January 31, 2012 in Uncategorized
Jozi, Jozi. 26o 12′ 16″ S, 28o 2′ 44″ E. OK, was it really those slippery Greeks again? Slippery Greece. Or was it now the Portuguese who are starting to attract attention, as ten year bond yields surged beyond 15 percent (17 percent this morning). Hello junk. Suddenly the doubts have come back. We had a chuckle in the office as the obscenely rich delegates at Davos urged Europe to sort their debt problems out. Yeah, rich people problems and then middle class and politicians problems. The issues that the Greeks have is that Germany seemingly is attacking their very sovereignty, it is just a matter of time before the old, you stole my gold story emerges again. This was the single worst day in six weeks for European equities, we kind of got used to the relative ease, and now we are back to the unease of widening spreads and periphery yields blowing out. All on the day that Euro zone leaders meet.
Our markets sank 265 points to 33629, the resource stocks were the biggest losers, 1.3 percent, the banks were off just a little more than two thirds of a percent. Gold stocks rallied over half a percent. Platinum stocks were hardest hit, there was another twist in the Impala Platinum strike. Something from left field. The stock sank two and three quarters of a percent to 17427. This was also against the backdrop of Eskom continuing to tell us how tight supply is. We are running on fumes here. So, for those of you who can afford it, be gone old light bulbs, time to save electricity. And fast. Should we have a repeat of 2008 then you can imagine that the platinum price will spike. I am still amazed that with all the problems from the majors that the price has not spiked yet.
Here is the announcement, titled “Work Stoppage at Impala Rustenburg”, tell me what you make of it: “Implats wishes to advise that the majority of the mining workforce at its Impala Rustenburg operation have failed to report for duty today, Monday 30 January 2012. This follows on a work stoppage by the operation’s rock drill operators (RDO’s), who participated in an illegal work stoppage last week.” Oops. The majority of the workforce? That is, how can you say, not good.
And the reason why? Well, this is the interesting part, for me at least: “The failure of the workforce to report for work this morning is due to an alternative union, known as the Association of Mineworkers and Construction Union (AMCU), who have, despite no formal process in place, attempted to gain recognition at the Rustenburg operation.” I found that AMCU were a registered trade union. And one of 198 unions registered in this country. Wow! I found AMCU on the page titled Registered Trade Unions in South Africa. Labour guide.
Now Implats is threatening the whole workforce it seems with dismissal: “The Company has applied and been granted a further Court interdict today declaring the strike illegal. The mining workforce will be given a deadline of 1 February 2012 to return to work or face dismissal.” Again, this is not good. Ounces are being lost, I do not for one see the grievances communicated properly and a serious tussle with your work force of this nature does not seem like a good outcome. Not good. David McKay wrote a good story last evening which explains the agreement with NUM but not AMCU -> Intimidation wracks Impala’s Rustenburg mine. Not good.
What is good for Impala Platinum though is the announcement of a replacement for Dave Brown, a well know figure in South African mining. And there was truth in the rumour, it is Terence Goodlace. 1 July 2012 will be his first day on the job. Check out the Implats announcement this morning: “Terence brings with him extensive mining experience having worked in the mining industry since the late 1970′s when he started his working career as a learner miner. He worked his way up to General Manager at Kinross and Evander Gold Mines obtaining his Mine Managers Certificate of Competency (Metallipherous Mining) in 1988. He also holds a Bachelor of Commerce degree from the University of South Africa and a Masters in Business Administration from the University of Wales.” That is very nice, but does Terrence speak Zanu-PF? Good to have a guy with that sort of experience.
We saw a trading update from PPC yesterday just after midday. Nothing really new in the statement, we report on cement sales each and every month, so we would have known that those are looking up. You heard us suggest that the cycle had turned and that “things” are looking better off a low base. The Western Cape continues to lag all the other provinces, come on guys, get building! Zimbabwe sales look better, Botswana is on the decline due to a general construction slowdown. What about the mining industry in Botswana? Lime sales have improved, thanks to an improving local steel industry. Which indicates obviously that steel is increasing, possibly not fast enough for our liking, but that is a better place to be than the alternative.
