Episode Transcript
The Finance Ghost: Welcome to episode 292 of Magic Markets. Now, my co-host and friend here, Mohammed Nalla, has lived in Canada for basically the entire time we've been doing Magic Markets.
And to be honest, Moe, that hasn't actually been super interesting, really – until now, because Canada is in the news. You have a statesman there who is not shy to take the fight to the US and there's just a lot going on there.
You were speaking at a conference in Quebec recently, discussing whether we're in a commodity super-cycle and how Canada could benefit. We're going to talk a little bit about what that means for South Africa as well. And then I'm going to talk to, specifically, the resources index on the JSE and what you're actually getting inside there.
But I've got to tell you, there's also a lot of other stuff going on in Canada. We won't sidetrack this into a political show, but my feed is just full of Mark Carney speeches and, I must say, the man is eloquent. I'm quite enjoying watching that North American circus play out.
Mohammed Nalla: Ghost it certainly is an interesting time in Canada, and for the world in general. An initial point is that Canada is really doing exciting stuff around the world, simply because I guess it has to. It's been shackled to the US economy for the longest time.
And the current administration in the US has upended a lot of assumptions – a lot of stale assumptions, I guess, at this point in time – in terms of how the Canadian economy can and should work. I'm certainly watching with a lot of interest.
I think Prime Minister Carney is doing some very cool stuff in terms of laying some groundwork for a more resilient Canada over the longer term. Whether he gets that right or not, and what that means for the average Canadian on the street, only time will tell.
But let's go back to the core topic we want to discuss this week. You're right. I was at a conference last week speaking to institutional investors in Canada. And, on the panel that I was part of, we were discussing commodities, because commodities are a very important sector to Canada.
Canada is one of the world's largest producers of oil, with the fourth-largest production and fourth-largest reserves, so that's obviously very relevant right now. But at the same time, Canada is number one in potash, which is effectively fertiliser, so it's very important in the agricultural value chain.
We have a lot of other minerals. Those are metals – whether it's gold, whether it's uranium (on the energy side of things) – and that makes the commodities discussion very important to Canada.
But when I was on my way back from this conference, I said, “I come from South Africa, and South Africa is also a very commodity-exposed economy. So, a lot of what I discussed at the conference is also relevant to a South African audience.”
In short, answering whether we are in a commodity super-cycle, I kind of went with a slightly more nuanced answer there. That’s simply because we're clearly in a commodity cycle, but we tend to name commodity super-cycles historically. You never know you're in a commodity super-cycle at the start of that cycle.
But what we are seeing right now are a couple of key themes that are overlapping and that contribute to a rally in a broad commodities basket. And, to the extent that those themes continue to overlap, yes, this could become a commodity super-cycle, which is determined by the duration and the breadth of that rally. But for now, I prefer to contextualise it in terms of these overlapping themes.
What are those themes? Well, we've got the big data-centre push, and that ties into electricity and energy; electricity grids. But at the same time, given the geopolitical backdrop, you've got defence spending. That filters through into other supply chains because governments and countries actually want secure, reliable supplies of minerals.
And so, to the extent that these themes are all overlapping, that's what's giving us this broad push in terms of an overall commodities ‘cycle’, if you want to call it that.
If we just look at something like copper, which is tied very strongly into the electrification theme, last year, investment by copper-focused mining companies rose by 8%. Now, that sounds like a lot, but it's actually catching up with decades of underinvestment.
Then you've got lithium specialists who actually cut their production by around 40%. That's very useful as a warning in terms of not treating commodities as a single trade. There are very specific value chains. Each of those tend to behave differently. They've got certain related supply and demand triggers, but they're not always moving in the same direction.
Now, the conference focused on what Canada could gain. But let's actually look at commodity economies in general, because the last commodity super-cycle we had was in the early 2000s and all the way up to the 2008 global financial crisis. And over that era, if we look at another economy, Australia built capacity. Their annual mining investment rose from around AUD 10 billion to AUD 48 billion over the decade.
