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The Next Commodity

October 2020
A new dawn for commodities

Executive Summary

• We are on the cusp of a new commodity supercycle

• There are 3 big secular drivers of this supercycle:

 The long era of monetary-policy dominance is over,

leading to a heightening of inflation risks not seen
since the 1960s

 Investors are deeply underweight and will need real

assets such as commodities as a hedge against

 Commodities are generationally cheap, both

Source: CFA Institute
compared to themselves and to other assets

The “why” and “what” of the next commodity supercycle

• Why commodities are on the cusp of a new


 Inflation risks at 50-year highs

 Investors vastly underweight real assets
 Supply destruction

• What to buy? We home in on the most capital scarce

sectors, as these will deliver superior returns in the

 Energy (oil and gas, coal)

 Gold and Silver
 Copper
Source: McKinsey

A supercycle with multiple drivers

• There is no formal definition of a commodity supercycle

• But when we have prolonged periods of mismatches in

surging demand and inelastic supply as we have today,
commodities are primed to deliver long-term superior returns

• The supply/demand imbalance takes time to correct due to:

 high start-up capex for new projects

 time needed to bring new supply online as firms wait

until they are sure of price upturns

• The next cycle will be a combination of real demand, investor

demand, and tight supply, rather than a single focus like China Source: Getty Images

Inflation and Fiscal
In world of heightened inflation risks, owning commodities is key
The coming fusion of fiscal and monetary policy

• There is a seismic shift away from monetary-policy

dominance towards fiscal-policy dominance

• The private sector’s preference for saving – despite

years of ever easier monetary policy – has meant the
government needs to spend to make up the shortfall,
supported by central banks’ government bond buying

• The pandemic has only magnified existing trends. We

are heading towards the fusion of monetary and
fiscal policy

• This has profound implications for investing and

portfolio construction

Source: Bloomberg, Macrobond and Variant Perception 6

Monetary policy is almost out of road

• Central to conventional monetary policy is a reliance

on the banking sector as its transmission mechanism

• But that relies on two things: banks’ willingness to

lend, and individuals’ and firms’ willingness to borrow

• QE has created trillions of USD of bank reserves, but

that has not translated into nearly as much credit
extended by banks to the private sector

• The demand for borrowing from the private sector

has not been there as companies and individuals
focus on repairing and strengthening their balance

Source: Bloomberg, Macrobond and Variant Perception 7

Sun sets on central banks => sun rises for inflation

• The private sector’s total wealth has been rising

• But that wealth has been concentrated in ever fewer

hands. The wealthiest 10% in the US hold about 65%
of the wealth; the wealthiest 1% own almost 40%

• Monetary policy has fuelled this inequality, and it is

increasingly impotent in reversing it

• The wealth imbalance is politically unsustainable.

Fiscal policy is re-establishing itself as the dominant
force in the economy, while monetary policy becomes

• This is potentially very inflationary

Source: Bloomberg, Macrobond and Variant Perception 8

Lake and Ocean Regimes

• The blurring of fiscal and monetary policy creates a

very different investing environment

• We have come from the “Lake Regime”, where rises in

inflation are less likely to become disorderly

• We are now in the “Ocean Regime”

• In this regime, massively expansive fiscal policy and

rapidly growing central-bank balance sheets means
garden-variety rises in inflation are more likely to
lead to unanchored and disorderly moves higher in

• Lake-going vessels are not suitable for ocean travel, as

are many portfolios not prepared for high inflation

Source: JMW Turner, Bloomberg, Macrobond and Variant Perception 9

A cautionary tale from Japan

• Japan has lulled many into thinking that monetisation

of large government deficits is not inflationary. This is
a dangerous assertion

• Peter Bernholz, an economics professor, noted that in

the 20th century, hyperinflation befell every country
whose government had borrowed and spent past a
certain limit, and the central bank had monetised
most of this spending

• Japan in the 2010s came very close to breaching

these “Bernholz thresholds”

