To market, to market to buy a fat pig. Last night there was the state of the union address (SONA) in parliament where your money paid for politicians to tell you what they have done with your money, and what they plan to do with your money. I have never been in the situation where I am spending someone else's money, so perhaps I am speaking out of turn here. But I know I speak to rich people all the time, not the downtrodden and most vulnerable in society. Of course people who are privileged enough to be in a position to invest money, money that they no doubt have worked very hard to make. But the true meaning of a safety net and a social security net is to protect those that are vulnerable. But the only way to earn the funds in order to pay for greater social benefits in society is for more taxes to be collected. More taxes collected equals more for social spend.
So how do you "get" more tax revenue? Create a better infrastructure, educate your people and make sure that they are healthy, being vaccinated and therefore able to avoid past infectious diseases. Think about it for a second, smallpox, virtually unknown in the modern world (the WHO said it was eradicated in 1979), killed 2 million people in 1967, of the 15 million that contracted the disease. Astonishing. 12 years later the disease had been eradicated. These are the advancements that humankind can make as a result of the pharma industry investing heavily in research and development. 100 billion Dollars, over one trillion Rand is spent in searching for the next life saving therapy, be it a cure for cancer or an HIV vaccine and everything in-between.
I have no problem with a company spending tens of billions and then having a 20 year patent, really, and profiting from this. But I can understand that it is a highly emotive issue, healthcare and costs associated with that. Rich people can afford the expensive therapies, but ironically need to buy more therapies in order for them to become cheaper. The more people that use it, the cheaper it gets. And the company can then continue to be profitable in order to sink more money into curing us of infectious diseases and crippling ailments. If you think that is too simplistic and crude (whilst championing business at the same time) then name me a single government in the modern era that has invented a medicine. I cannot think of one.
But we are getting off the topic here to some extent. The SONA did not put forward the ruling party policies, saying that will come after the elections. That tells me two things, one of course that the ruling party is confident that they are going to win the elections (and they will) and secondly, more importantly, the ruling party will see which direction the swing votes go. In other words, a jump to the left or right from the folks not voting for the ruling party, will prompt a policy change to get back those votes. That is our simple view, we may be wrong, but if you lose in one direction or another, you take notice. On that score however, the Free Market Foundation have an interesting post from a Zimbabwean member of parliament, which compares the economic paths of Zambia and Zimbabwe: Zimbabwe's loss Zambia's gain- destruction vs. protection of property rights. Interesting, again, letting the free market decide what is good for the citizens is good for everybody. But I would say that, of course.
Markets globally continue to get a lift, the move northwards at the start has put the all share index back in the green for the year. The gold stocks have rerated significantly this year, up over 43 percent in about as many days this year. Wow. Against all the talking heads expectations, mine included. I can't say that I have seen the results suggest that the businesses are in take off mode, but possibly there was a bout of selling of the one major, AngloGold Ashanti, that was maybe overdone. Year to date the stock has actually lagged the sector, which is up 44 percent. Over the last year however, GLD, the Rand price of gold is flat, whilst AngloGold Ashanti is down 28 percent. YTD has been an entirely different kettle of fish. The question will always remain, are these investable companies? If there is something that you cannot understand and has an enormous amount of emotion (as the gold market does, for historical reasons) be prepared to not be in a specific bunch of stocks. And sometimes when that index comfortably crushes the market (like it has) the chattering classes will ask, why are you not in the stock/sector?
Today is Valentine's Day. In case you had not noticed. The Americans apparently buy 150 million cards today. Not the e version, but real physical cards. Wiki has some answers of how the day became connected to love and romance, but the money spent is around 14 billion Dollars, roughly 150 billion Rand for one day. I saw another article that said that Russia had over one billion carats of diamond reserves. Does that sound romantic or what, the Russians have five times the reserves that the next placed Zimbabwe has. And to think that Zimbabwe needs 27 billion Dollars in order to kick start their economy. I wonder who will show them that sort of love, I doubt that it will be ourselves, we need every cent that we collect. There were some other amazing statistics that I managed to find online, 196 million roses are bought for the day. But 14 percent of the woman who received roses bought them for themselves. That sounds sad, but self indulgence, that is not I guess. Around 2 in 3 Americans celebrate the day. I wonder what happens here in South Africa? What are you going to do with your partner, if anything?
Anglo American have delivered results for the full year to end December this morning. Talk about a stock on the tear, this is definitely one of them that has blown them all away this year. Anglo is up nearly 25 percent this year alone!!! But over three years, Anglo is down 29 percent. Over a decade the stock is, in Rand terms, not that spectacular. The ten year performance of Anglo American in London is a less impressive 11 percent return. Yes. True. Versus BHP Billiton in London the divergence comes in 2008, after the purchase by Anglo of a very expensive iron ore asset in Brazil and just before Anglo had to recapitalise Anglo Platinum. Or swap debt, I guess. BHP Billiton is up nearly 300 percent in London over the last decade. Wow. Astonishing.
