Cadence Capital Limited (CDM) Q3 FY2026 Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the March 2026 webcast for Cadence Capital Limited. During the quarter, the fund was down about 2.9% against the index down 2.7%. For the 9 months to date, we're up 21.6%, strongly outperforming the index by 20%. The top contributors to this quarter were Lindian Resources, EQ Resources, Samsung Electronics, Robex Resources, Endeavour Mining, Megaport and West African resources. The detractors for the period were Turaco Gold, Amplitude Energy, Capstone Copper, Polymetal Resources and 29 Metals. The world has changed since we had our last webcast. We are no longer in a buy and dip world. Many crowded themes have rolled over, for example, technology, retail and many other discretionary spend areas. And more may follow suit, for example, AI -- AI, contractors, contractors in general, all trading at pretty big multiples. Structurally, higher interest rates, inflation, high energy prices and currency wars, make this a more dynamic and nuanced investment environment than simply buying the dip. During this quarter, CDM reduced exposure moving into cash by selling positions with a 55% net exposure or 45%, which is how we have ended the quarter. Next week, we are doing a roadshow to explain what we think investing looks like going forward and everyone is invited to attend in the different locations if they're interested. You can see from our final performance that year-to-date, CDM is up around 25%, outperforming the index by 21%. For the past year, the fund is up 29.5%, outperforming the index by 19.5%. And since inception over 20 years ago, the fund is up 11.2% per annum, outperforming the index by 3.7% per annum. On a compounded basis, this means we're up nearly 800% against the market that's up 340%. You can see in that middle period there, there's been a period of underperformance whilst we watched multiples expand and expand and expand whilst earnings for the index have actually gone backwards. Well, that has more or less come home to roost now and PEs are contracting. And we'll be very interested to see what the overall earnings that are produced for the June 2026 year-end. Turning now to the slide on our dividends. We've paid an interim dividend of $0.03 fully franked. After paying this dividend, the company still has $0.25 per share of profit reserves to pay future dividends. This equates to about 4 year' worth of dividends based on the interim dividend. In a period when people are actually struggling for franking and retained earnings, we do have a lot of franking and retained earnings I must leave. The historical chart below should show that, on average, we pay about 2 to 3x the fully franked yield that the All Ordinaries Accumulation Index pays, and we've been doing that since inception. We paid out $1.46 of dividends before franking and $2.06 of dividends, including franking. You can see that if you read a lot of press reports and television interviews and so on that with the Australian budget, franking has become more valuable than ever. Year-to-date, the fund has returned 6x the market. And in 2025, it yielded 3x of market. CDM shares are currently trading at a discount to NTA despite strong performance and large dividend reserves. In addition, we have reduced our gold and silver exposure by 70% over the last 4 months. We're very liquid and very conservatively positioned at the moment with 91% of the portfolio being able to be liquidated in 1 week to 97% of the portfolio within 1 month. Really, we're not holding many illiquid positions at all, and that is important when the market turns like it is. Here is a list of our top 20 shareholdings as at the 31st of March 2026. Please be aware that as we do this recording, our exposures have reduced further. And so there will be less overall exposure by the time you watch this video. Here's an example of something that has performed well for us during the period. This is now called PDI, is an African gold producer. And it started off in our portfolio as Robex Resources, a Canadian-listed company. We knew about this Canadian-listed company because of Matthew Wilcox, who has significant experience in investing in African mines, and we know him from his time at Tietto where he helped turn the Tietto gold mines around and sold them to the Chinese when he presented his new plan to get Robex Resources under operation and to expand, we were very interested. PDI is targeting 2026 production of around 200,000 ounces before stepping up to 400,000 ounces by 2029 with the addition of the Bankan project in Guinea. You can see at spot prices, PDI is expected to deliver EPS growth of over 100% and free cash flow of 13% in 2026. So very compelling valuations despite the fact that the share price has gone up so much. More recently, the gold price has started falling, and we have reduced our exposure to this company significantly as we do using our process. But of course, should the gold price start to recover and turn again, we would add to this