• Under the surface, Japan has been sailing very close

to the inflationary wind

Source: Bloomberg, Macrobond and Variant Perception 10

Heightened US inflation potential

• The response to the pandemic has led to a ballooning

of the fiscal deficit in Japan, meaning Japan will likely
breach the Bernholz expenditure threshold soon

• Japan could soon find itself with the ex ante

conditions that historically have always led to
runaway inflation

• The US has also seen a rapid move towards satisfying

the Bernholz thresholds

• The US, like Japan and other DMs, has not had this
much inflationary potential since the 1960s

Source: Bloomberg, Macrobond and Variant Perception 11

Be careful what you wish for

• The Fed’s new commitment to not raise rates until full

employment is pregnant with the risk of very high inflation

• In the 1970s, the Fed underestimated NAIRU – the rate of

unemployment below which inflation begins to accelerate

• This sowed the seeds for the inflation of the 1970s (made
worse by the link between gold and the USD being cut, the
Arab oil embargo, etc)

• The Fed merely underestimated NAIRU in the 70s, today

they are effectively consigning it to the dustbin

• The risk of 1970s-style inflation in this cycle has markedly


Source: Bloomberg, Macrobond and Variant Perception 12

The decimation of the dollar

• The dollar’s purchasing power has been steadily

eroded since the 1930s

• A dollar is a liability on the Fed’s balance sheet –

liabilities are only as good as the assets backing them

• From 1932, the Fed has been able to lend against

assets of poorer quality than gold

• Ever since, the quality of the Fed’s balance sheet has

deteriorated – culminating in the purchase of sub-IG
corporate debt in 2020

• The result is the real value of the dollar is a fraction of

what it was – the dollar is heading towards zero at a
rapidly increasing rate

Source: Bloomberg, Macrobond and Variant Perception 13

“Our currency, your problem”

• Bigger government looks here to stay – no other

entity is able to prevent the US from lurching into a
depression after crises

• Bigger government means more spending and more


• This is not a problem when you have a pliant central

bank willing to hoover up liabilities limitlessly – in the
form of US Treasuries – and print money limitlessly to
buy them

• Something has to give … in this case it will be the

dollar, and therefore all financial assets denominated
in it

Source: Bloomberg, Macrobond and Variant Perception 14

Ocean Regime => a new investment world

• The Ocean Regime does not mean high inflation and a

weaker dollar is imminent, but it does mean the
balance of risks have changed

• Once inflation becomes unanchored, it is too late to

take action. Portfolios should begin to be made more
inflation-resilient today

• There are 3 main implications of moving to the Ocean


 rising cross-asset volatility

 too much leverage becoming a dangerous game
 the long boom in financial assets ending, and
real assets and commodities outperforming

Source: Bloomberg, Macrobond and Variant Perception 15

Commodities an inflation winner

• The 1970s were pock-marked with stagnant growth

and double-digit inflation

• The best performing asset class in that decade was

commodities. They were the only asset to deliver a
positive real return

• Equities as a whole became a shunned asset, as the

coupon available on bonds rose sharply to
compensate for high inflation

• But some equity sectors did better than others, eg

energy, industrials and materials

• High and rising inflation today should lead to the

same outcomes

Source: Bloomberg, Macrobond and Variant Perception 16

Demand and supply tailwinds

Positive dynamics for commodity demand and supply are lining up

Demand and supply imbalances drive the commodity cycle

• Commodity prices can deviate greatly form long-run averages

• These imbalances take a long time to correct due to:

 high start-up capex for new projects

 time needed to bring new supply online as firms wait
until they are sure of price upturns

• Previous demand-driven super cycles include global

rearmament before WW2, and the reform of the Chinese
economy and its accession to the WTO in 2001. The OPEC oil
embargo in the 1970s was a supply-driven super cycle

