The art of Discovery Investing

Transcription

1 The art of Discovery Investing

2 Commodity Discovery Fund At the change of the millennium investing in raw materials was not a popular activity. Just a few years later, however, people began to realize that raw materials were getting scarce at a rapid pace. Continuation of the current development path will quickly lead to global shortages. This fear is supported by a recent study by the US Geological Survey, which shows that serious shortages in dozens of metal types will emerge within a matter of just twenty years Years strontium silver antimony gold zinc arsenic tin indium zirconium lead cadmium barium mercury tungsten copper titanium manganese nickel molybdenum rhenium bismuth yttrium niobium iron Elements Source: US Geological Survey Since the onset of the credit crisis, raw materials have been rediscovered as safe havens. China in particular is fast-tracking the investment of hundreds of billions of dollars in projects across the globe. China understands that investing in assets that cannot be printed is much more prudent than to continue the accumulation of foreign government bonds or foreign currencies. On top of this, the rapid growth of the BRIC countries is leading to ever higher demand for virtually all raw materials. In such a climate it is no surprise that prices of metals are on a steady ascent and discoveries of raw materials are becoming more and more valuable. For investors this situation offers huge opportunities. The Commodity Discovery Fund (previously Gold&Discovery Fund), a Dutch investment fund with an AFM regulatory license, invests in listed mining companies that are developing new raw material discoveries. An investment decision will only be made after a significant discovery has been proven. Gold, silver, uranium, nickel, coal, gas, oil and rare earth element discoveries add value in the order of billions of dollars annually. We have called this form of investing Discovery Investing. 2

3 Returns Investing in mining companies developing raw material projects can be very profitable. Exploration companies with a significant discovery usually get taken over by larger mining companies at a premium, often within a few years. In the gold sector, the number of take-overs averages fifty per year, and are worth about twenty billion dollars. Over a longer period of time, the performance of our investment fund has always been positive. Average annual returns exceed ten percent by a large margin, which is completely in line with our expectations. We expect prices to continue to rise as a reflection of the increasing scarcity of raw materials. Already we are seeing dividends and profit margins rapidly increasing at the companies we invest in. This improved performance is as yet not matched by a parallel share price appreciation. Performance Graph (NAV) CDF AEX CDNX July 2008 Sep 2008 Nov 2008 Jan 2009 March 2009 May 2009 July 2009 Sep 2009 Nov 2009 Jan 2010 March 2010 May 2010 July 2010 Sep 2010 Nov 2010 Jan 2011 March 2011 May 2011 July 2011 Sep 2011 Nov 2011 Jan 2012 March 2012 *The graph compares the performance of the Commodity Discovery Fund with the Dutch AEX and Canadian CDNX indexes. We expressly point out that this comparison is purely for information purposes only, from which no rights can be derived, especially since the composition of the Commodity Discovery Fund and the AEX and CDNX are different in nature. Take-overs The Commodity Discovery Fund is one of very few investment funds globally that focuses on raw materials discoveries. Our strategy has resulted in a take-over of one of our positions in every quarter since inception. Mostly by a large miner seeking to replenish its reserve base. The average return per company taken over in our portfolio exceeds 100%. Below is the list of companies in our portfolio that have been taken over. Name of exploration company Year of discovery Achieved return 1 Aurelian Resources (gold) % 2 Freewest Resources (chromium) % 3 West Timmins Mining (gold) % 4 Canplats Resources (gold) % 5 Underworld Resources (gold) % 6 Brett Resources (gold) % 7 AuEx Ventures (gold) % 8 Pediment Gold (gold) % 9 Ventana Gold (gold) % 10 Silver Quest (gold) % 11 Hathor Exploration (uranium) % 12 Extract Resources (uranium) % Fundamentals Of all the most important raw materials, gold is currently in the strongest uptrend. Its fundamentals explain our overweight position in the gold sector (>50%). Since the onset of the debt crisis, many investors have begun to realize that money is no longer covered by true value, but rather by credit (i.e. debt). It is telling that even central banks have become major buyers of gold, after having been net-sellers for decades. China, Russia and India especially have recently bought large amounts of gold. However, our outlook for silver is even more bright, and that is why companies developing silver projects now constitute almost a quarter of our portfolio. 3

