Annual Results for 31 December 2010

RNS Number : 6734I

Africa Opportunity Fund Limited

17 June 2011

 



Africa Opportunity Fund Limited (AOF.L)

Announcement of Annual Results for the year ended 31 December 2010

The Board of Africa Opportunity Fund Limited ("AOF", "the  Company" or "the Fund") is pleased to announce its audited results for the year ended 31 December 2010.

Summary

The Company

AOF is a Cayman Islands incorporated closed-end investment company traded on the AIM market of the London Stock Exchange.  Its net asset value on December 31, 2010 was US$39.4 million and its market capitalization was US$34.9 million.

Chairman's Statement

2010 Review

2010 followed 2009 as a good year for both world markets and the Company.  AOF's audited net asset value rose from $0.74 per share in January to $0.925 per share on 31 December 2010.  Including dividends, the total NAV return was a gain of 26.4%. 

As with 2009, the shares of AOF had an even better year in 2010, appreciating 44% and dramatizing the impact of a narrowing NAV discount upon returns.  It is gratifying to report a significant recovery in the NAV and share price of AOF.¹

To provide some basis for comparison, in Africa, South Africa rose 33%, Nigeria rose 22%, Kenya rose 28%, and Egypt rose 9%.  In non-African emerging markets, China fell 10%, Brazil rose 6%, Russia rose 12%, and India rose 21%.  In developed markets, Japan rose 12%, the US rose 15%, and the UK rose 9%. 

The AOF portfolio enjoyed the benefits of holding different asset classes in 2010.  At the end of the year 39% of the portfolio was in cash and bonds, which had contributed approximately 8% of the 26% of the NAV return.  The equity portfolio, representing 61% of the portfolio, added approximately 18% of the 26% of the NAV return.  Broadly, most of the portfolio companies in which AOF is invested made significant operational progress during the year and hold attractive return prospects as we invest the cash generated by the bond portfolio.  Companies such as Sonatel continued to add subscribers and African Bank continued to finance its operations without much drama, reinforcing the point that for several companies in Africa, the gyrations of world financial markets have only a distant impact on their underlying operating businesses.

Outlook

Commodity prices moved sharply higher in 2010 and several large international resource companies have sought to acquire assets in Africa, with Rio's acquisition of Riversdale Mining and China Guangdong's approach to Kalahari Minerals providing recent examples.  Meanwhile, Kosmos Energy, led by the key technical team that discovered the Jubilee field in Ghana, recently listed on the NYSE with a $7 billion market capitalization.  Clearly Africa offers a treasure trove of natural resource opportunities, and we devote some effort to finding undervalued opportunities.  On balance, however, we view the recent rise in commodity prices with concern.  Natural resource investments in Africa in some ways can be viewed as a derivative of Chinese aggregate demand and this gives us pause.  Natural resources which are inputs for the interest rate sensitive parts of the Chinese economy such as the construction sector are especially worrisome since they stand to suffer from the crescendo of tightening Chinese monetary policy.  As a consequence we have sought to hedge some of our natural resources risk by establishing short positions in natural resource indexes, and in turn our primary investment focus remains identifying goods and services which consumers will demand regardless of domestic political or global economic conditions. 

As we have stated before, Africa today shines as a growing continent.  An educated middle class is emerging in numerous countries which experienced decades of infrastructure stagnation and underinvestment.  African markets offer value that is difficult to find on other continents.  Single digit PE multiples and double digit ROEs are far from rare occurrences.  So too are double digit dividend yields.  To investors in Africa, fiscal imbalances and currency depreciations are part of the standard equation.  Civil unrest impairing market valuations is an occupational hazard.  Care and caution are certainly required, but businesses can still flourish in the midst of such imbalances.  We make no forecast about the general direction of markets, but we are both excited about the attractive opportunities available to us today and optimistic about AOF's prospects. 

In closing we would like to thank our shareholders again for their support and partnership during 2010.  We look forward to a successful 2011.

Robert C. Knapp

Chairman

June 2011

¹ Reference Indexes are calculated in US dollars using : Nigeria NSE Allshare Index, South Africa Allshare Index, Nairobi NSE Index, Egypt Hermes Index, Russia MICEX Index, Brazil IBOV Index, the Shanghai composite index, the India SENSEX Index, the S&P 500, the FTSE 100, and the Nikkei 225.

Manager's Report

The Fund's hunt for undervalued securities led to a rising exposure to African equity securities in 2010.  Its end-of-year allocation of 61% of its investment portfolio in equities was the largest since the inception of the Fund.  It had $15.4 million invested in debt securities, $25.9 million in equity securities, $3.8 million in cash, and derivative and short sale liabilities equal to $6.1 million.  Its end-of-year holdings were in Angola, Botswana, Cote d'Ivoire, the Republic of Congo, Ghana, Malawi, Mauritius, Morocco, Namibia, Nigeria, Tunisia, Senegal, South Africa, Zambia, and Zimbabwe.  Our lodestar for measuring the Fund's portfolio is our estimate of its appraisal value per share.  That somewhat subjective estimate measures the Manager's view of the long-term attractiveness of the portfolio.  It was $1.09 per share at the end of 2010.  A secondary perspective on the portfolio's value comes from quantitative data.  As of the end of May 2011, the Company's debt portfolio was valued at a 39% discount to its par value and had a current yield of 5.8%.  Its equity portfolio traded on a dividend yield of 5% and the overall portfolio's free cash yield, net of management fees, on market capitalization, was 2.9%.

