Monthly commentary - Mackenzie Resource Team

Written by the Mackenzie Resource Team

Global Resource Fund - Portfolio Insights 

• Precious metals and North American construction materials supported outperformance in the quarter, partially offset by the weak energy sector, as oil prices moderated in line with sluggish global demand.
• The Fund’s substantial overweight position in precious metals was a key contributor during the quarter, as gold producers are benefiting from rising gold prices and moderating cost inflation. Lundin Gold (+ 46%) delivered strong production, doubled its quarterly dividend and showed growth potential from new exploration successes.
• Canadian steel producer Stelco Holdings (+ 80%), a core position in the fund, received a friendly takeover offer from U.S. steel producer Cleveland-Cliffs Inc. The substantial premium highlights the deeply discounted valuation multiples that many cash-flowing resource companies are trading at.
• A detractor to performance was oil producer Parex Resources (- 44%), which had to downgrade its production guidance due to poor reservoir performance and delays in Columbia. The company is shifting its focus from exploration to production to improve its cash generation.

Precious Metals Fund - Portfolio Insights 

• Gold bullion prices were up 11.8% during the quarter (in CAD) with gold equities outperforming bullion during the quarter as operating margins are rapidly expanding.
• Gators Silver (+43%), a long-term core holding of the Fund, received a friendly takeover offer from First Majestic Silver. Single-asset silver producers with newly build mines, such as Gatos, Aya (+30%) and Silvercrest (+12%) are increasingly being recognized for their scarcity value in the market.
• A detractor to performance was Australian gold producer Bellevue Gold (-24%) that shocked the market with a substantial equity raise to cover higher-than-anticipated mine development capital expenditures. The cost of building and ramping up new precious metals mines has rapidly escalated, thus increasing the relative value of completed new builds.
• The fund reduced its position in global gold producer Goldfields, which offered a substantial premium to acquire Canadian developer Osisko Mining. Premium takeover offers for assets pose substantial risks for acquirers, as the gold industry has a history of value destructive M&A.
• Australian gold producer Westgold consummated its combination with Karora Resources. The portfolio managers accepted Westgold’s equity as this low-premium acquisition offers substantial operational synergies, as Westgold has a proven track record of underground mining in Australia, where Korora’s principal asset was located.

Market Review & Outlook

Macro Overview

• Lower US interest rates have started to make their way into the global economy with US treasury yields moving materially lower during the third quarter. A combination of elevated real yields, modestly declining US employment, poor Chinese economic data and relatively stable inflation has allowed the Fed to embark on lowering rates. The market further expects several rate reductions in the upcoming quarters.
• Long-awaited monetary stimulus is now underway in China. The risk of a doomsday scenario happening in China is being contained as Chinese leaders take action. Combined with lower US interest rates, the Chinese intervention further reduces the odds of trouble in emerging markets, or a global economic derailment. 
• We suspect that both republican and democrat leaders will promote large budget deficits over the next several years. Both candidates are inclined to spend meaningfully on bringing back jobs to America (onshoring) and lowering commercial trade with China through tariffs. We continue to think that such actions are inflationary and hence should put a floor on US CPI at a level meaningfully higher than expected.
• Several interest rate sensitive sectors joined the equity bull markets. Of particular interest to resources investors are pipeline, midstream and gold equities, which all moved meaningfully ahead of other sectors during the third quarter. Meanwhile, pro-inflation (and higher interest rates) sectors such as oil and gas substantially underperformed. 

Oil & Natural Gas

• Chinese oil demand weakness is now apparent, leaving OPEC members as the balancing act. Saudi Arabia has long been asking fellow members to abide to their respective quotas but has experienced limited success in convincing them to do so. After several quarters, Saudi Arabia’s patience seems to have run out. We now expect additional production from Saudi Arabia to come to market over the coming quarters unless OPEC members can agree to manage their output. Without OPEC discipline or a strong rebound in global oil consumption, oil prices are likely to struggle over the next year.
• Conversely, global gas consumption continues to move higher. 2025 should be another year of strong demand growth with several new LNG facilities starting in US, Canada and the Middle East. AI data centers, heavy industries, and the electrification of transport are pushing electricity demand higher in most countries, a trend unlikely to abate anytime soon.

Gold

• The significant bull case for gold that we highlighted in prior commentaries appears to be coming to fruition as the combination of sustained systematic buying by (Asian) Central Banks, superimposed with rising Western world investment demand for gold as rates decline continues, aided by the first ‘jumbo’ rate cut by the U.S. Federal Reserve in September.
• Spot buying from Chinese savers remain material and to date, Chinese stimulus measures have been insufficient to reverse negative trending consumer sentiment.
• Regardless of the outcome of the upcoming U.S. elections, growing fiscal deficits are likely, which further supports the case for gold as a portfolio diversifier away from volatile bonds and currencies.
• Gold equities are starting to outperform bullion as the market is just starting to reward their sharply increased free cash flow margins. With gold prices continuing their ascent in Q4 to date, we expect continued equity outperformance, provided that management teams maintain operational and capital allocation discipline.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

The contents of this document (including facts, views, opinions, recommendations, descriptions of or references to, products or securities) are not to be used or construed as investment advice, as an offer to sell or the solicitation of an offer to buy, or an endorsement, recommendation or sponsorship of any entity or security cited. Although we endeavour to ensure its accuracy and completeness, we assume no responsibility for any reliance upon it.

This document may contain forward-looking information which reflect our or third party current expectations or forecasts of future events. Forward-looking information is inherently subject to, among other things, risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed herein. These risks, uncertainties and assumptions include, without limitation, general economic, political and market factors, interest and foreign exchange rates, the volatility of equity and capital markets, business competition, technological change, changes in government regulations, changes in tax laws, unexpected judicial or regulatory proceedings and catastrophic events. Please consider these and other factors carefully and not place undue reliance on forward-looking information. The forward-looking information contained herein is current only as of Oct 29, 2024. There should be no expectation that such information will in all circumstances be updated, supplemented or revised whether as a result of new information, changing circumstances, future events or otherwise.