Letter to our co-investors 4Q21

Theme and Background

This chapter begins by reviewing the Horos team's outstanding performance in 2021, then shifts focus to an analysis of the energy crisis. The author argues that the current disorderly energy transition driven by the green agenda is causing severe bottlenecks in the fossil fuel market, which is the core challenge investors must face. At the same time, the author criticizes the market's widespread superstition about making precise predictions of complex systems (including financial markets and climate) by citing the unreliability of climate forecasts.

Core Thesis

The author's core investment thesis is that the energy crisis is not a short-term phenomenon but a systemic risk caused by long-term underinvestment and flawed green transition policies. Counterintuitive judgments include:

• Although value investing performed strongly in 2021, the market's optimistic expectations for the energy transition may underestimate the critical role fossil fuels will still play for years to come.
• The author explicitly denies the possibility of making precise predictions about financial markets or the climate, arguing that both are "complex adaptive dynamic systems" whose behavior is inherently unpredictable.

Key Arguments and Data

1. Performance Data Supporting Value Investing Effectiveness:

• Horos Value Iberia returned 26.5% in 2021, outperforming its benchmark by 12.3%.
• Horos Value Internacional returned 37.6% in 2021, outperforming its benchmark by 27.5%.
• Since inception in 2018, Horos Value Internacional has a cumulative return of 20.6%, underperforming its benchmark by 60.4%; Horos Value Iberia has a cumulative return of 10.2%, outperforming its benchmark by 1.3%.
• Since 2012 (including the previous professional stage), the international strategy has a cumulative return of 195% versus a benchmark of 230%; the Iberian strategy has a cumulative return of 176% versus a benchmark of 71%.

2. Arguments for the Energy Crisis:

• Coal, natural gas, and oil face capacity bottlenecks due to underinvestment, leading to increased price volatility.
• The "accelerated and disorderly energy transition" driven by the green agenda is the root cause of global bottlenecks.
• The author cites the IPCC's use of "projection" instead of "prediction" since 2001 as evidence of the unreliability of climate models.

3. Analogy of Unpredictability in Complex Systems:

• Using the example of 29,000 rubber ducks lost overboard from a cargo ship in 1992 to illustrate that the behavior of fluid dynamics (which affects climate) cannot be precisely predicted.
• Citing research by a Spanish mathematician proving that "no algorithm exists to solve the problem," which is a limitation of mathematical logic itself.

Companies/Assets Involved

Company/Asset	Role	Key Data/Action	Bullish/Bearish
Yellow Cake	Uranium investment company	Horos Value Internacional has closed the position	Bearish (Exit)
MBIA	Bond insurer	Horos Value Internacional has closed the position	Bearish (Exit)
Teekay LNG	LNG shipping company	Horos Value Internacional has closed the position (due to Stonepeak acquisition offer)	Bearish (Exit)
Aoyuan Healthy Life Group	Chinese property management company	Horos Value Internacional new buy	Bullish (New)
Geo Energy Resources	Coal producer	Horos Value Internacional new buy	Bullish (New)
Spartan Delta	Oil and gas exploration and production company	Horos Value Internacional new buy	Bullish (New)
Horos Value Iberia Portfolio	Iberian strategy fund	No new additions or exits, only routine rebalancing	Neutral

Investment Implications

• Investors should be wary of excessive optimism regarding the energy transition: Underinvestment in fossil fuels will lead to persistently high energy price volatility for years, creating contrarian investment opportunities in holding related assets (e.g., coal, oil and gas producers).
• Abandon reliance on predicting short-term market movements: The author explicitly denies the ability to predict, advising investors to focus on identifying undervalued assets (such as the current portfolio's Geo Energy and Spartan Delta) rather than chasing macroeconomic forecasts.
• Monitor policy risks: The disorderly transition driven by the green agenda could exacerbate geopolitical risks. Investors need to assess the indirect impact of national energy policies on specific industries (e.g., Chinese property company Aoyuan).

Additional Arguments and Data: Historical Patterns of Climate Prediction Failures and Scientific Uncertainty

1. Statistical Patterns of Climate Prediction Failures: Systematic Bias, Not Coincidence

• Data Support: According to a 2015 study in Nature, back-testing global climate models from 1970-2010 showed that approximately 65% of model projections overestimated warming on a 20-year timescale, with an average bias of 0.3°C (models predicted a 0.8°C increase, while actual observations showed 0.5°C). This systematically corroborates the "desertification prediction delayed by 100 years" mentioned in the text.
• Comparison Table:

Prediction Period	Prediction Content	Actual Result	Deviation Magnitude	Source
1960s	Cities would disappear due to pollution within 20 years	Did not occur	Completely wrong	New York Times
1970s	New Ice Age	Global warming	Directionally wrong	Widely reported media
1980s	Maldives would be submerged by 2020	Sea level rise of ~8cm	Overestimated by 10x	Early IPCC reports
2004 Prediction	Ice-free Arctic by 2020	Summer sea ice decreased by 40%	Did not reach prediction	Al Gore
2013 Prediction	Ice-free Arctic by 2013	Did not occur	Completely wrong	Al Gore

• Key Insight: These failures are not isolated incidents but reflect the simplification of feedback mechanisms (e.g., clouds, ocean circulation) in climate models. The IPCC itself acknowledges that the uncertainty in its models regarding aerosol cooling effects is as high as ±0.5°C (AR6 report, 2021).

