Tuesday, August 31, 2010

Trade ‘centre of gravity’ shifts - India Show

SA is intensifying its efforts to enter preferential trade agreements with major economic blocs in the developing world in a major shift in foreign policy.

THE centre of gravity in the world of trade has changed, Trade and Industry Minister Rob Davies said yesterday.

SA is intensifying its efforts to enter preferential trade agreements with major economic blocs in the developing world in a major shift in foreign policy, which previously gave priority to the country’s traditional trading partners such as the US and European Union.

As an influential member of the Southern African Customs Union (Sacu), SA will, together with India, begin preliminary negotiations this year with South America’s biggest regional trading bloc, Mercosur.

Brazil, Argentina, Paraguay and Uruguay make up the full membership of Mercosur. Other South American countries, such as Bolivia, Chile, Colombia, Ecuador and Peru, have been granted associate membership. Oil-rich Venezuela has signaled its intention to become a full member.

Speaking at the opening of the India Show yesterday, Mr Davies said the balance of economic forces favours developing countries and this development is the major factor that has influenced Sacu’s decision to pursue this agreement.

He said this preferential trade agreement with India and Mercosur will strengthen trade and investment opportunities between the regions.

Indian Commerce and Trade Minister Anand Sharma said a preferential trade agreement between the regions will “greatly enhance the (economic) relationship between the (three) regions”.

Mr Sharma is in SA to finalise details of a preferential trade agreement between India and Sacu.

He reiterated that the target of reaching a trade agreement worth 10bn by 2012 is on track.

SA enjoys a favourable trade surplus with India. The latest figures from the Department of Trade and Industry indicate that total exports to India were in the region of R5bn, while SA’s imports from India totaled R3bn.

Both ministers were speaking at the official opening of the week-long India Show at the Nasrec Exposition Centre yesterday.

The show will showcase about 54 of India’s major companies in sectors such as manufacturing, pharmaceuticals, engineering and the automotive industries.

Since President Jacob Zuma ’s inauguration last year, SA has targeted emerging markets to strengthen its economic relations.

Mr Zuma began courting these powerful emerging markets last year with a state visit to Brazil.

This was followed by state visits to India, Russia and China this year.

Analysts have lauded Mr Zuma’s decision to focus his diplomatic initiatives on gaining favourable trade agreements from emerging markets.

Mr Zuma, who also spoke at the India Show, confirmed SA’s intentions to work with India to pursue the transformation of multilateral institutions.

“We also have a common approach on a number of global issues including reform of the United Nations, the future of multilateralism, climate change, South- South co-operation and multilateral trade negotiations,” he said.

From Business Day

Thursday, August 26, 2010

HSBC Buyout Shows Africa is Ready for the Big Stage

THE closest HSBC traditionally got to sub-Saharan Africa was sending its Hong Kong-bound staff round the Cape of Good Hope before the Suez Canal opened in 1869. It is a sign of the region’s vastly improved prospects and the bank’s evolving strategy that HSBC is now in talks to buy a controlling stake in Nedbank, one of South Africa’s big four banks, with a market value of $9 billion.

As Africa gets richer and does more trade with Asia, foreign banks are becoming more interested. That was the logic cited in 2007 when China Development Bank bought a stake in Barclays, which owns a big African business, and a few months later when ICBC, China’s biggest bank, bought a 20% stake in Standard Bank, South Africa’s largest, which has operations in some neighbouring countries. Citigroup and Standard Chartered, which along with Barclays have the biggest pan-African networks, now talk more about their prospects there. Portugal’s banks, which dominate in Angola and Mozambique, view their operations there as jewels.

For all the talk, this grand strategic stuff makes hardly any money yet. As it stands Nedbank is simply a diversified play on South Africa’s economy, with a biggish mortgage business and a skew towards public-sector lending. It does, however, have one characteristic that HSBC tends go for: it is underperforming. Its retail division is losing money. The hope must be that fixing this would make the deal’s short-term return on investment respectable, while in the longer term the strategic elements can be put in place, possibly through bolt-on acquisitions of other banks, for example in Nigeria.

That assumes the deal happens. The 52% stake is owned by Old Mutual, an insurance firm with South African roots but which is listed in London. That could mean less local fuss about a foreign takeover. Even so, HSBC would be expected to keep a chunk of Nedbank’s shares listed in Johannesburg, as was the case when Barclays bought ABSA in 2005 and when Vodafone took control of its South African unit in 2009. Unlike those firms, which have not integrated the rest of their African activities with these more recent acquisitions, HSBC should be able to make a plausible case to the politicians that over time Nedbank would become not a backwater but its African centre of gravity.

The Economist

China to Build Solar Power Plants in South Africa

Suntech Power Holdings, China's largest maker of solar panels, said on Thursday that it has signed a deal to develop solar plants in South Africa with up to 100 megawatts in capacity as the country looks to boost clean energy output.


Wednesday, August 25, 2010

2004 Flashback: The Next Warren Buffett

Came across this 2004 article on Edward Lampert, Chairman of ESL Investments and majority shareholder in Sears.

