US-China Military Standoff Lifts Aussie Defence Sector: EOS, CDA, DRO, NST on Watch

From our perspective, the escalating trade rivalry between the United States and China is fundamentally reshaping global supply chains, creating what we see as a generational opportunity for Australia to elevate its economic and strategic standing. This contest has found a new battleground in critical minerals, and the resulting push towards "friendshoring" places Australia and a select group of its companies in a highly advantageous position. Throughout 2024 and early 2025, we have observed a cycle of escalating tariffs and retaliatory export controls. The U.S. has imposed levies of up to 100% on Chinese electric vehicles and 25% on critical minerals, among other goods. In response, Beijing has leveraged its formidable dominance in mineral processing, controlling up to 90% of refining for materials like lithium and rare earth elements (REEs), by restricting exports of key materials such as gallium, germanium, and graphite. Australia's Uniquely Positioned Response: From Raw Resources to a Processing Powerhouse This "weaponization" of supply chains has catalysed a major policy shift among Western nations to de-risk their economies by sourcing from trusted, allied countries. We believe Australia is uniquely positioned to be a primary beneficiary. The nation holds the world's second-largest reserves of lithium and nickel and the fourth largest of REEs. This geological endowment, combined with proactive government support like the "Future Made in Australia" agenda and a new 10% tax credit for mineral processing, creates a powerful incentive for investment in domestic value-addition. The heightened uncertainty is also burnishing the appeal of gold as a safe-haven asset, creating a favourable environment for Australian producers. Source: Investor Pulse, Research, Australia's Strategic Critical Minerals Profile & "Friendshoring" Opportunities (2025) [1] The Defence Imperative: Why Critical Minerals are a Matter of National Security Furthermore, we see profound implications for Australia's defence and sovereign capability. Modern military platforms are critically dependent on these very minerals; a single F-35 fighter jet, for instance, requires approximately 417 kilograms of rare earth materials. By developing secure domestic supply chains, Australia not only fortifies its own defence industry but also strengthens its role as a security partner to its allies. This focus on sovereign capability creates a fertile environment for Australian defence companies. Identifying the Beneficiaries: Key ASX-Listed Companies in Focus In our analysis, key names to watch include gold miners capitalizing on high prices, such as Evolution Mining (ASX: EVN) and Northern Star Resources (ASX: NST). In the defence sector, beneficiaries include naval shipbuilder Austal (ASX: ASB), secure communications leader Codan (ASX: CDA), advanced technology provider Electro Optic Systems (ASX: EOS), counter-drone specialist DroneShield (ASX: DRO), and protective solutions firm HighCom (ASX: HCL). In conclusion, our analysis indicates that Australia is in a rare position to convert geopolitical friction into a significant and lasting strategic advantage for its key industries and the companies operating within them. Here is our detailed analysis of how the current geopolitical climate benefits the specified ASX-listed stocks: Evolution Mining Limited (ASX: EVN) - Capitalizing on Gold's Safe-Haven Status and the Critical Copper Connection Source: EVN, weekly chart (2025) In our view, Evolution Mining is strategically positioned to capitalize on the prevailing geopolitical and economic climate. We see the heightened uncertainty from US-China tensions directly fuelling demand for gold as a premier safe-haven asset, which benefits producers like EVN through higher prices. Furthermore, we believe the company's significant copper production provides a valuable revenue stream and aligns it with the broader critical minerals theme, as copper is essential for the energy transition technologies being supported by "friendshoring" initiatives. Our analysis of the company’s recent performance shows it has translated these favourable market conditions into record financial results. For the first half of FY25, we note a statutory net profit of $365 million (a 277% increase) and a record underlying EBITDA of $1,014 million (up 77%). This performance was driven by a 22% rise in gold production and a 29% increase in the achieved gold price, all while maintaining a competitive All-in Sustaining Cost (AISC) of A$1,638 per ounce. We also observed continued momentum in the March 2025 quarter, with record group mine operating cash flow of $600 million enabling the company to reduce gearing to just 19%. Looking ahead, we are confident in Evolution’s reaffirmed FY25 guidance and its ability to generate over $2 billion in operating cash flow for the full year. This substantial cash generation allows for increased dividends and continued deleveraging, which we believe makes EVN an