With established investments in both of Australia's listed residential aged care providers, Estia Health and Regis Healthcare, our positive outlook for the sector is informed by three factors. Firstly, advanced age is associated with complex and ongoing care needs which Residential Aged Care is uniquely positioned to provide. Secondly, Aged Care operators with established processes to consistently deliver care (meeting ever more demanding standards) have a clear opportunity to consolidate what is currently a fragmented sector. Finally, the demographic tailwind provided by a growing and ageing population supports demand growth for the foreseeable future.

Aged Care Industry Consolidation - Number of Providers

In recent years the sector had to navigate challenges including a squeeze in funding, the Royal Commission and COVID-19; however recent operational updates from the listed providers as well as an announcement from the Federal Government, highlights how positive momentum is building in the sector.

Funding Clarity

On 4^th May 23, the Australian Government outlined how it will fund a 15% Aged Care workforce pay increase proposed by the Fair Work Commission. It is offering a meaningful increase in the AN ACC daily funding rate (rising to over $240 per resident) as well as a 'hotelling supplement' of $10.80 (per resident per day) to cover increased wages for aligned staff such as chefs.

The funding increase is expected to pass through to workers in the form of higher wages, yet it reflects a positive outcome for the sector overall. It resolves a major uncertainty has dogged the sector since the Fair Work Commission first proposed wage increases for Aged Care employees.  It also indicates the current government's commitment to sustainably reform the sector.

Providing financial incentives for workers to commit to a career in Aged Care should support improved quality of care and customer satisfaction. In the past, low wages have repelled workers from Aged Care and operators became increasingly reliant on temporary employment agencies to fill rosters. The margins charged by these agencies are high, therefore the financial burden of using agency staff has been punitive for operators. Stabilising the workforce represents a meaningful opportunity for Aged Care operators to improve their financial performance.

Operating Metrics Improving

Recent updates from both the listed Aged Care operators shows they have made good progress on driving operational improvement. Occupancy is trending higher following several years disrupted by the Royal Commission and then Covid-19. Higher occupancy drives both revenue and margin.

The sector has is also making progress adapting to the AN ACC funding reforms. Following substantial changes to the funding model, Aged Care operators can now refine their operations to ensure they are adequately funded to provide better quality care to residents. Resolving the uncertainty about the funding structure has enabled operators to develop platforms and models to deliver sustainable care.

Author: Sinclair Currie, Principal and Co-Portfolio Manager

Australian housing values appear to have stabilised, with a second consecutive monthly increase as CoreLogic's national Home Value Index rose by half a per cent.

The capital cities performed strongly, with Sydney leading the way with a 1.30% increase for the month, followed by Perth (0.60%), Brisbane (0.30%), Adelaide (0.20%) and Melbourne (0.10%). Canberra and Tasmania remained stable, whilst only Darwin recorded a decrease in values, with a 1.20% reduction.

Similarly, the regions have also performed quite well, with South Australia seeing a 0.90% increase, followed by Queensland (0.80%) and Western Australia and Tasmania, both increasing by 0.10%. Only regional Victoria and New South Wales experienced a reduction in values, of 0.40% and 0.30%, respectively.

Auction activity remained low in April, with volumes down by approximately 25% when compared to last year. Persistently low levels of residential property coming to market remains a key factor in supporting housing values. The rolling four week trend during April was around 14% below the previous five year average in new listings for April. Whilst numbers were down, clearance rates remained robust.

With the decision of the RBA to once again increase the cash rate by a further 0.25% following last month's pause, the outlook for the property market remains stable but with future growth potentially constrained. Whilst we are yet to see the full impact that the rate rise cycle has had on household cashflows, foreign buyers are returning and the labor market remains tight which should keep prices stable.

Clearance Rates & Auctions 17th - 23rd of February 2023

Property Values as of 1st of May 2023

Median Dwelling Values as of 1st of May 2023

Quick Insights

FOMO

Despite some uncertainty created by the RBA's recent decision to increase rates, some homebuyers have not been deterred.

Dr Nicola Powell, Chief of Research and Economics from Domain, recently said, "I think the improvement in confidence that stabilised the market will be enough to sustain the market recovery. " Sydney resident and homebuyer Scott Gardiner had this to say, "I could see that prices have started to move since January, and very soon, there will be more buyers in the market, so I decided to buy as soon as I got my mortgage pre-approval."

