Platinum shares still attractive – but the big value lies with Trans Hex
Of all those I've met in the money management business, Jan van Niekerk, CEO of RECM, is one of the most thoughtful. So having him on CNBC Africa's Power Lunch is always a treat. Today was no exception. RECM bought platinum stocks in buckets during the early stages of a run that has seen the counters rise 50% in the past year. While he wouldn't admit to still be buying, Van Niekerk did tell us RECM's fair value valuations of the platinum counters are well above current price levels. What got him excited, though, was the mention of diamond miner Trans Hex. Neglected by most, as we heard today, the stock is a stand-out for those who believe that as with shares, it's best to buy two hamburgers when the price has halved – not avoid them. – AH
@alechogg According to RECM Equity Fund fact sheet March 2014 they are reducing their exposure to Transhex.
— Francois Joubert (@FrancoisJou) April 22, 2014
ALEC HOGG: Platinum prices dropped sharply yesterday on signs that South African mining companies could be close to reaching a labour settlement. Net1 share price also dropped sharply on the Constitutional Court decision last week, but it picked up very strongly this morning. Joining us now is Jan van Niekerk from RECM, to discuss some of these market movements. Let's start with platinum, Jan. You guys are well exposed to the platinum sector. It appeared to have been offering value. Is the drop in the price something unexpected?
JAN VAN NIEKERK: Alec no, I don't think the drop in the price is unexpected. One would think that the market has been anxious about the supply of the new platinum out of the ground, on top of what's available above ground in the last while, and that resumption of the conversation and probably a resolution of the current mining strike would lead to new production. Perhaps just to reiterate, the thesis for our investment in the platinum sector is not predicated on the platinum price of today or tomorrow, but the long-term normalisation of the sector there. In the end, South African platinum producers still command most of the platinum resources in the world and ultimately, the marginal cost of production is set in South Africa, so we think the market price will adjust to that.
ALEC HOGG: Is there still value for those who haven't invested in platinum shares at the time that you did?
JAN VAN NIEKERK: Alec, our calculations show that at least – for what we consider to be the quality platinum miners – definitely, the intrinsic value is still significantly higher than where the current prices are trading. Obviously, there's a whole list of platinum companies. Some are better quality, some are less, and some are more marginal, but I think you just have to do your homework. We think we have and we've made our selections.
ALEC HOGG: But they're moved quite a lot…Anglo Platinum at 50 percent in the last year, and that's really the point of my question. You guys did your homework. You took your bets a long time ago. Are you still buying?
JAN VAN NIEKERK: Yes, I can't comment in terms of our actual transactions for our clients currently in the market. However, if you look at the disclosure of our portfolios as at the last month-end, you'll notice that many of those platinum names still appeared on the top ten holdings of our clients, so we are still current active holders of large positions in those platinum stocks, Alec. As I said, our calculations say that the fair value for these businesses is still way in excess of the current share price.
ALEC HOGG: All right, so you aren't necessarily going gangbusters as you did a year ago, but it's still no reason to start selling just yet. On the market today, we say Pick n Pay shares firming up a little – three percent – both the Pickwick and the Pick n Pay stock. My question here to you is Pickwick being the holding company for Pick n Pay… At some point in time, I guess, if there is any corporate action on Pick n Pay that would be the target. Is that one you'd prefer if you were holding?
JAN VAN NIEKERK: We're not owners of Pick n Pay for our clients currently, Alec. I think you're right. Pickwick has been trading at a discount to the underlying value of store for many years, for the fact that it's a controlling interest and we know the Ackermann family controls all of that. I guess the weakness in the structure is that ultimately, it's one conversation with the family. Should someone want to take over that business, that's where the conversation will be held and I think in the long term, if you want to get that extra discount to the underlying value of the business, that's the place you can buy. For most investors, you have to consider that it's slightly more liquid than the store's share, but that's definitely the way you would approach it.
ALEC HOGG: Particularly if you're a private investor, where you don't have to move millions of shares at a time like the institutions. I see Advanced Health coming up to the market soon. They've had a successful fundraising. Did that surprise?
JAN VAN NIEKERK: Alec, it's not really something we've considered extensively. I think you'll be aware that at RECM, we tend to be slightly biased against new listings on the market. We think that over time the incentive is for people… When people come to the market, it's more to sell you something at a fair price and we like to buy stuff at a very good price for our investors. Our expectations on those of people coming to the market are normally mismatched, so we didn't spend a lot of time on this one.
ALEC HOGG: But Trans Hex is a company you have been spending a lot of time on…the share price down again this morning. It's been disappointing. Is there still a case to be holding on?
JAN VAN NIEKERK: Yes, I guess the disappointment is probably in terms of the share price behaviour for some investors. We look at the fundamentals of the business. We look at the quality of the management team there and the resource, and I think it's public knowledge that the Baken Mine has been coming up to the end of life for a long time. There's nothing new about that. We think it's a very good management team. They have been able to build that business from just after the financial crisis – being in a small net debt position – to a point where there's a significant amount of cash on the balance sheet today. It depends on how you look at it, but the cash on the balance sheet probably matches the market cap, so we think that's fantastic progress in terms of the underlying business and the skills of the management team in respect of what they've extracted in the industry. We're very bullish on that stock, as you would have seen from some of our transactions.
ALEC HOGG: It has eased up or moved up very slowly over the last three years, so at least it's moving in the right direction. As your colleague Piet Viljoen says, when the price of a hamburger falls, you'll buy two. If the price of shares falls, people run away. Is it at the stage where it's like a hamburger – two for one?
JAN VAN NIEKERK: We certainly think so. I think the stock is probably so small and it's fallen off most people's radar screens, so I don't know how many participants there are or people who still believe in the story, but definitely, we keep close track of the intrinsic value of that business. For us, the natural reaction would be that if the share price falls, we buy more.
ALEC HOGG: My old friend, Anne Crotty, made a return to journalism over the weekend at the Sunday Times and took a quick hit at JD Group. Now, I'm not sure (a) whether you read the story, or (b) whether what she wrote, is going to affect the share price – or should affect the share price of the company, but it's down three percent today. Is there a link?
JAN VAN NIEKERK: Alec, I didn't read the story so I wouldn't be able to comment on that. Perhaps the only comment to make is that JD Group has been operating and running their business in a certain industry for many years where there are positive and negative comments, where there have been positive actions by management and by a bigger external shareholder. RECM clients are significant owners of shares in the JD Group. We therefore watch with fascination as well as with interest what Steinhoff is doing in that business. We think Steinhoff has a fantastic business management team and they have a good track record at turning businesses around. We think they'll do the right things at JD.