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25 SEPTEMBER 2009 SOUTH AFRICA EDITION 113
Space-age metals Three mineral stocks heading for the moon, P16
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7
A forgotten bank stock to buy now
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WHO’S TIPPING WHAT 8
PROFILE
22
from the editor
It’s tough at the top 25 SEPTEMBER 2009 ISSUE 113 ISSN 1995-4476
South Africa Gareth Stokes – Editor Julie Brownlee – Deputy Editor Annabel Koffman – Publisher Editorial & Production Gary Booysen, Karin Iten, Jeremy Miles Subscriptions and marketing Tel: +27 11 699 6530 Advertising sales Shaun Besarab – Tel: +27 82 725 8355 Paul Vidas – Tel: +27 82 926 3429 MoneyWeek is published in South Africa by Fleet Street Publications (Pty) Ltd, Unit 2, Block B, Northlands Business Park, Newmarket Street, Northriding.
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25 September 2009
How do you explain a string of annual losses to your shareholders? If you’re the chief executive of one of South Africa’s private listed companies, then you’re probably in for a public grilling at the Annual General Meeting. Angry stakeholders will ask tough questions and demand that heads roll. Executives will suffer pay cuts, shrinking bonuses and – in extreme cases – get their marching orders. All of which is happening to some unfortunates right now. But if you control the purse strings at one of our public institutions, the situation’s quite different. Higher brass at state run firms are seldom held to account. They’re quite content to dip their hands into the tax coffers, regardless of whether or not they show a profit. The latest public-venture raider is none other than Sipho Thomo. As chief executive of state arms manufacturer, Armscor, he received an 89% salary hike (including benefits, salary and bonuses). His 2009 salary package is now R3.3m. Yes, dear reader, this same Armscor needed R479m from taxpayers to stay afloat in its latest financial year. A couple of weeks ago, Eskom’s chief executive Jacob Maroga graciously accepted a 27% increase, despite presiding over a mindbending R9.5bn loss! He’s washed his hands of the troubles at the ailing state-owned power utility. He says the problems arose thanks to “mysterious” embedded derivative contracts negotiated on his predecessors’ watch. And the company’s simply swept concerns over Maroga’s handling of the utility’s 2007 coalsupply fiasco under the carpet.
utility hiked its electricity prices 34% in April and hopes for 40% plus increases over each of the next two years. Under these conditions, it’ll take consumers even longer to shake off the double-whammy of high levels of debt and recession. This pressure reflects in the latest (for July 2009) decline in retail sales data. Fewer people are spending money, because they have less to spend. They have less to spend because big wigs are earning more for not delivering while we foot the bill. It’s scandalous. Onto other matters, global economic sentiment remains on the front foot as commodity prices firm. Gold and platinum have made steady dollar gains in recent months. And the price of a basket of base commodities is showing marked improvement too. As the World Bank revises growth in China and India higher, expect demand for all manner of raw and processed steel products to surge. That raises the question: Will the aluminium price rebound far enough to guarantee profits at Eskom again? You’ll have to wait a year for that answer! Until Eskom’s commodity linked embedded derivative contracts are “in the money,” we’re all going to be subsidising the power utility with billions more. An interesting trend in the metals and resources space in recent years is the move to so-called “rare-earth metals”. It’s a topic South African investors seldom hear about. In today’s feature article (on page 16), commodities expert Eoin Gleason investigates the potential for metals like lanthanum, tantalum and neodymium. He tells investors how to profit as manufacturers increasingly use these scarce metals in electric batteries, wind turbines and electronic circuit boards.
We’re already paying dearly for Eskom’s decade long infrastructure neglect. The power
Gareth Stokes Editor, South Africa
In this issue 3 News The construction price-fixing scandal; sell sterling – buy the loonie.
5 Markets Why the West could be more like Japan than you think.
19 Blogs Beauty queens feel the pinch. 20 Entrepreneurs How one father turned pester power into a profitable business.
13 Briefing What the opening of the Arctic 23 Travel means for shipping.
Two fabulous places to stay in
Barcelona regardless of your budget.
14 Global view Public spending cuts will be deeper than Britons realise, says Matthew 28 Last word Bill Bonner on a well-known bear’s conversion to bullishness. Lynn.
news SA economy
We knew the goal was beyond reach, but now even government agrees! It was ambitious, we’ll give him that. But when President Zuma announced his “500,000 jobs by the end of the year” target, we knew it would fail. And finally, he agrees. Speaking at Cosatu’s tenth annual conference in Midrand on Monday, Zuma told the group that the global recession had set the plan back. Despite its failure to meet its goal, government is still committed to halving unemployment and poverty by 2014. It’s going to be a hard task. Especially considering that, to date, more than 180,000 jobs were lost during the first quarter of 2009. And Cosatu isn’t happy about this. The group warned government that it has to “change some of its ‘foolish policies’ which it said had caused the problem in the first place,” reports Troye Lund for Fin24. And it’s not the only warning Cosatu gave.
When talks of the ANC succession race emerged, the group went as far as to caution the ruling party not to “take for granted the support given to [the ANC] by the working class”. Not one to be bullied around, Zuma told members who plotted “in the dark corners” to stop. Warning, in his usual jovial manner, that he’d be forced to “name and shame” those who were behind succession plots. Sounds more like Macbeth than government, doesn’t it? But one thing is certain. Cosatu’s been putting the squeeze on government to stick to its promises. Just think about the numerous strikes (across just about every sector of the economy we’ve seen this year). Let’s hope Zuma’s words begin to soak into the areas where they’re needed most.
Currencies
Sell sterling; buy the loonie The pound has weakened again, falling back against the dollar and hitting a fivemonth low around £0.90 to the euro this week before steadying and recovering marginally; some analysts are expecting it to fall to parity with the euro soon. Canada, meanwhile, has been back in the spotlight for the right reasons, with signs of recovery mounting and the Canadian dollar – otherwise known as the loonie – reaching an 11-month high of $1.06 against its US counterpart. Having hit parity with the US dollar early last year before slumping by almost a fifth, it
Currency Forecasts
Pound/dollar year-end forecasts 2009
2010
2011
Highest forecast
$1.79 $1.92 $1.88
Lowest forecast
$1.44 $1.39 $1.57
Average
$1.65 $1.65 $1.63
Pound/euro year-end forecasts 2009
2010
2011
Highest forecast
€1.23 €1.32 €1.33
Lowest forecast
€1.02 €1.00 €1.01
Average
€1.16 €1.18 €1.19 Source: Evening Standard
appears to be on its way back.
What the commentators said No wonder sterling is suffering, said Richard Fletcher in The Daily Telegraph. The economy’s reliance on housing and finance made Britain “almost uniquely vulnerable” to the credit crisis; Britain’s been printing money like nobody else, the public finances are bad and Britain’s getting left behind in the global recovery. Canada, by contrast, “had a better recession than most”, said Lex in the FT. Helped by a comparatively sound banking sector and high exposure to rebounding commodities, growth ticked up in June for the first time in almost a year, and in August the index of leading indicators recorded its largest jump since 2002, although retail sales fell back. It’s also good news that Canada managed to avoid a huge fiscal stimulus, said Breakingviews’ Martin Hutchinson.
The bottom line R440,000 The estimated
(right) was paid to model for new designer Hannah Marshall’s show at London Fashion Week. O’Connor also asked for a cheese panini as part of her fee.
street value of the 42 cannabis plants found growing in the middle of Greece’s busiest motorway. The audacious crop has resulted in the arrest of a 35 year old man.
£20m What London Fashion Week contributes to the capital’s economy.
R225m
The amount that a paramedic allegedly tried to blackmail out of actor John Travolta following the death of Travolta’s son.
3
25 September 2009
$3,500 How much two rings stolen by Jonathan G. Parker are worth. How do we know his name? Well, this would-be burglar decided to stop mid-robbery to check his Facebook profile and then forgot to log out.
£25m The guide price placed on Rembrandt’s Portrait of a man, half-length, with his arms akimbo, which is to be auctioned at Christie’s in December. The guide price is the highest ever placed on an Old Master.
R32.5bn The estimated cost of building a high-speed train line between Nairobi and Mombasa. It would cut the average journey time from 13 hours to three.
R112,500 What a dentist from Atlanta has spent amassing a collection of 2,000 different toothpastes.
©GETTY IMAGES
R125 How much Erin O’Connor
news Its budget deficit this year will be around 4% and its overall public debt is heading below America’s pre-crisis level. Given huge fiscal problems all around the world, Canada “stands out as a safe haven”. The economy’s exposure to commodities also bodes well. The loonie “is among the least loony currencies for investors” and looks on track to head back over parity with the greenback.
Companies
The gloves are off at Simmers!
share price we’ve seen in the past two weeks
is “aimed at getting all the Vusilangoappointed directors off the board”.
According to Wakeford this fallout is “really a red herring and a storm in a teacup compared with the real underlying issues here which concern serious breaches in corporate governance”. He believes the quartet was “excommunicated” because of Brunette’s inability to establish a working relationship with them. He accused the chairman of being “oppressive” and believes Brunette’s “project clean sweep”
But that’s not even the worst of it. Management has asked the JSE to investigate the possible manipulation of trading in Simmers’ shares, reports Ryan. What will the outcome be? Well that depends on what investigators dredge up – but it’s clear the market didn’t like the negativity: The squabble saw the share price plunge a whopping 7.84% on the day.
The way we live now
The fur flew at Simmer & Jack Mines (JSE:SIM) AGM on Monday, reports miningmx.com’s Brendan Ryan. The contenders? Group chairman, Nigel Brunette and Valence Watson – CEO of Vulisango (Simmers’ BEE partner that owns a 22% in the group).
During the boom years Europeans flooded into Britain for jobs. Now they’re coming back to declare themselves bankrupt. Hundreds of broke Germans are on their way over because it is easier to be declared bankrupt in Britain. In Germany it can take up to nine years to be discharged from bankruptcy; in Britain, debts can be written off in a year. In return for £7,000 a Britishbased insolvency agency helps them find a home and job. After 12 months they can file for bankruptcy and a year later return home debt free. “It is much easier to go for bankruptcy here – it’s so quick,” says Hans Dahlmann, who moved to the UK with £150,000 of debt on credit cards.
Brunette even went as far as pointing the finger at one of the members – Kevin Wakeford – for leaking inside information. Wakeford replied that he hadn’t done this. But had, instead tried to “defuse a conflict within the company through finding a suitable board replacement for [Baba] Njenje” – another member of the quartet. Brunette believes Wakeford is behind the 22% fall in the
Vital numbers % change
FTSE 100 Nikkei S&P500 Nasdaq CAC40 Dax Top 40 All Share Rand/Euro Rand/Pound Rand/US$
*5142.60 **-0.41 10370.54 -0.70 1071.66 0.58 2146.30 0.92 3823.52 -0.31 5709.38 -0.38 22863.00 -2.09 25456.00 -1.79 10.91 0.07 12.07 -0.85 7.38 -0.16 *22 Sep ** since 17 Sep
©PHOTOLIBRARY
The fight took place after four nonexecutive directors resigned from the board. The reason? Brunette accused the quartet of having “unresolved conflicts of interest,” which he believes resulted in “breaches of fiduciary duties”.
Best and worst-performing shares Winners
% change Price
25 September 2009
% change Price
Suprgrp (SPG)
30.38%
103c
Sephaku (SEP)
-18.00%
451c
CIC (CCI)
29.17%
155c
Metorex (MTX)
-11.29%
275c
Telemastr (TLM)
27.78%
230c
IFA (IFH)
-9.01%
101c
Shariah40 (NFSH40)
16.54%
310c
SA Corp (SAC)
-8.75%
240c
Foneworx (FWX)
15.00%
115c
Annoraq (ARQ)
-8.31%
640c
S.Ocean (SOH)
14.67%
172c
Caxton (CAT)
-8.19%
1166c
Oando (OAO)
13.33%
510c
Phumelela (PHM)
-7.82%
1120c
Bell (BEL)
12.07%
1300c
Urone (UUU)
-7.28%
1720c
SovFood (SOV)
10.61%
1095c
Compclear (CCL)
-6.67%
280c
Coal (CZA)
10.37%
1320c
Eastplats (EPS)
-6.15%
412c
Weekly change to JSE stocks as 22 September 2009
4
Losers
the markets
Japan’s past is our future Most people are quick to dismiss the idea that Japan’s 150 credit bubble and bust in the 130 1980s and 1990s is relevant to the West’s situation now. 110 They shouldn’t be, says 90 Richard Cookson of HSBC. For starters, it’s hard to 70 argue that Japan’s bubble 50 was much bigger: in the five 30 years to the peak of the ‘53 bubble in 2000, US stocks rose by 220%, compared to 224% in Japan during the late 1980s. House prices in America rose by more than Japanese land prices (a proxy for house prices) in the five pre-peak years. Nor is the latest global market rally proof that we are out of the woods. There have also been six 20%-plus and four 50%plus rallies in Japanese stocks since 1990, says David Rosenberg of Gluskin Sheff. Yet the index is still 75% off its peak. Optimists also say that Western authorities have been much more proactive in containing the fallout and pre-empting deflation than Japan when its bubble burst, says Cookson. But Western central banks had to act fast as they were faced with a collapsing economy, while confidence in the Japanese financial system hadn’t been “completely eviscerated”. Japanese deflation only set in in the late 1990s. We don’t know yet if central banks have been able to ward off a deflationary “deleveraging trap”, only that “they have been aggressive in trying”. Cookson also points out that while Japanese corporate
‘58
‘63
‘68
‘73
‘78
‘83
‘88
‘93
‘98
‘03
‘08
Source: Captal Economics
debt was much higher than in America, in Japan household savings offset corporate deleveraging. In Britain and the US, savings are meagre. The hallmark of Japan’s experience, moreover, was a lack of demand for new loans as debts were wound down – a process that has now begun in Britain and America. As Japan showed, once deleveraging begins, “retrenchment takes many years”, says Albert Edwards of Société Générale, “rendering the economy extremely vulnerable to rapid relapses”. American households have reduced their debts for four successive quarters, as Capital Economics points out, but with debt still at 129% of household income, miles above the 30-year average, unemployment rising and wage growth slowing rapidly, there is still a long way to go. It’s a similar story in Britain, with businesses and households (whose debts are even higher than in America) retrenching. And as wages continue to slump, the danger of a deflationary spiral is growing, says Capital Economics. As Rosenberg puts it: “Sushi, anyone?”
