At the outset of this year, we suggested that investors should stay invested in resource stocks and join us in our patient wait for a long-anticipated bull market in global natural resources. Updating an annual outlook after just one quarter may seem presumptuous, but there have been many very significant developments in the market that have compelled us to restate the case for staying the course.

China continues to grow and innovate at an impressive rate. Electric vehicle design, manufacture and exports look set to rapidly impact global markets. Just as the US has skirted a well-anticipated recession, it appears the China slowdown is turning a corner; we expect to see indications that a cataclysmic slowdown has been averted and normal operations resume. Valuations in the stock and property markets are already at low levels and are pricing in very low expectations, so the surprise factor is much more likely to be to the upside from here.

Meanwhile, geopolitics remains complicated, but the "return to normal" in the macroeconomic environment seems to be well underway. It is hard to imagine anything more confounding than the extraordinary distortions created by the pandemic, and three significant conflicts (China-US trade, Ukraine and the Middle East). But underlying all these challenges, global trade continues to surprise on the upside and we are seeing some economic and corporate indicators turning positive for growth. We think much of the unmet demand from the past few years may have yet to be fulfilled, which is among the reasons we see a progressively more positive environment for natural resource companies.

On the pathway in the bull-market journey for resources

If I step back and contemplate on 35 years in the industry, many well-worn aphorisms can give some guidance and yet at times be completely wrong. For instance, it is generally accepted that commodities prices are mean reverting, that is, they tend to move back to their long-run average over time. This is clearly not true. I am imagining being asked a question by my great granddaughter in 2065 as I near 100 years. She says, "Pa, tell me about the Great Inflation of the 2030s." Well, I say, how surprising would it be to have a systematic commodity inflation of great amplitude over a ten-to-twenty-year period when the world is growing, adding two billion more people, and achieving higher living standards. Globally, we have not invested in commodity production adequately for the prior 15 years, so how can we assume per-capita consumption for three quarters of the world's population has been improved in any meaningful way?

To illustrate, in the first 10 years of my investing career, copper was a $1/lb commodity, keeping within a $0.65 to $1.40 range, in a period that was mostly a bear market. Then, it traded between $3.00 to $3.50/lb for almost 20 years. Copper deposits are hard to find, develop into mines and operate. Demand is growing, with electric vehicles, storage batteries, and decarbonisation driving growth of electricity grids - all of which is likely to push prices higher. Copper has just moved higher from a broad pricing range in the past three years, it is now trading at circa $4.30/lb. This suggests we have strong support for the metal that is fundamental to modern human existence, given its broad usage e.g. home appliances, transportation equipment, electronic products, electrical grids and building construction.

Similarly, oil was a $15 to $20/per barrel commodity, which moved up to $40 to $65, and now looks to be in an $80-$120 range as seen in the past three years or so. These large step changes of around 3x (300%) can also be seen in other key commodities such as iron ore, gold, uranium, lithium.

Another way of expressing this is that the commodity index (S&P GSCI) gained around 10% per year, for 15 years into the peak of the China growth boom commodity super-cycle. The subsequent 15 years have seen the commodity index flat to -1% per year for 15 years. (Past performance does not predict future returns).

Which areas have the most constructive outlook?

Uranium
Across 2023, uranium was the main commodity in a bull market. Breaking a twelve-year bear market, prices rose from $20-30/lb to $75-90/lb. Following a long period of underinvestment, we are finally seeing new mines in response to rising demand for renewables with uranium key to powering nuclear energy. Among the drivers of the positive momentum for demand and pricing is the commitment by nations to increase their use of nuclear power. For example, at the latest COP28 meeting 22 nations announced they would aim to triple capacity by 2050.

Gold
As we write in the early weeks of Q2 this year, the dashboard lights are kicking in at a very encouraging pace. The gold price has just traded up to all-time highs at $2,392/oz. This is very significant as the price capped out over six times in the past four years at $2,050/oz. We have potentially just commenced a once-in-a-generation bull market for gold. Gold has been stealthily outperforming all the world's paper currencies; many major currencies are down 20-40% in just 10 years. Gold was quietly stronger in the first part of the decade, then gained significantly, up +40%, and recently broken out again, +80%. Gold is well sought after and provided thousands of years of wealth creation and preservation for investors, we think a clear re-rating could be underway.

We have always really liked gold companies. This industry has one of the fastest paths to profitable development with the best potential for project investment returns and short payback years. In addition, it offers great optionality on mine extension and additional district gold discoveries.

Oil
Oil, as the world's largest and most-traded commodity, gets an enormous amount of attention. I am not convinced that recent oil price strength is related to geopolitical risk premium. The oil supply system has experienced many attacks, outages, disruptions and wars that have not persistently moved the oil price upwards. It seems likely that oil demand is being grossly underestimated going forward, and natural field declines will make meeting demand much more difficult. If economic growth and per capita consumption moves higher amongst the lower consuming three-quarters of the world's population, we may be undersupplied by 25% or more quite promptly. The recent oil strength does appear to be the start of a move, and the prior highs are $125 per barrel and $140 per barrel, so once we get through $150 per barrel, I think the narrative will quickly shift to how we can potentially be approaching a period of circa $200-300 per barrel oil prices.

Fundamentals for resource companies remains strong

Strong companies with a multi-decade investment horizon don't 'waste a downturn'. The last three years have been a quiet range-trading period with plenty of noise, but below expectation returns (around 4% p.a., vs expectations of +10%).¹ But the companies we invest in have executed some of the largest mergers and acquisitions of all time. Remember Newmont bought Newcrest, Exxon is buying Pioneer, Chevron is attempting to buy Hess, BHP divested their oil business, Agnico bought Kirkland Lake, among others. As a result, the balance sheets of many major natural resource companies look exceptionally healthy. Cash generation typically is high, while dividends and buybacks are robust. We believe that companies like these are very well positioned to capitalise on this new commodities cycle with many opportunities for shareholder value creation.