Money with a dash of Funny: Amplats

Showing posts with label Amplats. Show all posts

Monday, 25 January 2016

Be Optimistic

"Points such as optimism appearing oblivious to the risks, whilst pessimism seems so much more intelligent and aware are true, even if not stuffed with facts. When someone is screaming and telling you the world is ending, you had better pay attention. When someone keeps telling you to keep calm and that everything is going to be OK, there seems a genuine "something" missing. They know nothing, so innocent and unaware of the world."

To market to market to buy a fat pig. That rally lasted all of ten minutes. Perhaps a little longer, in market terms. Depending of course at what end of the spectrum you invest. Two days is either a time that you can lose your boots and find them again, or a blink in the investment world. Stocks continue to trade in lock step with the price of oil, which really leaves me scratching my head. You would have to think that lower prices of fuel and energy are good for consumers globally, for earnings and equity market levels (i.e. all the energy and services related stocks), that is not too good. The journal (that is the Wall Street Journal to you and I, who are not for jargon) suggested that Oil, Stocks at Tightest Correlation in 26 Years.

In other words, and I think that this is the best way of explaining it, if I provided an oil and gas company with software, or even cleaning equipment, tight budgets would mean that I come under pressure too. At the same time, Joe Consumer has more money to spend and may well drive the global economy in a different way, consuming. Which may require higher transportation of goods around the globe (even locally), which means that demand for oil and gas get stronger. And so the cycle continues.

It is the same with the equities markets, day in and day out. The sun comes up, the electronic opening bell rings, stocks trade, there are sellers and buyers, the bell rings for the close, the sun goes down. Repeat, and repeat again. Yet in our jobs, no two days are ever the same, there is always something going on. Even if the underlying companies that have their stock prices change hands furiously do the same thing.

Yesterday in Jozi, Jozi, stocks sagged all the way into the close, where we ended the day nearly one percent down. Having opened better during the course of the day stocks went {hum the tune} slip sliding away. Paul Simon, what a singer! Unbeknownst to me, Art Garfunkel had a successful solo career. It is hard to believe that Simon and Garfunkel have been broken up since 1970, they started as school kids called Tom and Jerry.

Back to local equities, where it does seem like a simpleton cat and a friendly mouse keep chasing each other, there certainly was enough company news to leave you feeling indifferent. See below in the company corner segment. The Monetary Policy Committee has a really tough time of it later in the week, the drought and weaker currency will obviously mean imported inflation, the weak demand in the economy will mean a balancing act. And a consumer that whilst having worked hard to repair their balance sheets, still looks a little exposed. Good luck to them, the stuff that I have been reading suggests 150 basis points rate hikes between now and the end of the next year.

And then over the seas and far away, stocks in New York, New York sank in the second half of the session as oil prices slipped. Both the S&P 500 and the nerds of NASDAQ slipped over one and a half percent, the Down Jones by around one-quarter of a percent less than that. McDonald's produced some stellar results that were all led by the US again, it has now been confirmed by both Starbucks and McDonald's that the average Joe (and their cup of Joe) are in pretty good shape. Obviously the companies cannot control the currencies, McDonald's pointing out that they will be taking a currency hit. Tonight of course is the much anticipated and highly publicised Apple results. Those are set to be released after market, either stay up and see the release one hour (traditionally) after the market closes, or wait for tomorrow morning.

I am going to leave this part of the message with a simple, yet powerful message. Byron sent this onwards yesterday, it is simply titled Why Does Pessimism Sound So Smart? the author is well known in the financial world, a fellow by the name of Morgan Housel. In this article, Housel makes a few excellent points against the backdrop of the reality that the S&P 500 (has risen) 18,000-fold over the last century.

Points such as optimism appearing oblivious to the risks, whilst pessimism seems so much more intelligent and aware are true, even if not stuffed with facts. When someone is screaming and telling you the world is ending, you had better pay attention. When someone keeps telling you to keep calm and that everything is going to be OK, there seems a genuine "something" missing. They know nothing, so innocent and unaware of the world.

And then the last point that he makes is #winningly good (I just made up a word): Pessimists extrapolate present trends without accounting for how reliably markets adapt. If your energy prices double, you will look for an alternative, not so? Replace energy chewing light bulbs, use gas, start using solar panels, sound familiar? All those good things, and once it becomes economically viable, it becomes mainstream. What happens to the grid as we know it? It changes, for the better of humanity.

