The folks at RECM are hard core value investors, so it’s always interesting to hear their take on the respective merits of different businesses. Goldfields and Sibanye are both gold miners, and indeed, Sibanye is an offspring of Goldfields, which spun the Sibanye assets back in 2012. But there are a lot of important differences between the companies, including the sustainability and quality of their assets, their long-term prospects, and their propensity to pay dividends versus reinvesting cash into the business. According to RECM’s Jan van Niekerk, Sibanye is a less long-term company. It’s sweating its average-quality assets hard, paying out healthy dividends, and probably burning through its value quite quickly. In contrast, Goldfields sits on a better quality asset portfolio, and prefers to reinvest cash, buying new assets and improving its ability to extract value from existing assets. So, from a value perspective, Goldfields it clearly the better long-term bet, even though Sibanye has been performing well in the short-term. It’s an important perspective to keep in mind when the day-to-day drama of the stock market is getting to you. – FD
ALEC HOGG: They say it’s the new centre of power in South Africa – Stellenbosch. Outside of that, lots of other stories today. We’re going to be talking to our old friend Paul Walker. He is one of the experts in the gold market globally. He came back to South Africa now. He’s running a business, called Isondo Precious Metals and he’ll be giving us some insights on the gold and platinum prices.
GUGULETHU MFUPHI: Indeed, all of that and so much more coming up, including a look at Mauritius and the role of private equity there in that particular market. In the meantime, perhaps, let’s catch up on the news making headlines.
Well, we start off with Sanlam Emerging Markets who will acquire a 63 percent interest in SORAS Group for R254m. SORAS is Rwanda’s largest life and no-life insurance company.
ALEC HOGG: It’s a pretty good name, that – SORAS – isn’t it? It’s almost like George. Glencore plans to cut 124 jobs at its Namibia zinc and lead mine, or 20 percent of the staff, and that’s to control the costs. In 2011, Glencore bought a majority stake in Rosh Pinah Zinc and Lead Mine from South Africa’s Exxaro and other shareholders.
GUGULETHU MFUPHI:Â Curro plans to provide assistance to CapMAC, amounting to R18.4m for further expansion at the Meridian Schools.
ALEC HOGG: The Association of Mine Workers and Construction Union – AMCU – says it is in no hurry to take a new proposal from the three largest platinum producers back to its members. The proposal is government-sponsored as it came out of a process, which involved new Mines Minister Ramatlhodi. The platinum strike is now in its 19th week and has cost the industry almost R21bn in lost revenue. Workers have lost R9bn in wages.
GUGULETHU MFUPHI:Â Time now for us to check in with the market and that performance in midday trade. What we see behind us, is Industrials really putting a lot of pressure on the Alsi today, followed by banks and the Financial Index, while South African Resources is the only index so far, marginally up in the green.
Turning our attention now to some companies in focus and their share prices: PSG – Alec mentioned that bookbuild there, comparing it to an event that took place in 1987 – I wonder if the share price back then Alec, might have dropped as well – down by just two-and-a-half percent. Maybe investors are slightly nervous before they actually get involved in this bookbuild. Goldfields as well, recently announcing that their operations at their South Deep mine are picking up once again – currently up by one-point-two percent. Protech Khuthele no doubt, still in the news with regard to the Business Rescue issues there. We’ll also get an update on that. Anglo Platinum’s also up quite strongly today.
Moving our attention now as to what all of this means for the Alsi this afternoon, we see it’s up marginally so actually, rather flat at 49835 points, so no major movements on that front, but we’ll see how that develops towards the close of the market. The Rand (the dreaded Rand) currently sitting at R10.70. No doubt, key concerns that economists have been giving red flags with regard to the Rand’s performance, especially in such an important week where we were expecting a lot of economic data out from our peers in the global sphere.
Let’s move straight into today. We’re joined in Cape Town by Jan van Niekerk. He’s the Chief Executive at RECM. Jan, it’s good to have you with us today. If we pick up on that Rand, we know that you deep value investors are always looking at the long term, so this short-term noise regarding the Rand: does that play an influence in your decisions?
JAN VAN NIEKERK: Hello, Gugulethu. No, not really. We try to get a sense of what a fair value for our currency is and to do that calculation; we look at relative producer price inflation rates between different countries. You’ve been talking about the Rand/Dollar exchange rate there. When we consider that over time, somewhere around R9.50 to R10.50 is probably a fair value for the currency and it’s very difficult to take a view on that. When the Rand was trading close to R7.00, one could argue that the Rand was too strong and if it were to get to R12.50 or R13.00, you could argue that it’s too weak, but it’s quite a wide range that you have to work with.
ALEC HOGG: Jan, it’s so good to see you in the studio because you look like those old-time movies of Dr Evil where he has the fellow on the big video screen, when Gugu was talking to you. If you say R10.50 is kind of the upward range of value for the Rand then clearly, at this point at R10.70 it must be a little bit undervalued.
JAN VAN NIEKERK: Look, if you’re happy with 20 cents on R10.70 Alec, then you can probably take a view on that. We prefer to have a bit more certainty when you look at this. As a value investor, you want things to deviate significantly from its intrinsic value before you act on it.
ALEC HOGG: Talk to us about PSG. I was mentioning earlier to Gugu about 1987, the time I remember Donald Gordon making that massive rights issue in London just before the market crashed. We now see PSG doing quite a big rights issue here in South Africa, raising one billion Rand from shareholders. Is it a warning sign?
