Jozi, Jozi. 26o 12' 16" S, 28o 2' 44" E. Wrong again! That is two meetings in a row here that I was wrong on the MPC. Whilst we were trying to bowl the "English" cricket team out (they speak English, if not all born there) in London at the Oval, locally we were surprised by a rate cut. I really hope for the Reserve Bank's sake that "things" don't get better as quickly as I think that they might. The enormous efficiencies that companies have managed to build in over these lean times mean that most businesses are better placed than ever before. Although, it is still very tough out there, not too much is going on. If it is different where you are, as ever we would love to hear from you, we can publish your pieces in the note.
So the surprise rate cut saw us blindsided, retailers rocked, big banks not so much. But why would you think that though, surely banks would benefit from the cuts in rates? But it is getting to the point where banks margins are actually squeezed with lower interest rates. But others, the geared retailers and the shorter term lenders in the form of ABIL and Capitec (with higher lending rates) stood more to benefit from the rate cut. The property loan stocks also took off, the thinking of course is that in the search for yield, at least these stock prices of the property sector are going to be better investments than the other fixed income options. Those stocks as a collective were up one and a quarter percent, whilst the banks were off 0.77 percent. The overall market, the Jozi all share index added three quarters of a percent to end the session at 34292 points.
Byron's beats covers most of the important news over here in the Anglo American stable. Gosh, they have been very, very busy, some good for some and some ugly for certain individuals. Here goes:
- Lots of news coming from Anglo America over the last few days. First we had the Anglo Plats update which we already covered then we had an announcement yesterday afternoon indicating a big management shift.
Anglo American plc announces a number of executive management changes across its South Africa based businesses following Neville Nicolau's decision to resign as CEO of Anglo American's Platinum business to pursue other interests.
"The following changes are effective from 1 September 2012: Platinum - The Board of Anglo American Platinum Limited has appointed Chris Griffith as the company's new CEO. Mr Griffith has been CEO of Kumba Iron Ore Limited (Kumba) since 2008. Prior to joining Kumba, he worked at Anglo American Platinum for 18 years, reaching the position of Head of Joint Venture Operations. In the interim period until 1 September 2012, Bongani Nqwababa, CFO of Anglo American Platinum, will fulfil the role of CEO of that business.
Kumba Iron Ore - The Board of Kumba Iron Ore Limited has appointed Norman Mbazima as the company's new CEO. Mr Mbazima has been CEO of Anglo American's Thermal Coal business since 2009 and has an intimate knowledge of the South African mining landscape and many of Anglo American's key partners, including Eskom and Transnet. He was previously the CEO of Scaw Metals and joint acting CEO and CFO of the Platinum business."
This is big news. Chris Griffith is highly regarded, we will have a look at the Kumba results which came out this morning later and you will see why. We had a discussion in the office yesterday after the news came out and all agreed that we would rather be Iron Ore miners than platinum miners right now. It also spurred me to check the relevant market caps of Anglo Plats and Kumba. Fascinatingly Kumba is now comfortably larger at R182bn compared to Amplats at R113bn. Chris Griffiths has a big challenge ahead but maybe he is the right man for the job.
So that was yesterday. This morning Anglo released their production report for the second quarter ended 30 June 2012 followed by Kumba's results. In case you forgot Anglo own 65.2% of Kumba. We will cover these now.
Anglo production report.
The report looked good, everything showed improvement except for platinum and Diamonds. The Iron ore division grew by 12% largely thanks to Kumba. In fact of the 12.9 million tons Kumba contributes 11.4 million while the Brazillian Amapa production contributed 1.5 million tons. A lot is still expected from the Brazilian operations in 2013 and beyond.
Met coal was a record quarter after recovering from bad weather in Australia. This was up 23%. Thermal coal was up 7% from their SA division despite freight issues with Transnet (not good) while the Colombia division was up 22%. Copper was up 7% with the Los Broncos expansion project starting to take effect. Weather and safety delays caused production to decrease compared to the first quarter of the year. Nickel increased 65% because of a big ramp up while platinum, as you know from yesterday, declined 13%. Diamonds decreased by 11% thanks to market conditions and maintenance.
All in all it looked good and the market seems to like it with the stock up 2% so far. But the guys who are dragging the team down are a concern. And at the same time Billiton do not have these bad team players. This includes Platinum, Diamonds and mining in SA. Sad but true. We prefer BHP.
Kumba Results.
Another good set of numbers from the Iron ore miner, even though profits were down due to lower Iron ore prices. Here are the numbers from the release.
"Kumba's headline earnings were R7.4 billion for the six months ended 30 June 2012; 18% below the R9.1 billion achieved in the first half of 2011. The decrease in earnings was primarily as a result of substantially weaker iron ore export prices together with cost increases which were partially offset by higher export sales volumes for the six months. The higher export sales volumes and a more favourable Rand/US Dollar exchange rate aided the 5% growth in revenue to R25.2 billion for the six months, another record for the group, despite the decline in iron ore prices. Attributable and headline earnings for the period were R23.05 and R23.07 per share respectively, on which an interim cash dividend of R19.20 per share has been declared."
They expect Iron ore prices to settle at these levels so let's assume a similar amount is earned in the second half. That puts the company on a forward PE of 12 and a whopping dividend yield of 6.7% according to my calculations. Total Production is up 13% thanks to the Kolomela ramp up which again is running well ahead of schedule. The Sishen mine production was slightly down, 4%, due to weather and some operational issues.
Their prospects seem muted to positive. They have seen a levelling out in China but feel current stimulation will stabilise things. Don't forget that historically Iron prices are still extremely inflated even though they have come down somewhat this year. We like the stock but as with any single commodity miner it is a wild ride. At least you get paid a handsome dividend while you ride the volatility.
