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What makes for the best commodity companies?

Tue 08 Aug 23, 11:46am (AEST)
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Source: Livewire Markets

Key Points

  •  Daniel Sullivan, the Head of Global Natural Resources at the Janus Henderson Global Natural Resources Fund is bullish on commodities over the next 12-24 months
  • Sectors with bullish tailwinds include lithium, copper, uranium, timber/building products and oil exploration/production
  • Sullivan is looking for companies with 'open' resources, meaning that the full extent of the resource is not yet known

Last year was a tough one for investors and a lot of commentary of late has been anchored to lower earnings as we approach reporting season, amid a more challenging economic environment.

But markets are forward-looking beasts and there have been calls recently (particularly in the US) that the macro picture might not be as bad as expected as inflation continues to fall.

Recently we’ve been speaking with fund managers who are more bullish than bearish, to find out why they hold that view and where they are hunting for opportunities.

Today’s instalment is with Daniel Sullivan, the Head of Global Natural Resources and portfolio manager for the Janus Henderson Global Natural Resources Fund.

The Fund focuses on researching companies with a high-quality natural resources advantage, and covers mining, energy and agricultural listed equities.

The responses below were provided by Sullivan.

The bull case for commodities and commodity companies

We are bullish over the outlook period [12-24 months]. We have diversified exposure to many resource assets and underlying commodities. 

We seek positioning for the growth lifecycle of new developments. 

There are some giant companies, but we say the mid-cap sweet spot US$1-6 billion market cap is a good risk-return area. We have five big exposures – metals, gold, oil & gas, agriculture, and forestry & wood products. Smaller industry options include gas, uranium, silver, etc.

What makes for a great commodity company?

The best companies are not exposed to short-term cycles, so a well-funded company that is growing its production can do well despite adverse macro conditions. 

I first learned this seeing Woodside (ASX: WDS) develop the North West Shelf project in the 1990’s, and it remains true that the best leaders don’t worry about what they can’t change but focus on getting their job done.

We look for resources that are ‘open’, or don’t have the full extent known or defined yet, where 

The rewards for success are so high that a general global economic downturn is irrelevant.

That means when a company buys that type of asset, or we buy that type of company, they get the upside of this unknown growth part cheap or for free. The converse would be, if we knew a resource completely (say 100 tonnes of gold or a tanker full of oil), it is easy to value, boring, and has no upside.

Historically it has been things like;

  • The drilling out of the North West Shelf gas resources that enabled Woodside and Shell to build the first LNG plant.

  • The iron ore mines being able to keep expanding again and again as demand grew, helping increase margins by ‘re-using’ existing assets, sunk-capital, like the towns, ports, airports, rail, etc

  • Oil Search drilling for decades in PNG, and finally making the oil discovery at Kutubu, and getting more funding to keep developing their target plays and opening up the multi-field discoveries that made the company

  • Exxon (NYSE: XOM) and Hess (NYSE: HESM) have just done a world-class and scale set of discoveries offshore Guyana, over 10 billion barrels. BP did this in the 80’s in Alaska with Prudhoe Bay.

  • Gold companies that make a new find and keep growing it – Plutonic, Great Central, North Flinders, KCGM (Superpit), etc

  • Robert Friedland with Diamond Fields, then Oyu Tolgoi in Mongolia, and now copper in the Democratic Republic of Congo.

So big, open to get bigger, production expansions, low operating costs = high margins. 

A visionary entrepreneur to tell the story and raise the risk capital, a smart imaginative geologist to decipher the complex data that often stumps many to unlock the play – APA US (Apache) have just suspended the drilling on a big new positive interpretation of their offshore oil discovery geology in Suriname (next door offshore to Hess/Exxon in Guyana) – so that’s the excitement and thrill of finding something new, valuable and hopefully very big. 

Which sectors/themes have you been hunting in for opportunities?

Lithium, copper, uranium, forestry/timber building products, oil exploration & production. 

We need trustworthy teams to lead their investment, culture and ESG issues to successfully execute on the complex task of creating value in the resource industry.

Which stocks are you currently bullish on and hold in the portfolio?

As at 30 June 2023, the top 10 holdings in our portfolio are:

Mining:

  • BHP Group (ASX: BHP)

  • Sociedad Quimica y Minera de Chile (NYSE: SQM)

  • Pilbara Minerals (ASX: PLS)

Energy:

  • Chenier Energy (NYSE: LNG)

  • Chesapeake Energy (NYSE: CHK)

  • APA Corporation (NYSE: APA) (formerly Apache)

Agriculture:

  • West Fraser Timber (NYSE: WFG)

  • Weyerhauser (NYSE: WY)

  • Louisiana-Pacific (NYSE: LPX)

  • FMC Corporation (NYSE: FMC)

The chart

The world needs natural resources and can’t plan the demand side exactly or bring the supply on without big effort – so we get very significant performance from the industries at times.

JH (1)
NDDUWI Index 1995 -2022 (02/08/2023) (Source: Bloomberg)

On the chart above:

  • DXAG is the DAXGlobal Agribusiness USD Total Return Index

  • MXWOOEN is the MSCI WORLD exAU/ENERGY Index

  • JCGMTR is the EMIX Global Mining USD Net Return Index 

  • NDDUWI is the MSCI World Index

Fun(d) question - Can you share an interesting fact about your investment style?

With over 120 years combined experience between four of us, we have seen plenty of cycles and global crises. 

Asset selection is never formulaic or simple, we keep meeting companies and reading fresh input every day. 

As technical specialists in minerals engineering, we prepare, prepare and prepare to structure our best portfolio offering for our clients every day.

Learn more about the future of resources

Daniel and his team invest in high-quality mining, energy and agriculture companies with the flexibility to invest across the supply chain, taking advantage of price shifts between upstream and downstream sectors and across industries. For further information, please visit the fund profile.

This article was first published for Livewire Markets on Tuesday, 8 August 2023.

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Written By

Chris Conway

Managing Editor

Chris is the Managing Editor at Livewire Markets and Market Index. His passion is equity research, portfolio construction, and investment education. He is also very keen on the powerful processes that can help all investors identify great opportunities and outperform the market, and wants to bring them to life and share them with you.

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