Investors interested in commodity-based businesses should understand the basics of the commodity cycle to identify potential investment opportunities.

It is common for investors, even those actively involved in commodity businesses, to lack an understanding of the close correlation between current spot prices and the investments they hold. I am not discussing commodity trading, futures, or options; rather, I am referring to purchasing quality commodity-themed businesses as part of a diversified portfolio.

I have exposure to certain companies and would like to share my thoughts on the sector and three companies that I believe offer value with compelling upside. All three happen to be based in Australia, as the ASX is well-positioned for these types of opportunities.

In simple terms, commodities are driven by supply and demand. These forces determine the current spot price, usually quoted in USD. You may have heard references like “oil is now $X a barrel,” “iron ore is $X per tonne,” or “gold is now $X per ounce.”

These values represent the current market prices of commodities traded globally. Understanding these prices and their averages is essential if you plan to invest in commodities.

The current spot price serves as a higher-level benchmark. Investment ideas are evaluated against this price to assess their value.

💭 These are just my thoughts and perspectives; this should not be viewed as an exhaustive explanation. I know many successful investors in this field who possess far more experience and skills in interpreting JORC studies, drill results, operational weaknesses, and mining tenements. My focus is more on understanding the underlying business in simple terms to gauge its value and the potential tailwinds or headwinds that could impact it.

⚖️ Supply and Demand determine the rise and fall of Spot Prices.

It sounds pretty darn obvious, but it’s a little more than that. Supply and demand drives the spot price which is all impacted by what companies are doing at a production and exploration level.

Let’s use oil and gas as our example. When oil and gas prices fluctuate, this directly affects the revenue or bottom line of producers and explorers.

The cycle revolves around production, current global supply, future exploration, and the capital needed to operate, which is based on the current spot price.

Operating plants, assets such as oil rigs, mining machinery, and equipment requires significant financial investment, and exploration costs can be substantial as well. If the current spot price is low, it makes little sense for companies to operate at full capacity when they may not be able to sell the commodity at favorable prices. As a result, companies often scale back or reduce production and exploration to conserve costs and generate enough revenue to stay afloat.

When prices increase, production and exploration ramp up since companies can now sell commodities at prices that allow them to make a profit.

🛢️ It comes back to the cost to produce the raw goods.

Ultimately, it’s all about ensuring that the cost to produce oil and gas (i.e., sourcing, drilling, and shipping) is lower than the current oil price per barrel. Currently, some low-cost producers can produce a barrel of oil at efficient costs—around $20 USD per barrel—and sell it for $72 per barrel. These companies typically have better infrastructure, little to no debt, and various other operational advantages over higher-cost producers.

It simply means they are better positioned to make a lot more profit as and when the Oil price increases. Companies that are top heavy, whether it is from debt, too many assets or costs building up can’t produce oil for less than say $80 USD per barrel. If this oil price is below this they are stuck, loosing money until the price moves higher than base operational costs.

Gold operates similarly to oil, as we are now witnessing. Gold prices are surging, leading to increased production, exploration, and drilling activities. Exploration for gold and silver is booming. Operations that were previously dormant due to low prices are now back in business, allowing them to produce, mine, refine, and sell gold in an elevated market.

These macroeconomic concepts, while not directly related to trading, are essential for understanding how these themes influence other sectors within the market. Understanding spot prices, average ranges, and the companies tied to these commodities is crucial when identifying potential winners.

🔁 The Boom and Bust of the Commodity Cycle.

The nature of commodities often involves boom and bust cycles, as we have seen with various commodities like lithium over the years. A surge in demand for batteries led to increased exploration for lithium. This resulted in higher spot prices. However, this exploration and subsequent production eventually created an abundance of supply. The market caught up, and now there is a surplus of lithium. While the long-term demand for lithium in batteries remains strong, we currently struggle to produce enough end products like chips, electric vehicles (EVs), semiconductors, and computers to outweigh the existing supply.

Ultimately, it all comes back to supply and demand. To understand the cycles, we need to look several years into the future and consider what factors can impact them, as well as how to identify investment opportunities within this context.

This principle applies across a range of commodities. For instance, wheat and cocoa can be affected by natural disasters that disrupt supply, leading to increased demand, or alternatively, by record harvests that create an abundance of supply.

Key to this is the relationship between supply and demand. If there is too much supply and insufficient demand to absorb it, prices will fall.

Investors need to deepen their understanding of these cycles. When spot prices for any commodity are flat, it discourages explorers and producers from investing in their operations. This includes the costs associated with oil rigs, mining operations, drilling, and exploration programs, all of which require significant financial outlay.

Easy in theory, complicated in practice to implement…

For example, a gold exploration company that discovers a valuable vein may not see immediate rewards if the gold price is stagnant. The same applies to oil companies; there’s little incentive to spend money on exploration and production when market demand is weak. As a result, companies may place their assets into dormancy and reduce exploration expenditures.

These cycles are not instantaneous. When demand does pick up, it can take a considerable amount of time for companies to reactivate their operations, resume exploration, and bring mines back to full capacity. This can create a lag in the supply-demand balance.

I do not recommend trying to time these cycles or trade based on them. However, I believe that commodity stocks play an important role in a diversified portfolio, particularly small-cap stocks.

🤔 What am I watching?

I am currently interested in a select group of oil and gas companies, gold producers, and uranium companies. While uranium is a more speculative commodity with significant fluctuations in the spot price, I believe in the long-term advantages of nuclear power.

Oil and gas stocks, as a whole, are significantly undervalued. I am looking at cash-rich, debt-free oil companies that have excellent assets, are low-cost producers, and can remain profitable even if oil prices decrease.

