Performance
The
Company’s NAV declined by 0.8% in July, outperforming its reference
index, the MSCI ACWI Metals and Mining 30% Buffer 10/40 Index (net
return), which fell by 1.0% (performance figures in
GBP).
The
mining sector was broadly flat in July and lagged broader equity
markets, with the MSCI ACWI TR Index rising by 1.6%. Mined
commodity prices were mostly soft, with copper and iron ore (62%
fe.) prices falling by 3.7% and 4.2% respectively. Gold bucked the
trend, however, rising by 4.1% as declining real interest rate
expectations and US dollar weakness were tailwinds.
In
macroeconomic news, China held its Third Plenum during the month, a
key meeting which takes place roughly every five years that aims to
map out long-term economic and social policies. A broad range of
reform measures were announced (over 300 in total) but the market
appeared disappointed it did not contain more drastic property
support measures. Meanwhile, as polls indicated increased
popularity for former US president, Donald Trump, concerns grew
around potential tariffs, US-China trade tensions and the impact on
growth.
Turning to the
miners, they reported on Q2 production during the month and some
reported on earnings. It was a mixed picture, with some companies
experiencing production challenges and cost and capex increases
announced. We also saw a pick-up in mergers and acquisitions
(M&A) activity with Cleveland-Cliffs announcing the acquisition
of Stelco and BHP and Lundin Mining announcing a joint acquisition
of Filo Corp.
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 on a long-term view.
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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