On The Gas Or On The Brake?

April 15th 2023

It may not correspond to a traditional definition of "Junk" bonds that might be found in a financial dictionary. But what if we defined “Junk” bonds as those that have a high risk of real losses (Adjusted for inflation) if kept until maturity? Then imagine that the most respected and important financial institutions were stuffed to the rafters with this junk. Would you regard that as a solid foundation for the financial services industry? In my view, the monetary aberration of the past 15 years may have created that scenario.?

Federal Reserve Balance Sheet

As the above illustrates, bailing out a very small number of medium-sized US banks is an expensive business. In effect, those bailouts have put Quantitative Tightening (Normalisation) into reverse. The latest scheme, the Bank Term Funding Programme (BTFP) seems to be Quantitative Easing (Money printing) in all but name. Banks are being offered the opportunity to raise funds via lending facilities that will allow them to use their Treasury bonds as collateral for short-term loans. What's the gimmick? The bonds are valued at par rather than at their market values. Why? The banks were going to hold the bonds until maturity. So this is a liquidity issue and not a solvency issue. The problem I have with this logic is that the market for bonds is now widely seen as dysfunctional. Without state interference, both direct and indirect, who would buy this paper? Maybe the value of the ten-year US Treasury bond is mispriced? In this case, the foundations of many financial institutions are rocky. If US Treasuries are correctly valued then, as this chart demonstrates, we could be in for a tough time. It highlights the inversion of the yield on the 10-year Treasury bond against the 3-month Treasury bond. It seems to be indicating that US interest rates will soon need to be cut in the face of a recession. The financial markets seem to be communicating a different message from the Fed.

What I find most concerning is that we appear to be only at the start of a credit-tightening cycle. Rolling over debt could prove very expensive in a relatively high-interest rate environment. Moreover, Morgan Stanley recently estimated that around US$1.4 trillion of US commercial real estate debt needs to be refinanced in the next two years. With the bulk of that exposure concentrated in small and medium-sized US regional banks. Most of which are not as highly regulated as the larger players. Skeletons and cupboards spring to mind.

Naturally, that takes me to abstract expressionism, which has been described as a tool by which the US promoted the values of American society, most obviously self-expression. I would suggest that the Fed has probably taken this a stage further. This Fed "Dot plot" could give the Rorschach test a run for its money. But the upshot seems to be that the Fed's funds rate is likely to end the year at a tad over 5%, should all things remain equal: which they won’t. When viewed in light of previous “Dot plots” it’s equally clear that the Fed is reacting to events or is data dependent (AKA making it up as it goes along). While the equity markets seemed to have already made up their minds, regardless of the evolving facts. Much seems to be riding on a reduction in US interest rates before the year-end. However, it's framed, it seems to be a very fluid economic environment.

As this demonstrates, it's a question of interpretation.

It may prove to be a temporary spike but Gold prices have broken out over US$2,000 per oz. In its wake, Silver prices have risen and now sit around US$25 per oz. Taken in the round, I still think the financial system is in a mess and there is a likelihood of stagflation. Longer term, unfortunately, I agree with a comment made by the then Federal Reserve Chairman, Alan Greenspan in 2005.

“We can guarantee cash benefits as far out and at whatever size you like, but we cannot guarantee their purchasing power.”

He may have been referring to welfare benefits but, in my view, the read-across is the value of money in real terms. It might have a veneer of sophistication but we could be witnessing a debasement of the currency much in line with previous debasements from the Romans to the Tudors. And, as I have requested before, should you know of a historic currency debasement that ended well, please let me know.

More broadly, as I write, Newmont, the world's largest Gold miner in terms of output, is getting closer to taking over its Australian rival, Newcrest. This makes me think that there could be further consolidation in the Gold mining sector.

Incidentally, I attended the Master Investor show in London on 15th April. So, I have added a few points and insights that I garnered from that. As for the house hunting in Dorset, well I have found somewhere so it looks as though the hunt is finally over.

As with buses, you can wait a long time and then several arrive at once. Over the past month, the same could be said for Regulatory New Service (RNS) communications from Anglo Asian Mining. And, I should point out that I have also incorporated, what I thought were the most relevant points, made in its latest Investor Meet presentation.

Wasting little time it announced plans for its Xarxar mine. Both an initial geological block model and an open pit optimisation study have been completed.? In effect, estimating what resources are there and the most economical way of extracting those resources. It’s aiming to produce around 10,000 tonnes of Copper per annum (pa) over seven years. With a base case price of US$8,000 per tonne, it believes that it can extract 93,000 tonnes. It’s now researching the possibility of a combined underground/open pit operation or even in-situ extraction (More environmentally attractive). It’s worth mentioning that should the price of Copper reach US$20,000 per tonne, the dynamics change markedly. In that case, it’s looking at extracting around 169,000 tonnes of Copper. Could that happen? Over the past ten years, Copper prices have peaked at a tad over U$10,000 per tonne. In an inflationary environment and with the huge requirements that Net Zero goals will place on the demand for Copper, I think that’s very possible. Particularly, when the backdrop is a paucity of large Copper projects.?

