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RAB Special Situations (RSS)

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£19.20m

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Interim Results

RNS Number : 7391B
RAB Special Situations Company Ltd
21 August 2008
 
RAB SPECIAL SITUATIONS COMPANY LIMITED
Results for the period ended 30 June 2008
 
 
Chairman’s Statement
 
I am pleased to present to Shareholders the results of RAB Special Situations Company Limited (the “Company") for the period ended 30 June 2008.
 
During the period the Company sought to achieve its investment objective (of maximising its total return primarily through the capital appreciation of its investments) by investing all of its assets directly in the shares of the RAB Special Situations (Master) Fund Limited (the “Master Fund”).
 
The investment strategy of the Master Fund remains the same as previous years and the Fund continues to invest in what the Investment Manager deems to be assets of global significance. Although this strategy led to investments in high profile companies, such as Northern Rock and Oakdene, these investments have always only been a small percentage of the portfolio. Further details can be found in the Investment Manager’s Report.
 
The basic net asset value per Ordinary Share fell during the period by 36.14p to 120.99p, equating to a fall of 23.00%. Over the same period, the Ordinary Share price decreased by 31.50p to 98.00p, equating to a fall of 24.32% and resulting in a widening of the discount of the share price to net asset value from 17.58% at 31 December 2007 to 19.00% at 30 June 2008. This is compared to the FTSE AIM All Share Index which fell 8.39% during the period to 961.10.
 
Since 30 June 2008, the basic net asset value per Ordinary Share has fallen further to an estimated 104.78p as at 31 July 2008 and the share price has fallen to 66.25p, giving a discount of the share price to net asset value of 36.77%.
 
Due to the widening of the discount of the share price to net asset value during the period and more significantly from the period end to date, the Board has held discussions regarding the use of its powers to repurchase Ordinary Shares and hold them as treasury shares and its powers to repurchase Ordinary Shares for cancellation. The Board has also discussed this matter with the Company’s advisers and continues to monitor the situation closely.
 
I am pleased to announce that at the Company’s third Annual General Meeting held on 23 July 2008, all of the proposed resolutions were duly passed. 
 
Although this has been a difficult period for the Company and economic markets generally, the Board, and the Investment Manager, are optimistic that the portfolio is well positioned to recover from the recent decline, and are confident that the good results of previous periods can be replicated in the future.
 
Quentin Spicer
20 August 2008
 
 
Investment Manager’s Report
 
The following text has been written for RAB Special Situations Company Limited (the “Company”) and RAB Special Situations (Master) Fund Limited (the “Master Fund”), collectively known as (the “Strategy”), the Company is fully invested in the Master Fund.
 
In the first half of 2008 the performance of the Special Situations Strategy was down around 23%, a similar loss to that which the Strategy suffered in Q2 2005*. However, the current market sell-off is more protracted and more intense than that of 2005 and the Strategy has now lost money for three straight quarters, ever since the credit crunch spread from debt markets and began to hurt equity valuations, particularly amongst smaller cap stocks. Moreover, at the time of writing in early August, we have suffered a very negative July which has left us down an estimated 33%** for the year to date. This decline in value does include a very regrettable loss on our position in Northern Rock but even without that position we would still be 29% down for the year.
 
After the 2005 correction we enjoyed a performance uplift of 68%** over the next three quarters and it would be comforting to look for another strong rebound now. Will it happen? In our view the valuation of all mining and resources stocks is now compelling. In 2005 the SXPP (a large cap mining index) fell 15% over the period of our correction, while this time it is down 30% since mid-May and down 25% from its 2007 peak*. This fall has come at the time of huge earnings upgrades in the companies which comprise the index, reflecting strong commodity prices; Bloomberg consensus estimates now suggest many resource stocks are valued on EV/EBITDA multiples of around only 4x. These cheap multiples must either reflect forced selling from fund redemptions in the sector, or extreme bearishness on future commodity price developments. The bearishness implied in the outlook for large resources companies is even more extreme in the case of small capitalisation development stocks. We believe this bearishness is hugely overdone, and that in general supply shortages will keep commodity prices high and cashflows strong; we also believe that share prices will eventually be driven higher by corporate activity and the recently announced $10bn bid by Xstrata for Lonmin at a 42% premium to the equity market valuation encourages us in this belief.
 