2010 was devoted entirely to reconstruction, thus continuing the theme which animated the second half of 2009 for the Fund.   It was, and remains, to recover the losses endured by the Fund in 2008 while improving the investment quality of the Fund's holdings.  Consequently, the Fund's new holdings had to combine minimal risk of loss with a material prospect of an internal rate of return exceeding 20%.  2010 ended with the Fund obtaining a total return of 26.4%.  The best exemplars of this theme were our investments in commodity producers and development companies.  In fact, the Fund's most lucrative returns of 2010 were earned on its commodity-related holdings: diamonds, rubber, and gold.  The Fund's gross long position in commodities at the end of 2010 constituted 27.5% of its net asset value while its corresponding net long position was 17.8%.  Our best equity investment last year was in the equity of Societe Africaine de Plantations d'Heveas ("SAPH"), which enjoyed a total return of 142%.  We invested also in equity and debt instruments of Great Basin Gold for a total return of 55%.  Our biggest laggards were our Ivory Coast government Sphynx bonds with a gain of 5%, and the Marine Subsea bonds with a loss of 38%.

It may seem oxymoronic to seek "minimal risk of loss" among commodity producers.  After all, the fons et origo of value investing, Graham and Dodd's 1934 classic, Security Analysis, devotes all of 10 pages to mining companies.  Private commodity producers have no pricing power.  Only the lowest cost producers of a commodity are likely to enjoy profits over the cycle of that commodity.  Yet, it would limit excessively the investment options of the Fund to ignore commodity producers and development companies on a continent where several of the largest companies are commodity producers.  For example, the largest companies in Ghana and Zimbabwe are commodity producers-Anglogold Ashanti in the case of Ghana and Zimplats in the case of Zimbabwe.  Our challenge has been to apply value investing precepts in the commodity investing arena. 

SAPH illustrates our basic investing approach for commodity producers.  The Fund's first purchase of SAPH equity securities took place in January 2008 at a price of 30,000 CFA Francs (or $67) per share.  At that time, at $2.56 per kilogram, the natural rubber price was hovering near 20 year highs.  Natural rubber prices fluctuate with those of crude oil because crude is a key ingredient in the production of the chief competitor of natural rubber, synthetic rubber.  They fell to a low of $1.29 per kilogram by December 2008 before recovering to an all-time high of $5.36 per kilogram in February 2011.  Despite that collapse in rubber prices, SAPH remained profitable.   Nevertheless, SAPH's market capitalization in 2009 collapsed in tandem with the steep natural rubber price declines.  After noticing that a stagnant SAPH share price was lagging the recovery in the rubber and oil prices of 2009, the Fund elected in January 2010 to increase its stake in SAPH by a third at an average price of 12,900 CFA Francs (or $27) per share.  Dramatically improved 1^st half 2010 results, which rose from $3 million to $39 million, led to a rise in SAPH's share price to its closing end of year price of 27,500 CFA Francs (or $56) per share.

There are two operating traits of SAPH providing collateral justification for the Fund's decision to increase its exposure to SAPH.  The first trait is West African rubber producers tend to have lower operating costs than their much larger South East Asian competitors.  Ivorian rubber trees are hardier and more fecund than Thai trees, despite Thailand's status as the world's largest rubber producer.  The second trait is SAPH's encouragement of small scale rubber farmers to expand their output by undertaking to buy their latex for processing into rubber.  SAPH advises those small farmers about seed types to use, farming and harvesting techniques in exchange for those farmers selling their output to SAPH at a discount to the prevailing global rubber price.  Thus, SAPH increased its trading and processing revenues and profits without a commensurate increase in the capital it invested in rubber growing activities.  Indeed, SAPH plans to increase steadily the percentage of its rubber attributable to "toll" processing of latex supplied by small scale farmers.  SAPH's guaranteed processing margin implied that it would remain profitable despite unanticipated dramatic declines in rubber prices.  Even assuming a retention in perpetuity of the operating margins of $270 per ton prevailing in 1H 2009 and a minimum annual output of 100,000 tons, SAPH was assured of an annual operating profit of $27 million, which it exceeded in just its 1^st half 2010 net profit of $39 million.  SAPH's market capitalization to "normal" operating profit ratio of 5.2X alone signified its compelling attractiveness.

