Resources equities – June 2011 An attractive way to play the commodity super cycle For professional investors or advisers only Sam Catalano Portfolio Manager, Global Resources Equities Gavin Marriott Product Manager, Global and International Equities
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Resources equities – June 2011 An attractive way to play the commodity super cycle For professional investors or advisers only Sam Catalano Portfolio Manager,
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Resources equities –
June 2011
An attractive way to play the commodity super cycle
For professional investors or advisers only
Sam Catalano
Portfolio Manager, Global Resources Equities
Gavin Marriott
Product Manager, Global and International Equities
2
Investing to maximise returnsLife in the New Normal
What is the New Normal
– Changes to the fundamental structure of the global economy
– An era of shifting geo-political power and influence
Implications for investors
– An era of lower returns on stocks and bonds
– Challenge to pre-conceived wisdom which will require investors to think differently
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-
The drivers of structural growthOften referenced but rarely understood
Structural growth drivers
The Facts – Global population grows from 6 to 9 billion people in 2050
– 98% of the population growth comes from developing markets
– Ageing:16% of population over 60 years old by 2050. Japan population half in 2100
– “New industrial revolution”
– Scientific evidence now substantial and driving public policy
– Emissions per unit GDP need to be 25% of current levels by 2050 to avert disaster
– Will require $20,000bn investment in energy infrastructure by 2030
– Increasing importance of Emerging Markets in global economy, with Emerging Markets now accounting for 1/3 of global GDP
– Globally infrastructure needs until 2030 are estimated at $32 trillion for transport, energy, water and communications infrastructure
Climate change Demographics Super cycle
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Super cycle drives resource consumptionIndustrialization and urbanization see growth rise by 50% by 2030
0.92.0
4.5
7.1
10.6
15.0
25.1
0
5
10
15
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25
30
India China Brazil Russia UK Japan USA
Per capita oil consumption
Energy consumption in Developing Markets only set to rise2
Actual Copper Price Forecast June-09Forcast Apr-05 Forecast Feb-06Forecast Mar-10
Source: Schroders
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0
200
400
600
800
1,000
1,200
1,400
Mar 10 May 10 Jul 10 Sep 10 Nov 10
100
150
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This year
Identify growth gapPoor broker forecasts – Stock example
Walter Energy WLT
– Adverse weather affecting a number of regions & starting to have significant effect on supply
– Floods in Queensland have major impact on coking & thermal coal supplies. The state supplies two thirds of the world’s coking coal and 8% of the world’s thermal coal
– Approximately 75% of Queensland mines are not operating because of flooding
– In 2008, flooding reduced coal production by roughly 8-10 million tonnes. The recent flood appears to be worse. Market slow to recognise the impact of unseasonal weather & price forecasts for coking coal fail to keep pace with deteriorating supply outlook
For illustrative purposes only and not a recommendation to buy or sell sharesSource: Datastream, USD, 31 December 2010, Australian Bureau of Meteorology (Comet Post Office Station)
Market slow to anticipate supply constraintsRainfall Accumulation (mm)
Rainfall Accumulation (mm) RHS
♦♦♦
♦
2011 consensus forecasts for Hard Coking Coal♦
Coking Coal Price in USD LHS
Current Coking Coal Price (Jan 2011)♦
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Identify growth gapThe inefficiencies we look to exploit – Market’s failure to fully appraise the asset base
– Market lacks insight into the bottom-up operational characteristics of different mining projects to value these projects appropriately
– We believe that better insight about the geological certainty and feasibility of economic recovery allows us to ascribe a more accurate value to a company’s assets
– Detailed cash flow forecasting at an individual asset level allows us to identify mis-priced securities
Source : British Geological Survey, Natural Environment Research Council
RESOURCES
RESERVES
Degree of geological certainty
Fe
asi
bili
ty o
f e
con
om
ic r
eco
very
incre
asing
“acc
essib
ility”
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0
25
50
75
100
125
150
Dec-07
Apr-08
Aug-08
Dec-08
Apr-09
Aug-09
Dec-09
Apr-10
Aug-10
Dec-10
Apr-11
First Quantum Share Price
Identify growth gapMarket’s failure to fully appraise the asset base – Stock example
For illustrative purposes only and not a recommendation to buy or sell sharesSource: Schroders, Nomura, Datastream, USD, 15 April 2011
First Quantum – Share price performance in USDFirst Quantum FQM.L
– Shares suffer from negative sentiment over the potential (now realised) loss of assets in DRC
– Ascribing zero value to all of First Quantum’s DRC assets, shares appear attractive relative to peer group and on sum of the parts valuation
– Market fails to recognise the value in Ravensthorpe and attach low probability of project being delivered successfully
Negative sentiment over DRC
- Ravensthorpe acquired by FQM in 2009 from BHP- BHP sold the project in light of rising capex and complex geology. BHP
had spent c US$3bn - FQM secure the asset for US$340m with capex budget of US$190m- FQM believes it can deliver project with capex budget of US$190m due to
its in-house engineering expertise, which is one of the key strengths of the company
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Global Resources – Near term outlookShort term positive – Waiting for the Chinese Rebound
– Strong restock in China expected Q2 2011. Significant destocking seen through 2010
– Commodity prices have remained at historically elevated levels (and in some cases record levels), despite mass Chinese destocking during 2010 and with anaemic demand in the developed world
– Western world (specifically US) recovery has been largely ex-construction based to date. Lead indicators suggest this might be turning
Supply
– Supply side will continue to disappoint. Supply disruption risk remains – there is limited flexibility in the supply chain
Valuation
– Sentiment has been very weak in recent months given caution over MENA activity and Chinese tightening activity
– We stick to the fundamentals. When sentiment turns, significant upside for many resources equities. We are well positioned
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0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
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1,600,000
1,800,000
2,000,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2008 2009 2010
Chinese end-use in 2010 has been strong
Source: Macquarie Research, March 2011
Record prices for Copper in 2010…what could a Chinese restock bring?
