Sandon Capital Activist Fund commentary for the month ended December 31, 2016.

2016 Hedge Fund Letters

The Sandon Capital Activist Fund delivered a 0.1% return for December, bringing total returns (net of all fees and expenses) since inception to the equivalent of 13.3% per annum. Cash levels ended the month at approximately 16%.

Sandon Capital Activist Fund

Iluka Resources Ltd (ILU), whose share price rose ~19%, was the largest positive contributor to the December result. Our thesis is that ILU is undervalued and should spin-off its valuable iron ore royalty. The thesis was made public after correspondence with ILU led us to conclude the status quo would prevail. We have begun engaging with various ILU stakeholders, though this engagement is at very preliminary stages. In the meantime, prices for ILU’s mineral sands products have begun to increase. We believe that if these price increases are sustained, they will provide some favourable tailwinds while the core engagement process takes shape. Our thesis on the company and a white paper on the iron ore royalty can both be found at www.sandoncapital.com.au under the “Campaigns” tab.

Armidale Investment Corporation Ltd (AIK) was the largest negative contributor (~-1.9%) as its share price fell after a strong increase in November. We do not consider these moves to be related to value but rather market “noise”. Key for us will be the release of the half year results, which will, for the first time, provide a consolidated picture of AIK’s performance as an operating company, as opposed to an LIC-style reporting. We believe the half year will provide important baseline comparators for future reporting periods.

The contribution from Tatts Group Ltd (TTS) belies the significance of events during the month. On 14 December, the Pacific Consortium (PC) made itself known to the public with the release of an indicative non-binding proposal to acquire 100% of TTS. PC comprises four parties, being First State Super, North Haven Infrastructure Partners (managed by Morgan Stanley), KKR and Macquarie Bank. Although more complicated than the Tabcorp (TAH) proposal, the PC proposal validates our thesis that the jewel in the TTS crown is the undervalued lotteries business. Their proposal also vindicates TAH’s move to gain a 10% stake in TTS in late November. TTS have, correctly in our view, concluded the PC is not superior to the TAH proposal. We remain convinced that the battle for the TTS lotteries business is only just beginning and that the lotteries business remains significantly undervalued by both the TAH merger proposal and now also by the PC indicative proposal. We are preparing further analysis of the lotteries business in light of the additional information provided by TTS when it rejected the PC proposal.

We have continued to accumulate shares in new activist prospects and remain poised to seize opportunities to deploy cash.

Sandon Capital Activist Fund Description

The objective of the Fund is to deliver returns to investors through a combination of capital growth and distributions. The Fund aims to achieve this objective by seeking to invest in opportunities that are considered by Sandon Capital to be trading below their intrinsic value and that offer the potential of being positively influenced by investors taking an active role in proposing changes in the areas of corporate governance, capital management, strategic and operational issues, management arrangements and other related activities. Neither returns nor capital are guaranteed.

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