Thoughts on Nokia EGM

Yesterday I attended the extraordinary general meeting of Nokia corporation. It was my first general meeting of any kind. I attended because it was historical meeting and certainly very widely watched and reported one - at least in Finland where Nokia easily brakes the news barrier whatever it does.

As you may know by now, the Nokia EGM decided to confirm and approve the sale of substantially all of Nokia's Devices & Services business to Microsoft in line with the proposal and recommendation of the Nokia Board of Directors. 

More than 99 % of the votes cast at the EGM were in favor of this proposal. If I recall right, it was only some 8 million votes out of 1,7 billion that were supporting either dismissal or the alternative proposal that was made. Surprisingly many votes were disqualified or blank (some millions).

So no surprises there.

The level of Q&A was disappointing not because of answers provided (often by Chairman of the board of directors Risto Siilasmaa), but due to the questions and comments being made. Lots of commentary and opinions. Many of them unnecessary or outside of decision at hand. It took ages to go through the Q&A part, but apparently there was some kind of agreement to allow gross overruns of budgeted 2 minutes per question or comment. 

Good experience, but I think I'll continue skipping most of GMs.

Changes in portfolio

I decided to let go of the following stocks:

• Baidu
• China Mobile
• Sanofi

Dividends from China Mobile and Sanofi are being treated unfavourably by Finnish tax authorities in comparison to other foreign companies. Dividend from a company in Hong Kong (China Mobile) is treated as regular income and thus subject to much higher tax percentage than normal dividend or capital gain. Dividend from France (Sanofi) on the other hand is supposed to have zero withhelding by broker. Since my broker withhelds part of the dividend and this is not taken into account by Finnish tax authorities, I am being taxed partly twice.

As I was looking for passive ETFs where to put the money I came across an interesting ETF (PowerShares Golden Dragon China Portfolio; NYSE: PGJ) that had big exposure to Chinese technology companies like Baidu and also to China Mobile. Thus, I dediced to take the profits from Baidu which has risen nicely lately and spread also that money around more evenly. 

 

I don't like the big exposure to banking sector of ETFs like iShares China Large-Cap (NYSE: FXI). Nor I wanted to put all money from China Mobile and Baidu to PGJ so I selected another ETF to maintain our exposure to China. Guggenheim China Small Cap ETF (NYSE: HAO) invests into 241 companies like BYD which I had a direct investment in some time ago. Sector exposure is quite balanced (industrials 19%, consumer cyclical 17%, technology 14%, real estate 11%, basic materials 11%, consumer, non-cyclical 10%...).

To maintain some exposure to Telecommunications Service Providers beyond our position in TeliaSonera some our our money went to iShares Global Telecom ETF (NYSE: IXP). Three biggest holdings are AT&T, Vodafone and Verizon. Naturally China Mobile is within top 10 holdings as it is one of the biggest operators in the world by any measure.

From the pharmaceutical / healthcare sector I selected iShares Global Healthcare ETF (NYSE: IXJ). Sanofi is there within 10 largest holdings. Top 3 being Johnson & Johnson, Novartis and Pfizer.

Tasman Metals vs. peers

When writing my previous article on Tasman Metals, I noted that it would be useful to look at Competing HREE mines coming online elsewhere outside of China that might fill the same supply space. I started some work on this, but concentrated only on mines in or near Europe. A recently published article in Seeking Alpha seems to do this job rather nicely (as far as I can tell). I highly recommend it if you are interested about rare earth elements to begin with.
 
Best In Rare Earth Class And Undervalued: Tasman Metals" by "The Critical Investor". 

I recommend to read also all of the comments, since there is some good discussion and alternative views there on the subject.
 
Also, I recommend listening to the recent interview with Mark Saxon, CEO of Tasman Metals by Gold Stock Trades Editor Jeb Handwerger in Youtube. "Tasman Metals: Critical Supply Of Heavy Rare Earths In EU"

The projects I managed to find in or near Europe were:

• Storkwitz deposit (Germany)
• Kvanefjeld project (Greenland)
• Kutessey II (Kyrgyzstan)

Storkwitz, located near the town of Delitzsch, is confirmed to contain JORC-compliant REE resource. In comparison to Norra Kärr the ore body in Storkwitz is much more difficult to access as it begins at 300 meters below surface and continues to greater depths trending straight down. It is currently estimated to contain 20100 tonnes rare earth oxides (half indicated and hald inferred). The drilling data covers up to 700 meters, but the ore body is estimated to possibly continue up to 1200 meters. In comparison, Norra Kärr ore body starts near surface and current drill holes are up to 150 meters making it feasible for open pit mining.

Kvanefeld in Greenland is potentially a huge project. Compared to Norra Kärr, the project is far bigger. Due to uranium it likely will also be more controversial. Resources are split to three different deposits within a grid of 7x8 kilometers. There does not seem to be infrastructure (roads, power..) so it is going to take more capital expenses than Norra Kärr. Target for operations to start is same as for Norra Kärr (~2016).

