Have ASX iron ore stocks found their floor? Tyndall Asset Management October 2024 Iron ore prices may have finally found some stability moving forward Recently, the People's Bank of China (PBOC) rolled out its most significant set of monetary easing policies since 2015. These measures were designed to address China's ongoing property sector challenges and provide a broader boost to economic growth. Interest rates and reserve requirement ratios have been cut to historically low levels, signalling the government's commitment to maintaining liquidity and preventing a deeper slowdown. While this has spurred a rally in both Chinese equities and Australian resource stocks, the question remains: Is this a short-term sentiment-driven bounce, or the start of something more sustainable? While opinions may vary on the longevity of this rally, one thing is clear: China's looser monetary policy has created an environment ripe for further fiscal and property policy adjustments. The current positioning of the market is quite negative on China and thus underweight stocks that are exposed to China such as Australian Resources. This helps explain the recent strong market reaction. Have iron ore stocks found their floor?  The common reaction to China's slowdown often involves calls to sell big miners like BHP (ASX: BHP) and Rio Tinto (ASX: RIO). However, that kind of knee-jerk reaction doesn't align with a value-based investing approach. While sentiment undeniably influences short-term market movements, the real question is: How much steel is the global economy demanding, and what is the marginal cost of supply? At current prices, iron ore is likely sitting at a support level, hovering around US$95/t, which is underpinned by break-even costs. Prices have dipped below US$95/t for only 16 days this year, compared to 50 days over the last three years. The cost curve supports this level, as many producers would be unprofitable at lower prices. Additionally, trader mentality tends to kick in once prices break the US$100/t threshold, adding further support to this range. On a more fundamental level, we believe there is currently around 120mt of supply in the market that requires a price of over US$90/t to stay profitable.  So, the question we have to ask is whether China's economic weakness is severe enough to remove another 120Mt of iron ore demand from the market. We don't think so.  While the Chinese government has signalled its willingness to address demand concerns through coordinated policies, the China Iron & Steel Association (CISA) has projected that crude steel production will remain flat year-on-year in 2024. This suggests stability moving forward at current levels. Supply-side adjustments: Rebalancing the market On the supply side, significant cuts in iron ore production from both India and China have already done much to rebalance the market. India's output has fallen from 70Mtpa earlier this year to 30Mtpa due to price sensitivity, while China's domestic production has similarly dropped from 200mtpa to 80mtpa on a 62% Fe basis.  In Australia, we have seen Mineral Resources (ASX: MIN) shut down the Yilgarn operations (8Mt) and the Sino Iron Project decreased from 21Mt to 14mt. These adjustments further underscore the market's price elasticity. The greatest long-term supply risk remains the Brazilian mining giant, Vale. Although Vale has increased its production guidance for the year, Brazilian exports typically flatten out in the final quarters of the year due to seasonality, so massive increases in output are unlikely.  Longer term, another potential supply-side disruptor that has long spooked the market is the Simandou project in Guinea. The rail line is expected to be operational by Q1 2026, with the port to be staged thereafter. The complexity of the project poses a significant risk of delays. We expect the operation to ramp up through 2028. Additionally, the wet season in Guinea introduces challenges with stockpile management and moisture control.  For now, the risk of an oversupply glut in the iron ore market seems overplayed by the bears in the market. Seasonality and Sentiment Another factor working in iron ore's favour is seasonality. Historically, iron ore prices have shown strength from December through February, as China's domestic production falls during the winter months. This forces the country to rely more on seaborne supply, which is often disrupted by wet weather conditions in Brazil and the Pilbara region in Australia. Port inventories are currently sitting at 150Mt, which is on the higher end of the seasonal average. However, this doesn't pose a significant threat to the market, as a portion of these inventories are now controlled by major iron ore players for blending purposes.  Moreover, low-grade discounts have narrowed, and rebar spreads have rebounded from their September lows, signalling that much of the bearish sentiment may already be priced in. It is also difficult to assess the full supply chain inventories in China including stockpiles at steel mills. Recent discussions with China companies suggest that this inventory may be at the lower end of history. Where is the opportunity in iron ore equities?  