Investment Trust Insider: which of last year's laggards are 2013's winners?

A performance fee introduced in 2009 gave senior management 20% of realised profits on investments over a 10% per annum hurdle. At the end of June 2012, Origo had accrued performance fees of $6 million.

There are also 13.6 million options exercisable at 31p, 11.5 million exercisable at 23.45p and 4.8 million granted in 2009, initially exercisable at 15.5p but this grows by 3.5% per annum. Most of these are held by the senior management. While all of these options are underwater, they could act as a drag on future performance and could add 8.3% to the issued share capital.

Future shock

So what upside is there in the portfolio? A lot will depend on your view of China and whether you believe the recent positive news coming out of the country will be sustained, but one issue, more than any other, has affected Origo’s recent fortunes: the introduction of a new mineral law in Mongolia.

More than half (54%) of the fund is invested in metals/mining stocks and Mongolian projects account for more than 40% of the fund. The biggest is Gobi Coal & Energy but it also holds stakes in Moly World, a molybdenum/tungsten project, and Kincora Copper, Kincora’s Bronze Fox copper/gold deposit, sits alongside Rio’s larger Oyu Tolgoi operation.

Gobi Coal (almost 30% of the fund) is also held by Baker Steel . Recently it wrote down its carrying value on the back of poor prices for Mongolian coal at the Chinese border. Gobi was supposed to float in 2012 but the Mongolian government started to make noises about rewriting the law that underpins the state’s relationship with big, mostly foreign-owned, resource projects, and this unnerved investors.

As drafted, the law says Mongolian citizens must hold at least 34%/51% in each project (depending on the type of project), the state has pre-emptive rights in the event that a project changes hands and it can take a stake in the licence holder of a deposit for no consideration.

Unsurprisingly, investors are protesting. If the law is watered down, Origo’s shares should jump; if not, the focus switches to its remaining investments.

These include Celadon Mining, a Chinese coal miner, two holdings in the agricultural sector (25% of the fund) China Rice (rice processing and distribution) and RM Wiliams (an Australian farming company exporting to China) and a spread of ‘clean tech’ investments (17%) including stakes in China Cleantech Partners (a fund launched in conjunction with Ecofin ), Unipower Battery (lithium ion batteries) and Niutech Energy (tyre and plastic recycling).

We will know what the real discount is when Origo releases its end-December NAV estimate around the end of this month, when it makes its next interim statement. Short-term success largely depends on factors outside its control but, with a fair wind, Origo could be a winner in 2013.

James Carthew is a director of Sapient Research