DK EQUITY GROWTH FUND. Quarterly Report December 31, Rates of Return

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1 DK EQUITY GROWTH FUND Quarterly Report December 31, 2000 Rates of Return 3 Mths 1 Yr 2 Yrs 3 Yrs 4 Yrs 5 Yrs 6Yrs 7 Yrs DK Equity Growth Fund -3.2% 3.1% 7.9% -7.3% -6.3% 4.1% 9.8% 8.3% Nesbitt Burns Small Cap Index -15.3% -4.3% 5.6% -4.4% -2.7% 2.7% 4.3% 2.3% (Unweighted) TSE % 7.4% 18.9% 11.7% 12.5% 15.5% 15.3% 13.0% The complexion of the North American Equity Markets changed dramatically in We saw a major shift from the unbridled bullishness, which characterized the previous few years, to a mood of worry, concern, and bearish sentiment. For the first time in ten years we saw a decline in both the Dow Jones (-4.7%) and the S & P Indices (-9.0%). Moreover, the speculation in technology related stocks came to an abrupt end in March with the NASDAQ Index losing roughly 55% of its value between then and year-end. For the full year the NASDAQ was down 39.2%, the largest annual decline in its 28-year history. The TSE 300 Index, which has been dominated to the tune of 30% by Nortel Networks, carried on upward until late August, but it too cracked when investors adopted a more realistic view of Nortel s growth prospects and revised its pricing from a high of about $120 to roughly $50 by year end. The TSE 300 was up approximately 37% from January 1 to the end of August, but lost most of that gain to finish the year up by roughly 7%. Globally it was not a great year for broad stock market indices. Of the world s largest 38 stock markets, only six posted gains in 2000, making it the most difficult year for global markets since The trigger for the declines is the concern that the longest economic expansion in U.S. history, which began in March 1991, is coming to an end. More forecasters are beginning to call for a recession (meaning two consecutive quarters of negative economic growth) for the U.S. economy in This is what prompted the U.S. Federal Reserve to surprise everyone with a ½% cut in the Federal Funds rate in early Whatever the reason for the downward revision in the equity markets, the real problem in our view has been the unrealistic valuations placed on technology stocks. It was inevitable many of these companies would not produce a level of earnings to justify the lofty valuations. Whether the trigger is a recession or something else is irrelevant.

2 2 In our portfolio we have continued to lose companies to takeover bids. This has been taking place with regularity for the last two years. To us it is a clear indicator, as we have stated on many occasions, our portfolio is dominated by businesses portfolio managers have overlooked during the new economy mania, and as a result have been trading at levels below their true worth. In the final quarter of the year Kaba Holdings of Switzerland made a friendly bid at $36 cash for all the shares of Unican Security Systems. Unican had announced in September that it was putting itself up for sale when the shares were then trading at $23. We have been shareholders of Unican for many years. We have watched Aaron Fish, the founder and CEO, build the business with great skill and we have watched, as he became increasingly frustrated as the market ignored his shares over the past two years. Unican is a great company that dominated the world in key manufacturing. It is also the second largest manufacturer of electronic entry systems (office, hotels, etc.) and a major manufacturer of many different types of locks. We expect the transaction will close early in the second quarter of This will not be the last transaction of this nature. We expect to see bids for at least one of our companies during the first quarter of As we have written repeatedly to our clients over the past two years, we like the fundamentals of the energy business. The low energy prices of late 1998 and early 1999 have actually sown the seeds for the very positive results we are seeing from oil and gas companies today. The low oil prices of two years ago sharply reduced industry cash flows, and curtailed drilling activity. This in turn reduced the supply of oil and natural gas in an environment of continued demand growth. Furthermore, the low pricing environment forced companies to become more efficient which has produced record earnings and cash flows as pricing has improved. It is also worth pointing out that in the past few years we have seen unusually mild winters in the U.S. and lower than normal seasonal demand for oil and gas. Reality has bitten this year. November / December 2000 has entered the record books as the coldest in the USA since records began in The two-month average temperature of 33.8 F beats the previous record of 34.2 F. We expect the pricing of oil and natural gas to continue to be a positive for North American exploration and production companies for the next few years. Current natural gas prices of $8 - $9 are likely to trend lower, but at $4.50 our Canadian gas producers are very happy and profitable. At $26 oil (currently $30) our oil producers are similarly sassy. Also don t forget that our typical 10,000 15,000 boepd producer is currently trading at 2 ½ to 3 times cash flows and 6 times earnings. These same companies traded at double those multiples three years ago. How good is the energy business right now? Let s look at Exxon Mobil Corp. In the second quarter of 2000, Exxon earned $4.15 billion, the highest quarterly profit ever recorded by a U.S. company. In the third quarter, they not only set a new quarterly record of $4.29 billion but also boosted 9-month profits to $11.79 billion more than any corporation has ever netted in a full year.