OPEC & Non-OPEC production EIA Form-914 supply survey Lower 48 USA bcf/d, wet gas
53.0
55.0
57.0
59.0
61.0
63.0
65.0
67.0
Jan-
08M
ar-0
8M
ay-0
8Ju
l-08
Sep
-08
No
v-0
8Ja
n-09
Mar
-09
May
-09
Jul-
09S
ep-0
9N
ov
-09
Jan-
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ar-1
0M
ay-1
0Ju
l-10
Sep
-10
No
v-1
0Ja
n-11
bcf/d
%bcf/d
Energy supply
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Energy supplyAmple scope for supply-side disruption
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Energy equity valuationsCheaper to buy than drill
Finding & Development F&D costs Super 6 Integrated Oil Companies2000-2008$/bl
Ultra Petroleum
EV / BOE $/bl
Quicksilver Resources
EV / BOE $/bl
Source: Company reports, Schroder estimates
0.00
5.00
10.00
15.00
20.00
25.00
30.00
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
f
0.00
5.00
10.00
15.00
20.00
25.00
30.00
Jan
-04
Jul-
04
Feb
-05
Sep
-05
Mar
-06
Oct
-06
May
-07
No
v-07
Jun
-08
Jan
-09
Jul-
09
Feb
-10
Sep
-10
Mar
-11
EV / Bbl $+2 Std Dev-2 Std Dev
0.00
5.00
10.00
15.00
20.00
25.00
30.00
Jan
-04
Jul-
04
Feb
-05
Sep
-05
Mar
-06
Oct
-06
May
-07
No
v-07
Jun
-08
Jan
-09
Jul-
09
Feb
-10
Sep
-10
Mar
-11
EV / Bbl $+2 Std Dev-2 Std Dev
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NameUpside Risked
1 Stock 1 365%
2 Stock 2 326%
3 Stock 3 288%
4 Stock 4 287%
5 Stock 5 278%
6 Stock 6 260%
7 Stock 7 256%
8 Stock 8 177%
9 Stock 9 146%
10 Stock 10 144%
Current positions % Upside
Schroder ISF Global Smallcap EnergyRisked upside to target prices ~69% average (June 7th 2011)
Source: SchrodersPast performance is not a guide to future performance and may not be repeated. Investors may not get back the full amount invested, as price of shares and the income from them may fall as well as rise
NameUpside Risked
11 Stock 11 137%
12 Stock 12 120%
13 Stock 13 106%
14 Stock 14 94%
15 Stock 15 92%
16 Stock 16 88%
17 Stock 17 86%
18 Stock 18 83%
19 Stock 19 72%
20 Stock 20 61%
NameUpside Risked
21 Stock 21 60%
22 Stock 22 57%
23 Stock 23 57%
24 Stock 24 54%
25 Stock 25 54%
26 Stock 26 53%
27 Stock 27 52%
28 Stock 28 50%
29 Stock 29 48%
30 Stock 30 41%
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Why Schroders for Resources and Energy?
