The Paragon Australian Long Short Fund is going through a rough patch, falling almost 18 per cent in the six months to June 2018.
The Paragon Australian Long Short Fund is a long/short fund that is fundamentally driven with a concentrated portfolio of high conviction stocks and a focus on capital preservation. The objective of the fund is to return in excess of 10 per cent per annum after fees over a 3 to 5 year investment horizon.
Since inception in March 2013, the fund has returned 103 per cent versus a 54 per cent gain for its benchmark AXS All Ordinaries Accumulation Index. That translates to a net return of 14.2 per cent per annum, nicely ahead of its objective.
Why lithium shares were on the nose in the first half of 2018
Despite its recent struggles, over the past 12 months, the fund is out-performing the market, delivering an overall gain of 26 per cent versus a market return of almost 14 per cent
Clearly FY18 was a year of two halves for the fund, with a strong first half performance of +53.1 per cent being followed by a disappointing second half performance of -17.7 per cent.
In recent months the fund has suffered from the sentiment shift away from its holdings in its Electric Vehicles (EV) theme, specifically lithium shares and cobalt shares.
Ongoing anxiety about oversupplies in the lithium and cobalt markets has resulted in a shift in sentiment in lithium stocks. For example, the Galaxy Resources (ASX:GXY) share price has fallen more than 30 per cent from its 2018 peak, with the Orocobre (ASX:ORE) share price down almost the same.
Paragon thinks the correction in Chinese lithium spot prices is due to seasonality, and therefore doesn’t buy into the current lithium oversupply anxiety.
Following research trips to China and South Korea, Paragon’s key takeaway is that demand is being under-estimated. Unlike supply, the fund says, demand continues to surprise to the upside, with Lithium demand now growing at 20 per cent per annum.
Looking out to 2025, Paragon says Lithium demand growth is expected to be ~4x. It has been ~100 years since an industry has grown close to this rate (Oil and Gas in the early 1900’s) over a similar time period.
Not surprisingly, the fund concludes that battery metal markets will remain tight, and it expects strong pricing for the medium term.
2 lithium stocks offering exceptional margins
Although the fund has previously declared key long holdings in Orocobre and Clean Teq Holdings (ASX:CLQ), in its June 2018 update it focused on two other lithium stocks.
Paragon said the Global Geoscience (ASX:GSC) share price de-rated in June after it completed a discounted $50m capital raise.
In the fund’s view, the GSC share price reaction will prove to be short term. Near term catalysts include its pre-feasability study (PFS) due in the next couple of months.
Paragon says Global Geoscience shares are currently trading at a conservatively fully-diluted and fully-funded Price/NPV of ~0.5x. The fund expects this discount to close, as it has done in the past for several of the fund’s other tier-1 project investments.
The Global Geoscience share price has fallen 34 per cent from its 2018 high, now trading at 34 cents.
Along with Global Geosciences, Paragon also highlights Kidman Resources (ASX:KDR), saying both companies will deliver strong project feasibilities with all-in cash costs less than $US2000/t Lithium Carbonate and less than $US5000/t Lithium Hydroxide respectively, offering exceptional margins vs current spot and contract prices.
The Kidman resources share price has also fallen 34 per cent from its 2018 high, now trading at $1.64.
Paragon says it looks forward to providing investors with further details as catalysts arise from these and other high conviction holdings, anticipating strong returns.