3 3 We continue to hold major commitments in exploration and production companies and some related service companies. We have been investing in energy companies for a long time and we have rarely seen the earnings, cash flows, and balance sheets of these companies in such good condition. Some of the larger holdings are Encal (gas), Ensign Resource Services (drilling), Peak Energy Services (rig servicing), and Vermilion Resources (oil). We also departed from our normal mandate in the most recent quarter by adding a larger cap producer to the portfolio Talisman Energy Inc. The value in Talisman is so compelling that we could not keep our hands off it. Talisman is one of the few internationally diversified, super-independents in North America. It has solid production and reserve growth and trades at 6 times earnings. The market value of the Company is being penalized, at least somewhat by its operations in the Sudan. However, we believe something is likely going to happen in 2001 either Talisman sells its Sudanese assets (value approximately $1.5 billion) or possibly it will itself become a takeover target because of its tantalizing valuation. Either way, we expect to see the value of the Company unlocked in Site Visit Tati Nickel Mining, LionOre Mining International Ltd. One of our larger base metal investments is TSE-listed LionOre Mining (2.9% of the DKEquity portfolio). Lionore has 4 main assets: A 41.65% interest in the Tati Nickel Mining Company in Botswana. The Anglo- American mining group has 43.35% and the Botswana Government owns the remaining 15%. A 75% interest in LionOre Australia Ltd. (listed on the Australian Stock Exchange) which owns 100% of the Emily Ann and 31% of the Maggie Hayes nickel sulphide deposits. A 60% interest in the roughly 2 million ounce Thunderbox gold discovery in western Australia. An 80% interest in the Activox hydrometallurgical process (with an option to acquire the remaining 20%). The Activox process is a low cost method suitable for extracting gold and base metals from concentrated ore. A demonstration plant has been in operation for the past two years in Perth and has successfully treated various nickel concentrates. Even though the share price has drifted downward over the past 12 months, mainly because of waning interest in the base metals sector, the Company has made major progress in creating value. Your author was visiting South Africa during the year-end holiday period. On December 28 I set out from Cape Town through Johannesburg to spend December 29 at Tati Nickel, just outside of Francistown in eastern Botswana. Francistown is the second largest city in Botswana and is roughly a 2-hour flight due north of Johannesburg, aboard a twin engine Cessna. Botswana is a stable, democratic country, with a population of roughly 1.3 million. The three main sources of income in the country are diamonds (De Beers), cattle, and nickel (Tati).

