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Sasha Naryshkine
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Equities analyst at Johannesburg based asset management firm, Vestact. A contrarian only when markets are down and long term optimist on global economic growth and human innovation. Manage money in Johannesburg (the gateway to Africa) and New York (the gateway to the world).
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  • Sasol, Going Big In North America

    This morning we have interim results from Sasol, one of South Africa's biggest home grown companies. On the by market capitalisation ranking tables Sasol is in 8th place, 260 billion Rands. Just, and I mean just behind Naspers (265 billion), which have overtaken them in recent days. MTN is comfortably ahead of those two with a market cap of 331 billion Rand. And then there are the big 5, all with primary listings offshore. BATS, SABMiller, BHP Billiton, Richemont and Anglo American are those big five, remarkably SABMiller's market cap is more than double that of Anglo American. Over ten years SABMiller in Rand terms is up 872 percent, whilst Anglo American in the same time is up 97 and a half percent. A shrinking giant (relative) and a new giant, dominant in our home market.

    Back to Sasol though. This company was formed, as a government parastatal, in 1950 with the intent of pursuing a coal to liquids technology that existed, but production at scale. Those were dark old days for South Africa, obviously the powers at the time wanted energy independence for the country. Sasol listed locally in 1979, the ADR listed famously on the day that Saddam Hussein's statue was torn down in Baghdad in 2003. Ernie Els bought the first ADR share, he was interviewed on the floor, I remember it pretty well. Condea was bought in Europe in 2001. Oryx was a monster achievement back in 2007, the Qatar plant started production back then, after having originally been commissioned in 2001. There were some serious problems at the start, but that changed as they managed to settle. More recently the Lake Charles announcement was a huge push to be taken seriously at a global level. In case you missed it, from last year December: Sasol. This changes everything. These projects are huge, and generally take a whole lot of time.

    So the company continuously changes, in order to meet the needs of their customers and a changing market. The fluctuations in the oil price and the Rand to the US Dollar (their products are priced in Dollars) make forecasting this company a tough old business. Really tough. But having said that, the market usually trades the business as a function of Rand oil price. And on that metric, a mere two months ago the percentage of the Sasol share price to the Rand oil price was around the crisis levels. Leading some to believe that the company offered some of the best value around. The stock is up around 11.5 percent this year, moving higher as I write this. Jumping around a little in this message, Sasol is 7.2 percent the size of Exxon Mobil. I guess that is not bad. 13.6 percent the size of the ADR of Royal Dutch Shell. And 22.3 percent the size of the BP ADR, so I guess not bad at all for a "little" company down here at the end of Africa. Enough history and enough background, let us jump oily boots and oil into the numbers.

    Sasol synfuels production increased ten percent. Operating profits increased 4 percent to 18.9 billion Rands, remember that these are half year numbers. This was on revenue that was 3 percent higher at 85.440 billion ZAR. Headline earnings per share edged up 2 percent to 24.01 ZAR per share, the dividend declared for the half is 5.70 ZAR, payable on the 15th of April. The enterprise value was five percent lower at 246.479 billion ZAR, mostly as a result of several write downs. Refresh your memory here, with this piece that we wrote: Sasol, you have to be patient here.

    The average crude oil price for the first half was relatively unchanged at 109.81 Dollars per barrel, the average Rand to the US Dollar over the same period was 8.48. The average currently is comfortably above those numbers. This excellent table tells you almost everything that you need to know about the business currently. The massive synfuels business is hugely profitable for their shareholders. A modest contributor to group revenues, but the most important contributor from a profitability point of view. Also, note that the Synfuels international business has similar margins to the local business.

    (click to enlarge)

    So what do you get when you buy Sasol? A fairly well diversified business geographically and by segment, with reliance on one particular business, the local synfuels business. For their profits. And I guess, like we said earlier in the message, the Lake Charles expansion is possibly more key to this company in the medium term than anything else. And I guess the company is being priced for that, this is not a very demanding rating at all.

    The execution risk of that project means that you have to be patient and trust that a company of this size and scale will get it right. The company is really cash generative and will have to juggle with their capital raising (so far so good) and using existing cash flows to fund a 21 billion Dollar project. I suspect that although this is not quite a swing for the fences approach, it is close. I suspect that if any company globally can bring off this type of project, we have to back David Constable and his current team. We continue to hold this business, and add on weakness.

    Disclosure: I am long SSL.

    Tags: SSL, Sasol
    Mar 11 8:12 AM | Link | Comment!
  • Anglo Platinum Violence. Again.

    Platinum stocks got whacked, in particular Amplats as news came through that inter union violence had again risen at their Siphumelele mine, part of the Amplats Rustenburg mines. Siphumelele is next door to the Khomanani mine, where remember shafts one and two are targeted as potentially being shuttered in the operational review. So, as you can imagine tensions are already high. The official Amplats parent, Anglo American release is as follows: Incident at Siphumelele mine in Rustenburg. So it seems from that release that NUM shop stewards were told to vacate their offices by the workers committee at the mine. Now, what the release does not say is that rival union AMCU was involved here. That is what is being widely reported. So, once again it is about union rivalry.

