Alma Recurrent Global Natural Resources Fund

Market Review and Outlook

In our recent white paper, titled “The Great Inflation Misdiagnosis”, we outlined that rising rates may help to reduce inflation temporarily. However, in order to secularly reduce inflation, we must increase supply via CAPEX in commodity related sectors. In our proprietary analysis of 60+ years of data, we highlight that while the Fed and Paul Volcker receive credit for increasing rates to reduce inflation in the late 1970s, in fact it was a doubling of energy CAPEX during the 4 years of the Volcker Fed which played a large yet unsung role.
In recent quarters, CAPEX has played an increasingly prominent role in investors’ minds. In the past, high commodity prices would elicit calls for increased CAPEX, but today, investors increasingly prefer companies to return excess cash to shareholders. In fact, within 2022, many commonly found commodity prices have reached previous highs

With all of these commodities at peak levels, the profitability of the sector is higher than ever before. As a proxy for spending in the mining industry, we looked at adjusted EBITDA for Rio Tinto, Anglo American, BHP Billiton, and Glencore. Compared to the previous peaks, in 2021 adjusted EBITDA for these four companies is an average of 43% higher. Since the Russia/Ukraine conflict began in 1Q 2022, there is a higher likelihood of the group’s strong profitability continuing rather than peaking.

In the context of our recent white paper, the combination of high commodity prices and strong profitability would historically have been an environment where CAPEX would rise, in an attempt to use strong current cash flows to capitalize on the favorable commodity environment. However, in the current environment, CAPEX remains remarkably constrained for the same four companies.

While 2021 CAPEX was significantly below historical peaks, recent 2022 mid-year earnings call commentaries from major mining companies showed further capital constraint. Rio Tinto reduced 2022 CAPEX guidance by 7%! While Rio Tinto’s 2023/2024 CAPEX guidance is 20% higher than 2022, 2023/2024 levels remain 40% below previous peaks. Glencore and Anglo American maintained their prior CAPEX guidance; in Glencore’s case some 42% below previous peaks. BHP Billiton will announce its capital plans next week. Capital discipline remains a key focus for management teams, which is good for shareholders, but limits future supplies of key natural resources needed for the economy today, and the energy transition going forward. As we outlined in our white paper, secular declines in inflation occur after periods of significant commodity CAPEX. At current levels, despite generating peak profits, the major mining companies are maintaining their capital discipline. Without growth in future commodity supplies, the likelihood of persistently high inflation increases.

Fund

During the month of July 2022, the Alma Recurrent Global Natural Resources Fund rose by 4.25%, outperforming the S&P Global Natural Resources Index’s 3.52% return. During the month, stock selection in the oil and gas infrastructure and steel sectors added value to performance, as did sector overweights in the aluminum and copper sectors. Stock selection in the gold and paper products sectors detracted from relative performance.