While the world has undoubtedly pivoted towards embracing renewable energy and will slowly reduce our reliance on fossil fuels, there are still short- to medium-term opportunities in the energy and PGM space for investors who can identify mispriced assets. 

Global demand for energy outstripping supply 

The pressures of ESG on fossil fuel companies and the current recovery in energy demand has created some attractive investment opportunities for investors. We believe that, notwithstanding the global transition towards green energy, prices of fossil fuels are likely to remain high in the short term, as demand remains sticky and is not offset by any new supply. A significant factor contributing to this is the unpredictable supply of green energy and the increasing demand for base-load power generation globally. This has resulted in many Western and Eastern countries incentivising higher coal production in the short term to meet the demand for their winter base-load requirements. 

The reluctance of investors and financial institutions to invest in the production of fossil fuels means that current supply is unable to keep pace with demand, further pushing up prices. 

In addition, we haven’t yet seen the full recovery of jet fuel demand post the Covid pandemic. 

Globally thermal coal prices have risen to near-record levels. Some of the separately listed-coal assets have proven to be extremely lucrative investments. 

Truffle invested in Thungela after it was it was unbundled from Anglo American and has seen the share price triple. Truffle remains positive on Glencore given its mix of commodities and exposure to green metals. Demand for these metals will be supported as the world transitions towards Electric Vehicles (EVs) and more sustainable energy supply. 

Still positive on PGM investments 

This scenario is similarly reflected in the Platinum Group Metals (PGM) space. Although there is currently a reluctance of supply due to concerns about the reduction in long-term demand for these metals due to the move towards EVs, we believe that there is a window of opportunity for PGMs in the interim. 

The journey to more sustainable commodities will not be without volatility. We, therefore, still have a healthy weighting of PGMs in the portfolio as they stand to benefit from the strong demand of ICE vehicles (internal combustion engine) until such time as auto manufactures can transition their drivetrains to EV’s. ICE vehicle demand in Emerging Markets is expected to remain strong for much longer than in developed markets given the size of the infrastructure costs. 

The infrastructure required to support EVs will take some time, which leaves many of these PGM companies to continue to supply into a market that should remain fairly tight with robust demand over the next few years. 

Generally, commodity company valuations look good and businesses in this space have much healthier balance sheets vs. previous cycles. Truffle continues to hold positions in Anglo American, Glencore, African Rainbow Minerals, Sasol, BP plc, Shell plc and various PGM companies.