SANLAM (SIM) RESOURCES FUND

It has been a period of commodity price volatility, says Lazar Naiker, equity analyst at Sanlam Investment Management. “Gold started and ended 2014 at $1 200/oz, but it traded in a wide range, and that has continued into 2015,” he says. (The metal has moved between $1 160 and $1 300/oz.)

“We’ve also had a strong dollar, and China’s disappointing economic performance is having a big effect on commodities,” says Naiker, pointing to the iron ore and oil prices as examples.

Platinum group metal prices — such as platinum, palladium, rhodium and iridium — have also been weak in dollars, but have been counterbalanced by a weaker rand.

Naiker thinks the recent bounce in the iron ore price was caused by restocking in China, where steel mills have begun buying to replenish their inventory. “More people think China will begin to stimulate the economy, but regardless of this, we still see more supply coming on stream in the second half of the year. We prefer Rio Tinto over Kumba, given its low cost position, but we also have exposure through our holdings in BHP and Anglo American.”

With respect to oil, Naiker believes falling rig rates in the US combined with geopolitical concerns have contributed to the recent spike, after the rapid slide that began towards the end of last year. “We are still seeing record production coming out of Opec and we think the US can turn the taps on quickly. So we hold a very benign view on the oil price over the medium term.”

The fund has also been selective in the platinum stocks it owns. “Relative to our peers, we are overweight our exposure to the sector. Our preferred equities are Anglo American Platinum (Amplats) and Northam,” says Naiker.

Production across the platinum industry in the early part of the year has been affected by safety stoppages, so Naiker thinks if production can return to more normal levels, the industry should remain profitable. “Recovering autocatalyst demand and growth in Chinese jewellery should support the price over the medium term. We think the recent BEE deal gives Northam a great degree of flexibility, while Amplats has a lot more options than its peers.”

The outlook is not positive for SA’s gold mines. “Due to the deep-level nature of the gold mines, they have moved far up the cost curve, and we don’t see any long-term opportunities in this space.”

Regarding the diversified miners, the fund has a larger position in Anglo American than BHP Billiton. “Billiton is a quality business, but this is reflected in the current share price, and we prefer the exposure to platinum and diamonds in Anglo relative to oil and iron ore in BHP,” says Naiker.

Naiker likes the added dimension that diamonds bring to Anglo American’s portfolio of assets (through De Beers). The diamond theme is extended in the portfolio with the inclusion of Petra Diamonds. “It is listed in London, but its operations are in SA — it is spending capex to access new mining areas which should yield greater efficiencies.”

As offshore components of the portfolio, the fund owns Rio Tinto and Russian miner Norilsk Nickel, which primarily mines nickel and palladium. “Nickel has been under pressure, but we think the company has a good polymetallic orebody. It enjoys earnings before interest, tax, depreciation, and amortisation above 40% and the current dividend yield is 11%,” says Naiker.

The portfolio holds paper and pulp producers in the form of Mondi and Sappi. “Sappi is a longer-term work in progress, but we like what it is doing in its specialist cellulose business. At the moment, Mondi is over-delivering on its projects and constantly improving its cost base.”