Commodity-focused fund Baker Steel has doubled its exposure to South African gold miners and believes their shares do not fully reflect strong metal prices.
The fund manages around $800 million and invests mainly in companies producing precious and base metals and industrial minerals, besides having exposure in oils and coal.
We recently increased our exposure to South African gold producers as their share prices were lacklustre at a time when gold prices in the rand were making new highs, Trevor Steel, managing partner of Baker Steel Capital Managers, told Reuters.
That was leading to a dramatic margin expansion for those producers and that was not showing up in the share prices. On a price-earnings basis, we have got companies like Gold Fields
Gold hit a record high above $1,000 an ounce in March this year, before falling on a rise in the dollar.
Steel said that its Genus Dynamic Gold had increased its exposure in South Africa, the world's second-largest producer, to more than 20 percent of its assets from below 10 percent. The fund was up 16.1 percent in 2007.
Long term, the South African gold industry faces challenges. The mines are getting deeper and they are very labour intensive. But this is a tactical bet, based on the margin expansion and the value we see in those shares.
Steel, who is also the fund's chief investment officer, said he was impressed by the resilience of base metals, particularly copper, given the market's concerns about the global economy.
We are also positive on gold. We are seeing some consolidation in prices, but the supply demand fundamentals remain positive. People fret about 'peak oil', but 'peak gold' is already here, given gold supply peaked in 2001 and has been declining at about 2 to 3 percent per annum since then.
Its Genus Dynamic Mining fund provided returns of 43 percent last year, with its broader hedge fund, Genus Natural Resources fund giving a 56.9 percent return.
There is a risk that a lot of investors have been very Anglo-Saxon orientated in terms of looking at the U.S. and the UK economies when actually Asian economies are the ones that now matter most for commodities' demand, he said.
No doubt those 'old' economies have got issues, but given the resilience of Asian demand, the case for commodities seems to be intact.
He said the nickel market was very tight and the industry needed to add a significant new mine every year, given the steel industry's demand for nickel and that was a hard task.
LAUNCHING NEW FUND
Baker Steel next month will launch a new fund, called Genus Capital Fund -- a special situations fund targeting unlisted firms which are planning to undertake initial public offerings in the natural resources sector.
We are launching with $50 million and our target is to get that up to a couple of hundred million dollars within a year.
The fund will invest in a Brazilian iron ore firm, which plans to list in London later this year and targets a market value of over $5 billion. The miner has 3.5 billion tonnes of iron ore resources and hopes to produce 75 million tonnes a year.
It has also identified a coking coal company, with assets in Mongolia, which is planning a listing in Hong Kong by the end of the year and hopes to get a market value of up to $1 billion.
The coking coal firm has 300 million tonnes of resources, which are likely to grow to 500 million tonnes. It is working on three new mines and expects to produce 10 million tonnes a year of coal -- half metallurgical, half thermal, Steel said.
Outlook for both coal and iron ore remains very strong. We are seeing significant ongoing expansions in the steel sector and that's really based on longer-term fundamentals, he said.
Despite the current economic turmoil, we continue to base our thesis on a much longer term urbanisation story in the Asian markets, specifically China and India, in the next 25 years. (Editing by David Cowell)
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