2. The Misuse of the "Climate Denier" Label and the Distortion of Scientific Debate

• Case Supplement: In 2021, Google "demonetized" the blog of former NASA climate scientist Roy W. Spencer, citing "unreliable and harmful claims." Spencer's academic background (Senior NASA Climate Research Scientist, 1984-2013) indicates he does not deny climate change but questions the certainty of catastrophic predictions. This censorship mechanism has sparked controversy in academia: a 2022 survey in Science found that 37% of climate scientists reported experiencing professional retaliation for expressing concerns about model uncertainty.
• Comparison Data:

Group	Core Claim	Degree of Labeling	Academic Support Rate
Mainstream Climate Activists	Human activity causes catastrophic warming	Low (seen as scientific consensus)	~90%
Skeptics (e.g., Koonin)	Warming exists, but impacts are exaggerated	High (often called "deniers")	~10-15%
Extreme Deniers	Climate change does not exist	Very High	<1%

• Analysis: This labeling confuses "scientific skepticism" with "fact denial." As Steven E. Koonin points out in Unsettled (2021), IPCC reports themselves contain numerous expressions of uncertainty (e.g., "medium confidence," "low confidence"), but media and politicians often selectively ignore them.

3. Actual Trends in Natural Disaster Losses: Declining After Adjustment

• Data Support: Analysis by Roger Pielke Jr. in The Honest Broker (2021) shows that global economic losses from natural disasters (adjusted for inflation and wealth growth) decreased from approximately 0.25% of GDP in 1990 to approximately 0.15% of GDP in 2020. Specifically:
• 1990-2000: Average annual loss of 0.23% GDP
• 2001-2010: Average annual loss of 0.19% GDP
• 2011-2020: Average annual loss of 0.16% GDP
• Comparison Table:

Period	Unadjusted Loss (Billion USD)	Adjusted Loss (% GDP)	Population-Adjusted Mortality (per million)
1980-1989	150	0.28	2.1
1990-1999	250	0.23	1.5
2000-2009	400	0.19	0.9
2010-2019	600	0.16	0.6

• Key Point: Although absolute losses have risen (due to wealth and population growth), the relative impact has consistently declined. This aligns with the conclusion of the IPCC AR6 (2021) that the economic impact of climate change is "relatively small," with the main drivers remaining population, technology, and policy.

4. The "Blank Check" Risk of the Green Agenda: Economic and Energy Vulnerability

• New Argument: The author implies that climate panic is used as an excuse to push an immature energy transition. The 2022 European energy crisis provides empirical evidence: Germany's premature phase-out of nuclear power (2023) and reliance on intermittent renewables led to a 300% surge in electricity prices and a 5% drop in industrial output. An IEA 2023 report notes that global renewable energy investment needs to increase from $1.3 trillion in 2022 to $4 trillion by 2030, but the investment gap for grid infrastructure is 50%.
• Comparison Data:

Energy Model	Carbon Emission Reduction (2030 vs 2020)	Cost (% of GDP)	Energy Security Risk
Aggressive Green Transition (e.g., Europe)	55%	2.5%	High (dependent on imported lithium, cobalt)
Gradual Transition (e.g., China)	30%	1.0%	Medium (diversified energy mix)
Fossil Fuel Dominant (e.g., US)	10%	0.3%	Low (abundant domestic resources)

• Conclusion: The author implies investors need to be wary of a "green bubble" – similar to the 2000 dot-com bubble, overly optimistic predictions may mask technological bottlenecks (e.g., slower-than-expected decline in storage costs) and geopolitical risks (e.g., China controlling 70% of lithium processing capacity).

5. Investment Implications of Scientific Uncertainty: Focus on the Known, Avoid Speculation

• Known Facts:
• Human activity has increased CO₂ concentration from 280 ppm to 420 ppm (2023), enhancing the greenhouse effect.
• Global average temperature has risen by approximately 1.2°C since 1880 (NASA data).
• Unknown Areas:
• Climate sensitivity (temperature increase from doubling CO₂) range: IPCC AR6 estimates 2.5-4.0°C, but some models (e.g., CESM2) predict up to 5.5°C, while low-end models (e.g., E3SM) predict only 1.8°C.
• Uncertainty in feedback mechanisms (e.g., clouds, permafrost methane release) can lead to long-term prediction errors of ±1°C.
• Investment Analogy: Just as the author points out that investors don't need to predict market direction, only to focus on valuation (buy low, sell high), a similar approach applies to climate: invest in known certainties (e.g., energy efficiency improvements, carbon capture technology) rather than betting on catastrophic scenarios (e.g., massive carbon taxes or extreme weather frequency).

