Riding the supercycle
With commodities poised to play a key role in the transition to net zero, BRWM demonstrates the benefit of active management in this sector…
Analysts:
Jo Groves
jo@keplerpartners.com
Kepler Partners is not authorised to make recommendations to Retail Clients. This report is based on factual information only.
The material contained on this site is factual and provided for general informational purposes only. It is not an invitation or inducement to buy, sell or subscribe to any product described, nor is it a statement as to the suitability or otherwise of any investments for any person. The material on this site does not constitute a financial promotion within the meaning of the FCA rules or the financial promotions order. Persons wishing to invest in any of the securities discussed in the website should take their own independent advice with regard to the suitability of such investments and the tax consequences of such investment.
Rightly or wrongly, investors love a catchy buzzword (or two) though admittedly some have more longevity than others. The Magnificent Seven polished off the FAANGs, the BRICS imploded when they admitted four new (vowel-starting) countries and let’s not dwell on the GRANOLAS.
But it’s time for the acronyms to step aside as there’s a new kid on the block: the mega-trend. For the uninitiated, mega-trends have a sustained (and often irreversible) impact on a global scale and, as a result, are a hot topic among investors seeking to leverage long-term, structural tailwinds to drive superior returns.
One of the most far-reaching of the current mega-trends is undoubtedly the transition to clean energy, which may be more akin to a revolution than an evolution. More than 200 countries attended the recent COP28 summit in Dubai with the ambitious target of phasing out the use of fossil fuels to achieve net-zero
emissions by 2050.
With commodities set to play a central role in this decarbonisation process, soaring demand for critical minerals could fuel a supercycle into the next decade and beyond.
Up, up, up and away
To be fair, commodities haven’t always enjoyed universal popularity among investors, mainly due to their historic cyclicality but this might be about to change. The structural growth drivers underpinning the transition to green energy are expected to support commodity prices throughout the cycle, rather than being subject to the ebbs and flows of the global economy.
Rattling through some of the headline numbers, the International Energy Agency (IEA) forecasts that demand for critical minerals will rise by more than 350% by 2030 to meet net-zero targets. The
primary growth drivers are battery storage systems and electric vehicles, in addition to low-emission power generation and electricity networks.
As we know, commodity prices are a function of supply and demand. On the supply side, there has been a decade or more of underinvestment, with the proportion of expansionary capex falling from 76% in 2012 to as little as 14% in 2019, according to RBC. There’s also a considerable time lag to open new mines, with
S&P Global reporting that the average mine takes 16 years from discovery to production, which will prevent a meaningful increase in supply over the next few years.
Factoring in the historic low in global inventories, supply constraints are therefore likely to support
commodity prices over the longer-term. As shown in the chart below, the IEA is currently forecasting
significant deficits in the supply of critical minerals by 2030 under its net-zero emissions by 2050 scenario.
BlackRock World Mining (BRWM) offers a diversified portfolio of global mining stocks that are well positioned to benefit from these structural growth drivers, balanced with exposure to precious metals to maximise total returns.
Managers Evy Hambro and Olivia Markham are currently overweight copper due to its critical role in the energy transition, with copper accounting for around a quarter of the portfolio. Copper is the most cost-effective conductive material for the capture, storage and transmission of renewable energy and, according to Goldman Sachs, demand for copper will soar by 600% by 2030 in its base case scenario (rising to 900% in the case of hyper adoption of green technologies).
With continued supply constraints, Goldman Sachs notes: “We see the copper market sleepwalking to a classic case of the ‘revenge of the old economy’, just as oil did during the 2000s commodity boom. We now estimate a long-term supply gap [of] twice the size of the gap that triggered the bull market in copper in the early 2000s.”
Evy also spoke about the brown-to-green theme in our recent webinar, whereby mining companies are decarbonising their production processes. This could drive a re-rating in valuations if companies are able to charge a higher premium for low-emission products beyond the purity of the commodity itself.
Why active management matters
Commodities provide an opportunity to diversify into a different asset class to equities and the underlying commodities have often outperformed when equities have underperformed. As we explored in our recent guide to investing in commodities, they have also acted as an effective hedge against inflation on occasions.
The commodities sector itself is also diverse, from agricultural products to oil and gas, and base metals to precious metals in the mining sector. Each commodity has a unique set of supply and demand drivers, which can be a barrier to entry for retail investors without the requisite expertise.
As a result, this is a sector that lends itself well to active management. The managers of BRWM have the flexibility to invest across the broad universe of commodities and geographies, enabling them to tactically adjust exposures to exploit valuation opportunities.
