Is this now an opportunity for china exposed stocks? Tyndall Asset Management May 2025 After a significant price correction in China exposed stocks over the last year, Tyndall's Jason Kim recently went to China and met with various companies and industry experts to help determine whether some of these stocks now represent a real opportunity for investors. During the course of 2024, Australia's largest trading partner, China, went through a significant economic downturn on the back of a residential property downturn after a weak COVID bounce when China came out of lockdown in late 2022. This resulted in poor consumer sentiment, which then spiraled into a negative feedback loop with business confidence which became more pronounced during 2024. This not only impacted the broader share market, but more specifically, it directly impacted resource stocks and those companies with significant exposure to Chinese consumers. Over several days in March, meetings were held with macro experts, steel mills, property developers, lithium miners, and EV battery makers across cities including Beijing, Shanghai, Shenzhen, Guangzhou, Chengdu, Changsha, and Tangshan. Key takeaways After facing soft demand, and deflation in China during 2024, the general view for the Chinese economy was that 2024 saw the low point for the economy, and that 2025 is likely to see some improvement. Overall demand growth is at least going to improve to be marginally negative to flat, and it is possible that we see a very modest recovery. Residential property prices in tier 1 and 2 cities are now starting to show some signs of stabilisation, post-September policy support, and arguably there may now be some green shoots. However, property prices in the lower tier cities are still weak, resulting in consumer sentiment still remaining fragile. Given the focus on improving consumer sentiment, it appears most likely that any Chinese government stimulus will be targeted more at the consumer rather than in construction/fixed asset investment, and that measures will be taken to help stabilise - rather than stimulate - residential property prices. This clearly has negative implications for steel and iron ore. The key risks are US tariffs and geopolitical tensions which remain a significant wildcard impacting exports and overall sentiment. However, many experts noted that the Chinese government may have been holding back some stimulus to leave enough fire power to properly address the negative implications from the US tariffs. Key Investment Outlook Iron Ore China produces approximately 1 billion tonnes of steel per annum. Due to a weak Chinese economy last year, we saw softer demand for steel domestically and an increase in steel exports to c100kt pa to shift excess production. This has seen steel profit margins decline. After meeting many steel mills, iron ore traders, and steel traders, the consensus view is that domestic steel demand still remains soft, with property and infrastructure seeing a modest contraction in demand. The key bright spots for demand are in the consumer related sectors - namely auto and appliances - after some recent consumer stimulus sought to increase demand in those industries. This view is in-line with what was discussed previously. China has increasingly imposed stricter and more frequent air pollution controls, requiring the steel mills to reduce production to reduce emissions, and this may be the mechanism that the authorities will use to help reduce oversupply. There is speculation that a government mandated production cut of 50 million tonnes per annum is imminent. All the steel mills we spoke to were generally supportive of industry-wide production cuts as it would improve their profitability, but this will come at the expense of less demand for iron ore. As a result, demand for iron ore from China is likely to be challenging, while at the same time meaningful new supply of iron ore (namely Simandou in Guinea) ramps up over the next 12 months or so. While the market is already forecasting lower long-term iron ore prices, any falls in spot iron ore prices in the short term will likely dampen sentiment in this sector. Lithium An incredible surge in lithium prices in 2021 and 2022 - peaking at around $US80,000 in Dec 2022 - saw a swathe of new lithium supply come to market, which perhaps unsurprisingly was followed by a spectacular decline in prices (refer Figure 1).  Figure 1: The Lithium Rollercoaster Source: Bloomberg, April 2025. After having met many Chinese lithium miners and lithium battery makers, it appears that even after this significant price correction the outlook for lithium prices still remains challenged. Despite growing demand for lithium as we transition to renewables and EVs globally, the expected growth in supply flagged by the lithium miners we met would suggest that any demand growth will at least be met by supply growth into the medium term. Portfolio Implications Given the near-term challenges for iron ore, we have moderated our overweight position in the iron ore miners to be marginally overweight. This acknowledges that any stimulus from China, while likely to be more targeted at the consumer, could still be incrementally positive for mining stocks. Our key overweight in this sector is Rio Tinto due to its strong forecast free cash flows, and participation in the Simandou project which will be a source of meaningful growth in iron-ore supply in the near future. While lithium miners may appear attractive at current share prices, our trip suggests it is likely too early to enter this space given the challenging oversupply outlook. We continue to monitor this sector closely for any potential opportunities. Author: Jason Kim, Portfolio Manager Funds operated by this manager: Tyndall Australian Share Concentrated Fund, Tyndall Australian Share Income Fund, Tyndall Australian Share Wholesale Fund

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