Contango MicroCap Limited

ABN 47 107 617 381

INVESTMENT COMMENTARY

Quarterly Update

December 2012

For

per

sona

l use

onl

y

For

per

sona

l use

onl

y

Table of Contents Managing Director‟s Letter Quarterly Investment Update

Global Overview 1

Global Interest Rates 2

Exchange Rates 2

Commodities 2

Domestic Developments 3

Australian Equity Market Review 3

Australian Equity Market Outlook 4

MicroCap Overview 4

MicroCap Portfolio Overview 5

IPO‟s & Placements 7

Portfolio Details 7

Key Investment Indices 11

Distribution Update

DISCLOSURE STATEMENT & DISCLAIMER

Contango MicroCap Limited, Contango Asset Management Ltd and/or staff at any of these companies may or may not hold positions in companies mentioned in this investment newsletter. This is general information and is not intended to constitute a securities recommendation. Contango MicroCap Limited is not licensed to give advice and does not warrant that past performance is an indication of future performance. A reference to a Fund or a company as to an outlook, or possible factors affecting future performance should not be relied upon or considered as being a statement of likelihood of future performance. While the information contained in this newsletter has been prepared with all reasonable care, Contango MicroCap Limited nor any affiliated companies accept no responsibility or liability for any errors or omissions however caused. Performance results are presented before all management and custodial fees and before any performance fees, trading costs or taxes. All fees are disclosed in CTN Prospectus and are available upon request. Before you make a decision to invest in any product you should obtain a Product Disclosure Statement as it contains crucial information including risks. Contango MicroCap Limited may not be suitable for your investment requirements and you are encouraged to consult a professional financial adviser prior to making any investment decisions.

For

per

sona

l use

onl

y

Dear Fellow Shareholder

INVESTMENT UPDATE – DECEMBER QUARTER 2012

MANAGING DIRECTOR’S COMMENT

2012 was a particularly difficult year for risk assets. Fear of sovereign defaults and the prospect of Greece exiting the Euro, combined with a slowdown in China, led investors to retreat to safe haven assets. By the December quarter, confidence was starting to return to equity markets. Going forward, we expect investors to move further out along the risk spectrum as confidence continues to rebuild. This is likely to lead to a repricing of risk assets including small and microcap stocks.

PERFORMANCE

Performance of underlying portfolio. As at 31.12.12

1m %

3m %

1Yr %

3 Yrs %pa

5 Yrs %pa

7 Yrs %pa

Inception %pa 25/03/04

CTN Investment Portfolio 2.2 -0.9 3.1 2.2 -4.0 11.3 17.4

ASX All Ords Accum. Index 3.4 6.8 18.8 2.8 -2.0 4.2 8.1

ASX Small Ords Accum. Index

3.2 2.0 6.6 -1.8 -6.9 1.3 5.6

S&P/ASX Emerging Companies Accum Index

-1.0 -8.5 -8.4 -4.1 -7.8 5.4 5.6

In the December quarter the Net Tangible Asset Value (before tax on unrealised gains) of Contango MicroCap Limited (CTN) fell slightly from $1.159 to $1.148. During the quarter the CTN Share Price rose from $0.93c to $0.995. This represents a rise of 7%. Over 1, 2 and 3 years ended 31.12.12, CTN shares have generated a total return (share price movement plus dividends paid) of 21.3%, -4.2%pa and 6.9%pa respectively. For each of these timeframes the Shareholder Return has substantially outperformed the return of the S&P/ASX Small Ordinaries Accumulation Index as seen in the following table.

To 31.12.12

CTN Total Shareholder Return

S&P/ASX Small Ords Accum

1 year 21.3% 6.6%

2 years pa -4.2% -8.5%

3 years pa 6.9% -1.8%

Total Returns - all including Dividends

DIVIDEND INFORMATION

In line with the CTN Dividend Policy to pay a minimum 6% p.a. of the July 1 NTA value of the company, CTN is able to provide an indication

1 of future dividends.

1Indicative Dividend Information as at 02.01.2012 Amount

March 2013 FY13 Interim proposed # 3.2 cents p/s

October 2013 FY13 Final proposed # 4.0 cents p/s

Share Price as at 31.12.2012 $0.995

Proposed Dividend Yield ^ 7.2%

Since declaring its first dividend in December 2004 CTN has paid a total of 63.2 cents per share (cps) in dividends to shareholders amounting to a total payout of over $64.35m.

For

per

sona

l use

onl

y

MARKET OVERVIEW

Despite the US fiscal cliff, most equity markets saw gains in the December quarter as uncertainty associated with elections in the US and Japan, and the Chinese power transition were successfully resolved.

Japan was the standout performer among the major markets with the Nikkei 225 up a strong 17.2% over the quarter as incoming premier Shinzo Abe pledged to combat deflation and the strong yen. Eurozone markets benefited from receding risks to the currency bloc with the German DAX up 5.5% and the France CAC up 8.5%.

The Chinese market was up a solid 8.8% in the quarter as the leadership transition proceeded as expected. The fiscal cliff did weigh on the US market with the S&P 500 down 1.0% and the Dow down 2.5%.

Locally, the ASX 300 Accumulation Index delivered a solid 6.8% in the December quarter driven by RBA rate cuts and a rally in resource stocks on the back of a rise in the Iron Ore price.

PORTFOLIO STRUCTURE

We expect global growth to show a modest improvement over the coming year. We also expect valuations of risk assets to rerate in response to the improvement in investor confidence. We have increased CTN‟s holding of industrial stocks to provide a more diversified structure and to benefit from the continued search for dividend yield by investors. We have retained a solid exposure to mining and mining services companies as we expect growth in China to continue to pick up leading to stronger commodity markets and improved returns for resource companies.

OUTLOOK

The outlook for the Australian equity market is heavily dependent on developments in the global economy.

In Europe, the region has re-entered recession and the outlook remains generally subdued. However, some downside risks have been mitigated due to the finalisation of Greece‟s latest bailout package, an increased commitment from the ECB, and new progress towards an integrated banking union. Given this, we expect bond spreads on some periphery countries to decrease further which will boost market sentiment into 2013.

The outlook for the US economy is solid with moderate consumer spending and business investment supported by a solid pick up in the housing market. Although the uncertainty from the presidential election and fiscal cliff is now largely resolved, discussions on spending cuts due in two months will continue to provide some level of uncertainty for the market. Nevertheless, we expect GDP growth of around 1.5% - 2% in 2013 with scope for upside surprises.

Growth in China is picking up. The government‟s new leaders have formally been selected which paves the way for new spending plans to be introduced in 2013. We expect GDP growth to surprise on the upside and exceed 8% in 2013.

Domestically, the outlook is solid and we forecast real GDP growth of around 3% in 2013 driven by trend consumption growth and a pickup in housing investment, partly offset by weak public demand. Mining‟s contribution to growth is expected to weaken going forward as commodity prices remain subdued and the investment cycle peaks. This will leave scope for further interest rate cuts by the RBA to stimulate growth in the non-mining segment of the economy.

With an improving but still subdued global outlook, central banks will continue to keep interest rates exceedingly low throughout 2013, forcing investors out along the risk spectrum in search of higher returns. Given this, we expect to see increased support for microcap stocks over the coming year.

Yours sincerely

David Stevens Managing Director Notes: 1 Please note that this is not a formal declaration of dividend. Shareholders and investors should only rely on a Formal Declaration for

confirmation of any dividend including amount, relevant dates and what level of Franking may be attached to any dividends declared. # Based on Dividend Policy announcement of 16.04.10– 6% applied to the NTA on 01.07.12 being $1.193.

^ Based on the share price at 31.12.12- applied to those dividends proposed to be paid in the next 12 months.

For

per

sona

l use

onl

y

1

QUARTERLY INVESTMENT COMMENTARY

Global Overview

Despite the US fiscal cliff, most equity markets

saw gains in the December quarter as uncertainty

associated with elections (US and Japan) and the

Chinese power transition were successfully

resolved.