Again, on a positive note, it announced a revised mineral resource estimate for its Gilar asset. It now estimates that it contains 249,000 oz of Gold, 46,000 tonnes of Copper and 48,000 tonnes of Zinc. While the ore can be processed at its plant at Gedabek (Seven kilometres away). It could also bridge the gap between declining production at Gedabek and future production from Xarxar and Garadag. Encouragingly, it appears to be growing its resources as it drills. The focus is on the lower levels of the deposit. It gives the impression that an extension of the current life of mine (5.25 years) is quite likely.

Reinforcing its pivot towards Copper production, it also released details of its preliminary assessment of its Garadag asset. Although this is not based on a JORC-compliant study, it is based on extensive research. This includes Soviet-era work plus studies by two previous owners. In all, this covers some 67,855 metres of drilling, 273 holes and 29,815 samples. It appears to be comprehensive. Based on JORC guidelines, it believes that it holds indicated and inferred resources of 66.3 million (m) tonnes of ore at 0.49% Copper and, so, it contains 324,688 tonnes of Copper. Once this initial phase is concluded, it intends to initiate a JORC-compliant mineral resource estimate with the “Preparation” of this report expected in mid-2024.

Capping this flow of positivity was the company’s strategic growth plan. In essence, laying out a broad road map for it to become a mid-tier Copper and Gold producer within the next five years. With an emphasis on Copper. Its Gedabek and Gadir mines are coming to the end of their lives. It’s envisaged that the output from these will be replaced by production from three new mines that are planned to be commissioned from 2023-2026. These are Zafar, Gilar and Xarxar. With Garadag coming on stream in 2026/27. Construction work at both Zafar and Gilar has already begun.?

Its Vejnaly Gold mine appears to be in production. However, its overground facilities were badly damaged during the recent Nagorno-Karabakh conflict. Moreover, the company is still figuring out what resources remain to be exploited not just underground but it's also conducting aerial surveys. Overall, it views it as similar to its Gosha mine. It's a "Contributory" operation.

It may be on the back burner for now and the company seems to want to play it down but its Demirli asset in Kyzlbulag could, in my view, give the company a substantial lift. From the Investor Meet presentation, Reza Vazari, its President and CEO, gave the impression that although Russian peacekeepers were due to leave the Kyzlbulag contract area in around 18 months, they could leave much sooner. However, this comes down to the results of negotiations involving, Armenia, Azerbaijan and the EU.?This raises the obvious question as to the state of these operations should they be handed back to Anglo Asian.

Even its Ordubad contract area is still in play and presents many Copper targets. While it has aerial access from Azerbaijan, road access is via neighbouring countries. I have written about this in a previous report that can be found here .

The backdrop is that it believes that it holds around 1m tonnes of Copper in various resource categories across its portfolio.?

But, hold your horses, this may be great news. But it will come at a cost. It believes that Copper production from Xarxar and Garadag could be more than 30,000-35,000 tonnes pa. That will require a new processing facility. It also points to both an open-pit as well as an underground operation at Garadag. Importantly, it’s yet to decide on the most cost-effective approach. So the big question is how much will this expansion cost? Moreover, how will it be funded? It points to its revolving credit facility providing near and medium-term finance but the longer-term (And more expensive) projects will require a different scale of investment. But it seems insistent on both maintaining its dividend and not diluting shareholders.

Strange but I can recall a presentation, about 18 months ago, at which Bill Morgan mentioned that he was confident that the company could be producing some 50,000 tonnes of Copper pa within a reasonable period. Taking a three to five-year time frame and I believe that is doable. While the management gives the impression that it wants to leave a legacy and not simply make a lot of money. This is a very unusual proposition in the AIM resource sector.

Caledonia Mining announced its operating and financial results for the year ended?31st December 2022 and, on the same day, provided details of a fundraise. At first glance, the figures appear strong. Gross profit is up 14.2% and its All-in sustaining costs (AISC) are up a modest 2.6%?to US$878 per oz. That said, its expansion efforts and maintaining its dividend come at a cost. Its net cash fell by 91% to just US$1.5m which probably goes some way to explain the fundraising of approximately US$16.59m. This was on the back of a steep rise in the share price in previous weeks (The stock had been shorted on the US markets). It's worth noting that there appeared to have been strong local demand with US$5.85m (Before expenses) raised from the Zimbabwean market - this included Zimbabwe's Mining Industry Pension Fund, which is described as taking a "Significant amount" of the placing.