Company corner

Amplats warned that earnings would be well lower (much lower), in the face of what we now know is a changing company. Changing from expensive underground mining to fewer and more profitable open cast and mechanised mining. That is effectively the future that has been chosen by the shareholder. And to think that the share price of Amplats in Rand terms is down nearly 60 percent. The going has been more than tough, it has been awful. See the twelve months ended 31 December 2015 trading update.

Whilst the stock slipped nearly three percent on the day, I suspect that much of that was market related, implying that (using a Rumsfeldian) all this was known knowns and baked into the share price cake. Talking about Rumsfeld, I saw this via Quartz, can you believe it? Noted torture enthusiast Donald Rumsfeld has made a really difficult solitaire app. Which is more torturous, holding Amplats shares for the last decade or hearing about (from Rumsfeld) the hardest version of solitaire and downloading it to compete? It is close.

The Lewis group produced a rather tepid trading update, I guess that is to be expected in this environment. Over five years, the price of the Lewis stock is down 41 percent. The market is telling you something here, that it doesn't even believe the current price, relative to future prospects. The historical dividend yield is 11.8 percent, the multiple (the current share price to the historical earnings) is less than five times. You can't even buy a private business at that price. Mr. Market is clearly cautioning you on this one, throwing up a flag of sorts. Is the consumer really about to stop buying furniture and is the company going to been thrown the book by the regulators for their insipid business activities? Is that what Mr. Market is really worried about? Time will reveal the answers no doubt.

AVI, the brands business that sells well known household good such as Bakers biscuits, Five Roses, Freshpak (you Rooibos drinkers, you!), Provita, I&J (Feeesh) and distributor of the likes of Carvela, Lacoste and Kurt Geiger shoes through their Spitz stores , released a trading update yesterday. This is for their 6 months to end December. It looks OK at face value, the reason for the share prices of them, and their peer grouping, Tiger Brands and Pioneer Foods sinking over the last six months can be attributed to several things. The weakening Rand and crippling drought means that input prices are going to rise, whether or not these companies can pass it onto their customers remains to be seen. I guess not all of it.

The other "thing" that has happened is that global investors have fallen out of love with emerging markets, that is ironically longer dated in nature. It may take years before some money managers decide that emerging markets are no longer broken. Against that backdrop it is fair to say that the dividend underpin (currently 4.4 percent pre tax) should provide a floor for the stock. Thank goodness for prudent cash management. Sometimes boring can be good.

Linkfest, lap it up

Thanks to the information age and an increasing number of people willing to do the hard yards, it is getting more difficult to find inefficiencies in the market. Making continuous outsized returns is becoming that much more difficult - Why we'll never see another Warren Buffett or George Soros ever again.

Having a computer know if you are being sarcastic or not has very little practical use. It does however show how far machine learning has come, being able to detect sarcasm requires some level of "understanding" - Researchers have developed an extremely effective "sarcasm detector". I'm looking forward to a day where I can do even more stuff by just talking to my phone/watch/fridge/TV/car.

Our style of keeping things simple and keeping our eye on the longer term view has served us and our clients well over the past 13 years - Finding the Real Expert.

The article title is a bit misleading, I suspect it was chosen to get more clicks - Dumb Alpha: The Drawbacks of Compound Interest. The point of the article is that, when investing lump sums with a long term time frame, your timing still matters. The market returns closer to the starting point matter more to your long term returns than the latter returns. To maximise long term returns, regular additions to your portfolio is essential!

I don't agree with this guy at all, the former finance minister of Greece: Yanis Varoufakis: Capitalism will eat democracy -- unless we speak up. And communism or extreme socialism will work? You can't speak up there. North Korea, Cuba, the list is finite, which is a good thing for productivity and inventions. Any one who names a political agenda after themselves is a narcissist (Marxism, Leninism), there is a Greek word that Varoufakis will understand.

Home again, home again, jiggety-jog. Stocks across Asia are understandably lower. The Nikkei in Japan is down over two and a half percent, the Shanghai markets are nearly down three. Hong Kong markets are off 1.8 percent, at least the US futures point to a little green open, obviously with earnings in focus it will differ on a company by company basis. I thought that the market would be more receptive to earnings as a whole, rather the same concerns around the oil price, the global economy and in particular China remain front and centre.

Sent to you by Sasha and Michael on behalf of team Vestact.

