Fund Manager
Craig Porter
Resource sectors led the TSX higher this quarter with the index up 19%. Investors started to deploy some of the massive amounts of cash built up over the past year, on the feeling that the markets were past their bottoms. As we go through the summer, a notoriously slow period, investors will need to see a few factors if the rally is to continue. On the economic front, we’ll need to see signs of actual growth, not just a slowing in the rate of decline. On the corporate front, as we go into earnings season, any results above expectations will provide a base for the market. After the quarter ended we saw signs of economic growth returning, as Asian economies reported positive news, including a strong GDP number out of China.
The two main energy commodities, oil and natural gas, took two widely divergent paths in the second quarter. The price of oil increased over 40% closing around US $70 a barrel. Early signs of a global economic recovery, stockpiling by China, and continued political tensions in oil producing countries such as Iran and Nigeria, conspired to drive prices higher. We feel that oil prices are probably a little ahead of themselves, however longer term, many of the problems that drove prices higher in the last cycle, such as a lack of new refineries or new discoveries, remain intact. The price of natural gas was flat this quarter, but we see the potential of it dropping sharply this summer. Numerous factors, including cooler summer weather and weak industrial demand, have led to inventories increasing to over 20% above normal levels. As well, major advances in drilling technology have helped bring on many sizeable gas discoveries at reduced costs. Although we have avoided gas-producing companies so far this year, eventually we will get back into these names as we feel that longer-term natural gas will be a key component of U.S. energy policy. The U.S. could eliminate a significant portion of its imported oil consumption by switching to compressed natural gas for automobile use. It’s a fuel that’s cheap, clean burning, and in abundant supply in America.
Continuing on the energy theme, we continue to like the prospects for uranium. It appears that sometime over the next couple of years we may see a supply crunch. Production is falling off at many of the older mines, and very few new mines have been brought on, due to rising construction costs and lengthy permitting periods. Couple this with the significant increase in new reactors coming on-stream in countries such as India and China, and we see prices going much higher. In anticipation of this scenario many Asian-based utilities and state-owned companies have been buying direct interests in uranium producing companies. It appears that western-based utilities have been slower to react to this impending bottleneck, and may be forced to pay much higher prices to fuel their reactors.
After a strong start to the year, the price of both silver and gold remained flat in the second quarter. With the higher prices this year, gold demand for jewelry has dropped, while investment demand for bullion has soared. Investors are buying gold as protection against a couple of threats. Firstly, investor demand is coming from those who fear inflation, as the massive amounts of liquidity and stimulus pumped into the global economy may lead to higher prices. Secondly, it’s being bought as protection against a fall in the U.S. dollar, as the U.S. government balance sheet is stretched with the trillions of dollars of debt taken on to fight the recession. As an indication of investor desire to own gold, the largest gold-based fund in the U.S. has become the world’s seventh largest holder of bullion, rivaling many of the world’s biggest central banks. In this flat gold price environment, the smaller growth stocks have outperformed the seniors this year. Increased investor tolerance for risk, as well as the thought that these companies are able to grow reserves and production levels much quicker, has led to this outperformance. Some of the best performers in fact have been companies that are developing new mines around the infrastructure of old operations. Companies such as Osisko, Detour Gold, and Sangold have made significant discoveries around old mine sites, and are seen as takeover candidates.
Although most economies were still not growing, Chinese restocking of base metals drove prices higher this quarter with copper and nickel rising 23% and 56%, respectively. We have been deploying funds to this sector in anticipation of a global recovery. Many companies were trading below their replacement costs, a situation which shouldn’t last in a growth environment. M&A activity will eventually correct these imbalances. The sector will also rebound quickly coming out of a recession, as inventories of many metals have not built up to dramatic levels. Due to low commodity prices and a lack of credit to finance operations, many companies had to shut down their mines cutting sharply into global supply.
Overall the future of the commodities markets will rest on the recovery of the global economy. We feel that the worst is behind us and, we are comfortable being nearly fully invested in the sector. Even if the markets remain weak, we are trying to ignore the short-term noise in the market and stay focused on the bigger picture of an eventual economic recovery. As third world countries continue to modernize, their consumption of commodities and energy will only continue to increase. We feel that the sector will be a leader in the next upturn, as many of the structural imbalances and bottlenecks that drove the last cycle still remain intact.
