Africa Opportunity Fund Limited Half Year Report (0986O)

Share Name	Share Symbol	Market	Type	Share ISIN	Share Description
Africa Opportunity Fund Limited	LSE:AOF	London	Ordinary Share	KYG012921535	ORD USD0.01

	Price Change	% Change	Share Price	Bid Price	Offer Price	High Price	Low Price	Open Price	Shares Traded	Last Trade
	0.01	1.56%	0.65	0.60	0.70	0.65	0.64	0.6425	0.00	11:00:06

Industry Sector	Turnover	Profit	EPS - Basic	PE Ratio	Market Cap
Trust,ex Ed,religious,charty	-1.5M	-2.41M	-0.1192	-5.45	13.14M

Africa Opportunity (LSE:AOF)
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RNS Number : 0986O

Africa Opportunity Fund Limited

30 September 2019

Africa Opportunity Fund Limited

("AOF" or the "Company")

Half Yearly Report for the Six Months ended 30 June 2019

The Board of Directors of Africa Opportunity Fund Limited is pleased to announce its unaudited results for the 6 month period to 30 June 2019. The full half yearly report for the period ended 30 June 2019 will be sent to shareholders and will be available soon on the Company's website: www.africaopportunityfund.com.

Highlights:

-- AOF's ordinary share net asset value per share of US$0.689 as at 30 June 2019 increased by 2% from the 31 December 2018 net asset value per share of US$0.675.

-- As at 30 June 2019, AOF's investment allocation for its Ordinary Shares was 79% equities, 5% debt and 16% unencumbered cash.

   --      AOF's Ordinary Shares net asset value per share as at 20 September 2019 was US$0.632. 
   --      AOF's Ordinary Shares did not pay an annual dividend for 2018.

-- AOF's shareholders adopted resolutions at an extraordinary general meeting held on June 27, 2019 for AOF to cease to make new investments for the next three years and to return funds to shareholders in an orderly manner during that three year period.

Manager's Commentary

Market Conditions

AOF's ordinary share NAV rose 2% in H1. As a reference, during this period in USD the S&P rose 19%, Brazil rose 16%, Russia rose 33%, India rose 10%, and China rose 21%. In Africa, South Africa rose 14%, Egypt rose 18%, Kenya rose 8%, and Nigeria fell 1%. Three Africa-focused exchange traded funds - the Lyxor ETF (PAF FP), the DBX MSCI Africa Top 50 (XMAF LN), and Van Eck Africa Index (AFK US), rose, respectively, 12%, 9%, and 12%.

Ordinary Shares Portfolio Highlights

The Fund turned in an underwhelming half year. On the positive front, its natural resources portfolio delivered strong returns of 5.5 cents per share, as the gold price rose 8%, and crude oil prices rose by more than 20%. Crucially, our top natural resource investments - Anglogold in gold mining and Kosmos Energy in oil and gas - have taken deliberate corporate action to lower the average production costs of their reserves.

The Fund's Anglogold investment (common stock and options) delivered gains of 2.6 cents per share in H1. Anglogold's total return of 40% can be attributed to the 2019 gold price rally, its asset disposal program, and its stringent financial targets to guarantee ongoing discipline in its future capital allocation decisions. It wishes to sell its mining interests in South Africa, Mali, and Argentina. Selling annual South African 400,000+ ounces with an all-in sustaining cost of $1144 per ounce while building a new mechanized mine in Ghana's Obuasi, with annual production of 400,000 ounces at a comparable cost of $800 should improve Anglogold's cost competitiveness, allow it to retire debt, and remove any South African mining discount hanging over Anglogold's valuation. One measure of the significant improvements Anglogold has effected in its mine portfolio is the 64% increase in its all-in sustaining cost margin (average gold price minus all-in sustaining cost per ounce) from 14% in 2013, at an average gold price of $1412 per ounce to 23% in H1 2019 at a lower average gold price of $1306. Complementing this encouraging margin trend is Anglogold's new leverage target of 1X Net Debt/Adjusted EBITDA ratio (versus its old target of 1.5X). These two measures should enhance Anglogold Ashanti's investment appeal.

The Fund's Kosmos Energy investment increased AOF's NAV by 0.9 cents per share in in H1, as its share price rose 54% and it declared a maiden dividend. Daily crude oil production reached a record level of 71,100 barrels of crude oil, up 65% from Q2 2018's daily 43,000 barrels of oil, despite operational problems at one of its Ghana oil fields. Contributions from the Gulf of Mexico more than offset Kosmos' Ghanaian problems, enabling Kosmos to produce $136 million in free cash flow in Q2 alone and putting it on track to generate close to $200 million of free cash flow in 2019. It drilled successful wells in the Gulf of Mexico and Mauritania, resulting in larger resources of both crude oil and natural gas. Kosmos is lowering its lifting costs per barrel by discovering new reserves near existing drilling infrastructure in the Gulf of Mexico and Equatorial Guinea. The latest new discoveries in the Gulf of Mexico enjoy lifting costs below $8 per barrel. Five more exploration wells will be drilled in H2. Kosmos has announced that it would sell down its stake in the Mauritania/Senegal natural gas fields by the end of 2019. It reported considerable interest in those assets, with the sale proceeds thereof being applied to reduce Komsos' net debt of $1.98 billion. Best of all, though, is that the overhang of Kosmos' founding private equity investors selling down their stakes over several years came to an end. Warburg Pincus and Blackstone left the share register by the end of Q2.