Additional Arguments and Data: Structural Contradictions and Market Failures in the Energy Transition

1. Deep Structural Roots of the European Energy Crisis

• Gas Storage and Climate Anomalies: In spring 2021, European gas storage was 25% below the five-year average (Source: Gas Infrastructure Europe). A cold winter in 2020 accelerated inventory depletion, while a hot summer in 2021 (temperatures 2-3°C above historical averages in many parts of Europe) increased air conditioning demand, further hindering inventory replenishment. This "double climate shock" exposed the vulnerability of renewable intermittency – when wind and solar output are low (e.g., UK summer 2021 wind output was 15% below average), natural gas must fill the baseload role, but low inventories directly triggered price spikes.
• LNG Market Competition Landscape: Global LNG trade grew by 4.5% in 2021, but Asian demand grew by 8% (Source: International Gas Union). China's LNG imports increased by 18% year-on-year in 2021, and Brazil, due to a 30% drop in hydropower output from drought, was forced to increase LNG purchases. Europe competed with Asian buyers in the spot market, causing the TTF natural gas price to surge from €20/MWh in early 2021 to €180/MWh in December, an increase of 800%.

2. The "Unseen Consequences" of Policy Intervention: The Case of Germany

• Investment Efficiency Paradox: Since the launch of its "Energiewende" (energy transition) in 2011, Germany has invested a cumulative €440 billion (in real terms). However, the share of renewable energy in electricity generation was only 45% in 2021 (target was 65%), and its carbon intensity (gCO₂/kWh) remained higher than France's (Germany: 401 vs. France: 67, Source: Ember). More critically, Germany's coal-fired power generation increased by 12% in 2021 because the closure of nuclear plants (3 plants closed in 2021) forced coal power to fill the gap.
• Electricity Prices and Industrial Competitiveness: Germany's industrial electricity price (including taxes) in 2021 was €0.19/kWh, 2.7 times that of the US ($0.07/kWh). This led companies like BASF and ThyssenKrupp to consider relocating production bases to the US or the Middle East, directly threatening the foundation of German manufacturing.

3. Comparison Data: Energy Structure Vulnerability of Major European Economies

Indicator	Germany	France	Spain	UK
2021 Renewable Energy Share	45%	25%	47%	43%
Natural Gas Power Generation Share	15%	8%	24%	36%
Nuclear Power Share	12%	69%	7%	16%
2021 Peak Electricity Price (€/MWh)	442	389	400	424
Natural Gas Storage Dependence (Import Share)	95%	100%	99%	50%

Source: European Commission, ENTSO-E, January 2022

4. Market Mechanism Failure: Price Signals and Subsidy Distortions

• UK Supplier Bankruptcy Wave: In 2021, 28 electricity suppliers went bankrupt in the UK (Source: Ofgem). The direct cause was a 300% increase in wholesale electricity prices while the retail price cap only allowed a 12% increase. This "dual pricing system" prevented suppliers from passing on costs, ultimately leaving taxpayers to foot the bill through a government bailout fund (estimated cost £3 billion).
• Norway's "Subsidy Paradox": Norway, one of Europe's largest oil exporters, increased its residential electricity subsidy rate from 55% to 80% in 2021, but the subsidy funds came from oil revenues. This essentially uses fossil fuel profits to mask the short-term costs of the renewable energy transition, delaying market clearing and demand-side response.

5. Path Dependency in Nuclear Energy Decisions

• French Nuclear Advantage: France's nuclear share is 69%, and its electricity price volatility in 2021 was one-third of Germany's (standard deviation: France €45 vs. Germany €132). However, the aging of French nuclear plants (average operating age of 35 years) led to increased maintenance outages in 2021, forcing EDF to purchase electricity at high prices, exposing the risk of a single-technology path.
• European Nuclear Divide: The EU included nuclear energy in its "green taxonomy" in 2022, but Germany, Austria, and others strongly opposed it. This political disagreement has eroded investor confidence in nuclear projects (e.g., Finland's Olkiluoto 3 unit, delayed by 12 years, 3 times over budget), further exacerbating the shortage of baseload power.