4 Portfolio Since 2010, we have expanded the share of metals producing companies in our portfolio significantly, to the detriment of the relatively smaller exploration companies that do not produce (Juniors). The weighting of the so-called "royalty companies" has even doubled during last year. These latter companies have a business model which provides upfront funds for developing a mine, in return for a life-long share in the revenues once the mine is in production. The category "developers" constitutes companies that are on the brink of actual production, and therefore of an uptick in value. These changes have given the fund a more defensive and less volatile nature. Distribution of asset classes CDF Junior 42% 61% Producer 32% 19% Developer 13% 15% Royalty 13% 5% Rare Earth Elements (REE) Over 5 percent of the fund's capital is invested in companies that are developing Rare Earth Element projects. This group of seventeen rare metals is essential for the so-called high-tech and green-tech sectors. Because China produces 95% of these essential raw materials, there is a high demand for REE projects in the west. Supply deficits are currently also apparent in the copper markets, while deficits in zinc are expected from Geography The Commodity Discovery Fund invests primarily in companies that are listed on the Canadian and US indexes. The projects themselves, however, are situated across the globe. These last few years have seen significant new discoveries in South America, in particular. This explains our relatively large positions in countries such as Colombia, Guyana and Brazil. Uranium Rare 3,4% Earth Elements 6,4% Base metals 10,8% Coal 1,2% Diamonds 0,7% Platinum 0,6% Oil & Gas 0,3% Africa 4% Asia 9% Europe 2% Silver 23,4% Gold 53,1% South America 23% North-America 62% 4

5 Life cycle A successful mine goes through a number of development phases. The cycle starts with a "discovery hole", the drill hole that shows proof of a significant discovery. It normally takes at least five to ten years to get to a producing mine from this stage. A large part of the value is created at the initial discovery stage. In the figure below we can see the value creation at various stages of the development cycle. For value investors such as ourselves, we are particularly interested in the discovery and in the production phases. We see sharply rising valuations during both of these periods, and it is here that our investment focus lies. In between these two phases lies a period where feasibility studies that determine the economic value of a project are conducted. Companies in this phase are often target for a take-over bid, which is the reason we still hold these in our portfolio. Value I Prediscovery II Discovery III Mine planning IV Production Time is depicted on the horizontal axis, and the value creation of the company is shown on the vertical axis. Every circle on the figure depicts one of our portfolio positions. The largest circles indicate investments larger than one million Euros. We identify four major phases in the development of a mining company: I Pre-discovery (Exploration company has not yet drilled) II Discovery (Drilling results show proof of a significant discovery) III Mine planning (Feasibility of a project is investigated) IV Production (Production start-up creates further value for the company) 5

6 Private Placements For our investments in Canadian listed mining companies, we work closely with a number of brokers in Vancouver and Toronto. Due to our mature size, the Commodity Discovery Fund is regularly asked to participate in so-called private placements. In these private placements, relatively large chunks of shares are offered under favourable conditions, usually at some sort of discount to the market price. Furthermore, these chunks often include a warrant that entitle the holder to purchase additional shares over the course of a couple of years, at a predetermined price. These private placements often generate additional revenue, and are only open to professional investors. Options Besides this, option strategies are set up that relate to positions in our portfolio. These strategies are intended to reduce volatility and add to our performance. The fund does not borrow money for financial leverage purposes, and does not lend out its shares. We maintain a cash position of between five and fifteen percent in order to be able to take advantage of market developments. Net Asset Value (NAV) The Net Asset Value (NAV), the intrinsic value of the fund, is calculated at the end of every month by our administrator (Circle Partners, in Amersfoort). This company conducts similar independent administration activities for more than a hundred different investment funds. They are also responsible for the administration of our participants. Besides this, accounting firm KPMG officially reviews our yearly financial statements. Every week we publish a preliminary and therefore unofficial NAV calculation on our website. Furthermore, the fund publishes a monthly report, as well as an elaborate quarterly report with a more detailed market analysis. Annual shareholder meeting An annual shareholder meeting is held every April, where the financial results are reviewed. Immediately afterwards, we hold a Discovery Investing seminar, where we present various aspects of our investment strategy. For this seminar we traditionally invite a foreign expert on investing in the mining sector as a guest speaker. 6

