The platinum strike has been in the headlines for many weeks now; its impact on profit catalogued online (http://www.platinumwagenegotiations.co.za/latest-news/2014) and its consequences discussed ad nauseum. However, a point that’s raised in this interview and that is often overlooked in discussions of the strike is what the strike is doing to the platinum market more broadly. Essentially, as platinum mining in South Africa looks more and more dubious a proposition, platinum consumers around the world – primarily in industry, where platinum is used as a catalyst etc. – are starting to think seriously about doing more to recycle the huge amounts of platinum (22m ounces in one estimate I saw) that is already above the ground and sitting around in old catalytic converters and suchlike. If industry does decide that the platinum supply is unreliable and that they should focus more on recycling, the long-term impact on South African mining could be very serious. Another thing to worry about as the strike grinds on. – FD
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ALEC HOGG: Well, it’s been a long weekend, but South African markets closed lower on Thursday afternoon, after the US Central Bank indicated that it might end its stimulus program by the end of this year. Shares such as Aquarius Platinum, Anglo American Platinum, and Impala Platinum were slightly up. To get a more in-depth view on market movements and the new stories for today, we’re joined by Sasha Naryshkine who is a Director at Vestact. That move, that slight improvement in the platinum shares, has me completely baffled Sasha. Why should it happen when we’re now into the ninth week of a strike?
SASHA NARYSHKINE: Amplats had announced last week that it had settled with NUMSA, so I can only imagine that at AMCU, there are members who are putting extreme pressure on them and you’ve seen the other unions settle for much, much less, than the AMCU members are settling for. In the special report last week that you did on the platinum belt and specifically, the surrounding economy of Rustenburg, shows that everyone is under extreme pressure. I think that with the platinum producers having drawn a line in the sand and said ‘we’re not stepping over this line. This is what it is, and it’s a critical tipping point for South African platinum. I think it’s probably coming to a head and you’ll likely see AMCU settle for much less in the coming weeks. I think that may be why there’s a fair amount of optimism amongst that. However, whether or not there are buyers at this point, I think the jury’s still out.
ALEC HOGG: It’s interesting – that. Carol Payton wrote a very good piece – I don’t know if you saw it in Business Day where she unpacked from a different angle – and her view that she was putting forward, which many investors had not really looked at, was because of migrant labour. Many people…many workers have gone back home. They’ve gone home where they can live off the land, and they don’t actually have to sit in the cities and wait for the companies to do the deals. Given that, as another side to this very complex story, it’s surprising to see that the platinum shares have not reacted more negatively to what is really a debilitating strike.
SASHA NARYSHKINE: It’s debilitating, yes, and the one elephant in the room here for me, is the recycled material. The first AutoCAD convertor was commercially fitted under a motor vehicle in 1971, so in between now and then you’ve had many motor vehicles and a motor vehicle is essentially a ‘durable good’. It’s not supposed to last too long, although some people, myself included, like to drive it for as long as possible. Essentially, there will be more and more platinum above ground in the coming years and as you say, the producers are sitting in a bit of a tight situation here. That’s also against the backdrop of China having tripled motor vehicle sales in five years. Whilst the outlook appears very good for the platinum producers, you have to say to yourself ‘well, there’s this other supplier, which is about two million ounces per annum, which is going to be sitting above ground’ and that’s only going to grow and grow.
GUGULETHU MFUPHI: So from an investor’s perspective, how do you position yourself?
SASHA NARYSHKINE: I think don’t touch for the time being. I don’t know what Anglo’s thoughts are on their Amplats position and how they’re probably being put under pressure from their international investors…remembering that Anglo’s South African shareholder base is, I think, 33/34 percent now. Essentially, we have to watch what U.K. Pension Funds etcetera are putting pressure on the company at the Head Office in London, saying ‘come on, guys. What are you doing with this asset? It could potentially be a big value unlock for the rest of the business if you found a way to get out’, but how. That’s the question.
ALEC HOGG: As Buffett says there are three boxes. The one is ‘yes’, the other one is ‘no’, but by far, the biggest one is ‘too tough to call’ and this looks like a ‘too complex’.
