Money with a dash of Funny: Anglo American

Showing posts with label Anglo American. Show all posts

Friday, 13 November 2015

Dr. Copper = Dr. Flopper

"The copper price reached a multi year low, back to July of 2009. The gold price was at a five year low, the oil price was zeroing in recent lowest prices in about six years. Copper is often referred to as Dr. Copper, with a Phd. in the health of the global economy. The weaker the copper price, the less the building going on. The less building going on, the less demand for Dr. Copper. Let us just say that we currently looking at Dr. Flopper."

To market to market to buy a fat pig. You were reaching for the barf-bag yesterday if you were deep in resources, those stocks were seeing their Christmas stockings stuffings disappear in a hurry. Emptying out, nothing left, the Grinch came early. The copper price reached a multi year low, back to July of 2009. The gold price was at a five year low, the oil price was zeroing in recent lowest prices in about six years. Copper is often referred to as Dr. Copper, with a Phd. in the health of the global economy. The weaker the copper price, the less the building going on. The less building going on, the less demand for Dr. Copper. Let us just say that we currently looking at Dr. Flopper.

The Bloomberg commodities index, a tracker of 22 commodities (according to this FT article: Fresh wave of selling engulfs oil and metals markets) is at the lowest level since the financial crisis. Whilst iron ore prices are below 50 Dollars a tonne, Twiggy Forrest, the Fortescue metals boss is warning his country, Australia, of darker days for iron ore.

The upshot of it all was unsettling equity prices, Anglo American trading at their lowest ever London price, since they listed in mid 1999. The price locally in Jozi fell below 100 Rand, the last time I remember that happening was in May of 2003, I think. The ten year return for Anglo American (sans dividends) in Rands is minus 51 percent. In London the return over the same period is minus 77 percent. Once the crown jewel of the South African market, the stock is now unfortunately deep in the midst of a continued drawdown in commodity prices not seen for quite some time.

In fact, the Anglo listing in London coincided with the biggest ever industrialisation plan we have seen in our time, Chinese thirst for commodities and their infrastructural roll out was like something we have never seen before on that sort of scale. And now that the country shifts towards a consumption based economy, singles day (four 1's next to each other apparently look like bare branches) was a wonderful reminder of how their economy has morphed into something different. The top items selling on singles day, baby related products, both clothing, items and nutritional, and then one for the singles, Levi's jeans and Nike sneakers. Adding to a massive singles days boost was that October retail sales were 11 percent higher than the year before, beating expectations earlier in the week.

The upshot of a stronger Dollar against most currencies globally and a slowing Chinese economy has translated to a weaker commodities complex. Stocks as a collective in Jozi, Jozi sank over a percent, the stocks at the top of the losers headboard included Anglo, Glencore, South32 and BHP Billiton, all the heavyweights with exposure to most bulk commodities. At the top of the leaderboards and bucking the trend and the only real standout was Naspers, up over a percent as the afterglow of the good Tencent results still continue to leak through. Stock earnings osmosis we can call it.

Stocks over the seas and far away, in New York, New York got a solid drubbing, selling off furiously into the close, the S&P 500 down 1.4 percent on the day, the nerds of NASDAQ down nearly a percent and a quarter, the blue chip Dow Jones Industrial Average the worst of the three, down nearly a percent and a half. Why? Anxieties around rising interest rates again. I am afraid that we are all going to just have to live with this, volatility into the Fed December meeting and what is now the inevitability of a rate hike. What makes this rate hike so unique is that the time from the first hike in the Greenspan era to now is a period of ten years. See this graph take from the St. Louis Fed, from 1954 to present.

If you are around 26-27 years old and you have been working in financial markets for your whole, yet short career, you would not have ever seen a rate hike. In fact, Ben Bernanke only ever had to hike rates once during his tenure. Do you see that last hike in September of 2006? That was Ben Bernanke, during his tenure as Fed chair. And from there until now, we have got used to the idea of a near zero rate world. I still maintain that the rate cycle at the top will be a "lower high". What to do with the pending Fed hikes and multiple Fed folks speaking? Nothing. Market participants with diverging time frames will act irrationally in the very short term, stay the course, stocks can fall ten percent in a short period of time as you saw in August/September, markets then recover thereafter.

