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Anglo American feels the heat

January 16, 2013 in Uncategorized

“Costs. Part poor decision making, part labour, part electricity. And of course, probably the most important part in all of this, part weaker demand. Because you can let the costs get out of control and then what do you have? Peter Major used a gangrenous toe having to be chopped off to save the leg, and the rest of the body. I suspect that it is that bad, maybe worse. And requires corrective action.”

To market, to market to buy a fat pig. Whilst the Germans were reporting sub-par economic growth, the key thing is that the economy is still growing. There was a little nervous excitement during the day leading into the Facebook event, which took place in the early evening our time. More on that later. Someone tweeted that most of the comments were happening on Twitter, about Facebook. Yes, Facebook is not for the chattering masses, but rather for updates about your life. Facebook is about your first day at work (or your kids first day at school), your prolonged insomnia, your shiny new kitchen appliance and your brilliant genius offspring. I like to think that I use both Twitter and Facebook properly. I hope…..

Jozi, Jozi 26o 12′ 16″ S, 28o 2′ 44″ E The response from both government and the unions to the Amplats announcement was of course noticeable shock and horror. Amplats is not SAA. There is no seemingly bottomless pit of money to help the business out when times are tough. There are real shareholders making real life economic decisions. Either it is these four shafts, or all the mines go in a while if the prevailing economic conditions exist. Government could lend a helping hand by strong arming Eskom to offer cheaper electricity prices to marginal mines. With all due respect, Minister Shabangu probably has little real world experience on the business of business. The economic realities are that the mines are losing money. Yes, the idea that mining companies are “making billions” is false. Amplats are going to report a loss for the year. A rather big one at that too, perhaps the parties that are outraged by the shaft closures and job losses failed to see the announcement only a day prior to this one. Oh, and all these businesses pay substantial and hefty tax bills, which contribute to the rather pleasing on the eye lifestyles, talking about large sums of money.

But that is me just being “chacharag”, a term made popular by some (populist) fellow who is just a poor cabbage farmer now. It is easy to think that formal employment offered by big companies is secure and that the companies have large sums of money. Correct me if I am wrong, but parent company Anglo American took on a rather large pile of debt in a debt to equity swap when Amplats was forced to raise money just to keep the wolves from the door, somewhere down the line. That was less than three years ago, in case you needed reminding: Anglo American supports Anglo Platinum’s $1.6 billion rights offer. The other shareholders, including the Government Employees Pension Fund I presume followed their rights. And I am presuming then that roughly 850 million Rands was sunk into the company via that specific shareholder. Of which no doubt Minister Shabangu will draw down on her pension when she retires. So, in a roundabout way, she is a shareholder.

And!! Wait for it, since the rights issue, where Anglo American shareholders sucked up over 10 billion Rands worth of debt, more debt has been added to Amplats. As much as was retired. And Amplats is not going to be paying a dividend to Anglo American this year. Nope. Not happening.

In 2006, a happier year for the company and shareholders, Amplats produced 2,816,500 ounces of platinum. Sales ballooned, profits were gargantuan when compared to the year prior and the company paid out extraordinary dividends. Cash operating unit costs per ounce produced was 6116 ZAR. That was in 2006. That was before the lights went out, because the longer term planning was not altogether good. You remember from yesterday when I showed you that table, of cash operating costs per ounce? For the September quarter it was 15,377 ZAR per ounce. For the year, the nine months to September it was 14,976 ZAR per ounce. In 2011, for the same period it was 13,093 ZAR per ounce.

Costs. Part poor decision making, part labour, part electricity. And of course, probably the most important part in all of this, part weaker demand. Because you can let the costs get out of control and then what do you have? Peter Major used a gangrenous toe having to be chopped off to save the leg, and save the rest of the body example. I suspect that it is that bad, maybe worse. And requires corrective action. Meanwhile the ruling alliance had this to say in a statement: The ANC condemns the action taken by Anglo American Platinum Limited. That hardly sounds like a friendly country to make bricks and mortar investments: “We call on the Minister of Minerals and Energy to call an urgent meeting of the industry with a view to considering the idea of companies who want moth ball shafts to surrender their licenses in respect of those shafts so that they can be put on a public auction for new owners who are still hungry to mine to put them to good use.”

All of this review would be unnecessary if every person was renewing their motor vehicle purchases every two years, or whatever it is that people with shiny new motor vehicles do. But this is not the case -> Europe car sales fall to 19-year low. Is that Amplats fault? No. And that is where I think I will leave my attack on people that only talk to their constituencies. A full blown platinum mine strike will do little for companies willingness to sweat their marginal assets. And for those Japanese scientists beavering away at substitution methods at Toyota R&D centres, we better hope as a country that there is nothing new any time soon.

The repercussions this morning of the overnight speeches from both the Minister and the ruling party have been negative for investor sentiment. {Sarcastic Alert} But who cares about those investors, right? The alert ends. I care. We should actually care what people think of our country as an investment destination.

Woolies released a -> Trading Update And Trading Statement this morning. And the stock has responded positively, but that is against the backdrop of a stock price that has been pummelled in recent days as the retail sector has taken pain. Byron covered that nicely yesterday in his piece on Shoprite. There are a lot of moving parts in there, because of acquisitions, the addition of Witchery and Mimco’s saw New Zealand and Australian sales jump over 55 percent. But, the key part in seeing group sales increase 18 percent for the comparable 26 week period last year is that earnings have comfortably outpaced that. For the first time in my life I left a Woolies store during December because it was so busy that I just couldn’t bear it. There was a queue of 15 odd trolleys just to get in.