It’s guiding Gold production of 87,500-97,000 oz for its 2023 financial year. However, this is broken down between its Blanket mine (75,000-80,000 oz) and Bilboes (12,500-17,000oz). The relatively small oxidisation operation it operates at Bilboes is a precursor to the much larger open pit operation that it’s planning.?

Like many miners, its costs are rising. The greatest increase can be seen in its consumables, increasing 36% to US$23.6m. While salaries and wages were up 12% to US$23m. But I don’t understand why “On mine administration” rose 110% since 2020, increasing to US$2.7m. More worryingly, its security costs have doubled since 2020 to US$1m. On a more positive note, its?US$14m 12MW solar plant was commissioned in November 2022 but only fully commissioned in February 2023. It expects this to reduce its AISC by US$37 per oz. In the meantime, its electricity costs have fallen 7.4% to US$9.6m for the year. So, its renewable energy savings appear to be kicking in. Moreover, an RNS issued in February 2023 pointed to the company using 18,000 litres of diesel for January compared to the 2022 average of 120,000 litres per month.?

In November 2022, the company purchased the Motapa/Arraskar exploration asset for US$1m. But the purchase came with US$7.25m in loan notes at 13% interest with US$5m repayable on 31st March 2023 and the remainder on June 30th 2023. The cost of the acquisition was not a notifiable amount but, at the time, the loan notes had a “fair value” of US$6.802m. It may have been below the regulatory disclosure threshold but why did it not make it public? I can understand the logic of the purchase, the asset runs contiguous to Maligreen, but it does seem strange not to reveal the total price at the time of purchase.?

What I found most concerning was the significant deterioration in the balance sheet. For example, its payables increased by around 75% to US$17.5m. It’s also highly dependent on its overdraft facilities (All of which are on-demand facilities). That said, after the year-end, it enlarged its overdraft facilities. Again, after the year-end, it issued US$4.5m in bonds (At 9.5% interest pa over three years) to cover some of the costs of the solar plant. And, in fairness, it has been a big year for the company. The solar plant cost around US$14m, Motapa required a US$1m upfront payment and Bilboes cost around US$1.63m to bring its oxidisation operation into play.?

Hedging its bets, at a cost of US$478,000, it bought put options for 16,672 oz of Gold at a strike price of US$1,750 covering its output from February to May 2023. That, coupled with its overdraft extensions, bond issue and most recent fundraising, should, in my view, see it through any immediate liquidity issues. But the question remains on how it will fund the development of Bilboes.

Unlike many AIM resource stocks, the management is in the habit of delivering for all stakeholders, which includes avoiding diluting shareholders. So long as it juggles its plates correctly, I believe it will continue delivering. And, like Pan African Resources, it's run by an accountant and not a geologist.

Centamin announced its results for the year ended 31st December 2022. It achieved its guidance for both output and costs. Output was up 6% to 440,974 oz of Gold (With revenue up 8% to US$788m, based on an annualised realised Gold price of US$1,794 per oz). While its AISC rose 13% to US$1,399 per oz. Its profit before tax increased by 11% to around US$171m but fell 29% to US$72.5m after tax (It has a profit share with the Arab Republic of Egypt). Its basic earnings per share were down 29% year-on-year. While its cost of sales was up by 11.6%, mainly driven by rising diesel prices. (For 2022, the WTI spot price was US$94.9 per barrel, for 2021 it was US$68.13). Nevertheless, it has a cash pile of US$157m (Excluding its sustainability-linked revolving credit facility of US$150m) agreed in December 2020. This four-year facility comes with 3.5-4.5% interest and can be expanded by an additional US$50m with the agreement of the lender. So it has a reasonable amount of financial firepower and appears to be structured in a way that would allow it to take on further finance for its Doropo project.

It claims to have successfully navigated the move from contractors to owner-managed at its Sukari underground mine and argues that the move produced efficiency gains. It also commissioned a 36MW solar plant which should reduce its diesel consumption by 22% (Up to 70,000 litres per day). Although it mentions the prospect of electrification of its mining fleet, Sukari is still not connected to the national grid. However, that high-voltage grid connection has been extended and is now only about 25km from Sukari.?The tendering process for a project to connect Sukari to the grid and displace its dependence on diesel is underway with submissions due by April 2023. Early estimates put the cost at between US$20-US$30m with grid connection targeted for 2024.

Capex for 2022 was US$276m (Mainly sustaining capex which rose 55%). Waste stripping added US$141m to its balance sheet (Non-sustaining capex: US$89m and sustaining capex: US$52m). Excess waste-stripping costs of US$51.527m were capitalised. These costs are those in excess of the normal life of mine strip ratio at that stage. The net effect is that it flatters the results.

