Colonial First State Wholesale Global Resources Fund
Quarterly Update
March 2017
Market Review
Global resources equity markets were mixed in Q1 17. Metals prices mostly rose with supply factors the driving force behind price movements.
Aluminium (+15.9%) responded to potential capacity curtailments in China on environmental concerns. Safe haven demand drove-up gold (+8.4%),
despite increasing US interest rates. Palladium (+17.3%) was supported by a lack of commercial inventories and persistent deficits. Iron ore (+1.9%)
was volatile, reflecting tensions between tighter Chinese monetary policy, fluctuating steel consumption and mine expansion in Brazil. Coking coal (32.6%) retraced as China lifted capacity controls and supply recovered. Brent crude oil (-7.0%) fell as US supply increases more than offset OPEC
supply discipline.
Fund Performance
The Fund returned -0.3% (gross of fees in AUD terms), underperforming its customised benchmark by 0.1%.
Mountain Province Diamonds holds a 49% interest in the newly producing Gahcho Kuė mine in Canada. First sales from any new diamond mine are
often weak as diamond buyers take time to gain comfort around diamond quality. Mountain Province sold off as a result of a disappointing first
tender. The lower than expected proceeds have also led management to seek a loan facility waiver to access ring fenced cash reserves. While
disappointing, we consider this to be a small setback and used the opportunity to add to our position.
Canadian small cap explorers and developers Integra Gold and Pretium Resources were the leading performers in a rising gold price environment.
Each have individual catalysts. Integra is developing an underground deposit known as Lamaque. Although their current resource is small, the
exploration potential is exciting. The company recently released a resource update, highlighting a doubled life of mine estimate, increased average
gold production and reduced costs, leaving it well positioned to become the newest gold producer in Quebec. Pretium is a developer located in
northern British Columbia poised to bring one of the highest grade gold deposits (Brucejack mine) towards production during the second half of this
year.
Fund Activity
We increased the fund's position in North American drilling and pressure pumping services' stocks on share price weakness. Patterson-UTI Energy is the
largest provider of contract land drilling services in the US. Halliburton is one of the world's largest providers of products and services to the energy
industry. Trican Well Service is the largest pure-play Canadian pressure pumper.
The fund's exposure to diversified global miners was reduced. We took some profits on South32, BHP Billiton and Rio Tinto after metals and mining
equities started the year positively, recycling the sale proceeds primarily into Glencore and Teck Resources for their more attractive risk-reward profiles
and leverage to a more favourable commodity mix.
Positions in copper and nickel equities rose over the quarter, reflecting improving market fundamentals. Holdings were increased in Antofagasta,
Ivanhoe Mines, Independence Group and Western Areas following site visits.
We initiated a position in rare earths producer Lynas. The company's deposit in Mt Weld, Western Australia, is acknowledged as one of the highest
grade rare earth mines in the world.
Vale, Fortescue Metals and Whitehaven Coal remain preferred names amongst the bulk commodities.
The position in uranium producer Cameco was reduced. We took some profits after a strong share price run from the lows of late 2016.
Market Outlook
We remain constructive on the outlook for the mining sector. For industrial and ferrous metals producers, current valuations imply that underlying
prices are peaking. Ongoing Chinese stimulus and infrastructure investment, however, suggest that prices remain well supported in the near term.
Supply growth challenges, stable to improving global demand and strengthening balance sheets continue to paint an attractive longer-term outlook.
We think that the current weakness in global oil markets is temporary and expect the balance to shift from supply surplus to deficit as inventories
draw and the market readies for the peak driving and demand season in the northern hemisphere. It is likely that OPEC will continue with their lower
production ceiling in an attempt to support oil prices. Increased optimism amongst energy producers bodes well for North American Infrastructure,
Drillers and Oilfield Service companies who are well placed to benefit from improving demand for well completions.
At this stage in the cyclical recovery, large cap miners and energy producers need to continue to demonstrate capital discipline and to maximise free
cash flow. Amongst the mid-cap and intermediate producers, high asset quality, low costs and balance sheet strength are qualities that we
emphasise. Smaller companies are inherently higher risk, but catalysts such as exploration success, permitting and development, or operational
turnarounds are drivers of the 'acorns' or small cap stocks in the portfolio. We believe these types of catalyst-rich names will increasingly be of interest
from an M&A perspective.
Colonial First State Wholesale Global Resources Fund
For further information
Head of Business Development — Australia and New Zealand
Head of Client Relationships and Service
Harry Moore
Dan Bristow
+61 3 8618 5532
Business Development — Melbourne
Peter Heine
Institutional Relationship Management — Sydney
+61 3 8628 5681
Business Development — Sydney
Jeannene O'Day
Bachar Beaini
Edward Tighe
Irene Rodionov
+61 2 9303 6311
+61 2 9303 1807
+61 2 9303 3929
+61 2 9303 2416
+61 2 9303 7506
Rose Beedles
Helen Squadrito
Glenn Venables
+61 2 9303 2863
+61 2 9303 6142
+61 2 9303 6280
Head of Consultant Research
Ross Crocker
+61 2 9303 6916
Business Development — New Zealand
Helen McKenzie
+64 21 951 520
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