The MSCI World index finished the December

quarter up a solid 2.5%. Japan was the standout

performer among the major markets with the

Nikkei 225 up a strong 17.2% over the quarter as

incoming premier Shinzo Abe pledged to combat

deflation and the strong yen. Eurozone markets

benefited from receding risks to the currency bloc

with the German DAX up 5.5% and the France

CAC up 8.5%. The Chinese market was up a solid

8.8% in the quarter as the leadership transition

proceeded as expected. The fiscal cliff did weigh

on the US market with the S&P 500 down 1.0%

and the Dow down 2.5%. Locally, the ASX 300

Accumulation Index delivered a solid 6.8% in the

December quarter driven by RBA rate cuts and a

rally in resource stocks on the back of a rise in the

Iron Ore price.

Global Indices 1 mth 3 mth 12 mth

ASX 300* 3.3% 6.8% 19.7%

Dow Jones Industrial 0.6% -2.5% 7.3%

S&P 500 0.7% -1.0% 13.4%

NASDAQ Index 0.3% -3.1% 15.9%

Nikkei 225 Index 10.0% 17.2% 22.9%

Hang Seng Index 2.8% 8.7% 22.9%

Shanghai Composite Index 14.6% 8.8% 3.2%

FTSE 100 0.5% 2.7% 5.8%

German Aktien Index (DAX) 2.8% 5.5% 29.1%

France CAC40 2.4% 8.5% 15.2%

India BSE 200 Index 1.5% 5.1% 31.0%

MSCI World ex Aust (hedged) 1.9% 2.8% 15.5%

MSCI World ex Aust (unhedged) 2.3% 2.5% 14.1% * Total Return

Despite the uncertainty in Europe during 2012,

global equity markets returned a strong 14.1% in

the year with major gains in Germany (29.1%),

Japan (22.9%) and Hong Kong (22.9%). The result

was partly driven by aggressive central bank

intervention and reduced tail risk in Europe and the

US. China‟s index was the main laggard (3.2%)

over the year, weighed down by concerns over the

economic outlook.

Over the year, the local market delivered a strong

19.7% total return (14.2% capital return and 5.5%

yield) driven by the global rally and RBA rate cuts.

Europe

Economic conditions remained weak in the

Eurozone over the December quarter as the region

officially entered recession for the second time in

four years. However, key event risks continued to

ease in the wake of the latest bailout for Greece

and support from the ECB.

Italian Premier Mario Monti tendered his

resignation during the month of December and

stated that he would not run in February‟s

elections. But Monti said he would consider

returning as the head of the next government if a

party backed his anti-crisis agenda.

China

The slowdown in China appears to have bottomed

in the December quarter with outgoing Premier

Wen Jiabao stating that the economy was

"stabilising". Third quarter GDP growth came in at

7.4% (compared with 7.6% in the second quarter)

and industrial production and Fixed Asset

Investment rebounded late in the quarter.

Over the quarter, China officially announced the

results of its leadership reshuffle which saw Xi

Jinping named as the next President and Li

Keqiang the new Premier. At the country‟s annual

Economic Work Conference, urbanisation and the

development of domestic demand were set as

2013 economic policy objectives.

US

US markets were focused on the Presidential

election and “fiscal cliff” during the December

quarter. The presidential election saw the

incumbent, President Obama, re-elected for a

second term with the Democrats wining a majority

in the Senate but a minority in the House of

Representatives.

After much negotiation and just after the official

deadline, the newly formed Congress passed a bill

(American Taxpayer Relief Act of 2012) to avert

the fiscal cliff. The bill raised tax rates for

households earning more than $US450,000 per

For

per

sona

l use

onl

y

Contango MicroCap Limited December Quarter 2012

2

annum and deferred spending cuts for two more

months.

During the quarter, the Federal Reserve

announced that the Federal Funds rate would

remain at close to zero until the unemployment

rate falls below 6.5%, subject to inflation

expectations remaining well anchored. The

Federal Reserve also announced that its

Operation Twist programme would be replaced by

$85 billion per month of outright purchases of

mortgage-backed and Treasury securities.

Global Interest Rates / Credit markets

Global credit markets were mixed during the

December quarter with US and Australian bond

yields rising and Eurozone bond yields generally

falling on the back of reduced tail risk in the region.

US 10 year bond yields increased 12 basis points

in spite of extra easing measures from the Federal

Reserve and Australian 10 year bond yields

increased 29 basis points despite RBA rate cuts of

50 basis points over the quarter. The local market

continues to expect more cuts to the official rate

with the June 2013 bank bill future priced with a

yield of 2.67%.

Compared to the US and Australian markets,

yields in the Eurozone mostly fell over the quarter.

Core market bonds were supported by weak

economic data while in the periphery the

„backstop‟ stance outlined by the ECB in

September continued to ease tensions. Spain‟s 10

year bond yield fell 67 basis points over the

quarter and Italy‟s shed 59 basis points.

Exchange Rates

The Australian dollar was mostly flat during the

quarter, helped by the recovering iron ore price but

offset by two rounds of monetary easing. The AUD

was up only 0.1% against the USD and 0.3%

against the Trade Weighted Index. Over the

quarter, the dollar has been relatively stable

against the Trade Weighted Index, moving less

than 1% each month, something which has not

happened since the index was first released in

1983.

The big mover among major currencies was the

Japanese yen which fell significantly during the

quarter (-10.1% against the USD). The move was

driven by anticipation of aggressive monetary

easing which was signalled by incoming Prime

Minister Shinzo Abe.

Exchange Rates Level 1 mth 3 mth 12 mth

AUD/USD 1.039 -0.3% 0.1% 1.7%

AUD/YEN 90.1 4.8% 11.4% 14.7%

EURO/USD 1.319 1.6% 2.6% 1.9%

AUD/EUR 0.788 -1.9% -2.5% -0.2%

AUST TWI 77.1 -0.1% 0.3% 1.7%

Commodities

Commodity prices were generally down over the

December quarter with gold underperforming-

despite aggressive central bank intervention.

The oil price traded in a narrow range in the

December quarter, as tensions in the Middle East

were offset by soft demand and stronger US

supply prospects. Less than $11 separated the

quarter‟s high and low for spot Brent (-0.4%).

Iron Ore made a strong comeback during the

December quarter with the benchmark Tianjin 62%

Fines (Iron Ore) up a strong 39.1% - its biggest

quarterly gain since 2009. Buying was supported

by signs of stronger activity and falling inventory in

China with inventory levels down 22.9% in the

quarter - the largest drop in six years of data.

Base metals, however, painted a less rosy picture

with the LME index posting a 2.7% fall. Spot gold

was a laggard among major commodities, falling

5.5% over the quarter despite a strong inclination

among central banks to support growth through

balance sheet expansion. This was its weakest

quarter since 2Q 2004.

Interest Rates Level 1 mth 3 mth 12 mth

AUS UBS Composite Bond 7,451.60 0.2% 0.2% 7.7%

AUS UBS Bank Bill Index 7,738.00 0.3% 0.9% 4.0%

% basis point change

AUS Cash Rate 3.00 -25 -50 -125

AUS 90 day Bank Bill rate 3.04 -13 -32 -143

AUS 10 year Bond yield 3.27 11 27 -40

US Federal Funds rate 0.25 0 0 0

US 30 year Bond yield 2.95 14 13 5

US 10 year Bond yield 1.76 14 12 -12

For

per

sona

l use

onl

y

Contango MicroCap Limited December Quarter 2012

3

Domestic Economic Developments

The main focus during the quarter was the RBA‟s

decision to cut the official interest rate twice for a

total of 50 basis points in easing. The RBA quoted

a softening labour market and lower than expected

mining capex as the catalysts for the cuts. The

futures market continues to expect further cuts in

2013. Australia‟s GDP data also supported the

RBA‟s decision to cut rates with third quarter

growth slowing from 3.7% to 3.1% over the year.

