Macro Tsimmis

intelligently hedged investment

Archive for February, 2007

BUY LionOre Mining International (LMGGF)—sulfide nickel play

Posted by intelledgement on Wed, 28 Feb 07

LionOre (LMGGF) are an international mining company with operations in Australia, South Africa, and Botswana. Their prime product is nickel, and in 2006 they mined 34M tons of the stuff…plus 155M ounces of gold as a side benefit.

Demand for nickel has risen along with most other commodities in the wake of the growth of the Asian economies, most especially, China who need nickel for their stainless steel habit. In 2006, nickel prices surged from $6/lb. in January to $15/lb. by December.

In the face of rising demand, world nickel production is undergoing a transformation. There are two sources of nickel, sulfides and laterites. The former are preferred, as the processing is cheaper but alas only one-quarter of the planet’s known nickel reserves are in sulfide form; the bulk are laterite. To make matters worse, the quality of sulfide ore is degrading as most of the best deposits have been played out. So while there is still more nickel produced from sulfide ore than from laterite ore—as has always been the case in human history—the gap is narrowing (56%-44% in 2006), and miners are developing improved processes for laterite and most new mines coming online are also laterite. Laterite ore nickel production is projected to surpass sulfide production in 2009.

About two-thirds of the new laterite ore will require relatively new hydrometallurgical processes—principally, a high pressure acid leaching (HPAL) technique—to be viable. On paper, it looks as if this new laterite ore production will keep supply in balance with rising demand. However, there are some HPAL-related challenges: HPAL plants are technologically complex and operationally demanding, and it is not clear if there are enough skilled workers to run all the ones on the drawing board. Consequently, delays—and concomitant price pressures—are likely.

The cool thing about LionOre is that they have three of the largest new sulfide ore mines under development. So the risk of delays effecting their forthcoming production are relatively small…and if they can get their mines up and running, they will probably benefit from increased nickel prices if laterite production is materially delayed (that is, barring a global decline in demand).

LMGGF is priced in the mid-$13s here. Last summer, a bidding war for two other nickel producers, Falconbridge and Inco. Read the rest of this entry »

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BUY FTSE/Xinhua China ETF (FXI)—Chinese discount

Posted by intelledgement on Tue, 27 Feb 07

Another one of our investment vehicles is on sale today: the iShares FTSE/Xinhua China ETF (FXI) is down big, at the moment more than 10% below the 2006-year-end price, on continuing fallout from the meltdown of the Shanghai stock market (down 9% in Asian trading earlier today). Well the FXI has nothing directly to do with Shangai (all FXI components trade on the larger and less frothy Shenzhen exchange) and China is not about to stop the growth gravy train barring a relatively unlikely (at this point) random event. Thus we see this as an excellent buying opportunity and are double dipping in our spec fund with the hope of cashing in for a quick 20% (three months) or 30% (six months), assuming the closing price for the day is $100 or lower. Stop loss will be set at 20%.

Note: this is another case—as with IFN—where our normal admonitions about the risks of the components of the speculative portfolio are not so pertinent as usual. We own this same ETF in the Intelledgement Macro Strategy Investment Fund and we paid about 17% more per share for that position. It belongs in the investment portfolio because it is an ETF that will not be broken by bad luck effecting any particular company and because the macros strongly indicate it will prosper, at least through the 2008 Summer Olympics. And it belongs here in the spec portfolio because the price has been beaten down to in irresistibly low level. As with the IFN, we are tempted to put a double portion on our plate in this fund and are resisting…but if you surrender to the temptation, you won’t get any flak from this quarter.

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Jan 07 Intelledgement Speculative Opportunity Portfolio Report

Posted by intelledgement on Wed, 14 Feb 07

Position Purchased Shares Paid Cost Now Value Change ROI CAGR
TMY 03-Jan-07 300 3.30 998.00 3.35 1,005.00 n/a 0.70% 9.55%
DNDN 10-Jan-07 248 4.01 1,002.48 4.29 1,063.92 n/a   6.13% 181.89%
PTR 23-Jan-07 8 127.17 1,025.36 123.33 986.64 n/a -3.78% -82.75%
cash       6,974.16   6,991.60      
Overall 03-Jan-07     10,000.00   10,047.16 0.47% 0.47% 6.33%
Global HF 03-Jan-07     10,000.00   10,119.00 1.19% 1.19% 16.69%
NASDAQ 03-Jan-07     2,415.29   2,463.93 2.01% 2.01% 29.70%

Position = security the portfolio owns
Purchased = date position acquired
Shares = number of shares the portfolio owns
Paid = price per share
Cost = what portfolio paid (including commission)
Now = price per share
Value = what it is worth as of the date of the statement (# shrs multiplied by price per share plus value of dividends)
Change = Change since last report (blank for positions new since last report)
Return on Investment = on a percentage basis, the performance of this security to date
Compounded Annual Growth Rate = annualized ROI for this position (to help compare apples to apples)

Notes: The benchmark for this portfolio is the Greenwich Alternative Investments Global Hedge Fund Index, which historically (1988 to 2006 inclusively) provides a CAGR of around 15.4%. For comparison’s sake, we also show the NASDAQ index, which over the same time frame has yielded a CAGR of around 11.0%. Note that for the portfolio, dividends are added back into the value of the pertinent security and not included in the “cash” total (this gives a more complete picture of the ROI for dividend-paying securities). Also, the “Cost” figures include a standard $8 commission and there is a 3% rate of interest on the listed cash balance.