AOF increased the portion of its portfolio invested in natural resource development companies.  13.8% of its end-of-year net asset value was invested in uranium exploration, gold mine development, diamond mine development, and underwater timber harvesting.  It represents a material increase from the 7.3% of its 2009 net asset value that AOF allocated to natural resource development companies.  Unlike 2009, most of AOF's portfolio in this area is held via convertible debt instruments or debt instruments with warrants, giving AOF a residual exposure to exploration or development success.  When financing the creation of new businesses in natural resources, our preference is to provide most of our financing in the form of debt, with the option of increasing our exposure to the profits and rerating that tend to accompany a development company's successful transition from developer to producer.  Ideally, we prefer that transition to occur by the first anniversary of our investment.  That cocktail of attributes- a senior claim on assets providing some protection in the event of setback and failure; equity-like capital gains if profits occur; and a short-term catalyst to trigger a rerating- lowers somewhat the risk of loss without sacrificing an inordinate amount of capital gains.

The Fund's purchase in March 2010 of equity and convertible debenture instruments issued by Great Basin Gold Ltd. illustrates our preferred mode for cash consumptive development companies.  It is that of a creditor participating in the profit potential of equity issued by a company with large deposits that are inexpensive to exploit.  Thus, the implicit price of the commodity in question at which we invest should be much lower than the then prevailing spot price.  Great Basin is listed on the Toronto, Johannesburg, and the NYSE Amex Stock Exchanges. The Fund invested $172,609 to acquire common stock of Great Basin at a price of C$1.08 per share and $1.64 million for a C$ 8% convertible debenture instrument, priced at 108, due in 2014.  Those shares were sold in December for $272,946 for a total return of 58%, while the year-end value of the convertible debentures was $2,442,198.  Including interest, the convertible debentures generated a total return of 53% in 2010.  By comparison, in moving from $1134 per ounce to $1421, the gold price rose 25.2% from March 2010 to December 2010 while the Philadelphia Stock Exchange Gold and Silver Index rose 34.9% over the same period.

Great Basin was developing two mines at the time of the Fund's initial investment.  One gold and silver mine- the Hollister Mine- is located on the prolific Carlin Trend in Nevada.  The other gold mine- the Burnstone Mine-is located in the Witwatersrand Basin in South Africa.   The Hollister mine had 1,122,000 gold equivalent ounces in the proved and probable reserve category and 1,431,500 gold equivalent ounces in the measured and indicated resource category.   Gold ounces in the Burnstone mine's proved and probable reserve category amounted to 4,096,000 ounces while 11,676,500 ounces lay in its measured and indicated resource category.  By South African deep underground mining standards in which gold can be mined 4,000 meters below surface, the Burnstone Mine bordered on the shallow end.  Mining would take place at depths ranging from 280 meters to 600 meters below surface.  Both mines were in test-mining phase, so there was a high probability that they would become commercial gold producers.  Indeed, the Burnstone mine was scheduled to enter commercial production in the third quarter of 2010.  Thus, we could see the catalyst for a rerating of Great Basin from a developer to a producer was on the 12 month horizon. 

Set forth below in tabular form are the vital valuation data which informed our decision to invest in Great Basin.

http://www.rns-pdf.londonstockexchange.com/rns/6734I_1-2011-6-17.pdf

Since the Burnstone mine was scheduled to commence commercial production in 2010, we decided to ignore completely the Hollister mine in assessing the attractiveness of Great Basin. Yet, after including the forecast total costs per ounce for the Burnstone mine, the enterprise valuation of Great Basin's debentures implied a 51% discount to the then $1126 gold spot price for each Burnstone proved and probable reserve ounce.  The enterprise valuation of Great Basin common stock implied a 43% discount to that spot price.  The debentures, ranking ahead of the common stock, had the best balance of risk and reward for the Fund.

Although, at first blush, Great Basin's debentures seemed remarkably undervalued, it was imperative to understand the possible reasons for that undervaluation to determine whether to accept or reject those reasons.  It is worth noting that the plans of mining and oil and gas development companies seem congenitally flawed by optimism.  It is hard for most of those companies to enter commercial production under budget and on schedule.  It is also a notorious fact that South Africa's electricity tariffs are rising rapidly and delays in the provision of electricity have become a more common occurrence.  Add the escalating costs of South African labour and the volatile Rand and the heavy doubts expressed by the markets become more understandable.  In fact, there were slight delays in the commencement of commercial production at the Burnstone mine, there have been construction cost overruns, the Rand has appreciated against the US Dollar, and the US Dollar costs of the Burnstone mine are much higher than forecast in the most recent mine plan.  But, nothing was close to the fears of the market.  Our view was that the Fund had numerous buffers of safety, whether via the Hollister mine which we discounted in its entirety or the relatively shallow ore body of the Burnstone mine or the short period before commercial production which permitted a certain amount of slippage or Burnstone's measured and indicated resources being more than 100% larger than the proved and probable reserve ounces on which we relied for our investment decision or the large discount between the spot gold price and the total cost per ounce implicit in the valuation of the Fund's debentures.  In sum, the Fund made an investment by the purchase of Great Basin Gold's debentures and common stock.

