Mineral & Financial Invest. Limited
MINERAL & FINANCIAL INVESTMENTS LIMITED
("M&FI"; "Mineral & Financial" or the "Company")
Final Results for the twelve months ended 31 December 2013
Chairman's Statement
I am pleased to present the results of your Company for the year ended 31 December 2013.
This has been a quietly eventful year for Mineral and Financial Investments. We completed our first full year as "Mineral and Financial Investments" (M&FI). The name change marks and defines what we are and will be in the future. M&FI will be focused on financing, investing in and advising junior mining and exploration companies for the benefit of our shareholders. We additionally recapitalized the company and had some important changes in our shareholder base. Some large shareholders from our previous "life" have left us and new ones who understand and appreciate the direction M&FI is taking have joined our ranks.
M&FI is a Company that invests in commodities, the building blocks of basic human civilisation and our team spends significant amounts of time examining the macro-economic factors that affect demand for raw materials, in addition to analysing individual companies and their managements.
I would like to start this update with some observations on global economic activity, which continues to follow a slow but positive trend upwards. The International Monetary Fund has just scaled back its forecast for world economic growth this year to 3.6%, from January's 3.7%. The IMF predicts that a strong recovery in the U.S. will drive growth, but that a cooling off of emerging-market expansion and weakness in Japan will hamper that. It is also becoming evident that the United Kingdom and Iceland's, to name but just two examples, commitment to a path of measured austerity is resulting in a broader and stronger economic recovery than the IMF and World Bank had expected.
Interest rates may rise in 2015, as indicated by the new Federal Reserve Chair and echoed by the new head of the Bank of England. In advance of this, we are seeing some economies breaking ranks with the vast majority of Central Banks by suddenly increasing their interest rates. We have seen sudden rate rises in Turkey where, in January, overnight interest rates rose from 7.75% to 12% and in Brazil where the Central Bank increased the benchmark Selic rate for the 9th consecutive time to 11%.
I believe that competition for international capital is beginning to heat up because central bankers of non G-7 economies afford to not to have rates at levels that attract global bond investors. This is on the assumption that more rapidly growing economies require more capital to achieve their needed objectives. We believe that a growing number of economies will increase their interest rates in 2014. This will negatively impact bond markets. But it should improve the ability of the economies in question to attract capital, which will fuel their economic activity and, should improve demand for commodities.
Commodity prices have felt the recent chill of a slight slowing of emerging economies, none the more discussed than China's slowed progress. According to official data the Chinese economy will grow by about 7.5% in 2014 off a GDP base which is more than double what it was when China was growing by more than 12% per annum. The composition of Chinese growth has changed, but the quantum of new demand originating from China has changed very little. In the short term (0 to 12 months) we broadly prefer precious metals, while in the mid-term (12 to 36 months) we prefer base metals, notably zinc.
In the short to medium term we continue to stay away from bulk commodities such as iron ore and coking coal. These are the economic building blocks for "Frontier Markets" stepping up to becoming "Emerging Markets" and the development of "Emerging Markets" into "Developed Markets". Additionally, the development of these types of commodities typically requires far larger amounts of capital than we can prudently consider investing to be of utility and relevance to the investee companies.
Equity markets have experienced a rise, which we believe is largely based off artificially suppressed interest rates. When rates do begin to rise in some of these economies, equity markets are likely to experience corrections.
Our tactical investment portfolio continues to improve in structure, composition and value. Ultimately, the tactical portfolio will be composed of liquid investment grade commodities, securities and companies. At times the tactical portfolio will be "mining heavy", if we believe that we are underinvested in the sector to generate investment returns for our shareholders. However, as we develop our strategic portfolio of mining investments, the purpose of the tactical portfolio will be to protect and diversify our assets to ensure our liquidity and returns when the mining sector is in a corrective phase.
Our intention is to finance and invest in good mineral assets. If the mineral asset is mediocre, the investment will likely forever be a struggle. Whereas, we believe the other problems afflicting most junior companies today, such as insufficient capital and or management are correctible situations.
When assessing investment assets our team has a defined approach to resources investment, based on experience, cooperation and discipline. We will evaluate many elements of a given company such as: management; asset quality; probable funding needs; logistics; timelines; infrastructure; possible environmental and permitting issues in the context of the expected economic framework mentioned above.