“It was hard to escape a twinge of déjà vu” last week, says Gillian Tett in the FT. In the boom years, banks were constantly putting assets into semi-detached entities, such as SIVs (‘structured investment vehicles’), much like “a household stuffing rubbish into a cellar”. Enter Barclays, which last week announced the sale of $12.3bn of its riskiest assets to a newly created company called Protium Finance, headed by former Barclays staff. It has loaned Protium the money to buy the assets. Essentially, Barclays is using “financial engineering to transform dodgy assets… on its trading book to a loan on its banking book”, says Tracy Corrigan on Telegraph.co.uk. That means that instead of taking a one-time hit to its balance sheet – denting its capital – it can spread the impact over years. The Barclays deal is a reminder that the carnage in the banking sector isn’t over. Most losses on toxic assets have been taken, but plenty more on conventional loans are in the pipeline. “Bad loans are the next wave” of the financial crisis, says Deutsche Bank’s chief executive Josef Ackermann. American consumer loan losses and delinquencies on commercial real-estate loans are rocketing, says John Mauldin on Investorsinsight.com. The latter are 9% delinquent and write-offs could reach $400bn. One study estimates that 1,000 American banks will go bust in this cycle; so far, around 100 have folded. We have seen the first slide in US bank lending in the post-war era, and “all over the developed world” banks wary of further losses are cutting back on credit, crimping growth. More than two years in, the credit crunch is far from over.
Viewpoint
The big picture: executive pay still outperforms
“Chances are that clunkers schemes… simply caused some buyers to advance their purchases… a similar French scheme in the mid-1990s was followed by a halving of car sales. This only adds to my worries about… this recovery. The Japanese spent much of the 1990s propping up their economy and sticking sunglasses on its face; every time they let go, it slumped again.”
Sliding share prices have not Executive pay against FTSE 100 performance stopped executives raking it in, says Jill Treanor in The Guardian. Executives' cash 150 Between 2000 and 2008, the FTSE 100 dipped by 30% – but the cash 125 paid to executives rose by 80% 100 on average, according to 75 corporate governance FTSE 100 consultancy PIRC. This suggests 50 that the introduction of a “say on 2000 2001 2002 2003 2004 2005 2006 2007 2008 pay” – a non-binding vote on FT Source: PIRC/TheSource: Guardian companies’ remuneration reports – has had little impact on ensuring that pay is linked more closely to performance. However, PIRC notes that over the past few years the proportion of pay made up of long-term incentive plans, which should provide a closer link to performance, has gone up.
Buttonwood, Economist.com
5
US household debt as a % of disposable income
The carnage in the banks isn’t over yet
25 September 2009
the markets
After expanding by about 7% a year between 1995 and 2008, growth in Vietnam (‘Asia’s other communist dynamo’) has suffered a sharp slowdown. Exports tanked amid the global downturn just as monetary policy was being tightened to cool the overheating. GDP growth slid to an annual rate of 3.1% in the first quarter.
outlook has improved. But the momentum is set to slow now that loose fiscal and monetary policies are likely to be tightened gradually.
©AFP/GETTY IMAGES
The central bank has said it wants to cap lending growth at 30% this year, so a lending slowdown is on the cards. “Surging bank credit has fuelled Vietnam’s rally since April” – the Ho Chi Vietnam looks good, but stocks are pricey Minh Stock But now it is Exchange’s VN Index has almost doubled bouncing back, due largely to a Chinasince then – “and we expect slowing bank style “government-orchestrated increase credit to end Vietnam’s outperformance,” in commercial bank lending”, says says Credit Suisse. In addition, rich Capital Economics. Credit growth valuations are another reason to take jumped from an annual 10% in March to profits. Vietnam’s biggest stocks are on 24% in June. A fiscal stimulus worth 8% the second-highest price-to-book-value of GDP, one of the largest in Asia, and a ratios in Asia ex-Japan. cut in interest rates from 14% to 7% facilitated by a slide in inflation thanks to The index as a whole is starting to look the slowdown, have also provided a fillip. pricey at almost three times book value. Industrial output and retail sales have While the regional stockmarket upswing stabilised, and a gradual improvement in looks set to continue for now, all global conditions should bolster exports emerging markets are vulnerable to and foreign direct investment, says a slide if global risk appetite falls Capital Economics. “Vietnam is back on again. The London-listed Vietnam track” and growth should rise to around Opportunity Fund (Aim: VOF), still on a 5% by the end of the year. 22% discount to net asset value, offers a cheaper bet for long-term investors than The small and volatile stockmarket has a punt on the index. gained around 70% this year as the
Gold: buy on the dips Gold’s previous forays over the $1,000 an ounce mark didn’t last long, but this time the yellow metal has been more resilient. It hit $1,020 last week, helped by miner Barrick Gold’s decision to close out its short positions on gold. Barrick had hedged against a drop in prices by selling gold short, which was fine when prices were stable to falling but proved a “multibillion dollar (and growing) liability” as the bull market became entrenched, says Bill Fleckenstein on Moneycentral.msn.com. Producers have now “unwound virtually all” their hedging positions, says Chris Flood in the FT, and after a rapid rise of around $90 in a month, gold looks vulnerable to profit-taking in the short-term. But the longer-term outlook is strong. Recent gains against a wide range of currencies suggest that as central banks debase their currencies by printing money, gold’s role as the ultimate store of value is being gradually rediscovered. Moreover, central banks are set to become net buyers for the first time since 1998, supplies are tight and Chinese retail investors are now being allowed to buy gold, which should boost demand, says David Galland of Casey Research. Buy on dips. 6
25 September 2009
Sterling is ‘in the global doghouse’ When risk appetite is high, sterling usually does well. But this time the pound “has not been invited to the party”, says Deborah Hyde on Citywire.co.uk. In fact, it’s “in the global doghouse”, says Jim Wood-Smith of Williams de Broë, hitting a five-month low of around £0.90 to the euro and falling by 2.6% against the dollar last week. Sentiment was hurt by the Bank of England’s (BOE) announcement that it might lower the interest rate that it pays on deposits that banks hold with it; the idea was taken as a sign that the policymakers think quantitative easing (QE) isn’t working as well as they hoped. In turn, this also increases the odds of interest rates staying at record lows for a long time. The currencies of other economies still engaged in QE have also been weak, including the dollar. But while most central banks have been hinting at tightening, the BOE recently increased
Pounds per euro 1.000 0.975 0.950 0.925 0.900 0.875 0.850 0.825 0.800 0.775
1929 to 1930 cycle
Source: Pacific Exchange Rate Service
Asia’s ‘other communist dynamo’ powers up again
O N D J 2008
F M A M J
J
A S 2009
the amount of money it’s printing to throw at the economy. Given the mounting expectations of low interest rates being maintained, sterling could become a funding currency for the carry trade (meaning it would be sold to fund the purchase of higher-yielding assets elsewhere, as the yen was until recently), says Melinda Burgess of RBS. That development would put further downward pressure on sterling as the global economy improves. Meanwhile, the BOE has compounded jitters by suggesting that, following the financial crisis, foreign investors may have become less willing to fund our current-account deficit. This would imply a lower long-term exchange rate for the pound. Analysts at Citigroup and BNP Paribas expect the pound to slide to parity with the euro.
sector of the week
Explorers strike black gold dragging sonar equipment thousands of feet below the ocean surface to bounce waves beneath the bedrock. Each layer of sedimentary rock reflects different parts of the sound waves back to shipboard receptors. Huge amounts of seismic data will be collated into detailed 3D maps of the oil-filled caverns – so oil experts can pinpoint the best place to sink a drill. For BP, it was a case of how best to place an $80m-$100m well the size of a dinner plate on the seafloor.
by Eoin Gleeson
Not at all. Oil experts have been factoring new discoveries like these into estimates of the world’s oil reserves for some time, says Carola Hoyos in the FT. As the price of oil spiked two years ago, the industry began scouring remote reaches of the ocean to find new reserves. But firms quickly found their equipment wasn’t up to the job. So they ploughed a fortune into developing drills and seismic equipment that could sound out fields deep beneath the seabed. Now those innovations are starting to pay off. Slowly, a picture has began to emerge of vast, untapped reserves miles under the oceans. Anticipating this, geologists have been adding allowances for undiscovered deepwater oil into their forecasts of future supply. So are our energy woes over? Absolutely not. Large offshore discoveries like this are incredibly expensive to develop. BP had to drill more than 35,000 feet beneath the Gulf of Mexico in order to strike oil. And recovery rates could be as
©LARRY LEE PHOTOGRAPHY/CORBIS
For an industry that is meant to be downing tools, oil explorers have found a hell of a lot of the stuff recently. First Iran strikes 8.8 billion barrels. Then BP uncovers a “giant” discovery in the Gulf of Mexico. And then Tullow Oil announces it has found a whole new oil basin, stretching 1,100km from the coast of Ghana to Sierra Leone. Have they been hiding this stuff from us?
Deepwater explorers will have to work harder low as 5%-15% of oil in place, perhaps yielding just 150 million barrels of oil from its discovery, says Keith Johnson in The Wall Street Journal. To put these finds in context, we need to find 45 million new barrels a day from 2030 to satisfy demand, according to the International Energy Agency. These new discoveries will not plug the gap. The growing importance of deepwater finds means that oil explorers are going to have to work harder on new discoveries in future. They’ll need a wealth of seismic surveying to scope out those reserves. Deepwater oil exploration begins with a fleet of seismic vessels
That work came to an abrupt end during the recession. The oil price sank and investment in expensive seismic surveying fell with it. Surveys were down 30% in the first half of this year, according to Danske analysts. In past downturns, seismic specialists have ploughed ahead with surveys on their own account, to prevent vessels going idle. Not this time. Ships are being called back and at least eight of the 28 new vessels scheduled for 2011 are at risk of being cancelled. The industry is suffering from serious overcapacity, creating huge downward pressure on contract margins. But demand for contract work is picking up again. And providers are united in their focus on reducing existing capacity: an estimated 58 vessels will enter the market this year, while 73 will be removed. Once the oil price rises again, the search for remote oil reserves will drive a sharp rebound in surveys and in these firms’ prospects (see box below).
The best bet in the sector Seismic groups were left for dead when oil collapsed. In August last year, we tipped CGG Veritas (NYSE: CGV), believing that the group’s ownership of leading seismicequipment manufacturer, Sercel, would see it through the recession. But the collapse of Lehman Brothers a few weeks later made what had already happened look trivial in comparison. CGG Veritas is down 49% since then, in an environment where day rates have fallen 30%-50% for many of the modern vessels.
Petroleum Geo-Services 40
Figures in dollars
30
20
10
0 Jan 2008
The firm is doing more than any of its peers to streamline and modernise its fleet, says analysts at Danske; it’s currently making plans to cut its fleet from 27 to 20 vessels. But competitor Petroleum Geo-Services (Oslo: PGS, NYSE: PGSVY)
7
25 September 2009
might be a better candidate for a quick recovery. Petroleum Geo-Services has a more modern fleet. With 13 vessels at its disposal, having recently cancelled its new builds, it is also less afflicted by overcapacity than CGG Veritas.
Petroleum Geo-Services has been reducing its leverage, with net debt to equity falling Jan 2009 from 1 to 0.5 times. Revenue is partly protected by a $743m order book, which in June grew for the first time since the Lehman collapse as multiclient surveys picked up. Contract margins are still declining and the firm estimates another 10% of global capacity must be removed to balance the market, but cost-cutting is helping to repair the damage. With the market pricing in a lost year in 2010, the group looks a cheap recovery play on a forward p/e of 11.
who’s tipping what Gareth Stokes, MoneyWeek’s analyst, picks the best – and worst – tips from the press and brokers’ reports, and suggests a share for the brave.