South Africa, by contrast, certainly benefited from higher prices to an extent. Export earnings, tax receipts – those were all up. But the response in new production was a lot weaker, and that's where the difference comes in. Because a price windfall like we're seeing right now helps near-term profits, but the longer-term investment cycle is what creates sustainable mining industries and actually earns you the money in the next cycle.
There was also a Bureau for Economic Research (BER) down in South Africa. They did a study that showed that South Africa's total mining output was around 12% lower in 2024 compared to 1994. We know this. There's a narrative of a sunset industry and so forth.
But if you actually take out gold and you look at the output across the rest of the mining sector, it was actually up 41%. So, that decline that you saw in deep-level, mature gold reserves actually masked growth that you saw elsewhere. That’s very important, because South Africa does still have a remarkable mineral endowment, but which sectors can South Africa focus on and grow from here?
South Africa has this enormous weight in PGMs (we know that – the world's largest reserves are there). They've also got manganese and chrome. Gold is still important even though it's a very mature industry, but that's a very different one. Gold does also come through in the electrification theme, but PGMs, that's a bit of a concern for me. That’s because it relies heavily on traditional internal combustion engines and hybrid vehicles, so the shift you've seen into electric cars creates a bit of downside risk.
I mentioned manganese and chrome. Those are actually exposed to a steel cycle, and that's tied to global infrastructure. So, those are the themes that would influence those specific sectors of the market.
Then Ghost, very importantly, as I kind of try and bring this to a close, there's the mineral resource endowment. I made this point at the Canadian conference as well: investment doesn't necessarily have to follow the endowment, because the key question is actually getting those minerals to the market.
In South Africa, that's where some of your choke points come about. It's the same thing in Canada. Infrastructure bottlenecks – rail, port, electricity (not so much an issue in Canada, definitely an issue down in South Africa). And if you look at Transnet's latest annual results, rail freight actually rose to around 168 million tonnes from around 160 million tonnes. That is progress, but it's still short of the targeted level of 180 million tonnes.
So yes, access to the market for private operators, that's also progress. It's in the right direction. But you haven't yet seen it come through in terms of additional tonnage. That's important because you can't earn export revenue if you're stuck waiting for a train. And so, those bottlenecks are really where I think the investment narrative, longer term, needs to actually focus.
Another angle is exploration spend. That's where South Africa's actually done quite badly. That BER report I mentioned showed that the share of global mineral exploration spend fell from about 5% in 2004 to less than 1%. Fewer discoveries mean fewer mines, fewer investments, less infrastructure investment, and it becomes a very toxic spiral.
Wrapping up, if I'm an international investor, I'm looking at commodities. Super-cycle or not, it's exciting. Should I choose South Africa? Should I choose it over Canada and Australia? Unfortunately, here's where I don't have a good news story.
If you look at this very objectively from the outside in, for broad long-term resource exposure, I'd probably start in Canada or Australia. Simply because, for starters, they offer a much wider mix of minerals. They've got deeper project financing markets.
Both of them have their own cost and approval delays – in Canada, permitting is probably one of the biggest bottlenecks. Everyone is complaining about that. But South Africa, for me, would be a much more selective opportunity.
That’s because, despite the massive mineral endowment, you still have the choke points of rail, power, licensing. And so, as a result, if you go back to 2008, the first-time platinum prices went above $2,000 an ounce, South Africa had the mineral endowment – it was in the ground – but the ability to get the product to market (or the failure thereof) actually meant that they were unable to capitalise on the commodity super-cycle at that time, certainly not to its fullest extent. That is why execution is very important.
And what I would watch from a macro perspective, if I'm wrapping this up, to see, “Are we heading in the right direction in any of those geographies?” I would say to watch rail volumes – in South Africa, that's what I'm watching closely. Watch new exploration, how much money is going into exploration spend, and then projects actually reaching production.
Nedbank does this fantastic report where they look at fixed investment in the economy and, unfortunately, on the latest report I saw this year, it's actually come off quite sharply. So, you have to pay attention, because that investment is what will catalyse further investment. And unfortunately, South Africa's not seeing that come through.