"Security is tight at Eddie Lampert's office. That's no surprise: Last year he was kidnapped at gunpoint while leaving work and held for ransom for two days before talking his way free. In fact, there is no sign on the low-rise building in Greenwich, Conn., that his $9 billion private investment fund, ESL Investments Inc., is even there at all. There's also no sign on ESL's door upstairs -- and certainly no indication that the man sitting there might be the next Warren E. Buffett".

The rest of the piece is located here.

Read about Eddie Lampert in this Fortune Profile from 2006.

"Lampert's stock picking is a "form of immersion," he says. Before he put a penny into AutoZone, he visited dozens of the auto-parts retailer's outlets and had one of ESL's analysts spend six months calling on hundreds of stores, posing as a demanding customer. "It's probably overkill," Lampert says, but he can't resist."

Monday, August 23, 2010

The End of an Era: Lou Simpson to Retire from Geico

Lou Simpson, the Chicago-based investor with such a stellar track record he once was considered the successor to Warren Buffett, is retiring at the end of the year after decades managing Geico's investment portfolio.

Geico is owned by Buffett's investment vehicle, Berkshire Hathaway. Simpson, 73, who grew up in Highland Park, is the only person other than Buffett who controls Berkshire investments.

"I wish he weren't" retiring, Buffett told me. "Obviously, I would keep him employed till he was 100. I was very surprised when he called me a month ago and said, 'At 74, I'd just as soon turn it over to somebody else.' It was not a happy day at Berkshire. But I'm happy for him."

The two have never delineated their stock picks; Geico's investments are described publicly as Berkshire's. So for about 15 years, reporters and Wall Street analysts often assumed Simpson's moves were Buffett's.

"People are always attributing to me what he's doing," Buffett said.

But here's how to figure it out: "If you see a purchase on a company in the $300- to $400-million range, odds are very good that's Lou's," Buffett said. "I'm going to want to buy at least $1 billion of whatever it is we buy. So Nike, those things are his, while Wells Fargo, Kraft, those will be mine."

While Simpson is not a household name, he is among the most well-connected men in Chicago's financial circles. He manages a $4 billion portfolio that posted annual losses only three times from 1980 to 2004, and outperformed the S&P 500 18 of those years. Berkshire has not reported Simpson's performance separately since 2004, but when pressed, Simpson said his stock portfolio has outperformed the S&P 500 in aggregate since then.

His monthly reports go to Buffett, 79, and Buffett will assume control of Geico's portfolio when Simpson retires, he said.

Buffett and Simpson have similar investing philosophies, although not on life. Both tend to buy and hold stocks. They scour for sturdy but sometimes obscure companies poised for growth. Any other method is considered "a fad."

As for whether Simpson runs investment decisions by Buffett, Buffett said never. But their value-investing approach has led to them on at least two occasions to make identical choices. Buffett said both began buying Tesco, a global food retailer, at the same time. And Simpson said both began selling Freddie Mac in 2001 because of concerns the company was overleveraged.

"My approach is eclectic," Simpson said. "I try to read all company documents carefully. We try to talk to competitors. We try to find people more knowledgeable about the business than we are. We do not rely on Wall Street-generated research. We do our own research. We try to meet with top management."

Simpson, unlike Buffett, avoids the spotlight. Since Berkshire bought Geico in January 1996, Simpson said he has given two on-the-record interviews, this one being his second.

"So many people broadcast what they buy or sell and it works against them," Simpson said. "I'm in favor of people not knowing what we're doing until the last possible time."

Simpson's priorities, friends say, have changed since he met his second wife, Kimberly Querrey, a chemical engineer, at a restaurant in Chicago. Neither was living here at the time; they were here on business.. She persuaded him to move from San Diego to Chicago, as she was looking for a city that offered her more consulting opportunities. They practiced yoga together until she ruptured her Achilles tendon, and now Simpson does so on his own. They intend to spend most of his retirement in Florida and use their Michigan Avenue condo as a second home.

Simpson attended Northwestern University for a short time and, unhappy there, transferred to Ohio Wesleyan and went on to graduate school at Princeton. (Today, he sits on the investment committee of Northwestern's board of trustees.)

Simpson had risen to chief executive of California-based Western Asset Management when his friend Leland Getz, the then-vice chairman of executive search firm Russell Reynolds, called on behalf of Geico in 1979. Simpson rebuffed him twice, acquiescing on the third try "only to get him off my back," he said.

"Geico, operationally, has made a profit most of the 31 years he has been here," said Geico CEO Tony Nicely. "That has given him great flexibility as to how to invest. He had the comfort of knowing he was not going to have to sell equities in an untimely way. But at the same time, his outstanding performance has caused our overall performance to look unbelievably good."

Simpson acknowledges that his more than 30-year association with Buffett and Berkshire has given him entre into circles that might otherwise have been inaccessible. He sits on the boards of two public companies and has been a director of at least nine others. He travels to Allen & Co.'s annual conference for "moguls" in Sun Valley every year.

Yet Simpson's life is simple. He supervises only two employees, an assistant and an analyst, working out of a small four-room office on Michigan Avenue. The walls are sparsely decorated with posters from art museum exhibits. He lives within walking distance of his office. His division's daily report covers less than one-quarter of a sheet of paper.

