By Joshua Peach
Beaten-up mining stocks were among the last-minute purchases by Australian fund managers scouring the market for bargain buys ahead of the new calendar year.
The final few months of 2024 were volatile for the Australian sharemarket. It rose substantially in November following a bullish market reception to Donald Trump’s victory in the US presidential election, only for the S&P/ASX 200 Index to retreat as much as 4 per cent in December.
Among those taking advantage of the erratic year-end was Chris Kourtis, director at Ellerston Capital, who told clients earlier last month that he had made his first investment in Mineral Resources, following a sharp sell-off in the iron ore and lithium miner in November.
“Mineral Resources, a stock we have never owned in the past, was introduced in late November to the portfolio as a high conviction long,” he said, adding that the fund had swapped out its holding in iron ore miner Fortescue for a similar exposure to MinRes, due to the latter stock’s more “attractive valuation metrics”.
“We have closely followed [MinRes] for many years but couldn’t get over the line on valuation grounds until now.”
The shares have slumped more than 50 per cent since the start of the year, hit by lower commodity prices, higher debt levels and, more recently, governance issues related to founder and managing director Chris Ellison.
The Australian Financial Review revealed that Mr Ellison had participated in a decades-old offshore tax scheme culminating in his agreement with the board to step down within the next 18 months. Mr Kourtis, however, believes the governance concerns that have hurt the company’s share price have been resolved.
“We didn’t particularly like how the governance issues played out, but felt the 27 per cent sell-off was an overreaction and was pricing in the risk,” he said.
Underpinning Mr Kourtis’ investment thesis was the company’s mining services business, which he said is undervalued by the market.
“The mining services business alone is worth more than the market cap of the whole company … so an opportunity to pick up this great business alone, when much of the balance sheet stress has already been alleviated, makes it [a] worthwhile risk/return proposition.”
Mr Kourtis isn’t the only fund manager to attempt to capitalise on the MinRes sell-off.
Matthew Haupt and John Ayoub, the duo behind Wilson Asset Management’s Leaders Fund, told investors in December that they had also bought back into MinRes after selling out of the stock earlier in the year.
“We did have a small dalliance with Mineral Resources in September. We’ve traded it quite well. We got out, but we’re back in now,” Mr Ayoub said on a call at the time.
Lithium bulls come back
MinRes is one of two mining stocks that the WAM Leaders fund has bought lately.
Mr Ayoub and Mr Haupt also backed West Australian lithium producer Pilbara Minerals, which sank 44 per cent this year following a horror 12 months for the price of the key battery metal amid a glut in global supply.
While the downturn in prices hit Pilbara Minerals hard, short sellers have been cashing in. The stock – which is Australia’s largest pure-play lithium miner – has spent much of the year at the top of the ASX most-shorted list, with hedge funds betting against the company accruing as much as 22 per cent of the register at one point.
Its shares have fallen more than 30 per cent since mid-November alone, following news it would suspend one of its two processing plants in WA and reduce lithium production in an attempt to weather the downturn in the commodity price.
But with short sellers finally retreating from the stock, Mr Ayoub told investors the fund had bought into the sell-off – betting on a recovery in lithium prices.
“We’ve just started to initiate some small positions back in lithium after we haven’t owned lithium for a while,” he said. “Both [MinRes and Pilbara Minerals] seem attractive from a valuation perspective, as we’ve probably seen the bottom of the lithium market.”
No tears over A2 Milk
Meanwhile, K2 Asset Management has ventured across the Tasman looking for out-of-favour gems. The fund snapped up shares in specialist dairy group The A2 Milk Company, saying it prefers bets on out-of-favour stocks over big growth names such as app developer Life360 – one of the best-performers of 2024.
“We are more comfortable making a meaningful investment in a quality fallen angel like [A2 Milk] as opposed to riding the momentum of a shooting star,” K2 co-founder Campbell Neal told investors.
Life360 more than tripled in value last year, buoyed by demand in the US market for its family networking app. However, Mr Neal was concerned the stock is overpriced versus peers.
“This is too rich for us,” he said, adding that the bull case underlying Life 360 was that it could follow the pathway forged by “freemium” pioneers such as Spotify and Pinterest – something he doubts.
“Platforms like [Life360] … are more aligned to users who have a specific need in mind. As a result, the advertising pull-through is more bespoke and ultimately the revenue per user metrics is substantially lower than Spotify and Pinterest,” he wrote in a letter to K2 investors.
Shares in A2 Milk have slipped more than 15 per cent since August, weighed down by a stoush with its partner, New Zealand’s Synlait Milk, and a weak outlook for its products.
Mr Neal said the company had the potential to deliver at least 20 per cent growth in revenue over the next two years and evolve into a “dividend aristocrat” – a company that consistently pays a dividend which increases annually.
“We would expect an investment in A2 Milk to deliver shareholders a total return of 10 per cent per annum or many years to come,” he said. “We shouldn’t lose sight of the fact that peer companies like Nestlé, Danone, Unilever and Hershey have all been around for more than one hundred years.”
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