SF t1ps Smaller Companies Gold Fund

Newsletter - Issue 14
September 2010

Metals Prices are Not the Key to the next leg but they will help...

The key to the next leg up for the stocks we are invested in is not, I suspect, metals prices. But I think that they will head our way anyway and it will do us no harm. On that matter, here is a piece I wrote elsewhere the other day:

Gold is back at $1250 an ounce but in recent weeks the hotter metal has been silver now at just under $20. This is good news for the SF t1ps Smaller Companies Gold Fund which is quite keen on silver and has large holdings in two big Canadian silver producers. We called it for silver in the summer as an even better bet than gold and we still stand by that call.

The strength of silver has been put down to the fact that not only is it a poor man's gold so will always be dragged on its coat-tails but that it also has key industrial uses. So if one takes the view that the world economy is growing and that there is a clear inflationary risk (so paper money is unattractive) silver hits the spot. We take that view.

So is it too late to buy into silver. Oh no. The long run relationship between gold and silver is 50:1. We have not really been at that level for almost 30 years. Silver was screwed by 2 events. In the early 80s the Bunker Hunt’s tried to corner the market. Mad men. Silver soared ( to $49.45) and then as their folly was exposed it crashed. Just as sentiment started to recover digital photography destroyed one key industrial use and then along came the dotcom revolution and great brains such as Gordon Brown and the writers at the FT were able to write it off as so very ''old world'' (even more than gold) and its price slumped to around $4 (when gold was $250 and Gordon was selling). You will note that at its nadir silver was trading at 1:62.5.

Markets always over-react both ways. So given that we see gold heading higher the implication is that silver should head sharply higher. Assume that gold reaches $1350. If silver only gets back to the long run average it should be at $27. I think it may over-react and head higher. If I was a spread better I might consider a pair trade on a long dated bet: buy silver sell gold. Since I am not I just suggest that - as a free share tip - you look at quality silver producers in Canada such as Great Panther or First Majestic. We have!

The argument for gold/silver is unchanged. QE will continue as will the turmoil in the Euro. Hand on heart can you say that you have faith in any paper currency as a store of value? No. Enough said.

But the next leg up for gold and silver stocks will, we think, be from corporate action. We have already seen one stock we invested in disappear as a result of a bid (Lihir) and last month we had news that two others (Red Back and Kinross) were to merge. So it is two down more to come. Next up is Kryso where the likely bidder is Chinese and across all resource sectors the clear trend is of Chinese buying of proven assets. That will continue.

But with gold and silver at current levels there are enough cashed up Western producers chucking off surplus cashflow who will also be a position to buy out their peers. So there are bidders aplenty. Now not every mining stock is vulnerable. I cannot see the Chinese (or anyone) bidding for over-hyped Greenfield explorers. What are attractive are those companies with a proven resource and/or production.

Guessing who is next to attract a bid is a mug's game. That noted our top bet for a bid approach remains Medusa Mining which looks hugely undervalued at 260p, ticks all the boxes as a potential target and must be worth a minimum of 400p a share to a predator. The point is that as more bids emerge the whole sector (bar the obvious non targets, green field plays) will be re-rated.

As we write the NAV of your fund - which is just a few days past its first birthday - is 119p. Against such a promising backdrop we believe that the best is yet to come. But that it will start to come pretty quickly. However, bear in mind that past performance is not a reliable indicator of future results and that If you are in any doubt as to the suitability of an investment, you should seek independent financial advice.

Tom Winnifrith

If you have any questions about investing in the SF t1ps Smaller Companies Gold Fund or if you want a simplified prospectus and an application form please visit our website at www.t1psim.com or email goldfund@t1psim.com

Total return, bid to bid line chart from 11/09/2009 to 06/09/2010 from UKUT and OEICs Universe

Source: Financial Express
Past performance is not a reliable indication of future results

Now is the Time to Buy Gold Fund Units - How to Do it!

1. Contact your broker. Most brokers offer the chance to buy units although few can match our initial rate of 2.5%. But call your broker and give him the fund's SEDOL code: B3 YQ 855. If your broker will not deal please call Spiros Kurtidis on 0207 562 3386 and he will try to rectify the situation.

2. Deal through t1ps and The Share Centre at the initial fee rate of 2.5%. If you want an application form email goldfund@t1psim.com or go to www.t1psim.com

3.Once you have made an initial investment (of as little as £500) you can set up a monthly standing order with The Share Centre to drip feed further cash (as little as £25 a month) into the fund. All existing fund holders can set up such an order.