Woolies “expect that both earnings per share (“EPS”) and headline earnings per share (“HEPS”) for the 26 week period to 23 December 2012 will be between 18-24% higher than the corresponding reporting period of the previous year.” Inside of that there are transaction costs associated with the Witchery Group, some restructuring plans involving employees, once off and net unrealised foreign exchange losses, which collectively add up to 111 million Rands. “Adjusting for these items, core EPS and core HEPS are expected to be between 33-39% higher than the corresponding reporting period of the previous year.” That is what made me sit up, wow, that is a big increase. Expect around 164 cents worth of earnings for the second half, so, somewhere around 330 to 340 cents for the full year. Woolies deserves a slight re-rating, as they have got this morning. Earnings expectations from the analyst community suggests a 17 percent per annum increase for the next three years. Woolies are fairly generous with the dividend. We will review when the numbers hit the screens, the company suggests Valentines Day. Thanks for that!

    Byron beats the streets.
    This morning we received another trading update from one of our retailers, this time fast food franchisee Famous Brands. The update was only for the month of December which is nice because it gives us some important information about what kind of month December was, especially for holiday makers.

    “System-wide sales across the Group’s total brand portfolio (including South Africa and the Rest of Africa region) grew 13.2% while like-on-like sales increased 9%, up from 6.1% in December 2011. System-wide sales in South Africa alone grew 12.4% in December, while like-on-like sales rose 8.5%. In the Rest of Africa region, system-wide sales increased 25.6%, with like-on-like sales improving 15.1%.”

    This looks like a good outcome for the company who are at the same time the sole suppliers to this sales growth. It is a double edged sword in a good way. It also highlights how well the company has managed to integrate itself on our roads, keeping travellers full and satisfied. Targeting our petrol stations has been genius. And as you would imagine people on holiday eat out more.

    Kevin Hedderwick reiterates this: “In contrast to the 2011 December trading period, there was a discernible migration of holidaymakers from Gauteng to the coastal areas. Our restaurants in KwaZulu Natal and the Western Cape outperformed the inland markets, delivering stand-out results. Further reflecting this trend are the record turnovers reported by our restaurants on transit sites, at casinos such as Sun City, and entertainment centres including uShaka Marine World in Durban and the V&A Waterfront in Cape Town.”

    There are two reasons for this in my opinion. Firstly it reflects the growth in our middle class/formal sector. People who have formal jobs work throughout the year and then go on holiday over December. That is what we do here in Sunny South Africa. And on that drive to the coast it is traditional to stop at a petrol station to fill up both your car and your stomach.

    Secondly I think it shows that people have cut down on overseas travelling thanks to a weaker Rand and tough economic conditions. This has forced them to take advantage of the lovely country we have at our disposal. The great weather we had over December also helped, especially at Milky Lane which the update suggests. This also leads me to believe that retailers like Holdsport and Mr Price have also had good Decembers.

    Other things to note from the update was how well Tasha’s has done, growing turnover by 30%. Not only is this brand stealing market share because everyone loves them and it has become the fashionable go to for lunch and coffee, but it also shows peoples willingness to eat up and pay a bit more for a better dining experience.

    And see how well Africa is doing, just like Shoprite and Massmart we are seeing growth well north of 20%. I was listening to the MD of Yum! Brands Africa on Bruce Whitfield’s show last night and he was explaining how KFC has become aspirational in many of these countries. In Lagos people go out on dates to the KFC, one couple even got married there. This is no laughing matter, remember how excited everyone got when the first McDonalds arrived in South Africa. If you are not used to it, it is special and new. Plus the other restaurant options in these areas may be lacking.

    We remain buyers of this company which has so much potential here in SA and throughout the continent. And they are certainly not hanging around having opened up 31 restaurants in the month, 21 in SA and 10 in the rest of Africa region. And this was over a slow period where builders go on leave and people go on holiday (to consume Steers and Wimpy on the way) which is even more impressive.

Facebook launched their third big offering, or that was what I was led to believe, last evening. A search function. With a weird name, “Graph Search”. Now, according to the Business Insider who suggested that Facebook should have just called it “Facebook search”, the term in tech world, social graph, refers to your network. Even Facebook network would or could have worked a bit better. If you are looking for the Facebook explanation, look no further: About Graph Search. As Paul said, this only works well if you make sure that your mates are active and you make sure that you are active. If you are active and post where you have been, what it was like, what you like, then one can get a better search result for all concerned.

But, don’t take my word for how this function will be used, listen to the experts over at CNET -> Facebook takes on Google with Graph Search. And then there was another good one from PC Mag: Facebook Introduces Graph Search With Limited Rollout. I quite like that one paragraph, which shows the power of Facebook: “searches tap into the people, photos, places, and interests that populate those 1 trillion connections and 240 billion photos generated by Facebook’s more than 1 billion users” 1 trillion connections? And you thought only Gideon Gono could count that far. Or the trillion Dollar coin idea, that was sent away in a rush!

Crow’s nest. SA inc. is going through another troubling time. Amplats is down nearly six percent. Yes, really. Anglo was downgraded by Credit Suisse earlier today, the parent company that is. Boeing continues to see problems in their 787 plane, another incident with a fire and a Japanese carrier, so much so that several fleets have been grounded. That is weighing on Dow futures somewhat.

Sasha Naryshkine and Byron Lotter

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