7 The team Edwin Bergshoeff Edwin Bergshoeff is a fund manager of the Commodity Discovery Fund. During the nineties he was a partner at Optiver and became an independent market maker at the stock market until Due to his elaborate experience as an options trader, the fund is in a good position to make efficient use of options, warrants and futures to enhance performance. Edwin graduated in Economics at Erasmus University in Rotterdam, and is one of the founders of the fund. Willem Middelkoop Co-founder Willem Middelkoop is responsible for research and works closely alongside his co-fund manager Edwin Bergshoeff. Willem has been a private investor in Canadian (junior) mining companies for over 10 years, and is an expert in "Discovery Investing". Willem ceased his work as a financial journalist, in He is, however, still an active writer, publishing books on financial and economic topics. Advisory Board Jan Dobber is the only member of the Advisory Board, and has been an active professional in the financial sector since Following employment at ABN AMRO Bank, he became director at Optiver, a position he held for 17 years. At Optiver, Jan was jointly responsible for the firm s expansion to one of the largest and most distinguished global trading houses. Jan, along with the two fund managers, co-founded the fund in All three own a third of the Commodity Discovery Management B.V. The founders are personally invested in the fund. The total value of their investments amounts to approximately three million Euros. This is roughly five percent of the total investment capital. 7

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9 Summary of the most important terms and conditions Commodity Discovery Fund 9

10 1 Name, design, goal The Commodity Discovery Fund (previously Gold&Discovery Fund) is established for an indefinite period of time and aims to perform collective investments and reinvestments according to the principles set out in the Fund Documents. The Fund was established as a tax-transparent mutual fund under the laws of the Netherlands. It comprises of a contractual arrangement governed by the Terms and Conditions between the Manager, the Depositary and each Participant. The Fund does not have legal personality. The Manager has obtained a license from the AFM pursuant to section 2:65 AFS to offer rights of participation in the Fund in the Netherlands. As a result the Fund, the Manager and the Depositary are subject to AFM supervision. 2 Roles and responsibilities The Manager is primarily responsible for the implementation of the investment objectives, in accordance with the Fund's investment restrictions, and decides on the Fund's investment activities. Within the limits as set out by the Fund's restrictions, the Manager has the broadest power to make investments and divestments in financial instruments on behalf of the Participants. The costs, risks and revenues that are a consequence of the activities of the Manager are charged and attributed to all Participants of the Fund. Participants are obliged to provide the Manager with client identification information. In case of changes, the Manager must be informed. The Manager holds accountability to registered Participants only. The Manager may outsource all or part of its duties and tasks to third parties, among others to one or more depositories, administrators, financial service providers and brokers. The Manager shall remain responsible for the performance or non-performance of the tasks so delegated and duties so delegated. The Manager is not mandated to represent Participants towards third parties. The Manager may make amendments to the Fund Documents. These will be published on the Website of the Fund. An amendment causing a reduction of a Participant's rights or entitlement, imposing costs on a Participant or causing a change to the investment policy of the Fund, will only become effective vis-àvis the concerned Participants after the lapse of one month following the date of the notification. During that month, Participants have the right to redeem their Participations at their respective Net Asset Value without a Redemption Charge being payable to the Fund. The Depositary is responsible for the safekeeping of the assets and liabilities of the Fund. The activities of the Depositary the acquisition, holding and disposal of legal title to securities and other assets for the account of the Fund's investors and after a mandate from the Manager. Participants have no proprietary interest in the Fund Assets. Pursuant (and subject) to the Fund Documents, Participants are beneficially entitled to the Fund Assets pro rata the number of their respective Participations. The Fund's financial service provider performs certain financial services on behalf of the Fund, subject to the terms of the Financial Service Agreement. Both the Manager and the Depositary have delegated to the Administrator certain financial, accounting, administrative and other services to the Fund, subject to the terms of the Administration Agreement and the Outsourcing Agreement respectively. Both the Manager, the Depositary, the financial service provider and the Administrator shall be liable for damages to the extent such damages are the direct result of the gross negligence, fraud or wilful misconduct. The tasks and responsibilities of the parties involved are described in various underlying documents. 2.1 Risk factors An investment in the Fund carries a substantial degree of risk. The value of the Fund's underlying investments is subject to market fluctuations. Participants should be aware that the return (if any) on their investment in the Fund is dependent on the value of the Fund's underlying investments. The Fund invests in sectors that are characterised by large fluctuations, which makes that its returns are very uncertain. 10

