History does not repeat, but it does rhyme

In 2000, one of the biggest discoveries in the oil sector was made, the Kashagan field in Kazakhstan. This discovery is considered the largest in over 30 years, as the field has estimated reserves of 13 billion barrels of oil. Following this discovery, several industry consultants believed the world would be flooded with cheap and plentiful oil from Kazakhstan, and OPEC members reduced CAPEX substantially in their fields. For sure, if a big producer were to step in and make prices go down, it makes no sense to invest to increase production. Unfortunately, this field only started to produce in late 2013, many years after those expert’s estimates. Technical and operational difficulties caused a much longer delay than many thought possible. The lack of investments in CAPEX was one of the causes that contributed to the rise in oil prices between 2005 and 2008. I always hear people say that they are going to renovate their houses and expect to complete the work in X amount of time and have a budget of $Y. In the end, the time ends up being 2X longer than forecasted and the actual spending 3$Y or more. This in a residence, which is a controlled environment and people have extensive knowledge of the details of the place. Now imagine a mine. Mines are famous for taking much longer than expected (and also costing way more than forecasted). The example of Cigar Lake is important. Cigar Lake is one of the largest uranium mines in the world and was discovered in 1981. Production start-up was estimated for 2007, then 2008, then 2010, then 2011, 2013 and finally, in 2014, the mine actually started operating – a delay of 7 years! There are no major uranium projects expected to come online in the next few years, but industry consultants are still talking about Arrow and more Kazakh product. As a result, several uranium producers are drastically reducing CAPEX, which will impact production in a few years. Even Kazatomprom is cutting down spending. Today less than 140 million pounds of uranium is produced per year, while more than 190 million pounds is consumed. The situation is unsustainable and we are seeing several consultants discouraging investment in the industry by saying that new mines can come to production very soon and there will be no surprises. We have seen already this movie with oil a few years ago. As the old adage goes, history does not repeat, but it sure...

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Uranium Presentation Slides ausIMM

Uranium 2019 Presentation AdelaideBaixar

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IMF

The markets are back at or close to all-time highs and selecting investments at this point is becoming quite tricky, especially for a fundamentalist and contrarian investor, like me. Also, trying to follow the macro tourists into which sector is poised to go up can prove itself a very difficult task – or, as experience shows us, equivalent to flipping a coin. But I believe I have stumbled onto something that could be a real opportunity at the moment: IMF – and I am not talking about the one led by Christine Lagarde. IMF Bentham is a litigation funding company providing funding to plaintiffs in Australia, New Zealand, Hong Kong, Singapore, United States and Canada. The name stands for Insolvency Management Fund and it is related to its initial target – insolvency-related issues. The company has its origins at the beginning of this century, did a back-door listing in Australia and it is traded now on ASX under the ticker IMF. IMF has been in the ASX top 300 companies since 2009. They simply finance litigation cases and do not provide investment advice. Up until 2015, the company used to invest its own money on the litigations it funded. This brought some idiosyncratic risk that the Board decided to diversify away from. Also, the earnings were a bit lumpy and the company was restrained by its own capital to grow. Hence, from 2016 onwards, the company changed its business plan and decided to raise funds, in which it also invests, alongside investors, to finance growth and diversify risk. So, in February 2017, the first fund, focused on the US, was launched. Soon after, in October 2017, the second fund, for the rest of the world, was launched. Today the company is already launching its 5th fund (the 4th fund is already closed and it was a success in terms of capital raising) and it is already oversubscribed. The due diligence process of the investors is still going on, but commitments have been made. Both the 4th (focused on the US) and the 5th fund (rest of the world) will be a US$500 million fund each. IMF is transacting from a risky venture to a more asset management company venture, with a little spice (it invests in its own funds 20% of the fund’s target capital raising) and still has a few investments on its balance sheet. This explains why the company holds so much cash on hand. Once fully invested, IMF has to put US$200 million of its own capital on its 4th and 5th funds, not accounting for the option they have to double the size of these funds. The funds are similar to private equity funds, with capital calls and management fees and performance fees (which varies according to the IRR). Fund 1 still needs to make commitments and Fund 2 & 3 have only 10% of capacity left. Fund 4 is already being invested and Fund 5 should close by July 2019. Funds 4 & 5 are considered to be “new generation” funds, and they charge a quarterly management fee and performance fee. Funds 4 & 5 have an option to raise another US$500 million, so after investing 75% of the proceeds of the funds, IMF will most likely exercise the option to raise series II and double the size of the funds. IMF has 50 investment managers that are litigation specialists. The cases are brought to them and these investment managers select the ones they really like. From there, they sign a non-binding term sheet which gives IMF exclusivity for 30-45 days so they can...