The ugly duckling poised to outperform the banking sector Tip of the week: Finally, a bank that offers value – the Financial Mail It seems as if South Africa’s banking and finance shares have turned the corner. Now that the “big four” have reported full-year 2008 (2009 in FirstRand’s case) results, analysts are looking to the current year for an earnings resurrection. But you don’t have to focus on one of the market leaders to scoop profit in the sector. There are a couple of so-called “second tier” banking shares that are simply oozing potential. And, according to the Financial Mail, African Bank Investments (JSE:ABL) – otherwise known as Abil – is one “ugly duckling” poised to outperform in coming years.
Why should you consider an investment in Abil? For starters, you can place a tick next to each of the five investment measures the Financial Mail uses to rate “out of favour” shares. Abil is cash positive. It’s likely to report an increase in revenue for the year to September 2009. The market has ignored it of late. It’s likely to pay a dividend. And it remains profitable. When the group published its interim results for
Gamble of the week: Steinhoff International Holdings After months of high interest rates and inflation, the consumer finally has reason to celebrate. Earlier this week, Statistics SA confirmed that inflation had crept closer to the Reserve Bank’s 3% to 6% target range. On the strength of this evidence, outgoing governor Tito Mboweni was able to hold interest rates unchanged. Although levels of household debt remain high, there’s enough evidence that consumers are staging a gradual comeback. It’s time to turn your attention from defensive shares back to cyclical businesses. One share to watch is international furniture manufacturer and retailer, Steinhoff International Holdings (JSE:SHF).
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the six months to March 2009, its revenue was 57% higher (to R7.4bn), while its interest income surged 36% to R2.7bn. The group declared an interim dividend of 85c/share. There aren’t too many banking shares – local or global – that can make similar claims. But the strongest motivation for an investment in Abil isn’t from the banking side of the business. A great deal of future group profit will be courtesy of its cyclical furniture retailing operations.
Steinhoff’s share price has improved significantly since its recent low of 950c/share. We expect there’s room for further improvement as the market cottons on to prospects in the business. In the year to June 2009, the company recorded R50.8bn in revenue with an 11% improvement in profit before tax (to R4.2bn). The generous 60c/share final dividend means Steinhoff is trading off a 6.39 times price-to-earnings margin, significantly softer than its ten year mean of 11.3. Other measures, like return on equity (15.4% compared to an average 20.5%) and price to book (0.95% against the mean 1.57%), also suggest the share has plenty more upside. Group chief executive Markus Jooste was pleased with the results. “At group level, margins were pleasingly maintained, at 10.1% compared to the comparative of 10.3%, due to the comprehensive diversity of our global operations, good
who’s tipping what This side of the business has been in the doldrums of late, but we expect a turnaround from the division through FY2010. This will send the share price higher. Management is hard at work integrating the financial services operations the group inherited when it bought Ellerines. And it believes the strong progress made through the first half of this financial year will convert to a reasonable improvement in the full-year financial result. As South Africa’s consumer-led recession abates, it’s hardly surprising the Financial Mail’s Larry Claasen concludes: “There’s value here if you want a banking share!” Recommendation: BUY at 3075c Market capitalisation: R24.728bn
Turkey of the week: Metorex is “still not out of the woods” – Finweek Shares in Metorex Limited (JSE:MTX) are a far cry from their 2008 high of R24.50 per share. Despite a range of rescue efforts the group is still embroiled in an ongoing battle for liquidity. At 30 June 2009, Metorex reported a net cash position of just R42.4m and total debt of R2.1bn. And that’s not good news for a copper producer trying to make ends meet through a recession.
207 tonnes. This decline in revenue coincided with a serious spike in operating costs, largely thanks to the weakening in the rand dollar exchange rate over the reporting period. Improvements in the current period will hinge on the economic recovery. Although copper production should improve further, the group expects to struggle with power supply at its DRC operations. And fluorspar production will hinge on market demand. Metorex has weathered a number of storms in recent years. The group undertook a major rights issue (at 200c/share), embarked on a debt restructuring exercise and disposed of a number of assets in its bid to remain viable. The company sold its entire holding in Pan African Resource for R386m with effect 1 July 2009. Even so,
Global copper prices hit rock bottom last year as demand from major emerging economies dried up. The result was a decrease in Metorex’s gross revenue, from R1.61bn to R1.24bn, despite a 23% increase in copper production to 31
financial management and the scale of our manufacturing and sourcing operations,” he said. Steinhoff increased its exposure to the massmarket furniture retail sector in central Europe. UK operations reported stable revenues after a successful three-year consolidation strategy. Continental European businesses benefited from the group’s “dominant large scale formats.” Margins should improve in future as growth at the Asian-based sourcing division continues. Trading results for July and September suggest an improved performance in the current financial year. Global economic
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there’s some doubt the company can meet its short-term obligations. Group financial director, Maritz Smith, told Finweek it could fall short of a $25m payment “due on the Ruashi copper/cobalt project” later this year. Shareholders will hardly be encouraged by the group’s decision to prepare its latest financials on a “going concern” basis! Nor will they be happy about the cautionary under which the company is currently trading. Metorex is still “involved in negotiations with the objective of reducing and restructuring its Ruashi debt and removing [remaining] liquidity constraints.” According to Finweek’s Brendan Ryan, the “approach to what happens next is a mixture of optimism and realism.” The optimist will hope management finds a workable corporate solution for its woes and that the resurgent global economy pushes Metorex higher. The realist will probably be only too happy to take profit at this level. Avoid. Recommendation: Avoid Market capitalisation: R2.045bn
conditions are improving, the financial market contagion seems confined to history and consumer confidence is on the rise in many of Steinhoff’s markets. If you need further reasons to add Steinhoff to your portfolio consider management’s focus: “Value creation, effective working capital management, achievement of acceptable operating margins and sound trading performance.” We rate Steinhoff a buy at its current price of 1615c/share.
Recommendation: BUY at 1615c Market capitalisation R23.038bn
best of the financial columnists
Christian Wüst Der Spiegel
We should save roads, not jobs Boris Johnson The Daily Telegraph
China’s rare advantage Melinda Liu Newsweek
Germany’s car makers are proudly showing off their concept electric sports cars at the Frankfurt motor show this week, even though it’s “still not clear when, or even if, viable electric cars will make it on to the mass market”, says Christian Wüst. The batteries simply aren’t good enough. The first small-series production cars, such as those from Smart or Mitsubishi, have a capacity of 16kW-20kWh, which, in theory, can power an electric car for 100km, but only at slow speeds. Speed up or put on the heating and the range shrinks dramatically. The big hope is that batteries – which today cost around £20,000 – will eventually be three times as good and a third of the price, but until that happens, the only practical solution is plug-in hybrids, which include an internal combustion engine along with the electric motor. In this, the Western manufacturers fussing with electric sports cars are “perceptibly lagging behind”. Toyota has sold over a million hybrids; the likes of Fiat, Renault and VW have yet to produce a single one.
Money talk
All three British parties are now engaged in a “competitive slash-fest”, says Boris Johnson. But what will they cut? The obvious answer is the armies of public sector officials, not just the outreach workers and diversity officers, but those whose jobs have been generated by the “cascade of bad law from Whitehall and Brussels”, along with all the other folks in HR and IT “whose non-job is to service those nonjobs”. But confronted with the human cost and increasingly strict employment law, the danger is that ministers will “go for the easier option and cut or defer investment” – on roads or schools, or power plants. After all, if you postpone a road upgrade, the road won’t start crying and if you axe a new high-speed railway line, it won’t threaten industrial action. But this would be a terrible mistake. If Britain is to remain competitive, it “desperately” needs new infrastructure. “The only answer is to be brave, and to begin a vigorous discussion with the unions and the public about the future of the economy.”
“I made my allowance as a kid cleaning toilets. I’m actually pretty good at it.” Jennifer Aniston (above), quoted on Sky News
The recent Sino-US spat over export tariffs on tyres and poultry has wider implications, says Melinda Liu. China has the world’s largest supply of so-called rare earths – “metals essential for everything from hybrid cars to iPods” – and episodes like this give the Chinese an excuse to hoard them. China produces 95% of the world’s supply and claims about 60% of known reserves; it also takes up to a decade to develop a rare-earth mine on a commercial scale. While the trade in these metals is only thought to be around $2bn, the total market for the products that depend on them is up to $100bn per year. And just as they are becoming more essential, China is moving to cut export quotas and proposing a total ban on the shipment of some elements. Tokyo’s demand last year alone exceeded China’s new quota. Countries are scrambling to exploit their own reserves, but the time lag means a “crunch is inevitable”. “Rare earths are the sword of Damocles hanging over Beijing’s trading partners.” We upset her at our peril.
The return of power dressing
One hesitates to identify the shoulder pad as an economic signifier, but “what the hell, those economists aren’t shy about explaining things they don’t understand”, says Anne Marie Hourihane. The shoulder pad is a sign of emergency, and it can’t be a coincidence that there are suddenly an awful lot of them around. When the Irish economy was booming, our women – present in the workforce in record numbers – were going into the office in floaty dresses and velvet-trimmed Anne Marie Hourihane cardigans. Now power dressing and shoulder pads are back – but there are no jobs to wear them to. This has happened before: think of Joan Collins in 1980s soap Dynasty. Her character, Alexis, didn’t really have The Irish Times a job, but her outsized jackets “showed her determination to triumph by fair means or foul”. And in World War II, British and American girls wore shoulder pads “so wide they almost constituted an air-borne division in their own right”. Shoulder pads have always been good for morale. “Let’s hope they work as well this time.” 10
25 September 2009
©REX FEATURES
Japan leads the way in electric cars
“You don’t start out in music with Ferraris. You start with a huge debt from your record company.” Singer Lily Allen claims file-sharing is threatening pop careers, quoted in The Sunday Times “Nobody can remember the office safe being opened so quickly.” A source at Sky News after ex-gangster ‘Mad’ Frankie Fraser demanded a £100 appearance fee, quoted in The Mail on Sunday “Labour will cut costs, cut inefficiencies, cut unnecessary programmes and cut lower-priority budgets.” Gordon Brown finally uses the word ‘cut’, quoted in The Times “We never wanted to be parents. Imagine if I had a child like me? I didn’t start earning until I was 36.” Ricky Gervais on Sky News “I have been very happy, very rich, very beautiful, much adulated, very famous and very unhappy.” Bridgette Bardot, quoted in The Guardian
investment strategy
How your mind hobbles your judgement Your brain’s tendency to seize upon – or ‘anchor’ to – recent information can be disastrous for your investment decisions, says Cris Sholto Heaton. Here’s how to get around it. badly; the actual close was within their predicted range only 41% of the time. The other group were given extra data: the largest previous weekly shift in percentage terms and what index levels a similarly sized move (up or down) would equate to from the current level. This meant they had three anchors – the current level, a plausible high and a plausible low. Forecasting success jumped – the actual close was within their predicted range 70% of the time.
The term ‘anchoring’ was first coined by psychologists Amos Tversky and Daniel Kahneman in 1974. It describes the way that human beings focus too heavily on a single piece of information when making forecasts. Rather than generating ideas from scratch, we fixate on a specific number or particular event at the outset, then try to forecast by adjusting this scenario. Various studies have shown just how powerful – and damaging – this tendency can be.
©COLIN ANDERSON/GETTY IMAGES
Stockbroking is a high-pressure career at the best of times. So spare a thought for the staff at Asian brokerage CLSA, where analysts Chris Lobello and Connie Lacanilao have been cranking up the tension further by using their colleagues as lab rats. The two have just carried out a study into ‘anchoring’, one of our biggest handicaps when it comes to making sound investment decisions.
Forecasts are easily influenced In one study of anchoring, a group of currency traders were asked to estimate the future dollar-euro exchange rate. All worked for the same firm and shared the same information. So while their individual guesses might be different, you would expect them to produce broadly similar answers. But when the researchers split the group in two, they achieved very different results simply by asking the traders a question before asking for their forecasts. The first group was asked if they expected the rate to be above or below 0.6; their average guess was then 0.79. The second group was asked if they expected the rate to be above or below 1.6; they guessed 1.28 on average. This huge gap arose because the traders ‘anchored’ on the number first presented to them, even though the question contained no useful information to help them make a good forecast. Worse still, other tests show that even entirely unrelated information can have this effect. Dan Ariely of MIT carried out a mock auction with his MBA students after first
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Don’t get anchored to erroneous conclusions asking them to write down the last two digits of their social security numbers. This clearly had no relevance to the auction process – yet the half of the group that had written down higher numbers bid 60%-120% more than their peers. This has major implications for investors, who tend to anchor on analysts’ earnings estimates or credit ratings. But even being aware of ‘anchoring’ doesn’t prevent it from affecting your judgement. So how can you get around the problem?