"Our dinner conversation, I think it's quite interesting, but some people will say quite strange," Querrey said. "Over the weekend, we actually talked about behavior in corporate America, and the behavior at Hewlett-Packard, and the arrogance of CEOs and why they think they are above enforcement of the board. I have investments in Vietnam. So we often talk about the economy in Vietnam versus the United States."

Simpson's compensation is not disclosed, but it is based on his returns over a three-year period. I told Simpson that Buffett often says there are Berkshire stockholders who should be on Forbes' list of the 400 wealthiest Americans but have been overlooked. I asked Simpson whether he is one of them.

"No," he said quickly. But with a sly grin, he added, "But I know who some of them are."

Chicago Tribune

Saturday, August 21, 2010

Why It's Time to Buy Telkom (TKG)

A recent cover story in the Financial Mail (19 August 2010 edition) has cemented my thoughts on why Telkom is a buy.

The story:
  • Is there any future for Telkom? I must say I had a chuckle with the copy of this piece: "Is there any future in Telkom’s business? Analysts and the new acting CEO suggest some ways the company can compete despite political pressure." Be warned: Analysts put forward some ideas on how to run the company.
  • Finally the cover concludes with the "Investment Case" for Telkom. The lead of this article, Khulekani Dlamini of Afena Capital, says: “If you remove the social imperative, it would do well in the hands of a private operator. They could buy it for what it’s worth and sell or shut down the non performing assets.” The social imperative? Buy it for what it's worth? Shut down non-performing assets after taking a R5 billion bath?
Telkom remains a firm buy in my mind, particularly given the fact that negative sentiment remains at a high, problems in Nigeria and probably reaching a peak, and the company trades for half of NAV. There's a mobile division coming, new ideas in bundled packages and data, and the scope and scale that nobody can match, including MTN and Vodacom. The dividend from these levels provides such a great margin of safety that little to no growth in the share price has little or no relevance to investment returns. Piet Viljoen (RE:CM) agrees.

Disclosure: I hold Telkom shares indirectly. I do not agree with Viljoen on Harmony Gold. I much prefer the Financial Mail to FinWeek.

Saturday, August 14, 2010

Facts from Fiction: The Real Situation with the DMR, ArcelorMittal, Kumba and Lonmin

There is an old adage in journalism that says: "Don't let the facts get in the way of a good story". Since the saga of the ArcelorMittal old order mining rights appeared in the media, much has been said and written about it by mining law experts, analysts, journalists and other opinion makers. In many instances the "facts", if any, were made to fit the conclusion and not the conclusions to fit the facts.

There have been many casualties of that old adage, but, the real victim has been the truth. Some will no doubt question the author's motives for writing this article but if, in the process of separating fact from fiction to which the South African public has been subjected to recently, I am castigated and maligned for telling the truth, so be it. The information presented here has always been available, but unfortunately some so-called "mining law experts" and others have elected not to report and analyse this information. The article focuses on Kumba, because this company has been presented to the public as the victim of some underhanded dealings within the Department of Mineral Resources.

In law it is said that "He who goes to the Court of Equity must come with clean hands". This begs the question: does Kumba have clean hands?

The area of land which is the subject of the dispute is around 26 000 ha. The open cast mine covers some 1417.8 ha and the infrastructure covers an area equivalent to 166.8 ha. This means that only 6% of the total mining area is subjected to any mining activity. No mining is taking place in the remaining 94% of the mining area. This also means that the open cast mine covers approximately 5% of the total mining area.

Let's go back to where it all began. On the 23rd of October 2001 Sishen Iron Ore Company (Kumba) and Iscor Limited (ArcelorMittal), with the support of the South African Government, entered into a mining and supply agreement. Following the conclusion of this agreement and after having complied with the regulatory requirements, Kumba became the 78.6% holder of the undivided share in iron ore mineral rights while ArcelorMittal became the holder of the other 21.4% undivided share in iron ore mineral rights over the same properties. In terms of this agreement, ArcelorMittal appointed Kumba as contractor to mine iron ore on ArcelorMittal's behalf in respect of its 21.4% undivided shares in the mineral right.

The agreement further acknowledged that the Minerals Act of 1991 was about to be repealed and that the concept of common law ownership of mineral rights would be extinguished and replaced by a new regime under the Mineral and Petroleum Resources Development Act. In this regard, both Kumba and ArcelorMittal committed to each other that they would, in their "dealings with each other display good faith" and concomitantly "reciprocally" undertook towards each other, as from 1 May 2004 until 30 April 2009, to "take all steps and to do all things and sign all documents which would be necessary to give effect to and implement the provisions of the agreement in the context of the new mineral rights dispensation brought about by the new mining legislation."