In terms of equities, Fortescue Metals Group (ASX: FMG) is a recent addition to the portfolio. It offers an attractive entry point, and its lack of gearing makes it a pure play on a rebound in iron ore prices while paying an attractive fully franked distribution. BHP and Rio Tinto offer more diversified exposure, with their base metals businesses providing some downside protection. While the market remains cautious due to weak Chinese sentiment, the fundamental factors supporting iron ore prices--cost support and seasonality--paint a more optimistic picture.  As long as demand holds and supply remains in check, iron ore prices are likely to stabilise around current levels, if not rise slightly through the remainder of the year. Given this, an overweight position in iron ore equities, particularly FMG, appears to be a solid investment in the months ahead. Is this the start of a larger rotation out of the banks into the miners? We are seeing a significant valuation gap between the Bank and Resource sectors. The Banks sector has surged to an all-time high P/E of 18.4x (refer to Figure 1), well above its historical average of 12.8x, even exceeding the +1 standard deviation level of 14.5x, indicating stretched valuations. Figure 1: ASX200 Banks - trading at 18.4x forward concensus earnings (all-time high) Source: Factset In contrast, the Resources sector is trading at 12.1x forward earnings (refer Figure 2), below its long-term average of 13.3x, making it the cheaper of the two sectors to own, which can be expressed through owning quality businesses like the iron ore majors. The stretched bank valuations have likely been partly an expression of the market being underweight China and resources given bank earnings have largely been in line with expectations.  Pristine asset quality and extremely low bad debts have been the prime drivers providing some modest earnings growth. The obvious catalyst for a bank correction was either via the resource's rotation from confidence in a China recovery or the potential of a recession in either Australia or the USA. The former is emerging, and the latter is a realistic, albeit not a base-case scenario. Figure 2: ASX200 Resources - trading at 12.1x forward consensus earnings (below LT average) - cheapest sector Source: Factset Author: Tom Hays, Research Analyst Funds operated by this manager: Tyndall Australian Share Concentrated Fund, Tyndall Australian Share Income Fund, Tyndall Australian Share Wholesale Fund

ESG Insights: China emerges as green energy leader. Tyndall Asset Management September 2024 I recently spent a few days in Hong Kong meeting with Asian companies and experts to explore China's economic shift from relying predominantly on infrastructure and real estate to its emergence as a global leader in renewable energy. Historically, China's economy relied heavily on real estate and industrial growth, benefiting nations like Australia through iron ore exports. However, global dynamics and the need to reduce carbon emissions are driving a significant transformation. With government policies encouraging the development of the 'New Three Industries'--electric vehicles (EVs), solar energy, and lithium-ion batteries--China is positioning itself at the forefront of the renewable energy sector, laying the foundation for future economic growth Government policies support emerging industries China's rapid economic growth over the last few decades has been driven by investment, infrastructure development, and real estate. In 2021, real estate investment accounted for 27% of China's total fixed asset investment, but by 2023, this figure had fallen to 22% and is arguably even lower today. The sector has faced shrinking investments, declining sales, and a notable drop in housing prices. Between January and July 2024, real estate development investment decreased by 10.2% year-on-year (YoY) to RMB 6.09 trillion. The gross floor area (GFA) of new construction starts also saw a significant decline, with a 23.2% YoY decrease, while the GFA of completed projects dropped by 21.8% YoY. Although real estate remains a significant contributor to the economy, the Chinese government has been actively working to diversify the country's economic drivers. The government has introduced policies aimed at reducing payments and interest rates on property loans to prevent a collapse in the real estate market, which remains a vital part of China's economy. At the same time, the government has implemented significant reforms and provided incentives to encourage the growth of key industries such as EVs, solar energy, and lithium-ion batteries. These new sectors are crucial not only for domestic growth but also for China's goal to become a global leader in renewable energy and green technologies. I will discuss two of these industries in further detail in this paper. Global leader in EV manufacturing The electric vehicle (EV) sector is a cornerstone of China's new industrial policy. As the world shifts toward cleaner energy, China has positioned itself at the forefront of the EV revolution. By 2024, domestic EV penetration had surpassed 50%, reflecting the growing consumer demand for environmentally friendly alternatives to internal combustion engine (ICE) vehicles. The Chinese government's push for sustainable transport has been instrumental in shaping this industry. However, subsidies are no longer the primary source of EV growth, as these vehicles have become competitive with ICE cars. The rapid growth of China's EV market is one of the most