Mr Gardiner just settled on a $725,000 Newcastle investment home. Sydney-based real estate agent Jack Henderson said some buyers are starting to feel some urgency as competition heats up. "After seeing 10 rate rises having less impact on house prices than people expected, people are becoming more confident."

Source: Australian Financial Review

Housing Heroes

New research by McCrindle Research for the Finance Brokers Association of Australia has revealed that due to higher interest rates more than 60% of homeowners have cut back on leisure and social activities to manage higher repayments. Another 28% said they took on more work and 30% said they were considering it.

These homeowners are now being credited for reversing the property slide by cutting back on non-essentials instead of selling. Tim Lawless, Director from CoreLogic said that borrowers falling behind on mortgage repayments, which usually trigger distressed selling, remained low at just 0.4% of all loans.

"We haven't seen any evidence that distressed home sales have become a feature of the housing market. A lack of sellers, let alone motivated sellers, is likely to be a key factor that has supported housing prices" Mr Lawless said.

Source: Australian Financial Review

Women & the Home Guarantee

Housing Minister Julie Collins has expanded the eligibility criteria for three home buyer schemes to include those who have not owned property in Australia in the past 10 years. The policy has been aimed at older women who may have lost their home in a divorce or separation.

"We know divorce is often a reason people lose their home, particularly women," Grattan Institute economic policy program director Brendan Coates said. Of women who separate from their partner and lose the house, just one in three buy a home again within five years, and only 44 per cent again within 10 years. The changes hope to address this issue.

Source: Australian Financial Review

Author: Filippo Sciacca, Director - Investor Relations, Asset Management and Compliance

Tesla claims it will eliminate the use of Rare Earths in its Electric Vehicles. Portfolio Manager Jason Kim investigates how realistic this claim is, drawing on insights from Adamas Intelligence, a leading research consultancy on critical minerals, and industry consultant Yoo Cheol Kim (YC Kim).

During Tesla's 2023 Investor Day in March, the global electric vehicle behemoth claimed that their next generation electric vehicles (EVs) will no longer contain rare earths. Rare earths are used in some permanent magnets that are a critical component of motors in electric vehicles. These magnets contain rare earths called NdFeB magnets (Nd - the rare earth elements Neodymium and Praseodymium, in conjunction with some Terbium and Dysprosium, Fe - Iron - and B - Boron).

Tesla CEO, Elon Musk, is known for making hyperbolic statements and although his statement contained no details on how this would be achieved, the impact on rare earths stocks was immediate and dramatic.

Lynas, a large producer of rare earths listed on the ASX, saw its share price decline by almost 7% on the day, with further declines over the subsequent three weeks - a cumulative 23% decline during March alone (although part of this decline may also reflect the coincident announcement of an increased Chinese production quota of rare earths). Similar declines were seen elsewhere, including in China, the dominant producer and processor of rare earths, with key stocks in China falling anywhere from 4% to the daily limit of 10% on the day after Tesla's statement.

Ferrite Magnets - the only feasible option currently

Tesla had previously used AC induction motors (with no rare earths) in their earlier models but replaced them with permanent DC magnet motors which contained rare earths (NdFeB magnets). Tesla's decision to switch away from AC induction motors was driven by a range of factors, including problems with unbalanced voltage supply, rotor locking, and interference with the complex network of sensors found in modern vehicles. In light of these challenges, a number of experts in the field of EVs and rare earths predict that Tesla will not return to using AC induction motors.

According to Adamas Intelligence, the only current feasible alternative to rare earth-containing magnets is ferrite magnets. Moreover, ferrite magnets are currently being used by Proterial (formerly Hitachi Metals) in its latest EV motor design and have previously been used in vehicles such as GM's 2016 Chevy Volt. Germany's BMW has been active in steering away from rare earth magnets, with the company prompted to reduce its rare earths consumption to limit over-reliance on Chinese-based supply chains given growing geopolitical tensions.

However, while ferrite powered motors can match the performance of NeFeB powered motors to some extent, this performance comes with a significant weight and efficiency penalty that has made the switch unattractive to date. This means that the manufacturer must accept a reduced driving range or an additional cost for a larger battery to maintain the driving range. There is also the issue of a material reduction in torque with the ferrite powered motors. Given the bigger batteries, as well as more copper required, some experts believe there is no material cost advantage to using ferrite powered motors to NdFeB powered motors.

