High rand price of PGM basket poses greater risk for investment
Investors likely to be tempted by the current prices, yet commodity producers are price takers and cannot be relied on to grow profits ahead of the market over long periods
In 2018 mining shares were one of the few places to hide, offering the only double-digit returns in the FTSE/JSE Top 40 Index. Yet we have been reducing exposure to this sector, with mining shares now comprising less than 8% of the PSG Equity Fund, compared to 14% early in 2016. Our most recent sale was Anglo American Platinum (Amplats), which we’d held since 2017. Generally, companies that produce commodities are price takers. Accordingly, their profits are largely unpredictable as they are dependent on global economic factors and the range of possible outcomes is wide. These companies also cannot be relied on to grow profits ahead of the market over long periods. We call such businesses “mean-reverters”, and our investment decisions relating to these businesses must factor in the unpredictability of future profit streams. Management teams in the sector have generally shown a tendency to build mines and buy competitors when prices are high and sit on their hands when prices are lo...
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