An improvement at De Hoek will be finished around Easter time this year, the Riebeeck factory environmental report for an upgrade has been handed in to the powers that be. For what is probably the best news that we have heard for a while from anyone in the industry, this must be like music to long suffering shareholders ears: “Although the global economic turmoil continues, we remain cautiously optimistic regarding the outlook for cement demand in South Africa and Zimbabwe. Current trends in cement demand and prices should result in improved results during the first half of our 2012 financial year.” The stock traded at its highest point for the day in the morning and towards the end of the day on around one third more volume than usual. Which is not bad after a down day.
Byron’s beats takes a look at another company in the industry who seem to be facing bigger problems.
This morning we had two big announcements from Murray and Roberts. One was a business update giving us an indication on how things are going around the world and then there was an announcement informing us of a R2 billion rights offer. This was expected by the market last year but in November they managed to restructure their debt facilities so this may come as a bit of a surprise. Let’s cover the business update first then look at the rights issue.
Now remember, these guys have been through a tough time having to write-down receivables from at least three really big projects. This includes the Gautrain where settlement is now only expected in 2014. The Gauteng Province has received an extension until March 2012 to submit its defence. Unfortunately Murray and Roberts have obligations to meet and these extensions are one of the reasons a rights issue has become necessary. Provincial finances have been all over the news of late and let’s be honest, things do not look good. The Dubai International Airport claims process has also met some delays and it is not expected that settlement will happen this financial year. This is the kind of thing that happens when a sector with a lot of players hits a slow down. Participants become ruthless and disputes arise.
On a positive note the order book looks strong and trading conditions have improved. Especially in the mining sector where they continue to secure significant contracts with big mining houses as demand for commodities remains strong. Very interestingly they mention a slowdown in the South African platinum sector due to a low platinum price. I can name a few other reasons, just look at what’s happening at Impala at the moment with the wage disputes.
Locally construction remains muted but in the long term things are more positive. “In the medium to longer term, the outlook for Construction Africa remains positive, given the major – and growing – infrastructural backlog in South Africa. However, in the near term the construction industry in South Africa is expected to remain muted.” The Middle East also has some exciting prospects with the World Cup coming up in Qatar in 2022.
The Australian market has been positive thanks to their massive commodity drive. Unfortunately you can see a trend with their international operations having a more positive outlook than the local stuff. Hopefully this will change.
So what of this capital raising? It’s big. Murray’s has a market cap of R8.6bn so we are looking at 23% of its entire market cap. That is why the share has been sold down 4.9% today. No one likes to be diluted. But it seems crucial for the future of the company. Just until these disputes are settled and that order book can bring the company back into profits. Here is the rationale from the company themselves.
“Subsequent to the October 2008 global financial crisis, and in particular since early 2010, Murray & Roberts’ business environment has been impacted by the weakening of the global economy and the slowdown in South African public spending on infrastructure. These factors, together with the challenges experienced on three of the Group’s projects namely, Dubai International Airport, Gautrain Rapid Rail Link and the Gorgon Pioneer Materials Offloading Facility, which resulted in unresolved claims, caused Murray & Roberts to end the 2011 financial year in a weakened financial position. The Board is of the view that the Rights Offer represents the best opportunity for the Group to retain strategic flexibility and to preserve and grow long-term Shareholder value.”
This whole situation reminds me why we do not invest in construction companies directly but prefer the broader based PPC. Project risk in this case has blindsided Murray’s on three occasions. I do believe the sector will pick up and I do believe Murray’s will get out of this mess. Shareholders will have to be patient though.
I had absolutely no idea what to make of the staggered SENS announcements from Harmony Gold, Pan African Resources and Wits Gold. Regarding Evander Gold Mines Limited, Harmony is the seller and the other two are buyers. For a whopping 1.7 billion ZAR in cash, payable over time, with the bulk (1.4 bn) upfront and 25 million X 4 over the next four quarters after the deal is closed. And then 100 million ZAR 19 months after the deal, subject to an average Rand gold price of 410k ZAR per kg. The balance of 100 million ZAR is payable 31 months after the transaction takes place, also subject to a certain Rand gold price.
