Commoditrade is trading some serious metal

Commoditrade is an investment company that is building a business specialising in commodities trading. Commoditrade was launched on AIM in March 2005, raising £515,000 before expenses - so how is it doing now? As a business, Commoditrade seems to be doing fine, with two cash generative acquisitions now beavering away. However, the company?s share price has been caught up in the general climate of nervousness and has been drifting since June. Now this is an interesting situation! Commoditrade operates in what is conventionally thought of as a risky business ? commodities trading. However, this emerging era of ever-increasing commodity prices and increased market volatility is bread and butter to commodities traders! So the company, with its metals focused commodities investment team, metal floor traders and black box trading systems working for it, seems to be doing very nicely ?plus, there are none of the new class of high risk assets on its books - slews of mortgages!

Commoditrade completed its first acquisition (a reverse takeover) in April 2006, buying seventy five per cent of the net revenue stream of the largest trading team on the London Metal Exchange for £24.4 million (plus costs) in cash and shares. This was achieved by acquiring an interest in a UK based commodities trading company (Sucden UK Ltd) and as this interest was bought from ?The Tambelan Company?, the company refers to it as ?the ?Tambelan interest?. This gave Commoditrade a major revenue stream from trading in non-ferrous metals in London, and also from trading copper, gold and silver via the New York Commodity Exchange.

Gross profits attributable to the Tambelan interest in the twelve-month period up to the end of December 2005, were £7.1 million. In the eight-month period from the acquisition to the end of December 2006, the profit from Commoditrade?s Tambelan interest amounted to £13.41 million before tax and amortisation ? the Tambelan acquisition is to be amortised over three years. The profit attributable to the Tambelan interest before taxation and after amortisation, in this eight month period, was £5.92 million ? about £8.88 million on an annualised basis.

The London Metal Exchange (LME) has been around for over 100 years and is the leading non-ferrous metals market. It offers futures and options contracts for aluminium, copper, nickel, tin, zinc and lead, and also contracts for polypropylene and polyethylene. Trading on the LME is conducted transparently, creating a feedback loop that helps market participants ?discover? how the market anticipates a particular material will be priced in the future. This helps industry to plan ahead, and LME prices are used by industry for this purpose throughout the world. The LME is a global market, with an international membership, turning over about $40 billion per day.

The LME is a ?principal-to-principal market? which means that ?member firms? can trade directly using its facilities. There are various categories of member firms ranging from ?Ring Dealing Members? (Category One) - member firms who trade in twice-a-day live, face-to-face ring trading sessions - down to ?Associate Trade Members? (Category Five) who are the direct clients of other LME member firms. So I hear you asking, ?in which category of firm does Commoditrade have an interest?? Well, Sucden is one of only eleven LME ?Masters of the Universe? Category One firms!

In August 2006, Commoditrade acquired another seventy five per cent interest; this time in the net profits of AMCO Commodities Asset Management. AMCO is a commodities investment management company, regulated by the FSA, which manages the AMCO Commodities Fund. This fund is focused on trading opportunities across the range of base metals ? such as changes in price direction, relative values, arbitrage and changes in the volatility of futures markets. By the end of December 2006 the fund was worth £59.5 million. Commoditrade paid £0.5 million in cash with 5,000,000 new shares at a price of 17.75 pence per for the AMCO interest. The fund has a goal of raising its value to US$500 million within three years of starting out.

So with these two acquisitions, these Commoditrade dudes are now trading some serious metal - and plan to trade some very serious metal!

So who are the folks behind Commoditrade? Chairman, Christopher Adams, is the head LME trader for Sucden on the London Metal Exchange. He has spent about twenty years in the commodities industry and most of his working life at Sucden. He has also held down jobs at other commodity trading houses, including Billiton Enthoven Metals Broker. He has traded for fifteen years and held managerial positions for ten. In 2005 he co-founded AMCO and held an initial fifty per cent interest. Executive Chairman, Graham Butt, is a director of Fulcrum Administration LLC (based in Dubai) and he is also a director of Corvus Capital - which holds 21.1% of Commoditrade?s equity. He is an expert in the formation and use of trusts, and a former director of the Castle Trust Co. During his career he has spent time investing funds for high net worth clients. Non-Executive Directors, Joanna Barrett and Geoffrey David Conway-Henderson, are also directors of Corvus Capital, and both are experienced in the ways of the finance industry and money markets.

The most recently released interim results, to June 30th 2007 - compared with interims to June 30th 2006 - showed gross revenue up 71% to £15.2 million. Profit before tax (after amortisation, issue of management share options and corporate overhead costs) was £3.5 million. During this period the company secured the services of key members of the LME trading team for a minimum period of three years, re-negotiated its contract with Sucden - which will lead to cost savings from May 2008 - and upped its holdings in LME shares, entitling the company to Category One ?Ring Dealing Members? membership of the LME.

So what has happened since June? Well there have been thirty-two announcements by the company. Eleven announcements deal with holdings in the company and the most significant of these is probably Ambeson Ltd, an overseas management company trust registered in the Virgin Islands, which piled into 23.3% of Commoditrade?s equity in December. Fifteen announcements reported share buybacks by the company. So, while the share price has drifted lower the company has continued to trade, talk deals (one fell though in December - so no trading in oil, bananas or plywood yet) and pile into its own shares for cancellation! Since the company started buying its own shares for cancellation, in November, it has piled into over 30 million of them!

Graham Butt, CEO, recently told the market that the company still has a strong balance sheet and the share buyback programme does not alter any of the company?s investment plans ? indeed, in late November the company reported had it had about £19 million in the bank and no debt. So, when Commoditrade?s results to 31st December come out, I think I?ll be having a look at them. A company that seems to be a thriving cash cow with a shrinking equity base and a drifting share price? This can?t go on forever ?

Links:

AMCO Commodities
www.amcofund.com

Corvus Capital Inc
www.corvus.com

Sucden UK Ltd
www.sucden.co.uk