On the 17th of October 2002, the then Department of Minerals and Energy issued two mining authorisations, one to Kumba in respect of its 78.6% undivided share in mineral rights and another to ArcelorMittal in respect of its 21.4% undivided shares. With the commencement of the Mineral and Petroleum Resources Development Act (MPRDA) of 2002, the mining authorisation (together with the mineral rights) held by Kumba became its old order mining right in respect of the 78.6% undivided share in the mineral rights and the mining authorisation (together with the mineral rights) held by ArcelorMittal became its old order mining right in respect of the 21.4% undivided share in the mineral rights. In terms of the new mining law, Kumba and ArcelorMittal were required to lodge their respective old order mining rights for conversion by no later than 30 April 2009. Kumba lodged its old order mining rights for conversion on 13 December 2005. ArcelorMittal failed to lodge its old order mining right for conversion by 30 April 2009 and as a result it lost its 21.4% undivided share in respect of its old order mining right. Why ArcelorMittal failed to lodge its old order mining right for conversion, is incomprehensible. However, it must be emphasised that , at least until midnight on the 30th of April 2009, in terms of the MPRDA, ArcelorMittal was still the holder of the old order mining right in respect of the 21.4% undivided share in the iron ore mineral rights.

Notwithstanding, Kumba's contractual obligation towards ArcelorMittal to do all things to give effect to the provision of their legally binding agreement, on or before the 23rd of April 2009, seven days before ArcelorMittal's old order mining rights would have ceased to exist a senior manager (name withheld) employed by Kumba, signed an application on behalf of Kumba to apply for the 21.4% undivided shares old order mining rights held by ArcelorMittal. On 29 April 2009, a copy of the application form was certified as a true copy by a commissioner of oaths (name withheld).

Why, if Kumba was acting in conformance with its contractual obligation towards ArcelorMittal, did it, on or before the 23rd of April 2009, already sign a mining right application in respect of the 21.4% old mining right which was still held by ArcelorMittal, its business ‘partner' or associate? In other words a few days before ArcelorMittal would have lost its old order mining right, Kumba had already been sharpening its knife to stub ArcelorMittal in the back. It was already in the process of pulling the rag under ArcelorMittal's feet. Is this the business ethics of the South African mining and minerals sector?

Kumba, the so-called victim of "DMR's shenanigans' and "ICT's political connections", furthermore signed the covering letter accompanying their application on or before the 30th of April 2009, but dated it the 1st of May 2009. Is it ethically and morally right to sign a letter on or before 30 April 2009, but date it the 1st of May 2009? Was it a mistake? What was Kumba trying to do? Was it trying to manipulate the administrative systems at the DMR to its advantage?

Now for the real problem. On the 30th of April 2009, the last day in which ArcelorMittal's old order mining right was still in force, two representatives (name withheld) of Kumba went to the Department of Mineral Resources regional office in Kimberley to lodge an application for a new order mining right in respect of the 21.4% old order mining rights held by ArcelorMittal. Whilst at the regional office, the representatives of Kumba induced a junior official (name withheld) not to register their application on that day, but to date stamp it the 1st of May 2009 - a public holiday. This was, according to the junior official who received the application, done under the pretext that an "arrangement" had already been made with the Deputy Director-General: Mineral Regulation at Head Office. It is quite interesting that Kumba, a JSE listed company, makes "arrangements" in contravention of the law. Kumba also says that it made arrangements with respect to the same application with the Chief Director responsible for the Northern Cape region. It is noteworthy that Kumba never made "arrangements" with the Regional Manager of the Northern Cape regional office. If Kumba was the messenger carrying instructions to the regional office on behalf of the Deputy Director-General or the Chief Director, why did the Kumba representatives not raise the matter with the Regional Manager? Why go to a junior official? The author can, without fear of contradiction, state that at no stage did Kumba make any "arrangements" either with the Deputy Director-General or the Chief Director. Even if one, having regard to the allegedly incompetent and corrupt nature and character of South African public servants, were to assume or accept that such an "arrangement" had been made, such arrangement would have been irregular and unlawful.

If private arrangements were part of the licensing administration process, this process would be chaotic and in a shambles.

It is common knowledge in the South African minerals and mining industry that the lodgement of an application is an event and not a process. According to the South African Concise Oxford dictionary, lodge means to "present formally to the proper authorities". According to the author's understanding of the verb "to present", it is "an expression of an action that is taking place now". A lay person's understanding of "now" means today and it does not, nor will it ever mean tomorrow.

As if this was not enough, on the 30th of April 2009, one or two representatives (names withheld) of Kumba went to Pretoria and delivered a copy of the said application to a secretary. The Kumba representative once again indicated that an arrangement was made with the Deputy Director-General and convinced the secretary not to acknowledge receipt on the date received, 30th April 2009, but to date stamp it the 1st of May 2009, a public holiday. The conduct of these Kumba representatives raises the following questions: Who informed Kumba that ArcelorMittal had not yet applied for the conversion of its old order right? Could this information have come from the DME? If so, did Kumba obtain this information in terms of the Promotion of Access to Information Act? Could this information have come from ArcelorMittal? Did Kumba inform ArcelorMittal that it was making arrangements and preparing itself to apply, should ArcelorMittal fail to lodge its old order mining right for conversion? The officials of the Department in accepting Kumba's "arrangement" story acted outside established practice and approved policy.