significant trends in the country's industrial landscape. In 2023 alone, EV sales in China reached 7.8 million units, representing a significant share of the global EV market. This growth has been driven by several factors, including government subsidies, the development of battery technology and an extensive charging infrastructure network. Additionally, Chinese consumers are increasingly favouring EVs over ICE vehicles. China's EV market is not only expanding domestically but is also influencing global markets. Chinese automakers such as BYD, Li Auto, and NIO are rapidly gaining market share within China and overseas. Chinese EV manufacturers have overtaken many traditional automakers in sales and technological innovation, with BYD now ranked fifth in global EV sales. However, Chinese automakers face challenges in expanding globally, due to the impact of trade barriers and tariffs. In 2024, the European Union imposed tariffs up to 38% on EVs imported from China, while the United States and Canada have also increased tariffs on Chinese EVs.  The US and Canada appear to be particularly concerned about the software within the vehicles with a built-in internet connection.  The issue relates to concerns on Chinese companies collecting data on American drivers and infrastructure together with the potential for foreign adversaries to remotely manipulate connected cars on the US roads. Overcapacity increases price competition The Chinese government's massive investments in EV manufacturing have resulted in an oversupply of vehicles. Many companies, particularly smaller startups, are struggling to maintain profitability due to the high cost of production and competition from established players. While companies like BYD and NIO have scaled production efficiently, others are facing challenges with underutilised capacity and financial losses. This overcapacity has led to price competition, with many manufacturers slashing prices to maintain market share. This has resulted in thin profit margins across the industry, particularly for companies still in the early stages of scaling production. China dominates solar energy production Solar energy is another key sector in China's energy transition. China is the world's largest producer of solar panels, accounting for over 90% of global production. Between 2021 and 2023, China's solar capacity more than doubled, driven by strong demand and technological innovation. The country added over 200 gigawatts (GW) of solar capacity during this period, making it the largest solar energy producer in the world. The Levelised Cost of Energy (LCOE) for solar power has dropped significantly, making it cost-competitive with traditional energy sources such as coal and natural gas. By 2023, the LCOE for solar power in China fell to just $0.04 per kilowatt-hour, on par with the cost of coal-fired electricity. Chinese companies have improved solar efficiency while reducing production costs, making solar energy more affordable and accessible. This has enabled China to export its solar products globally, particularly in Europe, Asia, and the Americas. One of the most significant innovations in the solar industry has been the development of "N-type" solar cells, which offer higher conversion efficiency than traditional "P-type" cells. These advanced solar cells have helped reduce the overall cost of solar energy, making it more competitive with other forms of electricity generation. Despite this impressive growth, China's solar industry faces similar challenges to the EV industry. The rapid expansion of production capacity has led to an oversupply of solar panels, causing prices to plummet. Between 2021 and 2023, the average cost of solar panels fell by more than 60%, squeezing manufacturers' profit margins. To address overcapacity, the Chinese government has implemented policies encouraging consolidation within the industry. Smaller, less efficient producers are encouraged to exit the market, while larger companies expand their market share. This process of consolidation is expected to help stabilise prices and improve profitability in the long term. Expansion into global markets  China's solar industry is also expanding its presence in international markets, particularly in Southeast Asia and the Middle East. Chinese companies such as Longi, Jinko Solar, and Trina Solar have established production facilities in countries like Malaysia, Vietnam, and Thailand, where they can benefit from lower production costs and favourable trade policies. In the Middle East, these companies are scaling up operations to meet the region's growing demand for renewable energy. The United Arab Emirates and Saudi Arabia have become key markets for Chinese solar products. China's dominance of the Global Battery market The rise of electric vehicles (EVs) has significantly increased the global demand for lithium-ion batteries. As countries strive to transition to cleaner energy sources, the battery industry has become a critical component of this shift. China has emerged as a dominant force in battery production, contributing to a substantial oversupply in the market. China's battery production capacity in 2023 alone matched global demand, highlighting its overwhelming presence in the industry. The country has invested heavily in research and development, with companies like BYD and CATL leading the charge. This dominance is not just in sheer volume but also in technological advancements, making China a formidable player in the global battery market. Global lithium-ion battery manufacturing capacity has outpaced demand, with an estimated 2,600 GWh produced in 2023 against a demand of 950 GWh. This oversupply is expected to increase, leading to falling prices and squeezing profit margins for manufacturers. For consumers, this could mean more affordable EVs and stationary storage solutions. The low prices are making it difficult for new entrants outside of China to compete, even with generous support provided by the US Inflation Reduction Act and other such support structures.  