So far this year our portfolio has been the beneficiary of a number of cash bids for smaller companies of which Oriel Resources and Pan African Mining were the two most important for the portfolio. In general these bids have been important in enabling us to raise liquidity, often at good prices, to reduce our leverage and to pay redemptions from the Master Fund. It is worth noting that these bids also mean that the average performance of the remaining stocks in the portfolio, both listed and unlisted, has been considerably worse than the fall of 33% we have suffered in aggregate. The valuations of our unlisted portfolio are reviewed quarterly by RAB Capital’s Valuations Committee; about a third of the loss in the year to date arose from our unlisted positions, reflecting difficult financing conditions, although we believe many of these may still eventually recover to previous highs.
 
An observation worthy of note is that companies with share prices which have halved generally still own the same mining and energy projects as before the crunch. The RAB Special Situations Strategy tends to focus on investing in natural resources companies at an early stage of development, but with significant sized deposits of various metals or energy. The persisting credit crunch has penalised these companies for their lower liquidity and ongoing need for capital to build their development projects. Nevertheless, the underlying value of metals or oil in the ground in any of these companies does not really vary with short term swings in the equity markets. We generally invest in development projects only if they can still make money if commodity prices halve from their all time highs. Consequently we still believe most of these projects will remain viable even with lower commodity prices. However, we actually believe in a twenty year super-cycle for commodities, driven by the twin factors of urbanisation and industrialisation in China, India and the Gulf amongst others, and which is compounded by supply shortages stemming from decades of under-investment in both the mining and energy industries. Our view therefore has to be that the deep value we see today in the battered share prices of the companies we own will be the basis of strong performance in the future. This may take longer to happen than the rebound in 2005 but we do believe it will happen. We are encouraged by signs of stabilisation in equity markets generally and in particular by recent rallies in the financial sector and in the US Dollar against most other currencies as possible precursors to the conditions necessary for such a rebound.
 
Finally, despite pressures on the portfolio we are being careful to hold on to a range of attractive assets at these very low prices. We hold companies with, for example, significant potential oilfields in the Caribbean and South Atlantic, oil shale in Madagascar and Sweden, major iron ore deposits in Brazil and Africa, gold in Australia, Columbia and Central Asia, coal in China and Mongolia, uranium in Namibia and South Africa, which all rank among the projects which in our view offer huge upside. We believe we have achieved our aim of, for example, buying oil in the ground at under 10 cent per barrel and iron ore in the ground at below 10 cent per tonne. We have always represented to clients that we mainly invest in companies with development projects, with a view to a strongly increased value on a three to five year view. In recent years we have made returns more quickly than this, and we believe that we will be able to do so again as the world runs short of natural resources, but for the moment we are having to hold on in adversity before achieving this. Once again we thank our investors for continuing to invest with us for this long term value.
 
Philip Richards and David Dattels
8 August 2008
 
*Past performance is not a guide to future returns
**Performance is shown net of all fees and charges
 
Sources: RAB Capital plc, Bloomberg.
 