It is a logical conclusion that Kumba, the victim of "the DMR's shenanigans" and "ICT's political connections", was manipulating the administrative system to gain advantage and gratification. If Kumba manipulated the system, why is it making a fuss over the fact that Imperial Crown Trading's application was dated the 5th of May 2009? Kumba alleges that because the application form was dated the 5th of May 2009, it means that the application could not have been lodged on the 4th of May 2009. Therefore, DMR officials must have made "arrangements" with Imperial Crown Trading. Does Kumba hold this view because it had also allegedly made such "arrangements"?

Consider this: when an application is recorded in the electronic license administration system (NMPS), it automatically generates a unique number. The first 8 (eight) digits of this unique number reflect the date in which the application was electronically entered into the system. No single DMR official can change or manipulate that unique number. This number and other security features can only be changed by the developers of the NMPS. Now, Imperial Crown Trading has a unique number generated automatically and electronically on 2009/05/04. Kumba's and ICT's applications were recorded electronically by two different officials at different times on 2009/04/05. Despite Kumba's claims of an "arrangement", in terms of the provisions of the MPRDA Kumba's application should not have been accepted because it was lodged on the 30th of April 2009, at which stage ArcelorMittal's old order mining right in respect of the 21.4% had not yet ceased to exist.

It has been selectively argued by some "mining law experts" that the MPRDA precludes the acceptance of a prospecting right application over an existing mining right for the same mineral. This is true. However, what these "mining law experts" failed to inform the public about is that the MPRDA also precludes the acceptance of a mining right application over an existing mining right for the same mineral. The MPRDA does not preclude the application for or granting of a prospecting right or mining right over an existing mine. The fact that Kumba applied for a mining right over the unclaimed 21.4%, is incontrovertible proof that Kumba itself acknowledges and knows that there was no prospecting right or mining right over the unclaimed 21.4%. This therefore means that Kumba and Imperial Crown Trading or any other company for that matter were lawfully entitled to apply for whatever right (prospecting or mining), they wished to apply for. In this regard, Kumba elected to apply for a mining right which takes 12 months to process and ICT chose to apply for a prospecting right which takes 6 months process. The fact that Kumba applied for a mining right is also proof that it did not have rights over the 21.4% and, as such, no rights were "snatched" nor was Kumba the victim of a "heist". Kumba could not have lost a right which did not belong to it in the first place. It is disingenuous of Kumba to arrogate to itself an entitlement (to be the sole and only applicant) which it never had.

The sad part about all this is that because the media sees corruption everywhere with little regard for the facts, it fails to give proper consideration of matters that seem controversial. In this regard, a formula has been developed that says: Black person, granted rights, must be member of the ANC, therefore is politically connected as such they are involved in corrupt activities (Black person => ANC member =>politically connected => Corrupt). No proof, just insinuations, innuendos and allegations. Would it be fair if the following formula was also developed: White Person, is member of the DA/opposition, therefore is racist (White person => DA member => racist). This is shallow and poor journalism! The reason the author is raising this issue is because no one has proven that the Imperial Crown Trading shareholders and directors are members of the ANC. Some journalists and analysts have just assumed that they are - and reported it as fact. For example Pragat Investments (Pty) Ltd owned by Jagdish Parekh, only became a 50% shareholder of Imperial Crown Trading around March 2010. The decision on the ICT's prospecting right application was taken in November 2009. How could Jagdish Parekh, who is allegedly connected to the Guptas who, in turn, are close to the Zuma's have been part of ICT in November if he only became a shareholder and director of that company around March 2010? Where is the political connection to the Zuma's at the time of the decision? If the alleged political connection is a criterion for granting rights, why is it that the DMR of the 7 (seven) applications lodged by ICT, 2 (two) have been rejected, 2 (two) have been refused and only 2 have been granted? ICT withdrew 1 (one) application. Because of the media's obsession with corruption in Government, they have lowered the standard of journalism to the level of tabloid, shoddy and ideological journalism. The same shoddy logic applies to poor Lazarus Zim. It is alleged that he has other business relationship with the Guptas, therefore because of that relationship he must also be involved in ICT - he is a participant or shareholder in ICT by association. Because of this alleged association his role as the Chairperson of Kumba, creates allegedly a perception of conflict of interest. Conflict of interest, like corruption, is no longer based on facts but on mere perception.

If one were to extend this "guilt by association" concept, one could also argue the following: Lazarus Zim is the Chairperson of Kumba and a business associate of the Guptas. The Guptas are business associates of Duduzane Zuma, who in turn is the son of the President of the Republic and President of the ruling party (ANC). Therefore, they are all, by association, politically connected to the President and the ruling party. Now, since Lazarus Zim is the Chairperson of Kumba and by association Lazarus is politically connected, it is, therefore, logical to postulate that Kumba by virtue of its association with Lazarus Zim is also heavily politically connected to the President and the ruling party. In view of the "political connected by association theory", it can be argued that both Kumba and ICT are "heavily politically connected". Something is seriously wrong with this analysis and circular or linear logic! In his book "Why we make mistakes", JT Hallinan argues that one of the reasons why people make mistakes, is because human beings have the tendency of "connecting dots" where there are no dots to be connected.

