VR Logo

Mining The Commodity Cycle

S. Naganath, President, DSP BlackRock Mutual Fund, explains the factors that make the World Mining Fund a strong offering

In addition to their World Gold Fund and World Energy Fund, DSP BlackRock Mutual Fund has come out with a new feeder fund – the World Mining Fund. S. Naganath, President & Chief Investment Officer (CIO), shares his views on the mining sector, the reasoning behind this fund and, importantly, who should invest in it.

Mining stocks are leveraged to the underlying metal. Do you see prices of metals rising?

A lot of factors augur well for the mining industry. Supply shortfalls and underinvestment in new capacity combined with steady demand will lead to higher prices in the long term. Let me explain.

The medium to long-term weakness in the dollar and the prospect of rising inflation is likely make an appearance in 2010-11.Given all the monetary easing that will take place, it will push up prices of real assets. An economic recovery is underway. It started in China, but now we are seeing traction in the U.S., the U.K. and Europe which is likely to result in commodity prices rising. The government stimulus programmes, which were largely targeted at infrastructure, acted as a demand driver for commodities. As the stimulus begins to taper off, the general economic recovery will add to the demand.

Supply is not necessarily keeping pace with demand. There have been mine shutdowns due to the crisis last year. Some will come back on stream others would take a while to get revived. Capex plans have been pared significantly. The impact of low capex on supply is not immediate. But three years later, if recovery is steady, supply would get tight for prices to start shooting up.  

Where are we right now in the commodities cycle?

I would say that we are in the middle of the cycle. This current commodity run started around 2002-03 and these cycles typically last for around 15 years. So, it still has a long way to go. This year, equity, gold, and commodities have all done well. There is a possibility of consolidation in 2010, but the medium to long term prospects are still good. Supply side constriction and steady-to-rising demand augurs well for commodities.  

Mining is an expensive business and more mining companies go belly-up than strike it rich. So, solid research is the key.

Exactly. All the factors I mentioned above will benefit those operating in this space, but not every company will necessarily benefit. If you have recently prospected and found a new oil field or mineral deposit, it may take around 3-5 years to start commercialising it. But the player who has done the prospecting years ago and is ready to commercialise that production will be better placed. So, that’s the job of the fund manager to figure out who has the best reserves, which firm is most efficient and so on and so forth. If you are investing in companies sitting on good quality reserves, are efficient in extracting minerals and metals from those reserves, and have, by and large, concluded their capex, they should do well. Generally, in this space, when you buy integrated companies the risk is less.  

What makes the BlackRock Global Fund – World Mining Fund a good investment?

The BGF World Mining Fund has been in existence for a period of more than 12 years and has a great performance track record. On the team are geologists who actually visit these mines. The fund manager looks at the track record in terms of successful exploration and successful commercialisation. Since the team has been following the sector for years, it is generally aware as to which geographies are risky and is adept at assessing the size of a find and its commercial prospects. Management quality too plays a very important role when analyzing a company as also whether the price at which the stock is available captures the risk.

Who should invest in the World Mining Fund and how much?

Anyone who shares an optimistic view of commodities and the mining sector in the medium to long term should consider this fund. There is an exchange risk. If the rupee depreciates, it adds to the return of the fund since the investment is in a non-rupee asset. Likewise, if the rupee appreciates it would potentially reduce the return of this fund. Having said that, we don’t think that forex rates will have significant impact on returns in the medium to long term. The actual investment will depend on the individual investor’s risk appetite, but broadly speaking, I would suggest anywhere from 1-5 per cent of their equity portfolio.