Note: all information about the projects in or near Europe where gathered in June before I finished my previous articled on Tasman Metals.

 The author is long Tasman Metals and considers the investment as very high risk one as all junior miners typically are.

New position: Citycon

I have recently trimmed down our Nokia position as it has skyrocketed in value. That was a turn-around bet worth taking! I have routed money from Nokia to my other holdings in Finland (Helsinki stock exchange). I also took a new position in Citycon (Helsinki: CTY1S) that has been popping up constantly in my screens (see earlier post: Helsinki Top 20). I have bit altered my screen, but still all three Finnish property investment companies are in Top 10.

Citycon is specialised in retail properties, especially in shopping centres, in Finland, Sweden and in the Baltic countries. It was founded in 1988 by several large Finnish Corporations and initially invested in office premises.

At the time of writing last trade with Citycon was made at 2,43 euros. It has roughly traded between 2,1 and 3,3 euros last three years. My main expectation with this one is stable dividend. Valuatum screening tool that I use puts both 2013 and 2014 yeild at 6,2%. Price per book is below 1 at 0,94. P/E estimation for 2014 is 11,3. This looks like a solid value play should.

Our portfolio has been tilting very heavily to IT and Telecommunications so these latest moves reduce our exposure to those sectors. However, our exposure still remains to be very high.

Western Digital: my best pick so far

My best stock pick during last three years has been Western Digital (NASDAQ: WDC). My initial thesis was based on low valuations of hard disk makers Western Digital and Seagate (NASDAQ: STX) compared to their future prospects. [Previous blog posts].

Copyright ©1999-2008 by StockCharts.com Inc., Redmond Washington. All rights reserved.

Reproduced with permission under "Limited Licence" / General Terms of Service.

I was right about prospects of hard disk makers and our current unrealised gain is over 100%, but I would have done much better if I had bought Seagate instead. The difference in performance can be largerly explained by flooding in Thailand in October 2011 that severely impacted WDC and benefited STX. The chart below gives you idea of their relative performance in the last three years (WDC stock price divided by STX stock price):

Copyright ©1999-2008 by StockCharts.com Inc., Redmond Washington. All rights reserved.

Reproduced with permission under "Limited Licence" / General Terms of Service.

Lately (over last year) WDC has outperformed STX. Longer term, I would not be surprised if this trend continues. Therefore, I continue to hold WDC instead of STX. However, something to consider is to own both companies instead one or the other. That would also protect from one time events that have material impact to either company.

Comparing valuation and financials of WDC and STX there isn't many material differences. The market cap, for example, is currently almost the same. The most notable differences are:

• P/B: WDC 1,9 vs. STX 4,1
• Dividend yield: WDC 1,6% vs. STX 3,9%
• Long term debt / Equity: WDC 0,22 vs. STX 0,79

Source: FINVIZ.com

There currently appears to be significant difference in current P/E, ROA, ROI, ROE, but I believe those are not lasting differences.

• WDC recorded $681 arbitration charge in their Q4/2013 impacting their net profit. The award was from WDC vs. STX dispute so this seriously distorts TTM figures.
• The companies operate in exact same industry with significant market share. Their gross margins and operating margins are very close. I can't see currently any reason why net margin (profit margin) could be materially different for the two companies.

Full disclosure: Long WDC at the time of writing.

  

7 reasons why I hold Fortum

Fortum is a leading power and heat company in the Nordic area. It was established on 7th of February 1998 as combination of "Imatran Voima" (literally: "Imatra's Power"), one of the most famous Finnish power companies, and Neste (literally: "Liquid"), an Finnish oil company. Since then many investments and divestments have taken place. Most notably actions have been separation of oil business (Neste Oil) in 2005 and large investments in Russian power and heat companies (TGC-1 and TGC-10) between 2005 and now.

Fortum is among the most traded shares on the NASDAQ OMX Helsinki stock exchange where it is listed. It has market cap of approximately 13 billion euros which places it 5th in Helsinki stock exchange in terms of market cap. Finnish State is majority owner with 50,8% of all shares. Fortum is considered as strategic asset for Finland and the ownership is steered directly from the office of Prime Minister. Foreign investors have 25,5% stake in Fortum (June 2013).


The reasons I hold Fortum are:


#1 Dividend

For the past five years Fortum has paid dividend of 1 euro per share. Shares of Neste Oil distributed to shareholders of Fortum are not included.

Dividend policy:

"Fortum Corporation's target is to pay a stable, sustainable and over time increasing dividend of 50-80% of earnings per share excluding one-off items. "

Dividend yield based on closing price 14,78 euros (Helsinki 26th of July 2013) and assumption of 1 euro dividend would be 6,8%.

