Issue #26 | What's Actually Holding AI Up

ASX - Top 3 Winners & Losers
Deals Down Under - Firmus’ $15bn Delayed IPO
Global Markets - Shovels in a Gold Rush
Other News - Aussie Politics, Sport and Culture

The S&P/ASX 200 finished the week down 0.5%. The pullback came after fresh US strikes on Iran, and the return of US oil sanctions left the countries' truce in limbo, raising uncertainty over energy flows through the Strait of Hormuz and reigniting inflation and rate concerns. Despite that, the market is holding a cautious approach, rather than completely selling off, treating the latest escalation as another step in a managed conflict. 

This week’s best performers

Mesoblast (ASX:MSB) +8.74%

Mesoblast develops cell therapies, including Ryoncil, the only FDA-approved treatment for a serious transplant complication in children. Shares jumped after fourth-quarter revenue hit $36 million, beating expectations and lifting full-year revenue to $115 million as uptake accelerates across major US paediatric transplant centres. The stock is still down 19% year-to-date, but the revenue is proof the commercial rollout is gaining real traction. Ryoncil also carries orphan drug status, which blocks the FDA from approving a competing version of the same treatment until 2032, giving Mesoblast a clear run to keep building sales.

Santos (ASX:STO) +7.32%

Santos, one of Australia's largest oil and gas producers had a strong week, as oil prices jumped roughly 3% on rising US-Iran tensions, lifting the whole energy sector. But there's also a company-specific story. Barossa is nearing full output and Pikka in Alaska is ramping toward continuous production, setting up a genuine free cash flow boost on top of the oil price bump. Management wants to return 60% of that cash to shareholders and cut $2.5 billion of debt by 2030, though the rally could stall fast if oil prices or project timelines slip. 

Vault Minerals (ASX:VAU) +6.80%

The mid-tier Australian gold producer benefitted from a binding $5.6 billion takeover bid from Genesis Minerals which topped the merger Vault had already agreed to with Regis Resources in May. Genesis offered cash plus scrip, a 15.7% premium to Vault's last close, versus Regis's all-share deal. The Vault Minerals board has called it superior. Regis now has five business days to counter, so the next move is on them, whether they walk away or spark a full bidding war. 

This week's worst performers

Minerals 260 (ASX:MI6) -18.42%

The company behind the Bullabulling Gold Project in Western Australia had a disappointing week despite its prefeasibility study showing strong numbers, including a $2.3 billion NPV and 6.2-million-ounce resource, but the market focused on the size of the upfront build cost instead. Broker Morgans called the sell-off overdone, keeping a price target of $1.38, more than double the current price.

Electro Optic Systems (ASX:EOS) -17.14%

The remote weapon systems and space technology manufacturer had a down week without a single clear catalyst for the big drop. EOS shares are still up around 150% over the past year, even after falling almost 12% in the past month. The company has kept landing work, including a US$124 million counter-drone deal with a UAE defence firm.

Elevra Lithium (ASX:ELV) -16.10%

The lithium producer’s shares fell despite a strong June quarter, with production up 15% to 54,479 tonnes of spodumene concentrate, the mine's second-best on record. The catch is pricing: Elevra's realised lithium price is lagging the spot market, so stronger output isn't yet showing up in revenue. 

Firmus Technologies buys up expensive Nvidia chips and rents them out to companies like Meta that need AI computing power fast. It's called a neocloud, and it's meant to be the ASX's biggest listing story of the year. Instead, on July 31, shareholders will vote on a very different kind of milestone - another injection of cash while the actual IPO keeps slipping further away.

The company has called an extraordinary general meeting asking investors to approve a $US2 billion top-up round, which nearly doubles Firmus' valuation to $15.5 billion. The raise wasn't marketed externally, existing backers took the whole thing, and Nvidia alone put in about $721 million of preference shares at $230 each, up from $145 last round. It's the same chipmaker that first invested in Firmus when it was worth a fraction of that.

The cash funds Nvidia chip purchases for the Launceston project and early works in South Australia. None of it accounts for the data centre Firmus is building on the Indonesian island of Batam, which it says will bring in $43 billion of revenue once it goes live in 2027. Investors will also vote on a share split that cuts each share into 50, so a future retail offer looks like a normal ASX stock instead of a $230-a-share outlier only institutions can afford.

That's the pitch. The problem is almost nobody outside Firmus can actually check it. UniSuper chief investment officer John Pearce told the Financial Review the $150 billion fund won't be investing directly, saying there's simply too much about the business it doesn't know, and that Firmus' investor roadshow earlier this year landed poorly. Ten Cap's Jun Bei Liu said much the same, describing Firmus as still elusive on the details behind its numbers.

Pearce draws a pointed comparison to the dotcom era, when analysts leaned on unconventional metrics like foot traffic because there were no profits to measure. He isn't calling AI a bubble, but he's blunt about the risk of AI. If a company like Anthropic or OpenAI stumbles, the AI infrastructure spending propping up neoclouds like Firmus could dry up fast, and that flows straight through to the chipmaker sitting at the centre of all of it.

For now, Firmus needs to move fast. If the listing drags on past November 30, its preference shareholders get extra shares when they eventually convert, 5 per cent more every six months of delay. That dilutes everyone else's stake, so the clause actually pushes Firmus to list sooner rather than later.

In every gold rush, the real money isn't made by the prospectors, it's made by whoever sells them the shovels. The AI boom works the same way, and it isn't just one sector. A whole layer of ‘unglamorous’ businesses is cashing in, no matter which chatbot or chipmaker ends up winning.

Start with electricity. Constellation Energy, the largest nuclear power producer in the US, has rallied hard over the past two years simply because data centres need guaranteed, round-the-clock power and Constellation already owns the plants that can provide it. Microsoft is even paying to bring an old nuclear reactor at Three Mile Island back online, betting on the power itself rather than on any particular AI model running on top of it.

Then there's memory. SK Hynix, which makes the specialised memory chips that let AI models actually process information fast enough to be useful, just priced a blockbuster Nasdaq listing even as broader tech stocks wobbled on Middle East tensions, a sign investors see memory chip demand as more durable than the AI hype cycle around any one company.

And underneath all of it is copper. Every data centre needs it for cabling, transformers and cooling, and Morgan Stanley expects data centre copper demand alone to rise from 760,000 tonnes this year to 1.3 million tonnes by 2028. Mines take years to build, so miners are buying existing supply rather than waiting on new production to catch up.

The common thread is that none of these businesses need to guess which AI company wins. They get paid either way. The risk, of course, is that they've priced in a demand curve that assumes AI spending keeps compounding at its current pace, and if that slows even slightly, some of this capacity gets built for a boom that doesn't fully arrive.

Australia sits inside more of this than people realise. AGL expects data centre electricity demand to jump seven-fold, Origin says data centres are already its biggest driver of electricity sales growth, and BHP and Rio Tinto sit right at the base of the global copper supply chain feeding this thing. Australia doesn’t have a fancy generative AI platform nor chipmakers, but we have a fair few shovels cashing in on the AI boom.

Thanks for reading Capital Down Under till the end! If you enjoyed this week's issue, feel free to forward it to a friend – we'd really appreciate it.

Also, if you had any thoughts, tips or ideas for next week, just hit reply.