If you have any questions about investing in the SF t1ps Smaller Companies Gold Fund visit our website at www.t1psim.com or contact 0207 562 3386

3 Bid Plays (well 2 so far and 1 to come?)

As we noted in the editorial M&A activity is picking up and will, we believe, be the driver of the next leg up in value for the stocks in which we are invested. We see this as a theme that will continue throughout the Autumn.

On 2nd August it was announced that Kinross Gold, which we hold, plans to acquire its fellow Canadian Red Back Mining, which we also hold!

The all paper merger will create a top tier gold producer, with the two fully developed Red Back mines strengthening African operations whilst boosting annualised production output to 2.6 million ounces of gold by end 2010, with production set to reach 3.9 million ounces by the end of 2015. We believe that the enlarged group will rival top tier producers such as Gold Corp, currently producing 2.4 million ounces a year, and even Newcrest, which currently produces 5 million ounces a year.

The transaction will be executed via a plan of arrangement, with an all share offer of $7.1 billion. Red Back share holders will each receive 1.788 new Kinross share per Red Back share held. On top of this, for each Red Back share, there will be 0.110 of a new Kinross common share purchase warrant offered. The value of the offer is roughly CAD30.5 per Red Back share, a 21% premium to the announcement day price. The warrants have a four year term, with an expected exercise price of $21.30, a notable premium on the current Kinross share price.

Kinross operates in Canada, the US, Brazil, and China. The acquisition of the un hedged African focused Red Back will create a strong gold producer with 10 mines, 4 development targets with projects spanning 8 countries. Both firms are currently trading strongly with Kinross reporting second quarter production, announced on 4th August 2010, of 538,270 ounces of gold equivalent, creating a solid profit of $696.6m. On 3rd August 2010 Red Back announced a quarterly profit from mining operations of $54.3m.The agreement which is planned to be decided through a special shareholder meeting, will take place on the 15th September 2010. We are happy to hold.

Last month we discussed Medusa Mining, and the unimpressive share price performance given the obvious value and prospects of the Philippines focussed miner. Charlie Munger once explained that price is what you pay, value is what you get, and we have always been confident that Medusa will prove our point. A month later the shares have jumped by 20% but at 260p the shares still look very cheap.

On 31st August Medusa announced its results for the full year ended 30th June 2010 with a headline release of net profit after tax of $65.81 million, a 131% increase on 2009, with revenue up 120% at $94.51 million. Net cash as of 30 June 2010 sat at $26.1 million, despite a major investment spending programme of $34.57 million, with the intent of furthering organic expansion with the ultimate aim of realising the target of becoming a mid tier 300,000 - 400,000 ounce producer. A record 89,679 ounces of gold was produced during the year at the flag ship Co-O mine, with an average cash cost of $184, one of the lowest in the industry. 100,000 ounces of gold are expected to be produced this year, with an average cash cost of approximately $190. And there will be a dividend (ok only a few coppers) to boost as well as a move to the main market very soon.

The results detail a strengthened balance sheet with a solid cash pile, net current assets of $65.06 million, and only $279,000 of non-current liabilities. Why include Medusa in this review? Because it ticks all the boxes for a major looking to build scale: a solid resource, cash generative and huge exploration upside. We regard this as a sitting duck but think a bid has to be priced at 400p plus to have any chance of success.

Finally, progress has also been made by AIM listed Kryso Resources, the mineral exploration and development company, with gold, and nickel-copper projects in Tajikistan. Following the proposed project fund raising, as detailed on 27th July 2010, it announced on 2nd September that China Non-ferrous Metals International Mining Co. Ltd has subsequently concluded a lengthy legal, financial, and technical due diligence study, with satisfactory results. Thus, £10,990,430 is expected to be raised through a placing of 73,269,539 new ordinary shares at a price of 15p, equating to 29.9% of the issued share capital on completion of the placing.

Kryso, which boasts a number of projects across Tajikistan, states that the majority of the funds raised by CNMIM will be used to fund the development of the Pakrut gold project, which contains a JORC code compliant mineral resource of 3,024,000 ounces of gold. It is also proposed that the funds will be used to further the exploration in the surrounding Pakrut area, whilst also further exploration at the respective nickel-copper project.

Even though the suggestion of the issue of shares, or new instruments was not passed at the 30th June AGM, we believe that the opportunity to develop the Pakrut gold interest, funded by a solid mineral developer, will help to persuade reticent share holders to pass the resolution. More importantly you do not buy a 29.99% stake as a passive investment. Kryso's days as an independent are numbered and our guess is that the Chinese will move sooner rather than later. A 20p takeout within months is not implausible.

Ross Jones and Tom Winnifrith

If you have any questions about investing in the SF t1ps Smaller Companies Gold Fund or if you want a simplified prospectus and an application form please visit our website at www.t1psim.com or email goldfund@t1psim.com