Independent Investment Research

In this edition of the IIR LMI Monthly Update we take a look at the key newsflow in November and December and take a look back at the performance of LICs and LITs in 2024.

We recently completed a review of Plato Income Maximiser Limited (ASX: PL8). The Company has delivered on its investment objective to date, delivering a consistent above-market fully franked yield while delivering market-like returns. An investment in the Company is most relevant for investors that can make full use of the fully franked dividends with the outcomes less attractive for those that don’t get the full benefit from the franking credits. Changes to the imputation credit system remains the biggest risk with regards to the strategy. We view the team to be highly experienced and qualified to manage the strategy with the Company being one of IIR’s higher-rated enhanced yield strategies. The strategy has largely reached capacity though. While this is not an issue for the strategy given the large amount of dividends paid out every year, with PL8 being the primary vehicle to access the strategy this has resulted in the Company trading at a premium for a prolonged period of time with new investors not necessarily getting the full benefit from the income generated by the portfolio. Investors need to remain patient if the Company is trading at an elevated premium to ensure the investment is delivering sufficient yield.

We recently completed a review of Sandon Capital Investments Limited (ASX: SNC). SNC is a genuinely differentiated product and one that provides genuine diversification benefits. Successful activist investing requires patience and a differentiated skill-set in IIR’s view. We believe the Manager has proven itself capable in this regard, with Managing Director and Chief Investment Officer (CIO), Gabriel Radzyminski, possessing the necessary acumen and determination required to extract identified value in underperforming investments. The risk and return characteristics show that the portfolio is being managed true to name and alignment of interest is strong. However, we believe the performance fee structure could be improved, with investors benefiting from a lesser degree of fee and cost ‘leakage’. In addition to its small size and limited liquidity, the strategy requires long-term, patient investors with investments often taking many years before the value is realised (akin to a private equity style of investment). We attribute a combination of these factors to have contributed to the discount at which the Company trades. It will be up to the Manager and Board to implement initiatives to increase demand for the strategy to narrow the discount. If this can be achieved, the discount provides an opportunity for investors to potentially enhance their returns.

We recently initiated coverage of Southern Hemisphere Mining Limited (ASX: SUH), an advanced copper exploration company operating in Chile. Recent targeting work on the company's flagship 100%-owned Llahuin Porphyry Cu-Au-Mo Project (located less than 70km from the 6.1 billion tonne Los Pelambres porphyry deposit), has defined several compelling drill targets. These are at a range of depths, and highlight the potential for additional discoveries to significantly grow the current Mineral Resource Estimate (MRE) of 169 Mt @ 0.43% CuEq. The company has recently commenced a ~5,000m RC drilling program that will look at expanding the current defined mineralisation, as well as test several of the newly defined targets, with an updated MRE expected in H1, 2025. An interim drilling report released this week has extended the already large strike of the Cerro-Ferro deposits from 1.9km to 2.2km. Results include 81m @ 0.49%CuEq from 2m and 122m @ 0.41% CuEq from 2m, with numerous holes open at depth for diamond tails during Q1 2025. Furthermore, a potential feeder zone has been identified from RC drilling and this will also be tested in Q1 2025 with diamond drilling. #commodities #resources #Chile #copper #equities #ausbiz #exploration #mining

Whilst we might be close to the bottom as far as lithium prices are concerned, the prospect of an imminent and significant rebound is limited, given the dramatic oversupply situation in the market that is expected to persist for years. The lithium hydroxide price has slid nearly 90% since touching a peak of $85 per kilogram in December 2022, after soaring by more than seven-fold during the previous 18 months. Nevertheless, global lithium supply is forecast to rise by 25% this year and 15% in 2025, based on UBS estimates. China is the world's biggest producer, and it has some of the highest-cost lithium mines, but many Chinese-owned lithium mines at home and in Australia and Africa are unlikely to close because they are integrated into downstream supply chains. This is because China’s government regards its world-leading EV and battery sector as strategic, and is keen to keep it thriving with steady raw material supplies and low costs. #lithium #commodities #resources #China #exploration #mining #EVs

