According to Datt Capital, sector valuations are now favorable, both relative to other sectors and to their historical averages. The sector is further supported by long-term global trends, such as the transition to renewable energy and electric vehicles, which will further strengthen the outlook for lithium and copper.
Emanual Datt, the company’s chief investment officer, described the resources sector as “the most inefficiently priced market” but cautioned that it only offers significant opportunities to investors who understand the nuances.
“By applying global themes to local markets, skilled managers and investors can generate consistent alpha over time,” he said.
Similarly, Jamie Hannah, deputy head of investments and capital markets at VanEck, highlighted the value and growth opportunities of the sector compared to other asset classes.
“Many large, diversified natural resource companies have underperformed the market in recent years, and there is a strong case to be made that many of them are now on the cusp of a recovery and could outperform the market as a whole in the years to come. »
He also noted that the sector offers some pockets of value, particularly in gold. The price of gold has risen 28 percent since the start of the year and, in general, the share price of gold mining companies is linked to the price of gold, he explained.
“Therefore, if gold rises by 28 percent, you will generally see the share price of gold mining companies rise further,” he said.
“We have seen some lag in this leverage in the current cycle and it appears there is value in this sector.”
If a company mines gold at an all-in sustaining cost of $1,400 per ounce and the price of gold rises back to $2,600, then this increase is pure incremental profit for the company.
On the other hand, Datt explained that the sector’s inefficiencies stem from its complexity and lack of institutional focus, particularly in small-cap companies, which creates greater opportunities for active investors.
“Natural resources are essential to daily life and support global economic progress,” Datt said.
“Global population growth, urbanization and increasing prosperity in developing economies are leading to increased demand for minerals and energy. »
He also highlighted the sector’s resilience during trade tensions with China in 2020, when the sector was hit by tariffs.
“Despite the geopolitical impasse, Australia’s iron ore and coking coal producers have thrived, underscoring the robustness of the sector,” he said.
Datt remains positive on the supply-side outlook, emphasizing the prudence of mining investments and oil companies’ priority on debt reduction.
Additionally, the industry’s top producers typically maintain strong balance sheets, which gives them more flexibility and allows them to better weather market volatility, Datt noted.
Although he admits there are short-term challenges, Datt is optimistic about the future of the sector.
“For investors, resource exposure offers a way to diversify portfolios while capitalizing on global trends. It is a sector that combines solid fundamentals with significant long-term potential. »
Commenting on the sector’s challenges, Hannah highlighted that the resources sector is vulnerable to geopolitical risks.
“Mining remains a key factor for a resources company and, therefore, is affected by underlying commodity prices as well as the political and regulatory environment of the operating country,” he said. -he declared.
According to preliminary estimates from November, the Reserve Bank of Australia’s commodity price index fell 11.8 percent in SDR terms over the past year, due to falling iron ore prices. and coking coal. The index also fell 12.6 percent in Australian dollar terms.