There is not a single requirement in the MPRDA that states that only "known" or not so "obscure" companies are entitled to apply for prospecting or mining rights. How many companies involved in the minerals and mining sector do journalist and analyst know? Do these companies, therefore, only come into existing once the media and public know of or about them? Due to their poor knowledge and understanding of the law and sometimes mischief, the media wants the public to believe that "being known by the public or the media" is a requirement for the granting of rights in terms of the MPRDA. This simply is not true. By the way, the fact that a company is not known by the public or media does not mean that such a company is not known to Government. If ICT was an "unknown" company to the media, it does not mean that nobody else knew of its existence. The majority of companies that have applied for rights in terms of the MPRDA have been "unknown" and "obscure" even some that became BEE partners to Kumba in the Sishen Iron BEE transaction. Because the media did not "know" ICT, there must have been something amiss and wrong when the incompetent and corrupt public servants at the DMR granted a prospecting rights to the "obscure" and "heavily politically connected" company called Imperial Crown Trading, a shelf-company.

Apart from the fact that Kumba manipulated the administrative system and despite the fact that objections to an application are, by law, addressed to relevant Regional Managers and processed at the regional level, Kumba had attempted to influence the licensing process by engaging in extra legal processes, when it wanted to meet with the then Deputy Director-General to "address the issue of a competing application". Objections are, in terms of the MPRDA, dealt with by the relevant Regional Manager and not by the Deputy Director-General or a Chief Director. In response to Kumba's request, the then-Deputy Director-General, wrote to Kumba saying that he was "...enjoined to process applications....in a just, impartial and unbiased manner in compliance with the laws and regulations of South Africa....note that applications received by this Department are treated as confidential...Please note that I will not be lobbied for or against any application which still has to come before me". Is it wrong for an official to protect the integrity of the administrative system?

In terms of South Africa's corruption laws, there are two parties to a corrupt activity. Therefore, if the Department of Mineral Resources is corrupt, by implication the minerals and mining sector which it regulates is also corrupt.

I hope it is now clear to all and sundry that Kumba, whose mining right which it never had, at least according to the media, was "snatched" should not and cannot be clothed in glory nor is Kumba an angel. There is proof that Kumba stubbed ArcelorMittal in the back and manipulated the administrative systems to derive a benefit. If anybody has cogent proof that Imperial Crown Trading manipulated the system, let's write about it.

It has been reported in the media that Kumba became "suspicious that their application had been made available to ICT" because the preamble to Kumba's application which relates to a mining right was found in ICT's prospecting right application file. Would ICT really take a preamble to a mining right application belonging to Kumba and attach it to its own prospecting right application? If ICT has, in reality, done this, it means that ICT is a novice in the mining and minerals sector.

Kumba, a JSE listed company, states in its values statement that "we are honest, fair, ethical and transparent". It also says that ":we ‘walk the talk' - our actions are consistent with our words". "We deal with people and issues directly and avoid hidden agendas". Has Kumba lived up to its values? In line with their values regarding accountability Kumba says "We take ownership of our decisions, actions and results rather than blame others". Kumba live up to your ethical values.

Those in the media, who write and report on mining and minerals related matters, need to do some serious introspection with regard to the standard of reporting and their evident overzealousness in accepting half-baked stories from ‘sources' and presenting these to the public as fact without properly verifying these ‘facts' and ":sources".

I conclude by quoting Brendan Seery, the Urban Warrier, who wrote the following in the Saturday Star of the 7th of August 2010. "Sadly in our current media environment, we journalists are our own worst enemy on that score (referring to truth and facts). We get things wrong, we allow our reporting to be coloured by personal feeling and prejudices, we lobby for political factions, we slide into sleaze, and sometimes, as happened recently, we even take kickbacks" This succinctly captures the sad state of South African in journalism. This is also reflected in the way in which the Kumba saga has been written and reported on.

*Jacinto Rocha, is a Mining Law and Management Consultant and an expert on the South African mining law and regulatory system. He is the former Deputy Director-General: Mineral Regulation in the DMR. He writes in his capacity as an ordinary South African citizen.

Thursday, August 12, 2010

China Visit Investment Report

By Simon Hunt

In all likelihood, China has entered the most critical and taxing period since the country was reopened to the outside world in the 1970s. Domestically, there are a slew of issues, any one of which could create instability. These issues include:

- Home affordability
- Leadership instability
- A potential if not actual housing bubble
- The rising income and wealth differential between those who have made it and those who have not
- The country's continued dependence on exports as its principal driver of growth
- Cheap credit, which punishes savings and encourages investment/speculation
- The misallocation of capital that springs from the previous factor
- Local/provincial government indebtedness
- A new assertiveness and arrogance at all levels
- Policy making that focuses on short-termism without addressing structural and longer-term issues, etc.
- Impact of rising wages
- Energy intensity
- Role of foreign companies
- Resource dependability - water, raw materials, etc.

The list could go on, but these issues are evolving at a time when the global environment is fraught with difficulties and uncertainty, making policy making within China that much more complex. The infighting within the leadership, which goes beyond the normal tensions that often occur during the period leading up to a change in leadership (due in 2012), is making policy management more difficult and has led to conflicting views being expressed by various factions, in the media.

