Our Primary Strategic Investments are in
Mount Gibson Iron Limited (“Mount Gibson”) (ASX: MGX), Tanami
Gold NL (“Tanami Gold”) (ASX: TAM), Metals X Limited (“Metals
X”) (ASX: MLX) and Prodigy Gold NL (“Prodigy Gold”) (ASX: PRX),
which are operating in Australia and listed on the Australian
Securities Exchange (“ASX”). During the period, APAC has
increased its shareholding in Metals X to approximately 22.7% as
at 31 December 2023. The net attributable profit shared from
Mount Gibson, Tanami Gold and Metals X which are accounted for
as the Group’s associates for 1H FY2024 was HK$298,065,000 (1H
FY2023: Net attributable profit of HK$2,057,000).
In October 2022, our shareholding in
Prodigy Gold, a gold exploration company listed on ASX increased
to approximately 49.9%. In accordance with Hong Kong Financial
Reporting Standards, APAC is deemed to have control over it and
commence accounting for it as a subsidiary. APAC owns
approximately 49.8% of Prodigy Gold at 31 December 2023. In 1H
FY2024, the post-acquisition attributable loss from Prodigy Gold
amounted to HK$20,562,000.
Mount Gibson
Mount Gibson is an Australian producer of
direct shipping grade iron ore products. Mount Gibson owns the
Koolan Island mine off the Kimberley coast in the remote
north-west of Western Australia. Mount Gibson developed the
Shine Iron Ore Project, located 85km north of Extension Hill,
but suspended operations in November 2021 due to the widening
discount for low-grade iron ore and the high freight costs.
Ore sales at the Koolan Island Restart
Project started in April 2019 and achieved commercial production
in the June quarter of 2019. The restart project had 21 million
tonnes of 65.5% Fe reserves. Mount Gibson has completed a
planned waste mining phase, enabling increased production from
2023 onwards.
Mount Gibson reported a net profit after
tax of A$139 million for 1H FY2024 from sales of 2.5 million
tonnes of iron ore. Operating costs improved in 1H FY2024 after
the completion of its elevated stripping phase at Koolan Island
and are on track with the company’s FY2024 guidance during the
period.
Sales guidance for the year ending 30 June
2024 (“FY2024”) is 3.8 million to 4.2 million tonnes.
Mount Gibson’s cash reserve including term
deposits was A$354 million at the end of 1H FY2024.
The Platts IODEX 62% CFR China index has
risen in 1H FY2024 generally, from lows near US$105 per dry
metric tonne (“dmt”) in August and ending the year near US$140
per dmt. The price is currently around US$130 per dmt. Iron ore
prices have generally fluctuated with sentiment related to
China’s economy. China’s stimulus measures drove recent
improvement in market expectations.
Tanami Gold
APAC owns approximately 46.3% of Tanami
Gold at 31 December 2023.
Tanami Gold’s principal business activity
is gold exploration. It holds 50% of the Central Tanami Project
and has a cash balance of A$26 million. In May 2021, Tanami Gold
entered into a binding agreement with Northern Star Resources
Limited (“Northern Star”) (ASX: NST) to establish a new 50-50
Joint Venture covering the Central Tanami Project.
Metals X
APAC owns approximately 22.7% of Metals X
at 31 December 2023.
Metals X is focused on implementing its
life of mine plan at Renison mine, including the development of
the high-grade Area 5 deposit. During 1H FY2024, the Renison
mine produced 2,630 tonnes of tin (net 50% basis), up 39%
year-on-year.
Tin prices have moderated slightly in 1H
FY2024 due to softer demand expectations and China tin
production remaining robust despite continued supply concerns in
Myanmar. At the time of writing, the tin price was around
US$26,000 per tonne. We remain comfortable with the medium
outlook for tin due to the lack of significant supply growth and
new demand for tin from the growing electrical vehicle and
energy storage industries.
For the six months ended 30 June 2023,
Metals X generated a net profit after tax of A$12 million with
net assets of approximately A$332 million at 30 June 2023.
Prodigy Gold
APAC owns approximately 49.8% of Prodigy
Gold at 31 December 2023.
Prodigy Gold is a gold exploration company
listed on the ASX. It holds a large footprint of exploration
tenements in the Tanami region in the Northern Territory,
Australia. Some of its tenements are held in joint venture with
partners such as Newmont Corporation and IGO Limited. Prodigy
Gold restarted its exploration activities in 2022 after several
years of restrictions related to the COVID-19 pandemic. Prodigy
Gold reported a net loss after tax of A$8.1 million for 1H
FY2024. At the end of December 2023, Prodigy Gold has a cash
balance of A$2.8 million.
