The fund delivered a year-to-date return of 11.8%, which was marginally behind the benchmark return of 13%. Our aim is to deliver outperformance over longer-term time periods. To this end, the fund’s returns since inception are compelling, with alpha of 4.1% per annum, net of fees.

Our platinum-group metal (PGM) holdings, Pan African Resources and Trencor, contributed to performance this quarter, while Exxaro and Sasol detracted.

The third quarter of 2019 saw stock markets come under pressure. The mining sector was no exception. Escalating trade tensions and slowing global growth have been the key headwinds for the sector. These factors have started impacting demand for many commodities, sending commodity prices lower (as always, there were a number of exceptions, such as nickel, PGMs and gold). We regard most commodity markets as reasonably well balanced. Lower demand is somewhat tempered by supply austerity that has been in place since the 2015 commodity market lows. We expect increased Chinese stimulus to have a positive demand impact, although there is typically a 12-month lag from the implementation of stimulus to the breaking ground of infrastructure and property spend.

Anglo American, Glencore and Exxaro remain our preferred diversified miners. We have added to our Exxaro and Anglo American positions during the quarter. Exxaro’s share price came under pressure as iron ore and thermal coal prices declined. We have been encouraged by Exxaro’s capital allocation since the new management team has been in place. Actions include: the sale of Tronox for a reasonable price and paying out most of the proceeds as a special dividend; changing their dividend policy to pay through the full dividend they receive from Kumba Iron Ore; and purchasing buyback shares to minimise dilution during the replacement black economic empowerment deal. They have also managed their coal operations well. Exxaro is trading cum a R18 dividend. Apart from this, the share trades on six times our assessment of normal earnings.

Our PGM shares continued their strong performance this quarter. Northam Platinum and Impala Platinum (Implats) went up 40% and 37% respectively. Deficits in PGMs have seen the three elements’ (platinum, palladium and rhodium) basket price continue to rise. Despite their strong run, we still view PGMs as very attractive. Our holdings in Northam and Implats trade on between 6 times and 8 times our assessment of normal earnings and have meaningful (albeit lower than a few months ago) upside to our fair values. Given the strong run, we have sold some of our shares in Implats. We have introduced a new position into the fund, being Sibanye Stillwater. In the past, we have had a number of concerns around the Sibanye investment case. These centred around their safety track record, leveraged balance sheet and acquisitive strategy.

On safety, we have been encouraged by their reducing their lost time injury frequency rate over time. They have introduced a number of interventions after their unacceptable 2018 fatality record. Encouragingly, they have been fatality-free in 2019 year-todate in the troubled gold business. On the debt side, with PGM and gold prices where they are (and we consider current PGM prices to approximate “normal” levels), Sibanye could generate up to R17 billion in free cash flow in 2020, which would go a long way to reducing its current R27 billion in gross debt. So far, as acquisitions are concerned, we are confident that the heightened focus on reducing the debt levels will reduce corporate activity in the medium term. Sibanye trades on 4.3 times spot earnings and < 5 times normal, which we think this is very attractive. The assets it possesses (excluding Stillwater) are not on par with Northam and Implats; however, we have sized the position appropriately for its risk-return trade off.

Mondi is a very attractive business. It has a shareholder-friendly management team that balances the investment needs of the business with return-of-capital to shareholders. Over the years, they have invested heavily in their asset base to drive down their cost position and improve their return on invested capital. Their ownership and vertical integration into forestry assets provides them a moat that would be costly and near impossible for peers to replicate. They stand to benefit from the continued trend of offlineto- online shopping (necessitating increased packaging), and the trend of increased use of sustainable packaging and a shift from plastic to paper-based packaging. We do, however, expect a tough environment for Mondi in the short- to medium-term. European containerboard supply is increasing at a time when demand conditions are softening. We have reduced the size of our Mondi position, with the proceeds being applied to the diversified miners, as discussed above.

