Three stocks that give targeted exposure to a decarbonised world
Decarbonisation is one of the great themes of the current investment market; certainly, it is a buzzword no-one can afford not to be heard chanting. While I think there are lots of potential problems inherent in the path to a “decarbonised,” or “net-zero” economy, it’s clear that there is a huge tailwind at play that any investor has to take quite seriously.
This year, I’ve looked at the ASX’s top uranium stocks; its best rare earths stocks; electric vehicle (EV) stocks; clean energy materials stocks to ride the nickel boom; star copper stocks; and stocks riding the emerging hydrogen revolution. All of these stocks effectively tap into the decarbonisation theme: but here are three more stocks that give you targeted exposure.
1. Calix (CXL, $5.85)
Market capitalisation: $937 million
12-month total return: 617.8%
3-year total return: 98.3% a year
FY21 Yield: no dividend paid
Analysts’ consensus target price: $6.50 (Thomson Reuters)
Victoria-based chemical technology company Calix is emerging as a star decarbonisation stock – quite literally, in some of its business areas. Although it is not yet a profitable company, Calix has risen sevenfold in 12 months; it started 2021 at $1.03.
For most of its listed life (since July 2018, when it was floated at 53 cents) Calix has been known as a wastewater treatment specialist, with its highly active magnesium-oxide-based products that are used in industrial and municipal wastewater treatment, crop protection, water conditioning for use in aquaculture, sewer network improvement, as a bio-treater and biogas efficiency enhancement.
The products are made using Calix’s core technology platform, the Calix Flash Calciner (CFC), which the company describes as a “reinvention of the kiln process,” at its world‑first, patented “kiln” at Bacchus Marsh, Victoria, from magnesium carbonate that Calix mines near Leigh Creek in South Australia. The process produces what Calix describes as “mineral honeycomb,” which results in porous “nano-active” materials with a very high surface area, capable of trapping substances. Calix sells products in Australia, Europe, North America and South-East Asia, with its North American expansion kick-started with the November 2019 acquisition of wastewater treatment chemicals company Inland Environmental Resources.
More recently, investors have focused on the decarbonisation potential of the company’s LEILAC (low-emissions-intensity lime and cement) business, which was an advanced R&D project when Calix floated in 2018. LEILAC can capture and sequester the carbon dioxide emitted in the production of lime and cement, which is a potentially lucrative situation given that cement manufacturing accounts for 8% of global carbon emissions, producing more than 4 billion tonnes of CO2 a year.
In June, Calix completed a two-year pilot test of its LEILAC kiln at a plant in Belgium owned by German giant Heidelberg Cement. Heidelberg Cement and the EU have agreed to fund a scaled-up trial at one of the company’s plants in Germany. Based on the success of the pilot test, US-based specialist decarbonisation investor Carbon Direct Capital Management invested €15 million ($23.7 million) last month to buy a 7% stake in LEILAC. Calix retains the rest and has struck a licence agreement under which it will retain 30% of royalties earned by LEILAC from deployment of the technology, regardless of its equity stake.
Calix also has several other interesting irons in the fire. It is using its new BATMn reactor in Victoria to develop high-performance, affordable, and more recyclable lithium-ion hybrid batteries, based on nano-active electrode material; it is working with Sweden’s SaltX Technology to pilot a unique salt-based energy storage system; it has signed a memorandum of understanding with lithium producer Pilbara Minerals (ASX: PLS) to develop a lithium chemicals processing plant for a low-emissions lithium salt for use in lithium batteries; and it has announced memorandum of understandings (MOUs) with British building materials company Tarmac for a lime calciner project in the UK, as well as Austrian refractory products company RHI Magnesita to develop a CFC for use in the production of refractory materials, enabling CO2 separation to either be stored or used.
When it comes to decarbonisation, few companies are as front-line as Calix. It has rocketed in price this year, but the analysts’ consensus valuation collated by Thomson Reuters (three analysts) still sees a bit of scope for the share price to grow.
2. Tribeca Global Natural Resources (TGF, $2.31)
Market capitalisation: $142 million
12-month total return: 95.8%
3-year total return: n/a (listed 12 October 2018)
FY21 Yield: no dividend paid
Analysts’ consensus target price: no estimates available
The management team behind the listed investment company (LIC) Tribeca Global Natural Resources Fund has pivoted the portfolio toward decarbonisation, particularly aiming at the alternative energy sources that Tribeca believes will “continue to drive a paradigm shift” in demand for commodities and energy sources needed to meet global targets and expectations. Tribeca sees commodities such as copper, lithium, uranium – the rare earths – and nickel will be key beneficiaries of decarbonisation; uranium for the inevitable boost to nuclear energy allowing for the retirement of fossil-fuel power generation; and the other commodities for their uses in batteries and renewable energy. Tribeca sees the nickel sector as the most attractive out of all the commodities at the moment, with more upside at present than most of the other battery materials.
