ASX mining shares can be compelling investment opportunities during weak points in their commodity cycles.
It's common for resources like iron and copper to go through cycles as supply and demand levels change over time. And as the lowest share prices usually appear when economic conditions seem the worst, I think it can take a contrarian attitude to be successful with mining stocks.
Fund manager L1 Capital invests in businesses it thinks the market is undervaluing too much. In its latest monthly update, the fund manager discussed two ASX mining shares it thinks are opportunities.
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Mineral Resources Ltd (ASX: MIN)
Mineral Resources describes itself as a leading diversified resources company with extensive operations in lithium, iron ore, energy and mining services in Western Australia.
L1 noted Mineral Resources shares rose 30% in September after China announced stimulus measures, leading to the iron ore price rising 8% over the month. Last month also saw the completion of the A$1.3 billion Onslow Haul Road sale, giving the company extra funding to help pay for its elevated capital spending.
The fund manager thinks the ASX mining share is approaching a "favourable inflection point", with its Onslow Iron Ore project starting a ramp-up towards positive cash flow from mid-FY25.
Mining services volumes are also expected to materially increase over the next year and a half.
L1 believes the mining services volumes alone should support operating profit (EBITDA) generation of around $1 billion. This is underpinned by long-life contracts, which will provide a "strong earnings base."
The fund manager added that Mineral Resources had "significant volume optionality" to produce more than 1,000kt of spodumene concentrate (raw lithium) when market conditions improve.
In conclusion, L1 had this to say:
We continue to believe that each of the company's core segments should see material improvement from current levels over the medium-term.
Nexgen Energy (Canada) CDI (ASX: NXG)
The other stock L1 favours is Nexgen, which owns the Rook I project. This is the largest development-stage uranium project in Canada, according to the ASX mining share.
Located in the uranium-rich district of the southwestern area of the Athabasca Basin, Saskatchewan, the project aims to tap into the Arrow deposit.
L1 noted that the NexGen share price rose 9% in September due to positive news related to the uranium sector. Microsoft announced an agreement with Constellation Energy to restart a previously closed nuclear power facility to support the power needs of its AI data centres.
The fund manager believes the uranium market has positive supply and demand tailwinds over the medium-to-long term.
L1 pointed out the strategic nature of the Arrow deposit, noting it would be a significant new Western source of uranium to help address an anticipated uranium market deficit. The fund manager believes that NexGen will have completed all regulatory requirements over the next six months, which will provide a clear pathway to full-scale construction of the project.
The fund manager thinks this ASX mining share can generate a lot of cash flow in the future, concluding:
Arrow has the potential to generate more than C$2 billion of cash flow annually, once developed (2028) – a highly attractive proposition given NexGen's current market cap of ~C$5 billion.
