Money with a dash of Funny: Exxaro

Showing posts with label Exxaro. Show all posts

Thursday, 20 August 2015

Will they, Won't they

"Over the last few weeks, I have seen an increase in the number of people saying that September might not be the date for an increase. What happens if they raise rates and there is an economic hiccup? Dropping rates again will probably do very little to smooth over the hiccup, for this reason and the low inflation, I think rates will stay down until there is an overwhelming amount of data to say that the economy is resilient."

To market to market to buy a fat pig. Ouch! It was another red day on the market yesterday with the All Share down 1.6%, for the year the market is up less than a percent. If our markets follow the trend set by Asian markets this morning we may find that by the close today, our market will be down for the year. Last year our market was only up 7% with most of the gains coming in the last 2 months of the year. If you consider that inflation last year was at the 6% mark, the market only had a real return of 1%. The inflation rate over the last 10 years has ranged between 3% and 11%, with the average being around the 6-7% range.

Market returns have ranged from 45% increase in 2005 and a 25% drop in 2008, with the average over that time period being around 17%. The result being that the average real returns of the market have been 10% a year. It is clear though that almost no year is the average year! Sometimes you get lucky and buy in a year where the market has a flyer. You then pat yourself on the back for your investment prowess. Other years you invest your money and the market goes nowhere or worse it drops! The timing that is involved when buying shares is all luck, the more regularly you are buying the less luck is a factor in your returns. That is the meaning behind the very true saying, "It is time in the market that matters, not timing the market".

Lonmin dropped a staggering 19.6% yesterday! There are concerns that they won't be able to refinance debt that comes due next year or if they do the terms will be far more stringent than they currently are. Given that the company is currently running at a loss and that the Platinum price is firmly rooted to $/oz 1000, you can understand why debt will become more expensive. The other idea that was doing the rounds, was to do a rights issue to raise capital. The problem with doing a rights issue to keep the lights on instead of using capital to buy new assets (like Woolworths or Mediclinic) is that current shareholders get diluted without the benefit of new earnings being bolted on. The next problem is that the more the share price drops, the more rights would need to be issued to raise the capital, which means more dilution for current shareholders. If you are going to see less of the future profits your current shares are worth less and so the cycle continues! From one precious metal to another, gold shares had a better day, up 5.2%. It would seem that their safe haven status is attracting funds, which is weird considering that the industry is more than likely going to have a prolonged strike on their hands. That does not sound very safe to me.

The big news out of the US last night was the FED minutes from the last meeting. Surprise surprise, they are not sure if a September rate hike is the correct time. Some of the key data that they monitor in order to make the decision is in the territory to justify a rate raise. The one big number which is a concern is the inflation figure, it is still too low. Increasing interest rates won't help it rise to the 2% target. Over the last few weeks, I have seen an increase in the number of people saying that September might not be the date for an increase. What happens if they raise rates and there is an economic hiccup? Dropping rates again will probably do very little to smooth over the hiccup, for this reason and the low inflation, I think rates will stay down until there is an overwhelming amount of data to say that the economy is resilient. We have 4 weeks to wait until we find out the answer to one of the most asked questions on Wall Street.

Company corner

Another of the gold producers with their results this morning, Gold Fields Limited - Q2 Ended 30 June 2015 Unaudited Results. Their All-in sustaining costs are in line with the rest of the industry, theirs sitting at $/oz 1029. They have swung to a small profit this quarter after having a small loss last quarter. They have the same problem as all the commodity producers, they don't control the price of the product that they sell. One separating factor for them compared to their peers is that they already have a wage deal signed.

We had the Interim Financial Results For The Six-month Period Ended 30 June 2015, for Exxaro this morning. As expected their earrings are down along with their dividend. HEPS are down 62% and the interim dividend is down 75%. One of their main assets is their 19.98% stake in Sishen. The market already received a clear view that this was under pressure from the Kumba results a few weeks ago. The stock currently trades on a P/E ratio of 5, which tells you people don't think the commodity glut is going to resolve itself anytime soon.

Blue Label and Edcon are going to work together to roll out retail technology stores called Edgars Connect - Blue Label, Edgars in retail JV. Selling cellphone services in retail stores has proved to be successful in the past, so this looks like a good deal for both partners. The big thing for Blue label is that they get access to Edcons account holders, they can sell the products on account but don't have to go through all the leg work of having to open accounts.

Linkfest, lap it up

I found this letter interesting, it is blow back from the Amazon debacle - Dear Jeff Bezos: My husband needed therapy after working for Amazon. The point made at the end, probably sums it up nicely. "Ironic, isn't it, that we were able to afford such a good therapist because of Amazon?".

