Scipion Capital’s Mining and Resources Fund taps into the continued commodity-intensive growth of emerging markets, Africa’s role in supplying those commodities and the subsequent growth in the underlying African economy, writes Elena Clarici, portfolio manager at the firm.
Scipion Mining and Resources Fund (SMRF) is one of three segregated portfolios offered by Scipion Capital, a frontier market specialist and investment manager focused on two distinctive themes: commodities and Africa.
SMRF aims to achieve long-term capital growth through investment in a diversified portfolio of resource equities, related commodity trade finance transactions and real assets such as gold bullion. Although it can invest in the entire spectrum of resource equities, enabling investors to access exposure to a wide range of metals and growth opportunities across the African continent through one fund, currently it is focused on small to medium sized companies, which typically offer faster rates of growth.
SMRF builds on Scipion’s flagship Commodity Trade Finance Fund, which has recorded positive net performance every month since its inception in 2007 and provided investors with average net annualised returns of more than 12 per cent. This performance principally reflects the strength of understanding of commodity trade transactions on theAfrican continent as well as the quality of local connections and ability to source those opportunities.
Africa is one of the most prolific and economically mineralised continents on Earth.
It is widely accepted that it hosts some 30 per cent of the planet’s natural resources. It is a major producer of many commodities and is the world’s largest producer of vanadium, manganese, platinum, chromium and cobalt, as well as being a significant producer of industrial and gem quality diamonds, gold, phosphate, palladium, titanium, uranium and zircon.
Discovery and exploitation of African mineral resources has occurred since the start of documented history, from mining of copper and gold in the Sinai Peninsula; in Nubia (southern Egypt and northern Sudan) as far back as 2,613 BC; and the extraction and trade in gold in Zimbabwe starting between 1,200 and 1,300 AD and continuing until the present day. More recently, as in the past 200 years, several world class deposits have been discovered in Africa, including gold in the Witwatersrand Basin and in the central African greenstone belts, Platinum Group Metals in the Bushveld Complex and in the Great Dyke of Zimbabwe, both Kimberlitic and alluvial diamonds in several southern African countries, copper/cobalt in the Central African copper belt, and tin/tantalum in the Central African tin belt.
Interest in African natural resources has grown significantly over the last couple of years. According to IntierraRMG, a resources’ sector business intelligence provider, a total of US$3.89bn was raised for resource projects in Africa from equity funding across global stock exchanges during 2011.
Further analysis by IntierraRMG showed that most of this activity was derived from the Australian and Canadian exchanges. Some $1.69bn was raised on the Australian Stock Exchange (ASX) and $1.39bn on the combination of Canada’s Toronto (TSX) and Toronto-Venture (TSX-V) exchanges. Capital raisings for Africa from London during 2011 amounted to $720m.
Throughout 2011, ASX listed companies have shown a particularly strong trend in African resources investment, where capital raisings rose 25 per cent compared with 2010, including 19 initial public offerings on the ASX.
Markets in Europe were subdued somewhat throughout 2011, primarily driven by continuing uncertainty over European sovereign debt and resulting euro crisis and many IPO have been postponed.
Major areas of risk
The African mining and resources space is often perceived by investors as possessing relatively high risk attributes. Some of these perceptions are based on objective reasoning. For instance, we at Scipion believe a number of general themes likely to be of major significance in coming years include: growing trend of resource nationalism, growing influence of non-Western mining companies and funds, greater competition, continued political and security unpredictability.
However, with appropriate local contacts, intelligence and analysis, country risk can be better understood, and investment courses of more acceptable risk taken.
Regions of opportunity
Countries we feel particularly comfortable in are: Morocco - which weathered the Arab Spring perhaps better than any other North African state. Morocco has a great geology and is well known for its potash reserves and hosts the biggest silver mine in Africa – the Imiter Mine.
Sierra Leone offers the most stable access to the West African iron ore story as neighbouring Guinea and Liberia continue to grab headlines for all the wrong reasons.
And, despite tax revisions, Zambia will continue to present the best case for investment in the Central African Copper Belt.
African scene going forward
From commodities suppliers, African countries are emerging as consumers of their own commodities. The mining boom prompted development of many big infrastructure projects; China is looking upon the African continent not only for its natural resources but also as a place to relocate its own manufacturing.
According to the International Monetary Fund (IMF), Africa’s economies expanded at a faster pace than the US and Europe in 2011 – a trend likely to continue.
In sub-Saharan Africa alone, the IMF predicts an expected average growth rate of 5.5 per cent this year. The continent now has the fastest-growing middle class (currently est. 300m people) in the world and the youngest population – 60 per cent of Africa’s population is under the age of 24. We believe that that when it comes to commodities usage, Africa will more than fill the gaps resulting from feared slow-down of China and India.
It is very exciting place to be and we are thrilled to be able to invest in the continent and assist in our small way to changing the world’s landscape.
Aside from being a fund manager, Elena Clarici is also chairperson of the Association of Mining Analysts and was trained as a mining equity analyst and natural resources investment banker in London, UK. She earned her PhD in application of artificial intelligence to mining engineering from the Royal School of Mines at Imperial College in London.