Resource nationalism is an investment killer

There are deals to be found in natural resource equities but investors need to remain vigilant against market fluctuations and political interference, says Dylan Fricker of Mackenzie Investments.

The vice-president and portfolio manager said commodities investors need to be especially on guard for geopolitical risk.

“Resource nationalism is an issue,” he said. “Be careful about where you’re putting your investment dollars, because sometimes the country in question is as important as the assets in question, if not more.”

Fricker suggested investors lean toward companies where unreasonable political action is less likely.

“For example, maybe you buy [Toronto-based] Agnico Eagle if you want gold exposure, as opposed to some African mining company that you’re not familiar with,” he said. “Just kind of keep that in the back your head.”

He said it is not unheard of for some governments to cash in when commodity prices spike.

“All of a sudden those host governments are like, ‘Huh! These guys are making a lot of money. I think we want more of that for ourselves and less to the investors that are mining it,’” he said. “So sometimes you can be absolutely right in your commodity call and absolutely wrong in terms of the equity you picked because it’s simply in the wrong location.”

And it is not just government greed that can throw successful investments into jeopardy. Heavy-handed courts and truncated dispute resolution can also destroy profits overnight.

He offered Cobre Panama in Colon Province of Panama as a case study, where copper mining operations were halted by Panama’s Supreme Court after protests over environmental concerns. And in Guatemala, significant production of silver, gold and other metals was suddenly suspended at a contentious mine owned by Pan American Silver due to widespread public opposition and accusations of land rights violations.

“Caveat emptor, in terms of where you’re putting your investment dollars,” he said.

Another danger for commodities investors is to get too comfortable when prices are favourable, ignoring the fact that prices and market conditions can quickly change.

“I always tell people to try and stay reasonably diversified,” he said. “It’s tempting when one sector is doing extremely well to get overinvested, whether you realize it or not. But I’ve also seen the downside case, when that one sector becomes not so well performing and people have regret. And they forgot to take profits or sell when they should have.”

Fricker said the outlook for energy transition metals, such as copper and nickel, is positive. Lithium, however, should raise some caution flags, he said, as battery technology appears to be moving away from lithium.

“It’s not inconceivable that in a few years, lithium batteries are kind of like lead acid batteries today. They’re obsolete or on their way out,” he said. “I’ve done enough reading to suggest that you might not want to put your net worth into a lithium mine because it could turn out a lot different than you might think.”

Fricker is also cautious of oil, as the outlook for oil pricing has deteriorated in the face of geopolitical events and U.S. tariffs.

“The futures market moved pretty quickly to say that the outlook for oil is probably going to deteriorate,” he said.

On the natural gas side, while the North American market currently appears oversupplied, prospects are good long-term.

“It’s pretty hard to argue that gas won’t be important in the energy transition picture,” he said. “And that’s a good story as it relates to Canada. Canada has some of the best gas assets in the world.”

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.