Indebted resource sector due for restructure

Natural resource companies in Australia are due for a significant restructure, which could create opportunities for investors, according to one hedge fund.

Tribeca Global Natural Resources Fund co-portfolio manager Ben Cleary says resource company management in recent years has left them flatfooted today.

“Looking ahead, we see a number of interesting market structure issues in the natural resources sector. Generally speaking, most major commodity producers remain heavily indebted, having overinvested at the top of the market, and they are not able to take advantage of what appears to be a bottoming of the sector,” Mr Cleary said.

“The sector has always been a boom bust sector, which of course leads to poor asset allocation over time. This has led to lower liquidity, high volatility and wider spreads in the sector.”

The mining sector in particular has seen heightened volatility and an ongoing bottoming in Australia.

According to the ABS, investment in the mining sector over the 12 months to June 2016 was half of what it was during the peak of the investment cycle in 2013, while June quarter pre-tax profits were 33 per cent lower than last year.

It is this ongoing volatility that investors can take advantage of as the sector restructures, Mr Cleary said.

“This is an ideal backdrop for a long/short manager to take advantage of capital raisings, mispriced assets and cheap volatility. It is volatility that creates opportunity, and when that volatility strikes, you want to be able to go long and short to capture it.”

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