Financial Mail - Investors Monthly - - Analysis: Resources Funds -

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.”

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