"The company cites weaker demand from their main customer, China and more supply. Classic part of the mining cycle is when more supply comes on stream as a result of the higher prices. In the market overview segment, Kumba says: Global seaborne iron ore supply rose 11% in 2014 led by a 24% increase in Australian exports as well as a 4% increase in exports from Brazil and 2% from South Africa."
To market, to market to buy a fat pig. Greece continues to dominate headlines and selling takes place on the heightened prospect of Greece leaving the Euro zone. I was particularly pleased with a question directed at a Greek politician, which went along these lines: What does Europe have to lose if Greece leaves the Eurozone? He kind of stumbled through the question and spoke of high unemployment across Europe and in particular Greece. I think too much is made of Greece, their blackmail and so on. I do realise that their woes are other peoples woes too, the problems however in terms of how it was created was not someone elses doing. i.e. The debt was not imposed upon the Greek people, you cannot consume and use so much and expect the problem to go away.
In fairness to all concerned, the Greek economy was the fastest growing in the region, even the Reinhart and Rogoff book suggested that perhaps Greece had transcended to a different bracket, out of serial defaulters. It seems that even they, as sceptical as they were, got it wrong. The only solution to the Greek woes is to return to high growth in order to repay what will no doubt be a restructured debt, with common ground found. If the economy manages to grow quicker than the rest of the zone, return to primary surpluses (on track for the first in 25 years next year), then perhaps all of this is achievable. Nobody likes hardships, I get that. Greeks are however European. Perhaps this proves that all and sundry should keep a closer eye on one another budgets. And then what, in times of stress, act sooner? Labour reforms are required, perhaps Greece can attract a whole lot of investment by being a lower tax (company) environment for all multinationals, one knows that they need it.
Another losing day for stocks over the seas and far away, although nothing dramatic really from the indicated start. What I mean by that is that futures trade through the day, indicate what the market could open at, as a function of earnings and in this case the mood on the day, indices trade whilst the market is open. Stocks in the US closed the normal spot session around where the futures markets indicated that they would open, hence no big moves here locally overnight. At the end of the day, and I cannot stress this enough, markets move as a function of earnings and the collective stock prices. You own shares of real companies and not indices, therefore if the index does X or Y or Z, what really matters in the P&L column and from a cash flow point of view (dividends) is whether or not the company/companies you own made progress last year. More importantly, if you own them today you want to be sure that their prospects are improving and not dimming.
Company corner snippets
It is so easy to sit here in an aircon office and critique other peoples businesses. Remembering that the power has not always been reliable, so we have not always had aircon, our working conditions need to be improved. The point I am trying to make is that we have choices and it certainly makes it easier. For instance, if you are a miner of a certain precious metal, your choices are far fewer, you cannot move the deposit to escape illegal miners, average electricity supply and a demanding set of regulations. I saw results yesterday from Amplats and Harmony, it is incredibly tough out there. Costs continue to rise above inflation, I saw Amplats said that they managed to keep their inflation slightly lower than South African mining inflation. Paul noted that the open cast mining of Amplats made all the money, the deep underground mines were as a collective not profitable. Another person on Twitter noted that underground mines are hugely energy intensive. It makes sense to focus all of the companies best efforts on the profitable ounces from the (unfortunately for labour) more mechanised open pits.
Another mining company to report full year numbers is Kumba Iron Ore, ahead of parents company Anglo American's results on Friday. Kumba is of course more than two thirds owned by Anglo American. You can read all of the highlights, in what was a very tough second half, here: Results highlights - 2014. It is important to note that the average price for Iron Ore over the period was 97 Dollars a ton, currently we are a little above 61 Dollars a ton. The company cites weaker demand from their main customer, China and more supply. Classic part of the mining cycle is when more supply comes on stream as a result of the higher prices. In the market overview segment, Kumba says: "Global seaborne iron ore supply rose 11% in 2014 led by a 24% increase in Australian exports as well as a 4% increase in exports from Brazil and 2% from South Africa."
Headline earnings was lower than the year prior at 11 billion Rand, headline earnings per share for the full year shrank 29 percent to 34.32 Rand per share. Revenues were lower (as a result of lower commodity prices) at 47.6 billion Rand. A final cash dividend of 7.73 Rand was declared, on top of the 15.61 declared at the interim stage. This is the lowest final dividend declared since 2010 and reflects the current environment. The company has lowered their dividend cover from 1.3 to 1.7 times, as the company "recognises the impact of lower iron ore prices on the company's cash generation amidst the continued uncertain market environment." For the first half, the company made 20.30, the second half you can see that it falls to 14 Rand. At a market price of somewhere around 237 Rand a share, with expectations of somewhere in the region of 23 Rand for the full year (a dividend cover of 1.7 times equals 13.50 Rand) which seems that the market has got it right.
If you buy them today and you are in some way "sure" that the iron ore price cannot go any lower (Andy Xie, he is bearish, he says it may go to 40 Dollars a ton), that yield seems attractive. Phew, it is tough, the company will continue to push volumes and try to keep costs under control, that is what they can do. The price of the product that they produce will be determined by the steel market, growing demand and consumption should see levels elevated to a new floor level. Your guess is as good as mine as to what is going to happen. The share price is down 3.3 percent, we continue to avoid single commodity stocks.
