Cadence Opportunities Fund Limited ($CDO)

Ladies and gentlemen, welcome to the March 2026 Webcast for Cadence Opportunities Fund. During this quarter, the fund was down 0.2%, outperforming the index by 2.5%. CDO is up around 36% for the past 9 months, strongly outperforming the index by 34.3%. CDO is one of the Australia's top performing investment companies, returning 24.5% per annum since its inception 7 years ago. The top contributors to performance during this quarter were EQ Resources, Lindian Resources. Samsung Electronics, Guzman Y Gomez, Robex Resources, Endeavour Mining and Megaport. The detractors were Turaco Gold, Amplitude Energy, Polymetals Resources, 29Metals and Capstone Copper. The world has changed since we did our December quarterly webcast. We are no longer in a buy the dip world. Many crowd themes have rolled over, e.g. technology, retail, diversified spending, discretionary spending and more may follow suit, for example, AI, the contractors to AI and generally speaking, quite expensive for service contractors. Structurally higher interest rates, inflation, high energy prices and currency wars make this a more dynamic and nuanced investment environment than simply buying the [ dividend ]. During the quarter, CDO reduced exposure moving into cash by selling positions, having 70% net exposure. Put another way, we're holding 30% cash at the end of the quarter. Next week, we are doing a roadshow to explain what we think investing looks like going forward. Here is a snapshot of the fund's performance. Since inception, the fund is up 24.5% against the All Ordinaries index up 10% and are up around 400% against the All Ordinaries Index 100% return. Turning now to the interim dividend and the dividend slide in general. We paid $0.075 fully franked dividend on the 30th of April 2026. And after paying this dividend, we still have $0.73 per share of profit reserve to pay future dividends. This amounts to more than 4 years' worth of dividends based on the interim dividend. If you look at our yield compared to the All Ordinaries Accumulation Index yield, you can see we paid 2 to 3x what the All Ordinaries Index pays. And we've paid out $0.85 of dividends and $1.20 if you include the franking since inception. The recent Australian budget has made franking more valuable than ever in our opinion, and we're going to talk a little bit about that at our upcoming investor seminars. Since inception 7 years ago, we have returned 2.5x the market. And in 2025, we're yielding 3x the market's yield. CDO shares can be bought at a discount to NTA currently of around 9% despite strong performance and large reserves for dividends. We have reduced our exposure to gold and silver by 70% in the last 4 months and have a very liquid and conservative position at the moment. 93% of our portfolio can be liquidated in 1 week and 99% of our exposure within 1 month. Here is a list of our top 20 shareholdings, which at the time of recording this video will have changed quite substantially. Turning now to some examples of what have performed well for us. PDI is an African gold producer. And when we saw it for the first time, it was called Robex Resources, a Canadian listed company. Matthew Wilcox presented to us what his plans were for this business to get it into an operating position and to then substantially expand the business. We knew Matthew from the work that he did at Tietto Gold, where we were a shareholder, and he turned that business around and managed to get it purchased by the Chinese. So we've had quite a bit of history with Matthew, and we're confident that he would be able to do it again. PDI is targeting production of around 200,000 ounces going up to 400,000 ounces by 2029 with the addition of the Bankan Project in Guinea. At spot prices, PDI is expected to have EPS growth of over 100% is on a PE of 5, operating cash flow yield of 20% and free cash flow yield of 13%. More recently, we've seen that the gold share price has rolled over. And as you would have heard us say many times before, we tend to exit positions when they roll over, and we have substantially reduced our position in Predictive. This is not a reflection of the operations of Predictive, rather the gold price. In any good gold bull market, there are, from time to time, 30% to 50% gold price retractions, and we have just experienced one of those. If you have a look at the share price for Predictive, you can see we first got involved in this company at around the equivalent of $0.20 per share. It now trades at $0.75 per share and traded as high as $1 per share. We still have a residual small position, which we fully intend to add to as the gold price recovers. In a different realm, we also owned Samsung Electronics shares. Now Samsung produces the chips that get put into computers that in turn get put into data centers to produce tokens that are then used for AI algorithms. Samsung announced in its first quarter '26 results that memory prices have gone up 90% quarter-on-quarter and net profits have increased 140%. You can see the table on the left showing EPS growth for the year of 2026, estimated to be 500% on a PE of 7, operating cash flow yield of 16% and free cash flow yield of 12%. Of course, Samsung share price has been volatile through the quarter with the war in Iran and generally elevated market volatility. We took this opportunity to sell our position when it rolled over in May after having made very good returns on the position. And we now start with a new position that we started adding to and at the moment is showing a small profit for us. Importantly, we have decided that rather than investing in loss-making AI businesses we purchased a chip maker originally on around 3.5x PE, growing at 200% per annum and now on a [ 7 ] PE growing at 490% per annum. This approach is -- the analogy would be the kind of picks and shovels that you would sell to a mine to go and do mining. This is the conservative approach we have taken to investing in the AI sector. But nonetheless, this has yielded very, very good returns. You can see on the following chart that we did not capture all of the returns that have been available in Samsung Electronics, but we have captured a very good portion of these returns. The stock price has retracted as I outlined, and we have a much smaller position now. But of course, if the stock continues to perform the way it should, we would expect based on fundamentals that the share price would go up, and we would continue to add to our position. Turning now to the outlook. As I outlined at the beginning of this presentation, the landscape has fundamentally changed. We have inflation, interest rates rising, geopolitical uncertainty, currency wars and the war for scarce resources continues. Against this backdrop, there is, of course, pressure on stock price valuations, bond valuations, property valuations that are really headwinds for all asset valuations. A CPI of 4.2% is above the RBA's target band of 2% to 3% and a longer-term interest rate up cycle commenced in May 2022, and we have been talking about that in our AGM since June 2022. We expect this trend to continue. So we've seen 4 years of rising interest rates. We did see 42 years of falling interest rates that should give you an indication of how long interest rate cycles are. Generally speaking, in an interest rate falling environment, asset prices go up. And in an interest rate rising environment, asset prices go down or are under pressure. This is at odds, of course, with the idea of just buying the dip adopted by many in these markets. We don't see the strategy being as successful going forward as it has been historically because the factor matrix around which we are operating has changed dramatically. Many crowded trades, technology, SaaS, retail, discretionary spend, diversified financial services in the end of discretionary spend have all fallen significantly without meaningful recovery and remain on expensive valuations for a higher interest rate environment. Other sectors such as AI, contractors to the AI sector, service contractors in general are also crowd of trade and trading at very high multiples because there are a narrow band of stocks that are actually producing positive earnings growth against the backdrop where the market overall is, in fact, returning in negative earnings growth. We see some of these stretch valuations as also being very vulnerable ultimately. We expect inflation to remain a challenge with persistent budget deficits, lower productivity and governments going insula reversing previous globalization trends. We see a lot of similarities between the outlook today and that of the 1970s with persistent stagflation. We will talk about this in some detail in the coming week. Stock selection and the application of the cadence process will be pivotal in these times, and we will continue to look for undervalued sectors, undervalued stocks in particular and also keep a watchful eye on overvalued sectors and overvalued stocks. At our upcoming presentations, we will highlight how important these emerging themes are. And on the following slide, you can see the different locations we'll be presenting at, and we would love it if you could attend one of these presentations. Ladies and gentlemen, thank you very much for your time again. And please, if you are not on our newsletter and distribution list, please go to cadencecapital.com.au/newsletter-cdo and join. Thank you.