We launched the Terra Fund on the 27th October and for the remaining three business days of October, the portfolio recorded a net positive return of +0.30%. During October, the MSCI World Energy and Materials Index, which rose just +0.4% and the WilderHill New Energy Index (NEX) which fell -6.6%.

Investment into the markets is being made on a gradual basis. We believe that valuations are reflecting near full value in some of the major mining stocks, which generally performed strongly during October. However, valuations in the oil and gas sector remain very attractive. While valuations remain fair overall in the renewable energy sub-sector, some companies are seeing significant competition and in turn margin pressure from Chinese turbine and PV module manufacturers.

The Renewable Energy Sector remained under pressure during the month as companies reported 3rd Quarter earnings. Most companies reported 3rd quarter earnings in line, guiding investors with an improving outlook. Nevertheless stocks in the sector have continued to be sold down, especially in the European markets. There are a number of reasons for this. The first is that the German government is expected to cut the solar subsidy on the back of lower module prices. A second reason is that margins of European manufacturers have been under pressure due to increased competition from Chinese module manufacturers, who in turn are selling modules into Europe at a 30% discount to European producer prices. Although clearly painful for European manufacturers, taking a medium term view, we see this as being very positive for the industry as a whole as it accelerates the point at which grid parity is ultimately reached and drives out weaker participants from the market.

Looking to the Wind sector, new projects continue to be announced globally but the price turbine manufacturers are achieving for their product has fallen. Indeed, Chinese turbines are selling for around U$750,000/Mw, compared to over U$1,000,000 for European equivalent. Again we see this commoditisation as a positive.

Nevertheless increased competition is putting pressure on a number of players. Suzlon for example has seen a significant fall in contracts won during 3Q’09 and guided investors that the outlook is challenging. But this competition is also presenting opportunities: Vestas, by contrast, reported 3rd quarter earnings well ahead of expectations and indicated that the outlook is more positive and that revenue targets set at the beginning of 2009 look achievable. We have focused on the competitive manufacturers in the Chinese market. The portfolio is long China High Speed Transmissions and Dong Fang Electric. Both these companies reported solid 3rd quarter earnings with very full order books. Once the current consolidation in the Chinese market ends, we expect these stocks to recover recent falls.

We have liked the outlook for nuclear for some time and are convinced that the long term demand for uranium is very well under pinned. We have invested in Cameco, the world’s largest uranium producer and ERA. In addition, following a recent 20% fall in Paladin’s share price we are adding this stock to the portfolio. The nuclear renaissance is being lead by China. It has 17 nuclear reactors under construction, 34 planned and 90 proposed. Across the emerging economies there are 40 reactors currently under construction, 85 planned and 163 proposed. From 2015, it is estimated that there will be a severe shortage of uranium to meet the demand from generators. Given China’s major building programme of nuclear plants we believe that the deficit uranium will arrives way before 2015.

Lithium and rare-earth minerals is an area that has interested us for sometime. The portfolio holds two stocks Galaxy Resources, which will be the world’s fourth largest lithium carbonate producer, and Lynas Corporation which has the world’s riches rare-earth mineral deposit. Both are Australian companies. The demand for these minerals for use in energy efficiency and power storage is already well understood and expected to increase dramatically over the coming years. Our thesis was to have exposure to the producers of the minerals, not the downstream manufacturers of products that use these minerals. Total global demand of lithium is approximately 22,000 tonnes, of which about 4,200 tonnes is currently used in batteries. As a result of burgeoning demand the price of lithium carbonate has increased from US$2500/t in 2000 to around US$6000/t currently and is expected to increase threefold over the next ten years. We have seen the major western auto manufacturers focus on developing a new generation of cars using power storage from hybrid electric vehicles to fully electrically powered cars using Nickel metal hydride batteries: NiMH. While there are drawbacks to lithium use in batteries (principally heat) it has distinct advantages over NiMH. The first is power to weight and rapid re-charge time. Car manufacturers are looking at lithium as a substitute to NiMH batteries: Toyota, which in 2010, will start using Li-ion batteries instead of NiMH in the Prius hybrid car. A conservative estimate is that globally, approximately 2.5 million hybrid vehicles will be on the road by 2015. China is the largest motor vehicle manufacturer of over 10 million units annually. In Shanghai for example, electric powered scooters have by and large replaced petrol powered scooters. BYD, one of the world’s largest lithium battery producers is bringing to market a lithium battery powered car while other vehicle manufacturers in China are also developing hybrid and electrically powered vehicles. Meanwhile car producers in Asia, Europe and North America are also bringing to market their versions of the same from 2010. Demand for lithium is forecast to grow by 7% to 10% per annum. In the short to medium term, these forecast rates of growth may very well prove conservative.

The mining sector has been one of the best performing sectors in the entire market year to date. Since mid October, we have seen base metal prices continue to rise while share prices have fallen. We have noted on a number of occasions that some mining stocks are trading at valuations that discount higher commodity prices than the under lying metal futures curve. This suggests to us that some stocks are at best fairly valued if not over valued and therefore due to consolidate recent gains. We continue to like the outlook for copper given the strong demand/supply fundamentals. Elsewhere in mining, the long term outlook gold remains very attractive with the gold price now at U$1092/oz, an all time high. The portfolio is net long 6.2% gold stocks with the largest position in Newmont Mining. Concerns over outlook for the US dollar remain. Meanwhile just this week, the IMF has sold 200 tonnes of gold to India’s Central Bank and has announced it will sell up to 400 tonnes in total.

The WTI crude oil price continues to be well supported between U$77 to U$84/bl. Valuations are especially attractive with oil and gas producers trading at discounts to the larger equity market. Oil and gas producers are currently discounting an oil price of between U$55 to U$65/bl. This is a 25% discount to the current spot price of WTI of U$80/bl, while the futures curve for December 2010, is currently pricing WTI at U$93/bl. Companies we hold in the portfolio such as BPZ and Petrobank are trading at discounts to their net asset value of up to 30%. Another company the portfolio holds, Denbury Resources, also trading at a discount to net asset value uses captured CO2 from industry to enhance gas production by injecting the gas into the production wells.

Our outlook for the oil price is that it is likely to rise going into next year as economic growth in the major economies very slowly recovers in 2010, while those of China and India are expected to record economic growth of over 8%. However, short term, the oil price is subject to bouts of volatility and as such the portfolio has protected the long exposure to the higher beta companies named above by holding short positions in several major oil companies.

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