    And what is in it for championing the causes of the working class? Money. Unions make money off their members, by entering into the collective bargaining process on their behalf. How much money the unions "make" in South Africa is unclear to me, but what is clear is that being a shop steward for one of the unions comes with better working conditions than the miners themselves. And more money probably. In 2010, Cosatu's revenue was nearly 71 million Rands, that was from their affiliation fee collections, grants received and political levy. That information is available from the document: Cosatu Secretariat Report 2011. Now, I can't find the National Union of Mine Workers annual income. It turns out that a few unions are rather late with their financial statements, no wonder that my sneaking around could not find the relevant documentation. I managed to find however this story from the M&G titled: State nails errant unions. There is a key paragraph in there:

      "Unions receive membership fees from their workers, which Watkins estimated at an average of R30 to R35 per member per month. This means that Cosatu unions receive R60-million to R70-million a month in dues. But Watkins said that payments for pension and provident funds, funeral schemes and many other offerings far exceed membership fees and that unions were big business."

    Yowsers. See what I mean. The business of being in unions is big business. A multi million Rand business. Now you can understand why there is violence at the mines and union turf wars, it ultimately boils down to money and a "what is in it for me" attitude. So much for the collective and taking the workers needs and putting them first. You have of course seen much written about this. David McKay as ever has a cracker of a story at MiningMx: Rival unions shatter fragile peace at Amplats. His conclusion is worth noting: "It will be interesting to see how the South African government responds to this latest setback for union peace after president Jacob Zuma declared in his State Of The Nation Address to parliament last week that public protests would no longer be tolerated." You heard anything yet?

    So, what is the fallout expected to be? Well, as far as I can tell, don't expect that specific mine to be open today. More lost revenue for the company who is under pressure already. Very bad. Bloomberg and CNBC Asia ran the stories in their headlines. Err.... at the top of the hour. And I have already seen a research note that suggested that this event suggest further downside and heightened risks to mining equities in South Africa. As a journalist friend of mine said: "Money, money and more money, while people face losing their jobs. It's quite sickening actually." As for Byron, I might actually have to tie him to his chair today, as he becomes more and more enraged with the unions in South Africa.

    Feb 21 8:30 AM | Link | Comment!
  • You Didn't Make That Iron Ore Price

    Kumba Iron Ore released results this morning, for the full year to end December. Normally Byron would have jumped all over this one, but I said that I wanted to cover them and work in resource nationalism, whatever that means. Because I had heard a radio interview with John Robbie and Prof. Ben Turok this morning, and in fact the first lines of the results nail what I am talking about. Record production of 43.1 million tons, that is excellent. Wait for it, export sales volumes increased to 39.7 million tons. The difference between the two is obviously what we use here, a total of 3.4 million tons. Wow. This is a 27 percent reduction in domestic sales, perhaps another sign that the local steel industry is in crisis mode. So, more than 90 percent of what is produced here is sold elsewhere. Why? Because someone else needs it more than we do.

    If our market was completely closed to the rest of the world and Kumba Iron Ore was selling iron ore at cost plus a small percentage amount to state owned steel mills. I am just guessing that they would employ a whole lot fewer folks and almost certainly wobble from one period to another. But, because of the great Chinese economic miracle of our time, South Africa has benefitted already from rising iron ore prices and greater tax collection. Kumba Iron Ore is a company that it could be argued is in the right place at the right time. Let me try and quantify that with a few graphs, first, the 20 year Iron Ore price from Index Mundi:

    (click to enlarge)

    The whole idea I am trying to explain is that iron ore prices used to be negotiated once a year and then that changed to a spot market. It is amazing to think that 8 years ago the iron ore price was 28.11 Dollars a ton. Nowadays the price is around 155 Dollars per ton. The average price that Kumba Iron Ore received in a very volatile year last year was 122 Dollars per ton, a decrease of 23 percent from the year prior. If the iron ore maintains these current levels then expect the first six months of this year to be a record half. Production will be up, the rand will be weaker and the average price will be near records. However, as you can see, predicting the iron ore price is about as easy as predicting climate change and where the next natural disaster will happen. Or even harder, will Lindsay Lohan ever act in another movie?

    But, this is a more important table than any other here, and is taken from this document: Annual crude steel production, 2000-2009. I have then stuck on and hacked a column from this table, Annual crude steel production, 2010 mainly because 2010 saw a bounce back in demand for iron ore and metallurgical coal. So, I have tried to stick that onto the table, to give an extra year, and then I plugged in the 2011 results, that document you can find here: Crude steel production 2011.