position. The next slide shows you the performance of PDI since we started investing in it, it's gone from around $0.20 to currently around $0.75 and was as high as nearly $1 before we started exiting our position. We believe this company to have a very good long-term future, and you would expect the gold price to be particularly volatile in this environment, but should gold start to recover, this is a very good investment into the gold sector. We've also invested in Samsung, which ultimately produces chips to sell, which are being used to build data centers and to run GPUs, CPUs and ultimately, TPUs. And this -- they, then, are being used to produce tokens, which are in turn being used by algorithms, AI to perform tasks. I mean, that's the value chain for the whole AI industry at the moment. The first quarter '26 results showed memory prices were up 90%. As you know, there's been a lot of demand for memory chip for data space for computers, energy required to produce these tokens and so on. Samsung's share price volatility increased significantly through this quarter with the War in Iran and generally elevated market volatility. But you can see for the full year '26 that the numbers that we're looking at here are 7x PE, growth of nearly 500% EPS, operating cash flow yield of 16% and free cash flow yield of 12%. When we had all this volatility recently, we took the opportunity just as we did with gold to significantly reduce our position. In fact, we got out of the stock completely, and we have now added back into a small position as the stock starts to recover a bit. But importantly, and this is -- I've been asked a lot about AI and the AI -- what's happening with AI. And we have said, look, what we'd rather do is not invest in a loss-making AI business, but rather invest in this company that produces chips for the AI industry at 7x PE with phenomenal growth. Here is a share price of the Samsung shares, a chart. We haven't been in it from the very beginning, unfortunately, but we have certainly made about 2.5x our money with this position. And again, after this reversal, we think that the stock is very well positioned to continue to benefit from selling chips to the industry. Turning now to the outlook. I think as I outlined before, the fundamental outlook for the economies globally has changed. Inflation and interest rates are rising. We started talking about this 4 years ago in our AGM and at our upcoming seminars, we will go into this in a lot more detail. There's a lot of geopolitical uncertainty. There are currency wars and the war for scarce resources continues. All of these things are compounding on each other and making it a very complicated investment environment. For stocks in general, but specific areas, of course, are doing very well. A CPI of 4.2% is above the RBA's 2% to 3.3% band, and longer-term interest rate cycle commenced in May 2022 continue. So we expect interest rates to be at risk of going up rather than down in the future. Of course, this is at odds with the buy and dip mentality adopted by many markets. Generally speaking, as interest rates fall, asset prices in general go up. Conversely, as interest rates go up, asset prices in general are under pressure. So in an environment where interest rates go up, even only slightly, we don't see the strategy of buying the dips as being as successful going forward as it has been in the past. Remember, we've had falling interest rates for 42 years -- about 42 years before we had them, again, rising for the last 4 years. Many crowded trades, for example, technology, SaaS retail, more generally diversified retail spending have significantly fallen without meaningful recovery and remain an expensive valuation sector in a high interest rate environment. Other sectors such as AI and contractors to the sector are also crowded and at very large multiples and may face the same consequences going forward. We expect inflation to remain a challenge with persistent budget deficits, lower productivity and government going insular, reversing previous globalization trends. We see a lot of similarities between this period and the 1970s and the early 1990s. We've spoken about that before, and we will talk about that in detail at our upcoming seminars. Stock selection and the application of the Cadence process is pivotal in these times. At our upcoming roadshows, we will highlight important emerging themes for the future. Here is a slide outlining the venues and times at which we will be presenting in the major cities of Sydney, Melbourne and Brisbane. And would really like it if you could attend these presentations, and we're going to go into all of this in quite a lot of detail. Of course, to keep up with all of our news and to get copies of the webcast and presentations that we're going to be doing, please join our register at cadencecapital.com.au/newsletter/. Ladies and gentlemen, thanks again for your time, and we look forward to seeing you all in the next -- near future, and hopefully, during the week, next week. Thank you.