• The next commodity supercycle will be driven by heightened

inflation risks, supply destruction and recovering demand

Source: Bloomberg, Macrobond and Variant Perception

Demand is set to pick up cyclically

• China’s economic leading indicators are rebounding which

points to a cyclical upturn for commodities

• Our macro-driven forecast for commodities has surged over the

past 6 months and continues to show positive expected returns
for commodities

• Liquidity and demand factors are boosting the commodity


• In our report from May of this year, China Deleveraging Over,

we noted a China rebound completes the “bullish commodity

Source: Bloomberg, Macrobond and Variant Perception

Supply conditions also cyclically tight

• The huge contango in commodity futures markets in the wake

of the Covid recession showed a mounting supply glut

• This forces producers to cut production, delay new projects and

thus supply shrinks

• Large commodity price spikes become a likelihood over the

following 18 months after recovering demand runs into tight
supply conditions

• Low inventories mean prices are more responsive to a demand


• There are long lags to bring new supply online for many
commodity sectors, eg it can take more than five years for a
new mine to generate cash flow after initial spending
Source: Bloomberg, Macrobond and Variant Perception
Chinese demand is slowing, but not going away

• China accounts for more than 50% of global demand

for many commodities

• As the economy rebalances and slows, demand

growth for industrial commodities will slow, but still
grow off a much larger base

• Thus China’s contribution to global commodity

demand will remain elevated

• For example, China’s imports of copper ore and

concentrate has increased by 4.7 million tonnes since
the start of 2018, which exceeds the total 4.5 million
tonnes imported in 2007

Source: Bloomberg, Macrobond and Variant Perception

Urbanisation still a commodity tailwind

• Global population growth and increasing urbanisation (led

by China) helped to drive the last commodity supercycle

• The next cycle will not be driven by these same factors, but
demographics are not yet turning into a headwind either

• Urban population growth and the resulting demand for

infrastructure investment will support demand for related

Source: Bloomberg, Macrobond and Variant Perception

Energy transitions are driven by politics, but are not instant

• Policy will be a big driver of the transition away from fossil

fuels towards renewables and alternatives

• Fossil fuels remain competitive economically, but this will

become a secondary consideration as policy drives the
energy transition

• The transition away from fossil fuels is forecast to speed

up from 2030 onwards

• We see scope for one more upcycle in fossil fuels, driven

by a cyclical-demand recovery and much tighter supply
due to a lack of capex

Source: BP 2020 Energy Outlook, Bloomberg, Macrobond and Variant Perception

Long-term supply: technology vs new projects
• Technological revolutions (eg US shale) lower the cost of
production and reduce the lead times for additional supply to
come online

• Continuous technology advancement can sustain supply

growth and limit commodity price growth

• The commodity bear-market reduces incentives to invest in

R&D or new projects. Big energy companies have slashed
R&D and capex budgets since the 2014 peak in oil prices

• This is a huge constraint on future supply and creates

conditions for oil price spikes in response to rising demand

• Fiscal support for R&D is likely to play a major role in further

breakthroughs in the coming energy transition

Source: Bank of Canada, IEA, Bloomberg, Macrobond and Variant Perception 24

A huge investor
The underweight in commodities will drive investor demand
Alternative assets about to come back in vogue
• The long-hailed shift to alternative assets has stalled

• Disappointing returns from alternative assets has made it

much easier for investors to cut allocations

• Pension funds are planning to divest from alternatives in

favour of bonds*

• With nominal assets less able to match returns of the past,

real assets will necessarily become a core holding of multi-
asset portfolios

• Commodities are likely to be a structural beneficiary of this

shift in portfolio construction

* according to Mercer’s 2020 Asset Allocation Insights report

Source: Bloomberg, Macrobond, Mercer, Willis Towers Watson, Brookfield and Variant Perception 26
Investors are structurally underweight commodities
• The commodity asset class is massively underinvested

• The amount of capital in real assets is minuscule

• Pension funds prefer safety in fund vehicles (hedge funds, PE, etc)
to fill their portfolios

• This is also playing out in the ETF world. Total commodity ETF
AUM is a tiny proportion of the total AUM