How to get around anchoring There’s no easy answer. But giving yourself multiple anchors might help. In the CLSA study, for example, the equity sales team was asked to give a forecast for the Japanese market’s closing value each Friday. Rather than pick a specific number, they were asked to choose a range within which they felt 90% certain it would close. The team was split into two groups. One received an email that listed just the previous week’s close. This group did
So a useful lesson is to get more detailed information before you invest: at least then you’ll be anchoring to relevant data. And learn from history. Looking at what has happened at similar points in the past will stop you from fixating on recent experience. Using sky-high dotcom valuations to gauge where the market ‘should’ be is what ruined many an investor after the tech bubble burst. Another useful approach is to turn the problem you’re looking at on its head. James Montier, formerly of Société Générale, points out that when valuing equities, it’s easy to anchor on the current price. If we like a firm, we convince ourselves it’s worth more to justify buying. So if we’re trying to value a stock through discounted cash flow (DCF), for example, we edge up our earnings forecasts until we get the answer we want. (DCF involves calculating a present value for the future stream of cash payments that an asset is expected to generate, discounting each expected payment to reflect the risk that it doesn’t materialise.) Montier suggests reversing this approach by calculating the growth rate implied by the current price of the stock. This can then be compared to past performance by similar firms to see if it’s actually likely to happen. Again, this takes you from anchoring on a single company and its stock price to looking instead at a wider range of possibilities.
personal view
Sasol: Expecting better than “fine” earnings in the years to come What I would invest in now
This week, Craig Pheiffer, General Manager of Investments at Absa Asset Management Private Clients, tells MoneyWeek where he would put his money.
The world’s currently picking itself up out of a recession that’s dragged on for the better part of a year and half. Over that period, economic activity and demand collapsed. And this caused the prices of many commodities to fall sharply from their 2008 peaks. Oil was no exception. Prices fell back from $146.08/barrel in July to $36.61/barrel in December. Over the course of 2009, however, demand has slowly been improving. Improved demand from Organisation for Economic Cooperation and Development (OECD) countries is also slowly supplementing the Chinese restocking that gave commodity prices a fillip in the first half of the year. Consequently, Brent crude prices have recovered to around $70/barrel. Apart from the volatility in commodity prices, we’ve also seen extreme volatility in our currency. From a level above R11.77/$ in October, the rand’s risen sharply to its current level of R7.38/$. It’s in that extremely uncertain environment that local petrochemical giant, Sasol, has had to operate over the past year. For the financial year ended 30 June 2009, Sasol reported a 33% decline in headline earnings per share to 2542c. It wasn’t a great result and reflects the lower average crude oil prices over the year ($68.14/barrel from $95.51/barrel in 2008). The fall in the average rand/dollar exchange rate over the period to R9.04/$ from R7.30/$ supported earnings, but a few one-off charges hurt the bottom line. This included the R3.93bn it paid in competition fines.
Sasol management estimates that every 10c change in the rand/dollar exchange rate impacts operating profit by R765m. A $1 per barrel change in the price of crude oil swings operating profit by around R572m. For the year ahead, management expects some stability in global chemical markets, but it also anticipates that crude oil prices and exchange rates could remain volatile. In light of that volatility and the global economic slowdown, earnings guidance for the 2010 financial year is limited to “a reduction compared to the 2009 financial year”. Although Sasol’s profits ebb and flow as the economic cycle turns, over time it increases production by pursuing new projects and opportunities. Earnings and dividend growth follow. As an investment, you can’t judge Sasol simply on an assessment of a single year’s earnings. You must consider all the operational variables over a longer timeframe. This global company has a project and concept pipeline that stretches well past the next decade – with growth projects varying across the spectrum from the idea stage to various phases of feasibility to full scale production. Over the next five years, as Sasol boosts production, analysts forecast that the oil price will move higher and the rand will depreciate against the dollar. That’s the perfect recipe for all of Sasol’s stakeholders. Longerterm investors haven’t been disappointed (they’ve seen compound annual share price growth of 21% over the past decade). The group is likely to weather this current storm and continue to generate wealth for its shareholders over the longer-term.
The share Craig likes: Sasol
12mth high R365.04
12mth low R216.56
Now R295.00
*Price as at 22 September 2009
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investment briefing
The opening of the Northeast Passage Two German freighters have successfully navigated the Northeast Passage, a feat that has long eluded explorers. Why does it matter? Simon Wilson reports. Why is the Arctic in the news?
commercial benefits look patchy. Northwest Passage Hardcore climate-change deniers Two German-owned freighters, the Northeast Passage (notably Christopher Booker of Beluga Fraternity and the Beluga East The Daily Telegraph) insist that the Foresight, have in recent weeks Siberian Sea Russia Beluga voyage is little more than a successfully navigated the Alaska ‘warmist’ PR stunt, and point out Northeast Passage, sailing from that Russia has long used its Asia to Europe round the top of northern coast for shipping fuel, Siberian Russia – a feat that eluded supplies and other goods to its explorers for centuries. In the 16th McClure Strait remote Arctic settlements (although century, two celebrated English funding for these has dwindled sailors, Richard Chancellor and since the Soviet era). Hugh Willoughby, made doomed Canada Greenland efforts to find a north-eastern Baffin route from Europe to the East Is Booker right? Bay Indies. The two men met rather There’s no doubt that Beluga is different fates. In 1553, Chancellor looking to win new business. But abandoned ship in the ice, and marched to Moscow, where he there’s also no doubt that the voyage is a further piece of was feted at the court of Ivan the Terrible. Willoughby, by evidence that climate change is real. Climate scientists are contrast, froze to death – as did Dutch explorer William certain that the Arctic is warming: this year is set to have the Barents, after whom the polar sea is named. The success of the third-lowest amount of Arctic sea ice on record, just behind the German ships in pulling off what appears to be the first two worst years ever – 2007 and 2008. What this does mean for commercial navigation is a highly visible symbol of the commercial shipping is that for the past few years the ongoing jostling for position over claims to the Arctic and its Northwest Passage across the top of Canada (far more potential riches as the planet warms. commercially attractive than the Russian route) has been navigable. Then in 2007, the even more crucial deepwater channel called M’Clure Strait opened. “We are seeing an So is the route now commercially viable? expression of climate change here,” says Mark Serreze, director Not exactly. The Russian Transport Ministry, which operates a of the National Snow and Ice Data Center in Boulder, Colorado. fleet of six nuclear-powered ice-breakers to assist commercial “The Arctic is warming; we’re losing the sea ice cover. The more shipping, says the route has rarely been completely impassable frequent opening of that Northeast Passage is part of the process in recent summers. But the ice-breakers are still very much we’re seeing.” needed. Despite global warming, ships attempting the Northeast Passage have to contend with hundred-mile long swathes of shifting pack ice, even during the two months or so each What does a warmer Arctic mean? summer when safe passage is feasible. The Belugas are specially Along with faster and cheaper shipping between Europe and reinforced ships, but each needed permanent support from at east Asia, the thinning ice cap means that the frozen north’s least one of the ice-breakers. And at the route’s northernmost vast resources of oil and gas are potentially accessible for the point, the Vilkizi strait at the tip of Siberia, both ships had to first time. Estimates vary wildly, but a top-end guess (by the call ice pilots on board to guide them through the ice. US Geological Survey in 2000) is that 25% of the world’s remaining oil reserves could lie beneath the Arctic ice cap and 30% of its gas. Lying deep under a frozen North Pole, these Sounds daunting? resources will clearly be extremely hard and expensive to Quite – and not necessarily much cheaper. The Belugas’ journey extract, but improving from South Korea to the technology and a high oil price Netherlands is about 11,000 make exploitation viable – if nautical miles (20,372km). In not quite yet, then in the theory, that shaves around Could the battle for the Arctic get hot? medium term. That said, some 3,000 nautical miles (5,556km) The main tension is between Russia and Canada, who both climate scientists now believe and ten days off the traditional claim that the Lomonosov Ridge, an underwater mountain that the Arctic could be ice-free route via the Suez canal, range under the North Pole, is an extension of their respective as soon as 2013. For that resulting in lower costs. The continental shelves. But although Russia and Nato have upped reason, political tensions have German shipping company the rhetoric and military activity a little this year, the likelihood been rising in recent years, as behind the voyage, also called of armed conflict in the high north is remote. First, four of the the polar powers – Russia, Beluga, claims it has saved five powers involved are Nato allies. Second, most of the Canada, the US (Alaska), $300,000 per ship. But the promising oil and gas fields are within established and Denmark (Greenland) and extra costs of ice-breakers, the recognised national economic zones. Third, last year all five Norway jockey for position unpredictability of the route, (including the most assertive, Russia) reiterated a commitment over who owns what in the and the fact that it will only be to the resolution of conflicts through existing customary law, high north (see the box passable for a couple of notably the UN Convention on the Law of the Sea. for more). months a year, mean that the 13
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opinion
No party will own up to the scale of cuts needed. So just who will wield the axe? Tax Freedom Day, calculated by the Adam Smith Institute, which works out the day on which you stop working for the government and start working for yourself. It takes account of all taxes, not just headline rates. In 2009, it was 14 May. In 1997, when Brown became chancellor, it was 25 May. In 1979, when Margaret Thatcher became prime minister, it was 29 May, as it was 40 years ago, with Harold Wilson in charge. The message is very clear. Whatever the government does, tax revenues remain broadly stable at around 35% to 37% of GDP. To imagine that any government will suddenly be able to sweep another 10% of GDP into the tax net is fanciful. It isn’t going to happen.
The British political season kicks off in earnest this week, with both Labour and the Conservatives holding their party conferences. Expect to hear lots about Matthew Lynn ‘cuts’. Promises will be made to trim waste. Efficiency drives will be launched by the minute. A few totemic big projects will be scrapped to show determination to get the deficit under control. If you’re in the nuclear submarine business, you probably don’t want to be relying too much on that British government order right now. There’s just one problem. Politicians still aren’t levelling with Britons about the scale of the assault on public spending that will be needed. They probably aren’t even levelling with themselves. In reality, the cuts will need to be much harsher and deeper than most people realise. The scale of the fiscal hole that Britain has dug for itself is now so deep and so alarming that even the main digger, Gordon Brown, has been forced to promise to put down his spade. Speaking at the TUC conference, Brown finally conceded that the next government, whatever its colour, would have to cut spending. That was inescapable. The British government’s finances are plunging deeper and deeper into chaos with each month that passes. In August alone, the government posted a deficit of £16.1bn (R196bn), the highest recorded for that month since records began. In the first five months of this year, the deficit was £65bn, and for the full year the Treasury expects a deficit of £175bn, or 12.4% of GDP. The actual figures are likely to be much worse: they almost always are. The deficit could easily be more than £225bn, the worst of any developed industrial nation. Everyone knows that can’t continue. One in every four pounds the government spends is now borrowed money. It could soon be one in three. Over the mediumterm, that spells financial ruin. At some 14
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©BLOOMBERG
Global view
We can’t rely on taxes from here anymore
point, tax and spending will have to be bought back into balance. But how? There’s an assumption this can be achieved by a combination of raising taxes and gradually curbing spending. The figure of a 10% cut in public spending is bandied about as a rough guide to how much will have to be sliced. Yet that is far too optimistic. The cuts will have to be much deeper. Here’s why. Firstly, forget tax rises as part of the solution. Governments can put up taxes as much as they like. And they probably will. The hike in the top rate to 50% is just the start. But there is a big difference between raising taxes and raising more revenue. The Laffer curve, named after one of Ronald Reagan’s intellectual gurus, Arthur Laffer, describes how, after a certain point, the more you raise taxes, the less revenue you get back in return. People leave the country, or decide it isn’t worth the hassle of working anymore. Evidence suggests that Britain has already reached that point. In a decade as chancellor, Brown tried to raise taxes plenty of times. Most people have lost track of the number of stealth taxes introduced. But he wasn’t very successful raising the percentage of GDP taken in tax. One of the best measures of this is
Secondly, the big problem right now is that tax revenues are collapsing. Take those August figures, for example. Tax revenues were down by 9.2% on the year. Corporation tax receipts were down by a whopping 49%, but VAT was also down by 13% and income tax down 12.5%. What makes anyone think this process is about to stop? Britain is heavily dependent on financial services, and profits in that sector will be squeezed for years to come. Lower profits equals lower taxes. As unemployment rises, income tax receipts will fall further. Every pound that slips out of the tax net adds to the deficit. Thirdly, at some point Britain will have to start talking about tax cuts, not rises. Even once the recession is over, the outlook for Britain is bleak. Growth of more than 1.5% looks unlikely, and that won’t keep unemployment from rising. At some point, Britain will have to embark on an enterprise recovery, based on encouraging entrepreneurs and foreign investors to start building new industries. That can’t happen while Britain is one of the highest-tax economies in Europe. It will take a radical programme of taxcutting to bring this about. And those tax cuts will have to be paid for out of lower state spending. Whether any political party has the courage to push through cuts on the scale required remains to be seen. They certainly aren’t talking about it yet – and it may well end up being the bond market or the International Monetary Fund that have to wield the axe.
investing in property
3 tips for the wannabe buy-to-let mogul by Gary Booysen research. While there may be more pearls out there, these days the swines are still in the majority. Do the research. Demand to see a record of all previous sales in the complex or find out the prices of what other houses have gone for in that area. Grill the body corporate and the managing agents of sectional title units. Find out if the levies are up to date. And this brings me to tip number three.
