Reaping Resources

Reaping Resources


Based on the investment principle that one year’s winner cannot be the next year’s – and vice versa – one sector of the JSE stands out from the pack as the most likely winner in 2013: Resources. With the All Share index up 17%, Industrials up 33%, and Financials up 29%, the Resources sector is down 8,4%, and with good reason most people would say.

Few analysts would come out and say it’s a sure thing. However, they are saying that for the braver soul, perhaps the time has come to start rebalancing in favour of the sector.

Renewed energy

Humphrey Price, senior portfolio manager at Sanlam Private Investments (SPI), cautions that he wouldn’t recommend Resources to his retired clientele but its valuations are certainly at the lower end of their historic scale, and are trading at a discount to the overall index.

“But if they’re cheap, they’re cheap for a reason based on the weak investment case of mining shares. These include labour issues, spiraling costs of production, the perceived lack of investor friendliness of our government, and finally commodity prices are high and investors are concerned that the next move will be a fall in prices,” says Price.

Suraj Sookdhew, RMB Private Bank portfolio manager, claims there’s a good chance the Resources sector will be this year’s winner, “but it comes with its challenges.”

“There are global economic issues such as slow growth in developed markets and a slowdown in Chinese GDP to around 8% from averages of over 10% recently,” he says. “However, when investing you need to be forward looking, and what we see is confidence picking up in the US, manufacturing data improving in China and even the Eurozone muddling along. Given the recent underperformance of the Resources sector, we would probably see some rotation out of the defensive Industrials into Resources,” he adds.

“We like the energy story within Resources, and currently Sasol is offering a good dividend yield and price earnings multiple around eight times. Its production seems set to double over the next five years given the recent announcement of a new gas-to-liquid plant in the US. It is also a good rand hedge.

Supporting this stock, we see oil remaining in the $100 to $120 band for the foreseeable future, given the current geopolitical tensions in the Middle East. Sasol is not without risks. The new project in the US is projected to cost around $20 billion and any cost and execution over-runs will be negative for the company as evidenced by the cost over-runs at Anglo American’s Minas Rio project.

“We also like the energy play within BHP Billiton while Anglo American is more of a recovery stock as it still has some issues to sort out,” says Sookdhew.

Platinum deficit

Price is in full agreement on Sasol: “Lower gas prices must translate into better margins. On a PE of eight times and a dividend yield of 5%, this conservatively run company will yield steady results.”

On Impala Platinum, he says: “The mining industry has experienced its pain and will emerge stronger. With CEO Terence Goodlace at the helm, expect improvements in refining capacity. In addition, longer-term decent vehicle sales should boost the demand for platinum. Globally, a rebound in rand platinum prices could filter through to better profits and dividends.”

Emile Fourie, SPI portfolio manager, adds: “South Africa supplies 75% of the world’s mined platinum; Amplats produces half of South Africa’s platinum. The normal growth rate in demand has averaged 3,2% a year since 1975. However, growth slowed to 0,5% a year over the past five years.

Platinum has been oversupplied since 2009. Analysts estimate the platinum market moved into a deficit position because of extended strikes over the past few months; the market should remain in deficit during 2013.

“Amplats currently trades at 1,7 times book value. Historically, investors paid large premiums above book value during market deficits (1999-2005 and 2007-2008). Back then Amplats traded at a P/BV above 8, making the current 1,7 look very attractive.”

Gold tracks global liquidity

While there are fears that the commodities cycle has peaked, few analysts believe that either gold or oil are about to drop.

What has supported the gold price is the fact that it now tracks global liquidity rather than the US dollar. It is widely expected that current economic conditions support a continuation of the sharp rise in global liquidity for the next two to three years until at least 2015, through mechanisms such as quantitative easing and low interest rates.

In this scenario, what then is a fair value for gold? As the market has come to understand the new correlation of gold to global liquidity, there has been an increasingly aggressive response by gold to consecutive global liquidity issues (averages 2011: $1 574; 2012: $1 704) which should underpin an average value for 2013 of $1 850. Thereafter, the price should consolidate as interest rates start to rise.

Eamonn Ryan
Before becoming a financial writer and freelance journalist in 1997, Eamonn Ryan was a legal adviser, company secretary and alternate director at listed company Cashbuild Limited from 1988 to 1997. Since becoming a financial writer, he has focused on the business and financial sectors, as well as personal finance, writing for Finweek, The Star Business Report, Sunday Times Business Times, Business Day, Mail & Guardian, Entrepreneur, Corporate Research Foundation (which brings out a series of books each year ranking SA’s best employers and best managers), as well as a host of once-off and annual publications such as ‘Enterprising Women’ and ‘Portfolio of Black Business’. He also writes media releases, inhouse magazines and sustainability or annual financial reports for various South African corporates and financial services groups, including the Ernst & Young annual M&A book.