First Sentier's Tim Canham reckons the commodities boom ain't over yet.
He's particularly bullish on ASX gold share Genesis Minerals Ltd (ASX: GMD) and mineral sands miner Iluka Resources Limited (ASX: ILU).
Canham is a senior portfolio manager within First Sentier's emerging companies team.
In an interview with the Australian Financial Review (AFR), Canham revealed they have just bought a gold share.
Why buy Genesis Minerals?
Canham said:
Even though it's not a sector in favour, we have a new position in a gold stock, Genesis Minerals. Former management team of Saracen Minerals, which merged with Northern Star.
The company recently conducted a $100 million capital raising. Genesis also announced a merger with troubled Dacian Gold. This gives the emerging company access to a relatively new processing facility in the region at below replacement value.
This merger and potential further transactions at a time when labour and capital cost pressure are intense, puts the company in an enviable position at a low point in the gold cycle.
The Genesis Minerals share price closed Friday's session at $1.39, up 4.92%. The gold share is up 94% over the past 12 months but down 18% in the year to date.
Why buy a gold share when commodity prices are falling?
This might come as a surprise given commodity prices have been falling for a few months now. The price of gold has fallen from a recent high of around US$2,052 t.oz in March to US$1,760 t.oz today.
Canham says the environment for gold shares "is very tough given the increasing cost environment in terms of labour, fuel and other processing inputs".
He adds:
An Achilles heel of the sector is that it has no pricing power, despite the relative cushion of a weaker Australian dollar. But I always like to own some gold, as when it's in favour, the stocks can really do well. Usually, when you least expect it, you are thankful you own some.
What's the outlook for commodities?
Canham is "quite bullish" on commodities:
When we look across a number of commodities like natural gas, oil, copper, zircon, and nickel – there has been very little supply response in any those key ingredients for global growth. The current high operating and capital costs make supply growth even more unlikely.
When I attempt to marry this up against these wonderful, smooth, upward-sloping demand charts of electric vehicle production, renewable energy and grid build-out, I do scratch my head. It makes me quite bullish in the medium term on the commodity complex.
Why buy Iluka Resources?
When asked to name an undervalued ASX share that he is most bullish on, Canham nominates Iluka Resources.
Yes, there are headwinds from global recession fears and Chinese housing issues, but the fundamental lack of supply in mineral sands products is very real.
Generally for me to get bullish about a commodity there must be a supply angle (i.e., a lack of it).
We think its rare earth refinery investment in WA is also misunderstood by the market and undervalued. As a manufacturing destination, WA looks attractive with some of the lowest gas prices in the world.
The Iluka Resources share price closed Friday's session at $9.58, down 0.1%. Iluka shares are down around 4% over the past 12 months and 8% in the year to date.
