Global Perspectives: Opportunities in a changing natural resources landscape

Matthew Bullock: Hello and welcome to the latest recording in the Global Perspective Podcast series. My name is Matthew Bullock. I am the head of portfolio construction and strategy for EMEA and APAC here at Janus Henderson. And today, I’m very lucky to be joined by Dan Sullivan, Head of Global Natural Resources, also here from Janus Henderson.

Daniel Sullivan: Thanks, Matt. Great to be here.

Matthew Bullock: So Dan, we’re here today to talk about the ever evolving landscape of global natural resource equities. The market for natural resources has shifted tremendously over the past few decades, and if we only go back, you know, a few decades, the US had the greatest purchasing power. Now it is China, but India has also been rapidly catching up. So maybe if we start there, what is the environment like today for global natural resources?

Daniel Sullivan: Yeah it’s quite a good environment. Still even in this volatile time, generally commodities are fairly slow moving. You know commodity prices themselves are fairly stable and maybe every 10 years or so they might jump up a notch and reflate to a new level. But we’re across the commodity complex, we’re probably still maybe 10% higher than normal. So we’ve backed off a bit from the sort of inflationary years like 2022 or maybe 40% above the normal, but we’re certainly not in a slump by any means yet, and so plenty of good opportunities. Most of the companies are making a lot of money.

Matthew Bullock: So opportunities, let’s focus in on that a little bit. Is there any sort of turning points that you’re looking for in the market? And if so, could you just sort of give us a little bit of insight of what it is you’re looking for right now?

Daniel Sullivan: Yeah, the particular risk is very broad and a lot of assets are falling more or less at the same pace as each other. But we can see a bit of a laddering across higher risk categories are getting hurt more and indeed they were partly in a sell off before the tariff announcements. So things like uranium and silver, more speculative elements of our exposure have fallen faster. Lithium’s been in a bear market now for maybe three months and the more stable elements of things like oil, iron ore, agriculture and they’re much more resilient.

Matthew Bullock: So I mean you, you briefly mentioned tariffs just then, but if I also think about some of the other key drivers of the markets, I mean something that comes up quite a lot is changing demographics or consumption shifts. Are you able to give a little bit insight there?

Daniel Sullivan: Yes, so that we sort of launched our product about 13 years ago and we had been through a lot of mining cycles over a 35 year career, and part of the logic of bringing agriculture in was having, having seen mining have a substantial growth and you know fairly small companies become, you know, global giants. We thought we could see this pattern repeated in agricultural companies and to some extent that’s happened particularly something like John Deere has become an enormous company. John Deere tractors some of the others have faltered a bit along the way, but I think the thesis was right and the other element to that was, you know, AGS different. It’s a good diversifier. So it has worked as a diversifier the last year or two have been a bit weaker than the previous 10, but it has been the better performing and lower volatility of the three things we mainly look at mining, energy and agriculture.

Matthew Bullock: Is that also domestically focused here on Australia or is it global?

Daniel Sullivan: It’s global, so yeah, it’s global and Australia probably makes up. We probably do have a bit of an Australian bias sitting in this market and Australia is a big mining economy. So the Australian exposure probably runs at 10 to 20%, 20% in Canada, 20% in the US and the rest in Europe and occasionally little bits and pieces in Japan and Singapore and Brazil.

Matthew Bullock: So if we sort of try to sort of ignore a lot of the short term volatility or noise and think longer term the, the premise is still there, the philosophy is still there that you’re looking at the market, you look at the structural changes occurring changing demographics. There’s still, you know, that leads to a good tailwind for natural resources.

Daniel Sullivan: Yeah, absolutely. So the world’s 8 billion people, all the UN projections, which are pretty much unstoppable, means we’ll get to 10 billion people short on a median projection. Most places are still getting wealthier, so people are getting better earnings power and. Higher consumption, so generally we should have 2 billion more people come and more people move to cities, get a high paying job, want to buy a refrigerator, motorbike, car, etcetera, etcetera. Air conditioner. So all of all of that stuff’s in place and that’s grinding up metal demand. So you see various calculations that you know invariably, say things like we’re gonna need more of X in the next 20 years than we did in all of human history. Yeah, so you can sort of apply that to food, copper, nearly everything. And so we get, we get these odd situations where the world talks about oil, oil consumptions plateaus, you’re never going to use more oil ever again, I think well, If half the world’s using 5% of the oil that an American uses, even if they only get to consume 10%, that’s a double for them. Yes, that’s twice as much oil for half the world’s population sort of thing. Like you start playing with these numbers and you talk about countries that have, like, India’s going to 1.4 billion people and Nigeria has 300 million and Indonesia will have 400 million. You think, OK, so this this is totally outside of things we think about as. Little countries like Australia with a you know 30-40 million New Zealand handful of people. Or Nordics, you know these little insulated places that have a way they think the world works, and then you say, well, actually our nearest neighbours gonna have 400 million people and they want to get rich and they want to live in nice places they want to eat good food. Like it’s a massive growth drive. And so that’s all happening. People building infrastructure at a massive rate, like the same way the Chinese did in the 90s. So yeah, I think that’s all on track to happen.

Matthew Bullock: So you mentioned oil just before but and we talked about demographics and a few other different areas of opportunity, but sustainability, renewable energy that sort of that sort of area. How does that sort of impact on what you’re thinking with natural resources?

