Investment Activity
In the following section we will discuss the Fund’s investment activity. Five new securities were purchased during the quarter including Cosan Ltd, discussed above. Four of the new securities were first purchased on August 24th during that day’s market calamity. We also sold three positions: Otsuka Corp., discussed above in paragraphs covering Japan, and two long-held U.K. companies, Segro plc and Vodafone plc.
Prosegur, Compania de Seguridad SA
Founded in 1976, Prosegur offers its customers various security solutions, including manned guarding, cash transit and alarms. Though listed in Spain, Prosegur earns a majority of its operating profit in Latin America, most notably Brazil and Argentina. The company’s other primary profit centers are its home market of Spain and, to a lesser extent, other European markets. Prosegur is controlled by its founding family, who we believe are competent operators, reasonable deal-makers and in the habit of maintaining a conservative financial position. Apart from well-publicized macroeconomic headwinds in its Brazilian business, the company is seeing a reasonable recovery in Spain and other parts of Europe. All told the company remains very profitable and continues to produce attractive returns. We expect that improvements in Europe, an eventual recovery in Brazil and expansion opportunities into new geographies will continue to produce organic and inorganic growth opportunities for Prosegur for years to come.
Interfor Corporation (IFP, Financial)
Interfor is the fourth largest lumber producer in North America. While headquartered in Vancouver, B.C., the company has a fairly balanced production profile with nearly two thirds of its lumber capacity located in the United States. Interfor has participated in a consolidating industry by making a number of acquisitions, growing the proportion of its production located in the US south. The recovery in US single-family housing starts has been sufficiently weak so as to keep lumber prices low by historical standards. Lumber prices are currently at levels sufficient to have caused recent US lumber mill shutdowns. Our expectation is that US single family housing will continue to improve, benefiting the North American lumber industry in the form of improved utilization rates, improved profitability and continued merger and acquisition activity. Interfor would make a terrific acquisition for several industry participants. In the meantime, Interfor will continue to be stewarded by one of the industry’s better management teams.
Millenium & Copthorne Hotels plc
Millenium & Copthorne is a global hotel owner and operator based in the United Kingdom. The company’s portfolio is primarily focused on global “gateway cities”, such as New York, London, and Singapore but also includes properties in other US, European and Asian regions. The company has accumulated an extremely valuable property portfolio, which the current market price fails to appreciate. The company is also exceedingly well-capitalized. Millenium and Copthorne is ultimately controlled by City Developments Ltd of Singapore, which has continued to increase its ownership of the company materially through recent share purchases in the open market. Finally, the company recently appointed a new CEO and commenced a number of initiatives designed to improve operating performance. We expect to realize a value much closer to underlying net asset value as a result of improved operations or an eventual transaction involving the company.
Lundin Mining Corporation
Lundin Mining is a Vancouver headquartered base metals mining company. The company’s operations span Chile, Portugal, Spain, Sweden, United States and D.R.C. and include several assets with exceptionally low cost of production. Lundin Mining also comes with among the best balance sheets in the mining industry and one of the industry’s shrewdest management teams. As compared to the Fund’s other base metal holdings, Lundin Mining falls between Antofagasta and Capstone from a valuation perspective, with Capstone being the least expensive, while adding geographic and asset-risk diversification benefits. The combination of the three holdings represents tremendous long-term value.
These five new positions span a number of sectors and geographies but are all driven by a determination to purchase businesses and assets with enduring long-term value at material discounts to conservative estimates of those values. We maintain the view that security prices often contain much more information about prevailing sentiment than they do about long-term intrinsic value, recognizing that the distortions of price and value can grow before being properly reconciled by economic forces. This process can take time and demands patience. We thank you for your patience and continued interest in our quarterly reviews. We look forward to writing to you next quarter.
Sincerely,
The Third Avenue International Value Team
Matthew Fine, Lead Portfolio Manager