 
#2 Stability

Nordic power and heat business is very stable. Fortum is number #3 in power generation and #1 in heat generation in Nordic region where power market is still highly fragmented. There are over 350 power generation companies in the region.

That is where the money comes now.

In European scale Fortum is mid-sized player in power generation. However, in heat generation it is one of the biggest players in the world (5th in 2011).


#3 Very profitable business valued very reasonably

Gross margin 41%
Operating profit 30,2%
ROA 7,8%
ROI 3 year average (est 2013) 12%
ROE 3 year average (est 2013) 15,6%

P/B 1,23
P/E (est 2013) 10,5

Source: Valuatum


#4 Low carbon power generation

According to its strategy, Fortum seeks growth in low-carbon power generation, energy-efficient CHP production and customer offerings. 68% of Fortum's total power generation was CO2-free in 2012. In EU region the number was impressive 93%.

Power generation mix in 2012 was:

• Hydro power 34%
• Nuclear power 32%
• Natural gas 27%
• Other 7%

Heat generation mix in 2012 was:

• Natural gas 62%
• Coal 12%
• Biomass 11%
• Other 15%

Within Europe 91% of power is generated within either hydro or nuclear power plants. The share of biomass, heat pumps and waste in heat production in Europe is far larger than in the overall mix.


#5 Russian operations

OAO Fortum (former TGC-10) operates in the heart of Russia’s oil and gas producing region. TGC-1 operates in north-west Russia (area bordering Finland). Fortum owns a bit over 25% of TGC-1. Fortum's share of both combined is 26 TWh of power generation and 34 TWh of heat sales. Compared to Nordic figures (52 TWh and 15 TWh respectively) the Russian operations is significant in the company level.

Power market liberalisation is ongoing in Russia. There are separate markets for capacity and electricity. The rules favor "new" capacity over "old" (pre-2007) capacity. Bulk of capacity Fortum got in the TGC-10 deal was "old". However, they have extensive investment program at OAO Fortum to add 85% more capacity between 2011 and 2014. Majority of the capacity is to be rolled out between 2013 and 2014.

Currently operating profit coming out of Russian operations is fairly small. However, Fortum targets operating profit level (EBIT) of about EUR 500 million run-rate in its Russian division during 2015. That would yeild a significant improvement to the bottom line (was 1,4 billion EUR after tax in 2012; EPS 1,59 euros).


#6 Long term market coupling in Europe

Electricity is cheaper in Nordic region than in many other parts of Europe. New interconnections will double the transfer capacity between nordic and continential regions from current 4000 MW to 8000 MW by 2020. Net exports from Nordic region to continental Europe in 2012 was 18 TWh (2011: 7 TWh). Long term market coupling and expansion of tranfer capacity are likely to increase price of electricity in Nordic region and bring it closer to that of central Europe.


#7 Potential divestments

Fortum is assessing divestment of its electricity distribution business, which ties lots of capital, but the returns are far behind those of power generation business. Fortum is the biggest electricity distributor in the Nordic region. However, in European scale Fortum is a minor player.

The electricity distribution as separate business is likely valued higher than its currently valued as part of Fortum. This would unlock hidden value - eventually to shareholders in one form or another.




References:

All financial estimates: Valuatum (based on closing price 14,78 EUR on Helsinki stock exchange 26th of July 2013)

Company web site

Investments and divestments
http://www.fortum.com/en/investors/share-information/major-investments-and-divestments/pages/default.aspx

Strategy
http://www.fortum.com/en/investors/strategyandgrowth/pages/default.aspx

Investor presentation July 2013:
http://www.fortum.com/Lists/ArchiveLibraryList/Fortum%20investor%20material%202013/Fortum%20investor%20Material%20July%202013.pdf



Full disclosure: Author was long Fortum at the time of writing.

Tasman Metals Norra Kärr project: The beginning of a European REE supply chain?

China is currently dominating the supply of rare earth elements needed in many high tech products. Outside of China most advanced development projects targeting REE mining are in North America and Australia. In Europe Tasman Metals is currently leading activities in establishing a European REE supply chain.

The Norra Kärr project

On May 21st 2013 Tasman Metals Ltd (TSX.V : TSM; Frankfurt : T61; NYSE-MKT: TAS) reached a significant milestone. It was granted mining lease for it's flagship Norra Kärr heavy rare earth element (REE) project. The project is closing the midpoint in Tasman's own roadmap showing timeline from discovery to production. If all goes as planned the mine construction could start in late 2014 provided that they get extraction permit and the mine is found to be feasible. Production could start earliest in 2016 according to the roadmap that can be found from company presentation (slide #28 in May 2013 version).

The Norra Kärr project is located in southern Sweden, 15km north/north-east of the township of Gränna and 300km south-west of the capital Stockholm. It is NI 43-101 compliant resource together with Olserum REE deposit also in southern Sweden. Technical report for Olserum was published recently while for Norra Kärr Tasman has completed both Technical report and preliminary economic assessment (PEA) [reports].