For 2023, it’s expecting increased production coupled with lower AISC. Its guidance for the year is unchanged at 450,000-480,000 oz of Gold with AISC of US$1,250-US$1,400 per oz. It’s aiming for around 500,000 oz of Gold pa from 2024.

It's guiding capex of US$225m for 2023. However, this does not appear to include around US$50m that will be capitalised. While inflation pressures on stripping costs (Especially higher fuel prices) are impacting. Thankfully, this is the last full year of waste stripping. The capex figure also includes several significant one-off costs ie the Gold gravity circuit, which is expected to be commissioned in H1 2024.

It's worth mentioning that the Sukari 120Mt waste-stripping contract was very significant for Capital plc, the contractors. It refers to it as its “First load and haul of significant scale”. It clearly wants this to run smoothly and predicts a “Steady state” for the remaining part of 2023. It appears to have raised additional asset-backed funding on the equipment that it has at Sukari. This it describes as in “Excellent” condition. So, the contractors seem to be pretty bullish about the waste-stripping project. By the end of 2022, some 62.4Mt of waste had been moved. With 38Mt earmarked for 2023 with the balance of 20Mt due to be moved in 2024.

Although waste stripping increased operational flexibility with four operating areas at the end of 2022 against one in 2020, I ask myself why it didn’t do the work itself. After all, it has moved its underground operations in-house.

Importantly, it has managed to add 2m oz of Gold to its reserve base over the past two years with unchanged cut-off grades, now standing at 6m oz of Gold (Open pit: 4.6m oz). At current production levels, that gives Sukari a 14-year life. Moreover, it appears quite sure of adding to those reserves. This includes the potential to incorporate new reserves from satellite targets that it has identified in the Greater Sukari concession. These appear likely to be shallow, high-grade deposits with a low strip ratio. Not huge but possibly in the tens of thousands of oz of Gold. And adding to its operational flexibility. Underground Sukari added 1.2m oz since 2020, net of depletion, a threefold increase. While over the past year, reserves at Sukari increased by 0.8m oz net of depletion. It's planning to drill 95,000 metres in 2023 with about a third of that aimed at growing the mine's resources.

The company has maintained its dividend policy of distributing a minimum of 30% of free cash flow (After sustaining capex and the Egyptian Government's profit share). As for total dividends for 2023, it gave some idea of what to expect depending on Gold prices. With Gold at an average of US$1,700 per oz: 3￠, at US$1,900 per oz: 5￠.

Incidentally, it appears to be ramping up its underground Sukari operation. and is planning on increasing ore extraction from the current 1mtpa to 1.5mtpa from 2024. While the move to owner-managed from contracted seems to be accomplished. At the same time, the adoption of paste-fill should improve efficiency (Higher recovery rates) and safety.

As for exploration, it holds three blocks in the Eastern Desert Exploration (EDX) zone in Egypt's Nubian Shield. These are Najd, Um Rus and Nugrus. However, the final commercial terms are yet to be agreed with the Egyptian government - it’s working alongside an industry group but does not view this as a major issue. It's envisaged that these three exploration blocks will provide feeder deposits for Sukari as well as standalone projects. It has budgeted an exploration spend of US$10m over the next two years. For now, its focus is on five targets in its Nugrus block situated within a 30km radius of Sukari's plant. Drilling is expected to begin in May with the results due in Q3/4. The airborne geophysical study that it completed last year covering its Sukari concession also feeds into its geological dataset for its EDX blocks. It believes that due to Nugrus' proximity to Sukari, relatively small deposits of 300,000-500,000 oz of Gold at 1.3-1.4g/t would be economically viable.

Its Doropo project in C?te d'Ivoire appears promising. The updated studies show an indicated resource of 2.5m oz of Gold at an average grade of 1.52g/t. However, it seems confident that it can grow this further. Its exploration budget for 2023 is US$30m with US$23m targeting Doropo. The project’s Pre Feasibility Study (PFS) is expected to be completed by June 2023. It should then move on to a Definitive Feasibility Study (DFS). However, it appears to be carrying out the fieldwork for the DFS in parallel with the PFS. So it appears quite confident in the project's viability. Based on a preliminary economic assessment from 2021, it’s looking at an operation with a mine life of 13 years with an annual average production of around 151,000 oz of Gold pa (Based on expected reserves of 2m oz of Gold). In 2021, it estimated the capex cost to be about US$275m (Including a contingency of 15%). My understanding is that it now looks as though this US$300m project will be financed through debt secured on its Sukari operation - a "Ringfencing" of the asset. That would provide some 70% of the required funding with the balance drawn from its RCF as well as its cash. And, so, allowing it to continue to pay dividends with its current dividend policy.

