Fund manager Hugo Nelson should spend less time looking for literary quotes for his quarterly reports and more time minding the shop. Not owning Kumba was one of the reasons that he has underperformed the entire peer group over the past three months, along with the heavy exposure to Delta, which was flat when the resources index was up 24%. Nelson did not hold Gold Fields or Harmony, which both did better than his AngloGold holding.

Financial Mail - 4 November 2005

"... to fiercer, weightier battles give expression" (from "Adieu to a Soldier" by Walt Whitman) was how we ended our last comment and boy were we right!

Hurricane Katrina was the eleventh named tropical storm, fourth hurricane, third major hurricane, and first Category 5 hurricane of the 2005 Atlantic hurricane season. It made landfall on 29 August along the Central Gulf Coast near New Orleans, Louisiana, as a Category 4 storm. Katrina resulted in breaches of the levee system that protected New Orleans from Lake Pontchartrain, and most of the city was subsequently flooded by the lake's waters. This and other major damage to the coastal regions of Louisiana, Mississippi, and Alabama made Katrina the most destructive and costliest natural disaster in the history of the United States! She, along with her sister Rita, significantly impaired the Gulf of Mexico installed base of oil production and land-based US refining capacity sending the oil price through the roof.

The impact of higher anticipated energy costs then led to an assumed higher cost of production for everything and an assumed uncontrollable level of inflation which further fanned the flames under the commodity complex fire - including gold where charts highlighting how cheap gold was relative to oil became de rigueur.

Did we manage to resist the call of the sirens? Pretty successfully I would say! The Coronation Resources Fund returned 20% for the quarter versus 24% for the FTSE/JSE Resources Index. Old faithfuls Sasol (36%), Impala Platinum (25%) and Mittal Steel (27%) contributed well.

The diversified miners underperformed the index, each delivering 21%. AECI (10%), Delta Electrical (flat) and AngloGold (15%) detracted with the latter underperforming the more geared plays of DRD (60%), Goldfields (24%) and Harmony (24%) which we do not own.

Not owning Sappi (1%) benefited our performance but not owning Kumba (70%) was most costly. Small new positions were established in Western Areas at 1840 cents, Merafe at 58 cents (this position was tactically liquidated at 67 cents), and Scharrighuisen (a coal contract miner) at 462 cents. Afrox was bought at 2329 cents.

Let me leave you with a remedy for these turbulent times in which geopolitical upheaval and natural disasters when combined with the generally held "wisdom" of the market (stronger for longer) seeks to separate the unsuspecting from their hard won gains. The advice is this - conservative investors sleep well! A conservative investment is one most likely to conserve (i.e. maintain) purchasing power at minimum risk. I quote liberally from Philip A Fisher in "Conservative Investors Sleep Well", first published in 1975.

"To be a truly conservative investment a company - for the majority if not all of its product lines - must be the lowest-cost producer ... It must also give promise of continuing to be so in the future. Only in this way will it give its owners a broad enough margin between costs and selling price to create two vital conditions:
1. Sufficient leeway below the break-even point of most competition.
a. When a bad year hits the industry ... losses for much of the higher cost competition will be ... great ...
b. The surviving low-cost companies ... benefit from the increased production that comes to them ... but also increase prices as excess supplies stop ...

2. The (resulting) greater than average profit margin should enable a company to earn enough to generate internally a significant part or perhaps all of the funds required for financing growth.

"Just as the degree to which a company is a low-cost producer increases the safety and conservatism of the investment, so in a boom period in a bullish market does it decrease its speculative appeal ... when hard times come ... If the high cost company doesn't go bankrupt, it is likely to produce another crop of badly hurt investors (or perhaps speculators who thought they were investors) who are sure something is wrong with the system rather than with themselves."

This is why we own Impala Platinum, Sasol, Mittal Steel, AngloGold, Delta Electrical (and Anglo American over BHPBilliton)! Sleep well.

Hugo Nelson & Henk Groenewald
Portfolio Managers

ADIEU, O soldier!
You of the rude campaigning, "which we shared,"
The rapid march, the life of the camp,
The hot contention of opposing fronts - the long
manoeuvre,
Red battles with their slaughter - the stimulus - the
strong, terrific game,
Spell of all brave and manly hearts - the trains of Time
through you, and like of you, all
fill'd , With war, and war's expression.

From "Adieu to a Soldier"
by Walt Whitman (1819 - 1892)