 

NI 43-101 Compliant Mineral Resource Estimate (March 2012); Norra Kärr

Approximately 50% of REE resources at Norra Kärr can be considered heavy REE. Preliminary economic assessment estimated Norra Kärr project net present value at 1,5 billion USD (Base case; 10% discount, REO basket price $51/kg). The deposit remains "open at depth" which basically means that there could be more economically viable mineralized ore deeper under the ground. Mine life is estimated at least 40 years.

Mineral resources vs. Ore Reserves

Mineral resources that are not mineral reserves do not have demonstrated economic viability. For relationship between mineral resources (inferred, indicated, measured) and ore reserves, please check the picture below as well as wikipedia entry for mineral resource classification.

About Rare Earth Elements

Rare earth elements have geochemical properties that make them typically dispersed and not often found in concentrated and economically exploitable forms [Wikipedia]. These metals are used in many hi-tech devices. In particular, rare earth elements are used in clean energy applications such as wind turbines, electric vehicles, photovoltaic cells and energy-efficient fluorescent lighting. Clean energy technologies currently constitute only about 20 percent of global consumption of critical materials. However, their share of total consumption is expected to grow as the use of these clean energy technologies is expected to grow rapidly.

The rare-earth elements (REE) are naturally occurring non-toxic materials, whose unique properties make them essential to emerging technologies that contribute to environmental, energy efficiency and health solutions. Examples of use of REEs [source: Tasman Metals]:

• A typical hybrid vehicle contains approximately 28 kg of REE
• Large wind turbine-generators units require 2 tonnes of high strength magnets, which contain approximately 30% REE (i.e. 600 kg or REE per generator)
• Catalytic converters  that transform the primary pollutants in engine exhaust gases into non-toxic compounds have REE coating
• REE phosphors in compact fluorescent lamps and LED lamps.
• Flat screen and plasma televisions
• Hard disk drives
• REE permanent magnets to generate high strength magnetic fields for MRI imaging.  700 kg of magnets are consumed in each MRI machine

Norra Kärr is source for Zirconium and the most critical rare earth elements

89% of revenue is expected to come from five metals:

• Dysprosium (Dy) 35%
• Zirconium (Zr) 20%
• Neodymium (Nd) 13%
• Yttrium (Y) 11%
• Terbium (Tb) 10%

Apart from Zirconium (Zr) others are heavy rare earths which U.S DOE estimated in 2010 to be both of critical importance to clean energy economy and having high supply risk between 2015-2025. Dysprosium (Dy) was deemed to me most critical of all.

 

Medium term Criticality Matric. Source: Critical Materials Strategy, U.S DOE, 2010

• Dysprosium (Heavy REE) is used in permanent magnets for wind turbines and vehicles with electric drive trains.
• Neodymium (Light REE) is used in batteries for vehicles with electric drive trains and in permanent magnets for wind turbines and vehicles with electric drive trains.
• Terbium (Heavy REE) and Yttrium (Heavy REE) are used in fluorescent lighting phosphors.

 

 

Pros and Cons for Norra Kärr

+ Contains the most critical REEs
+ EU focus (as far as I can tell this is the best shot at EU securing own REE source)
+ very low in radioactive metals compared to most other REE deposits
+ very well serviced by local infrastructure
+ open pit mine and ore body starts near surface

- Competing HREE mines coming online elsewhere outside of China might fill the same supply space (subject to separate article)
- Tasman Metals is a very small company (junior resource company) with just $7 in cash (May 2013) so it will need help from partners in the project both technically and financially
- Risks in permitting and feasibility of the mine (as with any mine at this stage)


Key financials and facts from PEA:

• Market cap of Tasman Metals: 42,5 million USD (June 9th 2013; source: Google Finance NYSEMKT:TAS)
• Norra Kärr project net present value at 1,5 billion USD (Base case; 10% discount, REO basket price $51/kg).
• Initial capital expenditures of $290 million (includes contingency of $66.8 million or 30%)
• $5.3 Billion in revenue over the first 20 years and $10.9 billion over the 40 year life of mine
• Average annual operating expenses of $74.3 million or $10.93 per kg of mixed TREO concentrate output

Full disclosure: Author owns shares of Tasman Metals.

Warning!: This is a very high risk investment!
As Wikipedia puts it (referring to NI 43-101 "national instrument for the Standards of Disclosure for Mineral Projects within Canada"):

"The promulgation of a codified reporting scheme makes it more difficult for fraud to occur and reassures investors that the projects have been assessed in a scientific and professional manner. However, even properly and professionally investigated mineral deposits are not necessarily economic, nor does the presence of a NI 43-101-, JORC- or SAMREC and SAMVAL-compliant CPR or QPR necessarily mean that it is a good investment."