 
Important Information
The Investment Manager’s Report (the “Report”) has been prepared and issued by RAB Capital plc (“RAB”), which is authorized and regulated by the Financial Services Authority (“FSA”) and constitutes a financial promotion for the purposes of the Financial Services and Markets Act 2000 and the FSA Rules. It refers to the RAB Special Situations Company Limited, an AIM listed, Guernsey registered closed ended feeder fund of the RAB Special Situations (Master) Fund Limited. The RAB Special Situations (Master) Fund Limited is an unregulated collective investment scheme for the purposes of the Financial Services and Markets Act and whose promotion is accordingly restricted by law. The investment programme of the Master Fund is speculative and entails substantial risks. Shares may be subject to sudden and large falls in value and there could be a loss on realisation equal to the amount invested. Changes in rates of exchange may have an adverse effect on the value of, or income from, the shares. References to future returns are not promises or even estimates of actual returns that an investor may achieve. The forecasts and material contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. The information herein reflects prevailing conditions and RAB’s judgement as at this date, all of which are subject to change. Past performance is not indicative of future performance. All performance data is shown net of 2% management fees, 20% performance fees and the fees and expenses relating to the fund’s AIM listing. This information is being disclosed on a confidential basis.
Prospective investors should inform themselves and take advice as to the applicable legal requirements and any applicable taxation and exchange control regulations in their countries of citizenship, residence or domicile which might be relevant to the subscription, purchase, holding, exchange, redemption or disposal of any investments. This Report is not intended to constitute, and should not be construed as, investment advice. RAB and its affiliates neither provide investment advice to, nor receive or transmit orders from investors, neither do they carry on any other activities with or for investors that constitute “MiFID or equivalent third country business” for the purposes of the FSA Rules.
 
 
 
 
Directors’ Responsibilities
 
The Directors are responsible for preparing these unaudited interim results, which have not been reviewed by an independent auditor, and are required to:
 
·      prepare the unaudited interim results in accordance with International Accounting Standard 34: Interim Financial Reporting (“IAS 34”);
·      include a fair review of important events that have occurred during the period, and their impact on the unaudited interim results, together with a description of the principal risks and uncertainties of the Company for the remaining six months of the financial year; and
·      include a fair review of related party transactions that have taken place during the period which have had a material effect on the financial position or performance of the Company, together with disclosure of any changes in related party transactions in the last annual financial statements which have had a material affect on the financial position or performance of the Company in the current period.
 
The Directors confirm that the unaudited interim results comply with the above requirements.
 
On behalf of the Board
 
Q Spicer
Director
20 August 2008

 
Income Statement
for the six months ended 30 June 2008 (unaudited)
 
 
Six months ended
30 June 2008
(unaudited)
Six months ended
30 June 2007
(unaudited)
Year ended
31 December 2007
(audited)
 
Revenue
Capital
Total
Total
Total
 
£'000
£'000
£'000
£'000
£'000
 
 
 
 
 
 
Gains and (losses) on investments
-
(27,626)
(27,626)
21,870
10,283
Interest income
8
-
8
22
28
Investment management fee
-
(1,097)
(1,097)
(1,152)
(2,539)
Performance fee
-
-
-
(4,266)
(1,676)
Administration fee
(55)
-
(55)
(57)
(124)
Other expenses
(146)
-
(146)
(132)
(274)
 
----------
----------
----------
----------
----------
Net (loss)/return on ordinary activities for the period/year
(193)
(28,723)
(28,916)
16,285
5,698
 
----------
----------
----------
----------
----------
 
(Loss)/return per Ordinary Share: basic and fully-diluted
(0.24)p
(35.90)p
(36.14)p
25.41p
7.91p
 
 
Statement of Changes in Equity
Six months ended 30 June 2008 (unaudited)
 
 
 
Share capital
Share premium
Special distributable reserve
Revenue reserve
Capital reserve
Total
 
£'000
£'000
£'000
£'000
£'000
£'000
 
 
 
 
 
 
 
At 1 January 2008
800
50,242
35,849
(835)
39,652
125,708
Loss for the period
-
-
-
(193)
(28,723)
(28,916)
 
----------
----------
----------
----------
----------
----------
At 30 June 2008
800
50,242
35,849
(1,028)
10,929
96,792
 
----------
----------
----------
----------
----------
----------
 
 
Six months ended 30 June 2007 (unaudited)
 
 
Share capital
Share premium
Special distributable reserve
B Warrant reserve
Revenue reserve
Capital reserve
Total
 
£’000
£’000
£’000
£’000
£’000
£’000
£’000
 
 
 
 
 
 
 
 
At 1 January 2007
600
23,594
35,849
848
(465)
33,584
94,010
Warrant conversion