Company corner

The other day we wrote about Tencent, you will recall this message, Tencent Q3 Numbers. In which I wrote: "... the Hong Kong Dollar market cap by the exchange rate (back to Rand) and you get a smidgen over 907 billion Rand. Ummmm. . . why is the Naspers market cap this morning, on opening just under 880 billion Rand? This implies that the local market gives Naspers a discount relative to the rest of their holdings and the rest of their assets, which includes a growing satellite TV business that is still growing strongly. Perhaps the best and cheapest way to own Tencent is through Naspers.

A reader of the newsletter, from one of the big four accounting firms put me in my place:

I'm not so sure about the logic of your reasoning about the valuation of Naspers with respect to Tencent. Naspers is not just equity funded, so the market cap is not a complete picture. Their latest financial statements (March 2015), indicate that they carried about R47b in debt. R27b of that covers the Tencent valuation shortfall, leaving R20b for the remainder of their businesses. This may be a low valuation (I don't know), but it is certainly not negative.

This is like saying that if you have R100 to invest, then borrow another R100 and invest the R200, you would have a net worth R200. Not really, your debtors would have a claim on half of the holdings. You, the equity holder would still only be worth R100.

Quite right. I replied: "The point I often make is that they have loads of other assets, including Multichoice which could be as much as 200 billion Rand, let us call it 150 billion Rand for comparison sake with their developed market peers. Their ecommerce business is growing revenues by 40 percent per annum, it is not too dissimilar to another global giant (Amazon) which still loses money as they expand their network, does one value this on a revenue only basis, stripping out investment spend (like Amazon)?

Tencent and Naspers are both listed, their share prices and by extension market capitalisation reflect the future earnings prospects, we can agree on that. Both sets of businesses have their respective assets and liabilities, Naspers have interest bearing liabilities of 37 billion Rand as of June 2015.

Surely the rest of the business, knowing what we know is not worth minus, including the liabilities (that are known). Perhaps I should have been more eloquent with my beef with the big discount, I often hear the asset management community tell everyone on the screens how Naspers is way too expensive. Certainly by earnings measurement, perhaps, certainly not in a sum of the parts, and their respective earnings."

To which the same reader replied:

I understand your point about Naspers trading at a discount and I don't disagree with that. I just think it is a bit dishonest to ignore the fact that Naspers is leveraged (albeit not very aggressively) when you make the point. We don't have to consider Tencent's debt, because we are really only interested in the value of Naspers' equity holdings, which the market cap gives us. Tick that. However, Naspers' market cap should reflect the value of it's assets (Tencent holding + all the other goodies) minus the value of its' long term debt and yes, I agree that this should reflect the future earnings prospects for its equity holders. My point is that simply comparing a company's market cap to the value of its assets (Tencent holdings in this particular case), while ignoring its debt, is a bit dodgy.

The point our accountant friend and reader was making is that my simple calculation of saying, hey, Naspers' stake in Tencent is worth more than their entire market cap is not the whole picture. My point is that you get the rest for free, including some sizeable businesses, and that means that Naspers still trades at a significant discount to the sum of the parts. This is what makes a market, two people who own the same stock, both of them, who have a different view on the valuation in its entirety. And sometimes these views are easier to put into context when one person says sell and other says buy. Keep the interactions coming, we love it!

Linkfest, lap it up

The numbers are in for singles day sales for Alibaba and they are huge! - Alibaba's Singles' Day shopping total was bigger than Facebook's revenue last year. This is another reminder of how the Chinese consumer is coming into their own and how online shopping is the way of the future.

Following on from our link yesterday about the really really expensive wine. It turns out that most people can't truly tell what the quality of a wine is. Even the pros gave different ratings to the same wine but in different bottles. It seems that when we think we are drinking expensive wine, our brain becomes more stimulated and voila, it tastes better - Expensive wine is for suckers

A big part of attracting investment and helping business thrive is to create certainty and protect property rights. In this case we are talking about space, where if you start mining an astroid you get property rights to it. I'm not sure anyone reading this message will be alive if/ when we start winning astroids but giving some form of certainty will speed up R&D to make this technology viable - Democrats and Republicans agree: If you can mine it in space, it's yours

Bill Ackman is a very smart man, he also seems to be involved with stocks that cause a stir. At the moment it is his stake in Valeant, who are known for buying drugs and then pushing up their prices - Ackman v. Berkshire: Whose Holdings Are More Immoral?. Here is what he said about Coca-Cola, "Coca-Cola has probably done more to create obesity and diabetes on a global basis than any other company in the world".