Gold Bug Bites, But Fever Stays

When you have been long enough in the game you know you will make good moves and bad moves (both in life and in investing). Also, you learn that you should not look at the charts to determine whether your thesis is working or not. I like a lot this particular Warren Buffett quote (about companies):

“In the short run, the market’s a voting machine and sometimes people vote very non-intelligently. In the long run, it’s a weighing machine and the weight of business and how it does is what affects values over time.”

Diversification is essential. No matter how much you believe in some individual investment you should not put your eggs in one basket. Not even close to half. Never.

Those who have put "all in" on gold are now really tested. Like the famous John Paulson who won big time betting on subprime collapse and is now 85% invested in gold. He lost almost 1 billion in two days during the recent correction in gold. The Gold Bug has bitten.

For us it's not a "biggie" as we are only 5% "sure" (as in the share allocated out of our portfolion) on the yellow metal. The 1 year chart and the 10 year chart start to look equally bad. Is this the end of the decade long bull market for gold?

 

I think both our thesis and the one Paulson has is intact although I'm not betting 85% of my assets here like Paulson seems to be (only 5% which in itself is a big bet considering how you "should" allocate your money according to "theory" and all studies to that end).

The thesis is (quote from the Bloomberg story on Paulson):

“Federal governments have been printing money at an unprecedented rate creating demand for gold as an alternative currency for individual and institutional savers and central banks alike.”That really hasn't changed. Look at USA, Europe, Japan. There is no way out other than to let the inflation handle the debt. So it's going to be print - baby - print for a long time.

My first blog post was titled "Gold Fever!" (posted on February 12th, 2010). At the time gold was trading at around $1090 per troy ounce. Now, after the recent collapse, it's trading at $1400. Quite a drop from the peak of over $1900 from September 2011. Still, I maintain also what I said in my first post:

"This is where the barbaric relic comes into play. Even though gold is not used broadly as currency right now, it has been used as such in history and may be used once more. It is the ultimate benchmark for currencies. Or do you think that the central banks are sitting on it just for fun of it?

Since I don’t like to put my eggs in one basket only, I try to avoid getting too much exposure into any currency or gold for that matter. The problem with gold is that it does not yield anything – it is simply a tool to preserve wealth and take part in speculation regarding its value vs. fiat currencies."

What comes to thesis for owning gold miners. Well, that didn't work out and I finally gave up on it in February 2013 when I let go our positions in Newmont Mining (NEM) and Barrick Gold (ABX). Their costs seemed to raise faster than the price of gold year after year so the thesis of using these as leveraged bets for gold simply did not seem to be working. And certainly now it looks even worse. Not going back on that horse very soon although tempted..

Over the years, consumer demand and exchange traded funds offering direct exposure to physical metal have grown to account for large portion of the demand for the barbaric relic. Therefore, it's not a surprise that when it rains it pours. Panic selling those ETFs is e-z.

You might want to check my old article written for Seeking Alpha titled "Riding the Second Gold Bubble" which reviewed (then) the last 110 years of gold price history as well as supply and demand. That kind of gives the ultimate perspective on the matter.
The author was (still) long gold at the time of writing.

Helsinki Top 20

I use a service provided by Valuatum.com via Pörssisäätiö to screen stocks listed in NASDAQ OMX Helsinki. I use the screen periodically to check where our holdings stand relative to other companies listed in Helsinki. Naturally I am also continuously screening for new investment ideas. Five out of our six positions are in Top 20 of my screen currently, which is not an accident, because the screen is designed to incorporate my preferences.

Currently the results of my personalized screen look like this:
Our positions are marked with prefix ">".

Rank Company (Score)
-----------------------------
#1 Citycon (2,9)
#2 Technopolis (2,8)
#3 Norvestia (2,5)
#4 Nokian Renkaat (2,5)
#5 Sponda (2,5)
#6 Ramirent (2,4)
>#7 Fortum (2,4)
#8 Elisa (2,3)
>#9 Orion (2,2)
#10 PKC Group (2,2)
#11 Sampo (2,2)
>#12 TeliaSonera (2,1)
#13 Teleste (2,1)
#14 Outotec (2,1)
>#15 UPM (2,0)
#16 Sanoma (2,0)
>#17 Metso (2,0)
#18 Cramo (1,9)
#19 Elecster (1,9)
#20 YIT (1,9)
..

>#93 Nokia (0,7)

Average Score 1,4
Median Score 1,5
Worst Score 0,0 (#100 Incap)

Parameters used in screen (weight):
-------------------------------------------
P/B est. 2013 (15%)
P/E 2012, est. 2013 (5%, 5%)
Dividend yield 2012, est. 2013 (5%, 10%)
ROA 2012 (10%)
ROI 3 year average est. 2013 (5%)
ROE 3 year average est. 2013 (5%)
Turnover increase in past 3 years, est. 2013 (10%)
Gross Margin 2012 (10%)
Profit Margin 2012 (10%)
Net Profit increase in past 5 years, est. 2014 (10%)


The used parameters emphasise profitability in broad sense (40% weight), attractive valuation (25%), growth (20%) and dividend yield (15%).

