Tuesday, June 7, 2016

Commodity Bear Market is over and new addition to portfolio

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Following five years of devastatingly poor returns in the market, sentiment towards commodities is at rock bottom - but it's starting to turn following the surge in the prices of a wide variety of products since the beginning of the year.

The biggest price gains, in percentage terms, occur at the beginning of a bull market.

And the best (lowest risk) time to buy anything is when the consensus expectation is turning from bearish to bullish, as is happening now in commodities. Now is the time for investors to focus on this unloved asset class.

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We believe we have witnessed the turning point for commodities. At least a dozen commodities have gained more than 10% this year and a number have gained over 30%; clearly, the bear market is over.
Commodities are under-owned and under-researched. The relentless selling that has been seen in recent years has eased, but few investors have started to buy; most are extremely nervous. Nothing goes up in a straight line, and not every commodity will have yet seen a bottom.


After some strong gains, it is normal to see corrections - which may be occurring for some (e.g. gold) right now. And the poor outlook for China is still a major question for many industrial commodities such as copper.

After a four year brutal bear market in commodities just a reversion to the mean would be welcome. However the bear market in commodities has resulted in mine closures, bankruptcies, lower investment in mines, resulting in lower production.  

Although commodity demand in China may have slowed it is accelerating in other countries most notably India which is just now entering a China like growth spurt.

I have also been writing about all the growth and opportunity in places like Vietnam, Pakistan, Eastern Europe, Southeast Asia. When the growing demand runs into shrinking supply prices rise. That is the situation we are seeing play out currently. 

I was early into the oil markets last year but pulled back and reentered this year. It seems I am on the right side of that trade now. I have been watching another company I have owned in the past and I think now is the time to own them again.

The name of the company is Sprott Resource Corp. which describes itself as;

a publically-listed private equity firm focused on the natural resource sector. The company currently has investments in energy exploration, production and services, mining and agriculture.

SRC creates value for its investors by applying a disciplined investment process to deploy capital while managing risk within highly cyclical sectors. SRC is a business builder that is committed to being a value-added partner with proven management teams. SRC supports its investments through active management and the provision of long-term capital, as well as strategic, financial and governance oversight.

Currently Sprott Resource Corp owns stakes in a met coal company, a oil drilling company, producing oil and gas assets, and farming operations. 

What I like about Sprott Resource Corp is that the assets it owns are worth substantially more than the current share price. The net asset value of Sprott Resource Corp's shares as of 3/31/2016 was $1.16 per share. The current price for a share of Sprott Resource Corp is $.47 per share. That is a discount of $.69 per share. 

Now a certain discount should be anticipated but I think this is an overreaction. The coal assets Sprott is involved in are met coal assets used in steel making not thermal coal used in electricity production. The coal assets are in the lowest cost quartile and are already seeing a price rebound.

The drilling assets should see a rebound as the price of oil and natural gas continue higher after their several year bear market. 

One of the big things about this company is that it is a Sprott company. That means that they will access to capital and deal flow via their connection to the Sprott family of companies. I think at the current bombed out price this is an interesting speculation on the end of the commodity bear market. 

As one can see from the chart below it appears the market agrees and the stock has bottomed and is in an uptrend. 


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