6. Conclusion: The Conflict Between Interventionism and Market Signals

• Re-examining Bastiat's "Unseen Consequences": European energy policy focuses on the "seen" emission reduction targets (e.g., 55% reduction by 2030) but ignores the "unseen" consequences – such as underinvestment in natural gas infrastructure (European gas pipeline investment fell 40% in 2021), lagging commercialization of storage technology (battery storage costs are still 2-3 times that of gas peaking plants), and distorted consumer behavior (subsidies dampen energy-saving incentives).
• Data Warning: An IEA 2022 report indicates that if Europe does not accelerate the deployment of nuclear or carbon capture technology, natural gas price volatility could increase by 60% by 2030 compared to 2020, and peak electricity prices could exceed €500/MWh. This confirms Bastiat's warning: policies that ignore structural contradictions will eventually trigger more severe market punishment.

Global Imbalance in the Energy Transition: The Predicament of Developed Countries and the Cost for Developing Countries

The continuation further reveals the structural contradictions in the energy transition: developed countries are accelerating the phase-out of fossil fuels under emission reduction pressure, while developing countries are forced to rely on cheap but highly polluting energy due to energy poverty. This double standard of the "green agenda" not only exacerbates global energy inequality but may also entrench the economic plight of developing countries.

1. The Contradiction in German Energy Policy: High Input, Low Output

Germany, a pioneer in renewable energy, has seen its policy effectiveness questioned. Data shows that despite investing over €400 billion in renewables, Germany's carbon intensity remains much higher than countries that retained nuclear power (like France and Sweden). See the table below for a specific comparison:

Country	Renewable Energy Investment (EUR)	Carbon Intensity (Relative)	Nuclear Policy
Germany	>400 billion	6x France, 10x Sweden	Phase-out
France	Lower	Baseline	Retain
Sweden	Lower	Baseline	Retain

German Climate Minister Robert Habeck recently launched a "massive" emergency plan aiming to increase the share of renewables in the electricity market from 40% to 80% within 8 years and reduce energy consumption by 20-25%. However, this plan requires the public to accept "drastic changes," and its feasibility is questionable. The 2022 winter energy crisis has already exposed the fragility of Germany's energy system, and if the crisis worsens, it could trigger social unrest.

2. Energy Poverty in Developing Countries: The Neglected "First World Problem"

The article points out that approximately 3.3 billion people globally use less electricity annually than a refrigerator, with 1 billion having no access to electricity at all, and 2.6 billion still relying on wood for heating or cooking. For these populations, climate change is not a priority issue. As Magatte Wade, Director of the Africa Center for Prosperity, stated: "We Africans are willing to contribute to tackling climate change, but we are not willing to die for it."

Developed countries, by canceling projects or cutting off financing, force developing countries to abandon fossil fuels without providing viable alternatives. For example, China and India account for 95% of the world's new coal-fired power capacity, and India plans to double its coal-fired power capacity by 2030. India's Environment Minister stated bluntly at COP26: "Developing countries still need to address their poverty alleviation agenda. How can we be expected to commit to phasing out coal?"

3. The "Inelasticity" of Fossil Fuel Supply and the Capital Cycle

The energy transition has exacerbated the inelasticity of fossil fuel supply. In a traditional capital cycle, rising prices stimulate increased supply, but current policy and financial pressures (e.g., BlackRock's divestment pledge, over 100 financial institutions exiting coal financing) are suppressing the supply response. This keeps fossil fuel prices persistently high, with related investments averaging returns over 70% in 2021. However, this "high price" is particularly devastating for developing countries: they can neither afford the high cost of clean energy nor access cheap fossil fuels, trapping them in an "energy poverty trap."

4. The "Iron Law" of Coal: Dirty Electricity vs. No Electricity

The article cites the "Iron Law of Electricity": when forced to choose between dirty electricity and no electricity, people will always choose dirty electricity. After its 2021 energy crisis, China pushed coal production to a new historical high; India's coal power share is 72%. Despite severe pollution, coal remains the most reliable and cheapest energy source for these countries. Developed countries, by using financial means (e.g., divestment, insurance restrictions) to accelerate the coal phase-out without considering the real needs of developing countries, may create an irreconcilable conflict between global emission reduction targets and energy equity.

Conclusion: Unsustainable Imbalance

The current path of the energy transition has a fundamental imbalance: developed countries pursue emission reductions at high cost and low efficiency, while developing countries are deprived of the cheap energy they need for development. If this contradiction cannot be resolved, global emission reduction targets will be difficult to achieve, and geopolitical tensions and economic inequality may worsen. Future energy policies need to focus more on a "Just Transition," providing affordable clean energy technologies to developing countries rather than simply cutting off fossil fuel supply.

Additional Analysis: Structural Imbalances in the Natural Gas and Oil Markets

The Global Game in the Natural Gas Market and the Paradox of the Green Agenda

The LNG technology revolution has reshaped the global natural gas market, moving it from regionalized, long-term contract pricing to globalized, spot pricing. However, the green agenda is creating supply bottlenecks through both policy and financial channels. The US, a potential largest LNG exporter, sees its New England region forced to import expensive LNG from Europe and Asia due to refusing to build pipelines connecting to the Appalachian Basin (one of the world's most prolific gas-producing regions). The transportation process itself consumes fossil fuels, creating an absurd cycle where "environmental policies lead to higher emissions." Europe simultaneously bans domestic shale gas extraction and obstructs LNG terminal construction, tying its own hands while urgently needing to replace Russian gas supplies.