Top 5 consists of three property investment companies: Citycon, Technopolis and Sponda. They all seem to have quite different focus within Finnish property market.

• Citycon is specialised in retail properties, especially in shopping centres, in Finland, Sweden and in the Baltic countries. It was founded in 1988 by several large Finnish Corporations and initially invested in office premises.
• Technopolis core business idea is to combine business support services with modern, flexible, multi-user business environments. It was established in 1982 in city of Oulu to be the first technology village in Nordic countries. Its first customers included a circuit board factory and a number of other electronic manufacturing and design companies. The success of Nokia in both mobile phones and networks has been instrumental to the growth of ICT and electronics industry in Oulu region and has also fueled the growth of Technopolis in the past.
• Sponda's office, retail and logistics properties are located in the largest cities in Finland and Russia. It has roots in the Finnish banking crisis as it was formed in 1991 by the Bank of Finland to take over the Finnish and foreign real estate properties held by the Skopbank Group together with its sizeable equity portfolio. After liquidation of its equity holdings to concentrate on real estate investment it was listed on Helsinki stock exchange in 1998.

Norvestia is an investment company with most of their stock holdings in various Finnish companies. Direct stock holdings made up 41,4% of their portfolio in end of 2012 while 37,8% was invested to funds and 14,4% to bonds.

Nokian Renkaat (Nokian Tyres) has roots in The Finnish Rubber Works founded in the year 1898, which have still a factory producing tyres in the town of Nokia in Finland. The company also has been part of the Nokia Corporation (between 1967 and 1988). “Nokian Renkaat” means literally “Tyres of Nokia”. Their ”Hakkapeliitta” series of winter tyres has been around since 1936 and is very strong and trusted brand in Finland. I for one am willing to pay premium for their tyres that are consistently ranked high in independent comparisons year after year.

I don’t have currently positions in the Top 5 companies, but I think they are all worth a closer look.
I don’t make changes to our portfolio that often and last time I checked two of my holdings actually were in Top 5: Fortum at #3 with score 2,7 and Orion in #4 with score 2,6. The screen relies on estimates about future. Those combined with volatility of stock prices means that you should not try to chase screens like this. Ultimately any investment decision should be based on much more than just looking at the current numbers and estimates of future numbers.

On share dilution and Talvivaara

Talvivaara Mining Company Plc. (LSE: TALV; Nasdaq OMX Helsinki: TLV1V) has an open-pit Nickel mine in Sotkamo, Finland. The project leverages one of the largest known sulphide nickel resources in Europe.

The company has run into all kinds of trouble, ranging from not meeting production guidance to waste pond leakage.

A reader asked my opinion on Talvivaara's situation right now as stock price in Helsinki has been swinging from 1 euro level to above 1,20 euros in last two weeks closing today at 1,13 euros. Frankly, I don't think short term price movement really mean anything. A stock can go from 2 to 4 euros only to fall back to 1. The price has to be related to per-share earnings, dividends etc. i.e. what you really get for your share. Even if tiny piece of company, it's still a piece of the real thing.

Talvivaara makes loss so valuating it is hard to begin with. Even looking at profits it may eventually get from its vast mineral resources is meaningless because it's very hard to predict what will be the amount of shares out there at the time when dividends start to roll in.

There is a good arcticle in Seeking Alpha regarding The Dangers (And Benefits) of Share Dilution. The article illustrates one hypothetical case of share dilution. I'll make another illustration here:

Company A is currently experiencing problems and needs more money to fund its operations. The company has potential to earn steady 1 euros per share annual profit once it fixes all the problems it currently has. Market expects it to get all funding it needs and values it at future P/E 10 at the moment. Thus, share price is 10 euros per share.

The company decides to issue more shares and sell them to investors so that the number of outstanding shares is doubled. This means that future expected per share earnings are halved to 0,5 euros per share. Assuming that the company is still valued at future P/E 10, the share price is also cut half - i.e. to 5 euros.

Back to Talvivaara.
I think it's very difficult to value Talvivaara right now. Certainly all my previous analysis will be void by the time Talvivaara has completed issuing new shares in the massive way it now plans.

With Solidium (i.e. Finnish Government) and other major shareholders backing Talvivaara the likelihood of going totally out of business seems low at the moment provided that they really get soon their act together and return profitable. They are bleeding cash (-60 million EUR in Q4 2012 alone) so even after getting more money via rights issue they can not continue like that for very long.

The proposed EUR 260 million Rights Issue may mean up to 26 billion new shares subject to shareholders' pre-emptive subscription right. Unless you pay more you probably get seriously diluted.

