Equity fund puts bets on Anglo, Glencore

THE BLOODLETTING that is gripping commodity markets is giving Shaun le Roux the courage to bet that Anglo American and Glencore will emerge as winners.

“When there’s this much distress, you’re going to get mispricing,” said Le Roux, whose R2.4 billion PSG Equity Fund beat 97 percent of its peers with returns of 23 percent over the past three years, according to data.

“We’re focusing on stronger players within the sector that we’re confident are going to make it, and that are very cheap.”

The wager reflects confidence that the biggest raw materials companies are better equipped to ride out a sell-off that has driven commodities to their weakest levels in 13 years amid concern about China’s slowing economy, the strengthening dollar and gluts in everything from oil to metals and crops. The mining index has dropped 13 percent this year, reaching a six-and-a-half-year low last week, with all but one of its 17 companies declining.

Excess supplies and lower prices would help shake out high-cost producers, said Le Roux, whose fund is among the R25bn overseen by PSG Asset Management.

“A lot of players will be under water and the natural conclusion is that in the medium- to longer-term prices will be higher,” he said from Cape Town on Tuesday. “Prices will ultimately settle at a level where supply and demand are in balance.”

Glencore, the Londonbased commodity trader that operates coal and ferrochrome mines in South Africa, and Anglo, which owns platinum, iron-ore and coal operations in the country, were among stocks that would survive, Le Roux said.

“They have relatively low-cost operations that generate cash even in tough times,” he said. “We’re comfortable that they’re very cheap relative to a conservative value of their assets.”

Opportunities

Glencore’s Johannes burglisted stock slumped 26 percent this year to a record low on Tuesday, before rebounding on Wednesday as rising oil prices helped to stabilise commodity markets.

The shares are trading at 14 times estimated earnings, compared with 16 for the benchmark all share index. The securities rose 3 percent to R40.67 by 3.36pm in Johannesburg on Wednesday.

Anglo fell to a six-year low on Monday to trade at 11 times earnings. The ratio between Anglo’s share price and the index jumped to a record on Tuesday as the benchmark gauge rallied to its highest since July 23. The stock gained 4.4 percent to R157.60 on Wednesday.

For investors like Nick Piquito of African Alliance Asset Management, there are better returns to be had by avoiding commodity producers.

“There are far more interesting opportunities,” Piquito, who helps oversee about $1.3bn (R16.6bn) as chief investment officer at African Alliance, said on July 30.

These include Datatec, a computer networking company, which gained 30 percent this year, Oceana Group, South Africa’s largest fishing company, which is down 3.1 percent, and JSE Limited, the operator of the Johannesburg stock and bond exchanges, which rallied 23 percent.

“There’s no doubt that if you look at outright valuations, you can make the case that resources, in particular, are very attractively priced,” he said. “Our sense on resources at this point in time is that it’s like attempting to catch a falling knife.” – Bloomberg