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Impala waterhole leaks

January 11, 2013 in Uncategorized

“If I were an Impala shareholder I would not be impressed. At least you are still getting the proceeds of the mine but slowly but surely 51% of that vital asset is leaving your books. And what happens when expansion is planned and money needs to be raised? Does the 51% stake holder have the money to fund such operations? And what happens if the Mine falls into hard times in terms of production? Impala’s revenue from the government will diminish. Basically they hold the risk of the entire mine but only own 49% of the asset.”


To market, to market to buy a fat pig. Yesterday we were subjected to another ECB conference, after they had decided to put rates on hold, there was never really a chance of a rate cut. There was some silly fellow at the conference who started spewing some nonsense about him having met a fellow during the holiday who said he was a garbage collector. But the banking kind, implying that there were still a lot of toxic assets out there. The ECB president Mario Draghi simply deflected his silly questions and then moved on. That was the highlight for me. But then the screen flashed that Mario Draghi saw that the environment had stabilised and things were looking better in 2013. Really? I can’t remember when last I saw anything on the Greek debt issues. Six weeks ago? Remember the PIIGS? Well, Ireland just had what you would call a relatively successful debt auction. And Spanish ten year bond yields just dipped below 5 percent. Just to remind you, towards the end of July in 2012, the very same bond was yielding 7.6 percent. Yowsers. And then that famous comment came along: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”

And then they did do whatever they needed to. Which meant that the peripheral yields, the ones under pressure, countries borrowing costs were getting to levels that were close to untenable, have now been dramatically reduced. It did help that the Spanish had a cracking bond auction yesterday morning. Well, better than anticipated. We were discussing the tactics of central banks yesterday. By Mario Draghi just showing his arsenal (the potent weapons kind and not the football club, which is the opposite, ouch) he has managed to scare folks away that were suggesting the doomsday Euro breakup. Draghi said the Euro was irreversible. And the rest, as they say in the classics, is history. The next test will be as early as today, Italy has a bond auction. I suspect that will go pretty well too, although remember that the Italian elections are being eyed closely. Don’t even get Italians started on the “pigsty” electoral system. Parties choose the candidates for you! Awesome.


We took some tap here in Jozi, Jozi 26o 12′ 16″ S, 28o 2′ 44″ E initially, SA inc. stocks under a little pressure as the Western Cape farm violence continues to reflect poorly to the rest of the world. Make no mistake, the daily earnings are not a rate to be proud of. But the flip side of that coin is the question around skills and commiserate remuneration. What skills do the farm workers bring to the table, and how can their skills be improved so that they can be more productive and as such command a better wage? Surely that is a fair enough question to ask. The outside world sees the images like this in the WSJ slideshow, with the simple caption: “MOVING TOGETHER: Protesters occupied a highway and threw rocks at police Thursday in De Doorns, South Africa, as they rallied for higher wages in the Western Cape’s vineyards. Police responded with rubber bullets, a water cannon and stun grenades.” Picture from the slideshow: Photos of the Day: Jan. 10. As ever these images are dramatic, violence is not the way to solve problems, whichever way you look at it.

The positive sentiment flowing from the ECB press conference as well as the happy feeling from the Chinese trade data helped us end nearly flat on the day. Slightly lower, but better than it was around midday. But then there is the small issue around a rating downgrade from Fitch, not really saying too much new, but serious issues nevertheless. Check it out: Fitch Downgrades South Africa to ‘BBB’; Outlook Stable.

Some of the main points are: “Economic growth performance and prospects have deteriorated, affecting the public finances and exacerbating social and political tensions.” Yes, this is of course very true. And with a populist approach to economic policy, even if it is something that is sorely needed to rebalance the ills of the past, I suspect this approach will continue. And then: “Public finances have weakened. Fitch estimates national government debt will have risen to 41% of GDP.” I suspect that this figure does not include parastatal debt, it would be much higher. “A trend decline in competitiveness, reflecting wage settlements above productivity and infrastructure constraints, contributed to a widening in the current account deficit to 6.5% of GDP in 2012 (Fitch estimate) from 3.4% of GDP in 2011.” But yet this is a non issue with the unions, they will dispute this productivity issue. Phew, there was quite a public spat between COSATU General Secretary and Adcorp Labour Analyst Loane Sharp last year. You will recall the one around productivity.

Lastly, another very well documented reason: “Social and political tensions have increased as subdued growth, coupled with rising corruption and worsening government effectiveness, have constrained the government’s ability to improve living standards, reduce the 25.5% unemployment rate and redress historical inequalities as rapidly as the population demands.” But government will tell you that they are fighting corruption. And unfortunately the education system, regardless of what the ruling party tells you, is really not that great. The ruling party hails the recent matric results. If I could change one thing, it would be excellence in education. Give someone a quality school leavers certificate and they can do the rest. Real democracy will be achieved when everyone has a quality education. Unionisation of teaching, don’t get me started on that one, that is almost an essential service like healthcare, police or military. Surely teaching should be one of those. That is a worldwide struggle, between the correct salaries for teachers and their lifestyles. The downgrade is what it is, and the observations from Fitch are nothing new.