So, what could go wrong? For starters, there is no definite conclusion to its long-running legal dispute challenging its concession agreement. Around that, Egypt has major social, economic and political problems. While, for now, Centamin is largely a one-trick pony. It's Sukari, admittedly both above ground and underground. But still a one-trick pony. The Doropo project is in a tough neighbourhood and borders Burkina Faso. Is it a stable operating environment? And, of course, it needs funding. Presumably with Sukari as collateral. And commissioning will be years away. While the backdrop is the Gold price.

Fresnillo made no new announcements since I last wrote. So, its investment case remains largely the same. Should there be no further delays, then we can expect news on the commissioning of its Pyrites plant phase II in Q2 2023. This US$155m flotation project should improve Gold and Silver recovery. But, as with its Juanicipio project, it has been delayed due to factors outside its control that relate to connecting it to the national grid. On commissioning, it's expected to produce 3.5m oz of Silver and 14,000 oz of Gold pa with production from both its Fresnillo and Saucito mines.

Reviewing the webinar covering its preliminary results for 2022, a few points struck me that I did not cover last month. On the negative side, its profits after tax were flattered by a US$67.4m tax income (A mix of benefits from Mexico's consumer price index, tax breaks and the revaluation of the Peso). This is unlikely to be repeated. In 2021, it faced a tax bill of US$156.5m. More broadly, its rising costs may be becoming embedded as it digs deeper and hauls longer distances. At the same time, it's impacted by Mexican inflation. One analyst questioned its reserve figures. In fairness, the company replied that its geological modelling underpinned its assumptions. As for capitalising (And flattering its results) part of its waste-stripping programme, this appears to be on the same scale for 2023 as for 2022. But is that H1 2022 or H2 2022? In H1, 48% of waste-stripping costs were capitalised but in H2, it was just 3%. Much depends on its stripping ratio compared to the long-term average. Hopefully, the company will experience productivity improvements as it approaches having a full complement of (Unionised) employees.

It has a raft of producing mines (Fresnillo, Saucito, Herradura, Nochebuena, San Julián, Cienéga and Juanicipio) plus a development project (Pyrites II) about to come on stream. And behind that many projects in the pipeline that should bridge any production shortfalls in its producing portfolio. More broadly, it appears to be confident that it can get a handle on its costs. But much depends on the price of Silver and Gold. Over which it has no control.

Golden Prospect Precious Metals published its annual report for the year ending 31st December 2022. Not wishing to repeat what Malcolm Burne, the soon-to-leave Chairman and founder of the company, has to say but I largely concur with his wider views. To summarise, he argues that there’s a huge economic mess out there and Gold is a useful insurance in times like these. However, he also points to the serious issues that ESG compliance is causing the Gold mining industry. Incidentally, Burne is eighty years old and owns 1,156,250 shares in the company.?

It’s worth mentioning that around 98% of the fund’s total assets are in companies quoted on the Australian and Canadian stock exchanges. While the fund is managed by New City Investment Managers.

Pan African Resources made no announcements of significance over the past month. However, Edison Research (Paid for by Pan African) produced a short note. It covers much that I wrote about last month regarding the funding of Mintails. Nevertheless, it does point out that the company appears underpriced when compared to most miners. With a yield roughly the same as its price-earnings ratio, it may have a point. On a slightly sour note, there is growing turmoil in Sudan. So it would be useful to know whether this will impact the company's exploration project in the country.

Sylvania Platinum issued no further news over the past month. And, so, I believe the investment case is broadly the same as I outlined in the previous newsletter. With so much out of its control - it's highly dependent on its host mines as well as the price of a basket of commodities, it's a difficult company to fathom. But it's cash-rich, debt-free and has avenues for expansion.

On a very different scale to the above, this is my only miner outside the precious metals space.

Rio Tinto made no noteworthy announcements since I last wrote. However, its stock price has been weak as of late. This is probably due to iron ore prices recently falling to a three-month low. Around that, according to a report from mining.com, China looks set to limit crude steel production in 2023 to 2022 levels. This may be unsurprising as the industry contributes some 15% of China's total greenhouse gas emissions. While China's National Development and Reform Commission also seems to be preparing to curb speculation in the iron ore futures market. That said, the Chinese government recently announced that it expects crude steel production to peak in 2025. So there seems to be reasonable mileage. And, of course, the urbanisation of much of Asia, including India will require iron ore.

These I regard as defensive stocks. That is, I expect modest draw-downs in stock prices but I believe they can survive most economic conditions, including a depression (Am I allowed to say depression? It feels almost politically incorrect.)