“Fewer houses under the hammer” and “Home loans more accessible” are just two of the headlines signalling the end of the housing slump. Over at FNB, property strategist, John Loos, says there are “clearer signs that the market is starting to stabilise.” And, while house price deflation is still present at around 3.4% on mid-priced homes, there’s no question the end of the house price slump is in sight.
Tip #3: Only buy houses from motivated sellers
This, with low real estate prices, has made now one of the best times to buy investment rental property. “We’re facing a very favourable housing market at the moment and there’s plenty of opportunity,” maintains James Wright of Investment News. He says: “With prices hovering around the 2006 level the market is looking ripe for the pickings.” But if you don't know what you’re doing, rental property can turn into your worst nightmare. Here are three tips that’ll keep you ahead of the game.
Tip #1: First get ahead of your fear – Don’t let nerves or apathy stop you from reaping your just rewards According to financier and property investor, Paul Beauchemin, the first and most important step to making a success of buy-to-let property is actually having the guts to step up and put your money where your mouth is. He says that it’s because of the fear of failure that “lots of people fail to pull the trigger on investment rental property”. But the housing crash has happened. And, if there ever was a time to buy property, it’s right now. According to Absa, “year-on-year price deflation in the South African housing market appears to have turned the corner.” At the same time, there are fewer distressed
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sales. Elma Kloppers of Fin24 reports, “Auctions are no longer being swamped with forced sales of houses, as they were earlier this year.” The South African housing market is getting ready to rise. In a couple of years, you’ll be looking at a great real rate of return as capital gains and rentals stack up in your favour. If you feared further market contraction, don’t. The worst is behind us!
Tip #2: Become knowledgeable The best way to conquer your indecision is to educate yourself. You can never do too much research. Just the fact that you’re reading MoneyWeek means you’ve taken the first step. But, becoming knowledgeable about the markets doesn’t just mean reading a couple of articles on which macro forces are affecting the economy. Anyone can tell you right now that, with Tito lowering the rates by 500 basis points, the housing market is about to rocket out of the doldrums. And while that’s important, it’s not nearly as important as bunking down in the trenches and sniffing out a great deal. You’re the only one who can do the real
So many people just assume that because they’re buying now (after the price dip) they must be getting a bargain. This couldn’t be further from the truth. Estate agents are under pressure and you can bet the house (hopefully your newly acquired one) that they’ll be pushing harder than ever to get your signature on that bottom line. Make sure you’re buying from someone that needs to sell. Many people are in a position where they would like to move and can still afford to pay their mortgage. Their only problem is that their house’s “market” value won’t cover their bond. This type of seller will hold out indefinitely at a price well above what the market is demanding. Watch out for these guys… and steer clear. Ask your agent about the circumstances of the seller. According to Pam Golding’s managing director, Ronald Ennik there’s nothing preventing the agent from telling the buyer anything the seller has revealed. He rightly said that the agent would use their discretion if the information was of a very personal nature, a divorce for example. But, quite often, with a little prying, you’ll be able to give yourself a leg up in the price negotiations to follow.
cover story
How to profit from the scramble for technology metals The modern world relies on a supply of certain exotic metals. And China is sitting on top of most of them. Eoin Gleeson reports. Everyone wants to talk to Evo Morales. The Bolivian premier can’t turn around without someone offering him favours. One minute, French ministers are inviting him to address their government in Paris. The next, Beijing is ringing to offer him a fleet of warships and tanks. What do they want from Evo? His lithium. The Bolivian government is sitting on one of the most valuable undeveloped resources on the planet – a massive lithium deposit 12,000 feet up in the Andes. About half of the world’s reserves are thought to lie a few feet beneath the vast salt planes. And suddenly everyone needs lithium. China needs it to produce batteries for the 500,000 electric vehicles it aims to produce by 2011. The Japanese need the metal to continue producing batteries for the
world’s laptops, digital cameras and mobile phones. So who will Evo allow to develop Bolivia’s lithiums reserves? My bet is China. No other country has been more determined to get its hands on new sources of industrial metals during the global downturn. But there is a small group of metals – lithium included – that China particularly covets. Call them the technology metals, because owners of these metals hold the keys to 21st-century technology. None of the big innovations that major economies are relying on to kick-start their economies will materalise without a steady supply of these metals. Not solar panels. Not electric vehicles. Not smartphones or laptops. So far the Chinese have managed to corner the market in one group of metals that is key to all of these industries – rare-earth metals. And they have their eye
Three stocks to buy now
on a few more. Only this time they’ll be competing with the Canadians, the French, the Japanese and the Americans. It’s a madcap rush across the globe to secure a steady fix of these metals – and you can profit from it. We have a look at three of the most prized.
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Lanthanum and other rare-earth metals
La
It was the Pentagon that first picked up on China’s interest in speciality metals. A few years ago, the US military started noticing that Chinese buyers were placing huge orders for titanium. And it made them jumpy. The US military relies on titanium to produce everything from armour plating to aircraft and high-end weapons. Suddenly finding new affordable sources of military grade titanium became a top priority for the
Continued overleaf
Figures in dollars
Geovic Mining 3.5 3.0
Technology metals have been the investment story of the year. As China has taken minority stakes in Australian mining groups Lynas Corp and Arafura Resources, stocks have soared across the board. But you have to be careful here. Some of the companies that have gone vertical this year are not close to production and are still facing feasibility studies. You have to accept the risk that projects may not come to fruition. Our rare earths tip, Lynas Corp, is closest – but it’s up 226% since we tipped it and its deal with China Non-Ferrous Metal Mining is up for review in October. There is concern that Australia is ceding too much control to Chinese state-owned firms. If the deal is rejected, Lynas will have to find new funding to develop its Mount Weld project. So take profits if you haven’t already. Lithium stocks have also soared on the back of demand for electric vehicles. But so far companies mining for cobalt – the
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2.5
Figures in Canadian dollars
2.0 1.5 1.0 0.5 0.0
N D J F M A M J J A S O N D J F M A M J J A S 2008 2009 Source: CLSA Asia-Pacific markets
other chief ingredient in electric car batteries – have been left behind. That has partly been down to financial difficulties as the price of cobalt slipped to $11/lb. But one very promising cobaltcopper outfit operating deep in the Congo is Katanga Mining (TSX: KAT). This Canadian-listed group is run by veterans of Continued overleaf
cover story Continued from previous page
But the Americans should have been more worried about China’s interest in rare earth metals, because now the Chinese control nearly 100% of the world’s supply. The rare earths are a group of 17 metals of which neodymium, terbium and lanthanum are among the most useful. You’ll find them in almost every consumer technology staple – from iPods to flat-screen televisions. “And we’re not talking about trace amounts of these elements either,” says Jim Jubak on MSN Money. Each battery in a Toyota Prius uses 20 to 30 pounds of lanthanum. And the turbines on a wind terminal are so huge that they need colossal rare-earth magnets to operate efficiently. You need about a ton of neodymium for every megawatt of generating capacity a wind turbine pumps out. Up until the 1980s, much of the world’s rare-earth reserves were mined at the Mountain Pass mine in California. That was until China entered the market in 1984. China set an army of cheap labourers to work and invested heavily in developing new mines and processing plants, eventually putting Mountain Pass out of the mining business. The Chinese have paid a heavy environmental cost for their campaign. Rare-earth metals are not found in pure deposits close to the surface, unlike lithium. So the traditional method used to mine these metals has been to bore holes into promising rock formations, pump acid down the holes to dissolve the metals
©SIPA PRESS/REX FEATURES
Pentagon, says Nathan Hodge in Wired.
China is hoping to persuade technology giants to relocate and then pump the acidic slurry into holding ponds for extraction. You can spot a rare-earth mine by the rancid lake of acid and dissolved chemicals that is left in its wake. But Beijing will say it was worth it. Control of the world’s rare-earth metals puts them in a position of extraordinary power. And they intend to lord it over their customers. The Chinese Ministry of Industry has already cut authorised production targets of rare earths this year by 8.1%, according to Wired. Serious restrictions on exports will follow. China’s goal is to force the tech giants that rely on rare-earth metals to relocate there. It wants to be a global leader in wind, solar and hybrid car industries. Having elite technology groups operating in the country will go a long way towards developing the necessary expertise and
intellectual property. That has spooked the likes of Japanese companies Mitsubishi and Sumitomo. Chinese production is projected to reach 160,000 metric tonnes a year by 2015, up from 139,000 tonnes last year. But that is still expected to leave a shortfall of 40,000 tonnes of rare-earth metals each year. So these technology giants have been scouring the earth for new reserves. The good news is that there are plenty of rare-earth reserves outside China, according to metals analyst Jack Lifton. The bad news is that they haven’t been developed for the last 30 years. So the race for rare-earth metals has shifted to Canada, Brazil and South Africa. Avalon Rare Metals is already drilling rocks at Thor Lake in Canada’s Northwest Continued overleaf
Continued from previous page Congo’s mining industry. Their political connections will go a long way towards making their project in the Congo work, says Profit Hunter’s Manraaj Singh. Katanga is sitting on 2.3 million tonnes of copper and 310,000 tons of cobalt. But the company has suffered badly over the past year. The share price dived as metal prices fell and its project was delayed. However, in April, the group secured a $250m bridge loan from Glencore Finance. This week its shares jumped 30% as it announced that it has accelerated the development of its copper-cobalt project in the Congo because of the recovery in copper and cobalt prices. The acceleration is expected to take installed copper capacity to 150,000 tons a year, from 70,000 previously. The worst looks to be over for this group and there is enormous potential here. Geovic Mining (TSX: GMC) has one of the largest cobalt deposits in the world in Cameroon. The mine permit covers 1,250 square
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kilometres and provides exclusive production rights to seven large cobalt-nickel-manganese deposits. Geovic has also experienced delays due to financing. Construction has been put back until 2011. So it’s a risky play. But Geovic expects to produce 4,200 tonnes of cobalt and 2,100 tonnes of nickel a year for at least 21 years. At C$0.64, it is valued at just above its cash value per share, given that the company has $60m in the bank. The closure of the world’s biggest tantalum mine in Australia is good news for Commerce Resources (TSX: CCE). It is working on a fantastic resource in Blue River, British Columbia. The resource is half the grade of typical tantalum mines, notes Victor Goncalves in the Gold Report, but it has twice the recoverability – most mines recover only 45% of the tantalum, against 95% for Commerce. The group reckons the project could have a mine life of more than 15 years, with annual production reaching a million pounds. Commerce is close to production, says metals analyst Jack Lifton. “They are financially strong and have been involved in the tantalum industry for years”.
cover story Continued from previous page
have to import a lot more. The US Defense National Stockpile Center’s inventory of cobalt has been run down to 600,000 lb – compared with 96 million lb in 1992. One major Canadian cobalt miner is already bringing forward cobalt production in the Katanga Province. And another miner is developing a very promising cobalt reserve in Cameroon. We have a look at both in the box on page 16.
territories. Its stock has soared over the summer in anticipation – up 326% since June. There has been a dangerous amount of enthusiasm in this area, and it’s not a stock we’d buy now. But one worth keeping an eye on is the as yet unlisted Molycorp. Backed by Goldman Sachs, this group is restarting work on the Mountain Pass mine – a huge proven reserve – and could well be worth a punt if it comes to market.
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Cobalt
Congo is rich in minerals. From the north to the southern province of Katanga, the central African country harbours vast reserves of everything from gold to copper and diamonds. But it’s been at best a mixed blessing. For years, militant factions in the Congo have been able to finance themselves handsomely by smuggling Congolese coltan – refined to tantalum (see below) for use in digital cameras and mobile phones – to neighbouring countries. This illicit trade has been so successful that the smugglers helped put the largest tantalum mine in the world out of business in December, says Andrew Grant in Discover.
In any case, it still means China has agreed to build thousands of kilometres of new roads and railway tracks, and hundreds of new schools and clinics across the country. In return, the Congolese have granted the Chinese rights over mines containing more than ten million metric tons of copper and 600,000 tons of cobalt. 18
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This soft, grayish blue metal with a melting point of 3.017˚C has an exceptional ability to store electric charge. That makes it perfect for making the electricity-storing capacitors you find in the circuit boards of computers, digital cameras and mobile phones. “Tantalum is used in every electronic device there is,” says Lifton. “We don’t know any other way to make practical devices.”
Ta
©AFP/GETTY IMAGES
Co
So the Congolese government has opened the country to foreign money in a bid to develop its commodity reserves – and spread the wealth more fairly. Billions have flooded in as American, Canadian, European and South African mining giants have fought for access to the reserves. But they have all been outflanked by – surprise, surprise – China. In April last year, the Chinese struck a deal to invest $9bn in the Congo. This was revised lower to $6bn earlier this year, after pressure from the International Monetary Fund (IMF). The IMF had threatened to withhold debt relief on $10bn owed by Congo, saying that the Chinese deal would add to the country’s debt load. Other commentators, such as Peter Lee on Asia Times Online, have suggested that the IMF’s move is more reflective of Western concerns about China’s influence in the region, rather than any concern over Congo’s debts.