4 4 I met with Brian Hyde (General Manager), Mike Smith (CFO), Chris Fredericks (COO), and the two senior geologists Garry Mathieson and Callum Kerr all very impressive people. Tati has been producing nickel since January 1989 from its Selkirk deposit and since 1995 from both Selkirk and Phoenix deposits. The latter deposit is the much larger and upon which the expansion is based. Tati currently produces just over 6,000 tonnes of nickel annually. It is one of the lowest cost producers in the world, with November unit costs of $1.59 per pound. In December of 1998, when nickel prices reached a low of $1.70 per pound, Tati was one of only 3 nickel producers in the world that still made a profit. Last year Tati completed a feasibility study to double production. The expansion is well underway and is expected to be completed by year-end and fully commissioned by February of The cost is roughly $66 million U.S. and it is being funded by cash reserves and cash flow. At this point the expansion is on time and running slightly below budget. The expansion is a major undertaking that involves the construction of a wet concentrator on site (to replace the existing magnetic separation plant); building a 40 km pipeline to increase the water supply; installation of additional transformers to increase the power supply; the construction of housing for additional personnel; and the expansion of the local school. The project will result in a doubling of payable nickel production to over 12,000 tonnes per annum, an increase in recoveries, and a reduction in costs to an estimated $1.47 per pound. Tati is a very serious piece of business. Upon completion, the expanded mine will be the largest nickel producer in Africa. It is a significant part of Anglo-American s base metal operations and a major part of LionOre s. Using very conservative assumptions (including $2.50 nickel) the expanded mine will generate a net profit of roughly $28 million U.S. annually. LionOre s 41.65% interest translates to roughly 15 Canadian per share. If one plays with higher assumptions regarding the price of nickel and the metal recoveries, the numbers are much larger. We could justify the current valuation of LionOre ($1.10 per share / market cap $120 mil) on a conservative estimate of the value of their interest in Tati alone. But in addition, the Company is well underway in bringing the Emily Ann nickel project into production by the end of this year. The Emily Ann mine, which your author visited during exploration drilling in April 1997, is located 540 km east of Perth. It is a high-grade nickel sulphide deposit with an inferred resource of 84,000 tonnes of contained nickel. It is expected the mine will produce roughly 6,700 tonnes of nickel per year (slightly more that LionOre s 41.65% of the expanded Tati production) at an estimated cost of $1.55 per pound. Financing has been provided by N.M. Rothschild and Inco Limited. The latter has a life-of-mine off-take agreement to purchase nickel concentrate from Emily Ann. LionOre also has 60% of the 2 million ounce Thunderbox gold discovery in Western Australia. A bankable feasibility study was commenced in the latter part of Based on the pre-feasibility study, which was completed in the third quarter of 2000, and assuming production at just over 200,000 ounces per year, capital cost of A$57.5 million; a gold price of A$450 per ounce (currently A$500); the project has an internal rate of return of 47%. Thunderbox could be in production in early 2002.

5 5 In addition to the above, the value of Activox extraction technology is also not currently reflected in the market valuation of LionOre. It is currently difficult to ascertain the value of the technology. However, in discussions with Company people, we know that the technology has been effective in treating various concentrates including those from Tati. The methodology has proven remarkably effective in increasing recoveries and in potentially reducing costs and mine profitability. In discussion with the Company we are of the opinion it is a question now of when Activox is utilized to extract nickel at Tati and possibly at other sites, rather than if it will be used. In summary, LionOre is a profitable first class junior mining company, with first class people and assets. It is quickly becoming a more significant player on the mining scene and it has strong ties to both Inco and Anglo-American. It is currently ignored by the majority of portfolio managers and analysts, and as a result it is priced much below its true value. In our opinion, within twelve months, when the Tati expansion is complete, when Emily Ann is in production, and Thunderbox is closer to reality, the value of the Company in the market will be substantially higher than what it is today. Looking at the stock market environment as we enter 2001, what might we expect over the next year or two? As our clients know, our philosophy is to concentrate our investments in smaller, faster growing companies. History shows investors in smaller companies enjoy higher long-run investment returns than investors in larger companies. The graph below shows how money invested in the Nesbitt Burns Small cap index has grown more over its 31 year history, relative to a similar amount invested in the bigger cap TSE 300 index. Nesbitt Burns Small Cap Unweighted Index vs TSE 300: Cumulative Returns for 31 years to Nov ,000 3,500 Cumulative Return 3,000 2,500 2,000 1,500 1, Dec-69 Dec-71 Dec-73 Dec-75 Dec-77 Dec-79 Dec-81 Dec-83 Dec-85 Dec-87 Dec-89 Dec-91 Dec-93 Dec-95 Dec-97 Dec-99 Nesbitt Burns Small Cap Equal Weighted History TSE 300 (TF) $100 invested in Small Cap on Dec. 31, 1969 equals $2,681 today. $100 invested in the TSE 300 on Dec. 31, 1969 equals $2,467 today. Cumulative TSE 300 returns would be lower if Nortel was excluded.

6 6 However, during the 31 years there have been periods where large caps have significantly outperformed small caps. The graph below shows that in the past 5 years we have seen a period where small caps have experienced the largest underperformance relative to large caps in the past 30 years. Nesbitt Burns Small Cap Index vs TSE 300 Relative Performance (%) on an annual basis Significant Small Cap Outperformance 10 - (10) (20) (30) Significant Large Cap Outperformance (40) (50) Bank of Montreal Nesbitt Burns Using history as a guide, we expect a reversal of the relative performance of Canadian small caps versus the TSE 300. In fact, examining the U.S. data we have seen that reversal take effect last year. Whether it happens because of continued takeover activity in our sector, or a recognition of value and an upward revision in market prices, or a combination of both, we do not know.