11 3 Participations, Subscription and Redemption 3.1 Participations Participations in the Fund are offered as a package with an initial total Subscription Amount of 45,000 EUR per Participant. Redemption applications must be received by the Administrator at least ten business days prior to the relevant Dealing Date. The Redemption Form must express the number of Participations to be redeemed. Payment of the Redemption Amount is made in the account of the Participant within ten business days following the relevant Dealing Date. 3.2 Subscription Participations will be issued to a Participant, the value of which will be calculated using the Net Asset Value (NAV). The Subscription Amount will be increased by a Subscription Charge of 0.5%. Applications to subscribe for Participations must be received in the form of a Subscription Form by the Administrator at least two business days prior to the relevant Dealing Date. Payment of the Subscription Amount must be made such that it is received in EUR in the account of the Fund at least two business days prior to the relevant Dealing Date. Subscription Forms are irrevocable once received by the Administrator on behalf of the Manager; these are accepted once duly signed by an authorised signatory of the Administrator. Upon issuance of the Participations, the Administrator will confirm the Subscription Amount, the Subscription Charge, the Net Asset Value per Participation and the number of the Participations issued. The Manager reserves the right to reject any application. When an application is rejected, the Subscription Amount paid will be returned as soon as practicably possible. 3.3 Redemption Participations can be redeemed by the Fund at the request of a Participant. Participations are available for redemption on the Dealing Date. Participations will be redeemed against payment of the Redemption Amount to be decreased with the Redemption Charge of 1.0%. The Redemption Amount is calculated by multiplying the number of Participations to be redeemed with the Net Asset Value per Participation as per the end of the Valuation Date. The Manager is entitled to redeem all Participations when a Participant is declared bankrupt or incapable of meeting financial obligations, or fails to comply with anti-money laundering requirements under the AML Act, or if the Participant is deemed to negatively affect the Fund's or Fund Manager s reputation. 4 Management Fee The Management Fee equals 2% per annum of the NAV of the Fund prior to the deduction of the Management Fee and the Performance Fee. The Management Fee shall accrue monthly and is payable quarterly in arrears. 5 Performance Fee The Performance Fee equals 20% of any increase in the Net Asset Value of the Fund, and is only charged if the NAV rises more than 1.5% per quarter (the Hurdle Rate). The Performance Fee is also subject to a High Watermark, which means that no Performance Fee shall be payable until any previous losses incurred by the Fund are recouped. The Performance Fee is calculated on the last business day of the quarter and is effected within twenty calendar days after the end of the quarter. 6 Costs The Fund will bear costs such as transaction costs, brokerage commissions, administration charges, etc. The Manager will bear the fees relating to marketing expenses, travel and lodging expenses, office costs, secretarial expenses and charges by advisors. 7 Net Asset Value The Net Asset Value shall be expressed in EUR and determined at the close of business on the Valuation Date by the Administrator in accordance with the Valuation Methods. An indicative NAV will be published on the 11

12 website regularly, and the value per Participation will be included in the Monthly Report that will be made available to the Participants. 8 Reporting The Annual Accounts of the Fund, the Depositary and the Manager will be audited by an independent accountant. The annual accounts of the Fund will be made public to Participants within four (4) months after the end of the financial year. The semi-annual Accounts of the Fund and the Manager will be publicized after the end of each half financial year (1st January to 30th June). Participants shall, on a monthly basis, be informed on: - the Fund's monthly performance (including the NAV) - a summary explanation of important events that have had a material impact on the performance of the portfolio over the last month. 9 Meeting of Participants Within four months following the end of the Fund's financial year, a Meeting of Participants will be held to consider and discuss the Fund's audited Annual Accounts. Additional Meetings of Participants may be convened if such is considered desirable by the Manager or by one or more Participants representing at least 75% of the Participations on issue. 10 Dissolution of the Fund The Fund is dissolved and liquidated by a resolution by the Manager. The Manager shall cause a Meeting of Participants to be convened wherein Participants shall be informed on the reasons of the proposed dissolution, the proposed liquidation procedure in respect of the Fund Assets and the allocation of the liquidation proceeds. Disclaimer: This summary describes the most important terms and conditions of the Commodity Discovery Fund. This summary does not claim to be complete, and is conditional to, and should be read in conjunction with, the Offering Memorandum of the Commodity Discovery Fund. No rights can be derived from this summary. 12

13 Term Sheet Manager: Commodity Discovery Management B.V. Depositary: Stichting Bewaarder Commodity Discovery Fund Administrator: Circle Investment Support Services B.V. Financial Service Provider: ABN AMRO Clearing Bank N.V. Legal advisor: Loyens & Loeff N.V. Accountant: KPMG Accountants N.V. Minimal participation amount: Euros (extra participations as of Euros) Subscription per: Monthly, as per the first of every month Subscription Charge: 0.5% Redemption per: Monthly, as per the last day of the month (10 business days before redemption) Redemption Charge: 1% Management Fee: 2% Performance Fee: 20% Hurdle-rate: 1.5% per quarter High watermark: Perpetual 13

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