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Know What You Own

And Own What You Know – The majority of INTAC’s investments are in the top performing asset managers working in New York, London, Tokyo, and other major financial centers around the world. As investment professionals we are keenly aware of our abilities and limitations, and believe that the guru managers such as Jardine Fleming (a member of the JPMorgan Group with over $1.2 trillion under management, over 650 investment professionals, and a 160-year track record) who have been Asian markets specialist for over 30 years can do it better than most.  Why compete with firms that have a proven track record of success, and have a competitive advantage by dominating their local markets?  Instead, make them your partners and invest with them when you are convinced that their markets will outperform.

However, as Michael E. Porter explains in his, “The Competitive Advantages of Nations”, all countries – even the smallest and the largest – can benefit from trade when each country focuses their production in areas where they have a competitive advantage.  The same can be said for investment managers.  So, in addition to researching, monitoring, and allocating capital to top asset managers INTAC also makes direct investments – but only in areas where we have a competitive advantage.

In direct investing it is very important to know what you own.  INTAC Trade Advisors stay up late reviewing company performance, business plans, cash flow potential, net asset value estimates, board of directors, and management teams for inclusion in the INTAC Portfolios.  These companies are in regions, countries, sectors and industries that we feel are positioned to outperformed based on our macro economic thesis.

To take advantage of the tremendous growth potential of China, our lead portfolio manager James Mark Plaxton started looking at direct investments.  While the local A and B shares, and the H shares out of Hong Kong were overbought, Mark started looking at companies that had production in China but are listed on the Toronto Stock Exchange and TSX Venture Exchange.  As a Canadian, Mark was keenly aware of the large Chinese population in Canada, the influx of wealthy, successful and Canadian educated Chinese professionals that were using the Canadian exchanges as a means of raising capital and liquidity for their Chinese operations.  Mark dipped his toe in by investing in Hanfeng Evergreen Inc. (HF) and CEO Dr. Gang Chai.  HF is a fertilizer company with operations and distribution throughout China.  Agriculture, a hard asset investment, fit into our outlook, and the demand for food and inflationary pressure in the local economy was evident.  Mark was able to secure a sizable portion in an HF private placement, acquiring the stock at $1.50, which came with a $2.00 warrant (the right to buy the stock at $2.00, regardless of the market price).  Within three years the stock ran up to $15.00, with INTAC exercising warrants that were deep in the money, and profitably pruning our position.  Mark recycled these profits into additional direct China plays introduced by Dr. Gang Chai – companies such as Migao Corporation (MGO) – a potash-based fertilizer company buying at $4.15 and exiting at $7.72, and McVicar Resources Inc. (MCV) – a hard assets conglomerate that we purchased through special financings and in the open market as low as $0.75, and have taken profits at $2.65.  However, these successes don’t come easy.  Due diligence doesn’t just mean looking at annual reports and stock charts.  Precious time, energy and money were spent with Mark flying to Toronto and traveling coast to coast in China to visit their offices and operations, review their income and expenses, talk to employees, kick tires, and look management in the eyes and ask them the tough questions.  Currently we are buying JITE Technologies Inc. (JTI) at $0.17.  JTI produces terminal blocks being used to connect power lines across China, and is predominately owned by MCV – another Dr. Gang Chai company and INTAC holding.  We feel JTI is well positioned to profit as China continues to build-out its electrical grid.  Despite the shadow of recession descending on the US and the slowdown of global growth that will follow, China will continue to invest in its infrastructure and spend their way out of a downturn.

INTAC has also been successful by owning what we know.  In addition to being a seasoned investment manager, James Mark Plaxton is a Metallurgical Engineer, having worked a number of years with Schlumberger throughout the Middle East early on in his career.  Mark went to school with some of the brightest mining and processing engineers in North America.  In 2004 Mark decided to leverage off of these relationships by contracting these experts to work as INTAC Trade Advisors, analyzing the mineral content and profitability of mining projects.  Mark had made the decision to overweight hard assets, with an emphasis on gold – with direct investment in junior mining stocks representing the highest leveraged play on an increasing gold price.  After countless hours of research, analysis, site visits and discussions with management INTAC participated in private placements and bought stock in the open market in junior mining companies like:  Columbia Metals Corp. Ltd. (COL), Virgin Metals Inc. (VGM), and Castle Gold Corporation (CSG) (formerly Aurogin Resources and Morgain Minerals).  COL, a gold/copper asset in Mexico, has both production and exploration potential.  We have bought in as low as $0.17 and taken profits on short-term strength at $0.74, but we are prepared to hold this stock long term.  VGM is a molybdenum/copper asset also in Mexico.  We got involved in VGM prior to its listing on the Toronto Venture Exchange at $0.10 and sold a portion at $0.82.  We bought into CSG (a gold producer also in Mexico) through Morgain Minerals and Aurogin Resources prior to the merger last year, as low as $0.10 per share (equivalent to $0.20 per share post merger), and we have been steadily building our position over the last 4 years.  Unlike COL and VGM, CSG hasn’t had a run up in its stock price, and remains undervalued based on its fundamental value and relative to its peers, and is a long-term holding.  We anticipate that 2008 may be an explosive year for juniors and that these direct holdings, among others, will add considerable alpha to our INTAC Portfolio and InvestmentPhilosophies.

Investing is one of the most competitive games in town.  Each transaction is a net sum zero gain – there is one winner and one loser to every trade.  The schoolyard bullies on Wall Street are just waiting to take your lunch money.  Instead of standing around waiting to be picked last for dodge ball, we suggest that you partner up with the world’s best by investing in an overall investment strategy like one of the 7 INTAC InvestmentPhilosophies.   

 

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