LinQ Resources Fund brought home the bacon at the end of 2010, with a second half net performance of 79%. The full year 2010 return was 55% net of fees.
Mining corporate finance specialist and ex-Rothschild Australia and Citi executive Clive Donner is the founder of LinQ. The LinQ Resources Fund was established in 2004 as a closed-end investment trust investing in small to mid-cap resources companies and was listed in 2005. Since its inception, the fund is up 18.7% on average per year.
Its biggest success stories hinge on a selection of far-flung, diverse, resource companies. Leading the way for LinQ in 2010 was Riversdale Mining, a Mozambique-based coking coal company being bid for by RTZ. That holding accounted for 18% of LinQ’s portfolio.
Just short of that weighting in their holdings was Atlas Iron, a Western Australian base metals miner that has benefited from re-rating. LinQ started investing in these companies when they were both at about $30 million in market capitalisation and now stand at around $4 billion.
However, LinQ also invests in unlisted companies, and its third best success story last year was a Brazilian iron ore firm, Ferrous Resources, which represents 10% of its portfolio. LinQ started to invest in that firm when it was valued at approximately $60 million and it is now worth about $3.5 billion, according to a recent valuation undertaken in possible preparation for a listing.
LinQ is not a trading-oriented fund, but it does buy and sell its holdings when it sees prices in its favour.
LinQ often invests into these companies using hybrid instruments such as convertibles. Post crisis, it has been far from easy for start-up resources firms, especially gold miners, to access bank funding, as banks have re-priced risk and in general have little capacity for riskier projects.
“We are extremely selective about investing in highly geared companies,” says Donner, expressing a strong preference for companies replete with equity funding. “We would prefer to be diluted than see a company take on a high debt burden.”
Banks that used to provide 60% gearing to gold mines have reduced credit lines, and a 30-40% gearing ratio is now more common. Hedging of future production continues, but today is accomplished via options based strategies rather than the spot deferred or fixed forward methods that were in fashion in the eighties and nineties.
The LinQ Resources Fund now stands at A$200 million in size, having started out at launch at A$120 million. It reached its high point in terms of assets under management at A$500 million, but this number has since fallen as exits to projects have been made and dividends paid. The fund’s current asset allocation split is 30% ferrous metals, 26% energy/coal, 25% base metals and 16% precious metals.
The next plan for LinQ is a follow up with another resources fund, but it is still in its formative stages.