COMMENTARY

- THE DELBROOK PERSPECTIVE -

September 2017 Fund Performance & Market Commentary

The Delbrook Resource Opportunities Fund (the “Fund”) posted a return of -1.4% for the month of September, compared to a 0.5% decrease in the SPDR Metals and Mining ETF, the Fund’s closest benchmark. This brings the Fund’s 2017 YTD return to +13.1% vs. a benchmark return of +6.4%.  The Fund’s long equity exposure to base metals, specifically zinc, provided the largest gains, while short exposure to bulks, specifically iron ore and lead, detracted from performance.

Entering September, the Fund has pared back gross exposure to precious metals. While we expect the space to fluctuate, we believe it will move sideways over the coming months in anticipation of a Federal Reserve rate increase in December. In addition, we believe those long gold are underestimating the risks associated with the end of Chair Yellen’s term in February 2018. Our understanding is that candidates being considered to replace her have widely varying views of current interest rate policies. The upside is that this uncertainty should create volatility in the sector over the coming months, and volatility generally creates an increasing number of opportunities, both long and short.
 
We remain bullish on the medium to long term opportunities in the copper space and have again begun to increase net long equity exposure.  At the beginning of the year, supply disruptions at the Grasberg and Escondida mines, the world’s two largest producers, dominated the copper narrative. The respective labour disputes posed a significant risk for commodity supply, which was reflected in the 16% Q1 rise in the price of copper. Looking forward we see fundamentals continuing to tighten. There is a shortage of new projects available to increase supply prior to mid-2019 and environmental restrictions will likely further limit secondary refinement capacity.

The demand side of the copper pricing dynamic also warrants discussion. Longer term, the ‘Made in China 2025 Plan,’ first announced in 2015, represents a sharp policy shift towards the promotion of the electric vehicles which cannot be ignored. The Beijing municipal government has earmarked $1.3 billion to replace 70,000 city taxicabs with electric models by 2020. Furthermore, Chinese government forecasts assumes 4.8 million charging stations will be in place by 2020, up from the 156,000 that were in place March, 2017.  We see this 3,000% increase in electric vehicle infrastructure over the next three years as a strong proxy for the eventual growth vehicles themselves. Given that an electric vehicle requires four times as much copper as a comparable hydrocarbon combustion automobile, we believe Chinese electric vehicle growth will be a significant driver of copper demand.

A more immediate price impact will likely result from changes in the secondary copper market. China is the largest importer of scrap metal in the world and imports around three million tonnes of copper scrap to supplement its copper needs. In mid-2017 China notified World Trade Organization (WTO) that it would halt the import of all metal scraps, including copper scraps, by the end of 2018 in an effort to reduce pollution. China is the world’s largest refiner of copper, as well as its largest end user (accounting for 45% of global demand), and as such any shift in expectations regarding Chinese economic growth can be expected to impact copper prices materially. ​

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









Matthew Zabloski