I am certainly going to avoid the Talvivaara stock until
1) they are done issuing new shares
2) they return profitable
3) there is clear evidence that they get the Nickel production running at 30.000 tonnes per year level, which was the original target.

And even after that it's going to depend on how the environmental side of things look and also what's their debt level like. I would expect the turnaround to take quite some time.

In addition to the already mentioned rights issue they seem also be proposing to the extraordinary general meeting of the Company to be held on 8 March 2013:

• Authorising the Board of Directors to decide to issue new shares and/or special rights entitling to shares in deviation from the pre-emptive subscription rights of the shareholders


• ...authorisation to the Board of Directors to decide to issue up to 600,000,000 new shares

According to Talvivaara itself: The number of shares issued and outstanding and registered on the Euroclear Shareholder Register as of 31 December 2012 was 272,309,640

Therefore:

• There is now 272 million shares.


• They might issue up to 26000 million shares subject to shareholders' pre-emptive subscription right


• And then they might issue up to 600 million shares basically in any way they please

I can't estimate what will be the share price after they are done with all that since there is no way to know how many shares there will be in the end sharing the profits they hopefully start spitting out at some point of time.

I have gone through many companies in resource sector and I have to say that I have seen cases where existing shareholders have been diluted quite seriously. Impossible to know how it's going to go in case of Talvivaara, but be warned.

I want to borrow the ending from the Seeking Alpha -article I referred to:

"If you believe a stock offering is imminent, you’ll likely want to stay on the sidelines until after the latest round of dilution."

Full disclosure February 23rd, 2013: The author does not own Talvivaara stock nor has any other kind of position that would benefit in from movement of Talvivaara stock price.

Portfolio update: Allocations and Top 5 positions

Our portfolio is now allocated as follows:

Stocks 94%
Gold 5%
Cash 1%

No bonds.
I simply substitute bonds with quality dividend payers in our portfolio.


Geographical Allocation:

Europe 50%
North America 29%
Emerging markets 21%

Actually, place of incorporation is pretty meaningless for most corporations we have invested in. Most are global.


Sector Allocation:

Information Technology 43%
Other 19%
Health Care 12%
Oil & Gas Production 10%
Communication Service Providers 10%
Low Emission Power Generation 5%
Mining & Exploration 1%

For a long time I tried to keep all sectors within 10-20%, but have since allowed myself to look the portfolio company by company rather than via sector allocation. The current allocation is tactical in nature and I believe long term I will pump at least mining & exploration above 10%. Low Emission Power Generation basically means our allocation to Fortum. I haven't counted UPM's power business there even though it's one of the reasons we are long UPM.


Top 5 positions:

Company/ETF (sector) allocation%

Nokia (IT) 13,6%
Vanguard MSCI Emerging Markets ETF (Other) 10,8%
Western Digital (IT) 7,4%
Orion (Health Care) 6,9%
Intel (IT) 5,6%

Nokia is our turnaround bet and it has come around quite nicely already. Initially the position was below 10%. While I think over 10% allocation to any single stock is risky I don't plan to trim down the position just yet.

Portfolio update: 5 out and one in

I have recently trimmed our stock portfolio down to 18 stocks and 1 ETF. There isn't any one reason behind this. Some companies had proved to be disappointments while others were just sold to make room for companies that I hope have much better future ahead.

We exited from the following positions:

• Becton, Dickinson and Company
• Vodafone Group
• Companhia Paranaense de Energia
• Newmont Mining
• Barrick Gold

Becton, Dickinson and Company (NYSE: BDX) wasn't ever a big part of our portfolio. There isn't anything wrong with the company. I bought it because it's defensive and now is the time to move that money to riskier positions. The yield is also quite low (about 2,2% at the time of writing) and I have plenty of defensive positions with more than 4% yield so I will rather continue to leverage those as defensive cash cows. I have been looking for good time to exit BDX position for some time. At the time of exit the stock traded near 5-year highs after bull run that started May 2012 so it looked like a good time to exit.

Exit from Vodafone (Nasdaq: VOD) wasn't an easy decision. However, I needed to sell it to gather money for other positions I see having way more potential. Vodafone was a defensive position similarly to BDX. Out of the three telecommunication service providers VOD was the one to go. I see more future potential in China Mobile. TeliaSonera on the other hand has tasty yield.

Companhia Paranaense de Energia (NYSE: ELP) like other Brazilian companies in the business of electricity generation and transmission have suffered big time from Brazilian government policies aimed at cutting electricity rates. While I continue to like the company itself, I now view it to be a much riskier investment than at the time when I initiated the position. Compared to Fortum ELP yields also much less. Thus, I wanted to exit this particular position.

Newmont Mining (NEM) and Barrick Gold (ABX) were both positions in the gold mining sector. Their costs seem to raise faster than the price of gold so the thesis of using these as leveraged bets for gold simply do not seem to be working well right now. I might return to the sector if we ever get to the true "mania phase" in the ongoing decade old gold bull run. Between now and then I think our pure gold metal positions are a sufficient bet on gold price.

