Investment Matters

Company News: Lynas, Reliance Worldwide and Boral

Lynas - Rare earth mineral supply reaches a critical point

At least politicians in the US can agree on one thing – that is that the rising risks from a reliance on foreign supply chains have become untenable.

On Thursday President Trump declared a national emergency - signing an executive order that identifies 35 minerals as “essential to the economic and national security of the United States”. The executive order outlines the vulnerability created by the United States’ heavy reliance on the import of rare earth elements from China.

The executive order will result in the commissioning of a report to investigate the United States vulnerability to foreign supply and recommend actions such as tariffs, quotas or other import restrictions against China and other “nonmarket foreign adversaries”.

Furthermore, the expansion and protection of the US domestic supply chain for minerals has been prioritised – with a strategy to be developed within the next 60 days to fast-track domestic supply.

The order opens the door for “billions of dollars” in government funding to help achieve this goal. Critically, the scope of the order includes “help[ing] allies build reliable critical mineral supply chains within their own territories”.

As we have noted in the past, Lynas is one of few producers of rare earth metals outside of China with the resources, scale and commercial expertise to deliver this supply.

The company has already won a tender to build a heavy rare earth processing facility in the US. The announcement on Thursday not only affirms the strategic value we saw in the company’s assets but bodes well for US government funding of its projects in the future.

Shares in the company finished 5% higher on the day of the announcement.

 

Reliance Worldwide - an update

We attended Reliance Worldwide’s investor day on Thursday. The key takeaways were that the company has a strong commitment to diversifying its product lines (through both acquisition and ongoing research and development), continues to expand its distribution partnerships and has maintained strong operating efficiency during COVID (most critically, ensuring product availability despite a surge in demand and short lead times from its distributors).

Reliance is a position we built with the cash we had on the sidelines going into COVID. It is a quality company with good growth in strong markets. Its shares were ‘on-sale’ during the March-June period. Our channel checks in the US during that time supported the contention that homebuilders and domestic demand for hardware remained resilient.

Pleasingly Reliance has seen strong sales momentum into September, with sales growing in the US, Europe and the Asia Pacific by 22%, 8% and 2% respectively.

In the short to medium term, pent up demand (including distributor restocking), as well as more people working from home and increased spending on remodelling and repair provides momentum for sales. We see that this provides potential upside for revenue growth in the short term.

The company is also looking to expand into other markets including commercial construction, where the efficiency created by its products provides value in the form of labour cost savings (its systems take much less time to install than welded or crimped piping).

Pleasingly, the company clearly outlined its long-term revenue growth expectations – which are driven by sound fundamentals such as the ageing of housing stock, new household formation and home values.

While these were largely in line with our expectations, the market reacted favourably to this, with shares ending the week 8% higher – despite a muted week for the market overall.

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Boral – looking past the personalities 

Boral has been a core holding the portfolio since October, on the strength of its underlying assets. What the Boral of the past 3-5 years did not have was great leadership, effective senior management nor a board that inspired the market.

The market was incredibly wary of a large acquisition the company made in the US in 2016 under previous CEO Mike Kane. The acquisition has proven to be poor, bedevilled with accounting and transparency issues, even before we consider the merits of price paid and assumptions around synergies.

We purchased shares following a series of downgrades and disappointments. More followed post our first foray, and Boral also fell with the market during the COVID downturn.

In the background however a series of players including John Wylie (according to AFR) and the Stokes investment vehicles were calculating what these assets might be worth with different management and a different board.

In recent months the Stokes have taken a 20% interest, a new CEO has been appointed and the board refreshed. The company is looking at options to divest various assets. In the end the asset values shine through the current conditions, current management and existing board.

Whilst Boral has been a strong performer since inclusion (>10% return in excess of the market), the experience also points to the merits of a “value” style that seeks to infer the underlying value of a company's assets, and sometimes wait until the right owner emerges. There are a number of other holdings in your portfolio that fall into this camp!

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