I read cash first, but then this line: “The First Tranche and the Second Tranche are payable in cash or through the issue of Pan African and Wits Gold shares, in equal rand value proportions, or a combination of cash and shares, at the election of the Consortium” Why on earth would Harmony want Wits Gold shares? Why on earth would anyone want to buy Evander Gold mine? Excuse me for asking that question, but you will not think it untoward when you read the following from the Harmony website: The Evander operation.
Lower ore tons milled on lower grades equals less gold produced. There is one good spot however, further reengineering of shaft 8 would yield much higher grades. And that is what I think holds the key to what looks like an operation in wind down mode, as per the Harmony piece: “In our last annual report, we estimated that this project would yield 245kg (7 876oz) from 29 000tpm at an average grade of 8.56g/t per month.” So, perhaps the fellows at Pan African think that they can do a better job than Harmony. Perhaps Harmony are only too happy to pass it over to a smaller and more nimble operator, but why the Wits Gold connection? Seems that Harmony are already a share holder at Wits Gold. The only company that I like amongst these three is Pan African. But this seems a rather large “meal”, even for them.
New York, New York. 40o 43′ 0″ N, 74o 0′ 0″ W. Stocks made a big comeback from the worst start in a while, there were personal income and spend numbers that looked OK, income beat but spend was light. That indicates that the average Jo(e) is still cautious. Which is fine, I suspect that confidence that was shaken so hard is being repaired alongside personal balance sheets. Session end tech stocks as a whole were higher, but the nerds of NASDAQ was lower by 0.16 percent, the broader market S&P 500 lost one quarter of a percent, financials lost over a percent, basic materials were down by three quarters of a percent whilst conglomerates were off by 0.8 percent, all leading the broader market lower. Blue chips nearly squeaked into the green, thanks to strong moves by IBM and Microsoft.
Fellow Dow constituent J&J announced that their troubled OTC business has a new team. McNeil, the business unit in question has fallen on tough times, recalls of some of their key products which are flu, hay fever and pain medication. Sales at this McNeil division have more than halved. Sis. Internal appointments taking over from some solid journeymen (women).
With Facebook set to file for an IPO tomorrow. The number that folks are expected is somewhere between 80 to 100 billion Dollars. At 100 billion Dollars that means the Zuck on paper is worth 20 billion big ones. That is right, he will be worth that much on paper. I am not too sure how much he will physically take out of the business, or just whether the company will raise 10 billion Dollars. Why is this important? Well, for starters it will dwarf (err…vertically disadvantage) the Google IPO, which valued the tech giant at a little over 23 billion Dollars. The market cap is now 187 billion, great tear since 2004. And it works, Google searches for small and big businesses are priceless. I agree that Facebook has changed our lives. I agree that 800 million people who you know more about than any government must be a valuable advertising audience. Some folks are already toying with share tickers, LIKE and FRND are not taken yet. Paul suggested that FB was going to be the ticker code, that was not taken yet!
Facebook revenue reportedly doubled in 2011 from 2010 to around 4.2 billion Dollars, with their bottom line around one billion Dollars. So, at 100 billion, there is no guessing what sort of multiple you would be paying. I am guessing that there will be excitement around this company, and folks will get a first chance to see their financials. Awesome. I look forward to it, I must be honest. The brave new world, is it an overpriced share? I have seen this all before though? I can tell you that there are many sceptics. When that balance is eroded and everyone talks about it, well, that is a rather scarier scenario. So, we are not at that point.
We have started much better here today, in part the catch up of having missed the rally from the bottom of the US market, where we closed off. There is only one reason to be grateful for winter and that is the fact that we get an extra hour trade at the end of the day.
Sasha Naryshkine and Byron Lotter
011 022 5440