Why is Tesla looking to stop using Rare Earth (NdFeB) powered motors?

Tesla's move reflects concerns that there is insufficient supply of rare earths to meet the projected demand for EVs over the coming years.

Rare earths industry consultant, YC Kim, subscribes to this view. He has stated that the global EV market is projected to grow from 8.2 million units in 2022 to 39.2 million units by 2030, a nearly 5-fold increase in eight years.

Tesla produced 1.4 million units in 2022, accounting for 17% of all EVs, and recently reiterated its target to sell 20 million EVs annually by 2030. If these numbers are correct, then Tesla's market share in global EV sales will grow from 17% to just over 50% by 2030. This is very ambitious. Even if Tesla only maintains its current market share, then based on 39.2 million units globally by 2030, Tesla would produce 6.7 million EVs p.a. by 2030 or roughly fivefold 2022 production levels.

While these numbers are forecasts and subject to significant uncertainty, there is little doubt that the switch away from internal combustion engine (ICE) vehicles is accelerating. The result will be an increase in demand for EVs such that production volumes will be multiple times higher by the end of the decade.

Given Tesla's ambition to grow its market share in EVs over time, they will feel this shortfall in rare earths supply acutely.

In 2022, Adamas Intelligence data indicates that passenger EV motors were responsible for 12% of global NdFeB magnet consumption.¹

According to YC Kim, if global EVs production grows to 39.2 million units by 2030, then EVs will account for roughly 50% of the NdFeB magnet consumption in 2030. This would see total demand for NdPr (Neodymium and Praseodymium) growing to almost four times its current size by 2030.²

Where will all these Rare Earths come from?

This fourfold increase in demand for rare earth minerals appears difficult to satisfy based on current supply forecasts. Indeed, the supply-demand forecasts of both Adamas Intelligence and YC Kim indicate a substantial shortfall in the supply of these rare earth elements (refer Figures 1 and 2).

Figure 1: NdPr demand-supply balance (LHS) vs price (RHS)

Source: Adamas Intelligence, and Australian Rare Earths Ltd.

Figure 2: Dysprosium and Terbium demand-supply balance (LHS) vs price (RHS)

Source: Adamas Intelligence, and Australian Rare Earths Ltd.

This supply shortfall will be very positive for pricing, as higher prices will be necessary to incentivise new supply to come to market.

If Tesla wants to meet its target, it is clear that based on current supply forecasts, there simply won't be enough rare earths to produce their targeted number of EVs using NdFeB powered motors.

YC Kim's discussions with major auto manufacturers suggest the first preference is to use NdFeB powered motors. He is of the view that while ferrite powered motors will work, given the significant trade-offs, they will only be suitable for lower priced mass market cars. It is simply a matter of rationing the limited supply of rare earths.

YC Kim is also concerned that the growing demand for EVs within China could result in the cessation of rare earth exports as soon as 2025. Further, China has issues with its own supplies currently and has stepped out to neighbouring countries such as Myanmar (via China-controlled entities) to produce rare earths. This looming supply shortfall and potential cessation of Chinese supply has not gone unnoticed by Western governments, as detailed by Stefan Hansen in his note The Value in Securing Critical Mineral Supplies.

Conclusion

Despite Tesla's ambitious claim that it will cease using rare earths, it appears the demand for rare earths will continue to grow and that supply growth still remains an issue.  This will most likely result in the various industries increasingly using lower quality alternatives purely out of necessity and not out of choice.

There are some possible advancements that may result in true alternatives to rare earths in motors, such as manganese bismuth magnets.  However, they are all still in their development infancy, and their commercialisation, if they prove to work, is still several years away.

Iluka Resources, which is predominantly a mineral sands miner with a very large presence in titanium dioxide and zircon markets, has been a beneficiary of government support aimed at increasing the supply of critical minerals including rare earths. This support will assist in the acceleration of Iluka's emerging, but potentially very large, rare earths mining and processing business.

As we transition towards a net-zero world while being in a period of heightened geo-political tensions, Tyndall AM believes that Iluka Resources offers a unique and undervalued opportunity. The market has not fully understood the potential upside from their rare earths opportunity, and the significance of the government support that this project has received.

Author: Jason Kim, Portfolio Manager