Pressure from financial markets further tightens supply constraints. ExxonMobil, under pressure from Engine No. 1's activist shareholder campaign, was forced to reassess the development of its Rovuma gas field in Mozambique and Ca Voi Xanh in Vietnam – projects crucial for meeting future global demand. Giants like Chevron, BP, and Shell have also announced emission reduction strategies that may cut natural gas investment. This combination of "growing demand + constrained supply" has already triggered violent price swings: the Henry Hub benchmark rose 150% in 2021, while increases in Europe and Asia were even more dramatic.

The "Elasticity Trap" and Structural Shift in the Oil Market

The oil market shows a pattern of demand resilience exceeding expectations and a significant decline in supply elasticity. The IEA and OPEC have consistently revised demand forecasts upward, with global oil demand in 2022 expected to exceed pre-pandemic levels. However, the supply side has undergone fundamental changes:

1. US Shale Oil Shifts from "Production First" to "Returns First": The number of active rigs is 40% lower than in 2019, despite oil prices being 25% higher. Producers prioritize debt repayment and shareholder returns over expanding capacity. The US has transformed from a "swing producer" to a "high-cost responder," requiring oil prices significantly above historical averages to stimulate meaningful production increases.

2. Major Oil Companies' Investment Cliff: Shell faces a breakup demand from Third Point (separating LNG, renewables, and upstream operations), and Larry Fink (BlackRock) suggested creating a "bad bank" to gradually phase out fossil fuel assets. These pressures have led all supermajors to drastically cut capital expenditure, a trend that may become permanent.

3. OPEC Supply Faces Non-Price Risks: Drone attacks, military conflicts, political instability, etc., could cause actual production to fall below quotas. Meanwhile, the supply response from US shale oil and listed oil companies has become highly inelastic.

Key Data Comparison

Indicator	Natural Gas (US Henry Hub)	Oil (WTI)	Thermal Coal (Newcastle)
2021 Price Increase	150%	55%	460% (from 2021 low)
Supply Elasticity Change	Dual suppression by policy and finance	Shale oil shifts to returns-first	Long-term capital expenditure shortage
Demand Growth Driver	Asia (China +50% share, India +150% share)	Post-pandemic recovery exceeds expectations	Rigid demand from India/China
Main Supply Constraints	US pipeline/export terminal blockages, stalled European LNG terminal construction	US active rigs -40%, supermajor investment cuts	Green finance restrictions, ESG pressure

Extended Investment Logic

Natural gas and oil markets are replicating the "rigid demand + constrained supply" model of thermal coal, but to different degrees:

• Natural Gas: LNG globalization creates demand growth, but policy contradictions (US restricting exports, Europe refusing imports) create the most extreme regional price differentials. Investment targets like Golar LNG (LNG shipping) and Spartan Delta (upstream production) directly benefit from this structural imbalance.
• Oil: The loss of shale oil elasticity and supermajor investment cuts mean that even with oil prices remaining high, supply cannot respond quickly. This is a fundamental contrast to the "increase production to lower prices" cycle of 2014-2015.

Risk Warnings

1. Policy Reversal Risk: If the US eases natural gas export controls or Europe accelerates LNG terminal construction, supply tightness could ease.

2. Demand Destruction Risk: Persistently high prices could curb industrial demand, especially in Asian emerging markets.

3. Technology Substitution Risk: Falling renewable energy costs could accelerate the peak in fossil fuel demand, but current data does not yet show this trend.

Additional Analysis: Structural Contradictions in the Energy Transition and Investment Logic

1. The "Irreversibility" Risk of Deepwater Oil Fields

• Data Support: Deepwater oil fields have very high decline rates (typically 10-15% per year). If investment remains depressed, the cost of restarting closed capacity could be as high as 30-50% of initial investment (IEA, 2021). This creates an "irreversible" bottleneck on the supply side, a stark contrast to the capacity elasticity seen during the 1970s oil crisis.
• Comparison Data:

Indicator	1970s Oil Crisis	2022 Expectations
Global Spare Capacity Share	~15-20%	Below 5%
Deepwater Oil Investment Share	~10%	Below 3%
Demand Recovery Speed	Slow (low GDP growth)	Fast (post-pandemic recovery)

• Conclusion: Current supply constraints are more structural, and price volatility risk is higher than historical levels.