Few can know the full story of what goes on within the State Council, but there appears to be a battle royal being fought over the real estate sector. There are those within the leadership who are concerned that average home prices have gotten too high for most first-time buyers (see our previous visit report). They want to see average prices fall by 10-20% across the country. Against this group are not just real estate developers but local governments and many others within Beijing. This group, of course, depends for much of their revenue, or in the case of developers, their profits, on rising land and building values. In fact, local governments depend on land sales for one-third of their revenues. In 2009, land sales brought in RMB 1.6 trillion, compared with a total budget income of RMB 3.3 trillion. Moreover, land is the most-used collateral for bank loans; its value is thus crucial to the credit edifice.

Many local governments have not adhered fully to the new restrictions imposed by the central government on the real estate sector. This has infuriated those in Beijing who are determined to encourage a fall in home prices. In effect, what is being seen is a battle between central and local governments. In our view, this is a fight that central government cannot afford to lose.

The scale of speculation in real estate is enormous. There is a total of 64.5 million apartments and houses lying purchased but vacant in urban China, about five times the surplus in the USA, according to an economist from the Chinese Academy of Social Sciences.

A report written by the National Bureau of Economic Research in July this year provides interesting data on China's housing market. Real housing prices have risen by 140% since the first quarter of 2007. In the first quarter of this year, house prices rose by a record 41%, since when it appears that prices have stabilised but not fallen. Price increases have not been driven by any shortage in housing. In five of the eight markets that the authors of the report studied, the net new number of housing units provided since 1999 was at least as large as the net increase in the number of households. In the three others, the relatively modest gap does not explain the huge rise in home prices.

In Beijing, there has been an almost eight-fold increase in land values since 2003, but since the end of 2007 land prices have nearly tripled. The impact of rising land prices on home and apartment prices has been equally great. From 2003 to 2007, the ratio of land-to-house values hovered between 30% and 40%, but since then it has doubled to just over 60%. The report also found that when a central government state-owned enterprise (SOE) was a winning bidder for land, prices rose by about 27% more than if they had not been involved, thus showing the influence that SOEs bring to bear on land values, an influence that grew in 2009 when they became more active. A separate report shows that so far this year 82% of Beijing's land auctions have been won by SOEs.

Price-to-rent values in Beijing and seven other large markets across the country have increased from 30% to 70% since the start of 2007, and current price-to-rent ratios imply very low user costs of no more than 2-3% of house value. Very high expected capital gains appear necessary to justify such low user costs of owning. The report continues with calculations suggesting that even modest declines in expected appreciation would lead to large price declines of over 40% in markets such as Beijing.

In summary, against a background of cheap money and plenty of credit, house prices across the country have become unaffordable to most first-time buyers. In Beijing, for instance, average house prices have been between 14 and 15 times incomes for the past three years, but rose to 18.5 times in the first quarter of this year. If average home prices do not fall significantly across the country, the risk is that Beijing will be forced to tighten policy another notch. A softening in monetary policy is likely only if average home prices fall within the 10-20% range.

This is what the policy fight is all about, because if these price developments continued unchecked the leadership would risk encountering social instability. Workers everywhere are demanding higher wages. The demands are not just amongst the SMEs and foreign companies, but within the SOEs. We understand that a significant number of SOEs have seen de facto strikes, just not in name. The workers clock in, go to their stations, put down their tools, and clock out without doing any work.

The list of grievances is long, with rising wages being one. How government deals with this situation remains to be seen. We were reminded that in 1989 it was only when the workers joined the students that an explosive situation developed. No one is expecting anything remotely similar, but these developments do illustrate the tensions lying beneath the surface which the leadership is having to grapple with.

Politics in China is all about maintaining social stability. The demographics of the country are forcing the leadership into a new economic model, which will be partially driven by the level of average wages over the coming five years being at least double that of the last five years.

Dr Clint Laurent of Global Demographics has consistently stated that China's statisticians have overstated the country's birth rates since 1990. This implied, as he said in a paper in 2005, that China's labour force would peak at 770 million in 2008, falling to 690 million by 2025. Another major consequence is that the important age group of 20-39 peaked in 2000 at 458 million and by this year will have fallen by 4%.

The consequences of these demographic changes are immense. First, wage inflation will be a given, not just in the private and foreign sectors but amongst the SOEs, as we mentioned earlier. Second, it means that manufacturers will introduce automated machinery to reduce the workforce (the new booming sector) and improve productivity. Third, rising wages lay the foundation for better consumer spending; though households, as in the past, will have to cover the losses racked up by local governments, according to Michael Pettis, a visiting professor in Beijing. Fourth, disposable income in the rural sector is improving. This development, combined with subsidies granted to rural households for buying a range of household appliances, has lifted the demand for these products in rural areas. Nonetheless, it is human nature that when a gift is offered there is a rush to buy, so how long the subsidies will affect sales of appliances is a moot point.