SASHA NARYSHKINE: This does fall in that category. You’re right.
ALEC HOGG: What about AECI getting money in from the Chinese? It has one billion Rand now to bolster its position.
SASHA NARYSHKINE: Yes, well I guess the share price moved in anticipation of the deal having been done, and it’s a strange one. When you look at a map of Johannesburg 15 years ago compared to what it is now, there was so much open space there. There’s been an enormous amount of development, and I guess that remains good news for the business. However, as an investor: when you’re buying it, it’s a ‘nice to have’. It’s not their core business, so I don’t know. It looks a little bit stretched at – what’s it – around 122/123 and maybe it falls into that third category you were talking about.
ALEC HOGG: ‘Too tough to call’.
SASHA NARYSHKINE: ‘Too tough to call’ – yes.
GUGULETHU MFUPHI: Too tough to call. I want to pick your brain on Steinhoff wanting to acquire 98 percent in total, of the JD Group.
SASHA NARYSHKINE: They can thank their lucky starts that they failed in October 2007 because the share ratio back then was something like 2.3 Steinhoff’s per JD. It has done a full turntable.
ALEC HOGG: That’s an interesting point because in that deal, the institutions blocked them, wouldn’t allow them to do the deal, and Marcus Jooste had to walk away from it. You’re right.
SASHA NARYSHKINE: JD was trading at 95, although the potential offer was a five percent premium at R90.00-odd – that’s where JD was. Of course, there weren’t as many Steinhoffs in issue because Steinhoff was a different business back then. They hadn’t injected some of their stakes into cap and of course, JD, to get bigger shareholdings there. It shows you, essentially, that timing pretty much goes along with luck, because we can say we tried first and we failed (and luckily, they failed), and now you see a business, which I wouldn’t think is on their knees. JD aren’t on their knees, but there’s also…if they manage to get a much bigger percentage, they could do an inter-company swap so they wouldn’t have to do a rights issue, you would think. I am however, interested to see because there are some deep value crowds in there. I think RECM earned seven-point-one percent of JD so maybe next time you talk to them; you can see whether or not they’re taking up the offer. You could argue that Steinhoff is a little bit undervalued relative to the rest of the market, but traditionally, Steinhoff would always trade on a single digit multiple, so it hadn’t traded on a 12 or an eleven-and-a-half or wherever it is now.
ALEC HOGG: But it emphasise that story that Nassim Taleb has often mentioned in the ‘Fooled by Randomness/Black Swan’. It’s better to be lucky than to be good. How lucky is Steinhoff?
SASHA NARYSHKINE: They were lucky not to get it and they’ve been lucky in some subsequent transactions.
ALEC HOGG: Do you know that story? The creation…the start of Steinhoff was way back when they bought a company from the old AMRAL and what used to be called AFCOL, which was a furniture part of SABMiller. They put in a bid the first time around, at 1925. Somebody beat them at 1950, and a year later, they were able to pick that up for a quarter of the price. That was the making of Steinhoff.
SASHA NARYSHKINE: Timing…of course and you know retail goes through these incredible cycles with very high highs and very low lows. You are able to time them. It looks as though they’ve timed Conforama beautifully and it looks as though they might well turn out with another cracker in JD. Shareholders might say ‘okay, I want to be involved in the full Steinhoff stable and I can get entry into Europe’, which is seemingly… You’ve seen those PMI numbers this morning with Europe showing more and more signs of recovering, so they might be able to woo many shareholders across, but what do you then do with JD. As the major shareholder, they have to give it their full go and I’m sure they’ll get it right.
ALEC HOGG: It’s much easier when it’s delisted.
SASHA NARYSHKINE: I think so. It’s much easier to be able to do what you really want to do and make the hard decisions. Unfortunately, that means a lot of bloodletting in terms of jobs, and making some difficult calls that need to be made.
ALEC HOGG: I’m sure that Mr Jooste will make those calls.
SASHA NARYSHKINE: He’s cleverer than we are, yes.