But you sometimes have been dealt a set of cards that you have to squirm around. It is true to say that Mark Cutifani was passed something not associated with the Anglo American of yesteryear. He, Cutifani, is a tough Australian mining engineer, with real on the ground experience. He is different from all of the Anglo American CEO's before him. It has not been an easy ride for him anywhere in his career, not at AngloGold Ashanti, and definitely not at Anglo American. Time will tell whether or not he has both the skill set (everyone seems to think so, so do I) and more importantly, whether the operating conditions and the commodity prices move in the right direction for him. Clearly Cynthia Carroll, who earned around 1.37 million Pounds when she was at Anglo overpaid for some assets and dumped some high profile management out of the companies subsidiaries.
Preliminary results for Anglo American year ended 31 December 2013 are available to download from their website. Kumba Iron Ore contributed 47 percent of all operating profits, their copper assets contributed 26 percent of operating profits. Diamonds were around 15 percent of operating profits. Add all of those things up, Kumba, copper assets and diamonds (De Beers stake) and you are at nearly 90 percent.
The company haves written off 1.9 billion Dollars worth of assets, Barro Alto furnace write off and impairment of the asset of 0.7 billion Dollars. Barro Alto is a teeny town in the middle of Brazil, but home to a major nickel mine. Nickel of course is used in steel manufacturing, because of its properties of being electrically conductive and corrosion resistance. In 1999 the nickel price was 4600 Dollars a ton. By 2004 it had risen to 15 thousand Dollars a ton, a three fold increase and some more. A massive surge in the price from 2006 through to the middle of 2007 saw the price shoot up to an incredible 51 thousand Dollars a ton, and some more. By the lows of the equities market in early 2009, the nickel price had fallen to 9000 dollars a ton. Wow. Back to 28 thousand in February 2011, and now around 14 thousand Dollars a ton. Now I ask you with onion tears in my eyes, how do you plan in a scenario like that? It is nigh impossible to be able to report back on cost containment. I can understand how Anglo are not going to be giving this a full tilt.
Talking about expensive assets, Minas Rio is set to be at 26 million tons per annum production from 2016. the expensive project is 84 percent complete, with the first ore expected to be loaded before the year is out. Platinum guidance has been raised at Amplats to 2.3 to 2.4 million ounces per annum. Diamonds, around 32 million carats per annum. That is pleasing, production guided higher.
The results were a comfortable beat on pretty low expectations, 209 US cents (basic earnings) for the year with a basic loss of 75 cents per share. The full year dividend was 85 US cents for the year, the final dividend unchanged at 53 cents. The risks still remain however that the company gets the bulk of their earnings from South Africa, where labour relations and government and mines are hardly friendly. I am sure that all stakeholders will work harder during the current year to ensure stability. Although Michael tells me that he saw an interview this morning with AMCU leader Joseph Mathunjwa in which he said that they are pressing on with their demands. So whilst it may have been quiet, the risks of violence remains.
Anglo does not look cheap. Not at all. I would suggest that after this recent rally that there remains an opportunity to exit the stock. There are better mining assets in better geographies with fewer problems, namely BHP Billiton, which remains our top and only pick in the diversified mining space.
Michael's musings: City Lodge ticking over
Yesterday City Lodge released their 6 month results and earlier in the month they announced that they bought the remaining share of their Kenyan operations.
Let's first start with their 6 month results and then move onto the Kenyan hotels. An overview of the company is that they have four hotel brands, ranging from Country Yard; which they describe as having its own distinct character to give guests an excellent experience in an elegant environment; to Road lodge with is a bare minimum hotel. The number of hotels is 55 with and another two in the pipeline, and 2 hotels in Kenya and 1 in Botswana.
Their revenue is up 9% compared to the previous period, and Headline earnings are up 14%. The impressive part of the business is their cost controls with, costs increasing 5.7% which is in line with inflation, but what shows to me their quality management is that despite electricity prices going up, their electricity cost has come down. A disappointment though was their occupancy rates, which ticked up slightly to 64% from 63% in the previous corresponding period. Going forward the management team expects this figure to improve with their forecast of improved demand towards the second half of the year. If that is the case, then City Lodge looks very attractive, because as occupancy rates increase, their profit per room increases. Their EBITDA currently sits at 42.1% which is not too shabby, and it will go higher with occupancy rates.
City Lodge are also looking at expending into the rest of Africa, where currently they have 3 hotels. The two in Kenya, they owned 50% of through a joint venture where they have now bought out their partners. A calculation that Byron did 6 months ago, using the full year results put the profit made in the rest of Africa per room at four times that of South Africa. The group say that they are looking at expanding further in East Africa and move onto West Africa, using the lessons learnt and the platform set in Kenya.
The potential to expand into the rest of Africa is exciting and as the economy picks up so should their occupancy rates. The main worry for me is the low growth that is expected for South Africa this year, which will make it very difficult for them to fill more rooms.
Home again, home again, jiggety-jog. We are up for the day, better European GDP numbers are pleasing!!! Better in the place that people hated to invest in a couple of years ago. And guess what, it is all still together.
Sasha Naryshkine, Byron Lotter and Michael Treherne Email us Follow Sasha, Byron and Michael on Twitter 011 022 5440
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