Market Commentary - Metals Team, May 2021

17 June 2021

Posted by Mark Smith on 17th June 2021

The Amati Strategic Metals Fund (‘ASMF’) was up in May largely driven by a positive bounce in the precious metals and specialty metal stocks held in the fund.

Fund strategy and methodology

We continue to structure the portfolio and add to our investments to reach target weightings, as inflows into our fund continue on a daily basis.  We have added to all our investment positions and introduced 8 new investments in lithium, graphite, rare earths, nickel and precious metals. The focus for our specialty metal investments was to ensure the companies had an integrated business model from mine to market, entering into joint ventures with battery manufacturers and had signed offtake agreements.  Two examples are Talga Group Ltd (with the world’s highest grade graphite deposit in Sweden and a graphite/graphene R&D test facility in Germany); and Sigma Lithium Resources (with a hard rock lithium project in Brazil and strategic backing with Mitsui).  With 37 investments the fund has room for 3-4 more strategic investments. We continue to adopt a disciplined approach to investing in the base metal sector choosing to wait for a correction in the copper market, before deploying capital in this sector.

During the month, we witnessed heightened political uncertainty in Chile, Peru and Tanzania, as well as the threat of higher mining taxes in Nevada and the proposed imposition of global OECD taxation changes, which will have a major impact on the streaming companies, such as Wheaton Precious Metals. The potential negative impact of geopolitical developments and fiscal changes, once again, highlights the need to carefully balance the risk profile of any resource fund.  The Fund is exposure to Chile, Peru and Tanzania with the exposure maintained below 3% for each country.


Chile held a Constitutional Assembly election which fragmented Chile's political establishment, with the dominant parties over recent decades receiving only 40% of the total vote. There was a clear public shift towards candidates proposing significant changes, including the far left achieving veto power with over 1/3 of seats. However, with a complex legal framework and no clarity on board election, the new constitution won't be put to public referendum until mid-next year, and given the fragmentation of the assembly there may be several rounds to this process.  The recent copper price rise has accelerated discussion around a sliding scale royalty for miners, which would equate to an effective royalty rate of 30% at current copper prices. More recently, unions in the copper industry have given the new royalty bill their blessing. While this has passed through the Lower House, under Chilean law only the office of the President can create or modify taxes. Thus, President Pinera could veto the bill, but this would prove politically challenging. We expect the Senate will take a more rational approach to royalties, though the sliding scale on copper price could be maintained. Meanwhile, we expect the current tax stability agreements with individual operations will be honoured.


At the time of writing, the final outcome of the Peruvian election, held on June 6, had not been decided. With 98.5% of votes counted for the Peru presidential election, Pedro Castillo maintained a slim margin of 50.2% of votes over Keiko Fujimori with 49.8% of votes. In the months ahead of the elections, the far-left-leaning Castillo had a 10-15% lead over Fujimori in the opinion polls. It appears that voters were frightened by some of the radical policies that Castillo initially proposed, which resulted in voters swaying more towards the equally unpopular Fujimori. However, it seems very likely that Castillo will be sworn in as the new President of Peru.

Given how close the vote is, there is a strong likelihood that the election will be contested, leading to further delays to Policy certainty. On the positive side for investors, the very sharp divisions in the Peruvian government, and the fact that Castillo’s party will only hold 37 seats in a congress of 130 seats, will make it difficult for Castillo to effect drastic changes to the country’s laws or constitution. We note that when Ollanta Humala was elected President in 2011, he was advocating for radical socialist measures, but in the end, worked well with the mining industry. A similar outcome could happen with Castillo, who recognizes the importance of the mining industry to the country (currently at ~10% of GDP). 

Indeed, our observations are that, in the weeks preceding the elections, Castillo already started to take a more centralist viewpoint with regards to proposed policies with more pragmatic advisors replacing the more radical initial advisors. Although, he is regarded as anti-mining, he recently dispelled all fears about nationalization, preferring to increase taxes and royalties. His priority remains job creation, addressing the national debt and respecting the independence of the central bank.

It is highly likely that investors’ concerns about policy changes will subside over the next couple of months. While taxes are expected to be increased (they are already high in Peru), the mining industry will not be affected in such a way that mines will no longer operate, especially given the strong revenues that the State is currently receiving from the mining industry. 

At the launch of the Fund in March, we identified Hochschild as one of best value mining stocks available. The company has all the attributes that we look for in mining companies – great value (0.80x NAV), diversification of assets with three operating mines with cash operating margins of 50%+, an exciting rare earth project and an option to majority own a very exciting exploration asset in Canada. The company is free cash flowing (~£70-80m) with the major capital expenditure behind them. The attraction lies in the exploration tenements that the company owns exploration rights to, which have the potential to add significant value for shareholders. It is also primarily a silver producer – a metal that we are particularly fond of. 

The uncertainty surrounding the election led us to adopt a cautious stance towards investing in Hochschild, limiting the Fund’s exposure to the company well below our target weighting. As we get greater certainty with regards to the new policies to be adopted in Peru, it is highly likely that we will add to this position. The valuation discrepancy between Hochschild (and Fresnillo, to a certain extent) and globally-listed primary silver producers is at an extreme suggesting that the uncertainty in Peru is more than discounted in the current share price. It is interesting to note that the share prices of the North American mining companies with significant exposure to Peru were hardly impacted by developments in Peru (Exhibit 1) leading us to conclude that the recent weakness in the share price is driven largely by the UK retail market with institutions sitting back and waiting for greater clarity.


With the death of John Magufuli (61) on 17 March 2021, Samia Suluhu Hassan was appointed the new President on 19 March 2021, and is Africa’s only current female national leader.  She is focused on ending corruption in Tanzania and opening up the country for international business. In her acceptance speech, she 

  • Announced plans to appoint a panel of experts to advise the government on a science-based approach to curb the spread of the coronavirus
  • Requested the newly appointed Foreign Affairs Minister to establish and promote relations with foreign countries
  • Directed the Tanzania Revenue Authority to stop frustrating businesses
  • Ordered review of regulations and taxes related to foreign investment and urged officials to "work hard to regain the trust of international business"

The new president was taken very well by the market and our investments in Tanzania were up strongly.