Home again, home again, jiggety-jog. Stocks across Asia are all softer, the late sell off on Wall Street means we all have to catch up today, there may be another bout of selling here today. Although, having said that, commodity prices still under pressure. The copper price is at a fresh recent low. Dr. Copper went to Gloucester, in a shower of sellers. He fuddled through a muddle, right up to his middle, And vowed never to own those again. Alas, loads of South Africans are up to their eyeballs in commodity stocks.

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

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Thursday, 16 July 2015

Go Private, save the state

"It seems like there is a whole lot more room to grow. I for one would much prefer it if the government outsourced all schooling to private entities, which set themselves really high standards. As Curro points out (just after this table in their 2014 Annual Report), them building schools saves the state 70-120 million Rand initially and then 50 million Rand a month. People pay for private education after they have paid their taxes."

To market to market to buy a fat pig. Agreekment done. At the "money moment", the Greek parliamentarians, for all their noise voted for the money. In fairness however to Syriza, the governing party, much of the members voting against the package were part of the ruling party. Were or are, it is difficult to say. Whilst there were heated debates inside the Greek parliament, there were the 'no to austerity' protestors throwing molotov cocktails at police. Question, if there were to be a cut in Greece's debt that is owed to the Troika, who would ultimately be hurt as their asset is written down? Is it the pensioner of France, Italy and Germany, Spain, Portugal and the Netherlands? Debt to one is an asset to another.

The bigger picture is that the IMF are right, even if there were incredible terms imposed on Greece and they were told that there was a 30 year interest holiday, they were told that there was more debt reduction, it needs to happen sooner rather than later. Investors of Europe need to know. Even if this is not exactly a deal breaker for opening a business elsewhere in the common currency area, it has captured the imagination of the networks for the better part of five years. Greece needs to grow their economy, that is the only way that tax receipts will rise and that the government will easily be able to service the debt more aggressively.

There needs to be political will power and I am afraid as long as there are far left wingers feeling that the only way to do things is more government intervention, and less private sector, I do not see that happening soon. The Golden Dawn (one of their members tore up the agreement in parliament yesterday) are borderline cases to be institutionalised. No, that is rude, as I said to my eldest last night, people get what they vote for. And do not ever question why someone voted X or Y, that is immediately suggesting that their political views are inferior to yours. That is exactly why each and every person has a single vote, it may not be perfect, it is however better than having no choices.

So that is done and dusted, expectations are for a fall out of sorts in the ruling party. Resignations, perhaps even new elections. If Tsipras comes through this wiser and better as a leader then thumbs up to his leadership skills, well done to him. If he firmly believes that what he is doing is the best interest of Greece long term and not scoring political points (even though he suggested that there was a knife held to his throat), then I admire that. It shows some maturity that was possibly lacking beforehand. Read the NYT piece: Greece, Its Back to the Wall, Adopts Austerity Steps.

The other "thing" capturing markets yesterday was Fed chair Janet Yellen delivering testimony in front of the House Financial Service Committee, see the NYT story: Janet Yellen Warns Congress Against Adding to Fed's Oversight. What I find really funny about the story, and perhaps it deserves a copy paste is the following paragraph in that story: "Ms. Yellen provided few new indications about the Fed's plans for the next few months, and she was not pressed on the issue. Lawmakers in Congress evidently do not share Wall Street's obsessive interest in the exact timing of interest rate increases." Ha-ha! A Wall Street obsession is definitely not a worry of the person on the street.

I expect that we will see rate rises different to those in the past, the trajectory will be slow to begin with, I reckon a range adjusting in smaller increments that the street is used to, like 10-15 basis points at a time. i.e. Moving the band slowly higher until you can hike by 25 basis points, why not, the way down was unconventional, why should the way up be anything ordinary? And expect the high end of the next interest rate cycle to be lower, i.e. not 6.5 percent, rather somewhere between 3.5 and 4, that is my best guess. Markets on Wall Street? Not too much action if you look at the scoreboard, the Dow and broader market S&P 500 were a whisker lower. Earnings, those continue to filter in and through, Bank of America was the standout, the stock was up 3.3 percent. It is still down 61 percent over ten years however, the "great recession" saw to that.

