Strategies of Enhanced Investments

Introduction into the African Commodities Strategy

Our African Commodities strategy invests in major commodity companies, involved in resource production and extraction, like mining companies, food production, steel, chemicals and fertilizers
Our African Commodities strategy invests in major commodity companies, involved in resource production and extraction, like mining companies, food production, steel, chemicals and fertilizers
We have chosen African region for that strategy because of the cheap large-scale companies, that have lost a big part of their capitalization, producing a lot of resources, paying high dividends, and paying expenses in currencies, weak against US dollar.
The strategy considers real-time commodities prices and automatically calculates how much profit each company is probably earning at the moment. Our platform finds the most undervalued stocks considering day shifts in production prices, commodity prices and currencies.

Preconditions:

  1. Commodities are strongly undervalued relative to the stock market
  2. African commodity companies` stocks have fallen strongly and are very cheap now. Local companies are discounted relative to the US commodity companies
  3. African companies pay higher dividends than ones in the US
  4. Due to the export-oriented economy, the strengthening of the dollar provides revenue growth and cost reduction
  5. Trade restrictions on Russia may cause a sharp increase in demand for products from Africa
1
Commodities are strongly undervalued relative to the stock market because of the decreasing investments in commodities due to the potential transition to the green energy.
During the last 12 years S&P500 has been growing and since 2010 its growth has exceeded 323%, which is far more than Oil and Gold, which have grown for 62% and 85% respectively.
Stock market`s return has been far exceeding commodities` return during the last 10 years

2
African commodity companies` stocks have fallen strongly due to electricity outages and production shortages, but production volumes started to recover to pre-crisis levels.
African commodity companies have lost tens of percent of capitalization in 2022 because of the electricity outages and production shortages.
African companies have fallen strongly in 2022

However, in the end of June 2022, local problems have been softened and production volumes started to recover to pre-crisis levels. This decrease in mining volume gives a good possibility to purchase perspective companies` stocks for low prices.
Gold production (y-o-y) started to recover to pre-crisis levels. In July that ratio started to grow for the first time in the last 6 months

3
Commodity companies tend to pay high dividends and African companies, like many of enterprises in the emerging markets, have on average a higher dividend yield than commodity companies in developed markets, like the USA or EU markets.
Average African companies` dividend yield composes 5.6%, that is much more than in the USA

4
Due to the export-oriented economy, the strengthening of the dollar provides revenue growth and cost reduction. Weaker than USD currencies seem very attractive due to selling commodities in dollars but paying salaries and spending money on OpEX and CapEX in local currency, that leads to decrease in costs and to growth in EBITDA.
US Dollar strengthens strongly against South African Rand in 2022

Recently, many currencies of developing African countries have been substantially devalued (as it can be seen below) which (combined with rising commodity prices) form favorable environment for the relevant commodity players and for the strategy as a whole.
5
Current geopolitical conflicts can help African commodities companies because they will be able to sell their products to Europe and USA, if an embargo on Russian commodities is introduced.
For example, in July 2022, the UK and the EU imposed an embargo on the import of Russian gold that empowers African companies to sell their gold to EU.
Value of gold exported from Russia in 2021, by destination (in million U.S. dollars)

Our platform uses real-time commodity prices and exchange rates that allow it to recalculate financial figures simultaneously and to predict future Revenue, Costs and EBITDA, not based on the previous report
You can read about our approach more attentively in Global Commodities strategy description
Frequently, analysts do not change their target prices for stocks based on daily commodity price changes. Generally, a small daily uptick in prices is thought to be due to cyclic shifts in supply and demand that correct down the line.
However, we believe that daily shifts cannot simply be ignored. While some shifts in commodity prices can be written off as temporary — for example, rising coal prices during floods in Australia — others are true signs of fundamental shifts in value.
In early 2021, it would be difficult to say that the increased demand for the electric vehicles and a rise in prices for commodities fueling that demand (Lithium etc.) are a cyclical trend. However, in the early stages of industry growth, these shifts in demand would appear in the same way a cyclical change would. Missing these early trends often means a significantly lower ROI.
Lithium prices have grown more than 262% over the last 3 years average price

By applying a consistent, fundamental approach, we have been able to find market inefficiencies that point out to undervalued companies in almost every market environment. We do believe it is necessary to estimate a fair value of the company every moment, taking into account the last market environment changes and time passed since the last reporting date.
For example, if average palladium price in the last reporting period was $ 1600/oz, and the company had profit $ 1 bn last reporting period and its current Market Cap is $ 5 bn, it is much more convenient to be invested in this company in situation when current nickel price is $ 1800/oz compared to situation when it is $ 1300/oz. Moreover, fundamental value of the company in $ 1800/oz market prices environment would be higher.
Why higher? Traditional big banks research would say that the fair value of the company is based on the DCF approach* and on the long-term price forecasts, while daily commodity price movements should have no influence on fair value of the company.
* Discounted cash flow (DCF) is a valuation method used to estimate the value of an investment based on its expected future cash flows.

Still, in our view the fundamental value would be different due to two factors:
There is some probability that the occurred commodity price movement is fundamental (e.g. connected with growing world demand for electric vehicles) and not temporary (in mathematical terms we could say that the posterior mathematical probability of the prices in future period would be higher because commodity prices are auto-correlated as it can be seen below).
In fact, the company is earning more in the current market environment and probably has earned more since the last reporting date, which means its net debt would be lower compared to the situation of negative market environment.
For calculations: As stated earlier, our platform often finds markets either overreact or underreact to small market environment changes. Therefore, we do believe it’s important to reevaluate the effects of market changes with a constant and consistent approach.
We use the EV/EBITDA multiple when calculating company valuations for African Commodities. Compared to other multiple valuations like a pure P/E multiple, EV/EBITDA shows better results as it eliminates some one-off effects from measuring earnings. It also avoids the valuation effect of company`s debt on the capitalization level (rather than at the earnings level).
We have used Global Commodities actual performance as a Backtest to African Commodities Strategy
Global Commodities results: 3.1X S&P500 overperformance
We have launched a Global Commodities strategy on May 31, 2020, which consists of American, Asian, Australian and South American companies. The strategy has shown strong results, overperforming S&P500 3.1X times.
The idea of the Global Commodities strategy is almost the same as the African Commodities strategy, but in African strategy we also add restrictions on FCF generation, multiples` values and high calculated potential. Because of pretty the same structure of strategies, we have used Global Commodities results as a backtest for the African Commodities strategy.
For every company we calculate EBITDА (Earnings before interest, tax and amortization) in the current and historical market environment. We take average EBITDA between them if the current market environment is better. Otherwise, (if the current environment is worse) we conservatively take the current market environment.
Global Commodities has shown great results, substantially out-performing major indices.

Quarterly analysis

The Strategy is 6.5% up per quarter on average, 1.6X more than S&P500
The strategy outperformed the market in 36% of quarters
The correlation coefficient between the profitability of the strategy and the market was +35%, there is a medium positive relationship between the profitability of the strategy and the market
Strategy volatility exceeds market volatility by 1.4X times: 14.2% vs. 10.3%
Maximum drawdown was occurred on 09/26/2022 as -28.5%
Actual performance

Actual Performance of African Commodities: -1.0 percentage points JALSH underperformance
We launched the strategy on June 23, 2022, and it showed normal results: the overall result is -4.0% since launch versus JALSH -3.1% returns for the same period.

Actual performance

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