Cadence Capital Limited ($CDM)

Ladies and gentlemen, welcome to the Cadence Capital Limited Half yearly webcast for December 2025. The portfolio had a strong period of performance, up 25.3% for the first half, outperforming the All Ordinaries Accumulation Index by around 21%. Top contributors during the period were Robex Resources, Kingsgate Consolidated, Equinox Gold, Turaco Gold, Endeavour Mining, Samsung Electronics and New Gold. Obviously, the gold stocks and material stocks in that list. The largest detractors from performance were Boss Energy and QBE Insurance. Neither of those stocks are in the portfolio anymore. In recent years, we have highlighted that gold prices were rising, whilst gold mining company valuations had not risen significantly. This changed in 2025, and we saw gold company share prices catch up to the gold price movements, and this drove a lot of the performance of the fund in the 6-month period. Over the first half of this year, the Australian dollar gold price was up 29%, whilst the All Ordinaries Gold Company Index was up 63%. Kingsgate and Equinox more than doubled over the 6-month period, while Robex, Turaco, Endeavour and New Gold were all up more than 50%. We declared a $0.03 fully franked dividend and after paying this dividend have $0.25 per share of profit reserves to pay future dividends. This is around 4 years' worth of dividends based on our interim dividend. The ex date is the 15th of April and payment date the 30th of April 2026. The dividend reinvestment program will be in operation for this dividend and is obviously an efficient mechanism to add to your existing holding, which doesn't include paying brokerage or the spread. If you are not registered for this DRP and would like to be, please contact BoardRoom. We will buy back the shares that are issued under this DRP so that there is no dilution. The buyback will operate when the CDM shares are trading at a discount to NTA. We put together this, a quick slide on the CDM yield. The $0.03 equates to 7.5% fully franked yield or a 10.6% gross yield based on the share price at the date of this announcement. You can see in the table that CDM typically pays to 2 to 2.5 to 3x the dividend yield of the All Ordinaries Accumulation Index. And in this period, we've paid around 3x higher than the All Ordinaries Accumulation Index in fully franked yield. CDM has paid out $1.43 dividends or around $2.02, including franking since inception. The NTA of the fund finished at the 30th of March at $0.79 per share -- I beg your pardon, at $0.89 per share pretax NTA and the share price was $0.79 per share, representing an 11.5% discount to NTA. The gold price rally over the past few years has been one of the most sustained rally since the 1970s, and this was followed by a sharp correction in gold prices this month that started actually late last month. The Australian gold price has risen due to -- since the beginning of the year and then corrected to at around 20% correction. This is to be expected in a gold market full run and represents probably a healthy correction in the gold price. Our NTA at the end of December was $1.085 per share. And you can see the post-tax NTA now is around $1.06 per share. The fund is up approximately 20% year-to-date, outperforming the All Ordinaries Index by 19%. Put another way, the index is up around 1%, and we're up around 20%. We have had a similar performance to the index over the last 3 months, but much better performance than the index over the previous 6 months. CDM has reduced its exposure to gold and silver over this period, as you would expect when there's been a correction, and we are watching closely how the gold price performs. Obviously, gold equities remain a core exposure within the fund, and many of them are very cheap and displaying very strong cash flow and earnings growth multiples. Here, you can see the top 20 shareholdings for the fund. And you should also see that the portfolio is, in fact, very liquid. 80% of this portfolio could be liquidated in 1 month -- in 1 week, I beg your pardon, and 90% of the portfolio in 1 month. Examples of things that have done well for us during the period include the Samsung Core position. We started looking at this company when it was around 3x earnings and growing at around 100% per annum. The company makes computer chips. And you would have often heard and read about NVIDIA, which has had such an amazing run. Well, this company is in the same space and has had a tremendously good run itself. The price of the memory that they sell is up around 40% quarter-on-quarter and their net profits are up 60% quarter-on-quarter. They contracted price for their computer chips are up 100% from February to February and the outlook remains very positive for memory prices, and they are also expected to more than double the amount that they sell in the year. So when you look at the forward-looking fundamentals, you can still see the stock at around 7, 7.5x earnings, growing at over 200% with operating cash flow yield of 20% and free cash flow yield of 15%. The price chart shows here that since the Iran war, there has been a bit of a potential change in trend in the stock