November Fund Performance & Market Commentary
The Delbrook Resource Opportunities Fund returned +3.4% in the month of November vs. a return of +0.9% for the SPDR S&P Metals and Mining ETF, the Fund’s closest benchmark. Year-to-date the Fund has returned +10.3%, approximately twice the performance of the benchmark, while maintaining a Sharpe ratio of approximately 1.1.
The Fund has begun to unwind its short positions within the precious metals space in anticipation of a rebound in gold prices after the US Federal Reserve meeting scheduled for December 13th. With 98.3% probability of a 25-basis point hike currently priced into the bond market, we see limited downside to precious metals equites in the short term, barring a dramatic hawkish shift in “fed-speak” – something we see as low probability given recent economic data and new Fed leadership scheduled for early 2018.
We’ve been asked recently to comment on some of our higher conviction ideas. One company we are very excited about is Barksdale (BRO-t) -- a base metals focused exploration company. BRO holds approximately 5,200 acres of land bordering Arizona Mining’s (AZ-t) Taylor deposit. Historic drilling on BRO's property identified a possible extension of the Taylor deposit, which may lead to the geologic resource. South32 (S32-asx)
recently exercising their top up right in Arizona and other majors have acquired land in the surrounding area. Therefore, we believe BRO is substantially undervalued at $35mm market capitalization. The Company will initiate a drill program in 2018 intended to confirm historic drill intercepts and further define mineralization.
Market Commentary: Bullish on Nickel
As we’ve written before, the commodity cycle for mining over the next decade will be different from the Chinese driven “super-cycle." Our recurring theme is that technological innovation will spur demand growth for certain commodities, while other commodities will be losers. As an example, this month we describe our outlook for nickel.
The global supply of nickel is currently about 2 million tonnes per year. That supply is almost evenly divided between high purity or Class I (99.98% nickel) and lower purity or so-called Class II, such as ferro nickel (15-30% nickel) or nickel pig iron (2-12% nickel).
Generic stainless-steel manufactures are currently the largest consumers of nickel at around 70% of global production. They do not require high purity nickel. In contrast, nickel used for batteries accounts for only 3% of consumption in 2017, but does require high purity nickel.
Class I nickel is mostly produced from sulphide nickel ore bodies - this represented the majority of historical nickel production up until the last ten years. The exhaustion of sulphide deposits in the early years of the "super-cycle" caused the nickel price to exceed $22 per pound.