Daniel Sullivan: So it got a massive amount of global push and I think we, you know, I knew about global warming at least from 1990, cause I can pin it in the book I’ve got back there and in the. The. Fund in the firm I think by 2018 we were like, OK, this is obviously very important. It’s gonna be important one way or the other, either through the reality of happening or people wanting to do something about. Mitigating so it doesn’t happen. So we knew by then it was going to mean something very important. We took it on into our fund as a key principle in ESG in sustainability probably. Engaging with it as a risk factor initially and within about two years, it had become a massive opportunity. So then we got onto the the growth boom in renewables and had the sort of massive, I don’t know, probably 400% move in the Renewable energy index, things like orsted, vestus and that was extremely positive. And felt really good and everyone was extremely excited about it. And then it like a lot of assets got over inflated and bubble burst and it’s been a horrible sort of three or four years since then scraping up the pieces so we can engage with it. It’s still very small, so you know. We’re we’re in a course at firm and people talking about orsted. It’s a great example of moving from coal company to a renewable company and it’s gonna change the world and all these things. Well, at 10 or 20 billion market cap like orsted, investors aren’t changing the world cause. Shells, still 200 billion in exons, 500 in Saudi Aramco is 1.7 trillion. So like it’s good, it’s great and it should keep happening. And solar is making great strides economically to get a place in the world and probably will be enormously significant. But right at the moment it’s still. Traditionally, on gas is still enormous industry and vital to pretty much everything we’re. Doing so one.

Matthew Bullock: Of the one of the questions that comes up a lot, so I go around talking to lots of different clients around the world about portfolio construction and we talk about the opportunities and natural resources. But the question that comes back a lot is how to use it in the portfolio and how it compares to sort of more traditional equity so.

Daniel Sullivan: So yeah, it’s a bit quirky. It’s a bit different. So it runs to its own sort of beat. It does tend to be procyclical. So tends to be better in upbeat economy. It can get hit pretty hard in the down cycle and then comes out faster. So yeah, we saw that behaviour in COVID and other previous corrections, particularly the metal side, I think really gets hit hard, which is partly why I brought the AG into the mix. But it’s variously depends what you put in the bucket, but it’s somewhere between sort of 5 and 15% of world equities. And in most of our modelling, you know, for, you know, decent time periods, asset allocation model. So you probably should have at least that weight. A lot of generalists will say I don’t need to own Exxon because its a dirty, old company and I don’t care and I’d rather buy Apple and Nvidia. Surely a company or segment, oil, at 4% can’t hurt me. And that’s true, 9 years out of 10 and then one year it will double and everyone around the world is saying why did I lose 4% attribution. This is really bad and can’t happen again. The people who had it did well those years. It’s different and makes a return at a different time. Natural resources keeps up with MSCI world over time, we’re probably in a bit of a gap at the moment, where tech has been so fantastic that we’ve been more sideways, and so there was a quite a large gap, I maybe got out to 40%, I think we’ve already closed 20 of that in the last three months in this correction, so I lived through the other tech boom and some tech and general index probably fell 70% ultimately, and commodities and mining equities or commodities and resource equities probably gained about 40%, while Tech fell 70. So it can be really significant. We’re not crazy about advocating massive overweight to it, but we do think it’s ignored and it can be a good diversifier and most people should have some exposure to it.

Matthew Bullock: Another thing that comes up quite a lot is M & A. So how does that again change your thinking? Is that something are you looking for potential targets? Are you sort of trying to play in that space?

Daniel Sullivan: Yeah, yeah. Yeah, like a lot of industries, it’s common, I think a resource company can basically find something that wasn’t known before and generate a lot of value very quickly. And if they’re in that process and the markets slow to recognise it then, someone with a deeper memory or the more skill we’ll take it over and acquire it before it’s fully realised by the public? I guess. So that’s a very common path. A lot of the majors. Decided they weren’t that good at exploration and just thought well, let the juniors do it. We’ll just buy them once they found something. So there’s a fairly well trodden path along that model where they hope someone else will do it for them because it is a speculative activity, so a lot of you know a lot of money probably gets lost and we concentrate on the winners cause it’s exciting, but yeah. A winner in mineral exploration might be 500 to 1000%, so it’s very, very worthwhile and if you get it right.

Matthew Bullock: 500 to 1000%?

Daniel Sullivan: Yes, yes, 5 to 10 times, right. So you might have a small company, maybe they can raise 100 to 200 million and go looking for gold, find some and that they might be able to turn that into 2 billion market cap or you know four or five if they’re like really lucky. So it’s it’s super fruitful and that might take a period of you know two to seven years. Across our whole spectrum there’s no activity as economically, generative as gold exploration, where for a pretty small amount of capital, you can probably find something, maybe you can find 3 to 10 million ounces of gold, get it valued at 2 to 5 billion market cap and have 2 year payback to turn that into a mine that makes money for 20 years. So it’s rewarding to get it right. There’s hundreds of gold companies trying to do it. So there’s always things to pick through and look and try to get on one of those great stories.

Matthew Bullock: I’m going to finish by asking you a very unfair question. Which is to sort of summarise all of this, where are the most compelling opportunities that you’re seeing right now for the year ahead? And finally, what’s making you the most excited?

Daniel Sullivan: We went into this price with a lot of gold and silver and that’s been very good. And we have traded a bit of it off. But that’s still our major overweight and that asset formation of small miners getting out there and doing something new that’s never been done properly or found before, so we own a variety of names. You know, we usually own 5 to 10 of those. For 5 to 10% of the portfolio and you know that’s where we hope to get a lot of our really growth equity to happen. They’ve got much more opportunity to do that than a than a large oil company or an iron ore company which is more commodity based and might be a sort of ±20% proposition.

Matthew Bullock: I’d love to keep talking, there’s so much that we could cover, but we’re out of time, unfortunately. But thank you firstly so much for all your insights has been really interesting. And also to thank our audience for listening. So if you have any questions about Janus Henderson’s investment views or if you have any other questions at all, then please don’t hesitate to reach out to your client relationship manager or to visit our website. So with that, thank you all very much for listening. And I wish you all a very pleasant rest of the day.