Uranium is a higher-risk investment, as it’s closely linked to the uranium spot price and the global supply of uranium. As nuclear energy plants, which take years to construct, come online, uranium will be tied to this thematic trend.

Additionally, I see growth prospects in AI and data centers, along with a rising demand for power, particularly for cheaper and more stable energy sources.

I am also considering some gold producers. Once again, I am focusing on cash-rich, low-cost producers with valuable assets that can scale, explore, mine, produce, and continue selling gold in a rising market.

I believe the best opportunities can be found on either the TSX (Toronto Stock Exchange) or ASX (Australian Stock Exchange). The USD is currently strong, making it illogical to convert AUD to purchase US-domiciled companies. I prefer to buy undervalued companies on the ASX, which are selling into an elevated USD, allowing them to maximise their profits.

Boss Energy | ASX:BOE

*DISCLAIMER: I hold Boss Energy shares.

• Current Market Price: $2.96 AUD
• P/E Ratio: x23
• Market Cap: $1.21b AUD

I like Boss Energy as a Uranium play. I want exposure to Uranium (a small bit) in my portfolio as an energy play. Boss Energy is a low-cost, very high-quality producer. Boss has zero debt, large cash piles, and quality strategic assets in Australia and soon-to-be Texas. Pretty much the best type of commodity plays are businesses like this. They can survive slumps and will benefit from the increase in Uranium spot prices.

Northern Star Resources | ASX:NST

• Current Market Price: $17.78 AUD
• P/E Ratio: x21.75
• Market Cap: $20.34b AUD

Rather than buying Gold ETFs or Gold directly, I like to play a theme such as rising gold prices with quality companies that can fit the theme. As a small-cap investor this is a much bigger company than I would typically invest in. However, once again, quality producer, the best in class, cashed up strong tailwinds ahead. It is a more confident buy rather than junior explorers. I don’t own it but will look to add a position if the price is right.

Karoon Energy | ASX:

• Current Market Price: $1.388 AUD
• P/E Ratio: x3.22
• Market Cap: $1b AUD

Another high-risk play in the oil space is Karoon. I am looking for an entry point. Trading very cheap. The company is a high-margin oil producer paying dividends and can still churn a profit should oil continue downwards. There is a lot of future growth not built into the share price. With a P/E in the single digits and the company buying back $100m in shares, the future catalyst could rerate the share price based on positive momentum of the spot price.

These are not recommendations just idea generation.

When looking for commodity-based businesses I prefer higher quality over junior higher risk plays. Cashed up, low cost producers with zero to no debt and quality assets are essential.

⚛️ This is my perspective on uranium. Currently, uranium stockpiles for nuclear companies are in good shape. However, not many uranium miners or explorers are ramping up their operations since the demand isn’t there yet. Once all these new nuclear facilities come online, demand is likely to increase, but supply has not caught up.

This imbalance will push up the spot price, as lower supply drives up the price until uranium companies begin producing and exploring again. Eventually, this will lead to an influx of uranium on the market, causing supply to once again outweigh demand and depressing the price.

I’ve witnessed this cycle for 15 years, as have any investors with exposure to commodities. There is a significant shift happening in the world right now, and I see certain commodities becoming crucial.

NATO Critical Minerals for Defense.

With NATO’s critical minerals report for defense, we can expect to see increased focus on the commodities listed therein.

Defence and Energy demands are rising due to factors such as electric vehicles (EVs), battery power, data centres, defence materials, weaponry, and chips—all of which require various parts and raw materials. I believe it’s important to choose commodities where supply is low and demand is high, while also looking down the supply chain for low-cost producers, rather than just explorers. I’m not particularly interested in junior exploration companies, as they often have no revenue and rely on drilling in hopes of finding something without substantial backing.

I prefer companies that are established producers with valuable, irreplaceable assets, are well-capitalised, and resilient balance sheets. Additionally, I look for those ramping up exploration on existing assets, as this enables them to generate revenue and self-fund further exploration without needing constant capital raises or risking shareholder dilution (I’m looking at you, junior micro-cap explorers with market caps under $10 million and 1 billion shares issued!). 😊

🍰 Commodities are just a small piece of the pie…

I believe all portfolios should include some exposure to commodities. High-quality smaller companies can help diversify a portfolio that may be overly concentrated in technology or other sectors. I typically allocate about 10% of my portfolio to commodity-based businesses and themes.

In certain economic cycles, having a higher allocation to these companies can be beneficial. For instance, investments in lithium and uranium have generated substantial returns. Currently, I am particularly interested in palladium and platinum and see potential growth in these areas leading into 2026 and beyond, especially concerning some critical minerals on the NATO list.

Many investors have a negative perception of commodities, but I disagree with the notion that they are high risk. In fact, technology companies, biotechnology, and early-stage companies across various sectors can often carry higher risks. Commodity companies are genuine businesses, so I focus on identifying the best in class. I do not speculate on companies that have no earnings; I ensure that I only hold positions in companies generating revenue, which is a non-negotiable criterion for me.

Avoid any Drill for Thrills and NO earning companies.

I am interested in commodity businesses that I would be comfortable holding even in a market downturn. The demand for raw minerals will persist, and I prefer companies like Boss, which are positioned as the best in their sector.

The core criteria I look for in these companies are as follows:

• Be high-quality, low-cost producers.
• Have a net cash position with no debt.
• Possess quality strategic assets in geographically diverse locations.
• Have future exploration capabilities.
• Trading at attractive valuations compared to their peers.
• Demonstrated resilience during previous price volatility and downturns.
• Operate with high profit margins.

If a company meets these criteria, I am inclined to consider an investment. If you know any flick me an email.