Peter Major: Sell Lonmin – and listen carefully to UK heavyweight’s warning on BEE

Alec Hogg caught up with SA’s favourite mining analyst, the outspoken and always candid, Peter Major, to a chat about the potential boom of mining projects in the country and positive sentiment from the Mining Indaba. The chat was disturbed halfway through when heavyweight City of London private equity tzarina Robin Saunders walked by – and was stopped for a quick chat. In the second half of the transcribed interview, Major gives his thoughts on the opinions which Saunders shared – and then offers his thoughts on Glencore’s unbundling of its Lonmin stake to shareholders. 

I’m at the Mining Indaba 2015 with South Africa’s favourite mining analyst, Peter Major. 

Let’s say, Alec Hogg’s favourite mining analyst.  I doubt that it applies to the rest of the country.

Well, you’re upbeat and when you are more confident about a sector that has been going through a bad time, I guess the whole country wants to pull with you. 

Thanks Alec.  I like to think I reflect the reality of the environment, so I like to think I’m only upbeat because a lot of important people have given me reason to be upbeat.  Certainly, at this conference, I’ve dealt with quite a few big people from overseas, representing big, well-known funds, and they all had upbeat messages.  A little bit like our Mining Minister, their message is upbeat, more than his but very matter of fact.  They say, ‘we are really looking for investments in Southern Africa’, South Africa in particular because they have a long history of fantastic metal deposits and they know how to get it out the ground.  ‘Peter, we’re here to cream the top of the pot.  We’re here looking for exceptional deals.  We are very demanding clients, so we are not here to subsidise things.  We’re not here for goodwill or for guilt.  We’re here to make money for our investors, and they have very tight criteria’.

At the moment if you’re an investor in mining, you can pick and choose?

You really can Alec, and we’re all attracted to people who think like us.  It’s amazing.  The people who I’m dealing with, think like I was brought up to think.  They think like Warren Buffet.  They, basically say, ‘we’re not after any metal in particular and we definitely aren’t looking for any uptick in metal prices, so we’re looking at projects that generate a [great rate return, at lower quartile metal prices’. That’s how we were all brought up in mining engineering, in mining design, in Investments 101.  Whether you’re at Allen Gray, Coronation, or Warren Buffet, you’re buying management’s ability to make money at a long-term commodity price, and that’s how mining investment went for thousands of years.  It is only the last ten to 15 years in this crazy cycle that you have these 2.000 listed Toronto and Australian companies.  We won’t call them scam artists or lifestyle companies, but people said, ‘buy us because if the commodity price keeps going up, you’ll make money’.  That’s not a mining project and that is not an investment.

Have they been shaken out?

No, but they’re being shaken out really rapidly because they didn’t have very big balance sheets to start out with, so they needed a continual inflow of money, and you have to continually give people a ‘feel good’ story or a lot of ‘blue sky’ story.  Real hardcore, experienced investors, almost never fall for that.  They’re the investors that are always around.  They’re the investors that control billions.

Your view on those two big platinum projects in Limpopo – the Northern limb. Are they both for real?

Alec, I think they are for real.  I was a little bit dubious a couple of years ago, because they came out of the clear blue sky and you said, ‘why didn’t Amplats find these after 89 years of prospecting?  Why didn’t Impala and Lonmin find these, after 56 years of prospecting?’  There’s been so much drilling and so much test work (the deposits look real), but this is where it gets important, as a fund manager.  Just because the deposit is real doesn’t mean that you are going to make a superior rate of return on it.  I can tell you a lot of fantastic deposits.  Amplats has them.  Lonmin doesn’t have a bad deposit but nobody has made money there in the last ten years, and I can’t foresee anyone making money there in the next five or six.

Yes, these projects are real and they’ve got enough seed capital to take them to stage one but they’re going to need a lot more capital taking them to stage two and three.  The people that supply that capital are going to say, “Great, you have a fantastic ore body but if I give you R100.00 today, how much do I get at the end of the year and how much do I get at the year after?”  Then you plug that on your little Excel spreadsheet and it says, ‘you have an ROR of ten or 15, or 20, or zero’ and that’s the key.  It’s not, “Do you have a great project?  Do you have a great ROR?”

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Alec paused the interview with Peter to get some fascinating insights from Robin Saunders on an international company’s perspective on BEE for investment viability in South Africa. Peter and Alec then picked up on their conversation, with a renewed focus on BEE and the case for foreign direct investment. 

 

Well that was a good discussion with Robin Saunders, Peter?

Boy, it sure was, Alec.  I think that summed up three days perfectly.

