Are re­source stocks a bad choice?

Finweek English Edition - - INSIDE - BY SIMON BROWN * The writer owns shares in BHP Bil­li­ton, Sa­trix40 and Sa­sol.

The ques­tion that’s been rolling around in my head for the past week is whether or not I have made an in­vest­ment mis­take in my long-term port­fo­lio with re­gards to re­source stocks. The mis­take could be that I hold two in the long-term port­fo­lio.

But first let’s step back. I have long said that sin­gle com­mod­ity re­source stocks are ba­si­cally trad­ing stocks. When the com­mod­ity they mine starts a long-term up­trend then I will con­sider a buy­ing po­si­tion for the best min­ers in that com­mod­ity space. I only buy the best and only when we have clear ev­i­dence that the com­mod­ity price is on the up. I then hold for as long as the com­mod­ity re­mains ro­bust, po­ten­tially a num­ber of years.

For ex­am­ple, I held both Kumba and Im­pala Plat­inum from around 2004, ex­it­ing in 2008. In re­al­ity this is trad­ing, not long-term buy and hold, but the strat­egy has worked well for me.

In my long-term port­fo­lio I have two re­source stocks: BHP Bil­li­ton* and Sa­sol*, and I have al­ways had a rea­son as to why they are dif­fer­ent to other sin­gle com­mod­ity min­ers.

The case for Sa­sol is sim­ple, the world runs on oil, af­ter wa­ter it is the most im­por­tant com­mod­ity that we need in or­der to sus­tain our cur­rent way of living. I have ar­gued that while oil may bounce around some­what, the longer-term trend is that de­mand is grow­ing and will con­tinue to grow and this is good for Sa­sol. This may all be true, but even more true is that the oil price is volatile and has traded in an ad­mit­tedly wide range for much of the last decade or more.

This is the big is­sue w it h com­modi­ties ( be t hey oil, wheat, plat­inum, etc.), as de­mand in­creases so does price and that is fol­lowed by sup­ply in­creases driv­ing price down. My first Sa­sol pur­chase was back in the early 1990s and the re­turn has been ex­cel­lent, and the div­i­dends even bet­ter. But look­ing at more re­cent re­turns we see Sa­sol (ex­clud­ing div­i­dends) has given us 5% over three years, 41% over five years and 169% over 10 years – hardly set­ting the world alight, al­beit div­i­dends do add to those num­bers a bunch but still well be­hind the Top 40.

This is an im­por­tant fact: I al­ways say that i f you are not beat­ing the mar­ket then you should stop try­ing and just buy the mar­ket via an ex­change traded fund (ETF).

So, in try­ing to de­fend my hold­ing of Sa­sol I have a look at the Brent oil price. Sure, a great-look­ing chart as it was around $20 a bar­rel when I first bought Sa­sol and it has been above $100 in 2008, and again for the last many years (ob­vi­ously now fall­ing sharply).

The big­ger ques­tion is if oil is also pretty much range bound, and the an­swer seems to be yes with a long-term range of around $50-$110. Cou­ple that with ris­ing costs and all that re­ally saves Sa­sol is a weaker rand and there are bet­ter ways to get ex­po­sure to that. The is­sue is if oil hits $200, surely we’ll see pro­duc­tion ramp up as with any other com­mod­ity ul­ti­mately push­ing it down again.

So what do I do? Firstly, I take some re­lief from the JSE in­dex com­mit­tee de­ci­sion that Sa­sol is an industrial c hem­i­cal com­pany r at her t han a re­source stock, but that’s not re­ally the an­swer. So I mull it over, think about it a lot and do noth­ing in a hurry – no knee-jerk re­sponses. Over the next few months I will even­tu­ally come to a de­ci­sion and let read­ers know what I have de­cided (and also up­date on BHP Bil­li­ton), but my gut says I could have been wrong.


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