It's not been a great few years for IC Top 100 Fund City Natural Resources High Yield Trust (CYN), which aims to provide share holders with capital growth and income predominantly from a portfolio of mining and resource equities and fixed interest securities. However, despite significant headwinds for commodities in the form of US dollar strength and China's slowing growth, the trust's manager Will Smith believes 2015 offers strong opportunities for resource investors.
"We've seen four years of falling commodity prices," he says. "But I'm much more upbeat about the world today than I have been in the past. We've previously seen only two down years together for the FTSE Mining index."
"The low oil price has to be good for somebody. Think of truck drivers in the Australian desert. It's great for miners getting their costs down." However, he thinks there could be up to a year's lag before lower oil prices feed through to reduced costs.
"It's a fascinating time for oil. We have to listen to the Saudi Arabians. They want to reduce production elsewhere and the obvious targets are the North American shale producers. We could be in for a medium-term lower price. It's not going back to $100 any time soon. A whole raft of projects have been cancelled and it has put back Arctic exploration around 10 to 15 years.
"In October I met a smug oil executive in North America who says he had stress tested down to $65 - but he wasn't stress tested down to $40. We will get shut ins below $40. Rigs will be cancelled and production will tail off."
Vermilion Energy (VET:TOR) is his largest holding in the oil sector. "It's a company with a good culture and terrific exposure to the European market. I don't see the dividend being under threat because of its global exposure."
Will Smith CV Will Smith is senior fund manager of City Natural Resources High Yield Trust and New City Energy. He is also co-fund manager Geiger Counter and Golden Prospect Precious Metals funds. Before joining CQS in 2008, he ran Landsbanki Securities' proprietary trading focusing on Global Resources. Mr Smith has over 30 years of investment experience and his positions have included head of FTSE 250 market making at Panmure Gordon. |
He has reduced his oil portfolio and increased his exposure to gold. The gold exposure was 8 per cent in the middle of last year and now gold and silver miners together make up 23 per cent of his portfolio. "We're now seeing real performance from the gold miners," he says. "We don't have exchange traded funds in there – they are a defensive play. If we thought gold was going down we would buy the ETF and sell the miners," he explains.
Meanwhile, he says base metals are in much tighter supply and demand situation than oil, for example, where there is oversupply. "Most copper mines are very old and some are very deep," he says. "There are no new big low cost deposits out there. We've also seen lots of zinc mines closing because they have run out of ore. There's not been the money around to develop new mines and exploration companies.
"Right now most metals are relatively well supplied but four or five years forward the supply won't be there. But demand for all these products is still going up."
Nickel is one of his favoured metals. "Sirius Resources (SIR:ASX), a nickel developer in Western Australia, is a typical CYN stock. They made a very high grade discovery two years ago and hope to be in production in the 3rd quarter of 2016. It's such high grade nickel that it will always be in the lowest quartile of cost producers. If they find some more it will be very exciting."
He believes that the mining industry will improve dividends in future "without a doubt". "Sirius is talking about its dividend policy two years down the line but haven't got round to building their mine," he says. "Dividends make it easier to value mining companies. We're getting away from growth, growth, growth."
Mr Smith has been avoiding investing in coal and iron for 3 years. "I just don't feel it is right to get back in. They are over-supplied commodities," he says.
However, he is always looking around for how to play soft commodities. "Fertilisers are over supplied. The next step change in yield improvements will come from crop protection and seed development," he says.
The key portfolio holding in this area is a UK company called Plant Impact (PIM), which operates out of the Rothamsted Research centre in Harpenden. It has been conducting crop trials on the Brazilian soybean crop. "Over four years they have produced meaningful crop trials - a 3 to 5 per cent improvement is worth it to the grower," says Mr Smith. "If it was a biotech company it would be on a higher multiple. If they can roll that out into other crops it will be a very exciting company."
• We seek to interview the fund managers we think will interest you the most, but if there is someone you would like interviewed, send your suggestions to moira.oneill@ft.com.