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Wednesday, 22 January 2014

Slippery slimy Platinum landscape

"The question to ask, is the worst past us, or does a lot hinge on the line being drawn in the sand now? You can argue that this is an accounting entry, but shareholders still take it on the chin, the fact that the company is worth less than you supposed. I am not too sure that there is going to be a moment to own these in the coming year, a lot hinges on many unknown issues. How the government will react to realities of violence (I really hope not) and potential job losses on a larger scale. And of course real demand, how that picks up, that side looks better."

To market, to market to buy a fat pig. Mr Market was a mixed bag yesterday, there is always much on the go, but the headlines are going to be dominated by Davos get togethers over the next few days. I was wondering and we put the question to everyone around here, if you got a ticket and full expenses paid, would you go to Davos? I would not say no immediately, I would think about it. It could be a great opportunity to meet an enormous amount of people that ordinarily would not gather in one place.

But. I have seen some soft research that suggested that the importance of Davos, in terms of the media attention that it attracted and subsequent web traffic, peaked in 2009. I think inside of us humans exists a belief that powerful people can solve the problems of the world quicker and with one sweep of the magic wand, when in reality powerful people are still people. They might have many instruments and resources to help them with time management, but they only have 24 hours in a day. And lastly (and I say this almost every year), if the WEF was held in Mogadishu, how many people would go? With all dues respect to Mogadishu of course, the Somali civil war is an ongoing event.

If the organisation protests to want to solve problems of the rest of the world, then have the meeting in a third world country. Perhaps a peaceful one, that is very poor. Malawi springs to mind. But that country is so poor, our president knows that, there is not enough money to build an infrastructure. Enough of that, this is good, people meeting, perhaps this year they can discuss Skype and how to use that. Or FaceTime, those people are rich, they have the best products. Talking Apple, the company releases their numbers on Monday, expectations are for them to have sold around 55 million iPhones last quarter. We will see.

And other "market" related news, Mohamed A. El-Erian at the age of 55 has quit at PIMCO. Bill Gross, the cofounder of the business back in 1971 at the ripe age of 69 has said that he is looking forward to another 40 years of business. Currently the company manages around 2 trillion Dollars worth of bonds, and whilst they are fabulously wealthy as a result of a transaction done with Allianz in 1999/2000 (they bought 70 percent of PIMCO for 3.3 billion), both Gross and El-Erian. Although Gross is the one with real money.

So where to for Gross? He is staying and continues to manage the Total Return Fund, assets under management are around 244 billion Dollars. Wow. Although, as far as I understand it, that very fund saw outflows last year. It was the worst year for the fund (down 1.9 percent) since 1994, according to the FT -> Pimco's Bill Gross suffers tough 2013.

Ahhhh, shame, as we say around here. Even worse is that the fund saw outflows of over 40 billion Dollars, as you can see, according to that story. The great rotation and so on, out of fixed income and the safety of treasuries in particular and into riskier assets, including equities of course. Equities had a fabulous year, bonds had a very bad year. New normal, the term PIMCO coined a while back, now Gross refers to the bond wars. It is where some of the smartest people in our industry end up, in fixed income. Good luck to that team and their reading of the interest rate cycle!

It is worth taking a look when the phrase was coined back then: On the "Course" to a New Normal. September 2009:

"As of now, PIMCO observes that the highest probabilities favor the following strategic conclusions:

Global policy rates will remain low for extended periods of time.
The extent and duration of quantitative easing, term financing and fiscal stimulation efforts are keys to future investment returns across a multitude of asset categories, both domestically and globally.
Investors should continue to anticipate and, if necessary, shake hands with government policies, utilizing leverage and/or guarantees to their benefit.
Asia and Asian-connected economies (Australia, Brazil) will dominate future global growth.
The dollar is vulnerable on a long-term basis."

The last one actually, because of European woes, turned out to be wrong. The fourth one, people are now anxious about the so called BRIC economies. The first one continues to be spot on. The second and third, yes, maybe, let us side with yes. Three out of five is not bad, not so? That was the New Normal. Now is the era post the new normal I guess, much the same as the old normal, that is what the new(ish) normal looks like.

Ah forget it, it is more fun to entertain the idea of the most rich and powerful people on the planet washing down foie gras with Dom Perignon in the Swiss Alps discussing income inequality. Much more fun. As luck would have it, with a bit of research, Mohamed A. El-Erian once wrote an article titled Davos at a distance. And for the record, Warren Buffett has never found the need to go. Ever. So whilst this might be very important, perhaps for us it is not really that important.