Much of the quarter‟s growth came from the

accumulation of inventories which is likely to weigh

on growth in coming quarters.

On the labour market, the economy added 41 000

jobs in the three months to November, though this

was not reflected in the unemployment rate which

increased from 5.1% to 5.2%. The Westpac-

Melbourne Institute‟s index of consumer sentiment

hit a 2012 high in November of 104.3, but fell back

in December to 100. The NAB business

confidence survey painted a much more negative

picture, plunging from 2.6 in August to -9.2 in

November - its lowest level since April 2009.

On the political front, Treasurer Wayne Swan

abandoned his aim of a budget surplus for FY13,

stating that, given lower-than-expected revenue

collection, it would be irresponsible to continue to

target a surplus.

Indicator Outcome

Employment change, persons, qtr, Nov 13 900

Unemployment rate, %, Nov 5.2

Consumer confidence, index, Dec 100

NAB business confidence, index, Nov -9

RBA cash rate, %, Dec 3.0

Credit growth, %, mom, Nov 0.0%

Australian Equity Market

The Australian equity market increased a solid

6.8% over the December quarter, driven by

industrials with a solid rise in resources. The more

volatile small caps underperformed large caps with

the Small Ordinaries up only 2.0%.

Accumulated Australian Indices

1mth 3mth 12mth

ASX 200 3.4% 6.9% 20.3%

ASX 300 3.3% 6.8% 19.7%

ASX 300 Industrials 3.1% 7.5% 28.0%

ASX 300 Resources 4.1% 4.6% 0.1%

All Ordinaries 3.4% 6.8% 18.8%

Small Ordinaries 3.2% 2.0% 6.6% As at 31 December 2012. Source: Iress * Total return

The more defensive sectors outperformed over the

quarter with Telecoms (11.4%) and Healthcare

(10.6%) the leaders while the more cyclical sectors

of Energy (-0.3%) and Information Technology

(1.5%) were the laggards.

Australian Sector * 1 mth 3 mth 12 mth

Materials 4.8% 6.4% 2.7%

Consumer Discretionary 2.6% 8.9% 22.1%

Consumer Staples 1.3% 5.2% 26.7%

Energy 1.4% -0.3% -0.5%

Financial 3.3% 7.1% 29.7%

Financial (ex LPT's) 3.4% 7.2% 29.0%

Healthcare 2.6% 10.6% 47.5%

Industrials 5.8% 8.5% 11.1%

Information Technology 0.5% 1.5% 23.8%

Property Trusts 2.9% 7.0% 32.8%

Telecoms 1.5% 11.4% 42.1%

Utilities 4.1% 7.1% 22.1%

S&P/ASX300 3.3% 6.8% 19.7% As at 31 December 2012. Source: Iress * Total return

Over the year, the local market was up a strong

19.7% driven by the more defensive sectors of

Healthcare (47.5%), Telecoms (42.1%) and

Property Trusts (32.8%). The laggards were the

Energy (-0.5%) and Materials (2.7%) sectors.

Healthcare was the best performing sector in 2012

increasing a very strong 47.5%. CSL (72.1%) was

a key driver of the sector‟s strong performance

with the stock finishing the year as the second

highest return in the ASX 100. A broad range of

stocks in the sector delivered strong returns across

2012 including Resmed (61.0%), Ramsay Health

Care (44.6%), and Sigma Pharmaceuticals

(43.6%).

Commodities Level 1 mth 3 mth 12 mth

Gold (US$/oz) 1,674.95 -2.3% -5.5% 7.1%

Oil WTI (US$/bbl) 91.73 3.1% -0.3% -7.2%

Aluminium (USc/lb) LME 92.53 -1.9% -2.6% 3.5%

Copper (USc/lb) LME 359.02 -0.4% -4.3% 4.8%

Nickel (USc/lb) LME 774.96 -0.1% -7.7% -6.5%

MG Metals Index 355.32 -0.6% -3.7% 6.6%

For

per

sona

l use

onl

y

Contango MicroCap Limited December Quarter 2012

4

Telstra (41.8%) drove the Telecom sector‟s total

return of 42.1% in 2012 as investors searched for

stable earnings and yield. The Telco sector was

the second highest returning sector in 2012 with

TLS among the top 25 best returning stocks in the

ASX 100.

Overall, Financials (29.7%) performed well driven

mostly by Banks (30.3%) with yield still proving the

sector‟s key driving force despite with the sector‟s

downward EPS revisions. Westpac (38.5%) was

the best performer followed by CBA (33.1%) and

ANZ (29.1%) with NAB (14.7%) the clear laggard.

REITs finished the year up a strong 32.8% as

investors sought out the more defensive sectors.

Goodman Group (58.5%) was the main

outperformer but the gains were broad based.

Consumer Discretionary (22.1%) was assisted by

strong returns from Retail (29.7%) with Flight

Centre (74.5%) the best performing stock on the

ASX 100. Consumer Staples (26.7%) was mainly

driven by Wesfarmers (30.5%).

The Energy sector (0.5%) recovered some of its

2012 losses in December rising a modest 1.4% in

the month. Over the year, Caltex (67.0%) was the

sector‟s best performer. The Materials sector

(2.7%) also lagged the broader market with both

BHP (10.9%) and Rio Tinto (12.0%)

underperforming given their exposure to Iron Ore

and the slowdown in China. However, both stocks

rallied late in the year as the Iron Ore price

recovered some of its lost ground. Capital Goods

also recovered some of its losses for the calendar

year (-2.0%) late in the year, rising 12.3% in

December.

Australian Equity Market – Outlook

The outlook for the Australian equity market is

heavily dependent on developments in the global

economy.

In Europe, the region has re-entered recession

and the outlook remains generally weak. However,

it appears that some downside risks have been

mitigated due to the finalisation of Greece‟s latest

bailout package, an increased commitment from

the ECB, and new progress towards an integrated

banking union. Given this, we expect bond

spreads on some periphery countries to decrease

further which will boost market sentiment into

2013.

The outlook for the US economy is solid with

moderate consumer spending and business

investment supported by strength in the recovering

housing market. Although the uncertainty from the

presidential election and fiscal cliff is now largely

resolved, discussions on spending cuts due in two

months will continue to provide some level of

uncertainty for the market. However, at this stage,

we maintain our forecast for GDP growth of around

1.5% - 2% in 2013 with scope for upside surprises.

China‟s economy appears to have stabilised with

the latest data and the rebound in key commodity

prices suggesting a floor in the current growth

cycle. The government‟s new leaders have

formally been selected which paves the way for

new spending plans to be introduced in 2013. We

expect GDP growth of around 7.5% - 8% in 2013

on the back of new investment spending and

increased loan growth.

Domestically, the outlook is solid and we forecast

real GDP growth of around 3% in 2013 driven by

trend consumption growth and a pickup in housing

investment, partly offset by weak public demand.

Mining‟s contribution to growth is expected to

weaken going forward as commodity prices remain

subdued and the investment cycle peaks. This will

leave scope for further interest rate cuts by the

RBA to stimulate growth in the non-mining

segment of the economy.

With an improving but still subdued global outlook,

central banks will continue to keep interest rates

low into 2013, forcing investors out along the risk

spectrum in search of higher returns. Given this,

we expect to see increased support for higher beta

stocks, particularly if global tail risks remain

subdued.

MicroCap Overview

The performance of the small and micro caps

stocks were significantly lower than their large cap

counterparts with the ASX Small Ordinaries Index

returning 6.6% against an ASX300 return of

19.7%. This was mainly due to the weaker

performance of mining and mining related sectors

which represent a significantly higher weighting

For

per

sona

l use

onl

y

Contango MicroCap Limited December Quarter 2012

5

within the small cap sectors. Looking at the

winners and losers over the last 12 months it is

clear to see the same trends that affected the large

cap sectors were very similar within the small cap

space so the sectors that performed well were

clearly defensive sectors such as Consumer

Discretionary (32.0%) which was driven by Retail

(51.9%), Consumer Services (42.6%), Health Care

another strong performer (34.0%) as well as

Financials (42.5%). Telco‟s (44.7%) and Utilities

(19.28%) also performed strongly over the last 12

months.