    OK, just to introduce the pieced together table, the total global steel production has risen 75 percent in the period from 2000 to 2011. Of that increase, China accounted for 86.5 percent. Strip Chinese steel production out of the equation and you see only 10 percent growth. Exclude the whole Asian continent and growth over that 12 year period would have been a mere 3 percent. Three whole percent. This is the whole point that I am trying to make. The new customer on the block and the other growing ones in Asia, South Korea and to a larger extent India have fuelled the increase in the underlying commodity prices. Iron ore and metallurgical coal prices have not increased because the Australian, Brazilian and South African governments suddenly "got so clever". No. It has nothing to do with you, the rising prices. The rising demand was fuelled and is fuelled by the Chinese decision to industrialize heavily. In fact, as far as I can tell from those longer dated tables, out steel production is lower. That now has something to do with us.

    (click to enlarge)

    And you can see the amazing figure of how much China accounts of annual steel production. It is fair to say that the Chinese have changed the fundamentals for global iron ore and metallurgical coal trade. Nobody else has changed the industry as much as the Chinese have over the last decade plus. So, with the companies paying much higher taxes across the globe as a result of bigger investments (and risks) that private companies and their shareholders took on. And now the state wants to tax those companies higher, everywhere. Leeches. If we can go back to that quote from yesterday. Capitalism has lifted humanity out of the dirt and is greatest value creator in history of the world:

      "In statistics we discovered when we were researching the book, about 200 years ago when capitalism was created, 85% of the people alive lived on $1 a day. Today, that number is 16%. Still too high, but capitalism is wiping out poverty across the world. 200 years ago illiteracy rates were 90%. Today, they are down to about 14%. 200 years ago the average lifespan was 30. Today it is 68 across the world, 78 in the States, and almost 82 in Japan. This is due to business. This is due to capitalism. And it doesn't get credit for it."

    That lays out all the reasons why I am opposed to higher taxes on specific industries that are perceived to have done well. The whole golden goose theory, lets milk it, because we can. And I am convinced that the intentions of the company Imperial Crown Trading 289 with regards to the prospecting rights (on a mine already in production, but that is a separate story) would not have existed in the first place if it were not for an iron ore price that had been catapulted higher due to increasing demand. It should be governments job to encourage the companies to mine as much as the commodities in the ground as they can, because the customer is not going to be there forever at this pace.

    Back to the results now that we have explained the market and what has been going on over the last decade and a bit. Chinese customers account for 66.3 percent of all their sales last year, the geographical category "rest of Asia" account for 23.2 percent. Earnings decreased by 28 percent to 12.2 billion Rands from 17 billion Rands last year. Largely as a result of the average iron ore price being much lower than the prior year, but also as a result of costs increasing comfortably above inflation. Headline earnings per share clocked 37.97 ZAR for the full year, with a final dividend of 1250 cents being declared. That brings the full year dividend to 3170 cents. Lower than the 4420 cents per share last year, but of course that is understandable. Cash costs per unit cost is still mind blowing, 31.43 Dollars a ton at Sishen and 31.22 Dollars a ton at Kolomela.

    One thing that I must say is that Anglo, the parent company who owns around two thirds of Kumba Iron Ore, has taken a lot of heat with regards to their Amplats holding, their Minas-Rio project in Brazil and their Copper operations on the West coast of South America, but sometimes they do not get the credit for Kumba Iron Ore. The work that has been done there was just somehow "expected" by shareholders. Kolomela was developed ahead of time and is rocking. Well done. But, it is clear to me that there are problems at Sishen, where production was lower by 5 million tons. That is more than 10 percent of production and at the average basket price of 130 Dollars a ton and the average exchange rate received (8.19 Rands to the US Dollar) that totals 5.323 billion Rand. Think of the lost revenue for government, let alone the company and the shareholders. More profits equals greater government revenue. Equals expansion. Equals more employment. What the strike did do however was wind down inventory, which was fairly important, sales exceeded production, so there were some benefits to the business, but as you can see, the costs were far greater to the broader economy.

    Finally, the hot molten question is, does one continue to hold Kumba Iron Ore at these elevated levels. The stock no longer looks cheap, but that is because the expectations are perhaps for a big year this year. The anxiety around continued Chinese infrastructural plans fading have gone. The new Chinese leaders have committed to continued to development. Which will bode well for the underlying commodity prices. Being in a single commodity stock always has its problems. The dividend flow should continue to be good as Anglo, the parent company, continue to suck as much out as they can. I would expect the stock to continue to yield around 6 percent next year and the year thereafter. At current levels I have seen a few analyst reports suggest a sell on the stock. But if you bought them a long time ago, you can expect around another 75 odd Rands in the next two years, I suspect that you should continue to hold. And watch like a hawk in the coming years for signs that Chinese demand is slowing. Remember too that there are big plans globally to bring more iron ore into production as demand continues to grow. A hold for now.

    Disclosure: I am long OTCPK:KIROY.

    Additional disclosure: We have clients that have long positions in Kumba Iron Ore and parent company Anglo American. Those are in non discretionary accounts however, our number one resource stock is BHP Billiton.

    Tags: KIROY
    Feb 21 8:28 AM | Link | Comment!
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