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Performance
The
Company’s NAV declined by 6.4% in June, underperforming its
reference index, the MSCI ACWI Metals and Mining 30% Buffer 10/40
Index (net return), which fell by 4.4% (performance figures in
GBP).
It
was a difficult month for the mining sector, particularly relative
to broader equity markets as the MSCI ACWI TR Index returned +1.4%.
Most mined commodity prices posted declines through June, with iron
ore (62% fe), copper and gold prices falling by 10.9%, 8.9% and
1.3% respectively.
Economic data
from China was weak, with its manufacturing PMI below 50 indicating
contraction, whilst average house prices recorded the largest
year-on-year decline since 2015. Meanwhile, US dollar strength
provided an additional headwind for commodities, with the DXY Index
rising from 104.7 to 105.9. Interest rate expectations declined
modestly, with the US 5-year yield falling from 4.5% to 4.3% which
supported the performance of growth sectors such as technology over
value sectors like mining.
Strategy
and Outlook
Constrained mined
commodity supply, an evolving demand picture, strong balance sheets
and valuations below historic averages make us optimistic about the
outlook for the sector.
Mining companies
have focused on capital discipline in recent years, meaning they
have opted to pay down debt, reduce costs and return capital to
shareholders, rather than investing in production growth. This is
limiting new supply coming online and there is unlikely to be a
quick fix, given the time lags involved in investing in new mining
projects. The cost of new projects has also risen significantly and
recent M&A activity in the sector suggests that, like us,
strategic buyers see an opportunity in existing assets in the
listed market, currently trading well below replacement costs.
Other issues restricting supply include cases of governments
closing mines, permitting issues and a general lack of shovel-ready
projects.
Meanwhile, the
demand side of the equation appears to be evolving. The commodity
super-cycle (2002 – 2011) was all about China’s extraordinary
demand growth. Today, China remains the most important individual
economy for mining, but we are expecting this importance to
gradually decline through to the end of the decade. We expect
global infrastructure spending to drive the next wave of demand,
with low carbon transition-related infrastructure particularly
meaningful. Offshore wind, for example, requires 5.4x more steel
and 2.9x more copper per megawatt of power capacity when compared
with gas (source: BHP analysis, Hatch, ArcelorMittal, August 2023).
The other area gaining attention is the implications for materials
from the build out of AI-related data centres, both for the centres
themselves but also for the increased power infrastructure
required.
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