The Tiburon Terra Fund posted a gain of 0.23% for December and is up 1.11% since inception in late October 2007. We continued to maintain a cautious approach towards markets in December, finishing with a net exposure of 18% and a gross exposure of 82%. The Fund has 37 positions, with the top 10 accounting for nearly 40% of NAV. At the stock level, the biggest winners were positions in Suntech Power and Yingli Green Energy (solar); +11.2% respectively, Cameco; +11.5% (uranium) and Denbury Resources; +11.5% (oil).

The UN Climate Change Conference, came and went without any formal agreements. In the short term, expectations have been dashed after the negotiation process was hijacked by the smaller developing nations (G77) which insisted that developed nations continued with the Kyoto Protocol rather than moving forward to forge a new treaty as the developed nations have desired for sometime.

It has been easy to label the conference a disappointment, however a last minute Accord was agreed that states nations consent to commit to verifiable emission reduction targets by 31st January 2010, which is consistent with a 550 CO2 parts per million scenario.

There are several positives to be excited about that will assist the global adoption toward a lower carbon economy. First, there was agreement in principle on financial assistance from the developed economies of U$100bn by 2020 for developing economies to make the transition to lower carbon economy. Up until the conference, the US had been holding out on this point. Second, emission reduction commitments must now be open to international scrutiny. China had been resistant to this but agreed to submit emissions to domestic monitoring. Our interpretation on this is that China now sees itself as one of the “big boys” on the world stage economically and politically and from a “face” perspective was not going to be held to up to scrutiny by any country especially when the moral high ground does not lie with the US or any other developed country. Furthermore, it has been more proactive in investing and developing a domestic renewable energy industry than the US and other developed countries. Third, both the US and China did quantify possible emission reduction. The US suggested reductions along the Waxman Markey bill (17% reduction by 2020, 83% by 2050 while China outlined a national target of reducing emissions per unit of GDP by 40 to 45% between 2005 and 2020.

As investors, we see the outcome of the Copenhagen summit as an opportunity. For example, in 2009, the Asia-Pacific (the vast majority of that by China) region invested U$37 billion in clean energy, surpassing the Americas which invested U$32 billion. Overall, global investment in clean energy was U$145 billion during 2009 against U$155 billion in 2008. Given the first half of 2009 saw credit finance to new projects in the West essentially frozen, over-all investment in Clean Energy during 2009 is not at all disappointing.

We also need to remember that investment by countries into renewable energy is moving at different speeds. During the fourth quarter of last year, demand for solar modules was very strong, with companies reporting demand exceeding capacity while the outlook for the first quarter of 2010 was also very strong. This can be partially attributed to strong demand from Germany which is expected to adjust its feed-in tariff for solar generating capacity. However, in addition China is expected to announce a feed-in-tariff structure for solar power generation shortly which is also supporting the sector.

Elsewhere, the Northern Hemisphere is in the grip of one of the coldest winters for nearly three decades. China, North America and Western Europe are seeing high demand for heating. The crude oil price has recovered to over U$80/bl, up 42% on the same time last year. Over the last several weeks the weather in China has seen coal fired power stations close as supplies have faltered because of transport conditions. In the US, demand for gas has increased with large draws on inventories over the last several weeks. The NYMEX natural gas price has also spiked 26% to U$5.75/mmcf (million cubic feet). Here in the UK, demand for heating has seen some gas supply interruption to industry as supplies have been diverted to the domestic residential market. This winter has exposed weaknesses in the energy policies of a number of countries. In the UK for example, gas storage is minimal while North Sea gas supply is declining at rates which now require the country to import from Europe through the trans-connector pipeline. This is why alternative energy is not just about climate change. Security of supply is critical for any economy and the UK can be considered to be very vulnerable at present and for the next decade or longer until the new offshore wind farms are fully developed and its new nuclear power stations are on line.

In the US, domestic gas reserves have increased dramatically due to production of shale gas, previously considered unrecoverable/uneconomic. This has given rise to the term ‘unconventional gas’ supply, in that it lies very deep and usually in shale bedrock. The US has sufficient supply of this unconventional gas to seriously consider increasing its electricity generating capacity toward gas and away from coal – an environmentally attractive proposition given that gas has less that 50% of the carbon footprint of coal. In addition, the US may consider legislation requiring the use of natural gas as a transportation fuel for commercial fleets. We would not be surprised to see a strong move toward this over the short term because it will go someway to meeting the US target of reducing its carbon emissions. Perhaps co-incidentally, corporate activity has increased in the domestic US gas market. Exxon has bid for XTO another domestic gas company leading to a strong bounce in gas oriented exploration and production stocks. We are long Chesapeake Energy, which remains one of the cheapest gas levered names in the North American E&P universe trading at $1.87/mmcf of reserves. It is one of the few stocks that demonstrate excellent value using $6/mmcf gas and $60 bbl oil on long term price assumptions. Over all, global E&P companies are trading at valuations that make them very attractive relative to recent finding and development costs, historical metrics and other sub-sectors. We see this as an area of further interest and merger and acquisition activity in 2010.

In base metals, the metal complex recorded strong recoveries from the lows of earlier in 2009. The copper price increased over 140% during 2009, followed by zinc; +119%. During December copper rose 5% to U$3.35/lb. We have been and remain positive on the outlook for copper. The metal has the most positive underlying fundamentals of the base metal complex given the demand that continues to be derived from China. China accounts for nearly 50% of global demand for base metals, but in copper, it needs the metal not just for consumer products but also to connect its new power stations to the electricity grid. China consumes nearly 7 million tonnes of copper a year. Nearly 3 million tonnes (or 17% of global consumption) is used in electricity distribution, cables electric motors, and other related infrastructure requirements. Over the coming years we expect a double approach to electricity infrastructure investment in China and India. Renewable energy investment will be “on grid” and “off grid”. Off grid means simply connecting remote populations to locally generated electricity which is not connected to the national electricity grid.

There is really no substitute to copper for conductivity and transmission of electricity. Therefore while we expect the global economy to slowly recover in 2010, we see demand for copper remaining well supported from China for example and for this reason the portfolio has concentrated its mining exposure to this metal through investments in Pan Australia, Lundin Mining and Equinox Minerals. Lundin is one of the cheapest mining stocks based on its forward EBITDA of 4x and a P/NAV of under 60%. Nevertheless we also expect volatility in base metals and copper in the short term as the global commodity indexes are rebalanced for the start of 2010.

During December we took a conservative tactical approach to gold following the strong rally in the metal during November. During the first half of December the portfolio held a very low net exposure to the metal on the back of the correction in the gold price which fell from a high of U$1215/oz to an intra-month low of U$1084/oz on 22 December, a fall of 10.8%. The catalyst for the correction in the gold price was the US$ index (DXY) which rallied 4% to 77.91 from an intra-month low of 74.89.

Therefore as we enter 2010, we are anticipating the first quarter to start on a positive note. We believe that renewable energy will continue to receive strong investment in 2010. The Copenhagen Summit may have disappointed many observers, but in reality the path that is being adopted by the major economies including China (and supported by India) by-passes the smaller countries. The US and China have their agendas and these will be pursued and others will follow. Although valuations appear fair, we expect upward earnings revisions on the back of increased order volume especially in solar. In conventional energy, the oil and gas price have both recovered due to recent very cold weather that has impacted nearly all countries in the Northern Hemisphere while valuations are attractive as stocks are discounting a long term oil price of around U$65/bl, well below the NYMEX futures curve. While base metals have performed well and are vulnerable to short term volatility, copper remains our choice of the mining stocks given the strong fundamentals of supply and demand.

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