By way of example, Evy and Olivia tilted the portfolio towards large-cap mining companies in 2023 with Glencore, BHP, Vale and Freeport-McMoRan comprising the four largest holdings (as at 30/04/2024). The managers feel that the size and strong balance sheets of these companies would enable them to weather any short-term volatility from weak economic growth in the major global economies.
Balance sheet strength is also a theme across the wider BRWM portfolio, with mining companies having
demonstrated strong discipline in controlling capital expenditure and paying down debt. As a result, the
European mining sector has an average net debt to EBITDA of 0.7 (as at 31/12/2023, Morgan Stanley), considerably below the average of most sectors.
BRWM also holds a significant position in gold miners due to the noticeable divergence between their share prices and the underlying gold price over the last year. Gold currently comprises around 18% of the portfolio, with holdings including Barrick Gold and Wheaton Precious Metals.
The benefit of active management is demonstrated by BRWM delivering a five-year net asset value total return of more than 110% (as at 28/05/2024), comfortably exceeding the return from the MSCI ACWI Metals & Mining Index. Although the trust does not have a progressive dividend policy, it will pay out most of annual net income in the form of dividends, with BRWM currently trading on an attractive dividend yield of 5.6% (as at 28/05/2024).
Looking forward, the sector is well-positioned to ride the tailwinds of strong demand for commodities to support the transition to net-zero. While investors should be cognisant of the higher inherent volatility of commodities, active management can help to protect capital during market downturns. The last word goes to legendary investor Jim Rogers, who advised: “Keep in mind that commodities’ prices move not because of magic, but because of shifts in supply and demand. The price of a commodity will never go to zero.”
View the latest research note here
Click here to add BRWM to your watchlist
Disclosure – Non-Independent Marketing Communication. This is a non-independent marketing communication commissioned by BlackRock World Mining. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
Disclaimer
This report has been issued by Kepler Partners LLP. The analyst who has prepared this report is aware that Kepler Partners LLP has a relationship with the company covered in this report and/or a conflict of interest which may impair the objectivity of the research.
Past performance is not a reliable indicator of future results. The value of investments can fall as well as rise and you may get back less than you invested when you decide to sell your investments. It is strongly recommended that if you are a private investor independent financial advice should be taken before making any investment or financial decision.
Kepler Partners is not authorised to make recommendations to retail clients. This report has been issued by Kepler Partners LLP, is based on factual information only, is solely for information purposes only and any views contained in it must not be construed as investment or tax advice or a recommendation to buy, sell or take any action in relation to any investment.
The information provided on this website is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation or which would subject Kepler Partners LLP to any registration requirement within such jurisdiction or country. In particular, this website is exclusively for non-US Persons. Persons who access this information are required to inform themselves and to comply with any such
restrictions.
The information contained in this website is not intended to constitute, and should not be construed as, investment advice. No representation or warranty, express or implied, is given by any person as to the accuracy or completeness of the information and no responsibility or liability is accepted for the accuracy or sufficiency of any of the information, for any errors, omissions or misstatements, negligent or otherwise. Any views and opinions, whilst given in good faith, are subject to change without notice.
This is not an official confirmation of terms and is not a recommendation, offer or solicitation to buy or sell or take any action in relation to any investment mentioned herein. Any prices or quotations contained herein are indicative only.
Kepler Partners LLP (including its partners, employees and representatives) or a connected person may have positions in or options on the securities detailed in this report, and may buy, sell or offer to purchase or sell such securities from time to time, but will at all times be subject to restrictions imposed by the firm’s internal rules. A copy of the firm’s Conflict of Interest policy is available on request.
PLEASE SEE ALSO OUR TERMS AND CONDITIONS
Kepler Partners LLP is authorised and regulated by the Financial Conduct Authority (FRN 480590), registered in England and Wales at 70 Conduit Street , London W1S 2GF with registered number OC334771.
Read the latest edition of DIY Investor Magazine
DIY Investor Magazine
The views and opinions expressed by the author, DIY Investor Magazine or associated third parties may not necessarily represent views expressed or reflected by EQi.
The content in DIY Investor Magazine is non-partisan and we receive no commissions or incentives from anything featured in the magazine.
The value of investments can fall as well as rise and any income from them is not guaranteed and you may get back less than you invested. Past performance is not a guide to future performance.
DIY Investor Magazine delivers education and information, it does not offer advice. Copyright© DIY Investor (2016) Ltd, Registered in England and Wales. No. 9978366 Registered office: Mill Barn, Mill Lane, Chiddingstone, Kent TN8 7AA.