The focus of Prodigy Gold for 2024 will be
exploration on the Northern Tanami project area and continue
with its strategy to divest non-core assets.
Financial Assets at Fair Value
through Profit or Loss
Financial assets at fair value through
profit or loss comprise mainly the Group’s Resource Investment.
As at 31 December 2023, APAC had significant investment
representing 5% or more of the Group’s total assets in Shougang
Fushan Resources Group Limited (“Shougang Fushan”) (HKEX: 639).
Our investment in Shougang Fushan generated
a fair value gain of HK$122,686,000 with carry value as at 31
December 2023 of HK$388,328,000.
Shougang Fushan is a coking coal producer
listed on The Stock Exchange of Hong Kong Limited. Its principal
businesses are coking coal mining and the production and sales
of coking coal products in China. It has three mines located in
China with reserves of 64 million tonnes of raw coking coal at
31 December 2022 and during six months ended 30 June 2023
Shougang Fushan produced 2.7 million tonnes of raw coking coal,
which is consistent with its 2023 guidance of 5.25 million
tonnes of raw coking coal.
Its results for the year ended 31 December
2023 are not yet available at the time of writing. The market
capitalisation of Shougang Fushan in February 2024 is around
HK$15.1 billion. The company generated EBITDA of
HK$2,372,560,000 and net profit after tax of HK$1,519,093,000 while its
working capital reported at 30 June 2023 is HK$7.4 billion.
Coking coal prices rebounded in 1H FY2024
due to better sentiment around China’s stimulus measures,
incremental supply tightness and restocking activities on the
back of low inventories.
Resource Investment
The investments in this division comprise
mostly minor and liquid holdings in various natural resource
companies listed on major stock exchanges, including Australia,
Canada, Hong Kong, the United Kingdom and the United States. Our
investments focus on select commodities within several commodity
segments: energy, bulk commodities, base metals and precious
metals.
Resource Investment posted a fair value
gain of HK$214,274,000 in 1H FY2024 (1H FY2023: HK$54,447,000),
which, after accounting for segment-related dividends and other
investment income and expenses, resulted in a segment profit of
HK$237,951,000 (1H FY2023: HK$114,919,000).
Our Resource Investment division includes,
among other investing strategies, the two resource portfolios
announced in August 2016, with additional natural
resource-focused strategies subsequently established and focused
on large caps and specialist opportunities. The aim of the
portfolios is to produce a positive return using the Company’s
funds as well as to create a track record to attract potential
third-party investments in the future. These various portfolios
are managed under the Resource Investment segment of the
Company, which is separate from the Company’s large strategic
stakes. Our portfolios have a global long-only mandate (cannot
short stocks) and strict parameters on market capitalisation,
liquidity, development stage (exploration through to production)
and jurisdiction to manage risk.
The Small and Midcap Mining Portfolio (P1)
focuses on investments in junior and intermediate companies
involved in battery metals, base metals, precious metals,
uranium, bulks and other hard rock commodities. Since its
inception on 1 October 2016, the Mining Portfolio has delivered
a return on investment of 508.4% to 31 December 2023, which is
an outperformance of 508.2% against its benchmark
(currency-adjusted equal weighting of ASX 200 Smallcap
Resources, FTSE AIM All Share Basic Resources and TSX Venture
Composite) return of 0.2%. A full breakdown of the Mining
Portfolio’s (P1) periodic performance against its benchmark is
presented in the table below.
For the half year ended 31 December 2023,
the Mining Portfolio generated a return of 8.4%, which was 10.2%
above the benchmark return of -1.7%. Despite the Magnificent 7
dragging the S&P 500 higher late in the half, it was another
tricky period for resources investors, with most commodities
dragged lower on increasing concerns around the Chinese economy
particularly the ongoing property crisis. Portfolio
outperformance was generated by a) a very large overweight in
uranium names like National Atomic Company Kazatomprom JSC, Boss
Energy Limited, Paladin Energy Limited, Denison Mines Corp. and
Peninsula Energy Limited, with spot uranium prices increasing
from US$56/lb to US$91/lb and propelling the sector higher, b)
reducing lithium exposure during 1H FY2024 and largely avoiding
the big sell-offs in the sector, and c) a number of significant
stock-specific wins, including Azure Minerals Limited
(takeover), Galiano Gold Inc. (acquisition rerate) and Founders
Metals Inc. (gold discovery). The portfolio remains tight and
focused with 36 names and continues to prioritise investments in
cashflow and production over earlier stage companies. The
largest detractor to performance continued to be the large cash
position, which averaged 52% of the portfolio during the period.