Tantalum
Congo’s mineral wealth: a mixed blessing
“Owners of technology metals hold the keys to 21st-century technology” So why should investors be looking at the Congo? Because of cobalt. Congo is home to a third of the world’s cobalt reserves. A byproduct of copper and nickel mining, only about 65,000 tonnes of cobalt are produced each year, says Profit Hunter’s Manraaj Singh. But it’s an invaluable technology metal. Alloys of cobalt are found in jet engines and nuclear reactors. But what is often overlooked is that cobalt is also a key ingredient in batteries for hybrid electric vehicles. Today, most electric vehicles are powered by a nickel-hydride battery, which contains about three to five pounds of cobalt. However, the emerging standard lithium-ion batteries will contain five to seven pounds of the metal.
Demand for tantalum has been hit during the recession as consumer electronics sales have slumped. A move towards lowering material costs in the electronics supply chain has encouraged purchases of cut-price tantalum from Congo, says Reuters’ James Regan. Not all electronic manufacturers are above sourcing their raw material from Kalashnikov-wielding militants. Thankfully, though, most electronic giants have more scruples. Apple and Motorola have pledged not to purchase metals from the war-torn nation, says Andrew Grant in Discover magazine. However, with the closure of the world’s biggest mine in Australia knocking out 30% of the world’s supply, that means that the race is on to find a secure, ethical, steady supply elsewhere.
The burst of interest in electric vehicles has helped lift the price of cobalt sold in the US to an average $20.03/lb in August, up from $14.25/lb in March, according to Purchasingdata.com. Still, that is a long way off the $52/lb it traded at last year. As cobalt is largely a byproduct of nickel mining, it has fallen hard, along with many other metals. Zambian cobalt producer Chambishi Metals, for example, has said it will postpone the resumption of cobalt production until there is a further improvement in the price of cobalt to between $24/lb and $30/lb. The company may not have to wait too long. The US already imports about 80% of the cobalt it uses. But it’s about to
Look no further than Canada, says Malcolm Bucholz on Resource Investor. Excellent progress is being made in developing a tantalum project in Blue River in British Columbia. The deposit has approximately 14 million tonnes of indicated and 19 million tonnes of inferred resources. With tantalum trading at about $45 per pound, each ton of ore would have an economic value of about $65, which would be sufficient economically to support a mining operation. When demand for electronic goods recovers, tech giants will beat a path to Blue River. We have a look at the outfit developing the project on page 16.
the best blogs What the bloggers are saying
Council papers are killing local press http://www.guardian.co.uk/media/greenslade How much do British council-run newspapers cost the taxpayer? When Roy Greenslade wrote about the East End Life paper handed out to residents of London’s Tower Hamlets borough, “the council spokeswoman assured me that there was no cost to local taxpayers”. Now comes the news that this “propaganda sheet” has cost nearly £400,000 more than expected because of the downturn in advertising. And the money comes out of the council taxes of one of London’s poorest communities.
An alternative to urban sprawl www.libertiespress.com/stephen-kinsella-blog “If a Martian landed in Ireland tomorrow, he would be forgiven for thinking two things,” says Stephen Kinsella. “One, we love building houses that all look the same. And two, we love leaving those houses empty.” Ireland’s construction boom has left endless sprawl with no shops or amenities. Dublin is now used by the European Environment Agency as a “worse-case scenario” of urban planning. ELA has suffered from council competition
To blame all the problems faced by local newspapers on council-run publications is wrong. But there can be little doubt that sales of the rival paid-for East London Advertiser, published by Archant, have been affected directly by Life. They’re down to 6,509 an issue, from 9,295 in 2007. “It is time we obtained the unvarnished truth about the overall cost to Tower Hamlets taxpayers of publishing its paper.”
Americans won’t dig gardening for long http://www.thebigmoney.com/ “Romantic notions offer poor returns on investment,” writes Martha White. And the current boom in gardening is no different. Across America, households are turning to gardening as a way to shrink not just their budgets, but their waistlines as well. Unfortunately, it can’t solve either problem. First, look at the economics: 19% of gardeners this year are new to the hobby. They’ll have to invest in trowels, rakes and other tools, which is fine if they plan to garden for the next decade. “But how many of today’s budding gardeners are going to stick with their newfound pastime?” Just take a look in the back of
your closet for “a refresher on the fleeting nature of trendy hobbies”. This is hot, sweaty labour – “not something Americans have been known to embrace en masse”. Second, “Americans just don’t eat that many vegetables”. The average American ate 417lb of vegetables in 2007, while the average garden produces 300lb a year. And unfortunately, many crops tend to ripen together within a period of days. That means gardeners can expect brief periods of glut and waste, followed by nothing. Gardening is a great hobby. “But it’s not a financial fixit” or a way to lose weight.
Urban sprawl contributes to Europe consuming more than its land and ecological resources can produce. So we rely heavily on resources from other parts of the world. The Council of Greater London says that London’s ecological footprint is equivalent to 293 times its own area. Especially shocking is the colossal misallocation of these resources, eg, the way we consume expensive petrol in driving hours from office to home. It doesn’t have to be this way. There are two ways we can arrest suburban sprawl. First, we can work where we live. Current planning laws make it difficult or illegal to operate a business out of a building in a residential area. This needs to change. Second, we need to build micro-suburbs. You shouldn’t have to hop in your car to get a paper or bring your kids to the playground. “The future of a well-done metro area would a long, high-density corridor stretched out along a light rail or metro line.” This will be driven by profit – houses in walkable areas are worth more.
uk.reuters.com/news/oddly “Despite a second consecutive victory at this year’s Miss Universe, even Venezuala’s hugely successful beauty factory is feeling the global pinch.” The previously well-funded Miss Venezuela Organisation announced this week that it is slashing the number of women in its national competition from 30 to 20. “We have had to tighten our belt a bit,” said Joaquin Riviera, who organises the annual pageant. Thankfully, local beauty ‘czar’ Osmel Sousa – a selfproclaimed “specialist in the female figure” – has promised that the lower budget won’t mean fewer dresses or less
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plastic surgery for the women competing. Good news for the huge audiences that are attracted to the popular pageants on TV. Good news for Venezuela’s prospects on the global stage, where it’s won more titles than any other nation, including six in Miss Universe. But perhaps most of all, good news for local industry: Venezuela has one of the highest rates of cosmetic surgery in the world.
©AP PHOTO/TIM AYLEN
Beauty queens get slashed
entrepreneurs
The smoothie operator who made £15m the packaging to Sainsbury’s (his daughter Ella’s face was on the front of the carton), in September 2005, the chain agreed to stock his smoothies in 450 stores. He borrowed £200,000 against his home in Reading, and outsourced manufacturing to a factory in Coatbridge, Scotland, who helped develop the company’s trademark resealable, squishy pouches, with their invitation to “shake me, squeeze me and slurp me”.
by Jody Clarke Sitting in an oversized chair, in a boardroom complete with swing, nursery wall art and bright-coloured hand prints, Paul Lindley, 42, looks more like a Montessori teacher than a businessman. But “understanding what kids want is what my business is all about”, says the chief executive of Ella’s Kitchen, the £15m-a-year organic food company for children. So getting a handle on the world view of a three-year-old is a key part of his market research. Born in Sheffield in 1966, Lindley moved to Zambia aged seven, where his civil-servant parents were seconded Paul to work with the country’s government. He later qualified as an accountant – “about as far from entrepreneurialism as you can get” – before going on to work at children’s TV channel Nickelodeon. It was there he learned what made children tick, he says. But it wasn’t until he faced problems getting his six-year-old daughter Ella to eat fruit (“she would go to school with a banana, and come back with a banana because it had a black spot”) that he hit on his big idea. He would create a brand of food that would encourage kids to eat well, by making healthy eating fun. With £20,000 in savings, in 2005 he employed a team of food scientists at Reading University to develop a children’s
MY FIRST MILLION Lindley, Ella’s Kitchen smoothie range. Mimicking the process of full-scale manufacturing, they looked to see if they could make a product that was safe, had a shelf life and was free from micro-organisms. “But I knew I didn’t want to go to one farm shop, then 25 farm shops, then delis and slowly work my way up. I wanted to go straight into the supermarkets.” So he struck a deal with Nickelodeon owner Viacom, whereby they would advertise his products in exchange for a share of revenue. “That was a big thing, because I could tell the supermarkets that in the first year, this will reach 40% of kids. That differentiated me from other start-ups.” After he showed artwork for
You could say that’s a dastardly means of capitalising on ‘pester power’ – and Lindley doesn’t deny it. “Kids are huge consumers. They spend way beyond what their pocket money allows.” It’s certainly worked. Turnover in 2006 hit £800,000, after Waitrose and Tesco took on the product, rocketing to £3m in 2007 and £15m this year. As for profits, the firm has made money from day one. So what does his daughter think of having her face all over the packaging? “‘It’s cool, it’s really cool,’ she told me. ‘But it’s embarrassing at the same time.’” Dressed in a bright purple shirt with the logo ‘life is cool’, you could almost say the same about Lindley. But as he says, “you regret the things you don’t do rather than the things you do. I’d hate to sit here now, five years later, reading in your magazine about someone else who had done it because they had the guts to do it.”
The MoneyWeek audit: Peter Andre
©GEOFFREY SWAINE/REX FEATURES
• What was his big break? Peter Andre’s first taste of fame came on Australian TV talent show New Faces in 1990. After his performance, he was offered a recording contract live on the show. Andre had several hits in Australia before releasing his debut UK album Natural in 1996. At the height of his fame his back catalogue and related merchandise was said to have grossed over £20m – although it’s not clear how much of that money went into Andre’s pocket. • How did his marriage to Jordan affect his earnings? In 2004 Andre received £50,000 to appear on I’m a Celebrity Get Me Out of Here. Whilst on the show he met glamour model
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Katie Price (also known as Jordan). They became a couple and the exposure reignited Andre’s career. Upon leaving the jungle he was offered a £1m recording contract; within a year he and Price were estimated to have made more than £5m from joint interviews, photo shoots, and TV and public appearances. When they married in September 2005, OK Magazine and ITV paid £2m for exclusive rights to the wedding. Andre earned just £30,000 through his own projects during the marriage, but is expected to get £6m after the divorce – half of the couple’s joint earnings.
• What has he earned since the divorce? Since his split from Price, Andre has made a reported £4m – twice what Price is said to have earned. He has bagged himself a £1m record deal, a £500,000 job with This Morning, £250,000 for his own fragrance and £250,000 in interview fees. He’s also earned £500,000 from deals including a cookery range and a UK music tour. The final £1.5m is thought to be coming from several deals with major brands being signed in the coming month.
personal finance
5 fun things to do this spring – without denting your wallet by Karin Iten I love summer. There’s nothing as wonderful as the feeling of the warm sun baking down on you. I can’t believe that just a few short months ago, I was telling you how miserable I was that it was dark when I got up. And that I could no longer stand being cold. Now, all I want to do is rejoice that spring is here and winter’s behind us. So, to celebrate the return of spring and the next six gloriously warm months ahead of us – this week I’m sharing my top five events that are bound to make the rest of September and beginning of October so much more enjoyable. (And I promise none of them will hurt your pocket.) So what are you waiting for?
Event #1: Watch our boys hammer the Brits It’s cricket season! And I just can’t wait to drag my umbrella and blanket to Centurion this Sunday to watch the Proteas take on England. The event: The ICC Champions Trophy and it’s happening at stadiums across Gauteng until the 4th of October. Tickets are inexpensive (going for just R60 if you’re willing to sit on the grass and only R140 for the final). It’s a great way to work on your tan and support our boys. (Just don’t forget to pack your hat and some sunscreen – we wouldn’t want you to over do it.) And don’t fret if you can’t make it to a game. You can catch all the action for free on SABC3. And speaking of cricket, after the tournament, England will start their SA tour. So if you don’t live in Jo’burg, you’ll soon be able to see the boys take on the Brits at a stadium near you.
Event #2: Get 9 hours of quality SA music for just R200 Jo’burg day is approaching... For those of you who don’t listen to 94.7, Jo’burg day is an annual music festival hosted by the station that showcases the best of SA talent. This year, the event features the likes of Prime Circle, Flash Republic, Johnny and Jesse Clegg, as well as many others. So buy your tickets today (at a minimal fee of R200) and don’t miss Jo’burg day on the 14th of October.
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Event #3: A laugh a minute at Cape Town’s Nando’s Comedy Festival If you’re in need of a laugh – and let’s face it, after the long economic (and seasonal) winter we’ve just experienced, who doesn’t – don’t miss the Cape Town Nando’s Comedy Festival. It’s on at the Baxter Theatre – from the 22nd of September until Sunday the 4th of October. Tickets cost between R100 and R120 depending on what night of the week you go – and this will get you 100 minutes of the best comedy this side of the equator.
Event #4: Want to spice things up, don’t miss the Soweto Food Festival Looking to shake your diet up this summer? Then the Soweto Food Festival (on from the 1st to the 4th of October) is for you. The event promises to introduce you to: “The best of kasi cuisine in a relaxed and contemporary outdoor setting”. Thrown into the mix are some exotic tastes from other African and international countries… as well as some interesting ways to make healthy eating fun. Tickets cost R35 per adult and R10 per child and will be available at the entrance. For more information, visit www.sowetofoodfestival.co.za.
