Energy and Natural Resources Market Cheat Sheet (October 3, 2011)
Strengths
- The Global Resources Fund performed well this week due to its defensive positioning in the portfolio.
- On a relative basis, asset allocation and stock selection among food and grain processors helped to limit downside risk to the fund. Additionally, weighting in senior precious metals also played a role in limiting a decline.
- Despite a sell-off in copper prices and poor sentiment towards mining stocks this week, M&A remains active. Minmetals Resources agreed to buy Anvil Mining for $1.3 billion cash, gaining three copper mines in the Democratic Republic of Congo, which may produce 60,000 metric tons of copper cathode annually from next year.
Weaknesses
- Copper fell almost 5 percent to a 13-month low on Wednesday, plummeting from ongoing European fears. Copper’s drop came despite a 21 percent jump in Chinese imports in August. Gold had dropped almost 2 percent and wheat 5 percent.
- Freeport McMoRan Copper and Gold continues to experience ongoing strikes at two of their properties. Mining Weekly reported that up to 1500 workers in Indonesia’s Freeport remote Papua province protested outside a government office on Thursday, while workers went on strike that same day at the Peruvian Cerro Verde mine. This is third stoppage at Freeport this month. The company still maintains that the labor concerns have had no effect on output. Freeport’s shares were at a 15-month low as it weathers these two strikes.
- Crude oil is headed for its largest quarterly drop in 15 months over concerns of global economic slowdown.
- HSBC highlighted that September data signaled continued stagnation of China’s manufacturing sector. After adjusting for seasonal variation, the HSBC Purchasing Managers Index held steady at 49.9 in September. Moreover, the index averaged its lowest quarterly reading since the first quarter of 2009. Despite manufacturing production in China continuing to rise during September, panelists attributed the subdued increase in production to fewer intakes of new business and decreased demand conditions.
Opportunities
- The Don Coxe Strategy Journal recommended an investment strategy of maintaining heavy weighting in agricultural stocks. Despite having high volatility, the endogenous risk in their earnings is well below those of most cyclical stocks – commodities and otherwise. He also recommended retaining strong exposure to U.S. oil producers operating on land. The spread between West Texas Intermediate and Brent oil, and U.S. and European natural gas prices, remains. Coxe says that at the moment, energy is the most conspicuous competitive advantage the U.S. possesses.
- The CEO of Anglo American gave an upbeat statement this week regarding current and forward-looking demand conditions. The company stated that demand from China continues to be robust and that it doesn’t expect any of its clients to cancel orders for the next 18 months to two years in their nickel and iron ore businesses.
Threats
- Should we continue to see excessive volatility in the markets, we could potentially experience a global sell-off. Worldwide negative sentiment remains present, as ongoing concerns surrounding the global sovereign debt issues, leading investors to lose confidence in global policymakers.
- After recently swearing in Michael Sata as Zambia’s new president, the new Mines Minister Wilbur Simusa reportedly said that the tax the country is receiving from Africa’s top copper producers is not enough and may need to be reconsidered. Reuters highlighted that copper mining is Zambia’s economic mainstay and any plans to increase the tax could hurt the industry target of doubling annual copper output to 1.5 million tons by 2015.