    Byron beats the streets. This morning Impala platinum finally announced the details of the Indigenisation deal between the Zimbabwean government and Zimplats which is 87% held by Impala. As you can imagine the details are complicated and I’d imagine a long negotiating process took place going back to the days of David Brown. Before we go into the details let’s have a look at the latest numbers and see how significant Zimplats is to the Impala picture.

    In last year’s numbers Zimplats contributed 187 100 ounces at a cost of $1 239 per ounce. This was out of a total of 950 000 for the group at an average price of $1 737. So you can see why Zimplats is so significant and plays a big part in Impala being one of the lowest cost producers around.

    “The term sheet, which will be signed today, stipulates the key terms, subject to certain conditions precedent, for the sale by Zimplats Holdings of an aggregate 51% equity ownership (“the Indigenisation Shares”) of Zimbabwe Platinum Mines (Private) Limited (“Zimplats”) to select Indigenous Entities as set out below. Zimplats Holdings will retain the balance of 49% of Zimplats.

    The purchase price for the Indigenisation Shares, after taking into account the payment for the release of ground obligation (in lieu of indigenisation credits), is US$971 million (R8.3 billion) (“the Transaction”).”

    After reading those first few lines the first question I asked was how will the Zimbabwean government afford this? The 2013 budget for the entire country is $3.8bn so this is more than one quarter of that. Of course they relay the details further down in the announcement.

    “Zimplats Holdings will facilitate the Transaction by providing vendor funding to the Indigenous Entities at an interest rate of 10% per annum. The vendor financing will be repayable from 85% of the dividends declared by Zimplats on the Indigenisation Shares. The proceeds, as and when received by Zimplats Holdings, will be declared as a dividend to Implats or used to fund Zimplats Holdings’ share of funding requirements of Zimplats. Management of Zimplats will remain with Zimplats Holdings.”

    So basically most of the free cash flow from the mine will be paid back to Impala shareholders via the Zim Government. 10% per annum on the US Dollar is steep but I think overall the Zim government has a great deal here. Of this 51% stake, 10% goes to the surrounding community, 10% to an employee trust and 31% to the National indigenisation and economic empowerment fund.

    If I were an Impala shareholder I would not be impressed. At least you are still getting the proceeds of the mine but slowly but surely 51% of that vital asset is leaving your books. And what happens when expansion is planned and money needs to be raised? Does the 51% stake holder have the money to fund such operations? And what happens if the Mine falls into hard times in terms of production? Impala’s revenue from the government will diminish. Basically they hold the risk of the entire mine but only own 49% of the asset.

    I guess they never had a choice and this was making the best of a bad situation. At least they still have the asset and there is some sort of compensation. Hopefully everyone sticks to their laurels and the people who are supposed to benefit from such a deal do actually see the compensation.


New York, New York. 40o 43′ 0″ N, 74o 0′ 0″ W Stocks finished at a five year high again, led by bank stocks. I read some lame commentary that suggested that perhaps earnings are not going to be as bad as some people predicted. Who are they, and these people? Weekly jobless claims were not great, but not that bad. The long term unemployment rate showed some signs of improving, I am guessing that is the number that was cheered. Another interesting fight, a very public one is the short position that Bill Ackman has built up on behalf of his investors in the company Herbalife. 1 billion Dollars worth of shorts! The execs at the company have rubbished Ackman’s claims. But that is not the real meat of the story that is attracting a lot of attention, rather that Daniel Loeb (a friend of Ackman) has a serious long position, 8.2 percent for his investors. And none other than Carl Icahn announced that he had initiated a position, a long position. Well, I never. This is really a fight amongst hedge fund gunslingers. A high noon meeting on the tumbleweed streets. Except this is modern day, there are air conditioned offices and the media who are loving this.

The stock, coincidently looks cheap. But when Ackman calls the company basically a pyramid scheme, you have to ask the serious questions. But, as some suggest Loeb might be out already, having made a short gain from when Ackman announced his short position. Ackman’s last TV appearance that I remember on CNBC was a little embarrassing, he has a big position in JC Penney and he was telling Andrew Ross Sorkin all about the vision, using the show as a presentation of sorts. Defending his investment which had gone poorly so far. Well, the Business Insider suggests: HERE IT IS: Herbalife’s Full Presentation On Why Bill Ackman’s Short Will Be A Disaster. A disaster? We will have to see.

Talking of mini disasters, Boeing has bounced back nicely in recent days, their chief technical officer was on a conference call suggesting that the Dreamliner problems were not unanticipated. There are always problems when a new aircraft was launched, I did also see Jim Cramer suggest on his morning slot at the NYSE that Boeing was one of the best engineering companies on the planet. Perhaps, but I know Jim likes the company a lot. So, go figure, he still manages his own money and a charitable trust.


Crow’s nest. We are seeing BHP Billiton sink over two and a half percent as they are forced to shut iron ore production in Western Australia, along with Rio Tinto and Fortescue. Cyclone Narelle. It is also impacting on BHP Billiton’s oil production. Although recent news suggests that the caution ahead of the cyclone was perhaps not warranted, but I guess you can never be too careful. But this is dragging the market lower to start with.


Sasha Naryshkine and Byron Lotter

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