And don’t forget to visit the event’s Beer Garden and Wine Route while you’re there. Here, you’ll be able to compare South Africa’s best beers and their international counterparts or enjoy a trip around our finest and most popular wines. And if that doesn’t sound like enough to do, The Whiskey Bar & Cigar Lounge will allow you to kick back and network with some single malts. This is an event not to be missed!
Event #5: Relive your youth with this musical spectacular If you’re an Abba fan, make sure you catch Dancing Queen at the Barnyard at Gateway, Durban. It’s already on and runs until the 11th of October. Back by popular demand – the performance will leave you breathless and you’re bound to know just about every word. Tickets are R115 per person from Wednesday to Saturday, with discounted specials of R80 per person every Tuesday night and Sunday matinee show. Book online at www.barnyard.co.za. So what are you waiting for? Shake off the winter chill by getting out and about this spring.
Tax tip of the week Has SARS deregistered you by force? Last week, SARS identified all Vat vendors who: • • • •
Are dormant; Failed to comply with the Vat Act; Failed to submit VAT 201 returns for a prolonged period; or Haven’t paid output tax for the last 12 months.
SARS then sent letters to these vendors notifying them that it has cancelled or suspended their Vat registration. Why’s this important? Because none of these vendors will get any of their refunds any more.
Did you receive a similar notice of deregistration? If you received this notice last week (by post or email), but you want to stay registered as a vendor, you (or your authorised representative) must go to your nearest SARS branch with the following: • Proof of identity; • Evidence of engagement in a business activity (e.g. invoices from the past 12 months); and • The latest bank statements or reasons why you haven’t made any sales in the last 12 months. Remember: If you do approach SARS with this information, it may request a physical inspection of your business premises! Make sure your tax affairs are in order. Peter Franck, Editor in Chief, Practical Vat Handbook
profile This week: Karren Brady
Margaret Mountford was renowned on The Apprentice for her ability to crush a contestant’s chances with a roll of her cool blue eyes, observes The Times. Her replacement, Karren Brady, is made of similar stuff. “I can see your tits in that shirt,” a player once leered at her. “Don’t worry,” replied the First Lady of Football. “When I sell you to Crewe, you won’t be able to see them from there.” Sure enough, she sold him. At just 23, Brady was no more than an apprentice herself when she was made managing director of Birmingham FC by the porn barons (David Sullivan and brothers David and Ralph Gold) who bought the club out of administration in 1993. “I used to add two more years to my age, because I thought I had to be at least 25 for people to take me seriously. As though two years made any difference!” Her appointment was widely derided as a cynical publicity stunt, says the Daily Mail.“Who was this stupid bimbo” who “didn’t know anything about football and hadn’t even been to Birmingham before”? The tone was set at her first press conference, where she was asked about her vital statistics. Yet, from the start, Brady was clearly in command, says The Observer. Radiating “perfectly pitched self-confidence”, she got the ramshackle club into profit within 12 months – “the first time Birmingham
City FC had ever been in the black in its 131-year history”. She floated it a year later, becoming the youngest MD of a British plc. Her 16-year tenure is remarkable in an industry “where careers are short and patience is even shorter”, says the Birmingham Post. Yet there have been plenty of ups and downs. She shocked the club’s old guard by marrying a Canadian player, Paul Peschisolido (though she still sold him – twice – to raise cash). More recently, she was embroiled in a damaging corruption probe (see box). But after negotiating the club’s sale to Hong Kong businessman Carson Yeung, Brady leaves it in fine fettle – back in the Premiership and financially secure. How did a convent-educated girl from north London thrive in such a macho world? Hard work and chutzpah, says the Daily Express. Brady learned selfconfidence from her property developer father, and rejected the lure of university to “get rich quick” instead. Interviewed by Saatchi & Saatchi for a junior executive’s role, she was asked if she preferred a designer coat or one from M&S. “It depends who’s paying,” she replied. It got her the job. She first encountered Sullivan, owner of the Sport Newspapers, when selling advertising at LBC Radio. Impressed with her skill at coaxing £2m out of him, he hired her. Soon afterwards she showed him an
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The charming yet ruthless First Lady of Football joins The Apprentice
advertisement offering Birmingham City for sale. “Why not buy it?” Though very dissimilar in style, Sullivan and Brady are two of a kind, says the Daily Mail. While charming, she’s also ruthless. “Intoxicating or just toxic, depending on what she wants from you,” says a long-time acquaintance. But who can doubt the respect she has earned? As David Gold points out: “Not only does she have the ability but she also has the personality. Not many people have both and that is why she is special.”
How she shrugged off the corruption scandal
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It’s one thing running what The Sun describes as “the club that porn built”, quite another to be arrested by City of London police on charges of corruption – although Brady doubtless cut a glamorous figure as she click-clacked into Bishopsgate police station in her four-inch Yves St Laurent heels in April last year. After years of dishing out the red card to recalcitrant players and managers, could Brady, who was subjected to a five-hour grilling before being bailed, really be in line for it herself?
reputation for being a stickler about finances. She had a lot to lose: at one point shares in Birmingham City were suspended, and there were clear implications for her presence on the boards of Mothercare and Channel 4. Having vehemently protested her innocence, her ordeal only came to an end this summer when all charges against herself and Sullivan were dropped, says The Daily Telegraph. Indeed, the police have never fully explained why they arrested her at all.
Her embroilment, with Sullivan, in a widespread probe into football bungs – which centred on alleged payments made to a football agent and two players – shocked the industry, says the Daily Mail. Not least because Brady was known “to have been particularly sniffy about such middle men”, and had a
No doubt Brady will take the experience in her stride, says The Guardian – as she did when she nearly died from a brain aneurysm in 2006. “I’m very good at cleaning stuff out of my mind. I don’t carry around any baggage.” The secret in business, as in life, she believes, is to take the hit and move on.
25 September 2009
Spending it Where to stay This week: One of Barcelona’s top hotels and a cheap alternative
Hotel Miramar
Chic & Basic Born
This hotel’s new extension caused uproar in 2007 – the exposed steel work and sharp angles can be seen from some distance and weren’t considered in keeping with the hotel’s 1929 villa facade. But it works, “in the way that daring European architecture can often sit against more traditional buildings”, says Kate Hughes in The Independent. Situated on the hill of Montjuic, the hotel offers “hypnotic views of the sea and city and an overwhelming sense of space”.
This is a stylish, modern hotel with an air of class despite the bargain-basement price tag. Located in Barcelona’s El Born quarter, you’ve got history on your doorstep in the form of the Gothic Santa Maria del Mar church.
What people The Miramar’s position is “outstanding”, says say Hughes. It is surrounded by sights including the Montjuic I Liobera Botanical Gardens. However, while “the hotel claims that it’s a ten-minute walk to the city centre... unless you’re an Olympic athlete, it’ll be at least 15”. The rooms The hotel’s 75 rooms mostly have views of either the city or the sea. So it’s unlike other Barcelona hotels, “which can just about muster one tip of the Sagrada Familia if you stand on the bed”. A standard double room with a terrace costs from The cost €132 (R1,450), with prices rising to €268 (R2,950) for a suite on a room only basis. Breakfast is an extra €27 (R300) per person. For more, go to www.hotelmiramarbarcelona.com.
What’s so special?
What people It’s a “cheeky little number inhabiting a highsay ceilinged, swirly staircased old building”, says The Sunday Times Travel magazine. The interior “definitely divides the ranks: some guests adore the near-fetishistic obsession with lighting, which plays on surfaces, turning them neon/psychedelic; others recoil from the shiny fabrics and iridescent bead curtains in the hallways”. All in all, this place is “camper than Christmas with Alan Carr”. The rooms The hotel may be cheap, but it’s more bargain than basic. Some rooms are small, but “they’ve not Scrooged on quality”. The beds are “downy” and there are “statement showers” and free tea, coffee and water. The rooms are split into three categories XL, L and M. The XL rooms come with kingsize beds and more space, while L and M rooms both have queensize beds. The cost Doubles cost from €89 (R979), including breakfast. To find out more visit www.chicandbasic.com.
What the travel writers are saying
My dream holiday
When it comes to life’s special landmarks it’s important to get the surroundings right, says Matt Rudd in The Sunday Times. For that first weekend away your choice “must be romantic but not stiflingly so,” says Rudd. Hotel du Vin is “perfect for early courtship” as it is “unpretentious, sexy, informal, relatively unassuming”. For a particularly special stay choose the Tunbridge Wells Hotel du Vin and get the suite overlooking the park. “It has a monsoon shower, a rolltop bath and an 2.4m bed you’re still young and gymnastic enough to enjoy.”
One of the most amazing hotels Bruce Forsyth has ever stayed in is the Grand Hotel a Villa Feltrinelli in Lake Garda, Italy. “The atmostphere is lovely as nobody bothers anyone”, says Forsyth in The Daily Telegraph. When he asked what time breakfast was the waiter simply said, “Whatever time you want.” But finding the hotel can be tricky: “the idea is to keep people out, not bring people in”.
By the time your fifth anniversary rolls around, “I’m going to assume you now have children”. There are very few hotels that can do kids and romance, but The Grove in Hertfordshire is one of them. It has “beautiful grounds, friendly, understanding staff and restaurants where you aren’t treated as if you have an especially virulent form of swine flu simply because you have a baby strapped to your chest”. And once you’ve made it through 25 years of marriage? “A class marriage deserves a class, long weekend” and Combe House Hotel in Devon is just the place. It’s a “jaw-droppingly beautiful manor with no horrible add-on spa, no annoying golf course and no modern annexe of naff rooms”. The “food is excellent” and romantic country walks abound.
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©BBC
What’s so special?
cars
Ferrari’s stunning new delicacy The new Ferrari 458 Italia is “keeping me awake, like no other car for quite a long time”, says James May in The Daily Telegraph. “It does look fantastic, doesn’t it?” And it also got May thinking: “shouldn’t a chap, if possible, once in his lifetime, even if only for one glorious summer, before it’s too late, own a Ferrari? I’m beginning to think so.” Even the idea of owning one is “delicious”, says May; Ferraris are a delicacy that “smell fantastic and complex”, make you salivate and tingle. “I’m 46 years old and I won’t have the wits to deal with such things for much longer, and I like the idea of driving a Ferrari into my own personal sunset.” If you have the money, and don’t mind looking like “a plonker” driving one, then the 458 is the most tempting offer from Ferrari for many years.
With a top speed of 327km/h and a 0-100km/h sprint time of less than 3.5 seconds, it’s also the fastest car Ferrari has ever built, says Dan Strong in AutoExpress. It offers a “staggering” 570bhp at 9,000rpm, and it is far from being a mere cosmetic improvement on its F430 predecessor. The engine, chassis and suspension technology have all had upgrades. Magnesium and carbon fibre have been used throughout to keep the weight down, and it has a radical new look designed by Pininfarina.
are replaced with buttons on the steering wheel and the car tells the driver when the brakes, tyres and engine are at the optimum temperature. It’s debuting at this month’s Frankfurt motor show and is set to hit roads early next year.
It’s all new inside too, says Dan Stevens in Autocar, with a minimalist, avantgarde style coupled with Formula 1derived driver information systems. All indicators, wiper stalks and so on
Wine of the week: new, fun loving, natural sweet Rosè Wine: 4th Street R25.95 in most supermarkets and retailers For those of you who missed the Standard Bank Soweto Wine Festival at the beginning of September, you missed the party of the year! So, diarise the first weekend in September 2010 so you don’t miss it again next year.
by Marilyn Cooper
4th Street certainly made an impact at this festival. Not only did it give away spectacular prizes: Brand name Louis Vuitton and Guess hand bags, MP3 players, GHDs – all pink, but it also took individual photos of the general public “in the pink”.
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The wine comes in either 750 ml or 1.5 litre bottles. It’s very reasonably priced and should be served chilled. “Neighbourhoods are where friends get together for impromptu good times that can spill over into festivities on the pavements and into the streets. 4th Street has tapped into this exuberant community life force with this natural sweet, palate pleasing rosè,” says 4th Street Brand Manager, Jeanne de Wet. Well, my street is spilling over with security cars, zozo huts containing security guards and patrolling 4x4s, clearly I live in the wrong hood!
Marilyn Cooper is a Cape Wine Master and Managing Director of the Cape Wine Academy.
blowing it
Recession brings back old-fashioned passions snuffed it and being able to say to my wife: ‘Do you see old soand-so’s gone? Didn’t we overlap at Oxford? Got a CBE, it says here. Much good did it do him.”
©ALBERT BOULTON/REX FEATURES
Simple pleasures are back. Here’s Vanessa Feltz in the Daily Express, raving about a chicken and leek pie she was given at a wedding. “Nothing, but nothing, is as blissful as a crusty, well-cooked pie. It evokes memories of pies past, ancestral pies and Proustian pies. Everyone wanted seconds… Who wants a fussy arrangement of sea bass when they could have a thwacking great slice of pie?” (I do, but you can’t please everyone.)
What’s common to all these pursuits is how cheap they are. No one seems to share my taste for owning an expensive motor boat that burns up fuel, goes wrong all the time, costs a fortune in berthing fees and is so unstable it hardly ever makes it to sea.