• There is a risk of a huge supply-demand imbalance in commodity

markets as investor preferences shift towards real assets

• Marginal capital inflows can lead to outsized price gains

Source: Bloomberg, Macrobond, Mercer and Variant Perception

From nominals to reals
• Future expected returns of nominal assets are depressed

• The transition to fiscal dominance and risks of disorderly moves higher

in inflation puts real returns at an even greater risk

• Most fixed-income assets now guarantee a loss of purchasing power at


• Equities rely on continued multiple expansion to avoid negative returns

• All roads lead to discretionary investors venturing into other asset

classes to protect the real value of their capital

Source: Bloomberg, Macrobond and Variant Perception

The end of the road for 60/40 portfolios
• Bonds are now a poor equity hedge given near-zero or negative

• The traditional 60/40 portfolio is now riskier, and with lower

return potential

• Risk-parity solutions rely on equalising contributions to risk from

different asset classes

• This means employing higher leverage on asset classes with lower

volatilities – but leverage is a dangerous game in the Ocean Regime

• Risk-parity relies on a negative correlation between stocks and

bonds to work

• In the Ocean Regime, this correlation will likely become positive –

making risk-parity much more risky
Source: Bloomberg, Macrobond and Variant Perception
The solution? Use commodities’ diversifying power
• Commodities have two great properties for diversifying equity risks:

 Commodities are volatile assets

 Commodities are generally uncorrelated to equities

• These two properties allow commodities to substitute in for fixed-

income allocations as a means to hedge equity risk

• We also see that high commodity volatility tends to coincide with

high prices (the opposite of equities and fixed-income)

• Commodities are thus uniquely positioned to outperform in

inflationary environments, like the 1970s

Source: Bloomberg, Macrobond and Variant Perception

Making the most of commodities in a portfolio
• A buy-and-hold portfolio of commodities has historically not served
investors well, but an actively managed portfolio has

• Commodities offer a rebalancing premium in portfolios because

they are volatile and are not correlated to each other

• Thus an equally-weighted portfolio of CRB commodities that is

rebalanced frequently can enhance the value of commodity
allocations in portfolios

• Rebalancing volatile commodities forces you to buy low and sell


• See our report from July 2020, Portfolios for the High Seas

Source: Bloomberg, Macrobond and Variant Perception

What to Invest In
Finding the most capital scarce commodity sectors to invest in
The capital cycle tells us what to buy

Plenty has been written about the capital cycle over the years, but by far the best is Capital Returns: Investing
Through the Asset Cycle, by Marathon Asset Management.

This inspired us to create our own Capital Returns framework to screen for capital-scarce sectors that outperform
capital-abundant sectors on a 1-3 year forward basis.

Source: Bloomberg, Macrobond and Variant Perception 33

Many commodity-related sectors are capital scarce

• We aggregate data for non-financial listed corporates globally

to rank GICS Level 4 industries in order of capital scarcity

• Out of 130 non-financial industries, many commodity-related

industries are very capital scarce, setting them up for a multi-
year period of outperformance

• We will focus on the most capital-scarce sectors:

 Oil & Gas, Coal, Precious Metals, Copper

• For more information on our please refer to our thematic

reports: Occam’s Razor to Capital Returns - March 2020 and
Capital Returns - February 2018

Source: Bloomberg, Macrobond and Variant Perception 34

Capital scarcity drives higher future equity returns

• The capital cycle follows a mechanical and

repeatable process:

1) large industry-wide investment coincides

with a peak in investment returns
2) this attracts new entrants, eroding
incumbent company returns and become
3) firms exit and capital flows away, creating a
much more profitable environment for the