If those indicators start to stall, South Africa might get the tailwind of current high prices and that's a windfall – you're seeing that in the trade balance; you're seeing that in the current account – but it's not building the next generation of mines. And that's kind of how I'm contextualising it.
Ghost, that brings us to what I think you want to discuss here, which is the RESI 10. What does this mean for an investor in public markets? Let's maybe focus on that. It is a listed index. What does that mean for investors? What exposures are they getting? And what does the outlook look like?
The Finance Ghost: Yeah, thanks Moe. Lots to ponder there. Before I get to the RESI 10, one thing I want to raise (and I think a lot of our listeners will know this already, but it's worth highlighting again) – there's quite a disconnect between the mining companies you can invest in on the JSE and where the underlying mines actually are. So, just because a mining house is listed here does not mean that it is mining in South Africa.
In fact, Moe, just to make that point clear, we actually have the biggest mining company in the world by market cap listed right here on the JSE, and that is BHP. And BHP has no active mining operations anymore in South Africa at all. It's really a legacy structure. They spun off South32 more than 10 years ago now, which essentially separated out these different exposures. But you can still go and invest in BHP, here, on the JSE.
Other stuff we've seen, because to your point, people look at this thematically and say, “Well, where would I invest in commodities?” A company like AngloGold, for example, is not blind to that. And even though it has so much history in South Africa, that company redomiciled and is trying to tell a story of being an offshore company and attracting a multiple accordingly.
So, the international stuff, the developed market-domiciled companies, do tend to get a better valuation than what you'll see in a South Africa-focused mine, for example, and certainly, what you'll see in the mines that are operating in Africa, which is obviously another layer of risk on top of that.
You mentioned Australia as well. That is a popular choice. Thungela did an acquisition there. Pan African Resources did an acquisition there. So, that's coal on one hand, gold on the other, and they are investing in Australia. They are trying to dilute some of that jurisdiction risk by actually going and buying international companies.
So, it really is almost this axis of these different exchanges that attract capital into mining. Australia comes up a lot. The JSE comes up a lot. And the Toronto Stock Exchange, that comes up all the time.
Mohammed Nalla: Indeed, Ghost. I want to jump in here because even the quintessential South African mining company, Anglo American, recently is in the process of doing that deal with Teck Resources, which is a Canadian firm. That emphasis of effectively moving into international capital markets for the multiple, I think you've seen that across the value chain.
But it's not just the access to the premium valuations in developed markets. It's also the fact that South Africa's relevance in this global commodities discussion has actually diminished quite substantially, which ties into those macro points I was trying to make earlier.
The Finance Ghost: Yeah, I really enjoyed that point you raised earlier, Moe, about the extent of production in South Africa today versus at the dawn of democracy, for example, and if you strip gold out, where there's been some activity there and some growth and everything else. It is very interesting and you don't necessarily see this when you just take a bird's eye view of what's available on the exchange.
So, let me get to the point that we were waiting to get to, which was around the RESI 10. I won't spend a huge amount of time on it, but I want to give you an idea here of the importance – when you think you're buying a theme and you think you're buying a particular ETF that's going to give you that theme – of actually going and doing the underlying research.
For example, the Satrix RESI would be one of the default choices. That tracks the FTSE/JSE Capped Resources 10 Index. So, what are you actually getting there? Well, the answer is that it depends very much on when you look, because this index is weighted by investable market cap and no company exceeds 30% of the index at each rebalancing date.
That tells you a couple of things. One, it means you can't own more than 30% in one company if you invest in that index. That's good in terms of diversification. But the fact that it's weighted by market cap also tells you that the weightings are going to move around a lot depending on how the valuations change.
Now, when you're looking at an ETF like the Satrix Top 40 (STX 40), for example (which tracks the FTSE/JSE Top 40), moving one company's market cap – yes, it'll make a difference to the weightings, but not a massive one. Whereas when there's only 10 stocks, if one company's market cap changes a lot relative to the others, then that will change the weightings quite a lot.