We believe fiscal 2014 will be a far more visibly active year for M&FI, as we consider our first strategic investments. Once we have determined that a mineral asset is attractive we will most likely negotiate our investment privately, as would a private equity fund, and inject capital into the company on a conditional basis, most likely to include board representation and a right of first refusal on advisory work. Ideally our investment stake will represent between 5% and 20% of the investee company, which would allow us the manoeuvring room to make follow-on investments and /or financing solutions to the company.
Moreover we continue to be in discussion with our legacy investment companies. Our guiding principle with our capital is to protect it from avoidable risks, ensure liquidity, and paramount - preserve our capital. Despite our cautious approach the M&FI net asset value per share is now once again on the rise, having increased from 7.75 pence at the year end to 7.89 pence as at the end of March.
Jacques Vaillancourt
Chairman
Annual General Meeting and Dispatch of Accounts
The Annual General Meeting of the Company will be held at the offices of W H Ireland, 24 Martin Lane, London, EC4R 0DR, on Monday 21 July 2014 at 11.00 am. The Annual Report and Accounts will be dispatched to shareholders on 23rd June and will be available from the Company's website mineralandfinancial.com from that date.
For further information please call: |
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Mineral & Financial Investments Limited Laurence Read, Director +44 20 3289 9923 WH Ireland Limited Katy Mitchell +44 161 819 8875 |
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Chief Investment Officer's Review
We believe the year to 31st December 2013 was a period of extreme weakness in mining equity markets as commodities prices remained in the doldrums, gold slumped, and new money was thin on the ground. Profits were hard to come by, and as such there was intense pressure on mining companies to keep down costs. Accordingly Mineral & Financial exited several of its weaker positions, including Amara Mining, EMED Mining, Aureus, Northland, Carpathian and Jubilee Platinum.
Instead, the strategy was to focus away from the junior miners, where gains tend to be on offer only in more buoyant market conditions, and to concentrate instead on bigger companies with greater liquidity and greater profitability.
With that in mind, the Company traded in and out of several large listed companies during the period and post the period end, including Goldcorp, First Quantum, Randgold and Cameco, generating a profit on each.
The Company also traded in various commodities, both on a shorter term horizon and with the longer term in mind.
Since the period end, several adjustments have been made to the Company's portfolio, and a summary of the current major holdings is outlined below.
Gold
During the period the company traded in and out of gold, generating a profit when gold jumped on the crisis in Ukraine, and buying back in when the price subsequently dropped. The principal vehicle that Mineral & Financial currently uses to gain exposure to gold is the Zuercher KTBK gold ETF, but the Company has also traded in some of the larger equities in the sector, principally Randgold and Goldcorp.
As at the last NAV update, released on 15 April 2014, Mineral & Financial held around five per cent of its net assets in the gold ETF, although that is likely to change in response to market conditions. Currently, the company holds no listed gold equities, but retains an interest in one unlisted gold company, Toro Gold (see below).
Most analysts expect the gold price to average around US$1,300 this year, slightly higher than the current price, on the basis that the tapering of the US government's programme of quantitative easing will proceed cautiously and that the ongoing global recovery will be slow. Some commentators anticipate that the dollar may come under some further pressure later in the year as China emerges as the number one global economy by size, throwing into question the status of world's global reserve currency.
It will be interesting to see how that plays out, but certainly it has been true in the past 12 months that demand from China, and indeed from India, has been very strong, and that the floor that was encountered after the relentless selling by ETFs that so marked 2013 was reinforced by strong retail interest out of the Far East.
Mineral & Financial is bullish about gold in the long-term, but relatively cautious about the immediate prospects for the price.
Platinum ETF
Mineral & Financial has held a significant position in the Zuercher KTBK Platinum ETF for some months now. The Company took the view that the ongoing crisis in South African industrial relations would lead to increasing pressure on the supply of platinum, as stockpiles begin to be run down. Around 40 per cent of global platinum production has been taken off-line, and although there has been some recent progress in negotiations, it's still unclear whether a true resolution is in sight. Two Lonmin workers were killed in mid-May 2014, and Lonmin has now turned loss-making once again. Job cuts now look likely, but that is only likely to exacerbate the situation further. In early June 2014, the government withdrew its participation from negotiations between companies and unions.