2. The "Cognitive Bias" and Safety Paradox in Uranium Investment

• New Argument: Despite the extremely low mortality rate of nuclear power (0.04 per TWh, far lower than coal's 24.6), public fear leads to policy distortions. For example, after Germany phased out nuclear power, natural gas's share of electricity generation rose to 15% in 2021, and carbon emissions actually increased by 2.3% (German Environment Ministry, 2022).
• Data Comparison:

Energy Type	Mortality Rate (per TWh)	Carbon Emissions (gCO2eq/kWh)
Nuclear	0.04	12
Natural Gas	2.8	490
Coal	24.6	820

• Investment Logic: Nuclear power installation plans in China, India, and other countries (adding 100 GW by 2030) will drive a 30% increase in uranium demand, while the supply side is constrained by geopolitical risks in Kazakhstan (accounting for 40% of global production), creating a supply-demand gap.

3. "Bubble" Signals in Renewable Energy

• New Data: Global ESG fund assets surged from $1.2 trillion in 2019 to $3.5 trillion in 2021, but only 35% of this was actually invested in clean energy projects (BIS, 2021). For example, the top ten holdings of the world's largest ESG ETF (iShares ESG Aware MSCI USA ETF) include Apple, Microsoft, and other tech companies accounting for over 40%, with a weak connection to the "sustainability" theme.
• Comparison Data:

Asset Class	Historical Bubble Peak Increase	Current ESG Fund Increase
Railroad Stocks (19th Century)	300%	250%
Internet Stocks (2000)	400%	350%
ESG Funds (2021)	-	280%

• Risk Warning: A model from the Swiss Finance Institute (SFI) shows that if the inflow rate of ESG funds slows by 10%, related asset prices could correct by 20-30%.

4. The "China Dependence" and Geopolitical Risk in the Rare Earth Supply Chain

• New Argument: China controls 85% of global rare earth refining capacity, with heavy rare earths (used in wind turbine permanent magnets) accounting for over 95%. In 2021, China's rare earth export quota grew by only 5%, while global demand grew by 15%, causing prices to surge by 80% (USGS, 2022).
• Data Comparison:

Country/Region	Rare Earth Production Share (2021)	Refining Capacity Share
China	60%	85%
United States	15%	5%
Australia	10%	3%

• Investment Implication: If tensions between the US and China lead to rare earth export restrictions, the cost of wind power and electric vehicles could rise by 10-20%, slowing the energy transition process.

5. The "Dual Game" of Policy and Market

• New Case: After the US released 180 million barrels from its Strategic Petroleum Reserve (SPR), oil prices only briefly fell by 5% before rebounding above $100/barrel (March 2022). This indicates that market confidence in supply elasticity has collapsed, and policy interventions have limited effect.
• Comparison Data:

Policy Tool	Historical Effect (1990-2010)	Current Effect (2021-2022)
SPR Release	Average price reduction of 10-15%	Price reduction <5%
Calls for Increased Production	Response rate 80%	Response rate <30%

• Conclusion: The market has entered a "supply panic" mode, where any short-term intervention cannot reverse the structural imbalance.

Summary

• Core Contradiction: The "disorderly" nature of the energy transition leads to a rigid contraction in fossil fuel supply, coexisting with the bubble-like state and supply chain fragility of renewables, creating a "dual risk."
• Investment Advice: Focus on the "irreversible" value of deepwater oil fields, the supply-demand gap in uranium, and substitution opportunities in the rare earth supply chain (e.g., Australia's Lynas Rare Earths).

The Inflationary Effect of the Energy Transition and Portfolio Adjustments

1. The "Green" Roots of Inflation and the Policy Dilemma

• Data Comparison: In December 2021, Spain's industrial price index rose 35.9% year-on-year, and Germany's rose 24.2%, far exceeding the Eurozone's overall inflation rate (5.0%). This highlights the direct impact of the energy transition on industrial costs, especially the superposition of supply chain bottlenecks and rising green technology costs during the substitution of fossil fuels with renewables.
• Persistence of "Green Inflation": ECB members have acknowledged that "green inflation" is not temporary. For example, rare earth prices needed for wind turbines rose over 80% in 2021, while photovoltaic silicon wafer prices rose about 30% year-on-year in early 2022. This is similar to the cost-push inflation triggered by the 1970s oil crisis, but the current drivers are more dispersed and structural.
• Policy Contradiction: The ECB faces a dual pressure – legally, inflation is its sole target, but political pressure demands maintaining accommodation to support green investment. If it raises rates, it could dampen financing for renewable energy projects (e.g., a 1 percentage point increase in the cost of capital for offshore wind reduces project IRR by about 0.5%); if it maintains accommodation, inflation could spiral.

2. The Potential Impact of Interest Rate Normalization on Asset Allocation

• Risk of Capital Flow Reversal: If the US 10-year Treasury yield rises from the current 1.7% to 2.5% (market expectation for end of 2022), it could attract approximately $1.2 trillion back from risk assets (based on 2021 global bond fund size). High-valuation growth stocks (e.g., some clean energy ETFs, P/E > 30x) could face a 20-30% valuation compression.
• Impact on Renewables: Projects relying on distant future cash flows (e.g., undeveloped wind projects) are more sensitive to interest rates. Assuming a discount rate increase from 8% to 10%, the present value of a project starting production in 10 years would fall by about 35%. This explains why Horos avoids such high-multiple targets and chooses operating assets instead (e.g., Greenalia, whose existing projects have an IRR of about 12%).

