The main reason for the underperformance was the very strong performance of the large iron ore producers BHP, Rio and Fortescue, to which the fund had no exposure. The Austral$ was also under pressure during the quarter. We see it as currently reasonably valued against both the euro and the US$.
There was some volatility within the larger positions in the fund. For example, Sheffield, a prospective producer of mineral sands, rose strongly by 42%. Perenti, a larger mining services company, had the same increase. The exciting takeover battle for JV partner Warrego boosted Strike Energy, which improved 28%. Market observers believe it is likely that Strike, based on its strong position in the new Western Australian gas fields, will eventually become a target.
Less encouraging, however, was the withdrawal of takeover intentions for renewable energy producer Genex Power, which ended the quarter down 37%. Genex is one of the few developing companies in this sector listed on the ASX.
Nickel producers/developers such as Panoramic and Pacific Nickel Mines were also under some pressure. More generally, the mining sector - particularly in Western Australia - is struggling with a shortage of labour, and therefore rising wage costs. However, the biggest factor behind rising production costs in the recent past has been the sharp increase in energy costs, which account for 25-30% of mining costs.
What is interesting is the rise in the gold price in the last 1-2 months of the quarter, and also at the beginning of Q1 2023. Although global inflation and major political uncertainties should have been a "good" environment for gold all year, gold demand only got rolling with a drop in longer-term interest rates in the US. Central banks, most likely Russia's, have also sharply increased their holdings in physical gold. We expect the improved gold price to translate into higher takeover activity - and subsequently, greater interest in junior miners. The Fund has a geographically well-diversified exposure, with significant upside potential, primarily through Evolution Mining, West African Resources, Horizon Gold and Canada's Osino Resources.
There were very few major transactions in the fund in the last quarter. Essentially, positions were changed due to risk management. This included a reduction of positions in Strike Energy, Sheffield and IVE Group, which had become somewhat too large due to price increases. However, the fund manager still has a very strong weighting in all these companies.
In 2023, we expect continued strong interest in companies that benefit from increasing electrification, such as producers of lithium, graphite, nickel or copper. It remains to be seen whether the current rediscovery of gold will have longer legs or just a brief interlude.
More crucial for the performance of equities worldwide should be the interaction of interest rates/inflation on company prospects and valuations. We are cautiously positive here, especially for Australia. In addition, the thaw that is becoming more and more apparent between the Australian Labor government and China should provide positive relief for the commodities sector in the 5th continent.
Wilhelm Schröder, Schröder Equities GmbH