Transactions: We took three positions in January allocating$1,000 for each one (10% of the starting value of the portfolio).

• 3 Jan – Bought 300 TMY for $3.30/shr
• 10 Jan – Bought 248 DNDN for $4.01/shr
• 23 Jan – Bought 8 PTR for $127.17/shr

Comments: A great month for the market, running at nearly triple its average ROI; a muted start for us. If the market is really going to be up 30% this year, that implies a continuing tight market for energy, which is good news for two of our three current holdings (although the value of TMY is much more dependent on operational performance than the world market price of oil).

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BUY India Fund (IFN)—cold shower for India…time to cozy up

Posted by intelledgement on Tue, 13 Feb 07

Indian index funds in general and banking stocks in particular are cooling off fast today in the wake of the decision by the country’s central bank to increase the amount of cash lenders must set aside to cover deposits yesterday. It was the second time in as many months the government has moved to curb inflation that accelerated to the fastest pace in more than two years.

Indian banks will have to keep cash equivalent to 6% of deposits on hand starting 3 March, up from 5.5% now. (There will be an interim rate increase to 5.75% on 17 February.) The measure is expected to sideline as much as $3.2 billion (140 billion rupees) in the banking system.

The central bank is making these moves to combat inflation generated by the unprecedented rate of expansion in the world’s second-fastest-growing major economy. Wholesale price inflation increased to an annual rate of 6.58% as of 27 January and the central bank raised the overnight lending rate on 31 January to 7.5%, the fifth increase in the past twelve months, making funds more expensive to banks. The central bank had also just raised reserve requirements last month from 5% to 5.5%.

The $854-billion economy is projected to expand 9.2% in the fiscal year ending 31 March, which would top last year’s record 9%, the Central Statistical Organisation said last week. Industrial production in December surged 11.1%, breaking into double digits for the fifth time in the last six months according to the government’s data department.

Investors were spooked by the pace of the moves by the central bank. It is unusual to see two material adjustments in the space of seven weeks; the implication is that the data the central bank staff are getting indicates that the situation is deteriorating rapidly. Indian index mutual funds and ETFs are off sharply this week and the financial sector has been particularly hard hit. The India Fund ETF (IFN) is down 4% today and down 10% over the last four trading sessions. HDFC Bank is down 6% today and down 11% since last Wednesday.

Ironically, it may have been concerns about the rising value of the rupee that lead — indirectly — to this anti-inflationary rate increase. In recent weeks the central bank is rumored to have been buying rupees to take them out of circulation and fight inflation. Speculation that the purchases had topped $1.5 billion in the past month sparked a surge in the value of the rupee to a 16-month high last week. A more expensive rupee would be very bad for the products-and-services-export-driven sector of the economy, so, observers speculate, the central bank reversed course and started to sell rupees. However, this constrained the central bank to enact another immediate reserves increase to trap the rupees in the banking system and prevent them from adding fuel to the inflationary fire.

Stepping back, these sorts of problems, while not easy to manage, are most definitely of a high-class variety (as opposed, say, to the sort of triage issues one faces coping with a sputtering economy with a grossly overvalued currency). The forces of inertia are aligned to inexorably fire up the Indian economy. Not to say that a random event such as a human bird-flu pandemic, sudden collapse of the dollar or China’s banking system, or a WMD attack by terrorists couldn’t throw a bucket of icewater on things…but the odds are good that in the long run, cozying up to India whenever — as today — she is shivering and temporarily-out-of-sorts will strengthen the long-term relationship between subcontinental investments and your portfolio…and your ROI.

For our part, we are going to double dip here: we already own IFN in our in Intelledgement Macro Strategy Investment Fund, but we are going to add a position here in our spec fund, as well. As we write, the share price of IFN is down 10% from where it ended 2006 and that is just too tempting…we will buy at the close providing the price is $42.45 or less (minimally a 7.5% loss on the year) put a stop loss in at 20%. We will look to get a 20% ROI within three months or a 30% within six months.

Note: normally we expect the components of the speculative portfolio will be significantly more risky and higher maintenance than those of the investment portfolio and are at pains to warn that it would not be prudent to invest any sum of money that you can’t afford to lose in speculative portfolio components. Well arguably—given that we confidently own this same ETN in the Intelledgement Macro Strategy Investment Fund and we paid about 10% more per share for that position—this is an exceptional case. Indeed, we thought about buying double our normal allocation, but there are other attractive speculative opportunities out there so we are limiting ourselves to one scoop here. But Indian growth is not going away, short of a calamity on the order of a ten-foot rise in sea levels, nuclear war with Pakistan, or a killer avian flu epidemic. If you are feeling frisky here, this is probably as safe a bet as you will see in this portfolio.

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