Don't panic "The Hitchhiker's Guide is the greatest success of Megadodo Publications. A handy electronic reference book, its chief selling points are the words: 'Don't Panic', written in large friendly letters on the cover, and the fact it is cheaper than its closest competitor." The Hitchhiker's Guide to the Galaxy, Douglas Adams

These are very trying times to be invested in the stock market, especially in the resource sector. Commodity prices declined across the board driven by a global slowdown in demand. Most commodity companies followed suit and many are down 50% or more from their peaks.
In this environment the fund declined by -31.3%, ahead of the benchmark's -33.1%. For the past 12 months the fund and benchmark returned -16.7% and -15.1% respectively, and over the longer term the fund returned a 3-year compound average of 25.4%, outperforming the benchmark's 23.6%. This remains ahead of the All Share Index's 15.3% total return.

The greatest detractors of quarterly performance were Anglo American (-48%), Impala Platinum (-45%) and Exxaro (-40%); while Afrox (+8%), Omnia (-8%) and Mondi (-9%) contributed significantly to outperforming the benchmark.

Over the years, we consistently warned of the high earnings bases for commodity companies given the multiple year bull market. This was coupled with relatively high ratings on these high earnings - a sure recipe for disaster.

Today, share prices are at a much more rational level. While earnings are still high, the rating applied to them is low. In addition, indiscriminate panicked selling has given us the opportunity to buy great companies at low prices. We have always valued companies based on their long-term business valuations. These valuations are based on cash flows into the far future; the next few years make up a very small part of this. While the earnings prospects and share prices have declined massively over the last few months, long-term values have not. For the first time in the past few years, we are more confident of the long-term returns available from the resource sector from its current level. We are happy with the position of the fund, with many more opportunities presenting themselves as share prices fall. This makes us all the more confident of continuing to outperform our benchmark.

The fact that share prices have declined should therefore make you as an investor more optimistic about the future returns from the fund; not less. While it is hard to separate emotion from decision making in times like these, these are exactly the times when rational investors can profit.

Our ability to forecast the immediate future remains limited, but all of the companies represented in the fund now offer favourable returns based on our long-term valuations. In the Hitchhiker's Guide to the Galaxy, Douglas Adams describes the adventures of Arthur Dent, a hapless Englishman, who escaped seconds before the earth was demolished to make way for an intergalactic expressway. While it may feel like that, our situation is not yet that bad. Don't panic.

Henk Groenewald & Duane Cable
Portfolio Managers

The past quarter was extremely volatile. Relative to the benchmark, the fund's performance was poor, returning 4.9% versus the 9.7% from the benchmark. This had a negative impact on longer period returns, bringing the fund to 37.6% for the 12-month period relative to the benchmark's 42.4%.

While we struggled to keep up with the rampant resources index's total return of 13.4% for the quarter, our colleagues had to contend with the financial and industrial index (FINDI) falling by 6.4% (including the dividends paid during the quarter). Over the last 12 months, the total return of the resources index was 39.9%, while the FINDI returned a negative 12%!

The global economic picture is indeed gloomy. Consumers in the western world are suffering a terrible hangover from years of living above their means, and inflation caused by high food and energy prices has impacted the world over. Central banks are divided on whether to cut interest rates to sustain growth, or to raise them to fight inflation. The South Africa Reserve Bank has chosen the latter route, which has led to a very pronounced slowdown in consumer spending. The only light in the dark global tunnel is the continuing strong performance of China and some of the other emerging markets.

Copper, precious metals and the rand were relatively flat over the quarter. Increased supply led to large declines in the smaller base metals. Nickel (-27%), zinc (-19%) and lead (-38%) continued their declines. In contrast, energy commodities oil (+35%) and thermal coal (+29%) and steel making raw materials iron ore (+85%), coking coal (+200%) and manganese (+36%) experienced large increases.
The relatively poor performance of the fund was due in large to our not owning those shares which benefited from the strong steel and steel making materials prices, such as Merafe (+34%), Assore (+30%) and Mittal Steel (+13%). In addition to which, one of our biggest positions, Mondi, suffered a 32% decline in the share price over the quarter.

