3 stocks leveraged to elevated mineral exploration spend

The search for battery metals is very much the modern day 'gold rush' and as the saying goes: 'During a gold rush, sell shovels'.

Macquarie said total Australian exploration spend rose 9.0% year-on-year in the third quarter to $1.09 billion. More specifically, metres drilled decrease -19% to 3,049 kilometres but the average cost jumped 29% to $356 per metre.

This indicates high prices is masking what is otherwise a slowdown in exploration activity. However, Macquarie said drilling demand is likely tempered by labour and covid-related constraints, most notably in WA.

"The higher cost per metre is likely due to a combination of drilling price inflation, the tight labour market, Covid-19 absenteeism, and mix of deposit type and customer," the analysts said in a note on Tuesday.

Outlook remains favourable for 'shovels'

"The short-term outlook remains mixed, with underlying activity remaining strong as majors step-up exploration activity following weaker junior capital raisings in CY22," said Macquarie.

"Medium-term, the outlook remains favourable underpinned by strong demand for metals, the move to electrification & greater decarbonisation targets, and expectation for increasing exploration budgets to replenish diminishing reserves."

Three Buy-rated stocks

Macquarie retained an Outperform for three companies in the commodities exploration space: ALS (ASX: ALQ), DDH1 (ASX: DDH) and Imdex (ASX: IMD).

• ALS: Diversified testing, inspection and verification business. In FY22, 37.5% of revenue was derived from the company's Commodities division (geochemistry sampling, metallurgy and inspections)

• DDH1: Australian mineral drilling contractor. FY22 earnings rose 10% to $113.6m and the company opted to pay out 42.5% of profits as fully franked dividends

• Imdex: Develops cloud-connected devices and drilling optimisation products. FY22 earnings jumped 38.9% to $104.9m

Source: Macquarie Research | Data as at market open 7 December 2022