The once unloved mining sector is providing bright spots despite basic materials as a whole being hit hard by China’s slowdown, Citywire AAA-rated Alex Savvides has said.
Savvides, in an investor update, said he holds Anglo American, Rio Tinto and Acacia Mining in his JOHCM UK Dynamic fund at present.
Global mining group Anglo American is current the ninth biggest position in the fund at 3.55% and was singled out by Savvides as showing the resilience of the sector.
‘Part of our original thesis on Anglo American was our expectation of a positive inflection in free cash flow generation, brought about through a mixture of cost cuts, production increases, expansionary capex reductions, new assets coming on stream and non-core asset sales.'
‘This uplift in cash flow generation would, we felt, protect and enhance the value of the group's equity,’ he said.
Savvides feels the mining company has made progress on costs, productivity and asset integrity, but the fall in commodity prices meant that the market lost confidence in the company leading to its declining share price.
Savvides has allocated 7.51% of the fund to the basic materials sector, which is a 2.01% overweight against the benchmark. Anglo American is the third most active position in the fund.
‘Anglo American shares are undervalued on virtually any metric over any reasonable time frame. We are in the middle of the panic,' Savvides said.
‘The worst-case scenario is that the company defers dividend payments; the best case is that the management team executes on asset sales, cost cuts and productivity gains while some of the company's commodity exposures stabilise through supply rationalisation. In both cases, the shares would most likely rise.’
In an investor update for July, Savvides said: ‘Over the past decade, the group has produced cumulative earnings of $75 billion. Today, you can buy all the equity for c. $18 billion. Anglo American looks extremely cheap.’
Platinum and diamonds
Savvides also listed basic materials groups Impala Platinum, Glencore and Lonmin as some of the platinum producers which have announced production cuts in recent months.
‘This is on top of a market that, according to the World Platinum Council, will be in deficit by 445,000 ounces by the end of 2015. This will help set the scene for a stabilising platinum price.’
‘The same can be said for the diamond market, where De Beers has cut production twice this year in response to lower demand,’ Savvides said.
The JOHCM UK Dynamic fund returned 48.81% in sterling terms over the three years to the end of August 2015. This compares to a rise of 28.1% by the FTSE All-Share TR over the same period.