A noteworthy disappointment was the failure to conclude in 2010 a restructuring of the defaulted Sphynx 10% notes secured by Cote d'Ivoire's government bonds.  Cote d'Ivoire ended 2010 with two rival governments.  A brief outburst of de facto civil war broke out in the first quarter of 2011, ending with the capture of the former President, Mr. Laurent Gbagbo, and the practical control of the full levers of presidential rule by his successor, Mr. Alassane Ouattara.  Resumption of negotiations about our bonds is likely to occur only after the President Ouattara's government has both regained complete control of Cote d'Ivoire and cured its defaults under the $2.3 billion, 2.5% Ivorian multi-step up Eurobond due December 2032.  Where did we make our errors of judgment in our purchases of Ivorian government debt?  After all, Cote d'Ivoire is no neophyte to debt defaults.  It has experienced a few bouts of sovereign debt restructuring since the 1980s.  Yet, as we expected, Cote d'Ivoire's macro-economic data and exports have improved since January 2008 when we made our initial purchase of Sphynx bonds.  But, there have been three surprises, among a few, that stand out for us.  The first surprise was that we expected the Ivorian elections to take place in late 2008 instead of 2010.  Our investigations lead us also to the conclusion that former President Gbagbo was likely to lose the presidential elections.   What never crossed our minds was the possibility of Mr. Gbagbo rejecting outright patent defeat and engulfing his country in war.   Our belief in a likely Gbagbo defeat should have made us suspect that the electoral timetable would be delayed repeatedly, imposing strains on government finances in the wake of those delays.  The second surprise was that large sums of money disappeared from the Ivorian government budget for the ostensible purpose of meeting various unbudgeted contractual obligations related to the move of the administrative centre of Cote d'Ivoire from Abidjan to Yamoussoukro.  Those sums would have been sufficient for honoring part of the Ivorian Sphynx debt obligations.  Last, but not the least, was the classification of our Sphynx debt as "external debt" even though it was supported exclusively by, and was repayable solely  from an issue of local CFA Franc denominated Ivorian treasury bonds.  In fact, the Sphynx debt is the only CFA Franc debt within the entire $14 odd billion of "external" or foreign debt owed by the Ivorian government.  As "external debt", it is argued that our Sphynx debt should be reduced in value in the same way that all other external debt owed by the Ivorian government has been reduced in value.   Still, despite those surprises, a promise by the legal government of Cote d'Ivoire to repay funds granted to it by AOF remains a legal promise valid and binding on the successor Ouattara government.  We hope that the Sphynx debt restructuring will be completed in late 2011.

Our biggest disappointment came from our holdings of Marine Subsea bonds which lost 38% of their value in 2010.  Marine Subsea operates in the oil services industry of West Africa.  It provides offshore accommodation, chartering, and logistics services to oil companies in countries like Angola.  For example, Angola's national oil company, Sonangol, is a joint venture partner and customer of Marine Subsea.  Those bonds were restructured in 2009 to extend their maturity from 2012 until 2019.  We served as a member of Marine Subsea's restructuring committee.  Standard Bank of South Africa granted Marine Subsea fresh finance in the amount of $110 million to enable Marine Subsea to take delivery of a new well intervention vessel designated for use by Sonangol of Angola.  Unfortunately, after this new well intervention vessel had been moved to Angola for service, Sonangol refused to use it because it lacked a crucial piece of equipment.   Sonangol's rejection of this vessel put in train a chain of events culminating in the seizure of that vessel by Standard Bank, in its capacity as a senior secured lender.  Disappointments force reflection.  We underestimated Marine Subsea's vulnerability to Sonangol's decisions.  Less leverage and more equity in the capitalization of Marine Subsea would have improved also its ability to absorb operational and financial setbacks.

The remainder of this report comprises commentary on two of AOF's largest equity investments and a restatement of the Manager's investment philosophy.

Sonatel.  This Senegalese integrated telephone operator listed on the Bourse Regionale de Valeurs Mobiliers is AOF's largest investment.  Its subscribers grew by 23% in 2010 to 11.3 million.  Sonatel has operations in Senegal, Mali, Guinea, and Guinea-Bissau.  It has 100% of Senegal's fixed line market, 90% of Senegal's internet market, 60% of Senegal's mobile telephony market, 69% of Mali's mobile telephony market, 28% of Guinea's mobile telephony market, and 31% of the mobile telephony market in Guinea-Bissau.  At 31% for the 2010 financial year, Sonatel's net margin is the second highest in Africa.  In addition, Sonatel has the 2^nd highest operating cash flow per telephone subscriber in Africa of $61, the 3^rd lowest debt to equity ratio in the telecoms industry of 9%, a debt to total assets ratio of 5%; and a return on average equity of 32%.  Yet, as of May 31 2011, with an enterprise value around $3.2 billion and a market capitalization of $3.4 billion, Sonatel has the 3^rd lowest African telephone operator valuation with a PE ratio of 10X and an enterprise value per subscriber of $287.