Capital Gearing Trust produced a webinar covering its Quarterly report for Q1 2023. This gives a broad outline of where it is and its views on the economic outlook. First and foremost, it's largely a defensive portfolio. Some 25% of its assets are cash or highly liquid short-dated Government bonds. Around 46% is invested in US and UK inflation-linked bonds. And around 28% is in risk assets. That risk aversion can be seen in its increased holding of bonds over the past 12 months. Its risk assets have performed poorly over the past quarter. Very importantly, the trust now trades at a modest discount to its net asset value. It appears extremely confident that it will not allow this discount to widen. So, presumably, it will use a buyback programme.

As for the economic outlook, its views as far as the brake and accelerator analogy goes, are in accord with mine. Although monetary conditions are tightening, the same cannot be said for the global fiscal outlook. It describes the broader landscape as fragile and unpredictable. And admits to being "Not certain about anything". Underpinning its approach, is the belief that the Fed will be forced to cut interest rates before the year's end in the face of a recession (Or breaking something else?). With a US recession likely in Q2/Q3 of this year. As for cracks in the financial system, it points to a recession plus higher interest rates causing problems for the private equity industry as well as commercial real estate. More worryingly, it points to a fall in headline inflation but core inflation remaining stubborn unless wage inflation can be conquered. That seems to imply that a recession is needed.

Overall, I agree with much of its argument. Particularly, its portrayal of uncertainty. It reminds me of a suggestion that I recently heard in a Ray Dalio presentation. It was along the lines of what really throws you out is the unexpected. That is an event or situation that you have not experienced in your lifetime. It's not in your frame of reference. I suspect we may be there right now.

The upshot is the fund has performed relatively well since I invested but in absolute terms poorly. However, this is a long-term holding.

Ruffer Investment Company made no new announcements over the period. So, I thought I would take a closer look at Jonathan Ruffer's monthly report and his broader views. In terms of Government debt, he makes the point that financial markets don't act in a binary way by turning off the lending but they ratchet up interest rates. This, in my view, coincides with Ernest Hemingway and his observation that bankruptcy happens slowly and then suddenly. Ruffer also points to a relentless fall in interest rates over the 40 years to 2021 and the importance of this sea change. He also emphasises the return of the inflation bogeyman. With the latter largely driven by a global workforce with greater bargaining power coupled with de-globalisation. And, just like Ray Dalio, his outlook is largely determined by his observations of the past. While the careful use of hedging and locking in the upside appears to be central to his strategy. Underpinning this is the determination never to lose money (Over what time frame, I am unsure) but I take it that he believes in covering the downside in real terms. And around that, I strongly agree with his opening comments to the effect that the improbable can happen and we should prepare for it.

Greencoat UK Wind, and the UK renewable energy sector more broadly, received little positive news in the UK spring budget. The changes to the capital allowance regime do not seem to benefit offshore wind turbine installers due to the length of the projects. However, Greencoat announced an acquisition. For ￡50m, it bought the onshore Dalquhandy wind farm in Scotland from BayWa. This is the sixth wind farm it has bought from the same company. The 42MW project supplies some 80% of its output to BT under a purchasing power agreement lasting ten years. So it comes with a high degree of visibility. By the way, it might be useful if the company could demonstrate how it obtains economies of scale and efficiencies from its increasing portfolio. Are there any synergies?

NextEnergy Solar Fund announced an eight-year power purchase agreement for a Portuguese solar project (Santarém) in which it has a 13% stake (Bought in 2022 for €22.5m). This project is still under construction. The counterparty is Statkraft, Norway’s largest energy provider. The fund is a co-investor in the project with NextPower III ESG but it’s on a no-fee, no-carry basis. Essentially giving the fund a private equity-style investment without the overheads. It also has a US$50m commitment to NextPower III ESG. My understanding is that the project should be commissioned in Q2 2023.

The Kwarteng/Truss budget and the subsequent gyrations in interest rates have done the trust (And the solar sector) no favours. It currently sits at a discount of around 12% to its net asset value. So, constructing projects with short-term finance and then raising capital via the issue of shares is difficult in this climate. That said, it appears to have a pipeline of grid connections. What does that mean? At a UK Parliamentary Business, Energy and Industrial Strategy Committee meeting in January 2023, evidence was submitted that suggested a 14MW solar project would have to wait 15 years for a grid connection. It's not supply issues with solar panels or even the availability of land but grid connections seem to be the bottleneck. My understanding is that this is not an issue for NextEnergy. As for the prospect of a Labour Government. It appears to be lobbying hard and it's not a major downside. In terms of growth, the next big move looks set to be battery storage. But it's worth bearing in mind that the life of an asset is likely to be much shorter, around 15 years, depending on usage, rather than 30 years plus with solar panels.

