Read the previous week’s Investment matters.
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With First Samuel’s 2024 CIO Events fast approaching, we were interested to see how the two topics discussed last year, GLP drugs (i.e. weight loss drugs) and Generative AI, had progressed over the past 12 months.
The Market
GLP drugs
Readers with only a passing interest in the news or popular culture will have seen considerable increases in mentions of “skinny drugs” such as Ozempic and Mounjaro. In the background, critical research continues to be released that points to significant increases in long-term health outcomes for those who take the medications.
Research into the impact of GLP1 drugs and their 2nd and 3rd generation counterparts continues to look for and often find wide-ranging side benefits. This is regardless of whether the patient has diabetes – the original target for this type of drug.
For instance, consider a cardiovascular side benefit:
“In the SELECT cardiovascular outcomes trial, semaglutide showed a 20% reduction in major adverse cardiovascular events in 17,604 adults with preexisting cardiovascular disease, overweight or obesity, without diabetes”
(Nature Medicine May 2024)
The combination of…
- heightened public interest;
- the debate surrounding how the drugs will be funded;
- a comprehensive research agenda; and
- still expanding use-cases
… means the GLP1 drugs will continue to guide equity markets.
We expect new trial results to impact how the market views addiction and overall longevity in the next 12-18 months.
Generative AI
Generative AI and tools such as ChatGPT and Bard (now Google Gemini) were the second topic of the 2023 CIO Events.
The use of these tools has continued to multiply. According to a paper published by the National Bureau of Economic Research, since the debut of generative AI less than two years ago, a broad range of professions have begun using the tools. And 28% of workers now use the technology on the job.
Despite the use-cases involving Woolworths sending us better marketing and using ChatGPT tools to write children’s homework tasks, we remain sceptical about how the tools can be used in daily business to increase productivity.
When reading the recent McKinsey Technology Trends Outlook 2024, I saw the following chart, which encapsulates the nuance of balancing AI’s potential and existing capacity.
Bear with me whilst I explain the chart and the context.
The McKinsey report covers a wide range of technologies, not just AI. McKinsey sought to map four distinct features for each technology in one chart, and I think it brilliantly succeeded.
The technology’s interest level is shown across the X-axis (the bottom of the chart). Interest in Electrification and Renewables is the highest (furthest to the right), and interest in Generative AI is also very high.
Up the Y=-axis (the height of the chart) is the level of innovation required and how complex the technology task is. This score is derived from the number of patents lodged and the level of pure research that is currently being applied. The highest score is for Applied AI, and the lowest for technologies, including Robotics and Quantum tech.
The size of the circle captures the amount of equity investment currently being deployed in solutions arising from the technology.
The circle’s colour (the darker, the more advanced) indicates where the technology lies on the adoption curve.
Comparing Generative AI to Applied AI using the four metrics
Using the four metrics, we can see the challenge of using Applied AI versus the current tools available to all, such as Chat GPT. Whilst the interest in Generative AI is currently higher than in Applied AI (X-axis), the investment in research and innovation is dramatically higher in Applied AI.
Based on the number of new patents issued in this area and the amount of research undertaken (Y-Axis), it is much harder to achieve results in applied AI than in generative AI.
The amount of equity investment (circle size) is already more significant in Applied AI. Hence, the investor community appears to understand that the most important opportunity is to develop new ways to use AI tools in real-world applications.
The adoption scale of Applied AI (darker colours) is now also reaching towards being fully scaled, but it still isn’t there. Applied AI reached the fully scaled level despite investment, innovation, and interest.
If McKinsey is right, the next two years may be fruitful in Applied AI
To return to the question of progress since last year’s CIO presentation, we sense the McKinsey analysis is correct. While Generative AI is interesting, the big prize is in Applied AI at the firm level.
However, fully scaled use cases in Applied AI are not yet available. Examples of possible Applied AI uses include automated generation of process documents, role descriptions, project planning worklists and low-touch legal documentation.
When these fully scaled tools, which have generated patents and been the beneficiaries of the research and equity funding, arrive, we expect the investment markets to take note across a range of existing businesses.
Aurelia Metals (AMI) – Results presentation and interesting regional development this week
This week’s news – corporate activity in Cobar
On Wednesday a surprise capital raise occurred. It was by one of the other significant miners in Cobar and a small First Samuel client portfolio position, Metals Acquisition Corporation (MAC). MAC owns the CSA Mine at Cobar, one of Australia’s highest-grade and deepest copper mines.
First Samuel believes that the combination of the two companies, Aurelia and MAC, makes sense in the long run due to their overlapping development potential and the opportunity to share resources at a local Cobar level. Both companies are already working on regional cooperation regardless of corporate activity.
