By his own admission Ben Cleary says resources have become a “dirty word” in Australia. That’s not surprising: commodities stocks in the Land Down Under have been walloped as evaporating Chinese demand has clobbered prices for resources like iron ore, coal, copper and nickel. Cleary won’t care, though: his Tribeca Global Natural Resources fund has returned a whopping 20 per cent so far this year.
The Sydney-based portfolio manager tells Barron’s Asia he set up the hedge fund a year-and-a-half ago to capitalise on volatility in what he calls “a pariah sector.” The fund invests mainly in stocks but also some corporate debt. Cleary claims the fund is unique in its “market neutral” approach, by which he means the size of its long and short positions are pretty much equal. The portfolio holds between 20 and 60 stocks at any time, but he’s currently got about 25 per cent parked in cash. “Resources is the most volatile sector broadly speaking, so we wanted to have a strategy that could take advantage of that enduring volatility regardless of commodity price direction,” Cleary explains. He declines to specify the fund’s size, but says parent fund Tribeca plans to soft close at $AUD100 million. “We’re well on our way to that number,” Cleary says. The fund aims to return 15 per cent to 20 per cent annually – even when stocks are having a rotten year.
So what’s his secret? Cleary takes a very macro view when it comes to picking investments. The fund uses financial modelling to forecast global supply-and-demand across a range of hard and soft commodities, and then basically ranks them from best to worst. He then looks for markets to express those views based on things like foreign exchange fluctuations, and finally does bottom-up research and company visits to pick individual securities.
One theme the fund’s long on is specialty metals like graphite, cobalt and lithium. “The big catalyst is electric vehicles and the part that lithium-ion batteries are going to play in that,” he says. He reckons clean energy vehicles will gain a couple of percent in global vehicle market share every year for the next five to 10 years, which Cleary says is a “quite conservative” estimate. The entire international lithium market is about 160,000 tons and based on his forecasts about 100,000 extra tons of supply will be needed every year to quench demand. “It comes down to how quickly supply can respond to fill that demand,” Cleary says. He doesn’t think suppliers will be able to keep up with demand over the next few years at least, which will push up prices.
Cleary favors miners that are already producing or are close to producing these metals. One stock he owns is Perth-based Galaxy Resources (ticker: GXY.AU), whose lithium assets include the Sal de Vida mine in Argentina. Galaxy shares trade at about $AUD0.23 a share and are up a dizzying 800 per cent in the last year. Another lithium pick is Brisbane’s Orocobre (ORE.AU), which also explores and develops lithium and potash deposits in Argentina. One of its projects is in production and is currently ramping up. The shares have run-up about 70 per cent since early December and trade at $2.40. Cleary also likes General Mining Corporation (GMM.AU), which is jointly developing the Mt Cattlin lithium mine with Galaxy on West Australia’s south coast. That mine should start producing within the next couple of months. On the graphite side, Cleary likes Melbourne’s Syrah Resources (SYR.AU), whose assets include Mozambique’s Balama project. “That should be in production within 12 months,” he says. That stock is up about 20 per cent since a recent low in mid-January. Sell-side brokers think the shares could be undervalued by around 40 per cent.
Cleary’s also sanguine on local currency gold stocks. The yellow metal has been one of 2016’s best performing assets amid global stock market doom, and Aussie gold miners have enjoyed an updraft from a weaker local currency. Mid-tier companies have also snapped up projects from bigger players that’s let them ramp up production.
Melbourne-based Oz Minerals’ (OZL.AU) share price is up about 25 per cent since Barron’s Asia wrote positively about the stock in early February. “We’re bearish on the Australian economy and its outlook,” explains Cleary, who has high conviction the Australian dollar will weaken more versus the greenback over the next one to three years. He also sees gold trading between in a range of $USD1200 and $USD1300 this year. “We’re quite comfortable still owning Australian gold producers because they have that currency advantage,” Cleary says. He adds that stocks like Northern Star Resources (NST.AU) and Evolution Mining (EVN.AU) have re-rated with investors as they’ve acquired “fantastic assets” from bigger producers, which has helped boost earnings. The fund’s hedged its exposure by shorting Newcrest Mining (NCM.AU), a highly geared producer, which has suffered production issues at major projects.
Tribeca is also long Fortescue Metals Group (FMG.AU), even if Cleary is “lukewarm” on iron ore generally. The Perth firm’s shares are up 30 per cent so far this year as iron ore prices have shot back up to more than $USD60 per metric ton as Chinese steel mills re-stocked. “The major iron ore producers have got the market where they want it,” Cleary believes. He says the company’s “done an incredible job” of cutting production costs over the last two years and is still making 30 per cent-plus margins at current iron ore prices. Fortescue’s also under no pressure to make capital investments right now given oversupply in the market. Cleary says he likes the stock but also Fortescue’s corporate bonds, which he says have traded as cheap as 50 cents on the dollar.
His outlook is bleaker for resources giants BHP Billiton (BHP.AU) and Rio Tinto (RIO.AU), though. BHP’s share price has almost halved over the last year while Rio has lost a third of its value as China’s slowing economy sapped demand for resources like iron ore and copper. Both have recently sacked off their progressive dividend policies and been tarred with credit rating downgrades. Shares in BHP and Rio have jumped in recent trading sessions after China moved to inject more liquidity into its financial system. Still, Cleary says they could fall further: He thinks production costs will come down by another 10 per cent to 30 per cent, which “probably gives you some idea of when these stocks are at an absolute bottom.” Both companies have slashed production costs for base metals like iron ore and copper to try and maintain margins as commodity prices have plunged. Cleary says BHP and Rio should also have acquired mines on the cheap from distressed sellers like First Quantum (FM.CA) and Anglo American (AA.UK) ahead of the next commodities cycle. “We’re growth investors and what we’d really like to see BHP and Rio doing is buying assets at this point in the cycle” if they weren’t hamstrung by their high level of debt, says Cleary.
The fund’s generally been bearish on the outlook for oil and has held short positions in highly-leveraged, high-cost North American shale producers. Cleary says the tide may be finally turning for crude, though. “We don’t think sub-$USD30 oil is sustainable long-term,” he reckons.
* This report originally appeared on Barron's and is republished with permission.