African Bank.  African Bank Investments Limited ("ABIL") is the largest consumer finance company in South Africa and Africa.  It is the holding company for African Bank ("African Bank"), a bank, and Ellerines Brothers, a furniture retailing company.  Its subsidiaries grant unsecured loans to individuals, loans secured by furniture to individuals, and sells furniture and various electronic household appliances.  Its customers are members of the emerging middle class and its average loan size is 9,807 Rands (or $1,401). Furniture sales by Ellerines have begun to rise as the restructuring efforts start to bear fruit in an economy recovering from recession.  A simple comparison of Ellerines' sales per square meter against the sales per square meter of its major competitors-the Lewis Group and the JD Group-reveal the significant capacity for improvement.  Ellerines' statistic of 6,325 Rands per square meter stands far below the 9,053 Rands per square meter figure for the Lewis Group and the 10,773 Rands per square meter for the JD Group.  Nevertheless, ABIL's 1,457 branches and stores remains one of the largest financial branch networks in South Africa.  Unlike the four major commercial South African banks, it has no exposure to the mortgage market.  Its funding strategy is rare.  It funds itself long term to make loans of shorter duration.  As of March 31, 2011, its ratio of tangible shareholders equity to tangible assets was 18.5% and its tier 1 capital adequacy ratio was 24.3%.  That high capital ratio permits African Bank to incur high non-performing loans and bad debts in its market.  African Bank has strong liquidity ratios, with maturing liabilities at any one time being half of maturing assets.  ABIL's return on average assets declined from 5.8% in 2009 to 5.3% in the first half of 2011 and its return on average equity increased from 15% to 18%.  But, its return on average tangible equity was 30%. ABIL had a market capitalization on May 31 of $4.2billion. It traded on a PE ratio of 13.6X, a Price/Book ratio of 2.2X, and a Price/Tangible Book of 3.9X.

Once again, we end with a restatement of our investing philosophy.  The key elements of the investment strategy for AOF are:

Material discounts to intrinsic value: AOF invests primarily where and when an investment can be made at a material discount to the Manager's estimate intrinsic value. 

Company preference: AOF prefers companies which demonstrate both high real returnson assets and an earnings yield higher than the yield to maturity of local currency denominated government debt.

Industry focus rather than country focus: AOF seeks to invest in industries it finds attractive with little regard to national borders.

National resource discounts:  AOF seeks natural resource companies whose market valuations reflect a discount to the spot and future world market prices for those natural resources.

"Turnaround" countries:  The African continent is home to a large number of reforming or "turnaround" countries.  "Turnaround" countries combine secular political reform with the opening of industries to private sector participation. 

Balkanized investment landscape:  AOF seeks to invest in companies with low valuations in relation to peers across the continent and uses an arbitrage approach to provide attractive investment returns.

Point of entry:  AOF seeks the most favourable risk adjusted point of entry into a capital structure, whether through financing a new company or acquiring the debt or listed equity of an established company.

Africa offers several attractive investment opportunities.  We remain interested in industries which have products in short supply in Africa that rely more on the domestic African economy than the global economy.  We are hunting in those terrains for compelling equity investments. 

We shall continue to build a portfolio that delivers both capital growth and income to the shareholders of AOF.

Francis Daniels

Africa Opportunity Partners

June 2011

AFRICA OPPORTUNITY FUND LIMITED

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 2010

	Note	2010		2009
		USD		USD
Income
Interest revenue		1,076,886		1,520,674
Dividend revenue		1,209,321		1,407,439
Net gains on financial assets  and liabilities at fair value through profit or loss	2(c)	7,528,764		6,852,439
Other income		7,862		1,517,681
Realised exchange gain		120,466		25,771
		9,943,299		11,324,004
Expenses
Management fee		669,238		540,759
Custodian, secretarial and administration fees		257,195		181,206
Brokerage fees and commissions		286,092		181,477
Audit fees		22,675		56,670
Directors' fees		98,928		82,144
Other operating expenses		203,169		81,136
		1,537,297		1,123,392
Profit for the year		8,406,002		10,200,612
Other comprehensive income		-		-
Total comprehensive income for the year		8,406,002		10,200,612
Attributable to:
Equity holders of the Company		8,344,751		10,021,265
Non controlling interest		61,251		179,347
		8,406,002		10,200,612
Basic and diluted earnings per share attributable to the equity holders of the Company during the year		0.1957		0.2351