Talking single commodity stock, there has been a deal announcement from (I am sure that it is fair to say this) two mid tier platinum producers. Northam are acquiring the platinum assets, Everest, from Aquarius Platinum. Price? 450 million Rand. Why? It is next to Northam's other asset, Booysendaal. Where? Near the town of Mashishing on the Eastern Limb. Mashishing is the new name of the town Lydenburg, people love catching trout out there, not so? I remember spending time as a kid on a commercial trout farm there, my best mate in junior school, his dad was involved in the industry. It was cold during winter, that was for sure.
Everest has been on care and maintenance since June of 2012, Aquarius was the first mover in cash conservation back then. 60 million ounces is what Northam suggest, Aquarius view this as an opportunity to strengthen their balance sheet in challenging times and focus on Kroondal (50:50 pool and share agreement with Amplats) and Mimosa (50:50 ownership with Implats). Remembering that the Zim government are putting pressure on mining companies to build smelting capacity in Zim, it can't be easy there. Aquarius may well end up with their flagship mine, Kroondal, and question marks around Mimosa. Wow, that mine may be closed as a result of a benefaction tax making it unprofitable. Aquarius has been a train wreck for investors, sadly, such high hopes have turned to little more than despair. Northam has not been so bad. I expect that within the South African landscape the smaller producers will continue to become more fragmented.
Tiger Brands released a trading update yesterday that Mr(s). Market definitely did not like. This was for their first quarter to end 31 December 2014. There was only a 7 percent increase in turnover to 8.2 billion Rand, the company suggested that tough trading conditions persist locally here in South Africa, as well as across the continent in terms of their business operations. Higher pricing, having to pass on the costs to the consumer, has impacted sales. The weaker Rand has not helped, many prices of raw commodities are set in US Dollars. The company has however still maintained their market share. There is a conference call at midday today, we can get a sense of how the weaker Nigerian market has been impacting the group, that no doubt will be one of the talking points. As the company points out in the trading update, currency issues (as a result of lower oil prices) have created liquidity issues with the currency in Nigeria.
Expectations of an immediate reprieve in Nigeria are a little too early to call, the falling oil price is having a negative impact on the Nigerian budget, equally a dodgy looking political landscape. If you did not hear, Nigerian elections were postponed for 6 weeks yesterday. And the Boko Haram insurgency has been well documented, for the time being there seems to be no winning there for the Nigerian government. More will be revealed on the conference call today no doubt, I would say that perhaps the Nigerian focus has been too much in this trading update. The stock slumped five and one quarter percent, the share price is about flat this year and again flat this morning as folks wait for more information around midday.
Imperial Holdings released a trading update yesterday, not great, the market was less than pleased. For the half year, core EPS is expected to be 13 to 16 percent lower. Operating income is expected to be between 8 and 11 percent lower than the prior reporting period. The reason for the lower earnings is that this is comparing the business to a time when there was a) a gain on the sale of a business, and more importantly b) Rand weakness coupled with a weaker consumer has meant that the vehicle import, distribution and dealership divisions have been under pressure. The full update for the year is expected to be provided when the company releases their interim numbers, two weeks today in fact. Yip, it has certainly been more than a little tough out there for consumers, it shows through company consumer patterns.
Did you see that Apple are basically the most or only really profitable company that manufactures smartphones. Check this BusinessInsider article out: Apple is taking 93% of the profits in the smartphone industry now. As you can see, there is no information for private phone maker Xiaomi. That is amazing, Apple has 93 percent of all the industry profits, their phones are clearly too expensive. Then again, according to a WSJ article that I read the other day, there are only two distinct kinds of phones, expensive ones that are high end and cheaper ones that are lower end. Apple does not want to really make a cheaper phone, for what? You can either afford one, or you cannot, they do not want to be a mass product, the price is part of the allure. Talking of cheaper, Apple are raising money in Switzerland, where the government there enjoys low rates. No, the Swiss government gets people to pay them (negative rates) for their debt. Retail demand should be strong, so says a credit strategist at UBS, when quoted in this WSJ article: Apple Plans Debut Swiss Franc Bond Sale. The mind still boggles how Nestle and the Swiss government are able to raise money at such low rates, Apple has noticed this too.
Things that we are reading, you should too
It is great when you have other companies advertising your product and in this case it is the big brand of American Express punting Apple pay - American Express launches vintage-themed ad starring Jerry Seinfeld, John Cleese, Jackie Chan and Tina Fey to promote Apple Pay
Another South African making waves, Mark Shuttleworth's Ubuntu has launched a smartphone - Ubuntu smartphone offers alternative to apps. It will be interesting to see if their approach of not having an app interface works or not, you never know if you don't try though.
This may sound easy enough but when you think about the complexity of having a robot understand what it is watching , it's not a small feat - Robots Learning to Cook by Watching YouTube Videos. Think about how different our world will be when robots can learn by just watching and then implement what they have learned.
Maybe we can buy one - Want to Buy a Used German Power Plant? Shipping Is Included. It is interesting to see the dramatic effect renewable energy is having on their electricity price. You have to think that the trend will spread to other countries in time.
Home again, home again, jiggety-jog. Stocks are a little lower, the focus should hopefully return to earnings pretty soon, we are certainly by no stretch of the imagination through earnings season. We continue to be excited by human innovation, new inventions, progress and fabulous new products from businesses that we have access to. We continue to back strong management teams with positive energy in sectors that have good growth prospects. Make sense? Easy enough?
Sasha Naryshkine, Byron Lotter and Michael Treherne
Follow Sasha, Byron and Michael on Twitter
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