We initiated coverage of Auric Mining Limited (ASX:AWJ) back in June 2021, when the company was an advanced explorer and prior to it taking the plunge into gold production. Since then, the company has successfully transitioned to production status via a relatively low-risk strategy of contract mining and toll treatment, firstly at its Jeffreys Find deposit and now at its Munda deposit, in Western Australia. Proving that miners don't have to be big to be successful, AWJ's share price performance reflects its success. With its production focus now moving from Jeffreys Find to Munda, AWJ has today announced the definition of a Starter Pit Reserve of 7,400 contained ounces (calculated using a gold price of A$3,500 per ounce (current spot price A$4,133). Mine planning is based on a total of 125kt @ 1.8g/t from the Starter Pit, with the financial model projecting Undiscounted Cashflow of $5.3M at All in Sustaining Cost (AISC) of $2,635 per ounce, over a 5-month mine life, including toll treatment. #gold #commodities #resources #exploration #mining #equities #metals #ausbiz

The below chart shows the rolling 12-month correlation of the S&P/ASX 200 Acc. Index returns and the change in the Australian Government 10-year bond yield over the 10 years to 31 October 2024. After a period of relatively uncorrelated returns, the return of the S&P/ASX 200 Acc. Index has become highly negatively correlated to the change in the bond yield.

The Vaughan Nelson Global Equity SMID Fund (Quoted Managed Fund) (ASX: VNGS) (“VNGS” or the “Fund”) is an Exchange Traded Managed Fund (ETMF) that listed in June 2022. The Fund provides exposure to the Vaughan Nelson Global SMID Cap strategy, which has an inception date of June 2020. The Fund is the quoted class of the investment strategy with the strategy also being offered through an unlisted unit trust. The Fund seeks to provide exposure to small and mid cap global equities with the objective of outperforming the MSCI ACWI SMID Cap Index, after fees and expenses and before taxes, on a rolling five year basis. The Responsible Entity (RE) of the Fund is Investors Mutual Limited who has appointed Vaughan Nelson Investment Management L.P (the “Manager”) as the Manager of the Fund. The Manager is a US based asset manager that was founded in 1970 and provides equity and fixed income strategies with US$17.8b AUM as at 30 June 2024. The Manager has a fundamental, bottom up investment process with a targeted return approach. The portfolio only incorporates stocks that the Manager believes can generate returns of 50%+ over a three-year period (~15%p.a. compounded), in the event the investment thesis plays out as expected. The portfolio will typically comprise 40-80 positions with the allocation to a single investment typically not exceeding 5% at the time of investment and the top 10 holdings typically accounting for 20%-25% of the portfolio. The strategy is managed in a benchmark unaware manner with the portfolio typically having an active share of greater than 90%. The Manager uses proprietary factor analysis to ensure that the portfolio is diversified across factors and that the strategy does not have unintended factor bets. This allows the Manager to build a relatively concentrated portfolio while being representative of the investment universe from a risk profile perspective. The Manager is paid a fee of 1.12% p.a (inclusive of the net effect of GST), calculated and accrued daily and paid monthly in arrears. No performance fees are applicable.

We have completed an update report for Acurx following the release of the September quarterly results and business update on 13 November 2024.  Our price target has declined slightly from $11.77 to $11.57 per share ($7.57 per share on a fully diluted basis and $9.97 per share using the treasury stock method). The decline is a result of the dilution from the shares issued during the September quarter through the ATM program. The Company is progressing with the necessary requirements to advance to the Phase 3 trials. With the CMC approved, the Company is well placed to commence the first of two Phase 3 trials next year. IIR continues to view there to be material upside for Acurx with our price target representing a 536% premium to the share price as at 13 November. The capital position of the Company has been weighing on the share price, however the Company has access to sufficient capital to enable it to potentially commence the first trial on a limited enrolment basis until additional capital can be raised. While the Company continues to search for a strategic partner there are a number of potential government grants that may be available to fund (either in full or partially) the Phase 3 trials for ibezapolstat, providing the Company with options. 

The Pharma & Biotech market had a relatively muted month. There were a number of companies that experienced strong share price movements but this was on limited newsflow and limited liquidity. In this edition of Movers & Shakers we take a look at 4 Pharma & Biotech companies whose share prices rallied in October on the back of positive announcements.