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Regal hedge fund manager says resources stocks are still cheap

Regal’s hedge fund focused on the resources space has thumped the market and its top stock picker, Tim Elliott, says resources stocks are still cheap.
Tom Richardson
Oct 24, 2022

Tim Elliott says we should celebrate Australian mining more. He says the industry that made Australians the richest people in the world in 2022 is set to boom harder than most expect, with resources stocks still cheap.

The clean energy transition will be the springboard opportunity for most investors and poor sovereign energy policy is the root cause of global inflation, according to the investor.

The hedge fund manager and Australian mining apostle runs the Regal Resources Long Short Fund, alongside Regal’s founder and chief investment officer Philip King.


Amid a roaring bull market in resources, the fund has rocketed 68 per cent higher after fees since inception in November 2021. Elliott is set to name his top sector pick at the charitable Sohn Hearts & Minds conference in Tasmania on November 18.

“Mining is the unsung hero of Australia,” says Elliott. “It underpins our standard of living, while generating high-paying jobs in regional Australia. Australian miners are the best in the world and have the highest ESG and environmental outcomes in the world.”

Elliott is a CFA charter holder and joined Regal in 2018 after seven years at mining giant Glencore, where he worked as an executive general manager identifying and acquiring resources businesses.

He says the experience at Glencore leading due diligence backed by full data room access and mining’s best technical teams is what helps him identify long positions for the fund today.

“Personally, I’d rather own a miner on 4x EBITDA underpinned by physical assets that are increasingly scarce, than a tech stock where you pay away 30 times FY30 projected sales reflecting heroic growth assumptions,” he says. “Miners might have cyclical downturns, but they have hard assets and bounce back soon enough, whereas a lot of puffed-up growth stocks will collapse and never recover – now that’s real risk.”

The fund employs a bottom-up stock picking approach to mean Elliott uses fundamental research methods to pick the best investment opportunities on a valuation basis, irrespective of what sector they’re in or the macroeconomic environment.

Elliott won’t talk about the fund’s short side in colour, but it can bet on companies falling in price and amplify leverage (gross gearing) via derivatives to try to crank returns.

Regal’s fund is unusual in the industry as a hedge fund focused on resources and fits in with the reputation Regal’s founder and chief investment officer Phil King has for innovating in the pursuit of investment returns for clients.

The minimum investment is $100,000 and clients are understood to come from Regal’s network of family offices and high net worth investors. Its October 2021 initial raising closed at $90 million and King is named as a member of the fund’s key investment team, alongside mining analyst Henry Renshaw.

“Miners are consistently undervalued because the market uses insanely low long-term commodity prices built on deeply flawed assumptions,” says Elliott. “It assumes there’s a deep pool of shovel-ready projects in low sovereign risk jurisdictions that can quickly be brought on to keep prices down at the marginal cost of supply, perhaps with a 15 per cent return on investment. Most of those assumptions are not true anymore, if they ever were.

“There’s less capital available for new projects, miners are very reluctant to build greenfield projects and they take forever to permit. So decades ago maybe high prices might induce new supply in a year or two. Well, going forward it will often be five-10 years of high prices before the supply response arrives.

“And by high, I mean really high prices like we see today in coal or lithium. It’s obvious that commodity prices will average far more than is assumed, which is why miners are cheap and will outperform.”

In the white-hot lithium space, Elliott says the fund’s biggest holding is ASX-listed Allkem. The company owns lithium brine operations in Argentina, a hard-rock lithium operation in Australia and a lithium hydroxide conversion facility in Japan.

“The growth should be self-funded because they’re generating remarkably strong cashflow every quarter,” says Elliott.

“We’re bullish on electric vehicles, with sales in China continuing to beat expectations. Commodities can be cyclical, but equities are already pricing in large falls in lithium pricing, and the reality is that later this decade we start to see a large supply deficit that looks permanent. That’s certainly not in Allkem’s price.”

Elliott insists Australian miners will deliver excellent investor returns into the future and the fund has multiple other bets in the lithium space including Cleantech and Pilbara Minerals, where it was a cornerstone investor in the latter’s largest lithium mine.

Good government key

It also owns a stake in Chalice, the owner of Western Australia’s Julimar Project, which is touted as the largest nickel sulphide discovery since 2000.

De Grey Mining is also backed as the owner of the Hemi gold project in the Pilbara area of Western Australia.

Elliott says the key to unlocking Australia’s resources potential further is good state and federal government policy.

“The world cannot decarbonise unless we mine a lot more commodities like lithium, copper, nickel and rare earths,” he says. “All those steel wind turbines are made of coking coal and iron ore.

“Yet it’s getting harder to bring on new mines, it’s costing a lot more and taking longer, there’s a lot more red and green tape in Western countries. Groups litigate to block even lithium mines essential for decarbonisation.”

The fund manager also suggested the rise of index or passive investing means there are fewer investment experts who can separate good projects from bad in deciding how to allocate capital in the quest to decarbonise.

“The root cause of high [global] inflation is partly COVID disruptions, but mostly due to energy policy,” he says. “The global energy shortage is going to cause a lot of real pain to everyday people and numerous businesses will collapse throughout the West.

“Instead of increasing energy supply we’ve chosen to destroy demand by increasing interest rates to induce a global recession, and it’s going to be painful, especially for poorer people and especially for Europe. This European winter will be awful, but the next winter will be catastrophic if we don’t produce more energy.

“Every other week we see an aluminium smelter shut down in Europe and open in China where there’s cheap, reliable energy. Real people lose their jobs and security of supply is compromised permanently.”

Government policy should encourage more downstream processing of commodities in Australia, the fund manager said.

“It would generate more tax revenue and high-paying jobs, while bolstering security of supply chains. But we need to accept that Australia is uncompetitive now due to our high energy prices and labour costs, so it simply won’t happen without government loans and tax concessions from government to compensate.”

Regal Investment’s chosen charity partner for the Sohn conference is emergency medical care provider the Green Light Institute. Elliott will present his resources pick on November 18 alongside other Australian asset managers.

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