meeting soon, which is fine as well. And I go to the comments earlier about financial health. Balance sheet, tick management. Excellent management. New managing director started two years ago. Don't have steady job and he's turning the company. What I call a Monday company never heard the term about a Friday company. Everybody wants to get the hell out of there because they hate working there for a Monday company. Everybody's kind of waiting to be back at work like a Sean Pyne, as we just saw. So the whole weekend waiting to get back to work on 

Felicity: [00:34:43] Monday has become one. 

Peter O'Conner: [00:34:45] BHP has become a Monday company and I, the CEO, knows I make that comment and actually use it himself. So that's an important cultural change. He's actually leveraging the staff and is no better or more powerful factor in the company than not capital, not the equipment's people. So he's embracing that. So let me get back to it now. So BP is about to sell its petroleum business. They've had that since the 60s, so this is a big change. There's delay selling it by way of a demerger to Woodside Petroleum, another Australian company, and that transaction should run over the next two or three months. So basically, selling about 10 per cent of what is current business is a combined in terms of earnings. There's a pre-arranged formula for how to work out the value of that company, which is agreed last year between Woodside. BHP are subject to shareholder vote and Woodside shareholders on May 19 and completion of this deal in early June. Shell of the BJP will get a windfall return. So how does that work? BHP sells a business stake in Cash and Woodside. They get shares in Woodside. The Australian Tax Office said the BSP will allow you to give those shares to your shareholders as a dividend. So in early June, BHP shareholders are going to receive a dividend from BHP in the form of Woodside shares, but it also had franking attached as an important factor for professional and personal investors. So private investors so on. The yield on that return in June is somewhere in the mid-teens, some sort of 13, 14, 15 percent. Now I know you've said to Peter, you just told us, don't buy resource share for dividend yield and you don't. This is such a nuanced one off event and nobody's talking about it. So it's hard to put it one that not only is this an extraordinary financial outcome nobody is talking about, my professional peers are not on board this story. Overseas investors aren't even thinking about it, so it's not yet priced in. And that's what I thought about going off piste. This is one of those off piste ideas people aren't talking about. I'm not thinking about the knock on off piste yet, so it's an opportunity in terms of income. It's an opportunity in terms of one off trade and the background story of BHP. I'm happy to be with there as well. So on if I had to do a buy and hold seat in the drawer for five years and not worry about it, I'm happy with that one. There are other very attractive stocks, but that's a good bet. 

Felicity: [00:36:48] Candace actually pitched BHP in the autumn, had a couple of episodes back and it was around $38. 

Candice: [00:36:55] Yeah, 38, 38, 75. And that's the only one in autopay at the moment, Peter, which is actually up 

Felicity: [00:37:02] CrowdStrike should be up, right? Or is that down? 

Candice: [00:37:04] Still, we pretty much long tech at the moment. Apart from BHP, I agree with your sentiment. So just I guess to wrap up, we're going to do a quick speed round here. First question. You mentioned good point. Don't buy BHP just for the dividend, but what do we see in the next three years? Dividend can normalising to be, you know, five per cent, not these double digits. 

Peter O'Conner: [00:37:24] Yeah, a mining company like BP three to five per cent would be a typical over the long cycle dividend expectation. And that's just been a completely realistic yeah. 

Candice: [00:37:33] And that's still a great that's still a great yield 

Peter O'Conner: [00:37:35] and full fully full franking as well. So you cover your tax,

Candice: [00:37:38] and I'm super keen to know how did you get the nickname Rocky? Is it just your expertise? 

Peter O'Conner: [00:37:45] Is there a story behind that goes a long, long way that he loves rock? There is, actually. It started back in Macquarie Bank over 30 years ago, and I was the only person Macquarie Bank that had any mining knowledge, and they started calling me a rock hard rock dr rocket to rock this rock, though over time it just got shortened. So it became an internal quarry bank and then it just went broader. And CEO's now answer my questions on conference calls and say, How really 

Candice: [00:38:08] did your family to your family use it as well? 

Peter O'Conner: [00:38:11] It's funny. My family knows when somebody says Hi high in Industry Street, I know it's somebody, so it kind of helps to look at the shoulder so they know it, but they don't use it. 

Felicity: [00:38:20] That's great. Now we have one. Very, last, very, very important question. I think I know what the answer is going to be. But coffee, tea or tequila? Well, we don't know why he needs someone to 

Candice: [00:38:39] connect the metaverse, say 

Peter O'Conner: [00:38:41] if you had two centuries, it might have been hard to call that it's not a 

Felicity: [00:38:45] cup of coffee in the morning. Shiraz at night. That's a good answer. 

Peter O'Conner: [00:38:48] Yeah, that rounds me. Yes, that's the bookends of the day. 

Felicity: [00:38:52] Well, thank you so much for your time. We really appreciate it, and I know our listeners will as well. 

Peter O'Conner: [00:38:57] Thanks, Candice. Thanks for allowing me to be part of your programme.

Felicity: [00:39:01] What a great chat. He was so interesting, there were amazing insights that one BHP is a good bye. Thank you all to Peter and Candice for pitching it. When you did that, metals and materials are used in everything and they're here to stay. 

Candice: [00:39:15] Think long term, guys. You know, as Rocky was saying, some of these trades are decades long, so it's it's good to know your business. Stick to conviction. He mentioned those four checkpoints, and it's just about playing the long game. And then finally, you know, we're in this really unique position in Australia. We do have to manage that working relationship with China. And he's not a bear, which is fantastic to hear. You know, we need China as much as they need us. And I think Australia is uniquely positioned, hopefully, to leverage off their renewable energy market more and expand out on the great commodities that we do have here in the abundance in Australia. 

Felicity: [00:39:55] Another point that we really, really enjoyed is the fact that he actually showed how he picks a company that he wants to invest in. So I know a lot of you ask us about that. 

Candice: [00:40:03] So we hope you enjoyed today's episode now. Before we sign off, please remember, although Phil, as you know, our financial advisors, at Shaw & Partners, as always, today's discussion is not constituted as personal financial advice. You should go out there and seek your own professional financial advice by looking up our financial advisor. And as always, you know, we're keen to hear your thoughts and feedback. So send us through your queries, guys. 

Felicity: [00:40:28] Now you can also search for financial advisors on the Money Smart website. Make sure you follow us on at Talk Money to Me podcast for daily market updates. And if you enjoyed this podcast, please give us a review on Apple Podcasts, Spotify five stars. And remember, if you have any questions or want to ask us any questions, please contact us at timt pm at Equity Mates dot com. We'll be back next week. Until next time, see you.