Natural resources firms are selling extremely cheaply at the moment, with European firms tending to ...
Natural resources firms are selling extremely cheaply at the moment, with European firms tending to be acquirers rather than acquirees, according to Ian Henderson, manager of JPMorgan's Natural Resources fund.
With big companies on sale for P/E ratios of around eight times, and smaller companies on ratios as low as one times earnings, the market reflects a consensus that the current earnings of natural resources firms are unsustainable, says Henderson.
"People feel commodity prices will fall a lot," says the manager, explaining commodities prices are deemed very cyclical by most.
Henderson believes the sector is in a long-term cyclical bull market that will continue.
"The medium-term horizon looks different to the short term," says Henderson. "There is a lot of speculative money invested in the sector that is not long term, such as hedge funds looking to hold metal and energy stocks."
China now consumes more than the US in every commodity available, Henderson explains, and the industry is currently unable to meet Chinese demand. Demand growth in the medium term is going to be very strong as a result.
Henderson holds every natural resources stock listed in Europe and the UK except for Vedanta, due to concerns around the firm's assets, including its copper mining operation in Zambia.
In terms of holdings, Henderson invests in Aim-listed Quantum First, which he feels, is undervalued by the market.
With expectations of around $11 generated for each share currently worth about $56, Henderson says he does not see the shares as very expensive. He has a 2.1% holding in the firm.
More generally, Henderson is bullish on uranium as a result of restricted supply and consistent demand for uranium from power stations that need it to keep generating power. The latest uranium development at Cigar Lake in Canada has been delayed by one or two years due to complications in the mining process, he says, meaning supply will be further restricted for some time.
"I am not hot on copper at the moment in terms of the price movement of the actual commodity, but some copper miners are the cheapest in the world," he says. He adds that the price of copper mining firms is only partially explained by the price of the commodity itself.
Aaron Barnfather, manager of Newton's Pan European fund, says his portfolio is generally underweight when it comes to mining stocks, adding that there is a lot of liquidity chasing commodities at the moment.
"It makes us quite nervous," he says of the sector, which is driven by underlying commodity prices.
The manager bases his decisions on individual stock selection processes, which have driven him to a holding of around 1% in Norwegian-listed KNS. One of the biggest producers of potash, it has strong pricing power as it is one of only four potash producers in the world, says Barnfather, adding that it also owns a significant salt mine.
KNS's position has improved recently after a major Russian potash mine was decommissioned following a flood, he says.
"You do not want your potash mine to flood, as it dissolves in water," he says. "The Russian mine is no longer a potash producer."
Phil Craig