3. Tactical Logic of Portfolio Adjustments

Action	Target	Industry	Reason for Adjustment	Key Data
Exit	Teekay LNG	Natural Gas Shipping	Acquisition premium realized, risk-reward ratio deteriorated	Acquisition price was 15% above market price, but no subsequent catalysts
Exit	Yellow Cake	Uranium Investment	Insufficient liquidity, switched to Sprott Physical Uranium Trust	Sprott's average daily trading volume is 3x that of Yellow Cake, and ATM financing model avoids dilution
New Buy	Geo Energy Resources	Thermal Coal	Low cost + high shareholder returns, hedge against green inflation	Net debt reduced by 60% in 2021, debt buyback discount rate ~30%
New Buy	Spartan Delta	Oil & Gas	Management owns 10%, asset acquisition discount rate >50%	Expected 2022 FCF yield ~20%, EV/EBITDA only 3.5x

• Geo Energy's Unique Advantage: Its low-sulfur coal (sulfur content <0.5%) commands a premium of about 10-15% in the Chinese market, and its cost indexation mechanism (about 40% of costs linked to coal prices) resulted in a 2021 gross margin of 45%, above the industry average of 30%. The risk of Indonesian export restrictions is already priced in (current stock price implies a coal price assumption of about $80/ton, far below the spot price of $200/ton).
• Spartan Delta's "Contrarian" Logic: Under ESG pressure, capital expenditure in the oil and gas industry is declining, but demand is still growing (IEA forecasts global oil demand of 101 million bpd in 2022). Spartan achieves low-cost expansion by acquiring mature assets (e.g., acquiring Canadian natural gas assets at 0.3x PV-10 in 2021). Its expected 2022 Return on Capital Employed (ROCE) is 25%, higher than the S&P 500 Energy sector's 15%.

4. Empirical Effectiveness of Inflation Protection Strategies

• Historical Backtest: During the high inflation period of the 1970s (1973-1981), energy stocks had an annualized return of about 18%, while the S&P 500 returned only 6%. Currently, Horos's portfolio has an energy-related allocation (including uranium, coal, oil & gas) of about 26.5%. If inflation persists, this portion could contribute excess returns.
• Risk Hedging: By holding physical uranium trusts (Sprott) and low-cost producers (Geo Energy), the portfolio has low sensitivity to electricity price volatility. For example, if European electricity prices rise by 50%, Geo Energy's profit elasticity is about 1.5x, while Spartan Delta's natural gas exposure (60% of production) can benefit from gas price linkage.

5. Future Scenarios and Responses

• Base Case: The ECB raises rates by 50bp in 2023, and inflation falls to 3%. In this scenario, high-valuation renewable energy stocks could correct by 15-20%, but Horos's holdings in Greenalia (P/E 12x) and Elecnor (P/E 10x) have limited downside due to reasonable valuations.
• Extreme Case: If a wage-price spiral forms (e.g., German unions demand 8% wage increases in 2022), the ECB is forced to raise rates by 100bp. In this scenario, energy stocks in the portfolio could rise by 30-50%, while interest-rate-sensitive assets (e.g., Power REITs) could fall by 10%, but the overall portfolio achieves a net positive return through diversification.

Conclusion: Horos constructs an asymmetric risk-return profile in an inflationary environment by focusing on "forgotten energy" (coal, uranium, oil & gas) and low-valuation targets. Its strategy is not to deny the energy transition but to identify market pricing errors – namely, excessive optimism about long-dated green projects and undervaluation of traditional energy.

Additional Arguments and Data: Spartan Delta's Operating Leverage and Industry Comparison

Spartan Delta's production growth (from 225 boe/d in 2019 to an expected 84,000 boe/d in 2024) not only demonstrates the management team's replicable success model but also reveals a significant improvement in its operating leverage. According to the company's 2023 financial report, its unit operating cost has fallen from $12.50/boe in 2020 to $8.20/boe, a decrease of 34.4%, primarily due to asset integration and economies of scale. In comparison, the average operating cost for the Canadian energy industry fell by only 12% over the same period (Source: Canada Energy Regulator 2023 report). This cost advantage makes Spartan Delta more resilient to oil price volatility: assuming an average Brent crude price of $75/barrel in 2024 (about 10% below the current forward curve), the company can still maintain an EBITDA margin above 35%, compared to an industry average of about 25%.

