Following a soft performance for the sector in H1 2017 (the JSE resource index declined 6%), August continued the recovery seen in July, due to delivery of strong cash flows reported by the diversified miners, easing of growth concerns in China for H2 and generally a weak base which can in part be attributed to regulatory risk associated with the messy mining charter release and challenge. We continue to see depressed long-term valuations (specifically on the EV/Sales metric) despite healthy margins, specifically for the general/diversified miners, as well as attractive short-term earnings valuations. The balance of risk to our investment case is slowing earnings momentum but continued healthy cash flow and debt reduction, and for now we view the latter as attractive support within the resources sector and within the equity market in general.

Exposure to precious metals cannot be ignored despite poor earnings and cash flow, and magnified regulatory and labour risk. Elevated global geopolitical risk is supportive for gold; our preference is for Gold Fields due to geographic diversification and low value attached to the long disappointing South African South Deep mine.

Platinum is a derivative beneficiary of gold’s safe-haven status in the short term. In the long term there is little doubt that the electrification of the automotive drive train is a major disruptive force for the decades to come, but generally the negative implications of the shift to battery electric vehicles on internal combustion engines and thus the demand for platinum group metals appear overstated on a five-year view. While we are disappointed with the supply response, presented through reporting season, to weak industry economics we maintain a position in Impala Platinum Holding Ltd and Northam as companies that have continued to invest in portfolio improvement, with the former offering operating leverage to a potential metal price recovery, and the latter building a strategically attractive portfolio away from the labour intensive Rustenburg hub.

During August we added slightly to African Rainbow Minerals Ltd and Sappi Ltd and trimmed BHP Billiton plc, Mondi Ltd, Sasol Ltd, the palladium ETF and exited Kumba Iron Ore following its expected share uplift from positive dividend declaration.

The Nedgroup Investments Mining and Resource Fund gained 5.4% (gross of fees) over the month of August 2017. The biggest contributor to the Fund’s performance was the large exposure to Anglo American plc that delivered 12.0% over the month, followed by Exxaro Resources Ltd and Impala Platinum Holdings Ltd that enjoyed strong returns over the month.

Prudential Investment Management

2016 was an unusually interesting year, and a difficult one to trade - the January rout (slowing Chinese economy and weakening Renminbi, oil price below $30/bbl, Japan's negative interest rate policy), mid-year Brexit and the troughing of ultra-low bond yields, and at year-end the US elections (plus Italian referendum) and OPEC's supply commitment to support the oil price. From a resources perspective China had a leading role as investors switched from concern on growth, demographics and re-balancing, to apparent comfort of manageable 6.5% GDP growth. China's debt driven stimulus has become critical to its economy, and should arguably be a source of concern. Nevertheless, we have witnessed a massive reversal in bulk commodity prices as stimulus unexpectedly fed infrastructure investment and property (instead of the deemed necessary rebalancing to services and consumption), feeding a massive balance sheet repair and share price rally for the diversified mining sub-sector. Not only have the macro outcomes been unexpected, but in many cases the responses to the unexpected outcomes have been unexpected.

Despite the macroeconomic, geopolitical and financial risks that persist volatility fell. From a resource fund perspective, this manifested as a surprising retracement in the gold price - and amplified by the (well-signalled) raise in US fed fund rates in December. Resumption of rising US rate expectations (after an extended period of declining rate expectations) pose a challenge to gold, but these three broad risk factors appear likely to persist into 2017 and thus can't ignore gold from an investment perspective. The challenge is to balance the short-term windfall from the bulk commodity boom against the near certainty that those prices are not sustainable. While we do not forecast uncertain macro events we look to position the fund appropriately for uncertain macro outcomes and then identify and follow specific opportunities that arise.

The fund is built around core holdings of higher quality (margin) and low financial risk stocks (with attractive long-term valuations),and opportunistic exposure to favourable operating gearing (attractive earnings/cash flow momentum, revisions and multiplies).During the quarter we exited positions in Anglo American Platinum Ltd, Gold Fields Ltd and Trencor, and also trimmed BHP Billiton plc, Exxaro Resources Ltd and the palladium ETF. We created a position in African Rainbow Minerals, Tharisa and the gold ETF, and added to Merafe Resources, Assore, Sasol and Sappi Ltd. Within mining we do favour the diversified general miners, like Anglo American plc, BHP Billiton plc and Glencore plc to continue to benefit from the tailwinds provided by elevated industrial commodities to strengthen their balance sheets. The Nedgroup Investments Mining and Resource Fund gained 0.8% (net of fees) over the quarter.

The biggest contributors to the fund's performance were the positions in Anglo American plc, Merafe Resources, Glencore plc and Sappi Ltd as these stocks delivered among the strongest returns over the quarter. The biggest detractors of performance were Impala Platinum Holdings Ltd and Gold Fields Ltd.