The theme of this quarter's report, as you may already have guessed from the title, is farewells. But first let's consider the facts of quarter two.
The fund returned 8.17% versus the FTSE/JSE Resources Index return of 8.84%. Our Sasol (24%), Impala (14%), Amplats (24%), Delta (26%) and AngloGold Ashanti (11%) holdings contributed to overall performance. Mittal Steel (-26%), BHP Billiton (2%), Anglo American (7%) and AECI (6%) all underperformed.
The zero holding in Sappi continued to add value as Sappi declined 3% in the quarter, and we remain negative on this counter. The low exposure to geared gold shares did not hurt much with the rand weakening by 7% and the dollar gold price strengthening by 2%. Harmony did have a bounce (17%) which we missed out on, however we remain of the view that this gold company is over-valued. Goldfields returned 5%.
During the quarter we sold our Amplats holding due to this counter reaching our fair value. We remain exposed to platinum metal fundamentals through Impala, where valuation remains attractive.
Delta announced the sale of their non-EMD businesses for R27 a share and will be returning this to shareholders. Mittal Steel performed poorly on the back of a steel cycle which is rolling over. We remain of the view that the business is undervalued based on mid-cycle valuation metrics and thus will hold on to our exposure.
We now get to the farewells. Firstly, we say goodbye to cheap oil! Mr Hubbard, a geophysicist, correctly predicted that US oil production would peak in 1970 - the so-called Hubbard Peak. We are evidently staring down the barrel of the global Hubbard Peak! Hence, US$60 per barrel of oil and Sasol being the largest position in the fund at 21%!
Secondly, we say au revoir to the European Union and the euro with it. The US dollar has been rampant since the French said "non!". The dollar gold price has, for the time being, disconnected from its recent tight relationship to the euro/dollar throwing all but the gold bull into a fair degree of consternation. We remain of the view that the dollar cannot maintain this level of resurgence versus the euro and that those who hold gold are merely waiting for sanity to prevail.
And now, let me leave you with the second and final stanza from "Adieu to a Soldier".

Adieu, dear comrade!
Your mission is fulfill'd - but I, more warlike,
Myself, and this contentious soul of mine,
Still on our own campaigning bound,
Through untried roads, with ambushes, opponents lined,
Through many a sharp defeat and many a crisis - often
baffled,
Here march, ever marching on, a war fight out - aye here,
To fiercer, weightier battles give expression.

The large position in Sasol, which was up 24% in the June quarter, helped drive the fund's returns, along with Delta Electrical, which was up 24%. The only thing that prevented a memorably strong quarter was the hefty 8% weighting in Mittal Steel SA, which was down 26%. But fund manager Hugo Nelson says it is cheap, based on the midcycle valuation metrics. Not holding Sappi or Gold Fields, which both undershot the index, helped.

Financial Mail - 22 July 2005

"I love it when a plan comes together!"
In the conclusion to our last fund comment we said: "...we have returned a par performance and are looking to start attacking the course more aggressively in the new year".
In the first quarter the fund returned 12% versus the FTSE/JSE Africa Resources Index return of 16%. Although we underperformed the sector by 4%, this comes on the back of a 10% outperformance of the sector in the prior period. The strong sectoral performance came from BHP Billiton which was up 28.41%.
The sector was assisted by a welcome 10% weakening in the rand/US dollar exchange rate over the period. There was no change in the US dollar/oz gold price but the rand gold price improved by 10% as a result of the rand weakness. We remain unexposed to the very geared gold shares like Harmony (-4%) and Goldfields (4%), preferring AngloGold (6.27%).
Our larger active positions performed well in the quarter with Sasol, Impala Platinum and AECI returning 16%, 9% and 9% respectively. Iscor, now Mittal Steel, returned 1% and we remain positive on all. Sasol and Impala Platinum in particular possess "free options". In the case of Sasol, it is their Gas to Liquids roll-out programme which one is not paying for and, in the case of Impala, a normalisation in Zimbabwe allowing a proper monetisation of their Zimbabwean resource base.
We have become even more negative on Sappi and have liquidated the small position we had started building in the prior period.
In conclusion, let us leave you with a problem to ponder: Which successful 1980s television series featured four characters thrown together when charged with a "crime they didn't commit" namely, stealing gold bullion from the "Bank of Hanoi" during the Vietnam War? Clue: The leader of this band had a catch phrase which also happens to be the title of this report.

Keep it on the fairway!
The last quarter is behind us and whilst we are 1% down, we take comfort from the fact that the Resources Index declined 11% - giving us 10% out-performance for the quarter. We have thus managed to keep it on the fairway quite nicely.
The rand, our eternal thorn in the flesh, strengthened by 12% to end the quarter at R5.694 to the US dollar. This represented a significant headwind for the sector. We do expect the rand's strength to reverse as the fundamentals re-assert themselves over the next year.
Our major stock holdings produced a mixed performance with Iscor, Sasol, Impala Platinum and AECI returning 45%, -1%, -11% and 17% respectively.
Major changes introduced during the quarter include the liquidation of our Gold Fields position on the day the Harmony hostile take over was announced for a whopping R100 per share and the purchase of a small exposure to Sappi after their poor earnings release and outlook for just under R76. We have also started reducing our Aveng holding as it has benefited substantially from the government's pronouncements regarding fixed capital formation.
The rand gold price is currently approaching the levels at which we were prepared to buy into the gold shares in the previous quarter. It ended the quarter 6% down at 82000 R/kg against our previous buying level of 79000 R/kg. The shares have also declined to more reasonable levels although largely influenced by mergers and acquisition activity, and may soon start to represent a genuine opportunity.
The fund maintains a significant bias towards energy/petrochemical counters with Sasol and BHP Billiton comprising 30% of the fund.
So we have returned a par performance and are looking to start attacking the course more aggressively in the new year.

The large holdings in Ispat Iscor and AECI, in particular, have helped the fund to outperform the r esources index quite comfortably, as well as the low exposure to gold, though there has been some buying of AngloG old this month. The fund made a tidy profit from Gold Fields, which it sold when Harmony's first offer was announced, as well as from Aveng, which was sold completely by January 14. Some Sappi was acquired at R76/share.