JP Morgan-led fund rewarded as Glencore survives 'darkest days'

New York - When shares of mining companies including Freeport-McMoRan to Glencore [JSE:GLN] were collapsing last year, a small fund run by JPMorgan Asset Management chose to hold on. Now, it’s reaping the rewards of a metals rebound that’s turning bears into bulls.

Old Mutual-JPM Natural Resources Fund has delivered a return of 79% this year, beating all but two of the 150 funds it competes with in North America and Western Europe that are tracked by Bloomberg.

Glencore, one of its biggest holdings, has tripled after plunging 70% in 2015. Freeport lost about as much last year, only to double in 2016.

“Even during the darkest days at the back end of last year and two weeks of January, we held in there with mining companies that people thought were going to go bust,” said James Sutton, who helps oversee $2.5bn in natural resources assets run by JPMorgan, including Old Mutual [JSE:OML].

Investors are paying more attention to metal producers, which have cut debt and costs to better benefit from a rebound in prices and demand. Citigroup and Bank of America Merrill Lynch are optimistic the industry will extend its recovery.

Morgan Stanley listed zinc, nickel and aluminium as its top picks for next year, boosting its forecasts for each.
Before the recovery, the industry was mired in a three-year slump as output surged and demand slowed from top consumer China.

A Bloomberg Intelligence gauge of 18 global base-metal producers including Freeport, Glencore and BHP Billiton slumped 66% from the end of 2012 through 2015.

The sentiment is turning as the Chinese economy stabilises and President-elect Donald Trump pledges to spend as much as $1trn on infrastructure in the US.

The BI producers’ index has jumped about 69% in 2016, heading for its best year since 2009, compared with an 11% gain in the S&P 500 Index of equities.

Pouring in

Money managers including billionaire Stanley Druckenmiller bought a combined 52 million shares of Freeport in the third quarter, more than the 47 million shares they added to their holdings in the previous three months, according to US regulatory filings compiled by Bloomberg.

Money poured in just before shares of the copper-mining company rallied to a 16-month high.

Shares of Freeport, the largest publicly traded copper producer, rallied this year as the Phoenix-based company sold assets and lowered costs. Trump’s plan to spend on highways, bridges and airports is giving the demand outlook an added lift this month.

Druckenmiller told CNBC last month that he’s making a “large bet on economic growth” after Trump’s election.

Room to run

"You have the potential to see increasing dividends or just better free cash flows that you haven’t seen before," David Mazza, head of ETF and mutual-fund research at State Street Global Advisors, said in an interview at the Bloomberg headquarters in New York on December 15.

"We think there’s more room to run there. They’ve been so mispriced," he said, referring to global natural-resources stocks.

Last Week, Cowen & Company analysts including Anthony Rizzuto named Freeport as their top pick for 2017. The outlook for the shares is positive “as the current copper price being discounted is below the current spot price,” according to a December 13 report.

Freeport slashed its capital expenditure to $494m in the third quarter from $1.53bn a year earlier. It also cut its total debt to $19bn from $20.7bn a year earlier.

Industrywide cash costs for copper fell to $1.20 a pound in the third quarter, from $1.52 in the same period a year earlier, according to Bloomberg Intelligence.

The improving outlook for metals is another source of optimism for the industry. In the case of copper, demand will outpace production by about 180 000 metric tons next year, Goldman Sachs Group forecast in a report December 11, reversing its outlook from a surplus of 360 000 tons.

The metal will rally to $6 200 a tonne over the next six months, analysts including Max Layton wrote in a note December 11, compared with $5 486.50 on Monday.

'Good place'

"We’re still in a good place where supply is falling for many commodities and demand is much better than people’s expectations," JPMorgan’s Sutton said. "The companies are in a good position to take advantage of higher commodities prices because their costs are very low.

They’re not spending on huge capital projects like they had in the past.”

The $29m Old Mutual fund is the smallest of three funds in a group that is betting big on mining companies.

The $1bn JPMorgan Natural Resources fund has returned 77% this year, while the $900m Global Natural Resources fund, which trades in euros, returned 56%.

Currency fluctuations damped performance as the euro weakened against the dollar this year.

Among the investors adding Glencore to their holdings were Vanguard Group, Dimensional Fund Advisors, FMR, and Allan Gray, which boosted holdings in the third quarter, according to data compiled by Bloomberg.

"While sentiment probably played an important role, higher commodity prices are also supported by the improved demand outlook," Societe Generale analysts including Sergey Donskoy said in a note December 12.

"Glencore remains one of the most remarkable turnaround stories in the mining sector, and we think it is still not fully appreciated by the market," the analysts said, raising their price target for the stock.

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