AFRICA OPPORTUNITY FUND LIMITED

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 2010

	Notes	2010		2009
		USD		USD
ASSETS
Cash and cash equivalents		5,492,114		3,673,348
Trade and other receivables		692,307		719,065
Financial assets at fair value through profit or loss	2(a)	41,323,702		30,792,960
Total assets		47,508,123		35,185,373
EQUITY AND LIABILITIES
LIABILITIES
Trade and other payables		1,702,811		725,023
Dividend payable	6	76,735		110,838
Financial liabilities at fair value through profit or loss	2(b)	6,051,401		2,771,400
Total Liabilities		7,830,947		3,607,261
Equity attributable to equity holders of the parent
Stated capital	3	426,303		426,303
Share premium		39,012,818		39,319,756
Retained losses		(22,215)		(8,366,966)
Equity attributable to equity holders of parent		39,416,906		31,379,093
Non controlling interest		260,270		199,019
Total equity		39,677,176		31,578,112
Total equity and liabilities		47,508,123		35,185,373

Approved by the Board on 17 June 2011.

AFRICA OPPORTUNITY FUND LIMITED

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2010

ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT

		Issued		Share		Retained				Non controlling		Total
		capital		premium		losses		Total		interest		equity
	Notes	USD		USD		USD		USD		USD		USD
At 01 January 2009		1,155,100		107,741,068		(49,824,259)		59,071,909		417,605		59,489,514
Attributable to tender offer pool		(728,797)		(67,977,957)		31,436,028		(37,270,726)		-		(37,270,726)
Profit for the year		-		-		10,021,265		10,021,265		179,347		10,200,612
Other comprehensive income		-		-		-		-		-		-
Non controlling interest buy back		-		-		-		-		(397,933)		(397,933)
Dividend	6	-		(443,355)		-		(443,355)		-		(443,355)
At 31 December 2009		426,303		39,319,756		(8,366,966)		31,379,093		199,019		31,578,112
At 01 January 2010		426,303		39,319,756		(8,366,966)		31,379,093		199,019		31,578,112
Profit for the year		-		-		8,344,751		8,344,751		61,251		8,406,002
Other comprehensive income		-		-		-		-		-		-
Dividend	6	-		(306,938)		-		(306,938)		-		(306,938)
At 31 December 2010		426,303		39,012,818		(22,215)		39,416,906		260,270		39,677,176

AFRICA OPPORTUNITY FUND LIMITED

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 2010

	Notes		2010		2009
			USD		USD
Cash flows from operating activities
Comprehensive income for the year			8,406,002		10,200,612
Adjustment for non cash items:
Unrealised gain on financial assets at FVTPL	2(a)		(5,837,946)		(8,546,665 )
Realised gain on sale of financial assets at FVTPL	2(a)		(893,590)		1,372,741)
Unrealised loss/ (gain) on investments held for trading	2(b)		683,823		587,641
Realised profit on investments held for trading	2(b)		(1,481,051)		(266,156 )
Tender offer pool adjustment			-		(3,485,296)
			877,238		(137,123)
Net changes in operating assets and liabilities
Purchase of financial assets at fair value through profit or loss			(17,500,722)		(14,581,367)
Proceeds on financial assets at fair value through profit or loss			13,701,515		14,317,361
Proceeds on financial liabilities held for trading			9,958,704		2,183,758
Purchase of financial liabilities held for trading			(5,881,476)		-
Increase in interests received			-		364,031
Decrease in dividends received			(16,307)		(4,239)
Net cash generated from operating activities			1,138,952		2,142,421
Net changes in working capital:
Decrease in trade and other receivables			43,068		83,612
Increase in trade and other payables			977,789		413,679
			1,020,857		497,291
Cash flows from financing activities
Dividend paid	6		(341,043)		(1,637,780)
Net cash flow used in financing activities			(341,043)		(1,637,780)
Net increase in cash and cash equivalents			1,818,766		1,001,932
Cash and cash equivalent at the start of the year			3,673,348		2,671,416
Cash and cash equivalents at the end of the year			5,492,114		3,673,348

NOTES TO THE FINANCIAL STATEMENTS

1.        GENERAL INFORMATION

Africa Opportunity Fund Limited (the "Company") was launched with an Alternative Market Listing "AIM" in July 2007.

Africa Opportunity Fund Limited is a closed-ended fund incorporated with limited liability and registered in Cayman Islands under the Companies Law on 21 June 2007 and with registered number MC-188243.

The Company aims to achieve capital growth and income through investment in value, arbitrage, and special situations investments in the continent of Africa. The Company therefore may invest in securities issued by companies domiciled outside Africa which conduct significant business activities within Africa. The Company will have the ability to invest in a wide range of asset classes including real estate interests, equity, quasi-equity or debt instruments and debt issued by African sovereign states and government entities.

The Company's investment activities are managed by Africa Opportunity Partners Limited, a limited liability company incorporated in the Cayman Islands and acting as the investment manager pursuant to an Investment Management Agreement dated 18 July 2007.