The Energy Portfolio is primarily focused
on the oil, gas and renewables sectors. At the end of 2019, the
mandate for this portfolio was expanded to include investments
in renewables, and with a broaden sector of investments, in the
last four years from February 2020 (before the full impact of
the Covid-19 Pandemic) to February 2024, the Energy Portfolio
has generated a return on investment of 113%.
The investment choices in the Energy
Portfolio are selected through a combination of fundamental
bottom up valuation and analysis of the prospects for different
sectors. For instance, during the early days of the COVID-19
pandemic, the investments were focused in companies in the green
energy sector given that the low interest rate environment was
supportive of stocks with significant growth potential. More
recently investments have focused on energy companies given the
impact of high interest rates on the green energy sector, plus
robust oil prices supported by OPEC+ production cuts. We remain
cautious on the outlook for both sub-segments, the potential
weaker economic outlook globally is likely to put pressure on
energy prices. While energy transition continues, the market’s
appetite for non-profitable companies has waned significantly
and sentiment about what happens to the proposed IRA funding in
the US given the potential changes from the election, will weigh
on the sector as well.
Precious
Precious Metals (majority gold exposure)
generated a net fair value gain of HK$53,315,000 in 1H FY2024.
As at 31 December 2023, the carrying value of the Precious
Metals segment was HK$382,712,000 (As at 30 June 2023:
HK$267,232,000). Our largest gold investment in the Resource
Investment division is in Northern Star (ASX: NST) which
generated a fair value gain of HK$12,520,000 with a carrying
value as at 31 December 2023 of HK$89,357,000. We also own
Westgold Resources Limited (ASX: WGX) which generated a fair
value gain of HK$16,606,000 with a carrying value as at 31
December 2023 of HK$37,861,000.
Northern Star is the second-largest gold
company in Australia and owns high-grade underground mines in
Western Australia and Alaska. In 1H FY2024, its production was
797,000 ounces of gold, and it generated a net mine cash flow of
A$237 million. In FY2024, its production target is 1,600,000 -
1,750,000 ounces.
Gold price range bounded between US$1,800 -
US$2,050 per ounce in 1H FY2024 and ended the calendar year
above US$2,000 per ounce after the US Federal Reserve took a
more dovish stance on the outlook for interest rates in
December. Gold price has recently hovered around US$2,000 to
US$2,050 per ounce.
Bulk
Bulk commodities segment generated a fair
value gain of HK$129,376,000 in 1H FY2024. As at 31 December
2023, the carrying value was HK$487,151,000 (As at 30 June 2023:
HK$324,588,000). Our largest investment in this segment during
1H FY2024 is in Shougang Fushan (HKEX: 639), which generated a
fair value gain of HK$122,686,000 and had a carrying value as at
31 December 2023 of HK$388,328,000.
Base Metals
Base Metals segment (a mix of copper,
nickel and zinc companies) delivered a fair value loss of
HK$8,309,000 in 1H FY2024. During the period, copper prices
stayed mostly flat; nickel prices fell 19%, while zinc prices
rose 12%. The Base Metals segment includes our investment in
China Hongqiao Group Limited (HKEX: 1378) which had a carrying
value as at 31 December 2023 of HK$10,863,000.
Energy
The Energy segment (mix of oil and gas,
uranium and renewables) had a fair value gain of HK$36,298,000
in 1H FY2024. Our significant Energy investments include
National Atomic Company Kazatomprom JSC (LSE: KAP), which
generated a fair value gain of HK$17,825,000 and had a carrying
value as at 31 December 2023 of HK$71,905,000.
Others
We also have a fair value gain of
HK$7,147,000 from the remaining commodity (diamonds, manganese,
rare earths, lithium and mineral sands among others) and
non-commodity investments in 1H FY2024 and had a carrying value
as at 31 December 2023 of HK$120,520,000 (As at 30 June 2023:
HK$113,025,000).
Commodity Business
Our iron ore offtake at Koolan Island
recommenced as the mine restarted operations, and we continue to
look for new offtake opportunities across a range of
commodities. For 1H FY2024, our Commodity Business generated a
segment profit of HK$69,373,000 (1H FY2023: HK$6,993,000).
Principal Investment and Financial Services
The Principal Investment and Financial
Services segment, which covers the income generated from loan
receivables, loan notes and other financial assets. For 1H
FY2024, this segment reported a profit of HK$35,856,000 (1H
FY2023: Loss of HK$15,957,000).