In the local market, Jozi, Jozi, stocks rallied across the board, obviously there strong Chinese GDP number buoyed commodity stocks. Both Anglo and BHP have recorded big write downs in the last two days, the Anglo production report from this morning does not look encouraging. Lower prices, lower demand is not a perfect cocktail for shareholder returns.

Less commodity exposure, I still am struck by that comment I read earlier this year that said an investment in commodities was a bet against humanity, I think that it was our old pal Cullen Roche who said it. I think what he is trying to say is that humanity keeps doing more with less of the same resource. That is not too dissimilar to that graph from yesterdays piece with more than double the number of people on earth eating food that is roughly the same price, farming technology has improved significantly over fifty year, without ordinary people noticing. When something changes slowly and constantly, it is called a Mesofact says our old pal Samuel Arbesman. Of course none of these people are really our pals, as a result of the awesomeness of Twitter, we fell we actually know these people. Including folks like Novak Djokovic and Serena Williams who we can (and do) follow on platforms like Instagram.

After all was said and done, the local market closed at 52 and a half thousand points. That looks like the best level in around one month to me. However it has been a tough old year, stocks have not really moved, the JSE all share index is up an uninspiring 5.55 percent. Although, that is around what inflation is, and on an annualised basis you would be double that. That is a decent enough long term return, remembering the rule of 70. i.e. how long does it take to double your asset base. Is it 70, or 72 or 69.3? Read Wiki: Rule of 72. Divide the annualised returns by 70, that is your number. Working the other way around, what return would you have to get in order to double your money in 5 years. Divide 70 by 5, you get to 14 percent. 6 years, that number falls to 11.66 percent, per annum. In other words, the consistent return matters. As Warren Buffett says however, he would rather have "lumpy" (read outsized) returns than solid and consistent ones.

Company corner

Curro and AdvTech confirmed yesterday that they are in talks. Obviously it was Curro who initiated the talks, they want to buy AdvTech. It makes sense that as the bigger competitor by market cap that they use the momentum and big shareholder to buy another business that the market has not taken so kindly too. As Michael pointed out yesterday however, and lean in a little closer to your screen here, Curro has a market cap of 12.1 billion Rand, turnover of just on one billion Rand for the financial year to end February. AdvTech has a market cap of 5.2 billion Rand, turnover of 1.93 billion Rand. Curro's turnover grew at 51 percent last year, AdvTech at less than ten percent.

Even at elevated share price levels, AdvTech trades on a 27 multiple, Curro has recently started making a profit, it trades on a multiple of nearly 200 times. Is the market bonkers? Perhaps not. There may be expectations from the market that the PSG magic could work again here, as it did for Capitec, PSG own 57 percent of the shares. And of course PSG have underwritten all the rights issues along the way, Curro has grown exceptionally fast. I doubt that there will be a massive PE unwind for Curro in a hurry, the goal is to continue to roll out as many affordable private institutions as possible. Where the perception is that paying for education means that the quality offered against the alternative (the government) equals a better outcome for the child, that is all that parents worry about. Curro have recently been in the news for all the wrong reasons, I truly hope that (for the sake of our nation) that this is dealt with swiftly. Racism is narrow minded and plain dumb, we should be all turned inside out, we would all look the same. Not very good "same" though, I love diversity and different.

Not too dissimilar to many success stories, and often what the ordinary person on the street misses, Curro started with a small school, all of 28 pupils in 1998. They started this year with 42 schools and 36 thousand scholars, learners, pupils, whatever you want to call them. So are they going to triple the number of scholars (or are they customers?) in the next three years?

It seems like there is a whole lot more room to grow. I for one would much prefer it if the government outsourced all schooling to private entities, which set themselves really high standards. As Curro points out (just after this table in their 2014 Annual Report), them building schools saves the state 70-120 million Rand initially and then 50 million Rand a month. People pay for private education after they have paid their taxes. I still like to think that the modern schooling system needs a serious shakeup, more responsibility needs to be given to the child. To get real life readiness, you have to be responsible for your actions. Elon Musk is right to start his own school, that is however for super rich kids. Sadly here in South Africa there are limited resources.

Whether or not a formal offer is made, or a merged entity appears at the other end when these talks between the two private education providers appears on the other side (or even if the competitions authority allows it), progress is being made shaping the minds of the youth. And that is something to celebrate, after all, the founder of the nation, Nelson Mandela was quoted as saying: "Education is the most powerful weapon which you can use to change the world." That will always be right, the only problem with that is that the more you know, the more you realise there is to know.