Sasol has been extremely disappointing for the fund. Further overruns on the Lake Charles Chemical Project (LCCP) cracker (when the project was 98% complete and no further overruns were expected), and the delay of their full-year results to June 2019, put pressure on the already depressed share price. We believe that the results delay is as a result of control weaknesses identified around the LCCP budgeting process and not centred around the financial statements themselves. A number of LCCP units have commenced their ramp up. As a result, we expect the company to shift to a phase of debt reduction and improved free cash flow. Sasol trades on four times 2021 earnings, which are set using what we feel are relatively undemanding rand-oil price assumptions. This is very attractive for a business of its quality.

Trencor announced that it will be unbundling Textainer to shareholders in the coming months. This is something Coronation has been pushing for over the last few years. The share price reacted positively (up 37% for the quarter) and we used the opportunity and reduced margin of safety to reduce our stake. We are happy with current valuation levels and portfolio positioning. We believe prospective returns from this base will prove attractive.

The first quarter of 2019 (Q1-19) was a very strong one for the resources sector. The fund returned 16.9% against a benchmark return of 17.8%. Its long-term track record remains compelling, with the fund performing well against both its peer group and the benchmark over most meaningful periods.

For the period under review, the fund benefited from overweight holdings in platinum group metal (PGM) shares, with Omnia detracting from performance.

We also added to our Sasol and Glencore holdings over Q1-19, while reducing the Anglo Platinum and BHP Billiton positions.

All mining companies have now reported their annual or interim results for the periods to end-December 2018. These results were characterised by a strong performance from bulk metals (iron ore, coking coal, thermal coal and manganese). The theme of strong cash flow, deleveraging and capital returns to shareholders continues. Anglo American has yet to start returning excess capital to shareholders, but we expect them to initiate in 2019, once their targeted gearing range is reached.

The quarter under review saw commodity prices get off to a strong start, which his was fairly broad based (nickel +25%, oil +23%, iron ore +21%, PGMs +17% and copper +11%). Abatement of fears around a potential trade war between the US and China was likely a contributing factor. Thermal coal declined 24%, although this was off a high starting price - a price we did not expect to be sustained.

The most topical of the moves higher was iron ore, which is a commodity we have been fairly bearish on. Our view is that recent supply additions from the majors, coupled with tepid steel demand growth, would see a market in surplus. In the long term, the rise of steel scrap is also expected to reduce demand for raw iron units. However, in late January 2019, a tailings dam of Brazilian iron ore producer Vale collapsed, a tragic event that led to the loss of around 300 lives. In addition, around 40mt of production was removed from the market in the short- to medium-term, while it and other Brazilian tailings dams are being assessed. Further to this, Cyclone Veronica in Australia looks like it will result in production being reduced at Rio Tinto’s and BHP Billiton’s operations. While our bearish thesis remains, these events should see iron ore staying stronger for longer before production resumes.

After a long, frustrating wait, PGM shares have finally begun to rally. We feel this is a vindication of our disciplined, long-term approach to investing, where we aim to assess information objectively and dispassionately and try to avoid being swayed by the news and sentiment of the day. Post- ‘Dieselgate’, negative headlines called for the death of the internal combustion engine and platinum demand along with it. PGM prices dropped below marginal costs of production. At the same time, electric vehicle commodities like lithium and cobalt were rallying strongly (up three times). Tesla’s share price rose seven-fold in the last seven years and its market capitalisation is comparable to traditional automakers such as General Motors (GM) and Ford, despite the fact that the company has struggled to turn a profit and produces only 3% of the vehicles that GM produces. While we are long-term believers in battery electric vehicles, we expect the process to be evolutionary rather than revolutionary. In the medium term, we also expect PGM demand to surprise positively as a consequence of tightening emissions standards, globally. In addition to this, material underinvestment in mine supply over the last decade means it will take many years before a sufficient supply can respond to current market deficits. We therefore expect structural PGM market deficits to persist for at least the next decade.

Coal is another example of ‘headline risk’. While headlines were bearish due to renewables adoption, the growth in absolute demand for coal (even as it has been gradually shrinking its share of the energy pie), coupled with limited investment in new supply, has meant a tight supply demand balance and a buoyant price.