or maybe just a correction, and we're watching that closely because that may represent the first reduction in exposure of around 1/3, which is how we exit positions 1/3 at a time. The tungsten position that we have in the company has performed very well. EQR is led by a highly experienced management team with decades of experience in tungsten and in the tungsten market in general. China produces around 80% of all the tungsten in the world and restricted exports in 2025, sending tungsten prices up 500%. So this is again an example of a critical mineral where there just isn't as much supply as the world needs. And so the scrambling for critical minerals is very much a part of the news every day at the moment, and tungsten is an example of it. EQR will double its production over the next 12 months in addition to producing into a rising price environment. At current prices, at spot price, EQR is expected to deliver a free cash flow yield of 30% and EPS growth of over 200%. You can see the numbers on the left show a very conservative fundamental valuation at this stage, and that's despite the share price having already gone up significantly. Turning to some of the CDM holdings. Well, we've spoken about Robex before. Robex went into commercial production in February. And in addition to that, has also entered into a merger agreement with Predictive, PDI. And this will bring together 2 projects with the capacity to produce around 400,000 ounces of gold per annum at very attractive costs. The increasing production as well as the rising gold price environment create a very attractive investment. At spot prices, once these projects are in production, we estimate free cash flow yield of around 40% at the current share price. This will be once merged, a significantly large company listed on the Australian Stock Exchange, several billion dollars of valuation. Endeavour Mining is a multi-asset gold producer in West Africa that produces around 1 million ounces of gold per annum with a cost base below USD 1,500 per ounce. And together with the rising gold price, this has led to $1 billion of free cash flow in 2025. I mean this is not a new unicorn in technology being invented that has a $1 billion valuation. This is a company producing $1 billion of cash flow per annum at the moment. With sustained free cash flow, Endeavour has reduced its leverage to a negligible number and accelerated its shareholder returns. 2026 guidance suggests they're going to have continued good production, increased margins and even higher net cash flows. At the current share price, we think the company is yielding around -- is yielding nearly 20% free cash flow yield. Cyprium Metals is a trading position that we talked on when they raised money recently. It's the old Nifty operation and is a copper restart project in WA. It really is a turnaround story that's been on care and maintenance. And the new management team is progressing a phased capital-light approach to restarting the mine. This will start with tailings treatment in mid-2026 and over time, grow to a larger mining operation with 50,000 tonnes per annum of production, which will hopefully see a very good company, which obviously, if you include those production numbers in is at a very, very conservative valuation and margin. Guzman and Gomez continues to be a core position for the company. The company has aspirations to grow the Australian store network from 200 to 1,000 stores over the next 20 years and expand the U.S. operations. The company after the half yearly results is trading at around 90x earnings now based on the, I guess, the unrealistic expectations for its Australian rollout and in particular, its U.S. expansion program because there just simply hasn't been that many stores opened in America compared to what many people thought would be the case when the company listed -- the company listed at a valuation went up to 340 PE. We started shorting it at around 240 PE. It's just below 100 PE now. And we think that quick service restaurants typically trade around 20 to 25 PE which means that the share price could be 1/4 of where it is now. Having said that, the company is growing. So as it grows into its valuation, we would expect the share price to potentially half from where it is now. Recent results have also shown softness in trading conditions in the Australian market and little to no success in opening U.S. stores. The losses in the U.S. stores are guided to increase next year. A quick snapshot of the half yearly reporting season. Old economy stocks for example, miners, generated substantial cash flow during the period. And we've seen evidence of improved shareholder returns from mining stocks underpinned by strong balance sheets. Defense, engineering and construction contractors have also had a very strong period with good earnings growth, supported by high levels of government spending. However, this growth outlook is a little bit less certain now with higher inflation and higher interest rates and also a question mark over how much more debt the government is prepared to go into to continue spending at these elevated levels. New economy stocks, largely high PE software and