The single biggest factor on the negative front is an underlying macro-economic pattern in several African countries. Governments in countries like Ghana, South Africa, Zambia, and Zimbabwe have incurred large amounts of debt in recent years to pay for heavier salary and interest-servicing obligations, and climbing contingent liabilities. Each government faces doubts about its resolve and ability to reduce sharply its recurrent expenditure ratios. Consequently, in those countries with shallow savings pools, high domestic real interest rates (20% in the case of Zambia, for example, and 10% in the case of Ghana) exert immense downward pressure on local stock exchanges, regardless of whether listed companies report growing profits. Its specific victim was a 14% decline in the Dollar market capitalization of Enterprise Group in H1. That loss accounted for approximately 34% of the Fund's losses or 1.4 cents per share. Insofar as the Ghana Stock Exchange Composite Index lost 14% in Dollars in H1 and the price movements of insurance stocks tend to be correlated with general stock market performance, Enterprise's return appears to be typical. Yet, one source of solace was that Enterprise's H1 2019 earnings per share increased by 140%, its operating cash flow rose at an annualized 24% rate, and its cost of float was 4%. Enterprise's profitability strengthened even as its valuation fell to a 26% discount to book value and a 40% discount to embedded value. Yet, in contrast to developed countries, Ghana's population is growing and it has high real risk-free interest rates - both desirable attributes for the profitability of an insurance sector. But, it is those high real interest rates that suppress Enterprise's valuation because future cash flows are discounted with those higher rates. Is Enterprise's June 30 market capitalization of $65.3 million warranted? That capitalization placed it on a P/E ratio of 10.6x, a P/B ratio of 0.74x, and a dividend yield of 2.14%.

Copperbelt's shares lost 25% in Q2 and 8% overall in H1 or 0.5 cents per ordinary share. As a supplier to copper mines, Copperbelt's share price in Dollars tends to move in sympathy with the copper price. Furthermore, the 34% rise in 10 year Zambian interest rates to 22.5% during this period more than neutralized the appeal of Copperbelt's 15%+ dividend yield. Zambia and Zimbabwe are in the throes of a severe drought. The usable storage level of their largest single source of electricity - the Kariba dam dropped from being 85% full at the end of July 2018 to 24% full on July 31, 2019. Copperbelt was granted permission by the Zambian government in early June to import electricity from South Africa to satisfy the unmet power needs of its mining customers. We expect that, as occurred in 2016, Copperbelt's power imports will insulate its revenues and profitability from the harmful effects of the latest drought. A more troubling development, though, is a request to Zambia's Energy Regulatory Board by ZESCO, the bulk electricity supplier to Copperbelt and its customers, in Q1 2019 to raise electricity tariffs (other than tariffs for mining and exports) by a weighted average rate of 113%. That request signifies that the renegotiation of Copperbelt's bulk supply agreement in 2020 will be difficult since Copperbelt's customers oppose an increase in their tariffs. As a transmission company, Copperbelt's economic function is to move electricity between electricity sellers and electricity buyers. One favourable development is that Copperbelt has been shortlisted for the award of solar energy projects under Zambia's GETFIT program. Despite these darkening clouds of uncertainty, we think that commercial logic should prevail.

Our Zimbabwean property investments suffered a 30% loss equal to 0.7 cents per share from the Zimbabwe government's reintroduction of the Zimbabwe Dollar in February 2019 and making it the principal medium of exchange in June 2019. Hyperinflation has reemerged in Zimbabwe and economic activity has collapsed, as the supply of foreign exchange contracted sharply, and the new Zimbabwe Dollar has depreciated by 70% since inception. Despite the current poor economic conditions, Mashonaland Holdings, for example, continued to generate modest levels of free cash flow, remains completely ungeared, and experienced rising occupancy levels. Zimbabwe's outlook is grim because its economy is forecast to contract this year in a hyperinflationary environment. The US Dollar value of our Zimbabwean holdings is likely to weaken as Zimbabwe's GDP shrinks in H2.

Changes made in the AOF portfolio during H1 included selling down our equity holdings in Anglogold Ashanti, Goldfields, Dangote Cement, Naspers, Stanbic Bank Uganda, Standard Chartered Bank Ghana, and Letshego. The ordinary share portfolio had 14% of its net asset value in gold mining equities, 3% in oil and gas equities, and no exposure to gold mining or oil and gas debt.

Portfolio Appraisal Value

As of June 30, the Manager's appraisal of the intrinsic economic value of the Ordinary Share portfolio was $0.977 per share. The market price of $0.585 on June 28 represented a 40% discount. Note the Appraisal Value is intended to provide a measure of the Manager's long-term view of the attractiveness of AOF's portfolio. It is a subjective estimate, and does not tell when that value will be realized, nor does it guarantee that any security will reach its Appraisal Value.

Strategy

The Fund has begun the process of realizing its holdings, but we believe the long-term investment appeal of Africa remains intact.

On Behalf of the Investment Manager, Africa Opportunity Partners Ltd

Responsibility Statements:

The Board of Directors confirm that, to the best of their knowledge:

a. The financial statements, prepared in accordance with International Financial Reporting Standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company.

b. The Interim Investment Manager Report, and Condensed Notes to the Financial Statements include:

i. a fair review of the information required by DTR 4.2.7R (indication of important events that have occurred during the first six months and their impact on the financial statements, and a description of principal risks and uncertainties for the remaining six months of the year); and

ii. a fair review of the information required by DTR 4.2.8R (confirmation that no related party transactions have taken place in the first six months of the year that have materially affected the financial position or performance of the Company during that period).

Per Order of the Board

30 September, 2019