Since launching the Baring Global Mining Fund on 29th February we have positioned the Fund to capitalise on a number of powerful investment themes.
One of these is continuing demand for precious metals such as gold bullion as investors continue to be attracted to gold's diversification benefits and perceived "safe haven" status.
One of the features of the Fund is that we are able to gain exposure to gold and other commodities through exchange traded funds (ETFs). This has been positive during a period where the underlying commodity has generally outperformed gold-related equities.
We also maintain selected exposure to gold stocks which we believe are well placed to deliver positive earnings surprise over the next 12-18 months. Canada-listed Banro Corporation is an example of one such holding and we expect performance to be driven by the growth of its gold projects in a mining friendly district of the Democratic Republic of the Congo.
Source: Barings, Factset, as at 2nd April 2012.
Like gold, diamonds also benefit from constrained supply and rising demand, particularly in Asia where disposable income is growing and aspirations are high. While diamond miners can often disappoint in terms of production growth, we have conducted our due diligence carefully and believe it is possible to find some attractive bottom-up investment ideas here. South Africa-based Petra Diamonds is a company which is delivering industry-leading production growth with a management team that has a track record of successfully modernising and expanding resource-rich mines across southern Africa.
Elsewhere in precious metals, we are also positive on the investment case for platinum and palladium as both metals are key components of catalytic convertors and beneficiaries of rising global automobile sales. However, risk management is an integral part of our investment process and we currently prefer to take exposure to the underlying commodities through ETFs as we are mindful that a number of miners are exposed to significant political and country-specific risk in Eastern Europe and parts of Africa.
A second theme in the Fund is our positive view on base metals such as copper and iron ore. China's insatiable appetite for commodities remains a key driver of metals demand and these are areas where China and other emerging markets are structurally in deficit. We still expect relatively robust growth in China over 2012, with positive implications for base metals demand and corporate profitability in the sector.
In addition to large diversified miners such as Rio Tinto and Xstrata, the Fund also has significant exposure to smaller commodity companies, where analyst coverage tends to be relatively limited. We believe significant alpha can be generated for investors in small and mid-cap miners through our experience and expertise in resources investing.
US-based Duluth Metals is a case in point and we are encouraged by the results of a recent feasibility study which confirmed the scope of its joint venture project with Antofagasta, which is located in one of the world's largest undeveloped repositories of base metals in Minnesota. Having visited the site and met with management last year, we are very positive on the outlook for growth and the stock is now a key holding for the Fund.
While global equity markets endured a difficult 2011, we are encouraged by the recent improvement in investor sentiment over the first quarter of 2012 and we expect markets to perform better from here. For mining companies, a backdrop of rising demand and constrained supply continues to underpin the longer-term investment case, while an environment of low interest rates and abundant liquidity should support the short-term outlook for commodities and other real assets, in our view.
Clive Burstow
Investment Manager, Baring Global Mining Fund
Baring Asset Management, London
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