According to equities expert Dermot Ryan, certain companies in the resources and commodities sector could be worth a look for investors this year. In this short video, Dermot shares the drivers for this change and what investors should look for.
A rebound in commodity prices and a renewed focus on efficient use of shareholder capital could make companies in the resources and commodities sector worth a look for investors this year, according to Dermot Ryan, AMP Capital’s Income Fund Co-Portfolio Manager.
In particular, companies in the mining and mining services segment leveraging data and technology to make themselves more efficient, decluttering transportation and “coming down the cost curve” by reducing their unit cost per output could pay off for selective investors, Ryan says.
While previous mining booms in Australia might have been characterised by some wasteful spending, “we are now seeing a new breed of cost focused capital expenditure coming through and we think this can lead to some interesting individual opportunities in the energy and mining space,” Ryan says.
“In previous booms we saw a sharp run up in commodity process, companies scrambling over one another to get mines built as quick as possible irrespective of costs. This led to greenfield expansion and large amounts of money being spent on labour, machinery and procurement and many of these didn’t get a good cost outcome,” Ryan notes, reflecting on the ‘mining super cycle’ which peaked in 2011/12.
While commodity prices have come off since the peak of the boom, some macro tail winds are beginning to emerge, putting some tail winds behind this segment again, Ryan notes.
“Global growth is running hot; a lot of demand is coming through for commodities and a lot of demand for seaborne high-grade commodities from China is coming through as China looks to focus on air quality and the environment,” Ryan continues.
We’re in a bit of a sweet spot for commodities globally with demand ticking up at a time when interest rates remain low, Ryan reckons.
“There’s an opportunity for companies who have de-geared their balance sheets to use some of that capital to invest back into their mines,” he says.
“Valuations are reasonable in the mining and mining services space because investors have wanted to wait to see how sustainable commodity prices are,” he notes.
Ryan highlights companies in the LNG, iron ore, copper and other commodities segments relating to electric vehicle manufacturing are worth watching.
Ryan notes the increasing use of technology and data in the segment including “port to mine” technology and other ways companies can increase input through existing infrastructure.
“There are a few factors this year that point to better shareholder returns at any given commodity price which is very encouraging for selective investors,” Ryan notes.
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