The sustainability of the low battery prices is an intriguing question and will likely result in an industry shakeout as is normal during overcapacity cycles.  Lithium, a key raw material cost is in over supply and thus helping keep battery prices low.  However, regulatory and environmental approvals are making it more difficult to bring on new mining or refining capacity than build a battery plant.  This may help bring the supply and demand fundamentals back into balance. Conclusion China's industrial transition represents a fundamental shift in its economic model, as the country moves away from traditional investment-driven sectors like real estate and toward new, innovative industries such as EVs, solar energy and lithium-ion batteries. These sectors are crucial to China's long-term economic sustainability and its efforts to reduce carbon emissions and become a global leader in green technology.  Exports of the traditional labour-intensive products are declining due to falling competitiveness.  However, the capital and technology intensive industries are rapidly filling the gap. This transition is not without its challenges. EV, lithium-ion battery and solar industries all currently face significant issues related to overcapacity, profitability, and growing international competition. The Chinese government's role in managing these challenges through policies and supply-side reforms will be critical in ensuring the success of these industries. As China continues to expand its global presence in the EV and solar sectors, it is poised to remain a dominant player in the global market for green technologies. However, the country must navigate complex trade dynamics and competition from other global players to maintain its competitive edge.  Western World governments do not want to be totally reliant on China for these technologies. Australia plays a significant role in China's ongoing industrial transition and its legacy industries given its endowment of both critical minerals and iron ore.  Tyndall currently holds a modest overweight in the resources sector, exposing it to the short-term stabilisation of the property market and the China economy, as well as to the longer thematic that relates to global decarbonisation and China's industrial transition. Author: Brad Potter, Head of Australian Equities Funds operated by this manager: Tyndall Australian Share Concentrated Fund, Tyndall Australian Share Income Fund, Tyndall Australian Share Wholesale Fund

August Reporting Season - Week Three Update Tyndall Asset Management August 2024 The third week of reporting season is always busy, with some 110 companies reporting that represent $716bn of market capitalisation. A similar number of companies are expected to report over the final week. The 2024 earning season has been marked by a mix of optimism and caution, with distortions caused by the COVID-19 pandemic largely now dissipated. However, this normalisation has not been without its challenges, particularly as earnings expectations have generally trended downward. Some of the trends emerging include: Consumer Spending Resilience: The resilience of consumer spending continues to surprise. Factors such as strong immigration, an older population with significant savings, and the ongoing drawdown of these savings appear to be the key drivers. However, this resilience is uneven across different consumer segments, with some sectors experiencing more challenges than others. Easing Labour Markets: A significant theme that has emerged is the easing of labour market tightness. Companies across various sectors have reported a reduction in labour shortages, with mentions of job cuts increasing relative to mentions of labour shortages. Housing Market Challenges: The Australian housing market remains a key challenge, with rising housing and rental costs impacting consumer demand. However, there are signs of improvement in certain segments of the market, such as residential sales enquiries, particularly in New South Wales and Victoria. Stockland (SGP) has flagged they are experiencing a pickup in residential sales enquiries which was well received by the market. Inflation Moderation: While inflation remains a concern for many companies both via high input costs and the reduction of consumer demand, its impact appears to be moderating compared to previous reporting seasons. The frequency of mentions of 'inflation' in earnings calls has clearly declined. It is worth noting that the RBA appears still concerned on the elevated inflation levels, with cash rate cuts unlikely until 2025. Dividend Revisions: Dividend revisions have skewed negative, with only 18% of companies