Linkfest, lap it up

I enjoy peanut butter, I buy the sugar and salt free one from Woolies. Not everybody can eat nuts, 1.4 percent of kids have a nut allergy in the US and this is rising. There is always capital looking to solve this problem, Mr. Picketty should take note that it is a French firm raising money in the US to solve the problem of nut allergies: Progress in peanut allergy trials raises hopes. Darn one percenters looking to solve problems of ordinary people.

Yesterday Amazon turned 20 many people didn't think it would get past its first birthday, it has survived start up phase, the dot come bubble and a host of new competitors - At 20, Amazon Continues to Defy Predictions.

Where there is a will there is a way! Many young people that I speak to are struggling to get jobs in the industries that they hope to have long careers in. This CV highlights the possibilities that are out there if you are willing to do what it takes, very inspiring! - Hey, I'm Nina!

Higher cash levels with asset managers may point to people preparing for an interest rate hike? Where funds want to own a couple more bonds but can only purchase them after the rate hike - Fund Managers Holding Highest Cash Percentage Since Lehman. This isn't pointing to a bear market because cash is also flowing into financial stocks which can be seen as a proxy for the economy and one of the sectors that do a bit better with higher interest rates.

Home again, home again, jiggety-jog. Mixed Asian markets this morning, I saw an interesting comment from Blackrock's Larry Fink that suggested that the reason why Chinese markets are so volatile is that capital markets are immature. There was an awesome interaction between Carl Icahn (who is nuts) and Larry Fink, you might see footage during the day. Back to the real grind of earnings today. Google, Ebay, Goldman Sachs, Mattel, Philip Morris, UnitedHealth and of course an interesting one Schlumberger. That is why we invest in markets, for companies, not for Jannet Yellen comments or Greek debt issues.

Sent to you by the Vestacters, Sasha, Michael, Byron and Paul.

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Thursday, 2 April 2015

Coming through!

"I kid you not, a 2 percent difference in market capitalisation exists between Anglo American and Steinhoff at this point. Steinhoff as of last evening, have a market capitalisation of 243 billion Rand, Anglo American have a market cap of 254 billion Rand. And you will be more surprised to know that Anglo American have fallen out of the top ten companies by market cap in the South African market."

To market, to market to buy a fat pig. Resource stocks were slam dunked, mostly as a result of the falling iron ore price. Below 50 Dollars a ton. The worst level since May of 2009, that is a long time ago. From May the 8th, 2009 to present day, your return in Anglo American securities would be minus 3.82 percent. That is in Rand terms. In Pound Sterling that same return has been minus 31.5 percent, your Rands have been somewhat protected by a weakening currency. The yield in Pounds is around 5.6 percent, could that be right? A payment of 85 US cents last year (at around 12 Rand to the Dollar, that is 10.2, after tax that equals 8.67 Rand) translates to a post tax yield of 4.8 percent for Anglo American. Obviously that is dependent on commodity prices, Mr. Market is telling you that the company might struggle to meet that 85 US cent obligation this year.

I kid you not, a 2 percent difference in market capitalisation exists between Anglo American and Steinhoff at this point. Steinhoff as of last evening, have a market capitalisation of 243 billion Rand, Anglo American have a market cap of 254 billion Rand. And you will be more surprised to know that Anglo American have fallen out of the top ten companies by market cap in the South African market. They only represent 2 and a quarter percent of the entire market capitalisation, obviously not on a weighted basis where large parts of the market caps of SABMiller and BATS have foreign registers in London that are larger.

Lean in a little, you are going to find this even more surprising and this represents all the heavy lifting that Marcus Jooste has done at Steinhoff, in June of 2010, Steinhoff had a market cap of 25 billion Rand, much fewer shares in issue (1.4 billion then versus 3.184 billion shares now). Anglo, in December of 2010 had a market cap in Rand terms of 413 billion Rand (shares in issue have not changed that much), that has shrunk by 160 billion Rand as commodity prices have softened. The divergence of an old South African champion that is closely associated with the mining activity in this town of ours and a new champion of retail across the globe, in the form of Steinhoff has been nothing short of breathtaking. And if you had to ask me to stick my neck out as to who has the better prospects over the next half a decade, I would back Christo Wiese throwing in his lot with Steinhoff every single time.

