There are many instances on the ASX where quality might prove more important than quantity. One such instance was presented to fund manager Allan Gray last quarter when it sold out of one S&P/ASX 200 Index (ASX: XJO) mining giant and poured the proceeds into another materials stock.
Here's why the contrarian investing gurus made the switch from South32 Ltd (ASX: S32) to alumina producer Alumina Limited (ASX: AWC).
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Why ditch South32 for another ASX 200 materials share?
There are stark differences between South32 and Alumina Limited.
The former is a $21 billion mining company producing a long list of commodities including bauxite, alumina, copper, silver, lead, zinc, nickel, coal, and manganese.
The latter, on the other hand, has a $4.6 billion valuation, with alumina refining a major part of its business. It's also involved in bauxite mining and aluminium smelting.
Both ASX 200 stocks were recently held by Allan Gray, but it's since sold out of South32, piling the proceeds of the sale into buying more Alumina shares.
The reason behind the switch was simple. The experts at the fund manager like alumina more than most other commodities. Analyst and portfolio manager Dr Suhas Nayak commented on the change:
Alumina is a significant proportion of South32's earnings, but you also have to buy all these other commodities [when you buy South32 shares].
It seemed like … the cheaper exposure available was Alumina Limited.
The Alumina share price closed at $1.565 today. It's also down 17% over the last 12 months. That leaves it with a price-to-earnings (P/E) ratio of 15.97.
Allan Gray managing director and chief investment officer Simon Mawhinney also delved into the ASX 200 share, saying:
Alumina trades at approximately US$500 per tonne of annual production capacity. To put that into context it costs roughly three times that to replace that capacity elsewhere … so it's very, very cheap relative to the amount of money it would take to replace that capacity.
It's also got reasonably – if not very – long reserve life resources and reserves and, absent a few recent hiccups it's had, it's quite low on the cost curve.
In the fullness of time we think Alumina will generate very strong profits and is very cheap relative to our assessment of fair value.
Alumina shares make up 9% of the Allan Gray Australian Equity Fund as of 31 December 2022. That makes it and Newcrest Mining Ltd (ASX: NCM) the fund's equal-largest holdings.