This decision by the UK will have far reaching effects for many people, good or bad effects we do not know yet. The aim is to get people to stop smoking by changing to e-cigarettes and then moving onto stopping. What are the long term side effects of vaping though? We are not sure because the product has not been around long enough - UK approves e-cigarettes as healthier alternative

Now that it is viable to move to solar, more people are. Given the momentum gained, economies of scale will kick in which will drive down the cost of solar even more. The market might move slower than people like but it normally gets it right after an adjustment period - India reveals world's first 100 percent solar-powered airport

Home again, home again, jiggety-jog. Wow! It's tough out there at the moment. Our market is currently down 0.8% meaning that we are down for the year. Twitter notified me that the Rand has just broken through the R/$ 13.00 level, which is the first time since 2001. I think people are hoping that there will be a repeat of 2001 and 2008 where the Rand weakened very rapidly to the dollar but then recovered to well below the R/$ 10 level. I don't think that will be the case this time because it has been a steady depreciation. The previous two times it was a case of "sell now and ask questions later". Have a look at the graph below, you can clearly see the difference between now and then.

Woolworths, the one retail stock that has been resilient over the last two weeks is down 2.6% and Naspers is down 2.2% .The one bright (or shiny) spot are the gold miners, currently up 12% today. Lonmin has had a huge bounce back today, up 22% at the moment! Stay calm, carry on and add if you have the funds to do so. Don't let a market pull back go to waste.

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

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Monday, 9 July 2012

My favourite season is earnings season

"In the last earnings quarter nearly 80% of companies beat earnings expectations and out of the ones I looked at, most of the beats came from developing nation growth. This is why I am slightly worried about the numbers coming through this quarter. As ever, it will be really interesting to see what companies say about the conditions that they are currently operating under."

Jozi, Jozi. 26^o 12' 16" S, 28^o 2' 44" E. After starting better here, and enjoying a decent day, the rally was scuppered by the release of the non-farm payroll numbers, which were lighter than anticipated. And worse than the market expected means that the selling starts, the Jozi all share index closed down 51 points, or 0.15 percent to end at 34170. I guess you could say that this is not very good news, US unemployment data in the last three months has been weak, but so then has the economic news, European austerity and uncertainty has weighed heavily globally on markets, I suspect that the Greek elections and the Greek momentum had a lot to do with confidence (lack thereof) during the first part of the quarter just past. And by no means is the European crisis finished, it is ongoing all the time as governments try and balance growth and austerity

A trading update from Kumba Iron Ore on Friday looked weak, but once again this is as a result of the same factors that we were referring to above, a slowing European economy which is resulting in a global slowdown. As Byron often says, if someone does not need a new washing machine in Spain or Italy, and the goods are manufactured in China, well, that means less business for the Chinese. And that means less demand for the raw products too. ALTHOUGH, the internal consumption story in China is one that still continues to impress the pundits, or so I am led to believe. China still has a relatively unbalanced economy. But back to this main story, Kumba Iron Ore expect earnings for the first six months of the year to clock 7.1 to 7.5 billion Rands, which on a per share basis is between 22.10 ZAR to 23.40 ZAR. Which on balance sounds good, and the share price is acceptable at 559 ZAR a share, bearing in mind that the distributions have been amazing. The payout ratio in recent years has been around 80 percent of earnings.

The first six months of last years' earnings clocked 28.20 ZAR per share, so we are going to see a comfortably lower set of earnings relative to that period. The full year number last year was 53.13 ZAR a share (24.93 for the second half), with 44.2 ZAR paid out to shareholders by way of dividends, including Anglo American who are a nearly two thirds shareholder. The reason for the lower earnings are explained in a simple one liner and are "largely attributable to a decrease in export iron ore prices in the period". I have been watching the monthly change at the SA ports, and the key one (as far as Kumba Iron Ore is concerned) to watch here is Saldhana Bay, where the volumes have been growing. Indicating that the volumes should be slightly higher, remember that in the second half of the year last year, production fell. What is different this year is that the newly "opened" Kolomela mine, which should produce between 4-5 million tons per annum this year and 9 million tons per annum from next year, 2013. Total sales last year were 43.5 tons, it will possibly be the number to watch.

But I thought, let us check out a five year iron ore pricing graph to see what Kumba Iron Ore are talking about, which I sourced from here: Iron Ore Monthly Price - US Dollars per Metric Ton. Here is the graph, which just shows the highs and lows and recent price.