Tritax Eurobox issued no new news over the last month, so I thought it might be useful to take a look at the 2022 European Real Estate Logistics Census published in September 2022 by Savills Research. This is on Tritax's website and appears to be an independent report but Tritax is a sponsor. It concludes that some 89% (2021: 95%) of respondents believe they will occupy the same or more space in the next three years largely driven by the need to hold more stock (38% of occupiers envisaged this over the next three years). Around that reshoring and shortening supply chains is a major theme with some 40% of occupiers expecting this over the same period.

Taking a three-year view, Germany remains the favoured destination over the period for both occupiers and investors. With ten out of Tritax's 24 units based there, this looks favourable. However, the report points to occupiers "Moving from one crisis to the next". While there appears to be an across-the-board unfavourable view of the economic outlook compared to the previous six months. Inflation expectations have taken hold in the industry with a consensus that costs will rise over the next three years. Some 56% (2021: 31%) of developers attached importance to the demand for shorter leases, this could reflect a growing economic uncertainty.

The report broadly underpins the company's investment case. It's cushioned by both inflation-linked rental income (Some 54% of its leases have uncapped CPI linkage) as well as fixed or hedged interest rate finance (Its first refinancing is in Q4 2025). While its assets are modern and it has a blue chip client base with a weighted average unexpired lease term of eight years. But inflation seems to be becoming sticky. Presumably, reshoring equals higher costs with a move from just-in-time to just-in-case supply chains.

British American Tobacco made no major announcements over the past month. However, I have noticed that vaping, especially amongst the young, has become a hot topic in the media. While the regulation of nicotine in vaping products is also coming to the fore with issues of "Overfilling" and suppliers providing products with more liquid nicotine than allowed under UK law (Currently 20mg/ml). My understanding is that British American is scrupulous, if only because it has too much to lose. But there are serious questions about the competition. At the same time, the market for illegal vape products seems to be approaching that of the market for illegal cigarettes. According to a report in the Retail Times, some 1m units of illegal vapes were seized by local authority Trading Standards departments in 2022. While just a few days ago, the Government announced an additional ￡3m of funding for Trading Standards to counter "Non-compliance". It may be a bit of a stretch but Britain's alcohol trade was once largely unregulated - think Hogarth and Gin Alley. Over time alcohol became highly controlled and, for the large players, highly lucrative. Something similar may be happening in this market.

It may be out on a limb but it's one of the few sizeable London-listed financial plays where the founder has very sizeable skin in the company. However, it's negatively impacted by lacklustre stock markets.

CMC Markets’ trading update was poorly received by the market. Its stock fell by around 20% in one day. It expects its net operating income to be between ￡280-￡290m for the 2023 financial year. While it anticipates operating costs for the same period to be ￡215m-￡220m. However, the latter excludes variable remuneration (2022: ￡14.5m). Ironically, given the latest banking crisis, it infers a lack of volatility (According to its 2022 Annual Report, short bursts of volatility may not be positive for it) with additional lower-margin institutional business and lower equity volumes. Presumably, a double whammy that hit its leveraged and non-leveraged businesses. Over the past year, it has significantly underperformed against its two London-listed rivals, the IG Group and Plus 500. Its Achilles’ heel could be its dependence on the UK and Australian markets. Both stock markets are in the doldrums. And I am a tad concerned about a possible tightening of regulation following the ￡19.2m fine imposed on William Hill, the bookmakers. For sure, it’s not the same industry but there is a degree of overlap.

A slight aside but the UK capital gains tax allowance has been reduced with the possibility of further amendments in the future. I wonder if this will make spread betting (Tax-free gains) more attractive. And, of course, it avoids stamp duty. While using spread betting as a hedge, it could be possible to mitigate a capital gains tax bill.

The following investment trusts may be from the same stable but I hold them for different reasons. The first gives me exposure to Asia, not only Greater China but Asia more broadly including India. While the second has a large tranche of Russian stocks in its portfolio and would almost certainly be more highly valued in a more normal market. A slight aside but from what I can understand JP Morgan recruits analysts who will remain in the role for the long term. It's not a stepping stone to another role. If nothing else, it certainly builds continuity and experience.

JPmorgan Asia Growth & Income could be a beneficiary of the break-up of the Chinese tech giants. At the end of February, Alibaba was one of its top ten holdings representing 2.8% of the fund’s assets. Towards the end of March 2023, Alibaba announced that it was splitting into six operating units, spurring a sharp rise in its stock value. That said, by the end of March it was no longer included in the fund’s top ten investments. However, Tencent made up 7.1% of its portfolio and also appears to be a contender for splitting. The bottom line is that de-merging some of these Chinese tech companies could be a wider catalyst for growth not only in Greater China but more broadly Asia.?