technology stocks are also facing an uncertain outlook with investors questioning potential AI disruption to business models and I guess also questioning the earnings growth outlook for stocks that were on extremely high PE multiples. These lofty PE multiples have seen significant compression during this period. And whilst we have seen significant PE compression, they are still expensive on PE multiples. So they do not look like fertile hunting ground for core investments under the Cadence process. Higher interest rates are obviously creating headwinds for all high PE stocks and current bond market yields suggest that more rate rises are likely. We've seen heightened volatility, heightened volatility equates to uncertainty and uncertainty is another word for risk. And many stocks during this half year period trade 10% intraday ranges. So there just seems to be high levels of risk and uncertainty. This is a chart we started showing in our AGM presentations in 2022, 220 years worth of interest rates. You can see how interest -- the average interest rate over this period is 8%. But you can see, for example, since the second world war, how interest rates went from 0% to 14% in America. And then in the 1980s went from 14% to negative interest rates around 2018, 2019, 2020 before turning around and probably starting to go back up again. These are very long cycles. The 40-year cycle up in interest rates, 40-year cycle down in interest rates, which is most people that have been watching this webcast would have lived that dream period of falling interest rates for 42 years. And we're now going to be living that potentially the period of increasing interest rates for the next -- for the foreseeable future. In actual fact, we have seen increasing interest rates since 2022. That period where we saw interest rates go from 0% to 14% was that period from the late '60s through to the 1980s. And here are a few headlines of what was making the news then. Energy shock 1970, global energy squeeze today. Food inflation and scarcity then, wheat harvest crisis, supply chain shock impact grain deliveries now. Industrial unrest and strikes then, and now storms of protests against rising cost of living. Then, gold and currency, Nixon ends convertibility of U.S. dollars to gold announces wage and price controls. And now central banks accumulate gold at a record pace as reserves climb amid global currency doubts. The nervous Central Bank back then, the Fed was raising interest rates to combat inflation and recession loomed. Today, market expectations pivot, higher for longer as rate cut hopes fade. That final sentence, understanding the past to navigate the present. We really are living a period that historic look very similar to the 1970 period. And so it's something to be mindful of. Turning now to the outlook. Well, the RBA has raised cash rates by 0.25% in February and March. And as we do this webcast, it's [ mooted ] that they will do another 75 basis points before the end of the year. This really does recommence that longer-term rate hike cycle that started in May 2022. I mean it began in 2022, but really, we're seeing some significant intra-year moves now by the Reserve Bank. CPI inflation is 3.7%. I've seen articles in the paper suggesting that it may go to 4.5% or 5%. whatever the actual number is, it is significantly higher than the target band at which we thought we would be operating. And so price pressure remains from a combination of persistent government spending, deglobalization, historically high migration levels, falling labor productivity and now more recently, energy price shocks and energy price increases. These structural drivers will likely keep inflation elevated for the foreseeable future. This further exacerbates price pressure, that geopolitical uncertainty also disrupts supply chains, which again puts price further pricing pressure, which again puts more pressure on interest rates and so on. There are many similarities in what we are seeing today compared to the 1970s. In this context, gold equities and critical minerals remain core exposures within the fund and importantly, are relatively inexpensive on their valuations. And that really is the key. It's to try and find things that are growing that are actually on low valuations. Across the broader ex resources market, valuations at the extreme end of the distribution have started to contract with high interest rates, particularly in growth areas that could be disrupted by AI disruption or simply stocks have run really high PEs and the expectation that they will continue to have massive earnings growth and that earnings growth has slowed as does eventually happen with most companies. Notwithstanding this, we continue to see evidence of really still high PE valuations outpacing earnings growth. And so that eliminates that part of the market for us. So we remain focused on implementing the Cadence process, and that has served us well through different market cycles. Ladies and gentlemen, if you are not receiving our newsletter, webcast or periodic results, please do so by going to our website and registering for this material. And thank you once again for your time.