• This process typically takes 2-3 years for

investment returns to materialise from the point
of peak capital scarcity

Source: Bloomberg, Macrobond and Variant Perception 35

Oil and Gas
No more hate
Energy remains the most hated sector

• Energy has been one of the worst performing sectors over

the last decade

• Energy equities have declined persistently since the 2014

crash, with a few false-dawn rallies that petered out

• Energy’s share of the S&P is at all-time lows, exacerbated

by the Covid recession

• Recessions have historically coincided with structural

changes in market leadership and changes in trend for

Source: Bloomberg, Macrobond and Variant Perception

Energy reminiscent of goldmining bear market in the 2010s

• Goldmining equities saw a multi-year bear market after

the 2011 peak in gold prices

• They then experienced a protracted bottoming process,

lasting even after gold prices stabilised in 2016

• It was only the surge in gold prices from 2019 that

propelled goldmining equities higher

• We see the potential for a similar dynamic to play out for

the energy sector – currently in its sixth year of a bear

Source: Bloomberg, Macrobond and Variant Perception

Large supply response from oil producers

• This year crashing oil prices and surging inventories have

elicited a large supply response from oil producers

• US production has fallen 3 million barrels per day

• The 2020 supply response is larger than what was seen in


• In 2014, capital was more readily available to oil producers

as investors were anticipating a quick recovery in oil prices

• Today, there is a lot less hope

Source: Bloomberg, Macrobond and Variant Perception

Capital is very scarce for energy companies

• According to our Capital Returns framework, oil

producers saw an extended period of abundant capital
availability before the 2014 oil price crash

• After the crash, capital become increasingly scarce –

this is forcing the industry to rationalise, reducing
competition for the survivors

• We proxy for capital scarcity using Capex + R&D to

Asset ratio, D&A to Asset, and ROIC

Source: Bloomberg, Macrobond and Variant Perception

Capital scarcity force shifts in producer behaviour
Extreme capital scarcity has forced changes in behaviour of oil producers. Priorities have shifted away from blindly
growing production towards improving the balance sheet, paying down debt and maintaining production.

Q4 2018 Q3 2020

Shale decline rates and high-grading stop fast supply recovery

• Shale wells have very high decline rates (>30% a year

vs LSD% for conventional)

• Lots of new wells need to be drilled to maintain

production, which is subject to capital availability

• When drilling activity falls, companies stop drilling the

least productive wells first and average productivity
shoots up

• When companies want to increase overall production,

with the most productive wells already drilled, it
becomes harder to maintain production levels

Source: Bloomberg, Macrobond and Variant Perception 42

Demand recovery given supply constraint is bullish

• The IEA demand forecast shows a steady recovery in

crude oil demand over the next two years

• Energy equities are lagging the projected oil demand

recovery path

• The virus overhang clearly remains a big area of

uncertainty for the recovery in oil demand and energy
equities appear to be priced for the worst

Source: Bloomberg, Macrobond and Variant Perception

Cyclical leading indicators positive for crude

• Cyclical as well as structural factors are starting to improve

for oil

• Our leading indicator for crude oil is rising and has turned

• This has been driven by signs of economic recovery - led by

China - and tight supply

Source: Bloomberg, Macrobond and Variant Perception

OPEC+ risks remain, but look contained for now

• The Saudis and Russians have to balance the conflicting

goals of:

 shoring up their own economy and budget

 targeting and restricting US shale

• A worsening Saudi/Russian budget situation and surging US

shale bankruptcies make another OPEC+ “scorched earth”
campaign to destroy US shale unlikely

Source: Bloomberg, Macrobond and Variant Perception

Upstream vs midstream and downstream

• There are two ways to gain exposure to higher oil prices:

1) The “aggressive” way: invest in upstream exploration and

production companies - total global rig counts are at all-
time lows

2) The “safer” way: invest in infrastructure-like assets within

downstream/midstream companies that will continue to
generate cash-flow and distributions for investors

• Midstream is the most underweight part of the energy complex

as the MLP structure is unviable at prevailing cost of equities

Source: Bloomberg, Macrobond and Variant Perception

Refiners face headwinds from extremely high inventories

• Consistent overproduction by refiners in recent years has

driven inventories to new highs

• Outages had surged during the Covid recession, but

significant production has been already brought back

• Refiners need coastal sites or heavy integration with

petrochemicals to remain relevant

• More sophisticated refineries – those that have deep

conversion sites – should do better

Source: Bloomberg, Macrobond and Variant Perception

Energy can be a minefield - stock selection is important

• It is important to differentiate different companies

within energy and identify the best assets to invest in

• Capital-intensive industries like energy are subject to

large boom-bust cycles

• As a whole, the energy industry has failed to achieve

sufficient return on invested capital through the cycle
for shareholders

• The chart on the right from our report: Improving Stock

Selection - October 2019, shows the aggregate
destruction of value as boom turns to bust

Source: Bloomberg, Macrobond and Variant Perception

E&P companies with large upside
We screen for cheap exploration and production (E&P) companies trading at close to the PV10 value of their
reserves, where crude oil is the majority of the production mix and where the capital structure is still viable.