Source: Morningstar Micropal, Offshore and International Funds, Sector Energy. Returns are in USD . As at 30 April 2011
Experienced team – distinctive approach
1st Quartile 2nd Quartile
3rd Quartile 4th Quartile
Schroder ISF Energy Fund
– Schroders voted top 3 team in Europe in 2005, 2006 & 2007 Extel surveys
– Schroders rated World Junior Oil & Gas Investor of the Year 2008
– Citywire A rating as at January 31st 2010
– 2010 Lipper awards Spain, Taiwan, Hong Kong and Gulf Region
– “Best Equity Sector Natural Resources Fund over 3 Years” 10
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35
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45
50
Peer Group Ranking relative to Peer Group universe 5 year to 30 April 2011
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Performance credentialsBuilding on Schroders’ proven capability in commodities & energy equities
0
10
20
30
40
50
3 months 6 months Since Inception**
Schroder ISF Global Resources Equity Benchmark***
%
Global Resources EquitiesPeriods to 31 May 2011 in USD
3 Months(%)
6 Months (%)
Since Inception** (%)
Schroder ISF Global Resources Equity * +2.0 +17.4 +39.6
Benchmark*** +0.3 +16.3 +34.6
Relative +1.7 +1.1 +5.0
Performance shown is past performance. Past performance is not a guide to future performance. The value of investment can go down as well as up and is not guaranteed. *Schroder ISF Global Resources Equity Fund. Acc C-class, Based on bid to bid prices, net income reinvested. ** Inception 17 May 2010. ***MSCI AC World 35% Energy and 65% Materials. Fund is benchmark unconstrained and that the benchmark is shown for performance comparison.
Periods to 31 May 2011 in USD
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Performance credentialsBuilding on Schroders’ proven capability in energy equities
-10
0
10
20
30
40
1 Year 3 Years 5 Years S.I.
SISF Global Energy Fund MSCI World Energy
%
Global EnergyPeriods to 31 May 2011 in USD
1 Year(%)
3 Years (%)
5 Years (%)
S.I. (%)
Schroder ISF Global Energy*
+38.4 -5.2 +8.8 +9.5
MSCI World Energy
+39.8 -3.7 +6.3 +6.1
Relative -1.4 -1.5 +2.5 +3.4
Performance shown is past performance. Past performance is not a guide to future performance. The value of investment can go down as well as up and is not guaranteed. *Schroder ISF Global Energy Fund. C-class, Based on bid to bid prices, net income reinvested. Inception 30 June 2006. Periods over 1 year are annualised.
Periods to 31 May 2011 in USD
-15
-5
5
15
25
35
6 Months S.I.
SISF Global Small Cap Energy MSCI World Energy
Global Small Cap EnergyPeriods to 31 May 2011 in USD
6 Month (%)
S.I. (%p.a.)
Schroder ISF Global Small Cap Energy*
+6.7 +29.5
MSCI World Energy +22.3 +33.7
Relative -15.6 -4.2
Performance shown is past performance. Past performance is not a guide to future performance. The value of investment can go down as well as up and is not guaranteed. *Schroder ISF Global Energy Small Cap Fund. C-class, Based on bid to bid prices, net income reinvested. Inception 17 May 2010. Periods over 1 year are annualised.
Periods to 31 May 2011 in USD%
30
Investing to maximise returnsConclusion
– Structural growth increases certainty of long term returns
– Resources are key beneficiaries of structural growth drivers
– Resource related equities are an attractive way to exploit the opportunities
– Strong argument for making a strategic allocation
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Important information
Risk warning: Investments in equities are subject to market risk and, potentially, to currency exchange rate risk. This fund may use financial derivative instruments as a part of the investment process. This may increase the fund’s price volatility by amplifying market events.
Important Information: This presentation does not constitute an offer to anyone, or a solicitation by anyone, to subscribe for shares of Schroder International Selection Fund (the “Company”). Nothing in this presentation should be construed as advice and is therefore not a recommendation to buy or sell shares.
Subscriptions for shares of the Company can only be made on the basis of its latest prospectus together with the latest audited annual report (and subsequent unaudited semi-annual report, if published), copies of which can be obtained, free of charge, from Schroder Investment Management (Luxembourg) S.A.
An investment in the Company entails risks, which are fully described in the prospectus.
Past performance is not a reliable indicator of future results, prices of shares and the income from them may fall as well as rise and investors may not get the amount originally invested.
Third party data is owned or licensed by the data provider and may not be reproduced or extracted and used for any other purpose without the data provider's consent. Third party data is provided without any warranties of any kind. The data provider and issuer of the document shall have no liability in connection with the third party data. The Prospectus and/or www.schroders.com contains additional disclaimers which apply to the third party data.
This presentation is issued by Schroder Investment Management Limited, 31, Gresham Street, EC2V 7QA, who is authorised and regulated by the Financial Services Authority. For your security, all telephone calls are recorded.