Commodities are undervalued
The outbreak of the COVID-19 virus has become a global pandemic with acute negative impacts on people, health systems and economies. The scale and impact of longer-term disruption depends on the successful development of a treatment or vaccine and support initiatives (economic, social, structural, etc.) by governments.
Volatile market conditions currently mask the fundamental value disconnect between primary commodities and linked downstream product value chains.
New mines (commodity supply) take decades to de-risk with the decision to construct routinely dependent on attractive risk adjusted returns. Low commodity prices and poor investor sentiment cyclically disrupt the allocation of capital to mine development, which creates opportunity for investors and implies higher future prices. In contrast to long timelines for new commodity supply, global just-in-time manufacturing assumes that primary inputs will be available as and when needed throughout the value chain. This is not always the case as demonstrated by high commodity prices during cyclical peaks and/or significant disruptions to globalized supply chains.
The disconnect between commodity prices (supply) and ultimate commodity demand (industrial production) can be highlighted by the change in relative value of the S&P 500 equity index and underlying commodity prices. The imbalance remains and commodity prices must ultimately rise to support global recovery and longer-term growth.
6.8xS&P500 v GSCI Commodity Indexreal assets must increase to support global growth
The protracted downturn in the mining sector (as represented by the depressed commodity indices) and the disruptive impact of COVID-19 has created an attractive investment environment for patient countercyclical investors to invest in mining opportunities with attractive risk adjusted return profiles.
Commodities, Global GDP and S&P500 Total Return
This information should not be deemed to be a recommendation of any specific commodity, company or security. This chart includes forward-looking information, and we caution you that such information is inherently less reliable. Actual performance will vary due to a variety of factors, including general economic conditions. Any projections have been prepared and are set out for illustrative purposes only, and do not constitute a forecast. Any projections or opinions are current as of the date hereof only. The statistical information provided herein has been supplied for “informational purposes” only and is not intended to be and does not constitute investment advice. Neither RCF nor any independent third party has independently audited or verified this information. Past performance is not indicative of future results. RCF disclaims any and all liability relating to such information, and no representation or warranty is made, expressed or implied, as to the accuracy or completeness of the information provided in this presentation.
All information in this insight is as of March 31, 2020, unless otherwise noted, and is based on information available at a certain point in time. All information should be assumed as subject to change; updated information will not be provided.