Tiburon Terra posted positive performance for March, up 3.0%. The portfolio had 44 positions at month end. Net long exposure was increased during the month to 41%.

While the Fund performed adequately with relatively low volatility and protected capital during the significant downturn in the clean energy sector – down 24% between January and end of March – market conditions have become more supportive of increased risk appetite, which in turn is supportive of a re-rating of the natural resources asset class. As a result, during March the portfolio steadily increased the net long exposure to take advantage of investment opportunities which we believe are very under valued.

Several factors converged during the month to increase investor appetite in global equity markets. The first is the market’s belief that EU Finance Ministers have arrived at a consensus of support for dealing with Greece’s debt crisis which would also involve the IMF. The second was higher commodity prices, which in turn led to support of higher stock valuations. Oil, base metal and bulk commodity prices have all increased during the month on the back of continued evidence that the US economy is gradually recovering, albeit slowly, while demand for commodities from China remains strong.

Despite this however, the Alternative Energy sector has continued to display considerable volatility during March. We took profits in short positions in Renewable Energy and Vedanta following these two stocks being heavily sold down in the market during February and into March. The portfolio has a neutral exposure to the Wind and Solar sub-sectors with long exposure continuing to focus on the Chinese companies while the short exposure in focused on US and Indian companies, which we believe, face continued margin pressure and long term loss of competitive position. We remain positive on the long term outlook for nuclear energy and the competitive positioning of the Chinese wind and solar companies.

While rising commodity prices helped propel stocks higher, it has been in the bulk commodity market that the real action has been taking place. Both BHP Billiton and Vale have been pushing for a structural change in the pricing mechanism by which iron ore and coking coal prices are set from annual to quarterly pricing. Spot prices for iron ore for example have been over 100% higher than the 2009 benchmark price. While this has met with resistance from Chinese steel makers, agreements have been made with Japanese customers, setting a precedent for their Chinese counterparts. This has in turn seen solid increases in the stock prices for Xstrata and Rio Tinto for example, rising 21% and 16% respectively during March.

One stock we are particularly excited about is Linc Energy, an Australian listed alternative energy producer that is currently undervalued and possesses tremendous long term potential. After a meeting with management in March, we increased our position to 5% NAV. Linc is utilising underground coal gasification (UCG) technology to produce hydrogen and methane gases from coal seams deemed uneconomic to mine. This gas is then converted into a clean burning diesel using a gas-to-liquid process, which sells for a $10-15 premium to regular diesel, which is contractually sold to BP. Furthermore the technology has global potential. For example, the company recently acquired a huge coal resource in the Powder River Basin deemed uneconomic for conventional mining, which it intends to develop using UCG. The cost of UCG is significantly more competitive than production of coal-bed methane and LNG. The company believes that it can produce natural gas at $1.50 per mcf (million cubic feet) suitable for use in power generation. However, the catalyst for unlocking value is the negotiation to sell several of its non-core assets, including Australian coal deposits Emerald and Galilee in Queensland, which alone could be worth $1.5 billion, a multiple of the current market capitalisation of the entire company. We expect the upside potential for the stock price to be substantial.

In recent scientific publications, “Peak Oil” has once again been written about. Sir David King, an advisor to the UK government, has predicted “Peak Oil” by 2014. This is clearly designed to shock the government into establishing a UK energy policy, as the United Kingdom, and indeed much of Europe, is vulnerable to long term security of supply. Even more vulnerable to “Peak Oil” are developing economies of China and India. Hence the drive to invest in alternative sources of energy such as nuclear, wind and solar, but also secure supply of conventional energy, which in turn is leading to increased corporate activity.

Oil companies currently look cheap based solely upon the net asset valuations, market multiples and replacement costs. It has become cheaper for large oil companies to grow through acquisition than finding and developing new discoveries. PetroChina has recently announced that it will spend USD$60 billion acquiring overseas oil and gas assets this decade. As the world’s second largest importer of crude oil, China evidently wants control over assets to assure its security of supply in the event that oil becomes scarcer.

This scramble for high quality, long life assets is occurring across the natural resource sector, exemplified by Peabody Energy’s recent AUD$13 bid for Macarthur Coal; Newcrest’s premium bid for Lihir Gold; and the proposed merger between the mid sized copper producers Quadra and FNX. Sovereign wealth fund Temasek also made a $500 million investment into a proposed copper development by Inmet. Already lofty at $3.50/lb, copper could go much higher if a global recover takes shape. The supply fundamentals appear favourable and new projects require higher prices to generate adequate returns. Companies with high quality large scale projects like Lundin and Equinox have substantial upside in the current environment.

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