Money Lending
Business Model and Customer Profile
The Group provides both secured and
unsecured term loans to its customers under its principal
investment and financial services segment. Money lending
activities diversifies the income stream and business risks of
the Group, and generates a stable return with the Group’s
available financial resources on hand from time to time. The
Group mainly financed its money lending business by its internal
resources.
The Group does not set a specific target
for the industry, business or level of annual revenue to
corporate borrowers. The customers of the Group’s lending
business were referred to the Group through its corporate or
business networks. For 1H FY2024, customers of the Group’s
lending business include subsidiaries of Hong Kong listed
companies for unsecured loans, and private companies for secured
loans.
Outstanding loan receivables net of loss
allowances as at 31 December 2023 amounted to approximately
HK$193,885,000 (As at 30 June 2023: HK$346,074,000). During the
period, the Group has reversal of impairment losses on its loan
receivables of approximately HK$24,110,000 (1H FY2023:
Impairment loss of HK$8,676,000). Details of each of the loans
outstanding as at 31 December 2023 are disclosed in note 15 to
the consolidated financial statements.
Risk Management Policies
The Group adopts a thorough credit
assessment and approval process, and will assess and approve
each loan transaction on a case-by-case basis. The finance
department of the Group (the “Finance Department”) is
responsible for conducting a background check on the prospective
borrower in compliance with the applicable laws and regulations,
reviewing the background and financial strength of such borrower
and where applicable, the guarantor, and enquiring the
prospective borrower about the purpose of the loan and the
expected source of funds for loan repayment. To support its
analysis, the Group will obtain corporate documents, financial
statements and search reports of the borrower and/or the
guarantor, and thereafter, assess the credit risk of the loan
and negotiate the terms thereof after considering (i) the
background and financial position of the borrower or the
guarantor (if applicable), including net asset value and gearing
ratio; and (ii) the value of the securities, if any.
Each loan transaction will be approved by
either the board (the “Board”) of directors of the Company, or
if the loan principal does not exceed the threshold set by the
Board, by the executive committee of the Board.
The Finance Department monitors the loan
and interest repayment regularly and reviews the annual
financial statements of the borrowers and guarantors (if
applicable). It would promptly report to the chief executive or
chief financial officer of the Group for any delay or default in
repayment upon maturity, who would then formulate plans for loan
collection, including but not limited to requesting for
additional securities or initiating legal actions.
Loan Impairment Policies
The Company adopts estimated credit loss
allowances (“ECLs”) according to the requirements of Hong Kong
Financial Reporting Standard 9 issued by the Hong Kong Institute
of Certified Public Accountants. Accordingly, it shall review
the recoverable amount of each loan at the end of each reporting
period to ensure that adequate impairment losses are made. The
Group applies a general approach on loan receivables to assess
for the ECLs. Assessment are done based on the Group’s
historical credit loss experience, adjusted for factors that are
specific to the borrower. In order to measure the ECLs of loan
receivables, the Group will apply a credit rating for each of
its borrowers by reference to each borrower’s past default
records, current past due exposure, an analysis of its current
financial position, likelihood or risk of a default, an
assessment on any significant increase in credit risk, and fair
value of collaterals (if any), and adjust for forward-looking
information that is available without undue cost or effort, such
as the current and forecasted global economy and the general
economic conditions of the industry in which the borrower
operates.
The Group regularly monitors the
effectiveness of the criteria used to identify whether there has
been a significant increase in credit risk and revises them as
appropriate to ensure that the criteria are capable of
identifying any significant increase in credit risk before the
loan amount becomes past due.
Forward Looking Observations
We have a moderate near-term outlook for
the global economy and commodities. The US economy has seen
continued resilience but is nonetheless entering a soft patch.
The market continues to seek confirmation of an economic soft
landing and will primarily focus on the pace of potential
interest rate cuts in 2024. Meanwhile, structural issues
continue to affect China’s economy. However, we have seen an
acceleration of stimulus rollouts recently, which will be
positive for commodities and provide support from a cyclical
perspective. We see opportunities in select commodities that are
positively exposed to the changing macro environment or are
long-term beneficiaries of secular trends such as energy
transition. We remain selective with our investments in the near
term and continue to look for high-quality opportunities that
will generate attractive returns over the long run. Our mining
and energy investment portfolios are the platform for future
mining and energy investments. Our largest investment is in
Mount Gibson, which has successfully ramped up production at the
Koolan Island mine after completing its large waste stripping
program and is now in a position to generate free cash flow in
the coming years and take advantage of a surprisingly resilient
iron ore price.
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