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Executive
Summary: In April, the Fund fell by 11.6% (the FTSE
Gold Mines Index was -10.4%, gold +1.6%, silver -4.4%
and palladium -1.3%). In 2004, the fund was down 7.7%
after a rise of +80% in 2003. Since inception 2 years
ago the fund is up by 47% with a Compound Annual Growth
Rate (CAGR) of 16.4% p.a. after all fees. Last
month, USD strength, US higher interest rate fears and
equity fund liquidations hurt our sector, despite a
rise in gold and both USD and EUR. We remind our investors
of the key reasons for holding the fund:
1.
Institutional weightings in gold, mining and resource
shares are way below the averages of the '70s, '80's
and '90's. Gold and natural resources are in a generational
bull market. Few analysts understand the epochal implications
of the emergence of China, India etc on global commodity
demand, less still can they 'model' the probable course
based on historical data.
2.
The fund is highly leveraged to a gold price and commodities
recovery. It holds pre-IPO stock (African Minerals),
a much reduced bullion position (only 3.5% and now only
palladium), and is 96% invested in shares, overwhelmingly
small and mid-cap companies, with nearly 5% of this
in options and warrants.
3.
The fund has the unique feature of being able to hold
physical bullion as well as shares up to 100% of fund
value.
4.
It is the policy of the fund to have the leading specialist
commodity advisers in the world advising on the fund's
investments.
5.
The fund is a 'whole of cycle' fund. In the latter stages
of a commodity bull cycle, shares will have discounted
all the good news and it's safer and more profitable
to hold physical bullion and higher levels of cash.
But not yet.
In
April, we reduced the number of names from 66 to
56.
Company
News The bid news was our participation in the DRDGold
(the old Durban Deep) financing led by our fund's advisers,
Baker Steel. This has the effect of shoring up the balance
sheet of a distressed situation with excellent turnaround
potential. DRDGold, S Africa's 4th largest gold mine,
recently put its loss-making North West Mines into liquidation,
with the loss of 6,500 jobs, following continued losses
and seismic activity, which made two shafts unsafe.
The residual business is a 560,000 oz producer with
10 years of reserves and costs of about $310/oz and
exceptional leverage to the Rand gold price, which may
have seen its lows. The deal is in two tranches: first,
a placing and, second, an underwritten claw-back offer,
both subject to shareholder approval. The fund's longstanding
underweight position in the S African sector has thereby
been changed at a stroke.
Ballarat
announced an exceptional drill intersection at their
Victorian gold project. The company has secured bank
bridge financing, without hedging, required to bring
the project into production. The project has also been
brought forward about six months. We have already made
about 3 times our money on the Ballarat position. Randgold
resources, the fund's biggest position, announced a
20% increase in its resource base.
Macro
News The continued USD rally and FED re-armament
of the interest rate gun continued to be negatives for
gold and the precious metals sector. What was surprising
in such a poor month for gold equities is that gold
actually rose in both USD and EUR terms, perhaps helped
by the apparent failure of the IMF gold sale programme,
opposed by both USA and Germany. The European Central
Bank announced it has sold 47 tonnes of gold, marking
its first sale of gold from its reserves. South African
gold production fell by 8.8% in 2004 ( a positive factor
for gold).
The
Outlook The USD and USD interest rates will continue
to be the dominant factors for the fund in the short
term. When the market begins to sense that we are indeed
getting close to a top in rates, the market will rally
significantly towards USD500/oz. At USD500 gold, the
fund, based on the gearing that P&C Director and
former global CEO of Rothschilds, Bruce Albrecht, has
calculated for each fund holding, should have a theoretical
fair value 50-70% above current levels. But patience
is required.
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