From BlackRock's portfolio update to its shareholders in the last couple of days.
Good stock selection in the gold sector helped the Company outperform this month, with quality names such as Fresnillo and Avanco Resources showing good performance. The Company continues to have a quality bias in gold through exposure to companies with tier 1 assets, as well as management teams with strong track records. During the month, the Company increased its exposure to iron ore producer Vale on the back of strengthening iron ore prices and the potential for further asset sales to be announced. The Company also topped up its coal producer exposure on the back of an increasing coal price and a more supportive longer term outlook which should lead to earnings upgrades.
The Company reduced its debt holdings after strong performance in these bonds year-to-date on the back of company action and rising commodity prices strengthening balance sheets. Amongst the Company’s unquoted investments the Company received its first royalty payment from Avanco Resources on 2 September. This payment was equivalent to 25% of the gold revenue and 2% of the copper revenue in the quarter ended 30 June 2016.
Strategy and Outlook
After an extended down-cycle, January 2016 appears to have marked the bottom for the mining sector. The sector has performed very strongly this year driven by commodity prices bouncing off the multi-year lows we saw at the end of 2015. Nonetheless, positioning surveys suggest investors remain cautious of the sector, given several years of severe underperformance, and the sector continues to be under-owned relative to history. Sentiment towards China has improved since the lows of Q3 2015 following stimulus at the beginning of 2016, lending support to commodities as fears over a ‘hard landing’ in the country have eased. The Chinese government’s stimulus package early this year has fed through into improved economic data points such as PMI figures above 50 and increases in property prices. At the same time, we have seen mining companies focus on cutting costs, reducing debt and improving balance sheets.
Looking ahead, we expect the mining sector’s performance to remain somewhat volatile in the near-term but we see the medium to long-term outlook as positive. The situation in China has improved but overall global economic growth is likely to remain low for some time. The impact of the mining sector slashing capital expenditure and underinvesting over the past few years is beginning to be felt by global production. Finally, whilst the sector has performed well this year, it has only returned to July 2015 levels and, with many of the miners trading at attractive free cash flow yields, valuations still at relative lows and commodity prices surprising to the upside, the risk of being underweight the sector remains significant.
AVB Price at posting:
5.5¢ Sentiment: Buy Disclosure: Held