There remains upside optionality in these names from rising oil prices, and probable and possible reserves.

Source: Bloomberg, Macrobond and Variant Perception

Quality non-E&P energy assets
We screen for high-quality energy assets that are infrastructure-like by looking for energy stocks that have stable
cashflow from operations (after adjusting for changes in working capital) since the 2014 oil-price crash.

Additionally, we filter for resilient balance sheets (Piotroski score >=5), low risk of bankruptcy (Altman Z-Score >
1.25) and high normalised free cashflow yields.

Source: Bloomberg, Macrobond and Variant Perception

One last puff of the cigar butt
Coal: vital for EM, a pariah in DM

• Coal still accounts for more than one-third of global

electricity generation

• Coal’s share of electricity generation in EM countries

like China and India is in the range of 60-70%. In the
US/European union, the equivalent share is 10-15%

• Coal companies are treated as pariahs, given the

ascendance of ESG investing

• Coal investing within DM fits into the “last puff of the

cigar-butt” category

• In EM, the runway appears longer

Source: Bloomberg, Macrobond and Variant Perception

Coal is a China story

• China’s coal-fired generating capacity is 50% of the world


• China coal-fired capacity is set to keep growing over the

next decade and offset losses in DM countries

• The Chinese economic cycle has typically led export prices

for coal

• Chinese real M1 growth has led API2 coal prices


Source: Bloomberg, Macrobond and Variant Perception

US coal companies are at cycle lows

• The US natural gas glut has crushed the coal industry

• Low natural gas prices have accelerated switching trends

toward gas-fired power plants away from coal

• Coal is relatively easy to store and remains important for

utilities as a low-cost way to ensure grid resilience

• Surging US coal inventories have historically been a contrarian


• More coal burning will be encouraged as natural gas prices

normalise by rising over the next 12 months

Source: Bloomberg, Macrobond and Variant Perception

Listed coal opportunities
We screen for coal companies which have achieved high RoEs and ROICs over the past 5 years (the last coal cycle
trough-to-trough was from 2016 to 2020)

We also filter for viable balance sheets (Piotroski Score > 4). Very few companies pass this screen and most are in
emerging markets

Source: Bloomberg, Macrobond and Variant Perception

Gold and silver
The 1st and 2nd placed metals to invest in
“Gold is money, everything else is credit”

• Gold is the purest alternative to the dollar

• Gold should not be thought of as just a commodity

but as a unit of account - a numeraire

• More than any other asset, gold has held on to its

purchasing power over the long term, especially
against the dollar and other paper money, and the
financial assets denominated in paper money

• The returns of stocks and bonds over the last 30 years

look impressive in USD terms

• However, the dollar proceeds of those returns have

been devalued – the real returns are considerably

Source: Bloomberg, Macrobond and Variant Perception 57

Gold is undervalued vs the money supply

• Since the end of the gold standard and Bretton

woods, and then the closing of the Gold Window in
1971, the US money supply has steadily increased -
exponentially so in 2020

• When the US was on the gold standard, the US’s gold

reserves fully backed the money supply

• This is far from the case today. The official gold

reserves held in Fort Knox only cover 11% of the M1
money supply.

• Even a reversion to the US’s gold backing 30% of M1

would imply a gold price of over $6,000 per ounce,
over 3x today’s price

Source: Bloomberg, Macrobond and Variant Perception 58

The classic inflation hedge

• In the Ocean Regime of potentially disorderly moves

higher in inflation, gold is a standout hedge

• As inflation rises faster than central banks can raise

rates, real yields fall – gold tracks the path of real
yields very closely

• Inflation has “positive skew”, ie you’re likely to get

bigger upside rather downside surprises in inflation

• Gold is the ideal inflation hedge in the Ocean Regime

as it has historically performed best when inflation
surprises to the upside

Source: Bloomberg, Macrobond and Variant Perception 59

Own what central banks are short of

• After years of selling their gold, central banks around

the world have been steadily increasing their gold

• As the dollar is progressively devalued and

inflationary risks rise, central banks are diversifying
away from the dollar

• Moreover, as the US flexes its financial muscles and

uses the dollar as a tool of diplomatic punishment,
countries such as Russia and China are turning away
from the USD, and increasing their gold reserves

