Athenkosi Mjebeza, an equity analyst at Terebinth Capital, part of the PPS Defensive Fund investment team. Photo: Supplied
By Athenkosi Mjebeza
The global landscape has become tricky to navigate in recent years. Since Covid-19, and over the past two years of synchronised global central bank rate hikes, there has been an ongoing debate about whether these would result in a soft, hard, or no landing. Additionally, geopolitics continues to complicate the scene.
Meanwhile, the Chinese government has started the process of resetting expectations through a massive stimulus package aimed at supporting aggregate demand. Given the multitude challenges, which are cyclical and structural in nature, it is important to reassess and position accordingly, using selective commodity exposure to express views on the most likely outcome, while being mindful of the tail risks.
Gold on the rise: Pan African Resources (PAN)
Gold has always been seen as a safe haven and desirable asset during times of economic and geopolitical uncertainty. The US-China trade war, the Covid-19 pandemic, and Russia’s invasion of Ukraine have caused the gold price to disconnect from real interest rates, in part driven by central bank purchases. This has resulted in a higher gold price, breaking through psychological barriers and prompting expectations for even higher levels. PAN reported strong financial year (FY) 2024 results amid improved production across all operations, with earnings further boosted by the higher gold price. The outlook remains positive. The company has a strong growth pipeline, and management has guided for 18% production growth in FY25 amidst a rising gold price. Operational performance seems to be on an upward trajectory after some challenges in the previous year and this momentum could continue.
Copper’s growing demand: Key asset in Anglo American's diversified strategy
Anglo American offers highly diversified commodity exposure, with copper remaining an attractive asset, while diamonds and Platinum Group Metals (PGM) assets offer additional optionality. Moreover, metal prices are currently trading at depressed levels. The copper outlook remains interesting, as robust demand from renewable energy more than offsets Chinese construction weakness. Supply faces challenges; despite accelerated investment in exploration, new greenfield and brownfield projects have stalled, and supply productivity has gradually decelerated. There are growing concerns about meeting future demand, with supply still concentrated in several high-risk regions.
Kumba Iron Ore and Chinese stimulus
The larger-than-expected easing package announced by China in late September reflects a more proactive stance centred on improving growth. This includes accommodative monetary policy, stabilisation of the property sector, and equity market recapitalisation. The repricing of iron ore followed these announcements, which also correlated with the recent re-rating of Kumba's share price. Caution is required, as the Chinese property sector consumes a significant amount of iron ore produced around the world. Without notable improvement in the property sector, production cuts in China and India (high production cost regions) make the current iron ore prices seem justified at these low levels. Nonetheless, at current iron ore prices, Kumba remains profitable, generates high free cash flow, and offers an attractive dividend payout.
Sasol's outlook remains challenging
Oil prices have come under pressure in recent weeks as concerns over plentiful supply and weakening demand mounted. The escalating middle east tensions have lifted the oil price, but even so, it remains relatively contained. The downcycle in the commodity chemicals market persists and is expected to continue into 2025, with prices and margins under pressure. This has impacted the company’s earnings. Management faces a significant task ahead, not only navigating a challenging macroeconomic environment but also meeting ESG targets. Sasol revised the dividend policy lower and did not declare a final dividend as debt marginally increased.
Athenkosi Mjebeza, an equity analyst at Terebinth Capital, part of the PPS Defensive Fund investment team.
BUSINESS REPORT