The main detractors were clearly within the Mining

and Mining related sectors with Energy (-9.3%)

and Metals (-10.1%) which was due to weakness

in the Base Metals sectors (-9.9%). The other

factor that has influenced this underperformance of

the mining sector has been a number of countries

changing mining laws to allow them to increase

their ownership of mining assets. Indonesia,

Congo, Mali, Kenya, Bolivia and Argentina are

some of the countries who have announced

potential changes to their mining acts. However we

have not seen the final documentation and the

outcome may not be as significant as the original

announcement. This added to the selling pressure

across mining related sectors.

Over the December quarter, small companies

(+2.03%) underperformed the All Ordinaries

(+6.8%). If you look at the performance over the

last 12 months the trend has been similar, with the

Small Companies index (+6.6%) versus the all

ordinaries (+18.8%). While the returns of smalls

companies have lagged their large cap peers we

remain of the belief that in a less risky global

environment as we are starting to see towards the

end of the December then small companies will

start to perform better.

By end of December the ASX Small Ordinaries

index was trading at 12.9x on forward FY13

earnings. A higher level compared to 10.4x the

previous quarter due in part to the market rallying

but we also saw some earnings downgrades over

the quarter post the recent AGM season. The

discount to the ASX 100 (14.1X) provides further

scope for smaller companies to close the valuation

gap with larger companies.

Portfolio Overview

The Contango MicroCap portfolio return of -0.9%

underperformed the Small Ordinaries return of

2.0% and the All Ordinaries return of 6.8% in the

December quarter.

Period

Contango MicroCap

Portfolio %

All Ords

Accum %

Small Ords

Accum %

1 Month 2.2 3.4 3.2

3 Months -0.9 6.8 2.0

6 Months 1.0 15.5 9.4

1 Year 3.1 18.8 6.6

2 Years pa -8.0 2.6 -8.5

3 Years pa 2.2 2.8 -1.8

5 Years pa -4.0 -2.0 -6.9

Inception pa 17.4 8.1 5.6

NB Inception March 2004

We have commented that the outlook for the

Australian equity market is highly dependent on

global developments. In a slower growth

environment with some downside risks, we

continue to believe that it is prudent to have a

more balanced portfolio.

Consequently, the change in portfolio exposures

that commenced several months ago continued

over the December quarter. Namely, exposures to

mining and mining services companies continued

to be reduced while exposure to industrial names

was increased.

Towards the end of December we saw a number

of developments such as the Chinese, USA and

Japanese elections processes completed as well

as stronger economic numbers from China

providing some comfort that the downside to

growth is now limited. While this is a promising

sign we feel that the outlook for global growth is

still going to be softer than previous cycles.

The upside is that with the various accommodative

easing measures announced by numerous

authorities may eventually have the effect of

repricing risk assets higher over the next six to

twelve months. This is helped by the fact that small

miners are still trading at a 30% discount to their

net present values (NPV) on average, compared to

a slimmer discount of 10% for their larger peers.

For

per

sona

l use

onl

y

Contango MicroCap Limited December Quarter 2012

6

Sector Weightings (%) Sep 12 Dec 12

Energy 15.9% 12.4%

Materials 27.9% 21.4%

Industrials 19.6% 17.1%

Consumer Discretionary 8.3% 13.8%

Consumer Staples 0.0% 0.0%

Healthcare 2.9% 4.9%

Financials 8.1% 11.8%

Information Technology 3.2% 3.2%

Telecommunications 3.2% 4.1%

Utilities 0.9% 1.2%

SPI 7.0% 8.6%

Cash 3.0% 1.7%

The valuation gap has narrowed for the mining

companies over the month of December mainly

due to a substantial rally in iron ore which has

risen off September lows of $US78/T to $US135/T

(+80.0%)

Referring to the above table the major move over

the quarter was the continuation of switching from

a number of mining and mining related companies

and reinvesting into the consumer discretionary,

healthcare, financials and telecommunications

sectors. We have maintained a low cash position

within the fund as we are comfortable with the

valuations of small and micro-cap companies. The

non stock exposure to the market (via SPI futures

positions) has been maintained at 8.0% which

provides the fund with flexibility to participate in

attractive placements and floats, should they

present themselves.

Within the materials sector our preference remains

within the iron ore space and copper names. We

have gone underweight the gold sector as we

believe that a number of the global economic

uncertainties that supported gold in 2011-2012 will

not be supportive into 2013.

Within the (Sector Weightings) table the major

sector and stocks moves have been - Northern

star (NST) was sold as the stock had hit our price

target and we saw better value in our other gold

names. Both Gryphon (GRY) and Resolute

(RSG) were sold to reduce exposure to the African

countries. The risk of doing business in Africa has

increased after we have seen a number of

countries make a concerted grab for a higher

proportion of mining projects.

Base Resources (BSE) was sold due to the

deterioration in their underlying commodities both

Zircon and Mineral sands. We added Aquarius

Platinum (AQP) as we like the fundamentals

behind platinum in the medium term. The

commodity is at its marginal cost and we will see

mine closures in South Africa which supplies close

to 80% of platinum. The recent deal the company

did with selling 51% of their Zimbabwean platinum

asset was well above the market consensus and

makes the stock look very attractive at current

prices. Mount Gibson (MGX) - an existing iron ore

producer - was added and it is generating solid

cash flow at current prices.

Exposure to Capital goods was reduced further;

both Forge (FGE) and Swick Mining (SWK) were

sold out of the portfolio on the similar theme to the

last quarter. We see further risk of downgrades

going into the next reporting period. No doubt this

sector has come under significant pressure and we

don‟t see any reason to reduce the overall sector

weight much further due to the valuations. We

believe the valuations the stocks are now trading

at are already factoring in a significant downturn in

the mining capex cycle. The portfolio is now

underweight companies exposed to mining in

capital goods, and neutral capital goods in total

due to non-mining related exposures.

For example, some of the larger exposures are

Cardno (CDD), a global civil and environmental

engineering company, and Service Stream which

is a domestic infrastructure contractor. Towards

the end of December we added NRW Holdings

(NWH) and McMahon (MAH) back into the

portfolio after they had a significant selloff over the

last 6 months. We see the valuations on these

companies as just too attractive.

The Energy names were also reduced over the

quarter. We were somewhat disappointed by the

performance of the commodity and there were also

a number of names which had disappointing

drilling results to date. The stocks that we have

exited are Pancontinental (PCL), Neon Energy

(NEN) and Texon (TXN)

For

per

sona

l use

onl

y

Contango MicroCap Limited December Quarter 2012

7

Healthcare sector was increased with Mayne

Pharma (MYX), an Australian based generic drug

company who acquired a US based company

called, Metrics, also a specialist in generic drugs.

This will open up a significant market to Mayne

Pharma products over the medium term. The

acquisition brought earnings and a strong

development team in the USA. Vision Eye

Institute (VEI) was added to the portfolio. The

company provides ophthalmic care in Australia. It

comprises ophthalmic consulting facilities, day

surgery and refractive and laser eye surgery

centres along the Eastern seaboard of Australia.

Consumer discretionary was also increased

through a number of new names entering the

portfolio. Village Roadshow (VRL) was added to

the portfolio, a provider of entertainment and

media services through its cinema exposure as

well as its theme park in QLD. Prime television

(PRT) is an owner of regional free to air television

licences as well as owning radio licences in QLD.