JPmorgan Emerging Europe, Middle East & Africa Securities has morphed into a very different animal. As of the end of February 2023, 36.7% of its portfolio in terms of assets was, indeed, from countries based on its newly acquired name. No mention of Russia. However, it’s now trading at a premium of around 126% to its net asset value with its Russian assets valued at roughly 1% of their market value as at the end of February/beginning of March 2022. And this excludes dividends that have been accrued since the freezing. The new structure appears to have put a floor under the price. At the end of the day, this stock comes down to what type of peace agreement can be reached to end the terrible war in Ukraine. But just an afterthought, the fund holds two classes of Rosneft shares. In total, it has around 3.7m shares. Using the Russian stock market values as I write and this is worth around ￡13.8m. As of 2nd March 2023, this represented some 0.65% of the fund in market value terms. In total, the combined holding was valued at around ￡121,000. BP also holds a stake in Rosneft (19.75%) which is now valued at zero. BP anticipates write-downs of “Up to” ￡19 billion (b) on this investment. Strange coincidence but I anticipate that my lunch today will cost me up to ￡19b. Do I think that BP will walk away from this investment? No. Do I think that foreign investors will walk away from their holdings in companies like Lukoil and Gazprom? No. Incidentally, the mood music towards Ukraine appears to be changing as the sheeple are guided in another direction. I could, of course, be completely wrong but these are my views. From what I can gather the fund managers appear to be as in the dark as anyone else as to the ultimate value of the fund's Russian equities. In my opinion, this company is potentially high reward but also high risk. I am under no illusions.

For sure, I have exposure to the renewable energy sector but I am still bullish about hydrocarbons. My understanding is that at US$60 per barrel, BP can still grow its dividend and expand its renewable portfolio. While Trinity is at the other end of the spectrum in terms of production.

BP is a sprawling giant. So, this might illustrate the scale of its operations. According to Energy Voice, it has just begun a five-well drilling programme off the Shetland Isles. This covers four development wells plus an exploratory well (The Ben Lawers). The latter is the first wildcat well the company has drilled in the North Sea in some five years. Its mid-case resource estimate is 638b cubic feet of gas. While the rig contract is worth around US$80m. But the point I am making is that the company has issued no RNS outlining this development. Considering that the UK's Oil and Gas Authority estimates that Britain's current reserves will only take the country to 2030. While its trade deficit in energy is around ￡100b per annum. Maybe BP's renewed interest in the North Sea should come as no surprise. Of course, strong oil prices are good for its business but it's a complex beast. So, I find defining it as an energy rather than an oil company makes it easier to get one's head around its operations.

Trinity Exploration & Production’s operational update provided little new information. Its ABM-151 well is now in production and it “Anticipates steady state production” of between 60-110 Barrels of oil per day (BOPD). Much as expected. While its Jacobin well is expected to spud in late April. Although it has greater knowledge of the area and the well is based on 3D data, it gives no indication of the probability of success. Anyway, it has another nine deeper prospects lined up in Palo Seco. Presumably, should this one be successful. As for the recent onshore Trinidad bidding round, the results should be announced in April 2023. Trinity has bid for the Buenos Ayres block (It runs contiguous to its Palo Seco asset). If Jacobin is successful then it opens up many opportunities for Trinity. But if it’s not then it’s difficult to see what the catalyst will be to take Trinity to a higher level.?

As I write, Trinity announced that a fire took place on its Trintes Bravo platform. However, it appears to be extinguished. Fortunately, no lives were lost and the injuries incurred seem to be minor. While its assets seem to be largely undamaged with production set to return within days. But its Trintes field produces around a third of its production. So, the situation will need to be carefully watched.

If there is a thread running through most of my investments, I suspect that it may be inflationary pressure. The huge fiscal stimulus that mitigated the COVID-19 pandemic caused a surge in demand while the virus reduced supply. Unsurprisingly, prices increased. While around that, reshoring appears almost guaranteed to raise costs. Not forgetting the dislocations caused by the Ukraine war. What I find more alarming is the pressure that the wholesale adoption of ESG policies and the move to Net Zero is putting on inflation. Simply a thought but maybe investors should be prepared for inflationary waves.

Just For The Record

If the AIM resource sector formed a punk band, they could name it The Jam (Tomorrow). That aside, I tend to agree with a line in this recording from that iconic punk-ish group “The public wants what the public gets”.

For those who sometimes feel that (Other) people are getting better qualified but dumber, this film may be worth a look .

For What It’s Worth I think some of these lyrics from a Buffalo Springfield song are still relevant today.

Baidu recently launched its rival to ChatGPT with the nickname Ernie Bot. Obviously, a homage to this great British creative rather than the Electronic Random Number Indicator Equipment.

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