These prices are average monthly prices and are perhaps a blended price of the spot market and the contract prices. You can see at the bottom left, the prices were set annually by the majors in a negotiated settlement with the steel companies. And then everyone kind of set that as the benchmark. I was trying to do a simple back of the matchbox type iron price, with the first six months of last year seeing an average price of 177 odd Dollars per ton. For the six months just past the price is roughly 20 percent lower at 141 Dollars per ton, that was the simplest calculation that I could do. Helping Kumba out would be the weakening Rand to the US Dollar. The results are expected to be released around the 20th of July.

Beware the one commodity stock is the message I guess, this no doubt is weighing on Exxaro too, which is lower on this news, and another piece of news that was pointed out to me this morning. Iluka Resources, which mines zircon missed earnings expectations by a country mile. It is an Australian mineral sands mining company, and from what I have read have blamed almost all the worlds markets for having missed almost every metric that analysts find important. Zircon is used in the making of ceramics, fancy plates and tea cups and so on, think your grandmothers finest tea cups when you were a kid! It is also used in construction, another sign that the Chinese economy is slowing. We do not have to wait too long to find out, the Chinese release their second quarter GDP number on Friday (expected 7.6 percent), as well as retail sales (expectations are for a 13.5 percent jump) and industrial production (9.8 percent growth expected). This without a doubt is the single biggest release of the week and no doubt will have everyone focused.

New York, New York. 40^o 43' 0" N, 74^o 0' 0" W. Non-farm (as opposed to NO farm payrolls, that would have been worse) payrolls clocked 80 thousand new jobs for the month of June, and the quarter clocked the worst seen since 2010. Well, I guess the optimistic types would be tempted to say that at least jobs are being added here. And you remember that piece that we posted on Friday, which suggested that the unemployment number would have been a whole percentage point lower if the government had kept all their jobs. But the unemployment rate remained the same, at 8.2 percent and government changes in jobs were not that bad for the month of June, recording a loss of 4000 only, state and local government jobs lost are 586 thousand since December 2008. Wow. So, on balance you could argue that the system itself is working, getting rid of unnecessary government jobs when the tax receipts fall, and now might be seeing a stabilization of that trend. Session end all the indices closed higher, off their worst point, reversing that trend in the last hour or so. Losses for Blue chips and the broader market were lower by one percent or so, whilst the nerds of NASDAQ sold off by 1.3 percent.

Byron's beats looks into the most favourite of seasons over here at Vestact, earnings season. There is earnings seasons from quarter one through to four, so that is like football, cricket, rugby and athletics seasons, but these are the same teams participating. And we get roughly a month and a half from each season, around half the year is spent with proper markets direction from companies.

In the US they report quarterly so this happens 4 times a year. So far the economic data for this quarter has been negative and I have a feeling we will see this showing up in the earnings numbers. I say this because we already saw numbers from Nike (whose economic calendar differs from the rest) which showed weaker demand from China. If that is a theme we see throughout these companies we could be in for a wild ride.

In the last earnings quarter nearly 80% of companies beat earnings expectations and out of the ones I looked at, most of the beats came from developing nation growth. This is why I am slightly worried about the numbers coming through this quarter. As ever, it will be really interesting to see what companies say about the conditions that they are currently operating under. Forward looking statements will also be very interesting and can move share prices extensively depending on the sentiment of the statement.

I've always said it is a lot more constructive to listen to what a company like Caterpillar have to say about demand in China than a 70 year old professor who spends the majority of his time in an office. Of course you have to try and filter through bias issues.

If we do get a bunch of misses there could be some good buying opportunities presenting themselves. We know how reactive the US market is to misses or beats. I would also assume expectations to be lower and most of the negativities to already be factored into the market. As ever we will follow and cover these releases extensively and will relay them onto you guys as they come in. Be prepared!

Currencies and commodities corner. Dr. Copper is last at 341 US cents per pound a little higher on the session. The gold price is slightly lower at 1580 Dollars per fine ounce, the platinum price is also lower, last at 1435 Dollars per fine ounce. The oil price has ticked up a little, remember the Norwegian lockout takes effect today, 84.63 Dollars per barrel for NYMEX WTI. Brent is last at 98.41 Dollars per barrel. As the risk off returns somewhat to the market, the Rand of course will sell off. 8.29 to the US Dollar, 12.84 to the Pound Sterling and 10.22 to the Euro is where it was quoted last. We are around two thirds of a percent worse by mid morning here in Jozi. ECB president Mario Draghi will deliver a testimony to the European parliament today, I guess that does hold some interest for many, we shall keep an eye on that. After the bell, as Byron said is the real meaty part of the markets for us.

Sasha Naryshkine and Byron Lotter

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