Despite February being a very volatile month, the Tiburon Terra Fund posted a gain of 0.32% following an unstable month that impacted financial markets across the board. In the face of a very weak environment for the renewable sector, we have continued to managed the portfolio in a defensive manner with net exposure a short 13% at the end of the month.

Sovereign credit issues continued to weigh on global financial markets during February with the debt crisis in Greece overwhelming market sentiment. Much has been written about the debt issues that are confronting Greece and how it must address the level of public spending to reign in its fiscal deficit. However, the greater issue at stake is how the EU deals with the crisis in Greece (and elsewhere) when as an economic bloc it can control monetary but not the fiscal policy of its members. Spain, Portugal, Italy and Ireland also have pressing fiscal deficits. Of the four, only Ireland has been proactive in addressing its fiscal position by increasing taxes and cutting public sector spending; lack of action will contribute to the instability in the Euro Zone. This has lead to the Euro weakening against the US Dollar, in turn increasing volatility in the natural resources markets.

To date France and Germany have presented a somewhat united face to the global financial markets but, there are already noises being made that German tax payers should not have to bail out the Greek government when it has not exercised fiscal prudence over the last decade. Despite this discontent however, the issue is another example of one that is “too big to fail”. As such the EU and the European Monetary Authority will have to provide a back-stop of support for Greece should it be needed. Nevertheless, the risk of volatility continuing to affect markets is likely to remain.

Of course there is also the question of the parlous state of the United Kingdom’s fiscal position where Sterling has continued to weaken against the Euro and US Dollar. With a General Election due by June 2010 and the spot light continuing to be focused on the Prime Minister and his competence as a leader, the world at large must be wondering whether the country is being run at all!

Alternative energy stocks were heavily sold down during the month. The portfolio held net short exposures in both wind and solar which made positive contributions to performance. Solar companies in Europe remain especially vulnerable to increased competition from Chinese manufacturers which has seen them suffer from continued and severe margin pressure. Two stocks in particular have been sold down as a result: Q-Cells and Renewable Energy. Both companies reported worse than expected Q4’09 results while Renewable Energy has had to go to the market to raise more debt as its requirement for working capital increased. Renewable Energy would not give any guidance on the outlook for the company. The stock fell 40% during the month.

In the US, First Solar and SunPower also reported 4Q’09 results below expectations due to continued margin pressure on sales, especially into Europe. The continued erosion of margins of western manufacturers by Chinese manufacturers was illustrated by a meeting we had with the management from Renesolar, a Chinese poly-silicone producer and wafer manufacturer. They hold a 10% share of the global market for PV wafers and will increase capacity from 825MwH to 1.0GwH in 2010. The company is predicting the cost of poly-silicone will fall below U$40/kg in 2010. Meanwhile, the company is focusing on becoming the largest OEM manufacturer of modules in the world, which will directly undercut the major European manufacturers on price as installers import from China.

Longer term this is very positive for consumers as the penetration of solar into the market increases as prices fall. However, it is also causing considerable disruption short term to regionally established manufacturers. This trend will likely to continue as evidenced by the German government cutting the Feed-In-Tariff on new solar capacity from 3Q 2010. The winners in this ‘war of attrition’ will be the Chinese solar manufacturers and where the portfolio continues to hold long exposure. Suntech Power and Yingli Green Energy are among the lowest cost producers of PV modules and continue to see their volume of sales increase while maintaining their gross margins.

In the Wind sector, we have continued to hold a cautious view on the outlook for Suzlon and Vestas. Both companies are confronted with intense competition globally and both are seeing margin pressure. Interestingly, when Vestas reported its Q4’09 results it did not provide any earnings guidance to the market for 2010. In our view, this illustrates that the company’s history of guiding the market toward ambitious targets is now very much less certain.

In the Energy sub-sector, the crude oil price has increased toward U$80/bl despite US Dollar strength, which is contrary to how the oil price has behaved over the last twelve months. The portfolio kept the net position in the energy sub-sector low, but it did increase the holding in BPZ Resources, an oil company with interesting and undervalued reserves in Latin America following a period when the stock had been heavily sold down in the market without any negative news presenting extremely good value. The stock appreciated 31% during the month. Elsewhere, we increased the portfolio exposure to Pacific Rubiales Energy and Suncor. Both companies also are trading at valuations which are very attractive with the oil price trading at around U$80/bl.

In mining, base metal prices have also continued to strengthen. For example, the 3-month copper price is now trading at U$3.27/lb against U$3.06/lb at the beginning of the month. However, equity prices have not followed the metal price increase with the same vigour due, in part, to the uncertain economic situation in Europe. The portfolio has a strong exposure to copper through holdings in Equinox Mining and Lundin Mining. The two companies are trading on valuations that are very compelling, however, in the case of Equinox, due to heavy rains in Zambia, the stock has been sold down in the market while other copper stocks have increased. We believe this is a short term aberration. The company has a very valuable asset in its Lumwana mine, which is steadily increasing production as it ramps up toward full production. It is likely that we will increase the position into further weakness. In the case of Lundin, the stock has also been somewhat ignored by the market recently although it has provided a positive contribution to performance during the month. Lundin’s Tenke copper mine in the DRC is potentially as big as Escondida. We met management very recently and we are convinced this company is too undervalued to be ignored.

Our holdings in rare earths and lithium (Lynas Corporation, Arafura Resources and Galaxy Resources) had a tough month on the back of weak market sentiment. However we remain positive on the outlook for all of these companies as we see increasing evidence that the demand for these minerals by the auto industry as it moves toward increasing production of hybrid and electric motor vehicles will place huge pressure on global supply and therefore in turn, very likely see prices considerably higher in the future.

In the diversified mining sub-sector, Rio Tinto also provided a positive contribution to performance during the month. Rio has been enjoying very strong iron ore and thermal coal prices. Although Rio has the major proportion of its iron ore and coal production on contract, the market is steadily moving toward a spot pricing market. Spot prices for coking coal have recently exceeded U$200/t while iron ore prices are above U$100/t. Demand from China remains very strong which in turn reflects the poor quality of its domestically produced product.

While February was a volatile month, due primarily to exogenous factors outside of the asset class, commodity prices have remained very strong. In the course of meetings we had with management during the month, demand remains strong for commodities form China while in the alternative energy sector, demand for Chinese manufactured solar modules continue to displace European manufacturers market share in their home markets. Volatility will continue, but it does appear that there is a little more clarity on the macro economic issues confronting Greece and how the Euro member states will operate if Greece seeks support. Therefore looking forward, if markets are entering a period of relative stability it is like the position of the portfolio will increase exposure to being net long given the valuations of the companies held in the portfolio are trading at significant discounts to their net-asset-values and peer group.

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