JAN VAN NIEKERK: Look, I think you need to make a few points there. 1. One billion Rand on PSG’s market cap these days is about five percent, so it’s a big amount of money for anybody, but relative to its existing business, it’s not that large. 2. Apart from Donald Gordon, in PSG’s own history if you look in 1998 before the crash, Jannie and the guys at PSG raised a lot of money in time, and they deployed that capital very cleverly, subsequently. Not that long ago, in Capitec – one of their subsidiaries, before anybody else started raising issues about the unsecured lending market, they also raised enough capital to see that business through the next two years, which they thought were going to be difficult. You can see the differences in the position Capitec find themselves in today, versus some of the other micro-lenders. I think you have to listen and follow what the guys do here. You have to back them and give them credit that they are doing the right thing, and they’re preparing…making sure they have the capital to tackle the economy as it comes. What is interesting in the announcement this morning about the rights issue, is that they specifically say both PSG and Capitec have enough capital. They’re not raising money for those two businesses, which tells you they were clever when they raised money for Capitec at the time. Everybody said it was too much capital. They were going to reduce their ROE’s in the bank business, but I think they were clever.
GUGULETHU MFUPHI: So as RECM, does this mean that you’re following them as well as investing in the likes of Curro, the other agricultural group that they mentioned in the announcement today?
JAN VAN NIEKERK: There’s a difference between following a great investor and investing in their companies. Unfortunately, something like Curro… For us, the valuations are just too high. We admire Mr Mouton and their business. We know both Jannie and his son, Piet, and many of the other guys in the business, but no, we’re not invested in those companies.
ALEC HOGG: But it’s been an extraordinary run for PSG. I looked at the long-term share price, and you could get the shares around R18.00 in 2009 – five years ago. Now you have to pay well over R100.00. When a company driven by an entrepreneur, comes to the market and raises capital, it tells you that he thinks the shares are rather highly priced. Does that reflect though, into the market generally, that maybe there’s some concern internally – even though they would never say it publicly – that the market’s too high?
JAN VAN NIEKERK: Alec, I don’t know. You should probably ask that question of Piet when you speak to him a bit later. I think there’s a balance between… As an owner of a business, you don’t really want to give away equity because that’s probably the most expensive capital you can ever raise, so they must have considered. Again, think about it: it’s only five percent of their market cap. It’s probably not that significant.
GUGULETHU MFUPHI:Â What about your view on resources and in particular, Goldfields? One often tries to compare them with Sibanye that they spun off a few years ago, and that share price has really rocketed substantially over the last year.
JAN VAN NIEKERK: Look, Sibanye rocketed in the last year because the share price first fell a lot. In addition, businesses are running their assets very differently. I think you have to take a view at the sustainability of the way the guys at Sibanye mine those operations. In terms of the way we look at business, is to try to figure out whether something is a quality asset or not. We would probably argue that Goldfields is a better quality asset. It has a more diversified resource base and it’s probably a bit more sustainable. I think people love the idea of dividends and cash flow yield, and we know management teams in gold companies, for many years, have been running the business for what shareholders want from that. Sometimes they want capital to be invested on the promise of gold in the future. At the moment, people want dividends, and I think that’s what’s driving the preference for Sibanye.
ALEC HOGG: Jan, I know you’re a straight shooter, so I’d appreciate a straight answer to this question. Protech Khuthele, just over a year ago, commissioned PricewaterhouseCoopers to do a valuation after they got a bid at 60 cents. PwC came back, saying that the shares, at 60 cents, was far too low, but in fact a value of somewhere between 79 and 88 cents was the right level. Today, a year later, Protech Khuthele is not worth anything like that. In fact, it’s gone into Business Rescue. PwC was paid… I’m not absolutely sure, but there was R6m in the accounts that said ‘transaction-related costs’ plus another R15m with other costs. Let’s say R20m they were paid to do that valuation. At the very least, should the (a) not give that money back, or (b) are they not open to a lawsuit?
JAN VAN NIEKERK: Look, I agree with your sentiments. I also think that investors who take comfort from these kinds of reports should really try to sit in on some of those meetings where the reports are compiled and where the negotiations happens in terms of the ‘fair and reasonable issues’ that people have to give, so I agree with you. The one point I will make is that valuation was done I guess, on the assumption that Protech is a growing concern. Now, it’s one thing to have a lot of assets. What I think happened at Protech, is they’ve run into cash flow problems, so the business isn’t worth zero. There are substantial assets inside of that business, but they’ve gone into Business Rescue because one of their big clients haven’t paid and they can’t settle some of their liabilities. It doesn’t mean that the entire business or some of those assets has gone away. I suspect that this is one of the steps in the entire process for this saga to unfold.
ALEC HOGG: But everybody’s walked away. The directors have all changed now, Jan. The new Directors arrive there and say ‘oh, my goodness, there’s a problem here’. Why didn’t the auditors – a year ago – being handsomely paid to look into the business, find those problems? All they really did was look at ‘what is the NAV’ and that’s the price, it appears that they valued it at.
JAN VAN NIEKERK: I agree with you. I’m cynical about these reports, as you appear to be. I think you should just follow the trail there. Protech has one big shareholder there who could and can, help if they want to.
ALEC HOGG: Well, it would be very interesting to see how that whole thing develops. We do know that PwC was also involved in the Rand Gold debacle where they settled R150m (or their insurers did, anyway) on behalf of the Rand Gold shares that were plundered by Brett Kebble. Again, is that really fair? That was Jan van Niekerk, the Chief Executive of RECM.
After the break, we take a look at the recent performance of both gold as well as platinum, with Paul Walker. Don’t go away.
