Commodities are currently undervalued
The value disconnect between primary commodities and the tertiary economies they feed has never been larger.
New mines 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 the development of new mines which creates opportunity for investors and implies higher future (incentive) prices. In contrast to long timelines for development of primary commodity supply, global just-in-time manufacturing assumes that primary inputs will be available as and when needed – surging commodity prices during cyclical peaks suggest otherwise.
The disconnect between commodity prices (primary 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 current imbalance has not been as high for decades and is unsustainable. Commodity prices will rise to support continued global growth and a significant increase in capital will inevitably be invested in real assets.
5.5xS&P500 v GSCI Commodity Indexreal assets must recover to support global growth
The protracted downturn in the mining sector (as represented by the depressed commodity indices) 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 December 17, 2019, 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.