"Impala have produced less platinum than anticipated and their costs have nearly doubled in the last five years. Per ounce of production in 2010, the number was 10,078 Rand per ounce, in 2014 it was 19,430 Rand. For the last six months it was 22,952 Rand per ounce. A reminder, if you needed one, before you get a single ounce of platinum out the ground, the Rand selling price is 1158 USD per ounce multiplied by 11.87 Rand to the USD = 13,745 Rand"
To market, to market to buy a fat pig. Before yesterday I hadn't heard a single One Direction song and had never watched a single episode of Top Gear. Fair Dinkum, as they say in Australia. Yet those two things, Jeremy Clarkson and Zayn Malik, became so important on social media. Malik was born in 1993, Clarkson reignited the show and was host from 2002 to err ... yesterday. According to the Wikipedia page, for Top Gear, the show is viewed 350 million times a week in 170 different countries around the world. It must have been a real money spinner for the BBC. @BBC_TopGear has 1.84 million Twitter followers.
That absolutely pales into insignificance against the @onedirection followers, a whopping 23 million. Success of that magnitude in less than 5 years, simply astonishing and absolutely amazing what can be accomplished in that short a time frame. Well done to the X Factor and Simon Cowell, this band was thrown together in ten minutes apparently. Wow.
That earth shattering news was met alongside equally earth shattering news, markets sank sharply, stocks down a lot. Why? The US economy was seen to be slowing a little, as the story from Bloomberg points out, this is the worst miss in expectations: Dollar Poised to Decline Amid Worst Data Misses in Six Years. Well I guess that means interest rates are not going to go up any time soon, right?
All that matters is that you stay invested in the companies that have better prospects than their peer grouping, or that are in industries that are poised to grow faster than the global counterparts. Easier said than done of course, they (being the companies you are looking for) are either too expensive for the balance of the market or too small with too many risks. As much as their are MANY success stories in the equities markets, there are many disappointments too. The trick is to find balance.
In the end the local market had lost over a percent, the industrial stocks dragging us lower. Over the seas and far away, the nerds of NASDAQ was over two and one-third of a percent lower. Wow. Those are pretty sharp sell offs, we are here again. I think that with single family home sales being at a 7 year high sounds like a good thing. Company earnings guiding lower, not thanks to the US economy being much stronger than the rest of the world. Bizarre, not so? I guess that is just the way that the cookie crumbles.
Indices, or loosely "the market" is made up of different companies, their different share prices based on the their respective prospects as per the broader participation in the market. It was yesterday that I was looking at some fallen angels, the only reason was simple, to illustrate that whilst the broader market goes up over time, not all companies manage to make progress. The two that I looked at were Impala Platinum and Murray & Roberts. Different businesses completely, you could argue that Impala has a large element of construction attached to it. To sink a shaft and maintain a shaft and mining infrastructure takes an enormous amount of engineering skills, long before you can even get the ore out of the ground.
Impala have produced less platinum than anticipated and their costs have nearly doubled in the last five years. Per ounce of production in 2010, the number was 10,078 Rand per ounce, in 2014 it was 19,430 Rand. For the last six months it was 22,952 Rand per ounce. A reminder, if you needed one, before you get a single ounce of platinum out the ground, the Rand selling price is 1158 USD per ounce multiplied by 11.87 Rand to the USD = 13,745 Rand. Look, it doesn't mean that Impala are operating in an environment that is consistent with yesteryear, meaning that their costs should reduce over time. Having said that, what are the chances of their biggest fixed costs reducing in a hurry? About zero. They are going to have to pay a productive workforce more, they are definitely going to have to pay Eskom more, from what we can tell.
From the 2014 annual report: Impala's unit costs were adversely affected by the strike and resulted in the R22 036 per refined platinum ounce reported, a 27.8% increase on 2013's R17 241. The strike, above inflation wage increases, lower productivities and above inflation power costs (in conjunction with lower volumes) all affected unit costs.
You could argue that, based on the factors from the strategic review document from February, you would think that the price should be higher. The platinum price, based on all these factors, should be higher, yet the stronger Dollar has probably prevented that in the short term. I wonder whether or not the motor vehicle manufacturers have been loading up, with the cheaper prices. The thing that worries me the most, is that all the above ground stock, in the form of the autocats that have been manufactured already, those can be recycled. The ones built today are more efficient than the ones built even a decade ago, a motor vehicle is a durable product, in other words not designed to last forever. The future for the jewellery market looks better.