Craig Porter
Craig Porter - Q2 2009 Commentary
Date Published
Related Fund(s)
Fund Manager
Resource sectors led the TSX higher this quarter with the index up 19%. Investors started to deploy some of the massive amounts of cash built up over the past year, on the feeling that the markets were past their bottoms. As we go through the summer, a notoriously slow period, investors will need to see a few factors if the rally is to continue. On the economic front, we’ll need to see signs of actual growth, not just a slowing in the rate of decline. On the corporate front, as we go into earnings season, any results above expectations will provide a base for the market. After the quarter ended we saw signs of economic growth returning, as Asian economies reported positive news, including a strong GDP number out of China.
The two main energy commodities, oil and natural gas, took two widely divergent paths in the second quarter. The price of oil increased over 40% closing around US $70 a barrel. Early signs of a global economic recovery, stockpiling by China, and continued political tensions in oil producing countries such as Iran and Nigeria, conspired to drive prices higher. We feel that oil prices are probably a little ahead of themselves, however longer term, many of the problems that drove prices higher in the last cycle, such as a lack of new refineries or new discoveries, remain intact. The price of natural gas was flat this quarter, but we see the potential of it dropping sharply this summer. Numerous factors, including cooler summer weather and weak industrial demand, have led to inventories increasing to over 20% above normal levels. As well, major advances in drilling technology have helped bring on many sizeable gas discoveries at reduced costs. Although we have avoided gas-producing companies so far this year, eventually we will get back into these names as we feel that longer-term natural gas will be a key component of U.S. energy policy. The U.S. could eliminate a significant portion of its imported oil consumption by switching to compressed natural gas for automobile use. It’s a fuel that’s cheap, clean burning, and in abundant supply in America.
Continuing on the energy theme, we continue to like the prospects for uranium. It appears that sometime over the next couple of years we may see a supply crunch. Production is falling off at many of the older mines, and very few new mines have been brought on, due to rising construction costs and lengthy permitting periods. Couple this with the significant increase in new reactors coming on-stream in countries such as India and China, and we see prices going much higher. In anticipation of this scenario many Asian-based utilities and state-owned companies have been buying direct interests in uranium producing companies. It appears that western-based utilities have been slower to react to this impending bottleneck, and may be forced to pay much higher prices to fuel their reactors.
After a strong start to the year, the price of both silver and gold remained flat in the second quarter. With the higher prices this year, gold demand for jewelry has dropped, while investment demand for bullion has soared. Investors are buying gold as protection against a couple of threats. Firstly, investor demand is coming from those who fear inflation, as the massive amounts of liquidity and stimulus pumped into the global economy may lead to higher prices. Secondly, it’s being bought as protection against a fall in the U.S. dollar, as the U.S. government balance sheet is stretched with the trillions of dollars of debt taken on to fight the recession. As an indication of investor desire to own gold, the largest gold-based fund in the U.S. has become the world’s seventh largest holder of bullion, rivaling many of the world’s biggest central banks. In this flat gold price environment, the smaller growth stocks have outperformed the seniors this year. Increased investor tolerance for risk, as well as the thought that these companies are able to grow reserves and production levels much quicker, has led to this outperformance. Some of the best performers in fact have been companies that are developing new mines around the infrastructure of old operations. Companies such as Osisko, Detour Gold, and Sangold have made significant discoveries around old mine sites, and are seen as takeover candidates.
Although most economies were still not growing, Chinese restocking of base metals drove prices higher this quarter with copper and nickel rising 23% and 56%, respectively. We have been deploying funds to this sector in anticipation of a global recovery. Many companies were trading below their replacement costs, a situation which shouldn’t last in a growth environment. M&A activity will eventually correct these imbalances. The sector will also rebound quickly coming out of a recession, as inventories of many metals have not built up to dramatic levels. Due to low commodity prices and a lack of credit to finance operations, many companies had to shut down their mines cutting sharply into global supply.
Overall the future of the commodities markets will rest on the recovery of the global economy. We feel that the worst is behind us and, we are comfortable being nearly fully invested in the sector. Even if the markets remain weak, we are trying to ignore the short-term noise in the market and stay focused on the bigger picture of an eventual economic recovery. As third world countries continue to modernize, their consumption of commodities and energy will only continue to increase. We feel that the sector will be a leader in the next upturn, as many of the structural imbalances and bottlenecks that drove the last cycle still remain intact.
Craig Porter