But very different to the theme that we’ve been hearing from most other people.

You know what the difference was?  We got Robin on her way out, she’s had a great three-and-a-half days here, so she couldn’t waist time, and she said, “I’m just going to tell you what needs to be told.  There’s not 500 people sitting in an audience.  I’m not on a major TV program, so yes, I’m going to give you guys 100 percent instead of 80/90 percent.”

She had some pretty caustic things to say about BEE.

You know what, they’re not caustic, and they’re the same, exact things people said when BEE was first announced 12 years ago.  They’re the same things that people have been saying regularly but unfortunately, most of the people who’ve been saying that are South Africans or foreigners who’ve been in South Africa for a long time.  Government has just said that these people don’t count.  They’re part of the old establishment.  The new people haven’t had a problem with this, and so Government has kind of chosen their source and discounted the sources they didn’t like.

What I did like was she’s not against the concept of Economic Empowerment for Previously Disadvantage.  She just says you need A) clarity and B) not to create elites.

Alec, I’ve met very few people in the country in all spectrums that were against it.  I’ve met rock-hard Afrikaner farmers, who can’t speak English.  I’ve met Englishmen too prim and proper to ever come down off a tower and have a beer with us.  Very few of them have said there shouldn’t be some kind of BEE. It’s just the way it was carried out and the recipients of it.

When you have our President and Mining Minister admitting how off the rails it was for 12 years, it shows that all those people raised these issues 12 years ago were wrong.

Now that you’ve heard what Robin had to say, from a big foreign investor’s perspective, the holes that she maybe pricked, in some of the optimistic bubbles.  Are you still feeling upbeat?

Yes, she hasn’t toned me down at all and most of the people that I’ve met here, that I’ve been on panels and boards with, they said 90 percent of the same thing she did.  They just didn’t elaborate as much on the negative part of BEE, and she said it very clearly.  They’ve all said it offstage but they didn’t say it on the stage with me, and that is everybody could accept, ‘once empowered, always empowered’ but nobody can accept you have to keep empowering, because, as she said, if you have to give a BEE 26 percent and he leaves.  Then the Government tells you, you’ve got to give another one 26 percent, and then he leaves, and then another.  She said you’ve lost 100 percent four times and you’ve funded it all yourself.

That is so anti-competitive.  That is so destructive.  It goes beyond even discussing, so she said, “There has to be clarity.  There has to be once empowered, always empowered.  They can even up it to 30 or 40 but boy, you’re going to have to have a super project.”  She made it very clear.  “We are very demanding on the return.  We only come here because it is the best return that we can get and no other reason.”

The big news event that came out was Glencore saying, that it’s going to unbundle its stake in Lonmin.  Was that a surprise to you?  

No, I don’t think anybody is surprised.  We were waiting for that hammer to drop because that deal was done in a different environment.  When there was still a chance, its original BEE could work.  When platinum was at a crazy price, $2.200.00 an ounce, the highest metal price the world has ever seen, and it was done by Mick Davis at Xstrata.  Now you fast-forward to today, it’s Ivan Glasenberg.  Glencore is his company.  It’s a trading company.  They don’t deal in platinum.  They never have and they have no ambition to.  They don’t like underground mines.  Lonmin doesn’t tick any of its boxes and it made sense that he’s distributing it to shareholders.  It doesn’t fit in Glencore at all.

But doesn’t it bring Lonmin into play now?

Maybe, years ago it would have brought Lonmin into play.  Who can make a competitive play with Lonmin?  We saw a potential merger in the 90’s, Lonmin and Empower.  It made sense, economically for the country.  The European Union shut it down, anti-trade, etcetera.  It means that everybody knows that if you have Lonmin you can’t merge it with a bigger producer.  It won’t stand up to scrutiny, and everybody knows this company has so much debt and it is barely making money, at today’s price.  If platinum goes down to where its mean is, this company is liable to close down.  It’s very scary.

So it is in a pretty rough situation and difficult to even, restructure? 

It is Alec.  When you’ve got huge debt, you’ve got falling commodity prices, and you’ve had such a history of bad labour relations and Government punishing you and social groups punishing you, it is almost impossible to restructure.

So if you’re a Glencore shareholder and you got a few Lonmin shares, you’ll possibly not hold onto them?

I think they’re very weak shareholders, yes.  I think the market is going to be flooded with Lonmin, at least until this 23 percent holding is gone.

So you wouldn’t be buying the shares right now?

I’d be too afraid to.  It looks very cheap here but you have to have a reason for it to go up, and we know something’s that look very cheap, they can go to zero.