The stock has provided solid earnings growth over

the last few years. Web jet (WEB) was also

added, an internet based airline and hotels

bookings service company. Web jet is

experiencing strong growth in the online bookings

market and again offers strong earnings growth for

the next few years as it starts to compete more

aggressively with names such as Wotif in the

online accommodation market. Cash Converters

(CCV) was bought through a placement over the

quarter. We consider this a good solid business

with growth opportunities over the next few years

The Financial sector was increased by adding

Mortgage Choice (MOC) an independent provider

of mortgages offering independent advice to

customers on mortgages. Countplus (CUP) was

added. Its principal activities include accounting,

tax and audit services; financial advice in relation

to personal insurance, investment and

superannuation; and broking services.

IPOs and Placements The portfolio participated in the following

placements and IPOs.

Code Company Price

PLACEMENT AOK Austex Oil Limited $ 0.12

AOKYY Austex Oil Limited $ 0.12

CCV Cash Converters $ 0.85

CMW Cromwell Property $ 0.79

CVN Carnarvon Petroleum $ 0.08

CVNYY Carnarvon Petroleum $ 0.08

DLS Drillsearch Energy $ 1.30

MYX Mayne Pharma Group $ 0.20

MYX Mayne Pharma Group $ 0.20

MYX Mayne Pharma Group $ 0.30

NAE New Age Exploration $ 0.07

NEN Neon Energy Limited $ 0.30

VEI Vision Eye Institute $ 0.34

WEB Webjet Limited $ 3.60

IPO DCN Dacian $ 0.50

In most cases the placements we participated in

have added value which is a good sign that the

market is becoming more interested in the micro-

cap space after a fairly torrid 9 months. We added

one new stock through the IPO process in Dacian

(DCN) resources, which was listed at $0.50 and in

mid-January is trading at $0.68. Dacian is run by

Rowan Williams and has a small gold resource

looking to grow through drilling, looking very

interesting over the next 6 months.

Portfolio Details

As at 30 December 2012 there were 82 securities

in the portfolio. The tables below show the

breakdown of these positions within the portfolio.

Position Weight # of stocks % of portfolio

> 2% 10 24.04%

1% - 2% 30 42.87%

0.5% - 1% 24 18.53%

< 0.5% 18 4.62%

For

per

sona

l use

onl

y

Contango MicroCap Limited December Quarter 2012

8

Market Cap # of stocks % of portfolio

$1b+ 2 3.44%

$350m- $1b 24 41.88%

$100m-$350m 38 38.35%

$0m - $100m 18 6.51%

NB: these tables do not include the holding of CCQ nor the assets held within CCQ, which represents 7.3% of CTNs total NTA value.

Attribution of 5 Best and 5 Worst holdings December 2012 quarter

Company Name Contribution BEST

Mayne Pharma Group 0.59%

Codan 0.53%

G8 Education 0.45%

M2 Telecomm Group 0.38%

Nucoal Resources 0.35%

WORST

Gryphon Minerals -0.42%

Northern Iron -0.44%

Maverick Drilling & Exp Ltd -0.50%

Base Resources -0.62%

Alara Resources -0.81%

Top 20 Stock Weights as at 30 December 2012 (as a percentage of the total CTN investment portfolio)

Code Company Name Weight

MTU M2 Telecomm. Group Ltd 3.3%

MMS McMillan Shakespeare Ltd 3.0%

AUB Austbrokers Holdings Ltd 2.7%

SLR Silver Lake Resources 2.3%

TGS Tiger Resources Ltd 2.2%

BDR Beadell Resources Ltd 2.2%

GEM G8 Education Ltd 2.1%

SGH Slater & Gordon Ltd 2.1%

FXL FlexiGroup Ltd 2.0%

SXY Senex Energy Ltd 2.0%

AHE Automotive Holdings Ltd 1.9%

TOX Tox Free Solutions Ltd 1.9%

MYX Mayne Pharma Group Ltd 1.9%

PIR Papillon Resources Ltd 1.8%

DLS Drillsearch Energy Ltd 1.7%

WHG WHK Group Ltd 1.7%

ANG Austin Engineering Ltd 1.7%

MGX Mount Gibson Iron Ltd 1.7%

NWH NRW Holdings Ltd 1.6%

WEB Webjet Ltd 1.6%

These top 20 represent 41.4% of the portfolio.

M2 Telecommunications Group (MTU) Australia‟s largest network-independent provider of fixed line, mobile and data services. Operating as a reseller, MTU primarily utilises Telstra‟s and Optus‟ networks to provide retail services to the small and medium enterprise (5 to 50 employees) market. They also have a smaller wholesale presence offering products to small Internet Service Providers. Through organic growth and selective acquisitions, MTU has delivered nine consecutive years of both revenue and profit growth. With a firm eye on further acquisitions and control over one of the largest dealer/agent networks in Australia we anticipate this strong growth to continue over the long-term. McMillan Shakespeare (MMS) A provider of workplace benefits administration in Australia. Services include the administration of salary packaging services and fleet management (covering procurement of motor vehicles and finance, and arrangement of related services such as insurance). The company acquired Interleasing in March 2010, positioning the company well to increase its opportunities particularly within the private sector. Scale benefits allows the company to drive a higher margin advantage over its competitors, with this forecast to improve further over time as the company demonstrates double digit growth. Austbrokers Holdings (AUB) Holds equity interests in 40 insurance broking businesses around Australia. In addition to its core general insurance broking business, Austbrokers cross markets other financial products and services suitable for its client base, including premium funding, life insurance and investment products. The recent formal alliance with the IBNA Group (a buying group of insurance brokers) provides further long-term growth initiatives as the industry continues to consolidate. Austbrokers only generates fees and commissions and does not take on any underwriting risk. Silver Lake Resources (SLR) A West Australian gold producer with a strong track record in profitability. The company has one operation at Mt Monger and is planning a second centre at its Murchison project. Production guidance is for 155,000 to 195,000 ounces for FY13, growing to approximately 400kozpa by FY14 once the recently acquired Integra Mining Limited is taken into account. In addition, a high grade copper discovery and the current merger with Philips River Mining both add further growth potential for the company.

For

per

sona

l use

onl

y

Contango MicroCap Limited December Quarter 2012

9

Tiger Resources (TGS) An Australian-based company focused on the discovery and development of high-grade copper/cobalt deposits in the African Copper Belt. They have an interest in a number of highly prospective projects covering 1,550sq km, including the Kipoi and Lupoto projects. The company is a copper producer with a new production record of 3,853t (46,000t annualised) of copper in concentrate achieved in June 2012. The operational performance continues to perform above nameplate. Overall the Kipoi project is well set to achieve production levels above the nameplate capacity of 35,000t for 2012-13. Cash costs in the order of $0.60/lb are providing very strong margins and the company is in a strong position to fund the expansion without additional equity being needed. Beadell Resources (BDR) A gold producer in Brazil. The company has faced a number of delays in recent months and based on current projections, the mill at Tucano should start processing its first ore in January 2013 and its first gold in March 2013, a delay of 6 months from original timetable. In the first years of the project when the grade is elevated the project should be producing +150k oz of gold at a cash cost of US$600/oz. We expect life of mine production will stabilize around 130k oz p.a. with an estimated cash cost of US$700/oz. Mine life is c10 years with good levels of in-pit and regional exploration. Further earnings could be derived from the potential iron ore that is contained within the waste with Anglo now signing the contract to take the run off mine iron ore. G8 Education (GEM) Operates child care centres in Australia and Singapore. Currently, over 230 centres exist including eight brands in Australia: Early Learning Services, World of Learning, Community Kids, Casa Bambini, Holiday Club, Kindy Patch, Headstart and KinderHaven. The company is exposed to strong underlying demand for its services due to factors such as increased participation of women in the workforce. GEM has a clear strategy of acquiring centres cheaply in a highly fragmented market, while ensuring that debt levels are managed and a high return on equity is delivered. Slater & Gordon (SGH) An Australian law firm specialising in personal injury insurance claims, commercial, and family law. SGH operates over 45 offices throughout Australia. SGH is currently the market leader in personal injury with 20% market share, with a 30-35% market share target over time through organic through and bolt-on acquisitions.