The fund’s six largest high-conviction holdings at present are:
- Canadian miner Teck Resources (copper)
- Anglo-Swiss commodity company Glencore (green metals, copper, nickel and cobalt)
- Hong Kong-listed stock Chalco (Aluminium Company of China)
- Canadian industrial materials producer Neo Performance Materials (a unique downstream rare earth processing and magnetic materials manufacturing business)
- US stock Energy Fuels (the largest producer of uranium in the US, from the only uranium and vanadium processing facility in the US, which can also process imported rare earth elements [REE]), and
- The ASX-listed DDH1, a mining services business with the largest drilling fleet in Australia.
This year, the Tribeca Global Natural Resources Fund has built a portfolio of “carbon credits,” that amounts to about 7.5% of its portfolio. A carbon credit is a tradeable unit representing the reduction or removal of one tonne of carbon dioxide equivalent (CO2e) from the atmosphere. Carbon credits enable a business, government or individual to pay someone else to cut or remove a given quantity of greenhouse gases from the atmosphere: that can be taken in the form of projects such as developing countries that reduce deforestation for firewood or financing wind turbines to displace fossil fuels. It can also come as credit for restoring or preserving forest that takes in carbon from the atmosphere. When an individual or company offsets their emissions, the equivalent volume of credits is “retired” from the market.
Some decarbonisation purists don’t like carbon credits, because they allow CO2 to be emitted; but in the real world, which has to keep operating, there are sectors where the emissions are very difficult to abate – such as oil, aviation, steel and cement – and carbon credits are anticipated to be integral to meet emission-reduction goals. Tribeca describes carbon credits as “a compelling, emerging asset class, which will grow exponentially, by 175 times over coming decades, according to Goldman Sachs estimates”. The Tribeca Global Natural Resources Fund stands out as a potential way to play this theme, as well as decarbonisation.
3. BetaShares Climate Change Innovation ETF (ERTH, $13.32)
Market capitalisation: $138.2 million
12-month total return: launched 11 March 2021
FY21 Yield: 0.07% for half-year to June 2021
Analysts’ consensus target price: no estimates available
ERTH aims to track (before fees and expenses) the performance of an index, the Solactive Climate Change and Environmental Opportunities Index, that comprises a portfolio of up to 100 leading global companies that earn at least 50% of their revenues from products and services that help to address climate change and other environmental problems, through the reduction or avoidance of CO2 emissions. This covers clean energy providers, along with leading companies tackling green transport, waste management, sustainable product development, and improved energy efficiency and storage.
At the moment, the top 10 holdings are:
- Tesla (5.3%) – US-based electric vehicle maker
- Infineon Technologies (4.5%) – German semiconductor manufacturer
- Ecolab Inc. – US-based water treatment, purification and cleaning company
- Eaton Corp plc (4.4%) – US-based (but Irish-domiciled) multinational power management company
- DocuSign Inc. (3.9%) – US company that offers the world’s number one e-signature solution as part of the DocuSign Agreement Cloud
- Trane Technologies plc (3.9%) – US-based (but Irish-domiciled) diversified industrial manufacturing company
- Vestas Wind Systems (3.7%) – Danish manufacturer, seller, installer, and servicer of wind turbines
- Compagnie de Saint-Gobain (3.6%) – French company that designs, makes and distributes materials and solutions for the construction, mobility, healthcare and other industrial application markets.
- American Water Works Co. Inc. (3.4%) – US water utility company that operates in the US and Canada
- NIO Inc. (3.4%) – Shanghai-based Chinese electric vehicle maker
47.1% of the stocks are from the US, with China (9.7%) and Germany (7.6%) the next largest sources.
The fund costs 0.65% a year in management fees. ERTH is not having a great first year – its annualised performance so far is running at 6.7% a year, versus 7.1% a year for its index – but longer-term, if the decarbonisation theme is as strong as most people believe it is, this ETF should do well.
All prices and analysis at 10 October 2021. This information was produced by Switzer Financial Group Pty Ltd (ABN 24 112 294 649), which is an Australian Financial Services Licensee (Licence No. 286 531This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. This article does not reflect the views of WealthHub Securities Limited.