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And another year in the books!! From the very beginning of 2021, we anticipated that the fund’s performance would consolidate after the exceptional returns in 2020. This message was repeated every quarter in our letters and proved quite accurate. The volatility experienced in the fourth quarter was exceptional, with a significant downdraft mid-quarter due to the fear of a global shut down from the Omicron Variant and the worry of monetary tightening by global central banks. By the end of the year, it was apparent that inflation was no longer just “transitory” and that interest rates would need to be increased in the new year (most likely sooner and more often than previously thought). Was the punch bowl being taken away? With expectations of rates being increased in the new year, the market finally began to see a rotation from growth to value stocks which had started mid-year and accelerated into the fourth quarter. Despite the worries and crosscurrents, the market rallied towards the end of December and provided a nice boost to returns for the year.
Below is a table with the fund’s performance relative to various global indices.
The Special Equity Fund was up +4.3% last quarter versus the S&PTSX Small Cap Index which was up +3.0%. The outperformance was largely attributable to strong commodity prices. The continued strength in materials (up +9.9%) and energy sectors (+7.5%) was especially noteworthy. Canadian small cap health care stocks were down -16.4%, making them the worst performing sector last quarter, followed by the communication services stocks, down -9.6%.
For 2021, the fund was up +16.4%. The portfolio’s energy sector contributed the most to the year’s performance, with energy stocks up over +115%. The material sector also added value in 2021, as the portfolio’s material stocks were up +9.1% despite the S&P/TSX material sector being down -4.1%. The portfolio’s underweight industrial, real estate, consumer discretionary and financial stocks detracted from performance.
Below are the portfolio and index sector positions as of December 31, 2021:
Contributors
The three names which contributed the most to performance this quarter included Arizona Metals, Neo Lithium and Paramount Resources. The three names collectively added +1.8% to performance.
Arizona Metals owns 100% of the Kay Mine project and the Sugarloaf Peak Gold project in Arizona. The focus for the company is further exploring and defining a proven probable reserve base at the Kay Deposit. The Kay deposit is a steeply dipping VMS structure with historic drilling from Exxon with very good polymetallic grades in a safe jurisdiction. The company through drilling continues to expand the mineralization package with a great grade profile. The company is funded for their 2022 program. We are extremely positive on the prospects of this deposit and the potential size given the lack of large project inventory globally. The portfolio continues to hold the position.
Neo Lithium’s Tres Quebradas Lithium brine project in Argentina was discovered and taken through to PFS in record time from 2015 to 2019. The deposit was high grade with low impurities and a OPEX that put it in the lowest cost quartile in the industry (not to mention the low CAPEX required to bring this greenfield development into production). In 2020 CATL made a strategic investment putting the company effectively in play. This quarter Neo Lithium was acquired by Zijin Mining Group for $6.50 a share cash bid. We have sold the position into the offer.
Paramount Resources explores and develops conventional and unconventional oil and natural gas in Western Canada with a focus on the Montney and Duvernay. It has a long-established history in Canada and as commodity prices began to run in the last year, provided a good entry point into the sector with limited risk as their balance sheet was substantially de-risked via asset sales. We still like the opportunity that the Canadian energy sector provides but have sold our Paramount position in favour of other energy companies with lower valuations and greater upside potential.
Detractors
The three names that detracted most from performance last quarter were Freegold Ventures, Horizonte Minerals and Sprectral Medical. Collectively these three names cost the portfolio -1.4%.
Freegold Ventures is a Canadian gold and copper exploration company with assets in Alaska. The Golden Summit property is an advanced stage gold project with a 40,000-meter drill program currently underway. Despite continuing to show wide mineralized intersections the stock continued to be under pressure. Golds in general faired poorly in 2021 despite the commodity holding in the $1800/oz range. The junior explorers became good candidates for tax loss selling toward the end of the year. The selling in an illiquid market exacerbated the move. We continue to like the set up for golds as we move into 2022. Despite the expectation of an increase in interest rates, we anticipate real rates will continue to be negative. We also think that M&A will start to increase and expect further consolidation in the space. The portfolio continues to hold the Freegold Venture position.
Horizonte Minerals is a leading nickel company that is developing two tier one projects in Brazil. The Araguaia ferronickel project and the Vermelho nickel-cobalt sulphate project are both high grade, low cost, long-mine-life projects. This quarter the company successfully raised US$600 million capital in both debt and equity to move forward on construction of their Araguaia project. The equity raise has put some downward pressure on the stock this quarter however we believe this company is in an excellent position to capitalize on continued strength in nickel prices. The management team is strong and has stewarded this company through some significant challenges over the past downdraft. The company has used its balance sheet wisely and come out of the downturn with a second asset that is targeting the battery grade nickel market. The portfolio added to the position in the latest equity raise.
Spectral Medical is a diagnostic/treatment company in Phase III US clinical trials for its lead product, PMX (Toraymyxin) for the treatment of patients with septic shock and endotoxemia. It is widely known that endotoxin is a trigger of sepsis. Spectral is hoping to combine its FDA cleared CE marked diagnostic for the endotoxin with its therapeutic hemoperfusion device (Toraymyxin) that removes endotoxin once approval is granted. Toraymyxin is approved for therapeutic use in Japan and Europe. Enrollment for the Phase III study was delayed through COVID as these procedures are preformed in hospital. The company will need to come to market/raise capital in the coming year. This company was also hit with tax loss selling towards the end of the year. The portfolio continues to hold the stock, and we will re-evaluate as the company raises capital.