The firm is well known for its “no win no fee” arrangements where if a claim made by its client is unsuccessful, the client does not pay any legal fees. If the claim is successful however, the client is charged legal fees which may include a success fee. FlexiGroup (FXL) A provider of vendor and retail point-of-sale finance services in Australia, New Zealand and Ireland. The group operates four main businesses, namely Leasing-Retail, Leasing Vendor & Commercial, Telecommunications, and Interest Free Loan. The company operates within a number of industries, including home improvement, solar energy, fitness, IT, electrical appliances, navigation systems, trade equipment and point of sale systems. Since listing in late 2006, the company has diversified its business mix through a combination of acquisitions and development of products in-house. Senex Energy (SXY) A diversified energy company engaged in exploration and production of oil and gas in Cooper Basin and coal seam gas in the Surat Basin. The company also engages in the exploration and development of unconventional gas in the South Australia Cooper Basin. Despite the relatively low proven and probable resource level current, it is the company‟s vast unconventional gas resources which provide the greatest upside to the current share price. Automotive Holdings (AHE) Automotive Holdings has grown to become the largest motor vehicle dealer group within Australia, with franchises covering 10 out of the top 11 passenger vehicle brands. The group's primary markets are Western Australia and Queensland, although recent acquisitions have given AHE a presence in metropolitan Sydney. AHE also operates a logistics division comprised of a refrigerated transport business, cold storage, warehousing and distribution. We expect profit to grow in excess of 15% in FY13. Tox Free Solutions (TOX) Tox Free Solutions is an integrated waste management and environmental service provider. The company focuses on the provision of industrial and hazardous waste treatment, contaminated site remediation and industrial services. The company also provides industrial maintenance services through its subsidiaries strategically located throughout Western Australia. Recent acquisitions include the purchase of a recycling business Greenchip in Victoria and the industrials services business Barry Brothers (from Programmed Maintenance Services). We expect the company to grow profit by around 22% in FY13.

For

per

sona

l use

onl

y

Contango MicroCap Limited December Quarter 2012

10

Mayne Pharma Group (MYX) (Formerly Halcygen Pharmaceuticals Limited) Mayne Pharma is a specialist pharmaceutical company with an intellectual property portfolio built around the optimisation and delivery of oral dosage form drugs. The businesses are divided into the categories of drug delivery, product, services and manufacturing. Papillon Resources (PIR) Papillon Resources is an exciting gold exploration company operating in Mali, West Africa. The company is 90% owner of the Fekola Project which recently released a maiden resource of 3.14 million grading 2.4g/. The Fekola deposit remains open along strike and at depth and has significant scope for further upgrades. Preliminary work shows the ore to be close to surface, metallurgically sound and relatively homogeneous over a wide area. These factors are likely to lead to eventual development in the near future. Drillsearch Energy (DLS) Drillsearch explores and develops conventional and unconventional oil and gas project primarily focused on the Cooper-Eromanga Basin in South Australia and Queensland. Production is forecast to triple from 0.5mboe in 2012 to 1.5mboe in 2013. Yet, it is Drillsearch‟s exposure to the evolving unconventional resource contained in the Cooper Basin that provides the most upside to the company. The company has the greatest leverage to Cooper Basin shale gas play with 500,000 acres relative to company size - its equity interest high at 40% and is project operator. We value the company at $1.80/share and expect the price to increase as activity levels ramp-up throughout 2012 and 2013. WHK Group Ltd (WHG) Is a provider of accounting and related services to small medium enterprises (SME) and high net worth clients. WHG is focused on providing total financial solutions to its client base via a suite of ten core services. WHG has an extended distribution network of member firms located across Australia and New Zealand. Its financial services division provides financial planning, risk and general insurance, self managed superannuation and finance broking services. WHG collectively services in excess of 200,000 clients through its network of over 100 offices. The business services division provides a full range of traditional accounting and specialist services including accounting, taxation, audit and assurance, estate planning, business advisory and corporate advisory services. The division has stable client base which also offers a large client referral platform for the financial services divisions of member firms.

Austin Engineering (ANG) Austin Engineering is an engineering company with manufacturing facilities in Australia, USA and the Middle East. The Australian and USA facilities provide fabrication facilities servicing the mining, oil, gas and industrial sectors. The Middle East operation provides specialised products and services for the aluminium smelter industry. Austin owns rights to welding processes and robotic applications to suit product lines, general fabrications and any repetitive production processes. Austin has become a leading supplier to the truck body market globally, initially in Australia via its business JEC mining and earthmoving, then globally by consolidating its former licensor Westech allowing Austin to exploit the South American and Canadian markets amongst others. Mount Gibson Iron Ltd (MGX) Is involved in exploration, development and mining of iron ore in Western Australia. The company has three major projects being: Tallering Peak, Koolan Island and Extension Hill. For FY12, Annual ore sales were 5.2Mt with 6.9Mt of ore mined and crushed. The total mineral resources and reserves stood at 95.2Mt @ 61.6% Fe and 44.3Mt @ 62.6% Fe respectively. NRW Holdings (NWH) NRW Holdings is a Western Australian based provider of services to the resources sector. The company provides civil contracting services including rail formation, bulk earthworks, mine development, road and tunnel construction and a range of contract mining services. Blue chip clients among others include Rio Tinto, BHP Billiton and Fortescue Metals Group. Webjet (WEB) Webjet is an online travel service provider and operates its business mainly through the website. WebjetFlights, WebjetHotels and various alliances where the company has allied with many other businesses to support its own operation and to expand the coverage of services: such as Macquarie Telecom, Qantas, Avis, Hertz and Budget

