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Trust Insider: gold minnows for a mining recovery

Trust Insider: gold minnows for a mining recovery

This week I am going to have a look at a minnow, Altus Resource Capital (ARC). ARC has a market cap of just £28 million but I think it might be interesting as one of several resource plays that are out of favour right now.

ARC’s speciality is gold miners. Its brief is to generate capital growth from a concentrated portfolio (about 20 holdings) of junior resource equities (initially described as sub-£100 million market cap but, since 2011, anything up to £500 million) but with a focus on the gold sector and companies involved in exploration, development and/or mining of metals and minerals. Most of these are quoted in London, Toronto, Sydney or Johannesburg.

Domiciled in Guernsey, ARC listed on the Specialist Fund Market on 30 June 2009. It has never been a big fund – the initial fund raising managed to issue just 26 million shares at £1 each (but then June 2009 was hardly the best time to try to launch a fund).

Markets had bounced, just, off the lows of March that year but most fund managers were sitting on their hands, wary of what new financial crisis was just around the corner.

Also, to be fair, the gold price had had its own wobble and was only just nudging the high seen in March 2008. In retrospect ARC’s timing was good as the gold price took off later that summer, doubling in just two years.

ARC posted quite respectable net asset value (NAV) performance during that period and was able to expand the fund a little – issuing £14.7 million worth of shares in December 2009 and £3.8 million in August 2010.

The share price hit a high towards the end of February 2011 and at this point the trust had a market cap approaching £90 million. 

However, junior mining stocks fall into the higher risk category of investments. The Arab spring and the Japanese tsunami unnerved investors early in 2011, and junior mining stocks began to fall even though the gold price continued climbing.

This ended in September 2011. Gold then fell from over $1,900 an ounce to less than $1,200 in December 2013.

ARC’s share price drifted off over 2012 but, in the early part of 2013, despair started to set in for investors in junior markets and in June 2013 ARC’s share price fell to the low 70s and has stayed there since, even when the NAV briefly fell below this level. However, the gold enthusiasts are now getting excited again.

From launch to the end of January 2014 ARC’s NAV has fallen by 17.6% (and investors who came in at the second and third fund raisings will have done even worse) but this performance is a lot better than the FTSE Gold Mines Index (off 44.1%) and the S&P/TSX Gold Index (off 38%) so it seems as though the managers have done a good job.

What is more interesting though is that, since launch, the gold price is up 34%, even after the falls of the past couple of years – the inference must be that junior mining stocks are very much out of favour. 

ARC is managed by Altus Capital. The individuals involved in managing the fund had not managed a fund before ARC was launched but they had plenty of experience as geologists, corporate financiers and managers of junior resource companies.

They called both the rally in the gold price and the likely duration of it, predicting in the prospectus that the gold price would rise for a couple of years.

Focus on developing companies

They also drew attention to the dearth of capital available in 2009 to finance the ambitions of the exploration companies and decided to focus on companies that had production or were in their development phase and had reasonable chance of attracting capital to finance their projects.

That stance has been relaxed a little since but only 17% of the fund was invested in exploration companies at the end of January 2014.

At the end of January there were 24 holdings in the portfolio. The top 10 accounted for just over half the fund – this is invested in precious metals companies, with the bulk of that in gold. But it also has exposure to uranium (4%), bulk minerals (around 16%), base metals (13%) and diamonds (over 6%) plus 6% in cash. There is quite a big exposure to Africa (over 40%).

One unusual feature is a holding in an open-ended fund run by the manager, which accounts for 7% of the portfolio. The manager rebates the underlying management fee on this investment.

The annual management fee is 0.85% on net assets with a minimum fee of £150,000 and Nimrod Capital, who launched the fund and acts as an adviser, also get 0.15% per annum.

Even added together, the base fees are the lowest of ARC’s peer group. There is also a performance fee that is 20% of excess returns over a 10% per annum hurdle since launch, subject to a high watermark, and 20% of any money returned to shareholders, subject again to the 10% per annum hurdle.

The manager did earn a chunky performance fee in the good times. It might be worth remembering that the high watermark resets if no fee is earned for three years, and we are not far off this.

At the outset a continuation vote was planned for the five-year anniversary of the fund’s launch  – that is, this year. If they get through it, the plan is to hold three-yearly continuation votes thereafter.

I realise for many of you the fund will be just too small to contemplate an investment but the rest of you might want to take a look.

ARC isn’t the only play on a recovering gold price but it seems to me that at some point the junior miners will be back in vogue and the NAV may spike up again.

James Carthew is a director at Marten & Co

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