CQS Natural Resources is a £154 million investment trust focused on global energy and mining equities. We pick the commodities we are most bullish on and the stocks we think are most attractively valued. In normal times valuations are reflective of a bullish commodity outlook, but we believe distortions in the market led by an increased focus on the environment have allowed us to find attractively priced stocks in commodities we expect to appreciate.
This is driven by several factors. Institutions have sold fossil-fuel producers owing to constraints imposed by environmental, social and governance (ESG) criteria, while banks don’t want to lend to the sector, meaning the stocks are cheap and new supply remains constrained. Similarly, sentiment for precious metals miners continues to remain weak despite gold at all-time highs. These both create attractive opportunities.
Mining stocks to add to your portfolio
NexGen Energy (Toronto: NXE) is a Canadian-listed, £3 billion uranium miner with the best undeveloped mine in the world in Canada’s Athabasca basin. Uranium is used for nuclear power, the only zero-carbon form of base-load power. Demand for atomic energy is set to grow in the West as countries realise it will be crucial to meeting carbon-reduction targets.
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This means reactors in the West will continue to see life extensions, with small modular reactors (SMRs) becoming an additional driver at the end of the decade. China continues to build 10 reactors per year, partly for energy-security purposes, supporting demand. Supply growth remains constrained given years of underinvestment in exploration and development, while long permitting timelines for uranium should also help sustain tight markets and high prices for years to come.
Australia’s Emerald Resources (Sydney: EMR), worth £1.3 billion, is a gold producer in Cambodia with an asset in Australia. Funded by cashflows from their low-cost Cambodian gold mine, the Australian project should support a rerating of the stock as well as a strong pipeline for self-funded future growth. Cambodia also offers growth potential, with some exciting new discoveries. This best-in-class management team can build new mines more rapidly and cheaply than its peers, as evidenced by the seven mines they have built previously. CEO Morgan Hart owns £74 million of stock, remaining heavily aligned with shareholders. This stock has been one of the strongest performers in the sector, but we retain our position as the company should continue to deliver healthy organic growth over the next four to five years.
Emerging markets boost demand for oil
Consider also Transocean (NYSE: RIG), a £3.5 billion US-listed offshore rig operator. We like sectors with structural supply constraints while demand is projected to improve. Offshore rigs fit the bill. No one is building new large offshore rigs, as current rigs trade at around 50% of their new-build cost, while the lead time on a new build is seven years and there is no certainty of future demand or support from banks in thrall to the ESG agenda. Demand is projected to rise as emerging markets, especially India and China, require more oil, leading to stronger investment by the oil majors.
Day rates have already increased from $100,000 per day to around $500,000 for Transocean’s high-end rigs, where the group dominates the market. But the nature of long-term contracts means this will continue to feed through as contracts roll over into newer, more expensive contracts over the next couple of years
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