Sep 26, 2006

Commodities undervalued by 30%, Morgan resources fund manager says

By Jennifer Hill
Reuters
Monday, September 25, 2006

http://investing.reuters.co.uk/news/articleinvesting.aspx?type=managerMo...

LONDON -- The oil price might have fallen almost 25 percent from its peak, but the commodities sector as a whole is undervalued by around 30 percent -- giving further opportunity for growth -- according to one fund manager.

Ian Henderson, manager of JP Morgan Natural Resources -- the top-performing fund in the IMA All Companies sector over the past five years, according to Trustnet data -- told Reuters commodities are trading at a "very substantial discount to the broader market at large."

"The outlook remains that demand for commodities is going to continue to run at faster than GDP (gross domestic product) growth for quite a number of years and the industry is going to be hard-pressed to increase production fast enough," he said.

"As a result, prices received by producers are going to be supported for much longer than people expect and this industry is going to be enormously cash generative."

China is "absolutely critical" to rising demand, he said, but added that a boom in consumption in India had yet to be factored into the market.

"India has the same population, and uses about a fifth of the commodities that China uses," he said.

Henderson believes takeover activity in the sector will continue, with firms being prepared to pay a premium of some 30 percent to acquire assets.

"Today, I think the sector is about 30 percent undervalued," he said.

JP Morgan Natural Resources, which invests in undervalued assets in the mining and resources arena around the world, has turned in a stellar performance of late.

The 775 million pound fund is up 40.85 percent over the past year, 174.81 percent over three years, 349.20 percent over five years and 256.47 percent in the past decade, vastly outperforming the IMA specialist sector.

Henderson said the fund had been helped by sound asset allocation calls, as well as the fact that the sector had been "in vogue for the past five years".

"We were large investors in gold mining in 2002-03, particularly 2003, when the sector added a lot of value for investors as the gold price moved up from its lows and we've been quite good at switching from gold to energy and from energy to base metal producers, which has certainly helped."

The fund's largest holding is First Quantum Minerals, a small base metals business with a principal listing in Canada and assets in Congo and Zambia.

Base metal producers remain undervalued, he said, as investors fret over the cyclical nature of the sector.

"Most analysts are very pessimistic and investors are generally very pessimistic," said Henderson.

But "in the near-term, the prospects for zinc look fundamentally well underpinned. It's particularly attractive, followed by nickel and then by copper."

The UK open-ended investment company is 37.1 percent invested in base metals, 28.3 percent in energy, 25.2 percent in gold and precious metals, 8.7 percent in diamond and others, and has a 0.7 percent cash holding.

The oil price dropped below 60 dollars a barrel last week for the first time since February this year, and is down almost 25 percent from its peak.

Simon Denham, managing director of Capital Spreads, said on Monday: "Oil is falling once more as producers, who in the first half of the year were holding back on selling forward production in anticipation of the fabled 100 dollar price are now selling into the market as hopes fade for a bounce.

"We are now well below 60 dollars in the Brent at 59.80-59.85 dollars and longs are being squeezed out."

But, despite that, Henderson said there is still money to be made.

"Some of the energy companies I own have been performing very well," he said, citing Canadian business Antrim Energy, which has seen a near-50 percent rise in its share price since the start of the year.

"It's still possible to make money, especially in the production sector -- lots of small exploration companies will do well," Henderson added.

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