In 2004, Ian Watson, and I founded Galahad Gold with the objective of investing in the metals. Many bargains were available then. A good example is Northern Dynasty Minerals with its famous Pebble gold, copper and molybdenum porphyry deposit, in which we purchased C$5m worth of shares at 72 cents with the added bonus of one-for-one warrants for another C$6.25m worth at 90 cents. Last year we sold out to Rio Tinto and via a market placing for an average price of C$10.70 a share.
We lost £5m investing in Skaergaard in Greenland. The deposit was too marginal so we cut the loss. However, we made £22m on another investment of £2m in Greenland, the Malmbjerg molybdenum deposit. We also made an astonishing profit of £76.3m in only two years on an investment of £3.7m in the fledgling uranium company, Uramin, which was . This transaction was much helped by the rise in the uranium price from about $30 per pound when we invested to $130 at the time of sale.
Our investments in Northern Dynasty, Skaeergaard, Malmbjerg and Uramin gave us an average internal rate of return of 66 per cent per annum. Galahad is now entirely in cash and over £150m is about to be returned to shareholders. We tried to offer Galahad shareholders the opportunity to retain an ongoing stake in our next venture in agricultural land, but tax difficulties prevented this.
These exceptional profits were obtained by following a very simple strategic investment policy, which we developed for Galahad:-
1.We only invested in safe political territories. The idea of investing in Russia, for example, did not appeal to us in the slightest degree. The better the investment the more likely the Government or an oligarch might fancy it and create difficulties.
2.We confined our investments to deposits that were post-exploration and pre-production. This is the stage in the stock market during which the most capital gains are usually made.
3.We made sure that each investment had very substantial pounds of metal in the ground, even if at the time the deposits were relatively marginal. This policy provided tremendous leverage for the shares when metal prices improved dramatically and further reserves were proved up. Northern Dynasty and Uramin are obvious examples.
The metals markets have been very kind to us, but I now believe that the low-hanging fruit has been picked and that there is a much stronger tailwind in soft commodities. There are five well-known arguments for ongoing strength in agricultural commodities:-
1.The growing world population
2.Increasing affluence in China and South East Asia with greater demand for high-protein food. The average Chinese consumer ate 20 kg of meat a year in 1985 and now eats 50kg. It is also interesting to note that 70 per cent of all grains are already used for animal foodstuffs - and that it takes eight kilos of cereals to produce one kilo of beef.
3.The invasion of grain-bearing land by bio-fuel producers, which in America are heavily subsidised. Last year bio-fuels took about one third of America’s record maize harvest.
4.The US Department of Agriculture predicts corn stocks will fall to a 33-year low and by the end of the 2007-2008 crop year, wheat stocks will be at 60 year lows.
5.Climate change with the higher incidence of droughts and floods makes crop production less reliable.
With such a strong tailwind identified, our next step was to find the optimum way of benefiting from it. As with Galahad, our new company, Agrifirma, has developed a strategic investment policy to give us an edge:-
1.Only invest in safe political territories.
2.Recruit a top-class very experienced management team
3.Concentrate initially on Brazil because of its many commercial advantages. This will also focus management’s efforts with obvious benefits.
4.Invest mainly in transformational properties especially those in which irrigation will make a substantial difference.
There are many reasons why we believe that investing in Brazil will give us an edge. First and foremost
Brazil has an abundance of the four major commodities that the world is short of:-
1.Brazil has the best water table in the world with about 15 per cent of the world’s recoverable water supply – 90 per cent more than its nearest rival.
2.Brazil is the prime exporter in the world of agricultural produce, and has the most agricultural land with fertile soil available for future exploitation. Remembering the words of the old song ‘There’s an awful lot of coffee in Brazil’ it is not surprising that Brazil is the world’s largest exporter of coffee. It is also the leading exporter of soya beans, beef, chicken, orange juice and sugar.
3.Brazil has its own oil and is very big in ethanol production using sugar cane in a much more cost-effective way than grain. There is massive potential for increasing hydro-power. Also Petrobas, its leading oil company, has recently discovered a massive deposit of light oil of 5-8bn barrels and there are other major prospects of a similar nature. Before long, Brazil will be a net exporter of oil and may in the long run join OPEC.
4.Brazil also has vast mineral wealth including iron ore (the world’s largest producer), quartz, chrome ore, industrial diamonds, gold, nickel, tin, bauxite, uranium and platinum
Brazil’s currency is now relatively strong. It has a trade surplus of US$40bn a year and in the last quarter its GDP rose 5.7 per cent, the fastest pace in over three years. President Lula Da Silva is a pragmatic and popular leader who was a former union negotiator. Since 2000, 5m new jobs have been created and - not before time - over-regulation is being tackled.
Brazil welcomes foreign investors and very importantly, international debt is being repaid with investment grade status expected within the next two years.
Another key factor is that Brazil has no sub-prime and very little prime lending. There is a flourishing middle class with over 20m middle class households, which is five times as many as India.
To obtain a further edge, Agrifirma will invest primarily in transformational land which can, for example, be massively improved by irrigation. There are several advantages in doing this. First, we will avoid the queue for prime land so more attractive bargains can be obtained. Second, once irrigated the land is more reliably productive and less vulnerable to bad weather, with the strong probability of two or more crops per annum. There is also a tax advantage, as the cost of irrigation can be written off against income for tax purposes. In addition, there is increased leverage arising from the potential of the purchased land that has not yet been irrigated. The payment for the land prior to irrigation is relatively small and can be looked upon as a kind of option money with the extra substantial gearing which that implies.