• Owning what central banks are short of will likely

prove a highly profitable endeavour

Source: Incrementum AG, Bloomberg, Macrobond and Variant Perception 60

Investment demand for gold soaring

• Gold is not only a hedge for inflation, it is a hedge

against uncertainty

• 2020 has seen investment demand for gold soar as

the global economy grapples with the impacts and
uncertainty from lockdowns

• Consumer demand, eg jewellery, has collapsed this

year as recessions hit around the world

• However, demand for ETFs and other investment

products has picked up the slack – accounting for an
unprecedented 42% of gold demand in 1H20

• Investment demand for gold is likely to remain strong

in the Ocean Regime of heightened inflation risks

Source: World Gold Council, Bloomberg, Macrobond and Variant Perception 61

Gold production peaking

• The previous 2012 peak in gold prices reinforced a

steady rise in production that looks to have run out of

• Production has plateaued since 2018 and it has fallen

in 2020 due to global lockdowns

• Gold exploration budgets peaked around the previous

2012 high in gold prices, and is now at a 12-year low

• Now there has been no major gold discoveries in the

past 3 years

• There is a shortage of large, new gold mines to

replace aging assets

Source: S&P GMI, Bloomberg, Macrobond and Variant Perception 62

Goldminers on cusp of new bull market
• Goldminers should offer some extra bang, while gold
remains a purer macro hedge for the inflationary
Ocean Regime

• Goldminers are historically cheap to gold

• Since 2019 miners have begun to steadily rally against

the gold price – showing signs of being on the cusp of
a new bull market

• As energy prices have fallen, input prices for miners

have declined

• The sector has aggressively cut costs after years of

excess, massively improving margins

• The sector has seen persistent investment outflows

Source: Bloomberg, Macrobond and Variant Perception 63
Goldminers – screening out the duds

Mark Twain once said “a gold mine is a hole in the ground with a liar at the top”. Many goldmining firms should
hugely outperform the gold price, but several will not. We screen out in our view the worst candidates, ie those
with a low Piotroski score and a low Altman Z score. We then rank on EV/EBITDA*.

* The last 4 companies on the above list are gold royalty companies – see next slide

Source: Bloomberg, Macrobond and Variant Perception 64

Goldminers – juniors and royalty
• Investors should also consider gold royalty companies

• These firms’ operating costs are much lower than

traditional miners as they don’t own/operate mines

• Instead they supply financing to mine builders and in

return receive royalties on a portion of the mine’s

• They are more inflation-proof than miners given they

do not have high operating or capital costs

• They also have a free option on exploration upside

• Also junior miners – while riskier – look cheap

compared to the majors, and warrant inclusion in a
precious-metals portfolio
Source: SeekingAlpha, Bloomberg, Macrobond and Variant Perception 65
Don’t forget 2nd placed silver

• Silver is similar to goldminers in that it offers extra risk

– but potentially greater reward – compared to gold

• Silver is cheap compared to the gold price, with one

ounce of gold buying 77 ounces of silver. This was a
low as 40 ounces in the early 2010s and 20 ounces in
the early 1980s

• Silver is a “by-product” metal, with the majority of

supply coming from mines whose main output is
another metal – meaning supply is slow to respond

• Supply constraints, relative cheapness and growing

investment demand are a recipe for explosive silver
growth in the coming years

Source: Incrementum AG, Bloomberg, Macrobond and Variant Perception 66

Copper’s clean sheet
The Age of Copper
• Copper will play a pivotal role in the clean energy revolution
sweeping across the world

• Policymakers are creating permanent demand in renewable energy

and EV-related (electric vehicle) infrastructure

• EVs use 4x more copper compared to a normal passenger car’s

internal combustion engine. Solar panels and wind turbines require
12x more copper than previous methods