attractive proposition for investors seeking stability and returns. From our perspective, Evolution's disciplined strategy and its portfolio of "long-life, high margin assets" enhance its resilience in a volatile global landscape. Northern Star Resources Limited (ASX: NST) - Navigating Operational Hurdles to Leverage a Bullish Gold Market Source: NST, weekly chart (2025) As a major Australian gold producer, we see Northern Star Resources as a direct beneficiary of elevated gold prices driven by geopolitical uncertainty and safe-haven demand. This strong macroeconomic tailwind provides a favourable backdrop, although our analysis of recent operational updates shows that high prices alone do not guarantee seamless performance. We note that even rising royalty payments, while a cost, are a clear indicator of the strong prevailing gold price environment. The company's March 2025 quarterly report revealed near-term operational challenges, with gold sales of 385,000 ounces at a high AISC of A$2,246 per ounce. We note that these challenges, primarily linked to its KCGM operation, prompted a revision to its FY25 guidance, with expected gold sales reduced by approximately 6.4% and AISC guidance increased by roughly 14.6% at their respective midpoints. Despite this, our analysis shows the company maintained a net cash position of A$181 million after a significant dividend payment. From our perspective, the recent acquisition of De Grey Mining, which became effective in mid-2025, is a transformative and strategically crucial step for Northern Star's future. We expect this move will be accretive to production and significantly improve the company's long-term cost profile, positioning it to better capitalize on sustained high gold prices. While navigating current operational issues, we believe the De Grey acquisition is a strategic imperative designed to enhance long-term resilience and leverage future gold price strength. Austal Limited (ASX: ASB) - Building for Allies in an Era of Heightened Maritime Competition Source: ASB, weekly chart (2025) We believe Austal is exceptionally well-positioned to benefit from the current geopolitical climate. In our view, increasing maritime competition and strategic tensions are driving strong demand for the advanced naval vessels that are Austal’s core business. With a major operational footprint in both Australia and the United States, the company is a trusted partner for allied nations, a position we see as enhanced by the "friendshoring" trend and security pacts like AUKUS. A more resilient Western supply chain for critical minerals also de-risks Austal's own manufacturing of technologically advanced naval platforms. Our analysis of the company's H1 FY25 performance shows strong growth, with revenue increasing 15.1% to $825.7 million and Net Profit After Tax more than doubling to $25.1 million. This growth is supported by key contracts, including a US$450 million award to construct a U.S. submarine module facility and an A$137 million contract for Australian Border Force patrol boats. We also note the company’s financial position has strengthened significantly, with a net cash position of $213 million. From our strategic analysis, Austal's deep integration into the U.S. defence ecosystem is a key advantage. Its role supporting the U.S. Navy's top-priority Columbia and Virginia-class submarine programs highlights its trusted status and provides a strong competitive moat. We see this dual U.S.-Australia presence positioning Austal as a key enabler of trans-pacific defence collaboration under frameworks like AUKUS. Codan Limited (ASX: CDA) - Providing Secure Communications for a World on High Alert Source: CDA, weekly chart (2025) In our assessment, Codan is a direct beneficiary of the global increase in defence and security spending spurred by geopolitical tensions. This environment translates directly into greater demand for the company's robust tactical communications equipment. We believe that in a contested global landscape, the need for secure and resilient communications is paramount, making Codan's established technology highly valuable. Our analysis of Codan's H1 FY25 financials shows strong performance, with group revenue reaching $305.6 million (an increase of 15%) and Net Profit After Tax rising by 21% to $46.1 million. We note the Communications segment was the primary growth driver, with its revenue increasing by 22% to $187.0 million and its order book standing at a healthy $247 million. An interim dividend of 12.5 cents per share, up 19%, further reflects this strength. From a strategic standpoint, we see Codan's targeted acquisitions, such as Kägwerks, as a savvy move to enhance its capabilities in high-growth areas like advanced solutions for unmanned systems. This approach ensures the company remains aligned with the evolving requirements of modern military operations. We also believe the overall business is strengthened by its diversified and successful Minelab division, which adds an extra layer of resilience. Electro Optic Systems Holdings Limited (ASX: EOS) - Delivering High-Tech Solutions for the Modern Battlefield Source: EOS, weekly chart (2025) We see Electro Optic Systems (EOS) as a company directly benefiting from heightened geopolitical tensions and the evolution of modern warfare, which are driving powerful demand for its core products. The conflict in Ukraine has starkly highlighted the importance of effective Remote Weapon Systems (RWS) and Counter-UAS (CUAS) capabilities, areas where EOS products have achieved operational success. The global competition for military-technological superiority is also increasing investment in advanced domains where EOS specializes, such as directed energy weapons and space control. Our analysis of the company’s recent activities highlights a pivotal strategic move: the divestment of its non-core EM Solutions subsidiary in January 2025. This generated A$158.6 million and allowed for the full repayment of all borrowings, leaving the company with a strong cash balance of approximately $128 million and nil borrowings as of January 31, 2025. We are also monitoring several significant opportunities EOS is pursuing, including potential large-scale contracts for its RWS and High Energy Laser Weapon systems valued at up to A$100 million each. From our perspective, the strengthened balance sheet gives EOS greater financial flexibility to invest in its core growth areas of CUAS, Space Control, and RWS. The company's focus on "friendshoring" markets like North America and Europe aligns perfectly with Western security objectives. Furthermore, Australian initiatives to secure domestic critical mineral supply chains can provide EOS with more reliable inputs for its advanced systems, bolstering its sovereign capability credentials. We believe the real-world combat validation of its systems gives EOS invaluable credibility and a significant competitive advantage. DroneShield Limited (ASX: DRO) - Leading the Charge in the Explosively Growing Counter-Drone Sector Source: DRO, weekly chart (2025) In our analysis, DroneShield operates in the C-UAS (counter-drone) technology sector, which is experiencing explosive growth. The effective use of drones in modern conflicts has made counter-drone solutions a critical and urgent security requirement globally, creating a powerful tailwind for the company. This is led by rising defence budgets that now include specific, large allocations for C-UAS capabilities, such as the US$1.3 billion earmarked by the US DoD. The company's recent performance clearly illustrates this rapid growth. We note DroneShield reported record quarterly revenue in Q1 2025 of A$33.5 million, a 102% increase year-on-year. By May 2025, it had already contracted over A$100 million in revenue for delivery in 2025, its sales pipeline had expanded to an impressive A$2.34 billion, and it held a very strong cash balance of A$213.4 million. Our analysis shows the U.S. market is strategically important, accounting for approximately 70% of its FY24 sales. Looking forward, we see DroneShield's strategic shift toward AI-powered software solutions and recurring SaaS revenue as pivotal. We believe this highly scalable business model has the potential to drive higher margins and transform the company into a more deeply integrated security solutions provider. With its substantial cash position, we assess that DroneShield is well-equipped to fund further R&D and scale production to meet the immense demand for its technology. HighCom Limited (ASX: HCL) - Protecting Personnel and Expanding into Critical Defence Technologies Source: HCL, weekly chart (2025) We see HighCom as well-placed to benefit from the increased global defence and security spending driven by geopolitical instability. This environment directly fuels demand for the company's core offerings of personal ballistic protection and advanced composite armour. The company's established HighCom Armor brand and its U.S.-based manufacturing facility position it strongly to serve the large North American defence market and capitalize on the "friendshoring" of defence manufacturing. Our analysis of HighCom's H1 FY25 results shows a significant financial turnaround. Revenue increased by 78% to $26.6 million, and the company achieved a net profit of $1.213 million, reversing a prior-period loss of $13.5 million. We note this performance was largely driven by $20.9 million in sales from military contracts within its armour division. The company has also announced a steady stream of new orders, including a notable A$3 million ballistic product order in March 2025. From a strategic standpoint, we view the company's expansion into the high-growth Counter-Small Uncrewed Aerial System (C-SUAS) market as a particularly important development. A recent A$2.6 million C-SUAS contract from the Australian Department of Defence signals this successful diversification and aligns the company with the evolving needs of modern defence forces. In our opinion, the return to profitability indicates that the company's strategic realignment and focus on the U.S. market are yielding positive results.