Yet. The market has a valuation of 37 billion Rand, or a mere 3.3 billion Dollars, for the second largest producer of the precious metal. The five year Dollar return on the ADR (in New York) sees the stock down 81 percent. The S&P 500 is up 77.7 percent in that time. Locally, it has hardly been much better, the stock in Rands is down 70 percent, the rest of the market is up 83 percent. You could argue that it could not possibly be worse, the stock in Rands is at a more than ten year low, surely this is a buying opportunity. Perhaps. I would argue that there are far better sectors, less regulated, immovable assets, unfriendly operating environment that leads me to believe that the company might struggle in the short term. The platinum price needs a serious uplift, something that is puzzling many in the industry. We continue to avoid.
Murray & Roberts was equally unstoppable, all the government infrastructural work associated with the football World Cup meant that the market was willing to rate the company on 25 times plus earnings. The share price went to 110 Rand, around seven a half years ago, before the world cup. By the time the tournament arrived, the share price was below 40 Rand. Today the stock trades at a level last seen in October of 2004. It trades around 14.1 Rand, and has a market cap of a mere 6.36 billion Rand, about the same size as Caxton, the knock and drop newspaper people. Netcare are ten times the size of Murrays. Collusion, the prospects of very little local government infrastructural development, their Australian (and local) business not seeing the same type of mining spend, it just seems like it cannot get much worse. The expectations are almost identical to Impala, earnings to go sideways for three odd years. Or that is what the investment community tells you.
Perhaps Bill Miller, the legendary Legg Mason fund manager was right. Ignore sectors that are way too cyclical to call the bottom and top of, you might seemingly miss big opportunities in commodities and construction, energy and most other consumer related investments that rally or fall as a result of interest rates, those would be a big ignore, for Bill Miller at least.
Company corner snippets
Well, well. You can't keep a good man down, this time the former CEO of Massmart, Grant Pattison has been appointed the executive chairman of a US business, NRG Energy. Double energy. It is not a drink laced with sugar and caffeine, rather a provider of energy, alternative and all types. Pattison is an electrical engineer by trade, he has basically been without a job for a year. What I saw from his LinkedIn profile (what a snoop) is that he went to school in one of rural Zimbabwe's finest, Falcon College. Those who know, will know, if you know what I mean. Too many knows. NRG has a market cap of 8.54 billion Dollars, Expectations see the stock trade forward on 25 times earnings, hardly cheap. I suspect however Pattison will hit the ground running.
Whilst the story itself was released yesterday, the same snoop on the LinkedIn profile says that Pattison has been there since December. I do see him from time to time, if I do, I will be excited to engage him on what the company has to offer here in South Africa. The business of supplying power to "other people" will no doubt become more and more important. I suspect as many more people get their newer bills from Eskom, or the city, they will be thinking about alternative power sources, in the end it is the economics that will dictate how you react as a consumer. I suspect that we are very, very close in that regard. Meanwhile, "things" at Eskom are going badly, at least the load shedding has been short lived. It is going to be a long, cold winter if we can't meet the increased capacity.
Things we are reading
The big news yesterday is that Buffett and 3G Capital are buying Kraft and merging it with Heinz - Warren Buffett Quadrupled His Ketchup Investment. Having the a balance sheet the size of Berkshires defiantly has its advantages, coupled with the operational efficiencies that 3G Capital bring - Here's what happens when 3G Capital buys your company
Crop yields in the developing world, particularly Africa lag the developed world - Scientists have engineered the food that will help save a starving, warming planet. Through innovations like this and better farming techniques, foundations will be laid that will allow an explosion of economic growth.
Another feature from Facebook - Facebook officially launches nostalgia-inducing 'On This Day' feature
A new study looks at a potential outcome of changing the minimum smoking age - Raise the smoking age to 21
Home again, home again, jiggety-jog. Stocks are off a percent here at the start, other than the resource stocks, it has been an electric comeback from them as the Dollar continues to drift lower against all the major currencies. I guess that weaker US economic news needs to be "verified" by the data flow in the coming weeks, and then company results from the middle of April. An expected record buyback from collective companies is expected in the next quarter. I cannot say whether I think that is good or bad, I think that reducing the number of shares in issue has a wonderful compound effect for long term shareholders, provided of course that they are not used for excessive remuneration. Balance? Yes, always balance.
Sasha Naryshkine, Byron Lotter and Michael Treherne
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