And because of the nature of the underlying index (where there's gold counters, there's PGM counters. You've got Sasol in there. You've got some copper plays and some big diversifieds), you can see these things actually change position quite dramatically. So, you actually have to be careful. You have to really look at what the current fund looks like.
I went and pulled out the July Minimum Disclosure Document (MDD). It's a little bit outdated, but it is the latest one available (they still need to release the August one). At that date, Gold Fields and AngloGold Ashanti are 42% of the index combined. Add in Harmony Gold and you're at 48% of this ETF just in gold. So, you need to be comfortable with almost half of your exposure being just in gold.
Then you've got the PGMs, so Valterra Platinum – 13%, Impala Platinum (Implats) – 6%, Northam Platinum’s almost 4%. So pure platinum, you're at nearly 23%. Sibanye-Stillwater, that's a mix of gold and platinum, basically. That's 4.5% or so. Add that all together and three quarters of the index sits in gold and platinum.
So, if you like precious metals, then great. But if you don't like precious metals, then you're not really getting a diversified play here because the remaining portion of this ETF is split across things like coal and copper. You've got Sasol in there with roughly a 5% weighting as at the end of July (that will obviously move around a lot). Go back and listen to last week's show if you want to understand much more about the drivers of Sasol's earnings and values.
And the one that you didn't hear me say there – BHP. Even though it's the largest right in the world, why is it not there? Because it's a secondary listing on the JSE, so it doesn't qualify for inclusion in this particular index.
Now, does this mean that there's something wrong with this ETF or that ETFs don't work for diversification? No, of course not. The ETF will track an index. The index rules dictate what's in there. And what's in there is going to be based on what you'll find on the market that this index is in. That's just the reality.
So, you need to do your research. Always. You need to go and read the MDD, you need to understand what's actually in there. If you're looking for diversified precious metal exposure, then great, it works. If you're looking for copper as a theme or the refining profits at Sasol, for example, then the ETF is probably not going to do what you're looking for. You'd probably have to dig in and go and pick a specific stock.
And I've got to tell you, Moe, I (more by luck than design, I think) managed to pick the winner in gold by buying Pan African Resources, because that is the gold miner that has put the most effort into growing its production – so, lots of capex, lots of new stuff came on stream. I just looked at it and thought, “Well, if I like gold in this environment, then why wouldn't I like a leveraged play on it where they're going to bring more gold to market and hopefully the prices are good?”
So again, do your research. Pan African was effectively a leveraged play on the commodity, even by mining company standards. Now it looks mildly heroic at the moment, if you look back over a few years. We'll see what happens. Obviously, if gold goes the other way, then it's a leveraged play on the way down as well. And this is what makes mining interesting and fun. So, the ETF is there, but like all ETFs, just understand what it has in it and the extent to which it actually helps you meet your objectives.
Mohammed Nalla: Ghost, I think that's fantastic. At the end of the day, it's also very important to understand, as you indicate, what's in those indices, what's in the ETFs. For me, the key takeaway is that you can invest in this ‘mining mega-theme’, ‘commodity super-theme’, whatever it might be, chasing the resources like you have, or also looking at some of the infrastructure plays.
And when you broaden your lens into the international markets rather than a slightly narrower market like South Africa, there are actually a number of ways to play that, whether that's energy, electrification, ports and so forth. So, it’s a big, interesting world out there.
I certainly think it's important for investors to understand, as we've unpacked, just what you are getting. Even if you're thinking of buying an ETF. Is it as diversified as you think it is? What's your benchmark?
If you're an institutional investor, that also becomes quite important because sometimes benchmarks are not necessarily representative of a broader subset of themes that can be invested in, in the market.
Unfortunately, that's where we have to leave the show this week. Let us know what you thought of it. Hit us up on social media.
It’s @MagicMarketsPod, @FinanceGhost and @MohammedNalla, all on X, or go find us on LinkedIn. Pop us a note on there.
Until next week – same time, same place. Thanks, and cheers.
The Finance Ghost: Ciao.
