CORONATION RESOURCES FUND
Coronation Resources Fund co-manager Nic Stein says the fund has been anchored by three large holdings in Anglo American, Sasol and Exxaro.
As far as Anglo American goes, Stein says: “We like the underlying commodity mix, particularly diamonds, copper and platinum. Diamonds (through De Beers), though soft, are holding up better than most resources. There have been no major discoveries in the past 15 years. So supply has been constrained, while demand has been supportive from the likes of China and America. It is a late cycle commodity and should benefit from China’s attempts to shift to a more consumption-based economy.”
One of Anglo’s big assets is the Minas Rio iron ore project in Brazil, which is in ramp-up. “The high iron ore price over the past decade has [encouraged] the new production,” says Stein. Anglo has impaired most of the value of Minas Rio since it acquired it in 2008. Improving capital allocation decisions, as well as addressing a cost base which is not as lean as its peers, provides the company with some “self-help opportunities” to grow earnings and improve returns on capital.
But the attraction of Anglo is also one based on value. “From a price:book ratio perspective, at the current share price, you are getting it at the cheapest level we have seen in 30 years. It trades on 8,5 times our assessment of normalised earnings, which is attractive.”
Has China’s slowdown surprised investors? “I think it’s a case of the whiplash effect,” says Stein. “The high levels of GDP growth we have seen in the past decade were built on a platform of incredibly high fixed capital investment. This has created a high base, and as the economy changes, this will have huge ramifications for commodity markets — where China accounts for as much as 70% of demand.”
In terms of Exxaro, Stein is impressed by the company’s thermal coal assets. “We think it’s an underappreciated, scalable resource they have in the form of the Grootegeluk coal mine, and the contract to supply Eskom makes the returns for this asset ‘bond-like’,” he says.
Exxaro’s mineral sands business (Tronox) operates in a market that is more opaque. But the subsidiary has $9,8bn in assessed taxed losses. “So there is plenty of merger and acquisition potential. On the current Exxaro price, you are getting Exxaro’s stake in Kumba for free. In addition, it trades on a low multiple on our assessment of normalised earnings, so it’s a defensive allocation to make in the portfolio,” says Stein.
There is plenty of room for some smaller companies in the portfolio too. One of these is Merafe, which operates a joint venture with Glencore on a fleet of ferrochrome smelters. “It was largely the price that attracted us,” says Stein. “There is limited supply coming on stream after the ramping up of the Lion 2 project. The company has taken shareholder-friendly decisions, such as shrinking the head office and resuming dividend payments. Having a sizeable commercial shareholder in Glencore also provides comfort.”
There are always a number of ways to reach a conclusion on the valuation of a company, as Stein demonstrates. “We believe Glencore’s assessment of fair value is far above where the share price is now, so any price weakness may well lead to them stepping in as buyers, limiting the downside. Looking at it another way, if you had to replace the smelters the company owns tomorrow, the cost would be equivalent to R2,50/share” says Stein. Merafe’s current share price is 91c/share.