Meanwhile, in the Daily Mail, But back to the subject of Jan Moir was singing the simple pleasures: I like Jeremy praises of long-forgotten foodstuffs such as Arctic Rolls, We’re so depressed by recession, we’re ready for simple pleasures again Clarkson’s attitude, as expressed in a recent column in The Sun. Findus Crispy Pancakes, “Every day we are told by doctors and hidden passions. What’s striking about Cadbury’s Wispa bars and Wagon dentists and the government that we these passions isn’t their modernity, but Wheels. They’re all back in vogue, she should eat more healthily, jog to the their old-fashionedness. says. We’re all so depressed by wars, shops and do press-ups in the pub. terrorism and the “tanking economy” John Sergeant, the journalist who starred that we’re spending hundreds of millions “Naturally, I’ve listened to all this advice on Strictly Come Dancing, chooses indulging in what experts call and continued to smoke, stay up late, fishing; Tim Rice likes mowing his lawn; “recessionary-induced emotional eating”. drink as much as possible and take no John Carey, the literary critic, is fond of exercise whatsoever.” This philosophy beekeeping, while Jeremy Paxman And in these hard times retro foods and has never done me any harm, he says. delights in frogspawn; Joan Bakewell beverages take us back more effectively He’s “wobbled through life without so likes people-watching at petrol stations than anything else to “a childhood of much as a twinge. Possibly because I and Gyles Brandreth, the former MP, scraped knees, Clarks sandals and don’t have any muscles at all. Just tons confesses to enjoying the deaths of people afternoons dappled with sunlight”. and tons of juicy and delicious fat.” he knows. In another testament to simple pleasures, He explains: “I am talking about the Waterstone’s and Faber last week delight of opening the morning paper and published a book called Modern Delight, turning to the obituaries and seeing the a collection of essays from the great and face of a near-contemporary who has just the good in which they disclose their
Tabloid money… screaming Gordo is the Tories’ No. 1 weapon ■ “Multi-millionaire Tony Blair spends so little time in Britain he’s suspected of being a tax exile,” says Trevor Kavanagh in The Sun. “Meanwhile, his wife, Cherie, is spending £250,000 (R3m) on antiques to furnish their 18th-century, £6m (R72.8m) mansion in posh Buckinghamshire. It’s good to know someone’s done well under Labour.” ■ Rumours are swirling round Westminster that the PM’s health is “cracking under the strain”, says Fraser Nelson in the News of the World. “But David Cameron can relax. I can assure him that Gordo, the Tories’ No. 1 weapon”, is perfectly well. He’s “shouting, screaming, hurling objects around the room, behaving like a maniac” – ie, behaving as he normally does. It may seem crazy “apologising for the way gay computer engineer Alan Turing was treated in 1954 – when Gordo was three years old. The British PM was 49 when he sold the nation’s
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gold reserves for $275 an ounce. It passed $1,000 two weeks ago. Where’s the apology for that?” As for the real insanity: “The national debt was £340bn (R4.1trn) when Labour came to power. Next year, £970bn (R11trn)… We will NEVER be able to reduce this burden on our families to pre-Brown levels.” A trillionpound debt may be with Britons forever. What an act of vandalism. “Throwing mobile phones around is the least of it.” ■ Like SA, Britains still being ripped off by its power bills, says Fergus Shanahan in The Sun. Power firms buy their gas in units called therms. Today, a therm costs 34p (R4). This time last year, it was £1 (R12). But prices haven’t fallen in line with this and the suppliers say they don’t plan any cuts until next year. Watchdogs reckon Britons are overcharged £100 (R1,200) a year for power. “The suppliers, never short of an excuse, say they need big profits to build more power stations.”
shares at a glance MoneyWeek’s comprehensive guide to the week’s shares in the news
PUNTS Company
Media
Reason
Current price
Spurcorp (SUR) Restaurants and bars
Financial Mail
Sasha Planting likes Spur even though “fewer people are eating out and food inflation is high.” Despite the adverse trading conditions, the group managed to increase after-tax profit by 7%. Spur’s expansion marches forward even though “high costs next year will limit franchisee profitability.”Buy. 950c
BHP Billiton (BIL) Mining
Imara SP Reid
Billiton’s second half revenue and operating profit declined by 39.8% and 98.2% respectively. But it’s a story of boom and bust. In the first half, these numbers were up 16.6% and 23.7% respectively. Management said that, as at the year end, most prices will be 20% to 60% below levels of a year earlier. Analysts at Imara SP Reid say that “whilst by no means unscathed by the global setback Billiton, unlike others, is clearly not wrong footed and management feels it is easier to justify its quality-only strategy of recent years, combined with a strong project expansion pipeline, than it was a few years ago.” They might not have always gotten it right however. The timing of “the Rio Tinto bid was not impeccable and cost a small fortune” but even so, the two operations are consolidating well. Buy.
20746c
Larry Claasen in Financial Mail says: “Exposed to the faltering global economy and the rand’s wild swings, Steinhoff has done well.” It’s increased its margin significantly and on a PE of 6.39 it’s cheap. Buy.
1615c
Steinhoff International (SHF) Furnishings & floor coverings
Financial Mail
Exxaro (EXX) Business support services
Imara SP Reid
Headline earnings per share are up 8% to 406c. That's higher than analysts expected. This is partly on the back of higher spot iron ore prices and it seems that there'll be even better prices in the second half of 2009. The profits are coming from Sishen Iron Ore, of which Exxaro holds 20%. Buy. 9200c
Investec(INL) Banking
Summit TV Nerina Visser, Head of Beta Solutions: Nedbank Capital
Nerina Visser of Nedbank Capital likes proudly South African Investec, despite its strong foothold in international markets. In its pre-close briefing it outperformed expectations. She likes its management style and, especially, its well capitalised balance sheet – which gives it the ability to take advantage of calculated opportunities its rivals are missing out on in these tough trading conditions. Buy. 5762c
Data Vendor Company
Contacts
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Address: 7 Sturdee Ave, Rosebank Johannesburg
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25 September 2009
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shares at a glance MoneyWeek’s comprehensive guide to the week’s shares in the news
Company
Media
AngloGold (ANG) Mining
Imara SP Reid
Reason
Current price
Third quarter gold production is forecast at 1.2m oz at a total cash cost of around $530/oz. That’s $636m for the third quarter if we assume an average rand exchange rate of R8.10/$. The current average exchange rate for the quarter so far is R7.94. It could push costs to $540/oz at predicted production levels. Its stellar performance reflects the group’s cost efficiency. It's also one of the least rand sensitive gold miners. Management has set a price target of $1000/oz by next year. Analysts at Imara say: “Our short-term view is for a slightly better gold price, but long-term gold will gain traction as inflation fears begin to emerge.” Buy.
31150c
DOGS Company
Media Financial Mail
Kap (KAP) Diversified industrials
Uranium One (UUU) Mining
Metorex (MTX) Metals & minerals
Imara SP Reid
Financial Mail
Reason
Current price
“Claas Daun’s baby could easily be classified as the most eccentric vehicle to hit the streets since the penny farthing,” says Jamie Carr in his column Diamonds & Dogs. He goes on to say “not even [Kap’s] bewildering diversity of interests could save it from the effects of a tough trading year.” It’s been most strongly affected by automotive sales down 20% year on year. Avoid.
200c
Analysts at Imara SP Reid say that Uranium One offers good exposure for long-term exposure to uranium. The U308 spot price peaked at $55/lb in June and has since fallen below $50/lb. Although they remain positive on the long-term prospects for uranium, the price will remain depressed in the short- to medium-term. At the current uranium price you’re not seeing anything special with this share. Hold.
1720c
“Saying the diversified mining group has gone through a difficult period is an understatement,” says Larry Claasen in the Financial Mail. He suggests you hold off until Metorex’s new CEO, Terence Goodlace, has had a chance to turn this ship around. Avoid.
275c
Reason
Current price
WATCHLIST Company
Media
Bowler Metcalf (BCF) Containers and packaging
Caxton (CAT) Publishing
Financial Mail
Financial Mail
Sasha Planting doesn’t think Bowler Metcalf is the whole package. “Though Western Cape filling operations did well, those in the interior need a new strategy,” she explains. It is, however, benefiting from lower input costs as polymer prices help restore its margins. The company also has a large amount of cash on the balance sheet so things aren’t all bad. Hold.
600c
This is the kind of share that responds quickly to the recession. Sasha Planting of Financial Mail says, “ad spend is down, as are retail and wholesale sales”. Caxton has, however, completed all its large capital projects and still has a healthy amount of cash. Large quantities of cash are going to position it well to take advantage of the recovery. Hold. 1166c **Closing prices as at 22 September 2009
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25 September 2009
last word
The last bear The stern of the Titanic rose before she sank They feel betrayed, as if their shepherd had gone over to the wolves. We take no personal offence. And in the following few words we undertake to prove not that Jim Grant is wrong, but merely to stoke up the fire.
Here on the back page, we have no quarrel with Philosophiæ Naturalis Principia Mathematica. But applying Sir Isaac Newton’s Third Law of Motion to economics may be pushing it too far.
Bill Bonner
We look at the facts. But that is the problem. The facts are survivors. They will tell whatever tale their interrogators want to hear. As for opinions, after six months of a stockmarket rally, the once half-empty glass has become half-full.
Equal and opposite reactions is the gist of an article that appeared in The Wall Street Journal, written by well-known economic historian Jim Grant. A generation of investors has gotten used to Grant’s ‘doom is nigh’ warnings. Now, he says, it’s a boom that is nigh.
In the slump of 1982, GDP sank at a 6.4% rate. Again, the reaction was nearly equal and opposite to the action. “Not until the third quarter of 1984,” says Grant, “did real quarterly GDP growth drop below 5%.”
Personal conversions sometimes mark dramatic turns. Paul of Tarsus saw a vision so bright it left him blind. The next thing you know he had changed his name and was pushing Christianity all over the world. According to Gibbon, the Roman Empire fell as a consequence. Then, on the advice of his mistress, Gabrielle, Henry IV became a Catholic, leading to the Edict of Nantes and its subsequent revocation. “Paris is well worth a mass,” he said.
What is remarkable about the Grant conversion is that his vision gives off so little heat and light. His Wall Street Journal article shillyshallies around, rehearses the history of previous recessions and comes to rest in front of a flickering match: “The deeper the slump, the zippier the recovery.” Many were the sheep in Grant’s flock. 28
25 September 2009
Economies may bounce back to normal, but you still have to figure out what ‘normal’ is. Imagine a US Senator bouncing down the Capitol steps. The question is whether he will get up or not when he reaches the bottom. In the 1933 example, the US economy, still youthful and vigorous, got up nicely. But ‘normal’ was down. He soon fell again. By the end of the decade he was on his back, with 15% unemployment and 2% deflation. ©GETTY IMAGES
Even in the world of finance, there are dramatic conversions. As they say on Wall Street, a rally ends when the last bear gives up. Our old friend James Davidson, a source of inspiration for tech bears for many years, suddenly saw the light in 1999. Shares he had formerly scorned – often dotcoms with no revenue and no business plans – were suddenly added to his own portfolio. This too heralded a big change – the end of the tech bubble. Tech stocks collapsed. Most disappeared. Then Stephen Roach became vaguely bullish in 2006, after a long period of doubt and misgivings.
up it rises to get back to normal. This downturn has clipped nearly 4% off US GDP, more than any previous downturn since World War II. Of course, this hardly compares to the slump of 1929-1933, which took 27% off the GDP. Then, in the ranks of the unemployed stood one out of every four able-bodied workers, as opposed to just one out of every ten, according to today’s statistical legerdemain. Still, the depth of the drop did not prevent a vigorous bounce; on the contrary, it seemed to demand it. After 1933, the US economy grew by nearly 10% in each of the next four years.
We’re not converts yet… Here on the back page, we predicted it. But rather than quote ourselves, we’ll let Robert Prechter say ‘I told you so’. Even before the rally began, Prechter foretold its story: “Regardless of extent, it should generate feelings of optimism. At its peak, the President’s popularity will be higher, the government will be taking credit for successfully bailing out the economy, the Fed will appear to have saved the banking system and investors will be convinced that the bear market is behind us.”
Now it is 2009. The poor fellow is down again. The feds rushed to help him to his feet. They gave him a combined fiscal and monetary shot in the arm seven times stronger – in terms of GDP – than the average postwar countercyclical lift. The juice opens his eyes. But he still staggers. The spring of the present year may have the same bright colours as it did 27 years ago. But in all matters economic, it is its opposite. He has put on some weight over the years; he now carries three times the debt/GDP as he had in 1982. His stocks are three times as expensive, in p/e terms, too. In 1982, he had been deleveraging for more than a decade. In 2009, he has just begun.
As to Mr Obama’s popularity, Prechter was wrong. But four out of five ain’t bad.
What will happen next, we don’t know. But if you see us turn bullish on this economy, it will surely be time to sell.
Grant’s brief tour of recession history seems to confirm the general principle. The further an economy falls, the further
To read Bill’s thoughts, sign up to Money Morning’s free email at www.moneymorning.co.za.