Now this is pretty interesting. Whilst Anglo American Platinum have released a trading update this morning for the full year and it looks mixed, the executives of Lonmin (Ben Magara), Implats (Terrence Goodlace) and the aforementioned Amplats (Chris Griffith) have released a joint statement regarding the pending strikes.

First things first, the Amplats trading statement. HEPS are expected to be between 480 and 590 cents (wide range) from a loss of 562 cents the year prior. Thanks in large part to a weaker currency and higher physical volumes. But Basic earnings per share (EPS) is expected to be minus 495 to 605 cents. This is as a direct result of a "write down (R2,814 million pre tax) in the carrying value of various projects and other assets as a result of the implementation of the restructuring plans; and the loss on the acquisition of properties amounting to R833 million related to the Atlatsa Resources Corporation (Atlatsa) refinancing transaction."

Yowsers. The question to ask, is the worst past us, or does a lot hinge on the line being drawn in the sand now? You can argue that this is an accounting entry, but shareholders still take it on the chin, the fact that the company is worth less than you supposed. I am not too sure that there is going to be a moment to own these in the coming year, a lot hinges on many unknown issues. How the government will react to realities of violence (I really hope not) and potential job losses on a larger scale. And of course real demand, how that picks up, that side looks better.

OK, now the joint release, it is worth a read where the CEO's have suggested that the industry cannot afford a strike, and the wage demands that AMCU are making are unrealistic. This is the second part of the statement:

"AMCU's current wage increases are unaffordable and unrealistic. It is of great concern to the platinum companies that employees are being made promises by AMCU that cannot be delivered upon. Strike action will not only hurt the platinum industry but will be to the detriment of employees and their families, to communities, and to the country as a whole.

In 2012 and 2013, our companies lost a combined 879,400 ounces of production as a result of strike action. This translates into revenue losses of around R12.54 billion. We estimate that employees were forced to forego wages of around R1.18 billion, excluding bonuses and other benefits which they were then not able to earn. Furthermore the platinum price has plunged by 19% over the past three years, while costs continue to rise.

Unfortunately these factors led to a reduction in the combined industry workforce from more than 145,000 to less than 134,000 in the two years from December 2011 to December 2013. This is a time when the industry can ill afford further losses of production and jobs due to strike action. We remain committed to further engagement and are resolute in our efforts to find a solution that will secure the sustainability of the industry as a whole and preserve jobs as far as possible. Importantly, we do not believe that a strike will benefit workers.

The platinum industry's imperative is to ensure that peace, order and stability is maintained at all times."

The realities are that the platinum industry is a part of who sets the price, from a supply point of view. I think that the statement is a little naughty in this release when suggested that the price is down 19 percent, in Dollar terms yes, not in Rand terms. Perhaps the company should then go on to quantify the costs part too, and not just the lost revenue. We know that the precious metals run up was in part fuelled by a massive jump in investment demand (the fund flows to the physical metal ETF's) and has fallen off in recent times.

The main question is for us here (and Paul did this on his Hot Stoxx show last evening, you must watch it), is why is the platinum price not trading at 2400 Dollars an ounce? If everyone knows of these problems that exist and they are that severe, why hasn't the spot market reacted? Not too sure really. Either we are overstating the issues that exist here and are internally focused, or the platinum market is not expecting the worst, or both. But this week is going to test the real resolve of all stakeholders here. It seems that shareholders have drawn a line in the sand. Or let me rephrase that, it seems that management perhaps on the instigation of their shareholders, have drawn a line in the sand. It will not be long until we have to wait to see the outcomes of these statement. Thursday. But stay tuned, the chamber of mines is trying to declare the AMCU strike as illegal, that would be a huge stepping stone for shareholders, the people who fund the business.

Byron beats the streets on JNJ's results

Yesterday we received 4th quarter and full year results from Johnson and Johnson. Before we delve into the numbers let's see what the share price has done. In the last year the share is up 28%, in the last 2 years it is up 54%. It has been a good performer to say the least, especially when you consider the size of the business and the risk you would be taking when buying this stock. I'd say the reward has far exceeded the risk.

The pie graph below explains the company's business perfectly. As you can see it is broken up into three main divisions which as a collective managed grow sales by 7.7%. With some negative currency impacts revenue only grew by 6.1%. The Pharma business is still the most profitable and is certainly the gem of the company. In fact many analysts are calling for a company split so they can just invest in the Pharma side.