seeing upgrades to their forward 12-month dividend forecasts according to JP Morgan. The average rolling dividend per share (DPS) revision is currently -1.9%, reflecting the challenges faced by companies to maintain cash flow generation and payout ratios. Earnings Performance and Market Reactions Reporting season has so far revealed a mixed performance across the ASX 300, with companies reporting a balanced mix of beats and misses. In aggregate across those ASX 300 companies that have reported (61%), profit before tax beats sit at 25% vs misses at 23%. It is worth reflecting that the final week tends to be more skewed to the downside (48% of results missed by >5% over the past two reporting seasons). Market reactions have been varied, with share prices responding accordingly to the earnings outcomes. Conservative Guidance: Week three continued the trend of conservative earnings guidance from companies. Companies that provided quantitative guidance that were materially below market expectations included BlueScope Steel (BSL), Megaport (MP1), Fletchers Building (FBU), Corporate Travel Management (CTD) and A2 Milk (A2M) with the latter four companies all down double digits. Earnings Downgrades: The conservative guidance has led to ongoing earnings downgrades, with FY25 EPS estimates continuing to be revised downward. The overall reporting season has seen net EPS downgrades of around 2.5% with only the Technology, Consumer Discretionary and Financial sectors exhibiting net earnings upgrades. Positive Guidance: Despite the overall trend of conservatism, there were some positive surprises. Companies including Charter Hall (CHC), WiseTech (WTC), Brambles (BXB) and Breville (BRG) provided guidance that was above consensus, boosting investor sentiment which saw double digit returns over the week. On the other side of the ledger, Bluescope Steel (BSL), Megaport (MP1) and A2 Milk (A2M) announced guidance that was 10% below consensus. Sector Highlights Financial Services: The financial services sector emerged as a winner of the reporting season so far, with net positive earnings surprises and 10% of companies net upgrading FY25 earnings. Key performers included Square (SQ2) and HUB24 (HUB), both of which beat expectations and saw upgrades to their FY25 earnings forecasts. Conversely, Insignia (IFL) called out a cautious outlook for platform flows, losses in a super contract and a dividend cut which saw the stock down double digit on the day. Banking: A combination of flattish net interest margins helped by delays in rate cuts and extraordinarily low bad debts are resulting in small upgrades in the banks - albeit earnings in FY25 are down on pcp. Capital remains strong and all the major banks have buybacks in place. Technology: The technology sector has been one of the standout performers during the reporting season. WiseTech (WTC) and Bravura Solutions (BVS) reported strong earnings and provided positive guidance, leading to upward revisions in their earnings forecasts. This has been driven by continued strong demand for technology solutions and services, particularly in areas such as software and IT services. Healthcare: The healthcare sector has faced significant challenges during the reporting season. Major players like CSL (CSL) and Cochlear (COH) reported disappointing earnings, leading to downward revisions in their earnings forecasts. The sector has struggled with margin pressures, increased competition, and regulatory challenges, all of which have weighed on performance. Materials and Energy: The materials and energy sectors continue to be impacted by weaker commodity prices and little respite in costs. Whitehaven Coal (WHC), BlueScope Steel (BSL), and Santos (STO) were notable underperformers, each facing sharp earnings downgrades due to weaker-than-expected operational performance and guidance. A weaker USD driven by falling interest rates post the Federal Reserve Jackson Hole Symposium may provide some respite. Consumer Discretionary: The consumer discretionary sector has presented a mixed picture, with some companies benefiting from resilient consumer spending while others have faced margin pressures and rising costs. JB Hi-Fi (JBH) delivered a strong earnings beat, while Domino's Pizza (DMP) and The Lottery Corporation (TLC) both underperformed, leading to negative market reactions Where to next? The final two weeks of reporting season are always brutal, with the sheer number of companies reporting making it difficult to separate the noise from the underlying fundamentals. It is important to determine quickly whether the share price reaction is reflecting the long term, short term or simply how the market is positioned in the stock. As long-term fundamental value investors, excessive moves during earnings season typically bring opportunities. As Benjamin Graham, the father of value investing opined: "In the short run, the market is a voting machine but in the long run, it is a weighing machine." Fear and greed are some of the most powerful long-term alpha generators and thus it is important to have a patient and disciplined process that can find opportunities amongst the dislocations. Author: Brad Potter, Head of Australian Equities Funds operated by this manager: Tyndall Australian Share Concentrated Fund, Tyndall Australian Share Income Fund, Tyndall Australian Share Wholesale Fund