For sale: a minority interest in one undeveloped iron ore deposit, no infrastructure, dodgy neighbourhood (had civil war in recent past), management has criminal conviction for heroin offences and civil penalty for misleading the market. Offers in excess of $1.5bn entertained, mandarin speakers preferred.

For sale: shell company, ‘for carrying on an undertaking of great financial advantage, but no one to know what it is’. Will compete in the open market to buy mining assets against deep pocketed sovereign states (who have no imperative to make profits), prime managerial sponsor has no resource experience, time share on oligarch’s yacht possible for selected investors if failed political spin doctor not using it.

For sale: selection of Australian coal mines, contracted to sell majority of output at fixed, below market prices to local utilities, will require foreign investment approval, offers in excess of DCF valuation.

For sale: in the near future sundry assets unwanted by oligarch. No translation of concepts such as governance or minority rights available from the Russian. Last float down 33% in six months.

If these ads had appeared in the mining press recently, one would be forgiven for thinking that the vendors would not have been knocked over in the rush. Yet African Minerals has received an undertaking from Shandong Steel to invest $1.5bn in Sierra Leone, Vallar has raised $1bn for God knows what and Banpu has taken over Centennial. In addition, Posco has taken a stake in AMCI (Australia), KEPCO has bought 20% of an Indonesian coal miner and Adani of India seems likely to invest $1bn in a very large but currently stranded coal asset in Queensland. Even Oleg Deripaska thinks he can float more of his Siberian ‘assets’. Iron ore prices may have peaked, China may slow a little, but the land grab for resources is still very much on. We are looking for opportunities to get back into some of the mainstream mining companies which are starting to look cheap if one infers valuations from recent deals, and we are very happy to maintain our positions in companies which offer the technology to get more (energy and/ or money) out of existing resources. Some of the acquirers are appearing on our ‘looking to short’ lists. When existing management is happy to sell to a strategic buyer, you probably don’t want to be a minority in the acquirer.

The next time someone tries to tell you markets are efficient, take them gently by the throat and give them a damn good shaking. The bid for Intoll by a large Canadian Pension Fund should have been no surprise to anyone. Where else could they have found an excellent inflation hedge in their own currency with a 90 year duration, a big discount to (everybody’s) valuation and a willing major shareholder? This was one of the most egregious pricing inefficiencies that we could find, but there are plenty of others that offer corporate appeal and a very positive risk/reward trade. With safe yield looking hard to find in fixed interest markets, a lot of equities in predictable, cash generative businesses offer interesting alternatives with corporate appeal thrown in for free. The markets are still being thrown around with a very high degree of correlation in the risk on/ risk off trade by so-called sophisticated investors trying to guess day-to-day newsflow. Fundamental value is the collateral damage of this process, but fear not – cashed -up corporates are prepared to close this arbitrage.

Over the last ten years (according to the IEA), China’s energy usage has doubled and overtaken that of America. Aside from being a truly depressing statistic when one considers how far apart the per-capita usage still is, it puts into sharp focus the pressing need to increase energy efficiency. Conventional silicon-based solar and wind projects may continue to be the mainstream focus of unimaginative politicians, but the sad fact of the matter is that the economics of this type of generation do not work without subsidy and in the West the money is no longer there. In the absence of a breakthrough in fusion technology, which seems increasingly unlikely as research funding will be first on the chopping block, the planet is running out of conventional options. Yet the stock market seems unwilling to recognise this glaring anomaly, and refuses to give many promising new technologies the benefit of the doubt. Five years ago, coal bed methane was viewed as an unworkable pipedream by mainstream commentators. Now four of the biggest global energy groups are head-to-head in developing $20bn plus of projects in Queensland. There will be a major thrust in energy-starved Asia to develop this type of resource as they have (a) a lot of coal, (b) a lot of mine explosions due to the failure to remove methane and (c) a pressing need to access cheap gas to reduce emissions. In the same vein (no pun intended), UCG will also be a major focus in order to exploit otherwise uneconomic coal deposits, and when combined with fuel cell or gas to liquids technology, a way to reduce carbon and other pollutant emissions. Technologies to improve coal quality, enhance uranium enrichment efficiency, access geothermal resources and massively improve on conventional photo-voltaic efficiency are all well represented in listed form in the markets, yet few if any trade on valuations that seem to give any real credence to ultimate commercialisation, even in cases where it is already a reality, albeit at an early stage of revenue generation.. We would term this ‘irrational pessimism’, and having lived through many valuation bubbles (Japan land, TMT, biotech etc, etc) where the underlying story was far flakier but where the market adopted a bullish view from the outset, this seems to us a compelling opportunity.

Although an unexciting month in football terms (unless you happen to be Spanish), July has been a good month for markets and a decent one for us with our portfolio registering its highest score of the year. We have taken the opportunity to take a few profits and modestly reduce our exposure, but feel disinclined to go heavily liquid just yet as we can find a lot of interesting stocks – but would be rather less optimistic at the overall market level. The sigh of relief that has followed the ‘stress’ tests of the European banking system – modelling more a minor headache than a hospital admission in our opinion – has been reinforced by a significant deferment of the more stringent Basel 3 requirements for solvency and liquidity. Blue skies ahead then? Unfortunately not. Financial markets care greatly about where numbers are placed in a financial statement – the difference between the banking book and the trading book may fascinate a few analysts who need to get out more, but to any rational person it is irrelevant. A security is worth what someone will pay for it, and for a business that depends on confidence – as every banking institution does – it increasingly behoves banks to demonstrate transparency. We do not believe that the western banking system is sufficiently capitalised to cope with an extended period of low growth and on-going sovereign fiscal strain. For that matter we don’t believe the Chinese Banks are solvent either, but don’t care as we don’t invest in them and are confident that the Government is able to plug the holes in the Balance Sheets as they continue to treat the banking system as an extension of the social security net. This is not the case in the West where the taxpayer’s money has run out and the banks’ managements are less pliable. Still a sector to avoid and one that will continue to weigh down on global recovery prospects.

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