For

per

sona

l use

onl

y

Contango MicroCap Limited December Quarter 2012

11

Accumulated Australian Indices

ASX 200 37,134.53 3.4% 6.9% 16.4% 16.4% 20.3%

ASX 300 36,840.05 3.3% 6.8% 16.1% 16.1% 19.7%

ASX 300 Industrials 67,043.66 3.1% 7.5% 18.0% 18.0% 28.0%

ASX 300 Resources 22,070.35 4.1% 4.6% 10.9% 10.9% 0.1%

All Ordinaries 36,642.63 3.4% 6.8% 15.5% 15.5% 18.8%

Small Ordinaries 5,444.84 3.2% 2.0% 9.4% 9.4% 6.6%

ASX 300 Accumulated GICS Sector Indices

Materials 70,526.32 4.8% 6.4% 13.2% 13.2% 2.7%

Consumer Discretionary 9,976.79 2.6% 8.9% 12.6% 12.6% 22.1%

Consumer Staples 68,071.09 1.3% 5.2% 18.1% 18.1% 26.7%

Energy 87,136.64 1.4% -0.3% 5.5% 5.5% -0.5%

Financial 44,311.61 3.3% 7.1% 18.6% 18.6% 29.7%

Financial (ex LPT's) 48,990.65 3.4% 7.2% 19.5% 19.5% 29.0%

Healthcare 59,611.55 2.6% 10.6% 26.7% 26.7% 47.5%

Industrials 28,862.26 5.8% 8.5% 11.4% 11.4% 11.1%

Information Technology 4,592.33 0.5% 1.5% 19.9% 19.9% 23.8%

Property Trusts 25,065.36 2.9% 7.0% 14.1% 14.1% 32.8%

Telecoms 16,067.70 1.5% 11.4% 22.8% 22.8% 42.1%

Utilities 50,059.04 4.1% 7.1% 11.8% 11.8% 22.1%

Global Indices

Dow Jones Industrial 13,104.14 0.6% -2.5% 1.7% 1.7% 7.3%

S&P 500 1,426.19 0.7% -1.0% 4.7% 4.7% 13.4%

NASDAQ Index 3,019.51 0.3% -3.1% 2.9% 2.9% 15.9%

Nikkei 225 Index 10,395.18 10.0% 17.2% 15.4% 15.4% 22.9%

Hang Seng Index 22,656.92 2.8% 8.7% 16.5% 16.5% 22.9%

Shanghai Composite Index 2,269.13 14.6% 8.8% 2.0% 2.0% 3.2%

FTSE 100 5,897.81 0.5% 2.7% 5.9% 5.9% 5.8%

German Aktien Index (DAX) 7,612.39 2.8% 5.5% 18.6% 18.6% 29.1%

France CAC40 3,641.07 2.4% 8.5% 13.9% 13.9% 15.2%

India BSE 200 Index 2,424.38 1.5% 5.1% 13.4% 13.4% 31.0%

MSCI World ex Aust (hedged) 2,386.65 1.9% 2.8% 8.4% 8.4% 15.5%

MSCI World ex Aust (unhedged) 3,271.91 2.3% 2.5% 7.7% 7.7% 14.1%

S&P 500 US GICS Sector Indices

Energy 532.96 0.5% -3.3% 5.9% 5.9% 2.3%

Materials 237.62 2.9% 2.0% 6.6% 6.6% 12.2%

Industrials 328.75 2.3% 3.0% 6.0% 6.0% 12.5%

Consumer Discretionary 376.06 0.2% 1.6% 8.7% 8.7% 21.9%

Consumer Staples 360.78 -2.5% -2.5% 0.5% 0.5% 7.5%

Health Care 462.95 -0.4% -0.5% 5.0% 5.0% 15.2%

Financials 221.24 4.6% 5.3% 12.1% 12.1% 26.3%

Information Technology 463.82 -0.1% -6.2% 0.4% 0.4% 13.1%

Telecommunication Services 146.04 -1.1% -7.1% -0.7% -0.7% 12.5%

Utilities 177.66 -0.2% -3.9% -5.4% -5.4% -2.9%

Commodities

Gold (US$/oz) 1,674.95 -2.3% -5.5% 4.9% 4.9% 7.1%

Oil WTI (US$/bbl) 91.73 3.1% -0.3% 7.9% 7.9% -7.2%

Aluminium (USc/lb) LME 92.53 -1.9% -2.6% 11.2% 11.2% 3.5%

Copper (USc/lb) LME 359.02 -0.4% -4.3% 4.1% 4.1% 4.8%

Nickel (USc/lb) LME 774.96 -0.1% -7.7% 3.7% 3.7% -6.5%

MG Metals Index 355.32 -0.6% -3.7% 7.9% 7.9% 6.6%

Interest Rates

AUS UBS Composite Bond Index 7,451.60 0.2% 0.2% 2.2% 2.2% 7.7%

AUS UBS Bank Bill Index 7,738.00 0.3% 0.9% 1.8% 1.8% 4.0%

%

AUS Cash Rate 3.00 -25 -50 -50 -50 -125

AUS 90 day Bank Bill rate 3.04 -13 -32 -49 -49 -143

AUS 10 year Bond yield 3.27 11 27 23 23 -40

US Federal Funds rate 0.25 0 0 0 0 0

US 30 year Bond yield 2.95 14 13 19 19 5

US 10 year Bond yield 1.76 14 12 11 11 -12

Exchange Rates

AUD/USD 1.0394 -0.3% 0.1% 1.4% 1.4% 1.7%

AUD/YEN 90.12 4.8% 11.4% 10.2% 10.2% 14.7%

EURO/USD 1.3195 1.6% 2.6% 4.3% 4.3% 1.9%

AUD/EUR 0.7878 -1.9% -2.5% -2.7% -2.7% -0.2%

AUST TWI 77.10 -0.1% 0.3% 0.8% 0.8% 1.7%

12 Months

basis point change

KEY INVESTMENT INDICES 31/12/2012 Month Quarter 6 MonthsFinancial Year

to Date

For

per

sona

l use

onl

y

Contango MicroCap Limited December Quarter 2012

12

DISTRIBUTION UPDATE

December 2012

For

per

sona

l use

onl

y

Contango MicroCap Limited December Quarter 2012

MICROCAP DISTRIBUTION UPDATE

In the December quarter the CTN Share Price increased from $0.93 to $0.995 –a rise of 7%. This exceeded the total returns of both the ASX All Ordinaries and ASX Small Ordinaries Indices (6.8% and 2.0% respectively) The performance in the December quarter completed a solid 2012 where the Value of CTN Shares (Share price + Dividend) to shareholders rose in excess of 21%, outperforming both the ASX Small Ordinaries and ASX All Ordinaries Accumulation Indices. CTN has built its profile and shareholder base while it continues to enhance relationships with investors, sharebrokers and financial advisers. In addition to having a positive outlook on the smaller part of the market, investors have recognised that the company is successfully undertaking activities to more fully realise the NTA value in the share price. Since June 2010 when the Board implemented specific initiatives- including those related to dividend policy, promotion and investor engagement- the CTN share price has increased 63.5% (when including dividends). Over the same period the S&P/ASX Emerging Companies Index has returned 5.5%, the ASX Small Ordinaries Accumulation Index has returned 8.8% and the ASX All Ordinaries Accumulation Index 20.5%. In this time the company has narrowed the Discount to NTA from 40% to 13%. Chart 1 demonstrates the performance of CTN over recent time periods.

Chart 1: Source CTN

Shareholders in CTN would be acutely aware of the performance of individual Australian microcap companies, in particular the difference in returns between Small Industrial and Small Resource companies. Chart 2 breaks down the Small Ordinaries Index showing the performance of Small Industrial and Small Resource stocks. Investors may be surprised how extreme the difference in returns over the last 3 years between these has been.

For

per

sona

l use

onl

y

Contango MicroCap Limited December Quarter 2012

Chart 2: Source CTN

Understandably many investors have questioned whether this performance differential challenges the perception that Australia is a resources dominated economy, indicating a structural shift in investment patterns? Alternatively, does this suggest that the resources sector is possibly oversold to its underlying value and at some point in the future will perform well? While we cannot give a definitive answer to this the comments provided by the portfolio manager through the investment commentary within this newsletter offer an insight into Contango thinking on this matter.

SHAREHOLDERS Another measure of CTNs success is reflected in the growth in the number of its shareholders, who recognise the opportunities in and benefits of owning CTN shares. Charts 3 plots the growth in shareholders in 2012 – which coincides with the growth in the share price.

Chart3: Source CTN

At the time of writing (15 January) CTN had its highest ever number of shareholders (4315).

New shareholders are attracted through various campaigns undertaken to the increase awareness of CTN. Channels include Stock Brokers, Financial Advisers, SMSF Trustees, Investor Groups and Associations, Financial Media and individual investors.

For

per

sona

l use

onl

y

Contango MicroCap Limited December Quarter 2012

Providing transparency in the company and regular information about the investment portfolio is a priority of the CTN Board as with an increasing number of Listed Investment Companies. These are contributing factor to ensuring that share price best reflects the value of the company.

ENGAGING THE INVESTMENT COMMUNITY

CTN continued to engage financial advisers and stockbrokers during an extremely active December Quarter. , Amongst others, CTN presented to investor groups aligned to the Australian Shareholders Association and Australian Investors Association, as well as other groups.

This followed numerous activities through all of 2012 which saw CTN present to significant numbers of financial advisers, stockbrokers and investors at various conferences and investor events.

This is in addition to our regular communications with over 4500 advisers and 3000 investors who have opted in to receive updates from us.

COMPANY ANALYSIS [In the September Investment Commentary we included some discussion on the research undertaken on Microcap companies. Judging by the feedback we received from shareholders this insight was widely appreciated. For the benefit of our new shareholders and those who did not read the last newsletter, we repeat elements of this and provide an update to it.]

Those who have visited a fund manager‟s office may have seen piles of research on a table- such as seen in this picture. Each pile which can be seen contains some of the stock research that individual broking houses

provide to Contango.....daily!

Occasionally the reports are for companies that the broker has just commenced new coverage of, where they wish to draw them to the attention of their clients (the fund managers). Most often they are simply updates of companies they already cover and address current events impacting the company. Typically around 4-10 companies are covered in each day‟s report depending on the

number of analysts the broker may employ and sectors they cover.