• Copper has many useful properties that make it a core input for
manufacturing and electrification: high durability, high malleability,
high electrical and heat conductivity, no loss of quality upon

• It also has antimicrobial properties – an additional source of

demand from the healthcare industry amid the pandemic
Source: Bloomberg, Macrobond, The Economist, Copper Alliance and Variant Perception 68
Copper has more room to run

• Futures speculative positioning in copper is near all-time highs

• Speculative froth usually precedes price corrections

• As speculators exit, there will be opportunities to buy dips in

copper and copper miners

• Our Copper Leading Index is rising strongly, pointing to a

supportive environment for the red metal through early 2021 at

• Our index is composed of global liquidity data, China leading

economic data and copper supply data

Source: Bloomberg, Macrobond and Variant Perception

The Chinese copper whale
• China’s dominance in the copper market has been growing

• China consumes more than half of the world’s copper but only owns
~5% of global copper resources

• The push towards self-sufficiency is clear with many Chinese miners

recently acquiring stakes in overseas copper deposits

• Still, China’s demand for refined copper is booming. The core driver
comes from policy stimulus aimed at stepping up fixed-asset investment

• Western policy is shifting towards “Chinaficiation” with massive

infrastructure spending on the horizon

• The West will join China with an ever greater appetite for copper

Source: Bloomberg, Macrobond and Variant Perception

Shifting demand to the West
• LME copper inventories are near 15-year lows owing to rampant
Chinese demand

• As copper inventories build back up, we don’t think this will dampen
copper prices because western supply chains are heavily destocked

• Inventory to sales ratios are at multi-year lows in the West: retail

inventory to sales ratios are at an all-time low in the US

• Mass restocking will be required to meet growth in new orders for

manufactured and consumer goods

• The result is a strong demand for raw materials and a long runway for
a copper bull market

• The marginal driver of prices is set to shift from China to the West

Source: Bloomberg, Macrobond and Variant Perception

Copper miners’ investment spending is low
• Copper miners are not incentivised to explore. This is still the case
after the rebound in the copper price

• Capex+R&D spending is at a 15-year low relative to the asset base

of global copper miners

• Fleeing capital is a sign that the industry is capital-scarce and future

returns are higher for the survivors

• Exploration budgets of metal mining companies are collapsing –

copper miners have slashed their budgets the most

• Mining costs are likely to rise - copper-producer currencies have

rebounded, oil and steel prices have rebounded and stringent Covid
safety measures are being implemented

Source: S&P GMI, Bloomberg, Macrobond and Variant Perception 72

Copper risks going into a huge deficit
• If copper demand starts to accelerate, then the dearth of new
projects could push the copper industry into a huge deficit

• Even for projects that are due to go live, the potential to discover
new copper is limited

• Only 102 million tons of copper has been discovered in the last 10
years (992 million tons was discovered between 1990-2008 with
much less investment, according to SPGMI's Reserve Replacement

• There are also copper supply risks in eg Chile – the world’s biggest
producer – due to worker protests and strikes

Source: S&P GMI, Bloomberg, Macrobond and Variant Perception

Copper miners are underperforming
• We like direct exposure to copper and also consider buying copper
miners with healthy balance sheets

• The aim is to find miners that can enjoy higher copper prices in
the future and avoid debt-laden companies that may fail before
this happens

• Copper miners have underperformed the copper price and the

broader equity market for at least a decade

• “Pure play” copper miners offer more direct exposure to a new bull
market, but the universe is much smaller compared to goldminers

• We therefore include diversified metal miners in our screen who

still account for a significant amount of the world’s copper

Source: Bloomberg, Macrobond and Variant Perception

Copper plays – avoiding the bankruptcy risks
Similar to our screen for goldminers, we aim to eliminate companies with low Altman Z-scores and low Piotroski

CAML, ANTO, CVERDEC1 and ERO are “pure play” copper miners in the list below, while the others are diversified

Source: Bloomberg, Macrobond and Variant Perception

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