Our resident pensions expert outlines key drawdown considerations

If you believe mining shares look oversold following a slump in commodity prices then a newly-listed fund provides exposure to lots of junior diggers. The team behind the successful Resources Investment Trust, which trebled in value between 2002 and 2008, is back with a new venture that has stakes in 41 mining, oil and gas tiddlers.

Global Resources Investment Trust (GRIT) floated on 7 March at 100p, to give it a market value of £39.5 million. Fund manager Sam Hutchins used to work at M&G on mining and commodities investments; and fellow manager Kjeld Thygesen has similar experience at NM Rothschild. Their expertise cannot be questioned but there are several risks that warrant consideration before you invest in the fund.

The trust has established its seed portfolio by swapping shares with the invested companies, which include uranium explorer Forte Energy (FTE:AIM) and metals prospector Wishbone Gold (WSBN:AIM). It is very hard for small resources firms to access capital, so this is a way for them to raise cash. The recipients are free to sell the shares from 7 September, six months after the fund’s launch on the market.

WSBN - Comparison Line Chart (Rebased to first)

We expect very few of the resource firms to keep hold of their shares in the investment trust in the hope it appreciates in value. Time is not on their side. Several of the invested companies have already stated their intention to sell so they can rustle up cash for working capital. This creates a stock overhang and September could in theory be a tricky month for the investment trust’s market valuation.

Funding plan

Hutchins says there is a plan to try and place the shares ahead of the six-month lock-up expiry. ‘All the companies are sellers, there’s no doubt about it,’ he says with refreshing candour. ‘We want to work with the companies to undertake a secondary offer, get bids for a large chunk of the portfolio and place shares with institutional investors.’ Until that happens, the investment trust may also prove fairly illiquid.

The concept of a share swap to play a recovery in junior miners has already been tried by Praetorian Resources (PRAE:AIM) but with little success. It joined Aim at 50p in July 2012 and has slumped to 9p. Many of its holdings have struggled, notably rare earth play Galileo Resources (GLR:AIM) whose share price has been in freefall ever since Praetorian listed.

Shares has noticed an improvement in market sentiment towards junior miners since summer 2013. Even so, Global Resources may not be in for an easy time of it. Many of its holdings are merely trying to stay alive, so we are concerned that exploration or expansion may move at a slow pace. It is also unclear what will happen when the invested companies spend their cash after they sell shares in the investment trust. Hutchins says the money will help each miner reach the next milestone in its career, such as the completion of a drilling programme, feasibility work or even production. Theoretically, it could trigger a higher share price and put them in a better position to raise equity on the market, but that is far from guaranteed.

Upbeat view

Despite our reservations, Hutchins is bullish. He says: ‘My colleagues and I have been involved in the natural resources sector all our careers. We’ve seen good and bad times; we’re currently in a bad time. Four to five years ago, (resource stocks) could float the dream. Capital is now very scarce but thankfully some light is shining through.’

The fund manager claims Global Resources’ portfolio would have been worth up to $400 million before the global financial crisis and says many of the projects are now more advanced. There is a counter argument that many mining stocks were over-valued at the peak of the cycle. Commodity prices have also come down and operating costs gone up, so lower valuations are justified.

ALHAMBRA RESOURCES - Comparison Line Chart (Rebased to first)

Seasoned UK investors may not be familiar with the bulk of the collective’s portfolio as it is dominated by Canadian-listed stocks. This includes Kazakhstan-based gold producer Alhambra Resources (ALH:TSX-V) and Nevada-based explorer NuLegacy Gold (NUG:TSX-V). One of the biggest holdings is Kyrgyz Republic-based Arakan Resources (ARK:GXG) which has a small coal mine in production. A favourite of Hutchins is Anglo-African Minerals (AAM:GXG), listed on the European GXG exchange but which he claims is looking to move to Aim later this year. ‘It has a relatively small market cap but controls a huge amount of bauxite resource in Guinea.’

He concludes: ‘The timing of launching Resources Investment Trust in 2002 was pretty close to the bottom of the cycle. I think the timing with GRIT is equally similar.’

Fund Pie1Pie2


David ‘Sam’ Hutchins

Global Resources Investment Trust (GRIT)

92.5p

ISIN: GB00BCKFVJ45

One-year annualised performance: n/a

Net asset value: 84.5p (as of 24 Mar)


Fund Facts

Launch date: 07/03/14

Fund type: Investment Trust

Fund size: £36.6 million (as of 24 Mar)

Dividend yield: n/a

Sector: Equity Natural Resources

TOP TEN EQUITY HOLDINGS

Company %

Arakan Resources (AKR:GXG) 13.9

Anglo-African Minerals (AAM:GXG) 7.6

Tirex Resources (TXX:TSX-V) 7.5

Alhambra Resources (ALH:TSX-V) 7.0

Waterberg Coal (WCC:ASX) 5.9

Apogee Silver (APE:TSX-V) 5.0

Siberian Goldfields* 5.0

NuLegacy Gold (NUG:TSX-V) 4.4

Portex Minerals (PAX:CNSX) 3.6

Mineral Mountain Resources (MMV:TSX-V) 2.8

Source: GRIT, Shares

*Private company (not listed)



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