Jozi, Jozi. 26o 12' 16" S, 28o 2' 44" E. It was a strange sort of a day here in Jozi, I expected worse because of the lower than anticipated Chinese GDP numbers, but, 8.1 percent growth is still the envy of the rest of the world. Unless you are Ghana, which I saw grew at around 16 percent in the fourth quarter, driven by a boom in the oil sector. But not off the enormous base that China has grown too, remember the message Friday? Resource stocks sold off in the second part of the session, they were actually comfortably in the green at the beginning of the session. The Jozi all share index closed off one third of a percent, down 111 points on the day to 33705 points. The same old worries emerged, Spain and their funding issues and the impact that is having on Italian borrowing costs. At much irritation of the Italians as I can understand!
Yech. The Harmony Gold stock price took some heat Friday, down at a 52 week low, 7869 ZA cents per share. The loss on the day was three and a half percent. The reason why the stock declined on Friday? Well, there was a production report for the first quarter, which was ugly, the company expects 18 percent lower production than the previous quarter. Now remember that gold production in the previous quarter was up 5 percent to 344592 ounces, whilst cash operating costs were actually lower at 249 thousand Rands per kg, or 958 Dollars per fine ounce. AND, there was a very modest dividend of 40 ZA cents for the first half.
BUT, 18 percent lower on the quarter? Wow. That is around 282 thousand ounces produced last quarter. And the gold price and currency have actually been working against them in this quarter. More so the currency, although that has been really weak in April, but that is outside of the last quarter. First, in Dollar terms, the quarter was about the same as the previous one, check it out, courtesy of Kitco directly off their website:
BUT, this is a much more important graph, the Rand gold price versus the Dollar gold price, you can see that the local currency weakening has really helped out holders of GLD (the Rand gold price instrument) and the gold producers locally, but not as much sadly. Here it is, again courtesy of Kitco:
The part that I want you to look at is the January to March Rand gold price, which is lower than the prior six months. So, what I am trying to say is that it could be uglier than at face value. So why was production so much lower? The company lists a few reasons, let me do a Jackie Selebi copy and paste, first reason:
- "The festive season and public holiday disruptions associated with the March quarter, being less shifts worked than in the December quarter, as well as slow start-ups post the holidays;"
Huh? Public holiday disruptions? New Years day and Human rights day? Or is it just a case of the workforce only getting into the swing of things after a couple of weeks in January? Perhaps.
- "Safety stoppages;"
We know that one, you know my views, perhaps a closer look at the shaft versus mine debate, when there is a fatality. Don't get me wrong, one mining death is one too many, but it is a very dangerous profession. And a poorly paid one too, in large part because the skills for the poorly paid jobs (in almost every industry) are lower. I do not know what the answer is, but it is impacting on one of our main industries in South Africa. But one death is one too many. So the balance needs to remain.
OK, next:
- "Shifts lost due to the one day protected strike of the Congress of South African Trade Unions (COSATU);"
One day, that basically is 3745 ounces, or 6 percent of the ounces "lost" relative to the last quarter, so perhaps not the biggest issue that Harmony had. And then Harmony talk about the heavy rains in PNG at their Hidden Valley asset, remember that at the half year stage production had ramped up 25 percent. There is nothing that you can do about the weather. And then the upgrade of infrastructure at the Doornkop asset, but that was not a surprise. This resulted in a loss of 44 percent in production relative to the previous quarter. Doornkop represents around 9 percent of all South African revenue, and about the same amount from a production point of view. So I am guessing that this has about one quarter to one third of the production losses when measured against the last quarter. Next and perhaps most disappointing, the grades are lower, in particular at their biggest South African asset, Tshepong:
- "Lower than expected grades at Tshepong, Masimong, Unisel and Joel contributed to a 12% decline in underground grade."
All in all, they, Harmony are disappointed. As was Mr. Market. And I am guessing that the trend of higher costs will remain. I am guessing that the gold will become deeper, more dangerous to find and that most of the "easy" stuff has been extracted, so perhaps grades are going to be impacted further. In a world of what I consider investment grade, sadly they do not get a podium placing. Sorry gold bugs, but the last thing, and most important, I still do not understand the fundamentals behind the product that they produce, the yellow metal, that still captures a lot of appeal as an alternate investment class. You know the argument, the only real currency. Why is that so? Because someone told you that it was so. From a share price point of view, the stock might actually look cheap at these levels, having been squashed.
New York, New York. 40o 43' 0" N, 74o 0' 0" W. A big sell off towards the end of the days trade, after Mr. Market tried hard to make a comeback towards the middle of the session but a late sell off, attributed to a weaker than anticipated consumer confidence number at the beginning of the session. Session end all the major averages were lower, the Dow Jones just over one percent, the S&P 500 down one and a quarter percent, whilst the nerds of NASDAQ closed lower by nearly one and a half percent! Not good.
This week should be all about earnings! BUT, there is a Spanish ten year bond auction on Thursday morning. In amongst some results from Citigroup today, Coca-Cola, JnJ, IBM, Intel, Goldman Sachs on Tuesday, Halliburton, Qualcomm and Yum! Brands on Wednesday, Bank of America, Du Pont, Freeport-McMoran (from general commodities point of view) and Microsoft on Thursday, whilst on Friday we will see numbers from General Electric, McDonald's and Kimberly-Clark. Whoa! That is more than enough to get you excited, but the reason why I am most excited is simple, it can then be all about earnings. But, that crazy guy Jim Cramer said that the market participants could actually be captured by a poorly performing Spanish bond auction, which he actually expects. But, earnings ultimately drive share prices levels in the long run. But I am well aware that sentiment makes up around half in the short term, perhaps even more of that. Good companies able to be bought at good levels will stand you in better stead in the long run, trading markets, that is just hard and requires a large amount of luck.
Currencies and commodities corner. Dr. Copper is last at 364 US cents per pound, the gold price is ticking up a little, 1649 Dollars per fine ounce, the platinum price is last at 1574 Dollars per fine ounce. 102.76 Dollars per barrel is where NYMEX WTI trades. The Rand is trading mixed, 7.87 to the US dollar, 12.63 to the Pound Sterling and 10.37 to the Euro. The market is mixed today, up and down.
Parting shot. Don't be confused. Old Mutual today goes ex dividend of 21.5 UK pence (which includes an 18 pence special dividend), roughly 270 ZA cents. But the share price is down only 130 odd cents today. Why? Well, there is actually a consolidation too, for every 8 shares that you used to have, you will be getting 7 now (actually next week), a strange sort of a consolidation really, normally it is a ten for one or so, that has been my experience, or two for one, that ratio is not one that I am completely familiar with. So, let us see where the share price should have adjusted, bearing in mind that there might also be natural sellers in the form of dividend stripping folks. Those who sell post the dividend, although I am not too sure that practice takes place as much as it did in the past. So, first things, the price needs to be higher in lieu of fewer shares in issue, if the value needs to be the same as before. PLUS, the price needs to adjust for the dividend. So, don't get anxious if you own the stock (many South Africans still do through the demutualisation process), there are the two things happening.
Sasha Naryshkine and Byron Lotter
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