Ninepoint Resource Class

April 2019 Commentary

Year-to-date to the end of April, the fund has returned -4.98% (Series F), compared to benchmark that has returned 12.11%. The fund is weighted as follows:

  • 60% Gold
  • 23% Energy
  • 7% Base Metals
  • 6% Uranium
  • 4% Other

The fund has underperformed because it has been overweight junior gold equities and underweight energy equities. Gold bullion has now declined for three straight months and the junior gold equity market continues to be dysfunctional and irrational. So why does the fund continue to be overweight gold equities? Because gold bullion and gold equities typically do well during periods of muted and/or slowing economic growth. Despite gold equities trading near record low valuations and sputtering economic data, interest in junior gold equities remains virtually non-existent. This lack of interest is partly a result of US broad markets continuing to put in record highs. The strength in broad markets is something we find surprising considering what we see as a clear deterioration in global economic conditions over the past few months.

From a macroeconomic perspective, there are many things we can point to that indicate all is not well. In the interest of time we will touch on only a few facts that clearly illustrate the deteriorating economic backdrop. Chinese economic data had been clearly deteriorating until Q1 Social Financing surged to a record $1.2 trillion, up 40% over the past year. Considering this surge, it should be no wonder that Chinese economic data improved, albeit marginally, through Q1. Despite this record amount of stimulus Chinese Q1 GDP still slid to 6.4% from 6.5% in Q4/18. The market was ecstatic with this figure because it managed to beat expectations by a whopping 0.1%. The market also chose to ignore the fact that Chinese D/GDP has gone from 233% in Q1/18 to 248% in Q1/19. Imagine what the GDP figure would have looked like without the record amount of stimulus. Another reason for market record highs is that earnings are “beating” expectations. At the start of the year the consensus EPS growth expectations were a healthy 2.8% (YoY for Q1/19). With all the “beats” we have seen during the Q1 earnings season, EPS growth is now on pace to register an unhealthy -3.9% growth. Huh? This is because the “beat” is relative to guidance that had been reduced during Q1/19. These “beats” we constantly hear about are the result of moving the goal posts during Q1. Finally, US Q1 GDP of 3.2% blew away the 2.2% that was expected. Looking under the hood we see an inventory build added 0.67% (net exports contributed 1.03% while government spending added 0.41%. Backing out these items would reduce Q1 GDP growth to 1.1%, a big miss relative to the 2.2% expected.

As was witnessed through 2018, the junior gold equity market continues to be dysfunctional and irrational. This is well illustrated by the performance of two positions held in decent size across the portfolios, White Gold (WGO) and Rubicon (RMX). WGO’s and RMX’s share prices declined 31% and 30%, respectively, year-to-date to the end of April. This is quite a contrast to the 0.1% gain gold bullion had posted year-to-date to the end of April 2019.  What happened? WGO has not reported any material news in 2019. The company has approximately $18M in cash. Agnico-Eagle and Kinross each own approximately 20% and last purchased stock at $1.50 in October 2018. This investment was predicated on a discovery announced in September 2018. Also noteworthy is that this investment was made when gold was trading at approximately $1,225/ounce. So gold is up 4+% and the stock is down 33% without any material developments. This change in WGO’s stock price is nonsensical. RMX has a new 1250 tpd mill, headframe, shaft, hoist, 13km of underground workings, more than 28,000 Ha land package and $700M tax loss pools ($300+M that can be used externally). The cost to construct the mill was $150M. The parts of the mill could be sold for $30M. The NPV5 of the external tax pools is $75M. Following the decline in RMX ‘s share price, the company has a market capitalization of ~$65M. Like WGO, the year-to-date move in RMX’s share price is nonsensical and the valuation is irrational.

2018 Flow-Through Update

The gross proceeds were 75% invested in mining companies, of which 56% had been allocated to gold mining equities while base metal and uranium equities represent the balance. The remaining 25% was invested in Energy companies. The proceeds were deployed into 37 companies with a weighted average market capitalization of $1.4B.

2018 II Flow-Through Update

The gross proceeds were 91% invested in mining companies, of which 58% had been allocated to gold mining equities while base metal and uranium equities represent the balance. The remaining 8% was invested in Energy companies. The proceeds were deployed into 28 companies with a weighted average market capitalization of $140M.

2019 Flow-Through Update

At the end of April, the fund was 21% invested. 19% has been allocated to gold mining equities while base metal and uranium equities represent the balance. The portfolio currently consists of 9 companies with a weighted average market capitalization of $175M.

 

Jason Mayer, CFA, MBA

 

Ninepoint Resource Class - Compounded Returns¹

1M YTD 3M 6M 1YR 3YR 5YR Inception
Fund -0.4% -11.3% -17.5% -5.3% -15.3% -13.4% 0.7% -6.1%
Index 3.4% 8.8% 0.8% 5.5% 8.1% -4.0% -0.4% -3.3%

1 All returns and fund details are a) based on Series F shares; b) net of fees; c) annualized if period is greater than one year; d) as at April 30, 2019; e) 2011 annual returns are from 10/17/11 to 12/31/11. Blended Index (50/50 S&P/TSX Capped Materials Total Return Index and S&P/TSX Capped Energy Total Return Index) and is computed by Ninepoint Partners LP based on
available index information.

The Fund is generally exposed to the following risks. See the prospectus of the Fund for a description of these risks: capital gains risk; class risk; commodity risk; concentration risk; currency risk; derivatives risk; exchange traded funds risk; foreign investment risk; inflation risk; liquidity risk; market risk; regulatory risk; securities lending, repurchase and reverse repurchase transactions risk; series risk; short selling risk; small capitalization natural resource company risk; small company risk; tax risk; uninsured losses risk.

Ninepoint Partners LP is the investment manager to a number of funds (collectively, the “Funds”). Commissions, trailing commissions, management fees, performance fees (if any), and other expenses all may be associated with investing in the Funds. Please read the prospectus carefully before investing. The indicated rates of return for series F of the Funds for the period ended April 30, 2019 are based on the historical annual compounded total returns including changes in [unit/share] value and reinvestment of all distributions or dividends and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. This communication does not constitute an offer to sell or solicitation to purchase securities of the Funds.

The information contained herein does not constitute an offer or solicitation by anyone in the United States or in any other jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. Prospective investors who are not resident in Canada should contact their financial advisor to determine whether securities of the Funds may be lawfully sold in their jurisdiction.

The opinions, estimates and projections (“information”) contained within this report are solely those of Ninepoint Partners LP and are subject to change without notice. Ninepoint Partners LP makes every effort to ensure that the information has been derived from sources believed to be reliable and accurate. However, Ninepoint Partners LP assumes no responsibility for any losses or damages, whether direct or indirect, which arise out of the use of this information. Ninepoint Partners LP is not under any obligation to update or keep current the information contained herein. The information should not be regarded by recipients as a substitute for the exercise of their own judgment. Please contact your own personal advisor on your particular circumstances. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any investment funds managed by Ninepoint Partners LP. Any reference to a particular company is for illustrative purposes only and should not to be considered as investment advice or a recommendation to buy or sell nor should it be considered as an indication of how the portfolio of any investment fund managed by Ninepoint Partners LP is or will be invested. Ninepoint Partners LP and/or its affiliates may collectively beneficially own/control 1% or more of any class of the equity securities of the issuers mentioned in this report. Ninepoint Partners LP and/or its affiliates may hold short position in any class of the equity securities of the issuers mentioned in this report. During the preceding 12 months, Ninepoint Partners LP and/or its affiliates may have received remuneration other than normal course investment advisory or trade execution services from the issuers mentioned in this report.

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