August 2017 Fund Performance & Market Commentary

The Delbrook Resource Opportunities Fund (the “Fund”) returned 6.7% in the month of August versus the SPDR S&P Metals and Mining ETF, the Fund’s closest benchmark, which increased +3.0%. This brings the Fund’s 2017 YTD return to 14.8%. 

The Fund’s allocation of capital within the commodity complex shifted during the month, reflecting our decision to take profit on select positions, most initiated earlier this year. Specifically, the Fund reduced its net long exposure to precious metals and further increased net long exposure to base metals, specifically zinc and copper. While our thesis on precious metals continues to benefit returns we believe a strategic shift in allocation will benefit unitholders given the “perfect storm” brewing in both the zinc and copper complex. As expressed in previous letters, we are expecting greater than forecast demand for both commodities. Combined with declining supply (the result of years of underinvestment in exploration) zinc and copper are both well positioned for significant price appreciation. We explore the investment cycle in more detail below.

Marketing Commentary: “What can be learned from the capex cycle?”

Capex spending trends in the mining sector are one of the best leading contrarian indicators for commodity price performance. During the past four years we have observed lower year over year levels of capex and exploration spending as mining companies have focused on balance sheet repair.

All mines are depleting assets. The industry requires continuous exploration and development efforts in order to maintain current levels of production. Therefore, we believe that a meaningful capacity gap is emerging in the development pipeline for select commodities. The net result will be a tightening of supply profiles over the next few years for our favored commodities: copper, zinc and gold. Should demand growth for these commodities increase even marginally ahead of consensus forecasts, the consequence will be meaningfully higher selling prices.

Capital expenditures in the mining industry were approximately $60 billion in 2016, down from a peak of over $140 billion in 2012. This was the lowest level of capex spending since 2007. It reflected a new found discipline by mining companies to utilize cash flow from operations to pay down debt and return capital to shareholders.

As always, please contact our office at 604.229.1450 with any questions you might have.

Matthew Zabloski