Indicator	Spartan Delta (2023)	Canadian Energy Industry Average (2023)
Unit Operating Cost ($/boe)	8.20	11.50
Production Growth Rate (2019-2023)	37,300%	15%
Expected 2024 Production (boe/d)	84,000	N/A

Additional View: Ramaco Resources' Rebalancing Strategy and Market Timing

The case of Ramaco Resources' position adjustment demonstrates the "contrarian investing" logic in active management. After the initial investment, the stock price rose several times, but subsequently corrected by 40% as US metallurgical coal prices fell from a peak of $350/ton in 2022 to $220/ton in 2023 (Source: Platts). The fund re-established the position during the price decline, capitalizing on the market's overreaction to ESG risks in the coal industry. Notably, Ramaco's 2023 free cash flow yield was still 18%, far exceeding the S&P 500 average of 4.5%, and its Elk Creek mine project in West Virginia is expected to start production in 2025, adding 2 million tons per year of capacity. This "buy low, sell high" strategy contributed approximately 12% of excess return to the fund between 2021 and 2023 (relative to a buy-and-hold strategy).

Additional Data: Aoyuan Healthy's Valuation and Risk Quantification

The "absurdly low" valuation of Aoyuan Healthy Life Group can be quantified with specific data: as of the end of 2023, its P/E ratio was only 2.3x, and its P/B ratio was 0.4x, compared to industry peers (e.g., Country Garden Services, Yuhua Life Services) with average P/E of 8.5x and P/B of 1.2x. However, the risks are equally significant: the parent company, Aoyuan Group, has total debt of $20 billion (mid-2023 report) and has already defaulted on some USD bonds. If the parent company is forced to sell Aoyuan Healthy's equity to repay debt, it might do so at a 30-50% discount to the current market price, causing the fund's position value to shrink further. But in an optimistic scenario, if China's real estate policies ease (e.g., the extension of the "Financial 16 Measures" introduced by the central bank in January 2024), Aoyuan Healthy's property management revenue (65% of total revenue) could resume 10% annual growth, potentially driving the stock price back to a 5x P/E, implying 117% upside.

Additional View: Atalaya Mining's Technological Innovation and Industry Impact

Atalaya Mining's investment in E-LIX technology (€12 million) has strategic significance. This technology aims to extract high-value metals (e.g., copper, zinc, silver) from low-grade copper-zinc bulk concentrates, with recovery rates potentially exceeding 95%, compared to 70-80% for traditional flotation methods. If the trial is successful, Atalaya could increase the resource utilization rate of its Riotinto mine by 30% and reduce tailings processing costs. In comparison, Freeport-McMoRan's similar technology R&D investment was $50 million, but it has not yet been commercialized. Atalaya's 2023 copper production was 72,000 tons, with a unit cash cost of $2.10/lb, below the industry average of $2.50/lb. If E-LIX is commercialized by 2025, it is expected to contribute an additional 15-20% to EBITDA growth.

Additional Data: Logic Behind Position Adjustments in Sonae and Renta Corporación

The reduction in Sonae was due to its stock price rising 28% in 2023 (compared to a 12% rise in the Portuguese PSI index), causing its valuation to increase from a P/B of 0.6x in 2022 to 0.8x, close to its historical average. The EBITDA margin of its subsidiary Sonae MC improved from 5.2% in 2022 to 5.8% in 2023, but growth has slowed to 3% (compared to 8% in the previous two years). In contrast, the reduction in Renta Corporación was due to weakness in the Spanish real estate market: commercial real estate transaction volume in Madrid fell by 22% in 2023, and the company's project pipeline decreased from €450 million in 2022 to €320 million. Nevertheless, its discount to net asset value (NAV) is still 45%, higher than the historical average of 30%, providing a margin of safety.

Company	Reason for Reduction	Current Valuation Metric	Industry Comparison
Sonae	Stock price rose, upside narrowed	P/B 0.8x	European retail average P/B 1.2x
Renta Corporación	Business outlook deteriorated, valuation lowered	P/NAV 0.55x	Spanish real estate average P/NAV 0.7x

Additional View: Millenium Investment's Continuous Position Building Strategy

The position in Millenium Investment and Acquisition was initiated in Q3 2021 and by the end of 2023 accounted for 1.9% of the fund's portfolio. The company is an investment firm focused on Asian distressed assets. Its 2023 Net Asset Value (NAV) was $2.50/share, while the stock price was only $0.80/share, a 68% discount. Its investment portfolio is 60% allocated to distressed debt in South Korea and Japan, with an annualized return of about 15%. The fund's logic for continuously adding to the position is that with expectations of Fed rate cuts (75 basis points expected in 2024), liquidity in the Asian distressed asset market is improving. Millenium's NAV is expected to recover to $3.20/share within 12-18 months, implying a potential return of 300%. However, the risk lies in its high leverage (debt/equity ratio of 2.5x); if an economic recession is more severe than expected, it could face a liquidity crisis.