With Mondi 30% lower than 3 months ago, we are even more excited about the opportunity for excellent long-term returns from this company. Our faith seems to be shared by management, who have bought R50 million worth of shares in their personal capacity over the last year. Mondi is trading at well below the value of their tangible assets and we have increased our holding in the company.

This quarter we also welcome Duane Cable as co-fund manager. Duane has been a great asset to the Coronation team since joining two years ago and will bring new vigour to the fund.

Henk Groenewald & Duane Cable
Portfolio Manager

A Tale of Two Cities

'It was the best of times'. The last 3 months was a great time to be a South African miner. The unusual situation of both strong commodity prices and a weak rand prevailed. Rand prices increased by 33% for SA gold miners and 55% for platinum producers; the highest gain in any quarter since the 80's. The relative competitiveness of South African cost bases against other mining countries increased by between 18% and 30% as the rand weakened.

'It was the worst of times'. It was also a terrible quarter to be a South African miner. The electricity crisis led to an unprecedented week-long shutdown and will reduce volumes across the board going forward. The ongoing issues around skills shortages, cost inflation and safety made it a very difficult time to be a manager at a mining company. The best of times for prices were, in most cases, caused by the worst of times for volumes as production problems in South Africa and elsewhere caused prices to go up; in some cases more than making up for the decline in volumes.

'It was the epoch of belief'. A strong driver of prices has been the weight of funds flowing into commodities from pension and hedge funds. It is estimated that over US$400 billion is now invested in commodities, of which US$70 billion flowed in the last quarter. Direct pension fund investing is a new phenomenon with claimed benefits of non-correlated performance and diversification. We cynically point to the fact that these 'diversification benefits' were always to be had in commodity markets, yet interest only flared after a multi-year increase and exciting returns. Past returns are often extrapolated into the future.

'It was the epoch of incredulity'. Looking back at the past 7 years since this commodity boom started, this period can only be described in the 'superlative degree of comparison'. The size and duration of the current cycle is unprecedented. South African mining earnings and share prices are up 7.5 and 14 times respectively from 1999. The structural cause - infrastructure spending by emerging economies - is still intact and will continue. In contrast, the cyclical picture is more negative than at any time during the past 7 years with even emerging economies not immune to the slowdown in their export markets. Yet commodity prices have increased strongly this year.

'It was the season of Light, it was the season of Darkness'. Summer in Cape Town came with intermittent power cuts, reminding us of the serious long-term consequences of our inadequate power supply. Power costs are going up. A lot. We estimate that mining cost bases will increase at least 10% above inflation from electricity alone over the next few years. South Africa has already missed out on the opportunity to capitalise on the commodity boom due to an inability to increase volumes. Investment considerations (uncertainty and more attractive opportunities elsewhere), logistical constraints (rail, road and port infrastructure) and a general skills shortage led to this sad state of affairs. Add the power constraint and it will clearly be very hard for SA to materially increase volumes in any commodity until the new power stations are commissioned post 2013.

'It was the spring of hope'. After years of crisis, there is a possibility of a regime change in Zimbabwe. Zimbabwe is a country with fantastic mineral wealth, good (if neglected) infrastructure, and educated people. Of the companies represented in your fund, Impala Platinum, Zimplats and Afrox will benefit from a normalisation of the situation in Zimbabwe.

'It was the winter of despair'. In contrast, the mood in South Africa is sombre. The developments at Polokwane, the electricity situation and continuing crime has created a quick slide from optimism into despair. In the investment markets, these mood swings were reflected, with internationally exposed resources shares hugely outperforming domestic shares.

Over the last 3 months, the fund returned 18.4% versus the 17.5% of the benchmark. Most of the performance came from our platinum position where we benefited from Northam (82%), Mvelaphanda Resources (51%) and Impala (33%). Harmony (38%) was the best performing gold share, rewarding our faith in management and offsetting the underperformance in Anglogold (-7%). For the last 12 months, the fund and benchmark returned 40.7% and 40.2% respectively, still well above long-term returns that should be expected by investors.