Medical devices have struggled slightly in terms of margins but that is because they are investing heavily in this division both organically and through acquisitions. The consumer business is still solid and even though the margins are tight, it is an important part of the business especially when targeting growth in developing markets.

Net earnings for the year came in at $13.8bn or $4.81 per share. Without the special items the earnings came in at $5.52 per share. Expectations for next year are around $5.85 which puts the stock on 16 times next year's earnings. For a massive company like this, growing earnings at a solid 6% a year, I'd say this reasonable.

I also saw some interesting comments in a WSJ article which looked at the effects on Medical companies from the US health care overhaul. Chief Executive Alex Gorsky said that this should push up the demand for their products as more people subscribe to the state medical insurance. The exact impact is not yet known yet though. On the other side of the spectrum however these big Pharma companies are expected to contribute to the insurance coverage. JNJ paid as much as $1bn to the fund last year. Here is the article titled Johnson & Johnson's Profit Jumps 37%.

Is still feel JNJ offers great exposure to one of our favourite themes, healthcare. You get instant diversification both by product and geographically. As developed nations get older demand for their products will increase. As developing nations get richer the same will apply. We are happy to add at these levels.

Michael's musings: China's Special Zones

At the end of September 2013 China launched a Free Trade Zone (FTZ) in Shanghai, which is 29 square kilometres where there are less regulations than in the rest of China. The reasoning behind launching the zone is for them to run pilot programs that they intend to introduce to the rest of the country in coming years/decades. If you live or have an office in the FTZ there will be less restrictions on trade and on capital flows, and if you have dealings with the rest of China, those transactions will be considered cross border transactions.

An interesting stat is that since the FTZ has been announces, the property prices in the area has gone up by 20% and the amount of property transactions is up by 280%.

China in the 1980's launched a similar concept with Special Economic Zones (SEZ), where strategic towns where transformed into economic hubs. The first of these was in a city called Shenzhen, who was little more than a fishing village, but due to its proximity to Hong Kong was chosen. What has happened to Shenzhen since 1980? A line that I found on Wikipedia talking about the construction happening, "one high rise a day and one boulevard every three days".

How has the wealth of the population changed? From 2001 to 2011 the GDP per Capita increased by 2.6 times, and Shenzhen became the first mainland Chinese city to surpass the $10 000 GDP per capita mark to be considered a developed region according to the World Bank. Then the last interesting fact about Shenzhen is that 20% of China's PhDs live in the city.

There are two points that I want to make, the first is how much development and growth can take place in 20 – 30 years. This picture which was tweeted by Google pics of Dubai (don't forget to follow us for financial and interesting info) embodies the phrase, "a picture is worth a thousand words”.

The next point is how less restrictions spurs growth. This is hard to argue when the rest of main land China has been growing at 7-10%, but I think that it can be done. In my opinion Governments main job is infrastructure development, which is what the Chinese are doing, but in order to have long term sustained development there needs to be free movement of goods and capital. Shenzhen would never be as successful and wealthy if it had been regulated like the rest of China. People understand that the FTZ in Shanghai has greater growth potential than the surrounding areas and that is why property prices are soaring. Introducing this zone says to me that as China develops their economy will become more open, which can only be a good thing for growth, and Chinese society.

Home again, home again, jiggety-jog. Markets are lower here today, oh check that out, they have turned positive! There was an SABMiller trading update we missed yesterday and a better than anticipated BHP Billiton production update this morning, that looks positive.

Sasha Naryshkine, Byron Lotter and Michael Treherne

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Friday, 20 July 2012

Gill went up the hill, rates came tumbling after

"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."

Jozi, Jozi. 26^o 12' 16" S, 28^o 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.

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. 40^o 43' 0" N, 74^o 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:

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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Monday, 2 July 2012

Forget the yields, check the goals!

" Accountability is key for shareholders, lawmakers, employees and Joe public alike. So whilst I think that this is a step in the right direction, I am not too sure what it means about the culture of the bank itself and the perception by politicians at large."

