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Global Listed Infrastructure Global Resources Update 2015 Todd Warren, Portfolio Manager Agenda 1. Review of 2014 2. What drives resources from here? 3. Valuations 4. Summary & Outlook 5. Appendices a. One – Stock stories b. Two - Team c. Three – Investment process 2 Review of 2014 Energy & Mining sectors have underperformed dramatically 170 Performance of MSCI World Equities by sector since Jan 2013 (rebased to 100) 160 150 140 130 120 110 100 90 80 70 60 MSCI World Index MSCI World Energy Sector Index MSCI World Metals & Mining Index MSCI World Health Care Index 50 MSCI World Financials Index MSCI World Information Technology Index MSCI World Consumer Discretionary Index MSCI World Consumer Staples Index 40 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Source: Bloomberg, data to 31 December 2014 4 2014 – the good, the bad, and the ugly General comments • Decent start to the year, before it gave way to macro headwinds – commodity weakness driving extreme negative sentiment late in the year • Energy particularly in the spotlight following OPEC decision in late November not to cut production • Iron ore continued to weaken throughout the year dragging down the mining sector, before a late seasonal rally Contributors • Gold – despite mixed commodity performance, equities were supported (Franco, Osisko, Detour) • Diamonds – strong rough diamond prices along with stock specific outperformance (Petra, Dominion, Lucara) • Lundin Mining – start-up of Eagle mine, and major asset acquisition significantly increased production • Stillwater – operational improvements along with being beneficiary of Russian geo-political issues Detractors • Diversified miners – weakening fundamentals for bulk commodities (Rio Tinto, BHP Billiton, Vale) • Upstream oil producers – collapsing oil prices dragged the entire sector down (Noble, Bankers, MEG, Sundance) For internal use by authorised First State Investments’ distributors and staff only. Not for distribution to clients or any external parties. 5 First State Global Resources Fund Performance As at 31 December 2014 Since 2 yrs 3 yrs 5 yrs 7 yrs Performance 3 mths 6 mths 1 yr Launch (% p.a.) (% p.a.) (% p.a.) (% p.a.) (% p.a.) Global Resources Fund -11.0 -18.3 -9.3 -9.4 -9.8 -7.9 -9.0 -0.2 Benchmark* -11.1 -18.1 -12.5 -12.1 -9.3 -7.4 -7.8 2.9 Relative performance 0.1 -0.2 3.2 2.7 -0.5 -0.5 -1.2 -3.1 Euromoney Global Mining Index** -10.9 -18.2 -14.0 -17.1 -12.9 -10.3 -9.7 1.0 MSCI AC World Energy Index** -12.0 -18.2 -8.6 3.9 1.6 1.1 -3.1 1.0 Source: Lipper, First State Investments. Single pricing basis with net income reinvested. *Benchmark Since launch to 01 Nov 07: Euromoney Global Mining Accumulation Index. From 01 November 2007 onwards: 75% Euromoney Global Mining Index / 25% MSCI AC World Energy Index. Since launch performance calculated from 5 September 2005. **Index returns are gross of tax. Returns from two years onwards are annualised. 6 What drives resources from here? The resources cycle Phase 1 Demand rises, inventories decline Supply response lags = higher prices High prices encourage new projects Governments attempt to raise taxes Phase 3 Phase 2 Supply is curtailed Supply response = demand Demand normalises Inventories rise = prices fall Producers benefit from recovery Capex & exploration reduced Productivity focus on operating costs 8 Intensity-of-use work suggests China has upside… Energy Steel Copper Composite Energy Composite Crude Steel Composite Copper UsePer Capita per Intensity capita of Use UsePer Capita per Intensity capita of Use UsePer Capita per Intensity ofcapita Use 9,000 kgoe 1,600 kg kg Japan 25 Japan Sth Korea Sth Korea 8,000 1,400 India India 7,000 Brazil 20 Brazil 1,200 China China 6,000 United States 1,000 United States 15 5,000 Japan 800 4,000 Sth Korea 10 India 600 3,000 Brazil 400 2,000 China 5 United States 1,000 200 - - - - 10,000 20,000 30,000 40,000 50,000 - 10,000 20,000 30,000 40,000 50,000 - 10,000 20,000 30,000 40,000 50,000 China GDP (US$, constant 2000 prices) India GDP (US$, constant 2000 prices) GDP (US$, constant 2000 prices) Source: Wood Mackenzie, CRU, Metalytics, 31 December 2013. 9 China – it is all about the base Copper consumption Crude steel production 1,200 ('000 tonnes) 900 (mtpa) 1,000 800 800 700 600 600 400 500 200 400 0 300 Jan 05Jan 06Jan 07Jan 08Jan 09Jan 10Jan 11Jan 12Jan 13Jan 14 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Power generation YOY growth Iron ore imports 30% 60,000,000 25% 50,000,000 20% 40,000,000 15% 10% 30,000,000 5% 20,000,000 0% 10,000,000 -5% -10% 0 Jan 05Jan 06Jan 07Jan 08Jan 09Jan 10Jan 11Jan 12Jan 13Jan 14 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Source: CLSA Tradebook June 2014. 