As always, it is rather difficult to forecast what will happen in the next year. Global growth and commodity demand has slowed markedly, but low inventories still do not offer enough of a cushion in the case of supply disappointments. In the absence of a major supply disruption, the single most important factor driving commodity prices and thus share prices are Chinese demand. China's performance in the face of weakness in export markets, high food inflation and electricity shortages (nice to know we're not alone!) will be the key determinant over the next year. Commodity prices need to continue rising to ensure increasing mining earnings as cost increases, employee demands and increasing government share of profits threaten to take away what prices giveth.

In running the fund, we try to stay away from big macro calls and focus on the companies in the business of mining. Our estimates of normal prices are of course a major input into company valuations, and in most cases are materially lower than current prices. When we find companies that offer long-term value despite lower prices we often take large positions. Notwithstanding potential cyclical headwinds, we are quite excited about the current positioning of the fund and look forward to continuing to outperform our benchmarks in future periods.

Quotes taken from 'A Tale of Two Cities' by Charles Dickens.

Henk Groenewald
Portfolio Manager

"For last year's words belong to last year's language and next year's words await another voice." (TS Eliot).

The last quarter of 2007 was a tough one, with the benchmark ending down 7.6%. Given our reasonably conservative positioning we were disappointed in the funds' performance, ending down 3%. For the year the benchmark returned 39.5%, relative to the 41.8% from the fund.

Cracks started appearing in the global economy as the effects of the credit crunch took hold, marking a definite slowdown in developed economies. Base metals fell, with copper and zinc both declining nearly 20% in the quarter.

In contrast, bulk commodities like coal and iron ore soared in the last quarter of the year. Supply disruptions and relatively little exposure to developed economies drove these prices to record highs. Consequently, companies exposed to these markets bucked the trend and performed well. The fund benefited from Exxaro's 19% rise during the quarter, but unfortunately, we held no Kumba Iron Ore (26%) shares.

The oil price kept astounding - having started the quarter in the 50's, it neared $100/bbl at the end of the year. Long-term favourite, Sasol (up 14.5% for the 3 months), benefited from the oil price moves.

Other than the abovementioned shares, there were very few resource shares up in the last three months of 2007. Heavyweights, Anglo American and BHP Billiton, were down 9% and 15% respectively, despite the excitement as BHP Billiton announced the potential takeover of Rio Tinto. Gold (-14%) and platinum (-3%) indices were also down for the quarter.

Despite the tough last quarter, resource stocks still had a relatively good 2007. The total return of the sector was 29%, relative to only 19% for the FTSE/JSE All Share Index. Over the past three years the resources index has returned 47.2% compounded versus the 35.3% of the All Share Index.

The last three years have clearly been exceptional. Unfortunately, as the warning on all investment products read, past performance is not necessarily an indication of the future - this year waits for another voice. The tailwind of a synchronized strong global economy is behind us, and tougher times lie ahead. Much depends on how strongly emerging economies can continue to perform given the weakness in their traditional export destinations.

The major question to be answered in 2008 is whether China's domestic economy is strong enough to withstand global weakening. Currently there are no signs of a let-up in relentless Chinese growth, but we will only have all the answers at the end.

In an uncertain environment such as this, we remain more conservatively positioned. Instead of trying to predict short-term price moves, we shall continue to concentrate on determining the value of the businesses operating in our sector. This value is not determined by commodity prices today, but rather commodity prices tomorrow and for a long time into the future.

We continue to look for low risk opportunities, and invest in companies that we believe offer attractive long-term valuations.

Henk Groenewald
Portfolio Manager

The objective of the Coronation Resources Fund is to provide unit holders with a return comprising both capital growth and income by investing in equity securities that are price sensitive to changes in the commodities cycle.

The fund will primarily focus on shares listed in the resources sector of the JSE, or equity securities that are listed in similar sectors of other recognised stock exchanges. It may also invest in other shares that will be affected by changes in the commodities cycle.

A maximum of 15% may be invested offshore.