Most broker research is focussed on ASX-100 companies. Occasionally you will see a report on a company in the ASX101-150 range, but rarely anything smaller than that. Broking houses and stockbrokers do not cover these Small and Microcap companies because it is not economically viable to produce research on them.

For instance, even if the Contango portfolio managers decided to (further research and then) invest in a company, there is no certainty they will place the trades through the broker who originally provided the research to them. Assuming that Contango did, the order size itself might only be small on a dollar basis. Then it could take a week or even a month to fully execute the order at the desired price.

Essentially, the brokerage that might be generated through the production of a research report may hardly cover the cost to produce it. Economically, it is more viable to research the companies with a large market cap, as they are likely to be more readily and heavily traded on a dollar and thus brokerage basis.

This is just one structural reason why there is such little research available on Small and Microcap companies.

It means that the handful of fund managers who do invest in Microcap companies require large investment teams to produce their own research- never mind actually being good at that.

It is for the skills and experience of the large investment team that CTN appointed Contango Asset Management Ltd to manage the investment portfolio- with their ability confirmed through the long term portfolio outperformance they have generated for the company.

The following paragraphs provide an insight into how the manager researches and selects stocks for its portfolio.

For

per

sona

l use

onl

y

Contango MicroCap Limited December Quarter 2012

Prior to selecting securities, the research process employs extensive macro-economic analysis. This process attempts to identify emerging, continuing or fading themes through analysis of proprietary research data and the relationship this data (current & forward indicators) has to macro-economic variables and sector returns. A wide range of inputs are used including research from the Economic Cycle Research Institute (ECRI), Strategic Economic Decisions (SED), Federal Reserve, the OECD and IMF. Contango also has reports prepared specifically for it by external experts in addition to receiving data / analysis from a number of global broking houses.

The portfolio aims to invest in companies with a market capitalisation of between $10m and $350m at the time of investment. This results in an investment universe of approximately 1,000 stocks. The manager specifically targets microcap companies with a proven track record that are looking to expand. Due to their risk profile and unpredictable nature, the Manager tends to avoid early stage companies that are investing in new technology, such as biotechnology, private equity and information technology companies unless it has a revenue stream as well as exploratory mining companies without known reserves.

The Manager maintains a detailed database on around 600 companies. Consistent historical data series are accessed from either companies or brokers to facilitate quantitative analysis. Typically, greater attention is paid to stocks that have a positive business cycle or sector thematic, or attractive characteristics at a stock specific level. Central to the research process is the development of robust earnings estimates.

In order to do this effectively, the analysts undertake multiple site visits and hold meetings with management to develop their insights into the likely magnitude of future earnings growth. This includes regular offshore travel which is particularly relevant when assessing mining companies where 40% of the ASX 300 Resources universe have assets offshore. By seeing the operations and assets the analysts can better evaluate them.

Contango typically undertakes up to 700 company meetings per year. Earnings estimates are prepared for each stock, drawing on company reports, broker research and competitor and industry analysis.

The final component in the analysis is to combine earnings estimates and valuation changes to determine an expected total return for each stock (12 month forecast). These are subsequently ranked according to their expected total returns. The entire process strongly interlinks the top-down and bottom-up analysis and is regarded as a key strength of the investment process. Microcap research must be created internally.

For those interested in knowing more about this or the Portfolio Construction which follows the analysis you are encouraged to read some of the detailed research undertaken on both CTN and the portfolio managers.

RESEARCH

CTN retains the following formal ratings (as distinct from Broker reports) which can all be obtained from the Research page

1 on the CTN web site

Morningstar “Investment Grade”

Zenith Investment Partners “Recommended”

Independent Investment Research (IIR) “Highly Recommended”

For

per

sona

l use

onl

y

Contango MicroCap Limited December Quarter 2012

EVOLUTION IN ADVICE

The following table identifies some current issues and features which are supporting an increase in demand for investing in Listed Investment Companies. Demand for LICs is expected to amplify in the coming years as more people start their own SMSFs, and more financial advisers look for cheaper, tax-efficient ways to give their clients exposure to segments of the market.

There are a few acronyms which may be unfamiliar to readers- refer notes for further information2 & 3

.

SUBSCRIBE TO CTN COMMUNICATIONS Shareholders and interested investors can use the subscription

4 feature on our web site to receive notification

when this and other important documents have been released to the ASX.

COMPANY PROMOTION AND ACTIVITY

CTN has been successful in increasing both the company‟s visibility and profile.

In the coming quarter CTN will make public presentations in most capital cities as well as other industry events.

CTN continues to contribute articles and materials on microcaps in the media.

CTN WEBSITE RESOURCES- NEW PHONE APP CTN continues to engage its shareholders through providing ongoing information relating to the underlying investment portfolio as well as other important operational matters. Our web site is comprehensive and provides information on the company, the investment portfolio and microcap sector. We are pleased to provide shareholders with a new Contango Mobile site. This has been created to give you convenient access Contango MicroCap

information. Stay up-to-date with the latest news, Share price and events via your phone. You can use the site to contact us by email, access and contact numbers. These are just a few of the items available on the new mobile site. Updates will occur automatically - no need to sync through your computer.

For

per

sona

l use

onl

y

Contango MicroCap Limited December Quarter 2012

The Mobile Phone app page

5 on our web site provides details on how to set up an app on iPhones, iPads,

Android and Tablet devices.

KEEP UP TO DATE WITH THE LATEST INFORMATION Shareholders should be aware of the information which is already available through the Investment Centre

6 on

the CTN website. CTN produces articles and papers relevant to Microcaps and LICs which are often published in various industry magazines and websites. Where possible, these are loaded onto the CTN website. In 2012 CTN released a discussion paper on issues in analysing LIC performance. This is the full version of the abbreviated summary which was in the previously mentioned May ASX Investor newsletter. It extends to include the relationship between Share Price and NTA in relation to market timing. This can be found on the CTN web site

7.

In addition, commentaries and research conducted in CTN by stockbrokers and researchers can be found there. Shareholders should keep an eye on the Articles

8 and Events

9 tabs on the CTN Investor Centre website.

CORE ACTIVITIES

Key activities remain around broker and adviser visits, support activities, group speaking presentations and

promotional materials.

As always, if shareholders or interested parties have any questions, suggestions or requests- such as

speaking at an investor group event, please feel welcome to contact me at any time.

Boyd Peters National Distribution Manager

------------------------------------- Notes: CTN performance is of the underlying portfolio before fees, taxes and charges. Past performance is not necessarily indicative of future performance. All data is to 31 December 2012. All comments in this newsletter should be read in conjunction with the Disclosure Statement & Disclaimer found at the beginning of the newsletter. Inception date 25 March 2004. “SMSF” Self Managed Superannuation Fund “FOFA” Future of Financial Advice- Government reforms into Financial Planning practices and provision of advice. “IMA/ SMA/ DMA/ UMA: Types of Managed Accounts- which are administration vehicles for

investments and an increasingly popular alternative to Wraps and Master Trusts.

Hyperlink references: 1. CTN Research Page http://www.contango.com.au/ctn_contango_microcap_research.php 2. FOFA information http://futureofadvice.treasury.gov.au/Content/Content.aspx?doc=home.htm 3. Managed Accounts information http://en.wikipedia.org/wiki/Managed_account 4. Subscribe http://www.contango.com.au/ctn_contango_microcap_news.php?newsArticle=1 5. Phone Apps page http://www.contango.com.au/ctn_contango_microcap_mobile_app.php 6. CTN Investment Centre http://www.contango.com.au/ctn_contango_microcap_investor_centre.php 7. Know what you are investing in http://www.contango.com.au/data/docs/reports/research/CTN_Research_LIC_Apr_12.PDF 8. CTN Articles http://www.contango.com.au/ctn_contango_microcap_articles.php 9. CTN Events http://www.contango.com.au/ctn_contango_microcap_events_and_dates.php

For

per

sona

l use

onl

y