About half of the money from the exited positions was put to Vanguard MSCI Emerging Markets ETF (NYSE: VWO). My conclusion from my emerging market positions, past and present, is that picking individual stocks from those markets seems like a bad idea compared to passive index investing. Passive ETFs like VWO are a good and cheap way to take a well diverisified position in those markets.

I increased significantly our position in Intel (Nasdaq: INTC). I continue to believe that Intel will be able to leverage it's technological advantages also in post-PC era. While waiting we continue to collect the dividends (at the time of writing projected at 4,26% with stock price $21,11 by Google Finance).

I started one new positions in Baidu (Nasdaq: BIDU) usually dubbed as "The Google of China".
I am planning to write separate posts about it later on. For the time being let's gategorize this company incorporated in Cayman Islands, but having most of its business in China, as a growth play.

UPM increased energy asset values by 217%

The Finnish company UPM is mainly known as forest industry player with pulp and paper factories. UPM actually comprises of three Business Groups: Energy and pulp, Paper, and Engineered materials. Past week UPM significantly increased its estimate of fair value of the energy business and lowered its estimate of the same for paper business.

“Energy has been the most profitable Business Area in UPM and is one of our growth businesses. I am pleased that we are now able to show the fair value of our Energy assets in our balance sheet,” says Tapio Korpeinen, CFO.

The reclassification increases Energy Business Area’s capital employed by approximately EUR 1,950 million to approximately EUR 2,850 million. That's whopping 217% increase. In comparison, after the charges, the total capital employed in the Paper business will be approximately EUR 3,400 million. Roughly speaking capital allocation of UPM is 1/3 for paper, 1/3 for energy and 1/3 for the rest.

The hydro and nuclear power assets of UPM were one of the primary reasons we initiated a position in it and continue to view UPM as an interesting play [see earlier blog post from 2011 here].

Disclosure: Long UPM at the time of writing.

Portfolio Performance 2009-2012

I track the performance of our portfolio against index investing. I have chosen MSCI All country world (ACWI) index as our benchmark index from which I calculate our "benchmark investment" record. The performance of our portfolio during 2009-2012 has been as follows in comparison to benchmark.

Our portfolio over the years has been more defensive (less risky, less volatile) than the ACWI index. Especially so in 2011 and 2012. Therefore, it has underperformed in bull market (2009, 2010, 2012) and overperformed in bear market (2011).

So far (starting from end of 2008) the benchmark investment has produced 6% higher returns compounded. This is mostly due to the big difference in returns in 2012. At end of 2011 we were at even with the benchmark.

The difference can be only partly explained by our defensive stance. Most of the difference comes from individual stocks that significantly underperformed the general market. This includes all mining companies and especially the exploration stage companies that got absolutely hammered. Luckily our allocation has been small to the sector overall and very small to exploration stage companies.

Most of my picks from IT sector did also loose to the index in 2012. Since our allocation to IT sector is about third of all assets, I think poor performance in those stocks explains most of the difference between our 2012 gains vs. index gains. Having such a big allocation to one sector is naturally risky and fairly big yearly fluctuations vs. index are to be expected. Our portfolio is slowly shifting to less defensive. Our latest pick (Metso corporation from Finland) can be considered cyclical as well as UPM from Finland, where we also increased our investment.

MSCI ACWI index 2009-2012 (Net; Euros)

I have not calculated our performance during 2007-2008 because we were off the market. During that time and also before that our benchmark index would have been different because the investment objective was different and risk level was much lower.

About the "benchmark investment"

I have chosen to construct my own imaginary benchmark index fund out of MSCI ACWI index instead of choosing one particular index fund that tracks the index. The main reason for this is that I would never invest all our money in any particular fund. I would rather choose several funds managed by several companies that as a whole would track the index close enough. My estimate for average cost level for the benchmark investment is 0.5% per transaction and 0.5% per year.

The index data itself is available via MSCI Barra web site as excel-file at least at the time of writing this post. I use a version of ACWI index which has large and mid cap companies in it. I use it with the following parameters:
- EUR (as in euros)
- Daily (as in daily quotations of the index)
- “Net” (as in “With Net Dividends” that takes into account taxes that you would have to pay before you can reinvest back into the fund. “Gross” option reinvests dividends wholly.)

The benchmark investment is always fully invested into the passive index. Starting balance was invested at end of 2008 to the index. By dividing the money with the value of the index, you get “shares in index”.

About calculating the yearly returns

The yearly return of the index and the "benchmark investment" will be different due to addition of money into the brokerage accounts during the year. The yearly returns are simply calculated as
[balance at end of year N] - [(balance at end of year N-1) + (additions to brokerage accounts during the year N)] / [(balance at end of year N-1) + (additions to brokerage accounts during the year N)]