Monthly commentary - Mackenzie Resource Team

Written by the Mackenzie Resource Team

Global Resource Fund - Portfolio Insights 

•  The fund’s modest underweight and strong security selection within energy helped offset weakness in the broader energy sector in the second quarter. Paramount Resources (up 15%) performed well after a dividend increase; illustrating the value of capital discipline and capital return to shareholders.
• Precious metal equities are a strong overweight in the fund and enjoyed a sharp rebound from prior underperformance. Producers benefitted from higher gold prices and moderating costs. AngloGold Ashanti (up 14%) and Pan American Silver (up 34%) were some of the positions that performed well during the second quarter.
• Lumber markets are currently oversupplied due to a combination of muted housing starts given the relatively high interest rates and poor industry supply discipline, with lumber producers such as Interfor struggling.
• The portfolio managers trimmed exposure to energy names such as Cenovus and Canadian Natural Resources. Iron ore miner Vale was trimmed to reflect governance concerns, with proceeds allocated to precious metals equities.
• With the Fed’s decision-making hinging on inflation data, economic activity, and a volatile presidential election cycle, we are unlikely to have confirmation regarding the opportunity to increase our portfolio risk exposures until late 2024 to early-2025. Our portfolio is currently positioned accordingly with well-diversified exposures including gold, super integrated oil and gas producers, and defensive margin sensitive businesses like construction materials, while retaining cyclical opportunities in copper and lumber.

Precious Metals Fund - Portfolio Insights 

• Silver producers benefited from the outperformance of silver over gold, with names such as Gatos Silver (up 26%) and Pan American Silver (up 34%) contributing to the portfolio in the second quarter.
• Index heavyweight Newmont Mining (up 19%), somewhat recovered after digesting its ill received acquisition of Newcrest Mining but remains an underweight in the portfolio.
• Some profits were taken in the South African gold producers, following very strong outperformance. Alamos Gold completed a very astute acquisition, and its weighting was increased in the fund.

Market Review & Outlook

Macro Overview

• Albeit at a slower pace, the global economic expansion continues. The rate of growth moderated during the second quarter, particularly in the U.S. while the European economy remained subdued. The Chinese economy continues to grow at a much lower rate than historically. Demand growth in China is likely to remain sluggish until a more pronounced policy change occurs.
  
• We are closely monitoring the race between slowing global economic activity and the wait for monetary stimulus. We apprehend the possibility that lower interest rates may not come in time to prevent a deeper economic slowdown. Many countries, particularly in emerging markets, are resisting the idea of meaningful interest rate cuts. A meaningful reduction would likely put pressure on their currency and further reduce capital flows to their country.
• The widespread moderation in U.S. economic activity flowed through into declining inflation rates. This should allow the Federal Reserve to start cutting rates sometime in the fall. 

Oil & Natural Gas

• Sluggish oil demand, particularly in China, is being balanced by strong restraint from OPEC+, while non-OPEC western world producers remain focused on capital discipline. We therefore expect oil prices to remain rangebound, with any breakout highly dependent on the next phase of the economic cycle; most likely dependent on an improving Chinese growth outlook. Conversely, if there were a further deceleration in global growth, OPEC would have to restrain production further.
• We anticipate natural gas prices to soon find a low for this decade. The beginning of the LNG export expansion cycle will commence with several sequential terminal completions starting late-2024, and continuing into 2026, which should cumulatively add 10-15% demand in the North American gas market. We continue to remain overweight natural gas, and in particular Canadian natural gas producers who should benefit from improved takeaway capacity as LNG Canada ramps up.

Lithium & Copper

• As laid out in our White Paper, “From oil to lithium”, consensus expectations for the transition from internal combustion engines to Battery Electric Vehicles (BEV) were overly aggressive. Battery demand is indeed growing at a healthy 10-15% rate, but below prior consensus expectations of 20-30%, in particular due to slow adoption in Europe and the U.S. With this reset in growth expectations, lithium prices have come down into the cost curve as current lithium markets are in oversupply.
• We expect lithium prices to remain volatile over the next decade as the fast-growing demand will occasionally be out of sync with fast-growing supply. Lithium suffers from lower barriers of entry relative to copper and aluminum, and we expect the industry to ultimately meet the need for lithium for batteries. Copper therefore remains our preferred exposure to the electrification thematic. With some of this being recognized and spot prices having risen to the $4 to $5/lb price range, we continue to believe the world needs $5 to $6/lb copper to incentivize new mines.

Gold

• The recent rally in gold prices has been driven by strong systematic buying from non-western central banks in an effort to diversify their U.S. Dollar exposure in response to the weaponization of currencies and far-reaching sanctions set on Russia. Demand is also being buoyed by spot buying from Chinese savers, for whom there are little other investment alternatives available given challenges in the Chinese housing and stock markets. While higher prices are starting to, at least temporary, weigh on gold demand in the East, rising investor demand for gold is offsetting any market slack.
• A significant bull case for gold would be the combination of sustained systematic buying by central banks, superimposed with rising western world investment demand for gold. Western world investor demand remains currently muted as real rates are relatively high. A bull case is evolving, where a decline in real rates precipitated by Fed rate cuts would superimpose resurgent western world gold demand on top of Chinese demand.
• Gold equities have largely underperformed gold bullion, as production difficulties stemming from labour shortages and rampant cost inflation saw costs rising faster than revenues. This margin compression weighed on the sector and resulted in a cyclical low for margins in Q4/2023. With gold prices rising, and mining inflation pressures moderating, 2024 could see the precious metals equities outperform bullion as operating margins widen with higher gold prices.

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This document may contain forward-looking information which reflect our or third party current expectations or forecasts of future events. Forward-looking information is inherently subject to, among other things, risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed herein. These risks, uncertainties and assumptions include, without limitation, general economic, political and market factors, interest and foreign exchange rates, the volatility of equity and capital markets, business competition, technological change, changes in government regulations, changes in tax laws, unexpected judicial or regulatory proceedings and catastrophic events. Please consider these and other factors carefully and not place undue reliance on forward-looking information. The forward-looking information contained herein is current only as of July 16, 2024. There should be no expectation that such information will in all circumstances be updated, supplemented or revised whether as a result of new information, changing circumstances, future events or otherwise.