The New Criterion

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Global Masters Fund (GFL) $2.25

Value conscious investment legend Warren Buffett would be proud of this listed investment company’s rationale for not charging any base or performance management fees.

With two-thirds of Global Masters’ circa $18 million of investments tied up in Buffett’s investment vehicle Berkshire Hathaway, the LIC serves as a local conduit for investors who can’t afford to shell out US$284,000 ($366,000) for a single Berkshire share.

“There is no logical reason why we should be charging a management fee if we are not managing anything,” Global managing director Manny Pohl says.

“When you have two passive investments it’s not right to be charging a management fee. Mr Buffett does that for us.”

The second investment refers to Global’s allocation of 8.5 per cent of its funds to the London Stock Exchange listed Athelney Trust, which invests in undervalued UK stocks with a market cap of less than £300 million.

To keep the lights on absent those management fees, Global Masters has also invested 12 per cent of its portfolio in another Pohl-linked LIC, Flagship Investments.

Unlike Berkshire Hathaway, Flagship pays dividends from its portfolio of Australian shares and these flows defray the incremental costs of running Global (such as listing fees).

Global Masters has just completed a $4.3 million capital raising, offering 2.1 million shares in a one-for-four rights offer at $2 apiece.

The funds won’t be ploughed into more Berkshire shares and may be used for more active investments, in which case the fund may eventually introduce a management fee.

Pohl hasn’t exactly lost faith in Berkshire shares, which have gained 32 per cent over the last year and 123 per cent over five years.

(The stock also zoomed 7.9 per cent in the September quarter on the back of a buoyant US market).

But he gently notes that at the age of 87, Buffett is no spring chicken while his vice chair Charlie Munger is 93.

He’s not implying the sprightly duo aren’t up to the task, but such are market perceptions that when they fall off their perches there’s likely to be pressure on Berkshire shares.

Global Masters net tangible asset value rose 18 per cent in the 12 months to September 30, to $2.06 (pre tax obligations on the sale of assets).

Unusually for a small LIC, Global shares are trading at a 5 per cent premium to NTA.

Despite their fee-free ride, Global investors last year vented their ire at the level of director salaries, voting down the remuneration report under the “two strikes” rule.

A perplexed Pohl argues that at an average $42,000 across three directors, these stipends were not exactly excessive. In any event, the board did not incur a second strike at this year’s AGM, held last Friday.

As for the famed Buffett annual jamboree, Pohl has attended two and found them to be “illuminating and interesting”.

This year’s meet, held in front of 40,000 in Buffett’s home state of Nebraska in May, lasted for eight hours.

But the AGM – dubbed the Woodstock for investors – is also in danger of becoming a sideshow of quips and bon mots for Middle America.

Pohl says the Munger-chaired Westco Financial offered a more concise and useful AGM when it was 80 per cent owned by Berkshire. Sadly, the AGMs were abolished after Berkshire took full control in 2011.

Altech Chemicals (ATC) 15.5c

Just as diamonds are compacted carbon, sapphires are derived from alumina subject to immense heat and like diamonds they can also be grown artificially.

The blue tinge of the sapphires – the part that makes them so alluring – is the result of impurities. “Just buy your wife Altech shares instead,” counsels Altech chief Iggy Tan.

We’ll avoid that advice in the interest of domestic harmony, but Tan may well have a superior notion of value as Altech seeks to become a leading provider of the key ingredient for synthetic sapphires: alumina of 99.99 per cent purity.

The market allure of high purity alumina (HPA) lies not with the content of jewellers’ windows, but in the emerging market for unscratcheable and unbreakable mobile and watch sapphire screens.

To hammer the point home – literally – Tan’s presentation to the recent Australian Microcap Investment Conference was accompanied by vision of an Apple Watch screen being attacked with sandpaper, a mallet and then a drill.

(The screen emerged intact, but don’t try this one at home folks).

Sapphires are also used as substrates in LED lighting and to replace the plastic separators in lithium ion batteries that are prone to catch fire (as with the Samsung devices banned by airlines)

Altech owns the Meckering kaolin (clay) deposit in Western Australia, a source of alumina feedstock leached of all impurities (such as sodium) over millions of years.

Altech plans to build a 4500 tonnes per annum processing plant in the Malaysian state of Jahor to convert the material, shipped from Fremantle, to high purity alumina.

Making sapphires involves heating the metal to 2000 degrees Celsius and growing the crystals over 21 days.

A bankable feasibility study (which is due to be updated) costs the project at $80 million, with a 3.7 year payback period and producing annual EBITDA of $55 million.

Tan contends the process is half the cost of conventional producers such as Nippon and Sumitomo, who have to buy the aluminium metal derived from molten bauxite in an energy-intensive process.

On his rough equation, a product that costs US$9000 a tonne to make currently sells for US$27,000 a tonne. The current global market is not big – 25,000 tonnes – but is forecast to grow at 17 per cent per annum.

Put another way, the world will need four of Altech’s proposed plants to satisfy just the battery demand by 2026.

Altech has the support of Mitsubishi, which has signed a 10-year offtake agreement for all output. Tan, we add, founded and ran the lithium developer Galaxy Resources so is no virgin to development projects.

The really hairy bit is raising $70 million of debt, but the company hopes to secure the support of German export credit finance house KFW Finance (a Teutonic supplier will build some of the plant).

Expect a capital raising as well.

And what if the loan is not forthcoming? After all, Malaysia has been a scary place for the likes of rare earths producer Lynas, which ran into near fatal problems at its Kuantan processing plant.

“There is no plan B,” says Tan.


Tim Boreham edits The New Criterion

*Disclosure: Global Masters is covered by Independent Investment Research


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