As spectacular have been the vicious moves by Kumba Iron Ore and AngloGold Ashanti, southwards, in terms of moves to the bottom of the 40 biggest companies by market cap. Those companies find themselves in places 40 and 42 respectively, Redefine sandwiched between the two and Brait breathing down their necks. Again, if you had to stick a gun to my head I would rather choose Brait and Redefine over the iron ore and gold producer. I suspect that Mr. Market will continue to do the same too, the prospects just seem better. Paul did a show on Hot Stocks on the commodity producers, with a focus on iron ore and him and Wayne did not make an investment, even at these depressed prices. I am afraid that until something changes structurally, i.e. there is strong demand from either India, or a pickup in demand from the rest of the globe, the medium term looks like a hard battle. To let you know how "bad" it has been for producers, here is as long a graph I could get on the iron ore price from IndexMundi:

What becomes evident is that the price of iron ore, over 17 years up to 2002, "did nothing" for a long time. Demand was muted and it was unattractive to push volumes. The opposite changes. And now there is an enormous amount of volume being brought online and demand is softening from the Chinese. Yowsers. At the opposite end of the spectrum as far as poor performance was concerned on the day, was MTN, which was up over 6 percent, dragging the rest of the market higher. The favourable outcome in Nigeria, i.e. no violence with a political shift in power represents a new maturity with regards to African politics. I like it a lot.

Not a prank, quite simply put, as per the FT (subscription only, they have a free subscription option that lets you view a couple articles a month) article: Greece submits new list of reforms to eurozone. You can actually read the whole list of reforms on this document, which was "obtained" by the FT, titled: Greek Reforms. I read most of it. I was quite interested in the "VAT lottery", a system whereby if you insist on obtaining a receipt with the VAT amount from a retailer, you can enter that receipt into a lottery. i.e. By being a good citizen, you get a chance to win the lottery.

Another one of the points, and I think that spelling it out word for word, explains it all: "The initial goal for revenues from privatizations was 50 billion Euros between 2011 and 2016, with a 5 billion target for 2011, 10 billion for 2012 and 5 billion for 2013. In practice, proceeds from privatizations amounted to 1.6 billion in 2011, no revenues in 2012 and 1 billion in 2013. Seldom has a privatization program failed so spectacularly!" Wow. I guess practically speaking shifting government obligations onto the private sector means less government outlays.

There was also some cryptic explanation of how small business in Greece exists, a segment titled: Reducing undeclared work and reinforcing monitoring mechanisms: Undeclared work is prevalent in Greece, and it has risen alarmingly during the previous 4 years. The main reasons include the structural peculiarities of the Greek economy, dominated almost entirely by small and medium-sized businesses and an admittedly high degree of tolerance of shadow labor forms with fully undeclared labor at the extreme end of the spectrum. What does that sound like to you? Shadow labour forms? Man, I don't understand any of it, we cannot understand it, we don't live there. And guess what, early signs are that the new proposals have been rejected. Back to the drawing board, try harder.

Things we are reading

Ha, ha, ha. This is simply amazing, one of the best stories I have read in a long time. It starts badly when the guys iPhone gets stolen, he ends up travelling for nearly a whole day to find it and then is very surprised at some sort of culture that has developed between him and the chap who ended up with the stolen phone. Fun read: How I Became A Minor Celebrity In China (After My Stolen Phone Ended Up There). The second hand phone market in China is massive, the biggest in the world!

I know that you have always wanted to know, yet you have never quite found out where or who to ask, relax, here it is: 8 things worth knowing about eating sushi. I plan to do this too, to get to the Tsukiji fish market. The one in New York (new location Hunts Point) has annual sales of 1 billion Dollars and is second in size to the Tokyo one.

A big debate on the recovery has been where the jobs have been created - Duetsche Bank: No, This Is Not A Low-Wage Recovery. Having jobs growth in the higher paying jobs is good news for the economy, the data also highlights the need to upscale yourself.

This is not the first app to offer voice calls it is one of the biggest though which makes it far more useful - WhatsApp finally adds voice calls for all Android users, iOS coming soon. For companies like MTN and Vodacom we have already seen a shift in the number of voice calls and we will continue to see it. Data consumption is increasing at a faster rate than prices are falling, which means these companies can still see growth going forward.

Home again, home again, jiggety-jog. We are up one quarter of a percent today. Naspers got to 1900 ZAR a share. Turn down for what??

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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