The portfolio outperformed the composite benchmark return of 6.9% for the month. The biggest contributors to performance were Mondi, BHP Biliton and Sasol that gained 30%, 15% and 12% respectively. The biggest detractor of performance was the portfolio's exposure to precious metals, which as a sector had negative returns. The only bright spot has been Goldfields that returned 3% for the quarter.

The last quarter has seen valuation and long-term fundamentals start to drive relative share price performance. Ever since Q1 2008, stock prices have been driven more by news flow and global Macro calls and hence correlations have been unusually high. These macro calls have also changed direction many times as we have seen with the debate on the dollar and the inflation / deflation debate. Performance had become very correlated with either pro growth stocks all going up together or falling together.

In the last three months, the platinum sector has underperformed by 10%. We have had the view for some time that this was a very expensive sector, but for much of 2009 and 2010, it reacted solely on the view of global growth regardless of the pricing of the platinum equities. We still believe valuations are very rich in this space and that the platinum prices needed to make them fair value would require a rand PGM basket some 25% stronger. As volatility continues to fall, we expect valuations to reassert themselves further. On trailing PEs, the sector is still over 25 with 12-month forward valuations only marginally below 20.

The Nedgroup Investments Mining & Resource Fund marginally underperformed the quarter ending June 2010. However, the portfolio outperformed its collective investment scheme peers by ranking third out of seven funds over the quarter and remaining a top performing portfolio in the sector over the longer term.

The biggest contributors to performance were Anglogold, Goldfields and Astral that gained 18.3%,13.2% and 4.9% respectively. The biggest detractors were the large-cap mining diversifieds namely, Anglo and BHP Billiton.

There has been plenty to worry about in terms of macro events with the euro fiscal situation and the cooling China property market causing large declines in most mining companies. Valuation of mining companies is very good right now. In the midst of the commodity bull market, risks were never discussed and valuations and more importantly, earnings forecast, got a bit ahead of themselves. At one stage in early 2008, Anglo American was forecasted to earn $8.50 of earnings for 2009. Of course the earnings never materialised and Anglo eventually earned just over $2.00 per share. Currently, both subdued 4 00 earnings expectations and valuation is a lot more subdued. Earnings are forecast to be close to $4.00 per share and that would place the company on an earnings multiple of 10 times in December 2010. Of course there is a lot of doubt about the $4.00 of earnings, but that is to be expected given the weak equity markets and prevailing weak macro.

The world might appear more risky now than in June 2008, but from the viewpoint of valuation, Anglo American is certainly less risky now than in July 2008. In June 2008 there were no concerns on China, euro fiscal positions etc. Anglo American traded at R500 and had a trailing PE of 17. Currently, the stock is on a June 2010 PE of 12 and trades at R275.

The portfolio comfortably outperformed the composite benchmark return of 2.1% for the quarter ending March 2010.

The biggest contributors to the portfolio's performance came from Mondi, Kumba and Exxaro that gained 25.5%, 16.8% and 20.8% respectively. Precious metals delivered disappointing returns, especially gold stocks. The portfolio also benefited by not owning any Arcelor Mittal shares.

The last quarter illustrated how important it is to be on the low end of the cost curve as well as having sufficient "credible" reserves. The South African gold stocks are the most costly in terms of production, and although they have a lot of resources, they are only viable at high gold prices and require significant CAPEX (capital expenditures) spend to exploit. Thus, the SA gold stocks have not really been able to exploit the rise in the gold price as their volumes fell when one would expect it to rise.

Contrast this to Kumba and BHP Billiton which have extensive reserves and are both low cost producers. As the commodity prices rose, they were able to expand production and thereby add to their earnings. In addition, their resources were cheap to access so the CAPEX involved was not material.

More importantly, during the downturn in prices during the first half of 2009, they did not need to stop their capital projects as their existing operations continued to be profitable. Thus BHP Billiton and Kumba are able to generate earnings growth through the cycle. Gold companies in South Africa have not been able to achieve this with earnings having been stagnant over the last 15 years.

The biggest contributors to the fund's performance over the forth quarter came from Anglo, Kumba and BHP Billiton that gained 31.0%, 20.4% and 14.8% respectively. Gold equities have been poor performers with Goldfields and Anglogold returning -3.7% and 0.9%. For the year as a whole, gold has been a disappointing sector, returning 7.8% versus the resource sector return of 38.2%.

The main driver of 2009 has been the recovery in risk assets in anticipation of a strong rebound in earnings for the 2010 and 2011 years. This rebound is premised mainly on inventory rebuild and the continuation of government led simulative policies (monetary or fiscal). Resource earnings on consensus expectations are forecast to grow 50% in 2010 and 43% in 2011. This will elevate resource earnings above the 2008 peak. There is no doubt that a recovery in earnings is arriving, but it is unlikely that the recovery will be smooth.

The role of China is going to remain key with it being responsible for a large portion of commodity demand. One of the key unknowns for 2010 is how sustainable is the recent spurt in Chinese fixed asset investment, which contributed over 40% of GDP growth in 2009.

The fund continues to prefer the cheaper large diversified miners over platinum and gold counters. A lot of special value situations have arisen in mining services, for example the fund acquired a holding in Sentula Mining during the quarter.