New York, New York. 40o 43' 0" N, 74o 0' 0" W. Hip-hip hooray. And then the another one, but Mr. Market did not quite take that one to heart. Just after midday on Wall Street everything was going swimmingly well, but stocks closed off their best levels. Still, I would take that every day over the opposite happening. The broader market S&P 500 added just over one quarter of a percent to close at 1376 and a half points, the Dow Jones Industrial Average added exactly the same amount, whilst the nerds of NASDAQ rocketed up, off the best levels of the day, but still a comfortable 0.79 percent up for the session to 2965. A couple more days like this and nerds will be closer to 3000 points, but bear in mind that the all time inflated Über-bubble high was back in March of the year 2000 (say it like Conan O'Brien says it!), where the tech bubble was at its hottest. 5048 is the all time closing high, March 10, the year 2000. I had not been in this industry for very long, so I guess what was normal for some, is not for others! In less than five years the index grew fivefold. If you were not investing in tech stocks, then you were just plain stupid back then. And then, after that, if you had avoided the sector, or got out "early" then you were clever.
I found these milestones online, from this Yahoo! source Milestones in the Nasdaq composite index:
- First close above 1,000: July 17, 1995.
2,000: July 16, 1998.
3,000: Nov. 3, 1999.
4,000: Dec. 29, 1999
5,000: March 9, 2000
Next day: 5,048.62 (all-time high)
By October 9, 2002: all the way down to nearly 1,100
But of course these stocks that make up the biggest part of the NASDAQ by market cap are all much, much cheaper than ever before. Microsoft now trades on 11 times earnings, whilst the all time high (adjusted for the split last in Feb 2003) was nearly 59 Dollars at the end of December 1999. And the annual earnings per share back then was 1.42 USD, or net income of 7.785 billion Dollars on 19.7 billion Dollars worth of revenue. That was in 1999 when businesses were spending like gang busters, just two years prior to that in 1997, the business had made 3.454 billion Dollars off only 11.936 billion Dollars worth of annual sales. Just last evening the Microsoft revenue for the past quarter clocked 18.059 billion Dollars. The quarterly revenue was nearly more than the entire 1999. And more than double for the quarter past, than for the whole of 1996, where net revenues were 8.671 billion Dollars for the full year. And if you needed to know, last evening the company reported that they have 63 billion Dollars worth of cash on their balance sheet. Cash on hand for Microsoft in 1995 was less than 5 billion Dollars.
I am getting to some sort of point though. Adjusted for the share splits, the share price now is at the same level it was in 1998. 1.83 Dollars per share is what the company made back then, BUT, they have done two share splits since then. So divide by two in March 1999 and another in Feb 2003, and you get to currently 46 cents worth of annualized earnings. So, back then the stock was trading on nearly 70 times earnings. And today, for all the hard work and better products released (a few stinky buys) the stock can only get an 11 times rating from Mr. Market. The truth.
Google hit the streets with results afterhours and a beat of expectations, which is always comforting to see. A bottom line beat, but a top line miss. EPS was anticipated to be just over 10 Dollars a share, a slight beat of 10.12 Dollars was delivered, revenue missed but still showed a 35 percent increase on Q2 2011, the comparable quarter. If you are looking for the official release then you will have to check out Google finance ironically, over here: Google Inc. Announces Second Quarter 2012 Financial Results. I use Google Finance all the time, it is one of my favourite free services, if not absolute favourite. I do NOT use the Yahoo! service because that comes with a login.
So where did Google make all their money? Well, in the traditional places, paid clicks increased 42 percent over the comparable quarter, but only one percent on the prior quarter. 90 percent of their sales still come from the advertising revenues. Motorola made a loss and the jury is still out on that one, but I suspect that Google are a smart bunch, they are biding their time. I remember that my wife had one of those clam phones, they were very cool at the time. They made you look a little like that Horatio fellow from CSI Miami, remember him and his witty one liners? Cash on hand is now 43.1 billion Dollars, WOW! That is enough to buy Yahoo! twice over and have some left over. And then Google can reemploy Marissa Mayer and pay her less, check this out from BusinessWeek just a couple of days ago: Yahoo: Help Us, Marissa Mayer. You're Our Only Hope. I honestly do not think that one person can change something that is structural with a business, they are no longer market leaders. I know that Steve Jobs almost did not go back to Apple, and I know that Marissa Mayer is really amazing, but there are limits, not so? I hope that Yahoo! are going to get what they pay for, her immediate pay package is around 100 million Dollars. Check out what some folks think that she could do: 5 things Marissa Mayer will change about Yahoo.
We like Google a lot, and think that the company will continue to be an innovator, amongst the leaders in new product delivery and implementation. Quality attracts quality, that is what happens to good businesses, the smartest folks want to further their careers here, rather than at the laggards, dare I say it, at Yahoo! Earnings expectations next year are expected to be around 41 Dollars. So, with a share price at 600 odd Dollars a share, is that expensive? 47 Dollars worth of earnings per share in 2014 are the estimates, just under 13 times earnings for 2014. We continue to rate the stock a buy.
Currencies and commodities corner. Dr. Copper is last at 344 US cents per pound, the gold price is lower at 1577 Dollars per fine ounce. The platinum price is lower at 1409 Dollars per fine ounce. Commodities are lower across the board, the oil price is also lower at 91.69 Dollars per barrel. The Rand is weaker, 10.07 to the Euro, 12.94 to the Pound Sterling. The market is flat, GE results were a slight beat on the bottom line, a miss on the top line. Futures are lower, indicating that we are perhaps going to slide into the weekend here.
Sasha Naryshkine and Byron Lotter
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