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End of the Year Newsletter

As usual, I would like to begin this letter thanking all our partners for the support and trust and our employees for the excellent year we had. Despite all the challenges in 2018 – perhaps the most complex year of the last 10 – L2 Capital has managed to grow and reach new heights. This year we started our first international fund, the L2 International Opportunities Fund. The goal, as the name itself already suggests, is to look for opportunities in the marketplace to deliver capital gains in the medium and long term. We always look for assets that are being traded at a value well below their intrinsic value (in the case of longs) or too high (for shorts) to make high conviction allocations. The great opportunity of the moment, according to our models, is in the uranium sector, in which we have focused and conducted a thorough due diligence. We expect strong returns on this investment and we will report every 3 months to our partners. As always, I will make my only prediction for the new year: all analysts, economists and strategists will miss the predictions for this coming year. Last year, experts predicted Brazilian GDP growth in 2018 of 2.68% and it will be at around 1.4%. The exchange rate, which was to stay at 3.32, ended the period close to 4. We will not get any specific bank or brokerage report, but according to the Focus report, which meets the median of expectations, for 2019 it is projected an inflation rate of 4.03%, dollar to 3.80 and GDP growth of 2.55%. We will follow the development in a year’s time. Once again, we managed to deliver good results in our international portfolios, our investment focus. The average portfolio rose about 8% this year – far short of what we have been delivering in recent years, but still a far superior result than most players on the market. We suffered a little towards the end of the year because of our exposure to uranium, which we will mention later. On the Brazilian side, we had an important election in 2018 with the victory of candidate Jair Bolsonaro. Among other proposals, Bolsonaro has brought a leading economist to become the Finance Ministry, and the market is awaiting major reforms, including the pension reform, which is of major importance and urgency. We will be happy if a real pension reform is approved and we believe it is of real value for the country. Without it, the debt-to-GDP ratio will explode, generating serious negative repercussions on the economy. Of course we are excited about the new government and the proposals being discussed, but we believe that the market is partially pricing this reform and we think it prudent to wait a little longer. There was some renewal in Congress, but not to the point of inspiring full confidence in the adoption of measures that are essential to fiscal rebalancing and the resumption of growth. Moreover, Brazil is part of a globalized world and risks from other places can – and normally do – reach these shores. Our decision to take the foot off the accelerator at the end of last year and start stepping lightly on the brakes proved to be right, and we were able to deliver good results on the international front. Most of the investments made this year were concentrated in the uranium sector, and despite a significant 40% increase in the price of the commodity since the lows in 2018, many stocks in which we invested rose but returned the gains at the end...

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Australia Trading Journal – Part 6

Since our last update, on June 5th, we kept our NCM position without selling calls, as we expected gold prices to go higher. Our expectations were confirmed and the metal price rose nearly 10% in less than a month in USD. NCM shares have risen by 28% since we bought them on May 09th. We decided to write more covered calls: Trade Sell (Call) Security: NCMGZ7 Price (AUD):1.11 Date: July 12th Strike (AUD): 26.50 Expiration date: July 28th In case of being exercised on this option, we expect to get a 36% return in less than 3 months. If the option expires worthless, we may have to analyze markets conditions to decide whether to sell more calls or to simply carry the shares, as we did last month. We will be releasing a new report as soon as we decide to do any other moves regarding this...

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Bolha Chinesa

Relatórios ainda mostram uma economia chinesa forte e pujante. Infelizmente, não é isso que enxergamos. Como já vimos mostrando desde 2013, a situação chinesa é bem diferente do que mostram as estatísticas e os dados do PIB. Como Li Keqiang, vice Premiê da China, admitiu em 2007, não devemos confiar nos dados da economia chinesa, com exceção dos de consumo de eletricidade, de volume de carga transportada por ferrovia e de empréstimos bancários. Então, vamos dar uma olhadinha nesses números, a começar pelo consumo de eletricidade: Não nos parece um país em franco crescimento. Se olharmos, então, para o volume de carga transportada por ferrovia, o problema fica ainda maior: Por último, nos restam os empréstimos bancários. Esses sim estão em plena ascensão, o que tampouco é motivo para comemorações. Enquanto a economia da China cresceu US$4 trilhões nos últimos anos, o volume de empréstimos bancários (sem contar o shadow-banking, que é gigantesco) disparou para US$17 trilhões. Como já apontamos no começo desse ano, a bolha chinesa estava prestes a estourar – vide gráfico abaixo (from zerohedge): Não deveria ser uma surpresa para ninguém o que está acontecendo nas Bolsas desse país (quedas superiores a 30% nas últimas três semanas). Para tentar mitigar essa queda e voltar com o bull market, o governo chinês está fazendo de tudo: diminuiu o compulsório, diminuiu a taxa de juros, diminuiu o valor das comissões, proibiu novos IPOs de virem a mercado (restringindo, assim, a oferta), proibiu fundos de pensão de vender suas ações e, por fim, criaram um fundo de quase US$50 bilhões para comprar ações. Já vamos dizer de antemão que isso não vai funcionar. Nunca funcionou nem nunca funcionará. Para uma capitalização bursátil de cerca de US$8 trilhões, US$50 bilhões não é nada. Toda manipulação acaba um dia e é melhor acabar cedo do que tarde. Estamos vendo riscos em todos os lugares do mundo e, na nossa visão, é necessário diversificar e ter uma parte do portfolio em ativos reais. Ouro e prata físicos continuam no topo da nossa...

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