Jozi, Jozi. 26^o 12' 16" S, 28^o 2' 44" E. The stuff online, on twitter, on the box, that I saw on Friday, ranged from this is very good, "the Europeans had gone a long way to solving their integration issues", all the way through to the usual "this solves nothing". Question, is Greece still in the Euro zone? The answer is yes. The decision by the Europeans to not lend the money to Spain, but rather directly to Spanish banks sent the borrowing costs of Spain and Italy markedly lower on the day, but had the opposite effect for Germany, their borrowing costs climbed, but admittedly we are not really that far off record low levels for the German Bund. So, I am guessing that it is fair to say that bond investors in Europe were either scrambling to cover their tracks, or genuinely believe that the Europeans were closer to a banking union, which is the first full step towards fiscal integration. I think that it is important that the Europeans have a central banking authority. If not Euro Bonds immediately, because the statistics (and Angela Merkel's not in my lifetime comment) leads me to believe that we should see these late 2036. By which time most of us will have forgotten this crisis. But I am pretty sure that we might be able to recall the wonderful football of Euro 2012, poor Italy last evening, but Spain were just too majestic. Now time for the tour de France.

Friday we had stocks rocking, resource stocks benefited from a lift off in commodity prices, the copper price, the oil price, the precious metal prices all steamed ahead in a rally alongside the equity market, and alongside falling sovereign yields for the peripheral bonds. At the end of the session resource stocks had rallied a whopping 2.54 percent, it could have been more if it were not for a surge in the Rand to almost all the major currencies. It was a clear sign of risk back on again. The Jozi all share index closed at 33708, up 455 points on the day, or a gain of 1.37 percent. Gold stocks slipped, but that probably was the currency, the Rand which had been trading at 8.40 plus the US Dollar earlier in the week, traded at the best level in weeks, down to 8.19 to the US Dollar. Mr. Risk-on was shooing Mr. Risk-off away from Mr. Markets house. There were a couple of downgrades, from the day prior where ABSA and FirstRand were both given the 'unlike' button, with a ratings change from buy to hold. Not that I care too much about 12 month target prices and estimates, because our time frames are a lot longer than that, but they matter.

When a scandal rocks, you expect someone to take the fall, not so? Accountability is very important in the way the world works, saying sorry is a hard but necessary part of life. In South Africa I get the sense that we are not good at this. The story that I am referring to is the Barclays Chairman having resigned overnight. He said sorry. And then he went his own way. No wait! He is staying until the company finds a replacement.

Is it a good thing that Marcus Agius took the fall? I reckon yes. According to the Barclays CORPORATE GOVERNANCE document that I dredged up: "The Chairman's main responsibility is to lead and manage the work of the Board to ensure that it operates effectively and fully discharges its legal and regulatory responsibilities. The Chairman will lead the Board to ensure its effectiveness in all aspects of its role, including setting its agenda to ensure that adequate time is available for substantive discussion on strategy, performance and key value issues."

Accountability is key for shareholders, lawmakers, employees and Joe public alike. So whilst I think that this is a step in the right direction, I am not too sure what it means about the culture of the bank itself and the perception by politicians at large. Only bad things for the bank. In CEO Bob Diamond's letter to a Member of Parliament Andrew Tyrie (who is also the Chairman of the Treasury Select committee) he makes it clear that this sort of behaviour is out of line: "The first issue is that Barclays traders attempted to influence the bank's submissions in order to try to benefit their own desks' trading position. This is, of course, wholly inappropriate behaviour. Barclays submissions should reflect the cost of interbank borrowing rather than individual traders' positions."

And then Diamond says something even more interesting, that will leave you saying a multitude of things, these days expressed through short hand in text messages and social media: "It is also important to note that these traders had no way of knowing whether or not their actions would ultimately benefit or detriment Barclays overall. They were operating purely for their own benefit. This inappropriate conduct was limited to a small number of people relative to the size of Barclays trading operations, and the authorities found no evidence that anyone more senior than the immediate desk supervisors was aware of the requests by traders, at the time that they were made. Nonetheless, it is clear that the control systems in place at the time were not strong enough and should have been much better."

Undoubtedly the way that Libor functions now is kind of silly, as John Cleese in a Monty Python act might say. It is rather silly. How can the banks send their rates to Thomson Reuters, who then aggregate and slice and dice and then come to a number. Surely the process itself, of which hundreds of trillions of Dollars globally depend on a rate, should be refined. The WSJ (in an article titled Barclays's Agius Is Stepping Down) puts the silliness into perspective, or perhaps it is just me: "Libor - or the London interbank offered rate benchmark - is supposed to measure the interest rates at which banks borrow from each other. It is based on data reported daily by a 16-bank panel."