In 2019, Aurelia Metals offered the previous owner of the CSA mine, Glencore, almost $600m for the CSA mine, but the parties ultimately failed to sign an agreement. With Aurelia now trading at a discount to underlying value and with a lazy balance sheet, the opportunity for MAC to lead any tie-up is clear.
We were interested in MAC informing the market that the “proceeds (from the capital raise) will be used to optimise MAC’s balance sheet and de-lever ……. while also providing additional flexibility to pursue strategic inorganic growth opportunities.”
First Samuel’s Australian Shares sub-portfolios clients participated in the MAC equity raise.
Aurelia FY24 results and current expectations
First Samuel View: Positive
Market reaction since result update: +13% (i.e. from 28th August)
Aurelia Metals presented its yearly financial results at the end of August. The results were in-line with market expectations and the guidance for FY-25 was slightly better than we expected.
- FY-25 gold production guidance of 40-50koz was 28% stronger than key analysts’ expectations and;
- FY-25 group operating cost guidance of A$185-220m was 12% lower, driven by lower-than-expected operating costs at the main Peak mine.
This combination of higher production and lower costs sets up an already strong balance sheet to maintain a net cash position through the completion of current projects. The optionality a strong balance sheet creates for the company in the next 18 months will be critical as it navigates expansion and exploration options across the portfolio.
As a reminder, Aurelia Metals (AMI) is a gold and base metal-focused miner with operations in and around the Cobar Basin of New South Wales. AMI has one principal operating underground mines: Peak and a newly commissioned nearby project called Federation. Both Peak and Federation are polymetallic mines, and in addition to gold, they produce various other precious and base metals.
The stability generated by the new management team and CEO, Brian Quinn, since May 2023 has seen a range of successfully met targets and operational deadlines. These have, in turn, been rewarded by a higher share price and solid prospects for additional value creation.
A capital raise in 2023 allowed clients to add to the position at levels around 10c per share. The proceeds from the capital raise have funded the completion of the Federation Project and positioned the company with a solid balance sheet (net cash) leading into FY-25.
Source: asx.com.au
On 11 September 2024, the Federation Mine was officially opened. CEO Bryan Quinn noted at the opening, “Our exploration team discovered the high-grade Federation deposit in April 2019. Recognising the significance of the discovery, we moved quickly to accelerate exploration and infill drilling, in conjunction with project evaluation and permitting applications, to enable production from this exceptional mineral deposit.”
As the Federation project ramps up, the breadth and diversity of the overall portfolio of Aurelia assets become clearer, as shown in the chart below. The chart shows the increasing value of the projected copper revenues. First Samuel believes that the potential to expand copper production and maintain a higher level of gold production is underappreciated, with a range of development options at the Peak mine yet to be included in market forecasts.
Clients may recall that our portfolio has “baskets of stocks” around critical themes or products, including a copper basket and a gold basket. As we construct our portfolio, we consider Aurelia Metals to be split into each of these baskets.
With the ASX having few growth options in the copper space, the combination of Aurelia Metals and Metals Acquisition would create a more meaningful copper-exposed, Australian-domiciled investment.
Mineral diversity (polymetallic) is clear in revenue projections
Source: Aurelia Metals, Macquarie Research Sept 2024
We see significant value in the Aurelia share price (our valuation is closer to 30c) despite the strong growth in the past 18 months. A relatively simple way to appreciate the value is by looking at the below chart. This maps expected cash balances (without dividends) through time (in this case to 2030) and compares this balance to the existing share price (end August).
Forecast cash flows for Aurelia versus current market capitalisation
Source: Aurelia Metals, Macquarie Research Sept 2024
On the current trajectory, the total value of the existing share price will be repaid in 2029, even though, on current plans alone, the Federation Mine will only be in the 4th year of a current 8-9-year mine-life. The company’s primary asset, Peak, has operated for more than 32 years, and with the inclusion of the Great Cobar project (first mined in 1870), it is expected to operate for many more years.
‘What now’ for the position – First Samuel’s view
We see ongoing value in Aurelia Metals and are comfortable maintaining a long-term position. Federation’s ramp-up provides a further opportunity for the company to build positive momentum, and the option value of additional growth projects and new exploration targets is compelling.
The possibility of creating a regional force through a combination with Metals Acquisition Corporation would be a bonus.
What they said
AMI (Aurelia) has pivoted to become a base metals focussed producer; it trades on low EV/EBITDA multiples and has a strong balance sheet (net cash of A$108.6m) which differentiates it to peers..
Adam Baker, Macquarie Group Research
The information in this article is of a general nature and does not take into consideration your personal objectives, financial situation or needs. Before acting on any of this information, you should consider whether it is appropriate for your personal circumstances and seek personal financial advice.