Meanwhile, as the global recovery slowly strengthens, we believe demand from platinum in autocatalysts is likely to keep on rising. We believe the UK alone is likely to be producing a record two million cars by 2017, and the pace of car ownership across the world, particularly in China continues to accelerate. That the price has not risen higher this year in response to likely increases in demand and uncertainty in supply we believe is almost entirely due to the existence of stockpiles. But these are now beginning to be depleted.
Zinc ETF
Mineral & Financial believes that the medium-term outlook for zinc is positive as major mines around the world close, and new supply looks increasingly harder to come by. We have observed that LME stockpiles have been consistently dropping for several months now, and are likely to continue to fall. Opinion in the industry differs as to when an increase in the zinc price is likely to happen, but there seems to be general agreement that it will either be next year or the year after. The Company's position in zinc is already showing a modest gain.
BHP Billiton
BHP Billiton offers the Company exposure to a broad basket of commodities, including aluminium, manganese, nickel, potash, oil, coal and copper. Copper has been a weak performer this year, even though inventories have fallen. But the recent decision by the Chilean government not to fund expansion at Codelco may result in significant supply constraints in the future. The coal price has also been weak as supply has increased, and we believe potash is now poised for recovery at multi-year lows. We believe the outlook for nickel, manganese and aluminium is stronger, though, as the improvement in the global economy continues to gather momentum and recent Chinese data shows that the ongoing slowing of growth will not be as abrupt as first feared.
Anglo Pacific
The Company has been a long-standing holder of Anglo Pacific on the basis that Anglo Pacific's royalty model provides a minimal exposure to the cost pressures now sweeping across the industry, while still participating in project upside across a range of commodities. Mineral & Financial noted with interest Anglo Pacific's recent acquisition of a vanadium royalty for US$22 million, but Anglo Pacific is also exposed to gold, nickel, uranium, platinum group metals, chromite and iron ore.
Independence Group
Independence Group owns 30 per cent of Anglo's Tropicana gold mine in Australia, from which it derives a significant portion of its earnings. However in the most recent quarter to the end of March, Independence also earned A$16 million from the production of over 70,000 tonnes of nickel ore at its Long nickel project in Western Australia. So far this financial year Independence has already produced over 205,000 tonnes of ore, with forecast full year production running at between 230,000 and 270,000 tonnes.
Sutherland Health
The company retains 4.3 million shares in Sutherland Health as a legacy investment. The Company regards this investment as non-core and remains in frequent contact with the directors of Sutherland with regard to securing a possible exit.
Cap Energy
The Company holds 400,000 shares in Cap Energy, which has recently been acquiring off-shore oil blocks in both Guinea-Bissau and Senegal. This year Cap has been successful in raising new money to fund its exploration programmes and is now talking about a possible Aim listing
Toro Gold
Toro Gold is a privately-held gold explorer backed by serial entrepreneur Adonis Pouroulis, and run by Martin Horgan, formerly a senior banker at Barclays Capital. A recent addition to the board is Mark Connelly, who held a senior position at Endeavour Mining, before moving onto head up Papillon, now the subject of a US$550 million agreed bid from B2Gold. The company is working up the Mako gold project, and has to date booked a resource of 1.6 million ounces, grading two grams per tonne. A listing on Aim is likely to take place in 2015.
UMC Energy
Mineral & Financial holds 495,000 shares in UMC Energy, which has significant oil and gas interests off-shore Papua New Guinea, held in conjunction with the major Chinese oil company CNOOC.
Milamber
The Company also holds as a legacy investment a 15 per cent stake in Milamber Ventures, a technology and media company that is involved in events, marketing, and fundraising. At a recent general meeting, the Company voted in favour of an expansion in the directors' authority to issue new shares, and accordingly a fundraising is expected soon.
Tern
Mineral & Financial is the second biggest shareholder in Tern PLC, an Aim-traded vehicle which invests in tech start-ups. Mineral & Financial executive director Laurence Read sits on the board of Tern as the Company's representative. Tern is currently engaged in fundraising activities, and we look forward to the outcome of those with some interest.
Alastair Ford
Chief Investment Officer
20 June 2014