The current environment in the mining sector offers stock-specific opportunities although the companies remain in ‘self-help’ mode, focusing on cost/capex austerity, using cash flow to reduce leverage and staying cautious on deploying capital to grow their businesses, T.Rowe Price said.
The firm, which stressed it remained “comfortably underweight”, said the theme worth focusing on was supply-side reform in China, and said this could potentially drive a structural shift in the outlook for certain commodities.
T.Rowe Price also said it was underweight metals and mining in 2015, moved overweight in March 2016 and then moved underweight again in January this year.
“We shifted our exposure in the T.Rowe Price Australian Equity Fund away from early cycle beneficiaries of China’s mini fixed-asset investment stimulus of 2016 to being more idiosyncratic,” the company said.
“We like companies that are exposed to growing end markets that can capture optionality from high-quality assets in a sector that is largely ex-growth.”
At the moment, the company said it had developed interest in stocks such as Syrah Resources (high-grade graphite), Iluka (paints, ceramics) and Independence Group (gold, nickel, copper, cobalt).
As far as the gold sector was concerned, the T.Rowe Price Australian investment team said it expected a merger and acquisition activity first before “extending throughout the broader mining sector over the next two to three years”.
Speaking on the mining sector, the company said: “Meanwhile, there is a continuation of the narrative from mining management teams around ‘value over volume’ as a mechanism to drive higher returns”.
“The big question is how long that philosophy holds within an industry that is inherently asset depletive, and where behaviour tends to be an ingrained feature.”