10 Late in the boom: why invest in resources now? Benefit from balance sheet reform • Management often replaced by conservative-minded ‘guardians’ • New mandate: cut expenditure/debt; boost shareholder appeal by paying back cash • Engage M&A cautiously Miners’ returns typically improve after a sector correction 100% 80% 60% 40% 20% 0% -20% -40% MSCI Metals & Mining Returns -60% MSCI World Returns -80% 1997 2002 2007 1995 1996 1998 1999 2000 2001 2003 2004 2005 2006 2008 2009 2010 2011 2012 2013 2014 Source: DataStream, total shareholder returns, assumes reinvesting dividends, First State Investments image. 11 Capital discipline = lower future supply 24 August 2011 18 February 2014 19 August 2014 “World class diversified project “Our high quality project pipeline” “Selective investment and strong pipeline” growth in free cash flow “ Source: BHP Billiton ; Preliminary results, 24 August 2011; Interim results, 18 February 2014; Preliminary results, 19 August 2014. 12 When the surplus ends, inventories decline and pricing tension returns Global market surplus/deficit for base metals (expressed as % of demand) 50% 40% ) - 30% Tin 20% Lead 10% Zinc 0% Nickel -10% Cumulative surplus(+)/deficit( Cumulative Copper -20% Aluminium -30% 2013 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2014F 2015F 2016F 2017F 2018F 2019F Source: IAI, ICSG, ILZSG, Wood Mackenzie, Macquarie Research, November 2014. 13 Inflection point - rising free cash flow = ? UK Mining Companies* EVA and Economic Spread^ 40,000 20.0% 30,000 M&A Phase 15.0% 20,000 10.0% 10,000 Capex Phase 2014 Inflection 5.0% 0 0.0% -10,000 -5.0% -20,000 -30,000 -10.0% EVA (US$m) - LHS Economic Spread pre abnormals (%) * UK mining companies includes BHP Billiton, Rio Tinto, Anglo American, Glencore, Vedanta, Antofagasta, First Quantum and other smaller companies. ^ Economic spread is Return on Invested Capital (ROIC) minus WACC. Source: Citi Research, dataCentral, data to 31 December 2014. 14 Copper – low cost producers • Cost curve is rising Grades declining, exploration disappointing. • Large cap seniors – Antofagasta, Southern Copper, Grupo Mexico • Leading intermediate producers First Quantum World class, low cost operations Brownfield and greenfield growth Strong track record - in house project delivery team Lundin Mining Diversified base metals producer 25% stake in World class Tenke mine with Freeport Acquired Eagle mine from Rio Tinto HudBay Low cost exposure to copper and zinc Significant growth in copper production imminent Longer term growth options via greenfield projects Sources – BMO, First State Investments. Photos: First State Investments. 15 Gold exposure – quality seniors and catalyst rich juniors • Goldcorp Low cost, long life, low political risk Accelerating cashflow and earnings Growing gold production, 4 mines in 4 years Strong balance sheet • Franco Nevada – Royalties Little exposure to operating costs or capex Large cash position • Catalyst driven juniors Detour – survived troubled ramp up in 2013 low gold price, re- rating underway Romarco – high return project in USA, permitting finally in place, funding now secured Source: First State Investments. 16 Oil markets – keep it in perspective Oil markets – it’s noisy out there... “The oil price is tumbling. Is that good or bad news for the world economy?” • The Economist, 18th October 2014 “Has Saudi Arabia lost control of the oil market?” • Financial Times, 16th October 2014 “Saudi Arabia tests US ties with oil price” • Financial Times, 16th October 2014 “Is the oil crash a secret US war on Russia?” th Source: The Economist. “Cheaper Oil, Both Symptom and balm”, October 18th, 2014 • BBC World News, 16 October 2014 “Painful though it is, this oil shock will eventually spur huge change...” • The Economist, 29th May 2008 “Goldman’s analysts speak, and the price of crude oil rises” • Financial Times, 22nd May 2008 “Crude is gushing from the ground...the world is awash with the stuff, and it is likely to remain so” • The Economist, 4th March 1999 Source: The Economist, “Recoil”, May 29th 2008. The Economist, “Drowning in Oil”, Mar 4th 1999. 18 Global supply > global demand 100 2.0 1.5 95 1.0 90 0.5 - 85 (0.5) 80 (1.0) Global Supply/Demand, GlobalSupply/Demand, mnbpd Global supply is running ahead of demand into seasonally (1.5) Stock Stock change & Misc. to Balance, mnbpd 75 weaker first half (2.0) 70 (2.5) 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 Stock Chg [rhs] Supply Demand Source: IEA OMR, Bloomberg. 19 1986 price crash was supply driven too... 14 OPEC (read Saudi) refusal to cut 160 1986 saw prices fall 70% from the production to rebalance markets in $30/bbl level seen through the prior November has had a similar affect 140 12 two years as Saudi grew tired of on prices which are now down losing market share (emergence of ~60% versus prior Alaska, North Sea and Mexico) and 3-year average of $110/bbl OPEC quota cheating.
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