Re­sources en­dure tor­rid times

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

Warn­ing: in­vest­ing in re­sources can be haz­ardous to one’s health. The graph at right, and the per­for­mance ta­bles that fol­low, all at­test to the ex­tremely dif­fi­cult time re­sources com­pa­nies — and the funds that in­vest in them — are en­dur­ing.

The in­dus­try has had a par­tic­u­larly tor­rid time over the past year. The best per­form­ing fund (not re­viewed here) showed a decline of 11%, while the worst per­form­ing fund (also not re­viewed here) sus­tained losses of more than 20%.

Over three years, re­sults are not quite so bad. Most funds posted an­nual re­turns that were pos­i­tive, but still be­hind the in­fla­tion rate (see graph). In what can be de­scribed as a good ad­vert for ac­tive man­age­ment, all of the funds re­viewed here beat the per­for­mance of the FTSE/JSE Re­sources In­dex over three years, which is a popular bench­mark among many of the man­agers.

So what has made the en­vi­ron­ment so tough for in­vestors? The “fairy tale” that we have come to know as China, has changed. It’s re­spon­si­ble for as much as 70% of to­tal an­nual de­mand for some com­modi­ties, so its slow­down has caught ev­ery­one by sur­prise. We knew China was tran­si­tion­ing from an in­fra­struc­ture-led econ­omy to a more con­sumer-ori­en­tated one, we just didn’t know it was go­ing to hap­pen quite so quickly.

It’s re­ally in the ju­nior space that we begin to see a pic­ture of the car­nage that is emerg­ing. Deloitte pub­lishes an an­nual “Track­ing of the Trends” sur­vey, which pro­vides a view of the min­ing in­dus­try and the chal­lenges it faces.

The 2015 edi­tion ob­serves that be­tween June 2013 and Septem­ber 2014, nearly 200 Aus­tralian min­ing com­pa­nies filed for bank­ruptcy. In Canada, an­other big home for ex­plo­ration and devel­op­ment min­ing com­pa­nies, through the TSX Ven­ture Ex­change, more than 700 ju­niors had neg­a­tive work­ing cap­i­tal. With such long lead times in­volved in bring­ing projects to fruition, we can rest as­sured that the seeds of the next com­mod­ity cy­cle are al­ready been sowed.

In SA, de­clin­ing labour pro­duc­tiv­ity and in­creas­ing costs have proved chal­leng­ing for the in­dus­try de­spite the sav­ing grace of the de­pre­ci­at­ing rand, which has ar­ti­fi­cially in­flated rev­enues at a time when com­mod­ity prices have been stag­nant. In the course of a few weeks, An­glo Amer­i­can Plat­inum, Har­mony Gold and Lon­min com­pleted or ini­ti­ated re­trench­ment pro­grammes in an at­tempt to get a grip on costs.

But it’s a com­bi­na­tion of China’s tran­si­tion and com­pet­i­tive dy­nam­ics that has con­trib­uted to the price decline in the world’s sin­gle big­gest com­mod­ity mar­ket — that of iron ore. Iron ore ma­jors, in­clud­ing BHP Bil­li­ton and Rio Tinto, are hell­bent on in­creas­ing sup­ply into a mar­ket where iron ore has fallen from over US$130/t at the be­gin­ning of last year, to its cur­rent $60/t. (It fell be­low $50/t at one stage.)

Crit­i­cism has come from all quar­ters, in­clud­ing from Glen­core CEO Ivan Glasen­berg, who re­cently prof­fered an eco­nomics les­son to the in­dus­try at a con­fer­ence in Barcelona. (Glen­core, in­ci­den­tally, does not own any iron ore mines.) Glasen­berg ar­gued that iron ore pro­duc­ers should re­strict sup­ply in or­der to in­crease the value of the com­mod­ity in the ground.

In re­ply, BHP Bil­li­ton and Rio Tinto have de­fended their de­ci­sion, say­ing it en­trenches their long-term po­si­tion and what has hap­pened to the iron ore price in the past decade was ex­cep­tional. “Many pro­duc­ers were at­tracted to the dy­nam­ics of the iron ore mar­ket when prices were fly­ing, and it’s prob­a­bly time for that to cor­rect,” says Stan­lib’s Kobus Nell.

The de­bate is fast turn­ing po­lit­i­cal in Australia, where most of Rio Tinto’s and Bil­li­ton’s iron ore op­er­a­tions are lo­cated. “Par­lia­ment should look closely at the iron ore price war,” sug­gested one of the head­lines in an Aus­tralian pa­per.

“Isn’t it time for a car­tel in plat­inum?” should read the head­line in one of our pa­pers. Plat­inum prices have been in the dol­drums for ages now. The fund man­agers we spoke to were di­vided in their opin­ion on what lay ahead for the price of plat­inum and the shares of its min­ers. Some think the mar­ket for the com­mod­ity is about to turn as above-ground re­serves dwin­dle; oth­ers are not so con­vinced.

With South­ern Africa in con­trol of 70% of to­tal re­serves, and in light of some of the job losses we are see­ing in the sec­tor, per­haps now is the time we should put the ques­tion back on the agenda.

The his­tory of De Beers might pro­vide some ob­vi­ous clues on how to go about do­ing this. If that were to hap­pen, the statue of Ce­cil John Rhodes might well find a new home in Rusten­burg.

The de­bate is fast turn­ing po­lit­i­cal in Australia, where most of Rio Tinto’s and Bil­li­ton’s iron ore op­er­a­tions are lo­cated

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