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Dear Shareholder,

After a spotty 2019 due to concerns around the “Trade War” between China and US, a phase 1 trade deal was struck in early 2020, which we had expected would reduce the risk of escalating tit-for-tat tariffs and allow for a more stable growth outlook. However, as we all know, the focus for 2020 has been the coronavirus pandemic which started in January and gathered steam in February and March, leading to large scale lockdowns globally. 

The COVID-19 pandemic has dampened growth considerably, and in the depths of the economic downturn in March and April 2020, global manufacturing PMI numbers fell into the 30s and GDP numbers showed quarterly drops of 30-40% in major economies. The global economy has recovered from its lows, although at time of writing, unemployment levels remain elevated and countries across the world remain in differing levels of social distancing. 

Central banks and governments took definitive action to support economies through a combination of asset purchase programs, low interest rates and various fiscal measures including tax breaks, grants for businesses and cash handouts. The US Federal Reserve has initiatives to purchase government securities, mortgage backed securities, and corporate bonds, which is estimated to reach US$3.5 trillion by the end of 2020. China has an estimated ¥4.6 trillion (or around US$0.7 trillion) of discretionary fiscal measures, including focus on infrastructure investments financed through government special bond issuance. Similarly, the ECB’s emergency bond purchase program allow for purchases of up to €1.35 trillion (or around US$1.7 trillion). In June 2020, Fitch estimated that global fiscal easing measures totaled to US$5 trillion, equivalent to more than 7% of 2019 global GDP. Most recently the US Federal Reserve adjusted its inflation target to an average of 2% and confirmed the markets expectations for ongoing low interest rates, seemingly indefinitely.  

The pandemic related lockdowns and reduction in global economic activity drove most commodity prices lower, particularly in the March-April 2020 period, although we have seen a recovery since the lows, evidenced by improving demand in power, transport and personal consumption. The notable outperformer in the commodity space has been precious metals and specifically gold and silver, which are seen as a safe haven and store of value in the face of significant fiscal and monetary easing.  

Geopolitical tensions cannot be ignored, and we expect a bumpy outlook over and above COVID-19 related uncertainty. The relationship between China and the US seems to have weakened again and an escalation of tension between the two largest economies is not conducive for global growth. On a broader level, the world is moving away from globalization, and for now seems to be on a path of bifurcation split over political differences. We remain confident that consumption and growth will drive commodity demand, but become increasingly aware of the need to be nimble and select in our investments. 

In our smaller and more flexible Resources Investment segment, we found opportunities in select commodities, especially in precious metals, and the overall segment delivered a profit of HK$63,356,000 in the twelve months ended 30 June 2020 (“FY 2020”). Separately our Principal Investment and Financial Services segment also generated a robust profit of HK$57,851,000. However our overall earnings were frustratingly impacted by an impairment loss on interest in an associate of HK$580,014,000, which is driven by an unrealized loss on our investment in Mount Gibson Iron Limited (“Mount Gibson”). It is important to note that this is a non-cash impairment. As we discuss later, Mount Gibson’s share price was impacted by some operational challenges, but there was also a timing component. At the beginning of FY 2020, iron ore price was near its recent highs of US$120 per tonne. After weaker iron ore prices for most of FY 2020, prices only started to recover in late June 2020. This move in the commodity price obviously has an impact on a pure play iron ore producer like Mount Gibson.  

It is our long held belief that Shareholders should receive a return, and although we generated a net loss in FY 2020 of HK$429,401,000, we reiterate that this was driven by a non-cash impairment. As a result, we are pleased to declare an interim dividend of HK10 cents per share for FY 2020. As ever, I would like to thank you all for your continued faith in APAC Resources.

Andrew Ferguson

Chief Executive Officer

25 September 2020
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