To ensure that investments to be made by the Company, and the returns generated on the realisation of investments, are both effected in the most tax efficient manner, the Company has established Africa Opportunity Fund L.P. as an exempted limited partnership in the Cayman Islands. All investments made by the Company will be made through the limited partnership. The limited partners of the limited partnership are the Company and AOF CarryCo Limited. Millennium Special Opportunities Holdings Ltd, a limited partner during 2009, had their minority interest purchased by the Company effective 31 December 2009. The general partner of the limited partnership is Africa Opportunity Fund (GP) Limited.

Presentation currency

The consolidated financial statements are presented in the United States dollars ("USD").

2(a).   FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS

		2010		2009
		USD		USD
Designated at fair value through profit or loss:
At 1 January		30,792,960		57,140,459
Additions		17,500,722		14,581,367
Disposals		(12,807,926)		(14,317,360)
Net gains on financial assets at fair value through profit or loss		5,837,946		7,173,924
Transfer to tender offer pool		-		(33,785,430)
At 31 December (at fair value)		41,323,702		30,792,960
Analysed as follows:
- Listed equity securities2		30,175,364		14,333,949
- Listed debt securities		9,559,422		15,673,728
- Unlisted equity securities		46,469		225,224
- Unlisted debt securities		1,542,447		560,059
		41,323,702		30,792,960

Net changes on fair value of financial assets at fair value through profit or loss	2010		2009
	USD		USD
Realised	893,590		(4,371,565)
Unrealised	5,837,946		11,545,489
	6,731,536		7,173,924

² including securities lent and securities pledged as collateral under repurchase agreements

2(b).   FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS

	2010		2009
	USD		USD
Written call options	5,959,443		2,716,650
Written put options	91,958		54,750
Financial liabilities held for trading	6,051,401		2,771,400

	2010		2009
	USD		USD
Net changes on fair value of financial liabilities at fair value through profit or loss
Realised	1,481,051		266,156
Unrealised	(683,823)		(587,641)
Total gains/ (losses)	797,228		(321,485)

2(c).    NET GAINS/ (LOSSES) ON FINANCIAL ASSETS AND LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS

	2010		2009
	USD		USD
Net gain on fair value of financial assets at fair value through profit or loss	6,731,536		7,173,924
Net gain/ (loss) on fair value of financial liabilities at fair value through profit or loss	797,228		(321,485)
Net gains	7,528,764		6,852,439

2(d).   FAIR VALUE HIERARCHY

As at 31 December 2010, the Group held the following instruments recognised at fair value:

The Group uses the following hierarchy for determining and disclosing the fair value of the financial instruments by valuation technique:

Level 1: quoted (unadjusted) prices in active markets for identical assets and liabilities.

Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly.

Level 3: techniques which use inputs which have significant effect on the recorded fair value that are not based on observable market data.

Assets measured at fair value - 2010

	31 December 2010		Level 1		Level 2		Level 3
	USD		USD		USD		USD
Financial assets at fair value through profit or loss:
Equities	30,221,833		30,175,364		-		46,469
Debt securities	11,101,869		9,559,422		-		1,542,447
	41,323,702		39,734,786		-		1,588,916
Financial liabilities at fair value through profit or loss	6,051,401		6,051,401		-		-

Assets measured at fair value - 2009

	31 December 2009		Level 1		Level 2		Level 3
	USD		USD		USD		USD
Financial assets at fair value through profit or loss
Equities	14,559,173		14,333,949		-		225,224
Debt securities	16,233,787		15,673,728		-		560,059
	30,792,960		30,007,677		-		785,283
Financial liabilities at fair value through profit or loss	2,771,400		2,771,400		-		-

The following table shows a reconciliation of all movements in the fair value of financial instruments categorised within Level 3 between the beginning and the end of the reporting period.

	2010		2009
Financial assets  at fair value through profit or loss	USD		USD
Opening balance	785,283		741,589
Additions	300,000		-
Disposal	(608,952)		(181,530)
Total gains in profit or loss	1,112,585		225,224
Closing balance	1,588,916		785,283

3.        STATED CAPITAL

		2010		2010		2009		2009
		Number		USD		Number		USD
Authorised share capital
Ordinary shares with a par value of USD 0.01		1,000,000,000		10,000,000		1,000,000,000		10,000,000
Stated capital
At 1 January		42,630,327		426,303		115,510,000		1,155,100
Tender offer pool		-		-		(72,879,673)		(728,797)
At 31 December		42,630,327		426,303		42,630,327		426,303

The directors have the general authority to repurchase the ordinary shares in issue subject to the Company having funds lawfully available for the purpose.   However, if the market price of the ordinary shares falls below the Net Asset Value, the directors will consult with the Investment Manager as to whether it is appropriate to instigate a repurchase of the ordinary shares.

4.        EARNING PER SHARE

Earning per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the period excluding ordinary shares purchased by the Company and held as treasury shares.

The Company's diluted loss per share is the same as basic loss per share, since the Company has not issued any instrument with dilutive potential.