And then the reason why I think it is silly appears in the next part of the explanation of how Libor is set: "By 11:10 a.m. London time, the banks on the Libor panels submit to Thomson Reuters, as an agent for the British Bankers' Association, their estimated borrowing rates. Thomson Reuters discards the highest and lowest submissions. The remaining 50% of the submitted quotes are averaged to work out the Libor rate. By about 11:30 a.m. London time, Libor rates are published."

Discards the high and the low rate? And then averages? What is the point, if the importance is for tens of trillions in swaps, securities and loans depend on a few reported bank rates and then the aggregating by Thomson Reuters, is the only benchmark. That has to change. And no doubt will. Expect Bob Diamond to appear in front of the politicians.

Byron's beats covers a pretty poor trading update from Angloplats and shifting PMI.

"Anglo American Platinum's earnings for the period is expected to decrease by more than 20% from that reported in the six month period ended 30 June 2011. However, in view of volatility in exchange rates and metal prices, Anglo American Platinum cannot, with reasonable certainty, quantify the extent of the decrease in expected earnings other than that the decrease is expected to be more than 20%. The expected decrease in earnings is primarily as a result of lower sales volumes and lower metal prices achieved compared to the comparative period."

So not much info given but I can tell you now that reasons include lower production due to labour issues, increasing costs due to electricity tariff and wage increases. The Platinum price, as we spoke about a while ago is not actually that cheap when you compare it to oil. I wouldn't say that is an excuse for a 20% decrease in earnings. Last year the company made 1236c per share for the period. Assuming best case scenario, earnings are down only 20%, the company will make 988c. At R468 the company looks pricey for an industry that is struggling. I can't say in decline because I do feel the platinum price will pick up. We will await the full release on the 23 July for all the explanation.

In other news we had a whole lot of PMI numbers released today which paints an interesting picture. For the record PMI measures activity in the Manufacturing sector. Any number above 50 shows expansion. Any number below 50 shows a contraction. As expected the average for the Eurozone was not good, 45.1. But, there is light at the end of this tunnel. Ireland which was one of the first countries to be bailed out and have had a torrid time showed their best improvement in manufacturing for the last 12 months. The read came in at 53.1. The Irish are still being funded by bailout money but the yields on their bonds have decreased exceptionally. If they can do it, so can the rest.

Elsewhere India showed their best month on month increase since August 2011 with a healthy looking read of 55 while locally we had a negative read of 48.2. China also came in with a read of 48.2 as their economy shifts to one of higher wages and stronger consumers. I am not trying to sugar coat this read. It is not good that Chinese exports are decreasing. Lower demand from Europe is taking its toll on both our economy and the Chinese. No one said it would be easy.

New York, New York. 40^o 43' 0" N, 74^o 0' 0" W. Lift off. Stocks surged through the session, closing at the highs, with the nerds of NASDAQ rising a whole three percent on the optimism that the Europeans had finally done something concrete, or moved in the right direction. Forward is a good direction to move. The broader market S&P 500 added two and a half percent to 1362, whilst the Dow Jones added a more modest (relatively speaking) 277 points or 2.2 percent to close at 12880. This was the single biggest rally and day for markets since last October, so I guess it is worth a serious mention then.

The rally was pretty broad based and across all sectors, energy, materials conglomerates all clocking huge gains, only one stock went backwards in the Dow Jones Industrial Average (out of 30), and that was JP Morgan. The size and scale of their hedge gone bad is just being predicted at this point. The London Whale finds his position at a parish called Kemble, the source of the Thames River. I beg your pardon, the River Thames is the correct way to name the river. If you are interested the FT has a whole lot of articles on how and why the London Whale trades have not yet all been unwound, meaning what, I am not too sure. So, JP Morgan still have serious problems on their hands.

Currencies and commodities corner. Dr. Copper was last at 346 US cents per pound, the gold price is slightly lower at 1592 Dollars per fine ounce. The platinum price is also slightly lower at 1434 Dollars per fine ounce. The oil price is also lower at 83.66 Dollars per barrel, but had a huge rally late last week from prices that we have not seen for the last 18 months. The Rand is firmer at 8.17 to the US Dollar, 12.79 to the Pound Sterling and 10.37 to the Euro. We are firmer here today, just a little bit, after having been lower initially.

Sasha Naryshkine and Byron Lotter

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