Market review
-Mining and Energy stocks delivered gains over the month of December.
-As ever, events in China were key, notably a robust rise in electricity consumption in November, indicating healthy economic activity, while there is a growing sense the government will deliver on reform.
-Copper made headway amid indications the US economic recovery is gaining momentum leading to anticipation of greater demand.
-Iron ore fell due to a seasonal decline in demand in China, while gold slipped as the US Federal Reserve announced that it would start to taper quantitative easing and subdued inflation reduced the attraction of the precious metal.
Fund performance
ExxonMobil was a significant contributor to outperformance in December. The company benefited from better refining margins as well as news of a joint venture with Russian oil and gas giant Rosneft. Together, they will be launching a pilot program to drill horizontal wells and revive old wells in parts of Western Siberia.
Investors warmed to low-cost, long-life copper producer Antofagasta thanks to the metal’s pricing strength coupled with the company’s ongoing focus on containing both operational and capital expenditure. This discipline was clear from an investor visit that Antofagasta hosted to its three copper mines in Chile during December. The exercise also reinforced confidence in the company’s ability to deliver on the project it has under construction.
Stillwater is one of the few producers of platinum-group metals outside South Africa and Russia. The perception of higher risk associated with those countries makes Stillwater’s US location a commercial advantage. That advantage has been somewhat masked in recent years as the company’s world class asset in the state of Montana has suffered from sub-optimal management. Major changes at board level and the appointment of a new CEO is seen as a catalyst for a turnaround. This newfound sense of optimism was powerful enough to overcome a broadly flat pricing environment for platinum and palladium prices over the month.
Anadarko Petroleum was a notable performance detractor as the stock was hit by a court ruling that may result in a US$14 billion payout. A judge ruled that the company and its Kerr-McGee unit were liable for the environmental clean-up associated with the chemical company spun off in 2005. Anadarko said it would appeal the ruling, which would require it to restore polluted sites and compensate 8,100 claimants.
Fund activity
We believe the Fund is well-balanced and positioned and thus only made marginal adjustments to stock positions.
Market outlook and fund positioning
The truism about raw materials investing is to be long where China is short and short where China is long. China is short of quality iron ore and has few copper assets. Both are indispensable to urbanisation. China is expected to produce around 830 million tonnes of steel in 2014 and plateau production near the 1 billion tonne mark by the end of this decade. Our investments in BHP Billiton, Rio Tinto and Fortescue Metals have the portfolio well positioned to capture the benefits of growth in iron ore production.
A gradual fall-off in available sources of low cost copper underpins our optimism for the long-term copper price. About a decade ago the average grade of copper was around 0.9%. Today it is around 0.7%. Said another way; much more ore needs to be moved to extract commercial quantities of copper. Our preferred copper stocks Antofagasta, Capstone, First Quantum, Lundin Mining and Southern Copper (as well as Rio Tinto and BHP Billiton with their sizeable copper operations) are well placed to capitalise on this. In the energy arena, preferred companies include ExxonMobil, Chevron, Tesoro, Valero Energy and Marathon Petroleum. A recovery in US refining margins makes us optimistic about their earnings prospects. Furthermore, the US Environmental Protection Agency is relaxing renewable energy requirements, and reduced levels of bio-fuel blending will be a tailwind for the refining sector in 2014.