			2010		2009
Gain attributable to equity holders of the Group	USD		8,344,751		10,021,265
Weighted average number of ordinary share in issue			42,630,037		42,630,037
Earning per share	US cents		0.1957		0.2351

5.        RELATED PARTY DISCLOSURES

The financial statements include the financial statements of Africa Opportunity Fund Limited and the subsidiaries in the following table:

	Country of		% equity interest	% equity interest
Name	incorporation		2010	2009
Africa Opportunity Fund (GP) Limited	Cayman Islands		100	100
Africa Opportunity Fund L.P.	Cayman Islands		99.12	98.84

During the period ended 31 December 2010, the Company transacted with related entities.  The nature, volume and type of transactions with the entities are as follows:

				Balance at
	Type of	Nature of	Volume	31 Dec 2010
Name of related parties	relationship	transaction	USD	USD
Africa Opportunity Partners Limited	Investment Manager	Management fee expense	669,238	-

During the period ended 31 December 2009, the Company transacted with related entities.  The nature, volume and type of transactions with the entities are as follows:

				Balance at
	Type of	Nature of	Volume	31 Dec 2009
Name of related parties	relationship	transaction	USD	USD
Africa Opportunity Partners Limited	Investment Manager	Management fee expense	540,749	-

Key Management Personnel (Directors' fee)

Except for Francis Daniels and Robert Knapp who have waived their fees, each director has been paid a fee of USD 20,000 per annum plus reimbursement for out-of pocket expenses.

Francis Daniels and Robert Knapp who are directors of the Company are also shareholders of the Investment Manager.

Francis Daniels and Robert Knapp who are directors of the Company also form part of the executive team of the Investment Manager. Details of the agreement with the Investment Manager are disclosed in Note 5. They have a beneficiary interest in AOF CarryCo Limited. The latter is entitled to carry interest computed in accordance with the rules set out in the Admission Document. The total carried interest is 20%.

Details of investments in the Company by the Directors are set out below:

	No of shares held	Direct  interest held
		%
2010	10,875,827	25.51
2009	10,775,827	25.28

6.            DIVIDEND PAYMENT

The Company expressed in the Admission Document for the Alternative Investment Market of the London Stock Exchange on which it was listed an intention, subject to having sufficient cash resources, to pay an aggregate annual dividend of an amount equal to the product of the net asset value of the Company on January 01 in each year multiplied by the three month US Dollar London Interbank Offered Rate (derived from Bloomberg) on the same date, payable in four equal quarterly installments. Accordingly such dividend payments were made during the financial year 2010.

		Dividend		Dividend
		2010		2009
		USD		USD
Dividend declared and paid		230,203		332,517
Dividend payable		76,735		110,838
		306,938		443,355
Dividend per share		0.01		0.01

Opening balance - dividend payable	110,838		1,305,263
Additions	306,938		443,355
Payment	(341,041)		(1,637,780)
Closing balance	76,735		110,838

7.        SHARE BUY BACK - TENDER OFFER

The Company announced a tender offer in early February 2009 which closed on the 26th February 2009. Shareholders were given the option to submit 100% of their holdings for redemption. 37% of holders chose to remain invested.

The Company's assets and liabilities were divided into a Tender offer pool for existing shareholders and a continuing pool for continuing shareholders on 27 February 2009, the calculation date.

Following the calculation date, exiting shareholders ceased to have any rights as shareholders and became unsecured creditors until the payment of the Tender Consideration has been completed.

The assets and liabilities which have been sent to the Tender offer pool have been derecognised as they meet the criteria set out in IAS 39 for derecognition.

8.            EVENTS AFTER THE REPORTING DATE

The Company made a tender offer distribution of $0.0275 per share on 13 May 2011 to those former shareholders (the "Former Shareholders") who tendered their ordinary shares to the Company on 19 February 2009 (the "Tender Date").  This amount was calculated in accordance with the terms of the Company's tender offer circular, dated 4 February 2009. The bank balance attributable to the tender offer pool as at 31 December 2010 was fully repaid on 13 May 2011.

This distribution represented proceeds from approximately 30% of the securities remaining in the tender offer pool (the "Tender Offer Pool") as measured as of 31 March 2011.  Subsequent distribution(s) to the Former Shareholders will be made as and when the Company believes it to be appropriate to realise the remaining investments in the Tender Offer Pool.  The Company estimates the current unrealised value of the remaining investments to the Tender Offer Pool at approximately $0.06 per share, based on current market conditions and other related factors.  There can be no assurance that the future realised value of the few remaining investments in the Tender Offer Pool will equal or exceed the current unrealised value of those investments.

Copies of the annual report are being posted to shareholders and copies will be available from the company's registered office and also from the Company's website.

Website

www.africaopportunityfund.com

For further information please contact:

Africa Opportunity Fund Limited

Francis Daniels                                                           Tel: [phone]

Grant Thornton UK LLP (Nominated Adviser)

Philip Secrett/David Hignell                                      Tel:  [phone]

 

END

 

 

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