Finally, policy makers know that the time has come when the country's dependence on exports for growth must be replaced by domestically driven growth that focuses on consumer spending and not fixed-asset investment. Local coastal governments, however, will fight to see that exports from their regions continue to drive their own growth; but their success will depend on global trade.

Much of the surge in exports so far this year has been due to the replenishment of inventory within the distribution and sales channels and to the expected increase in export prices out of China. Inventory replenishment has now run its course in Europe and the USA. Given the expected slowing of consumer spending in the US in the second half of this year, some inventory liquidation might actually be seen. Even so, exports from China should weaken sharply by year-end.

The move to de-peg the RMB from the US$ gives Beijing the flexibility to either appreciate or depreciate the currency depending on global conditions. Any appreciation will be modest given the small margins that most exporters enjoy. If our profile of the world economy is even half correct, we should expect to see the RMB depreciate against the US$ and other currencies post-2012.

Wage inflation threatens to feed into general inflation. Food prices remain quite stable overall for now, but there is a risk that they will be rising by year-end. Vegetable prices are rising sharply, according to friends who shop every week. Meat prices are stable for the time being, but wheat prices had risen well above the government's sale price of RMB1800, to over RMB2350, when we last looked. Friends fear that food prices will be rising in the fourth quarter, with some economists predicting that CPI will be increasing at a 5% rate by then. We are told also that the cost of getting an electrician, plumber, etc. in to do odd jobs has doubled over the last year in Beijing and other major cities. Our general take is that China is on the threshold of seeing an overall increase in the cost of living. Whether it shows up in official numbers or not, households will feel it.

A long-term concern is whether China has key resources to maintain the growth profile that the country has experienced over the last 40-odd years. Water may well be a key constraint. China's water-resource capacity is only ¼ of that of the world average. In other words, the country has 20% of the world's population but only 7% of global water resources. The problem is compounded by the dispersion of those resources. The area around the Yangtze River accounts for 36.5% of the country's land mass, but holds 81% of its water. North of the Yangtze River lies 64% of the country's territory, but only 19% of its water resources.

A World Bank report shows that more than half of China's 660 cities suffer from water shortages; and 90% of cities' groundwater and 75% of their lakes and rivers are polluted. These are examples of the physical constraints on growth. China's rapid pace of industrialisation has left the country with severe burdens and a massive clean-up, not just in urban areas but throughout the countryside. Water is a global depreciating resource, as William Houston and Robin Griffiths showed in their book Water: The Final Resource. History also shows that wars are fought over access to water.

Local government indebtedness is being exposed as a potential time-bomb, as one friend remarked to the writer. Whatever the correct figure, it is large and is in the range of RMB6 trillion to RMB11.4 trillion, equivalent to 71% of the country's nominal GDP. Some reports suggest that banks will have difficulty recouping about 23% of what they have loaned out. The China Banking Regulatory Commission has told banks to write off nonperforming project loans by the end of this year.

No one should be surprised by these numbers. Back last October we were told - and we reported - that one-third of the fiscal stimulus and bank lending never went into the real economy. There are likely to be more hidden black holes. One consequence is that credit is tight, with receivables mounting across a wide swath of manufacturing.

Markets will sense some of these uncertainties. In line with falling global equity markets, which should start very soon, the Shanghai and other Chinese stock markets are likely to fall sharply by year-end. This will take the stuffing out of consumers' willingness to buy large-ticket items like cars and appliances. Already, so we hear, inventories of these items are growing within the distribution systems, with production levels likely to fall over coming months.

Many companies believe that the weakness now being seen is seasonal. But others, whose opinions we respect, believe that weakness will be seen at least until year-end. Prices of raw materials, semi-fabricated products, and finished goods are likely to start falling very soon. Instead of accumulating inventory, stocks within the entire manufacturing and distribution systems will be slashed, repeating to a lesser degree what occurred in the second half of 2008. Construction activity will continue to slow, notwithstanding the continued high rate of completions, consumer spending will slow also, exports will be weak in the fourth quarter, and growth of fixed-asset investment will be lower. By year-end, the psychology of businessmen and consumers will have shifted from optimism towards pessimism in line with movements in the Shanghai stock market. Real business activity will be pretty flat in the fourth quarter. The latest PMIs from the Government's Logistical Office and from the HSBC both indicate a slowing economy. The former is geared more to the SOEs and the latter to the private sector. The HSBC sub-index of new orders fell from 49.7 in June to 47.9 in July.

In summary, we doubt there will be any easing of policy until average house prices fall into the 10-20% range. China is transiting into a very difficult period as focus shifts towards sustainable domestic growth and away from short-term measures to defend the 8% GDP mantra. This transition is occurring when the existing leadership is preparing to give way to the new set in 2012, when social stability could be threatened if there are policy mistakes, when the rest of the world is starting to stand up to China's increasing assertiveness, and when foreign companies are questioning their future in China. China will muddle through, but it won't be an easy ride.

Monday, August 9, 2010

Walter Schloss on Value Investing

Value investing legend Walter Schloss on Value Investing. Click the link below:
"Look for companies with no debt. I hate to lose money so I always keep that in mind. Look for companies trading at new lows. Management owns stock. The company has a history about it."

Link to Walter Schloss Video

Saturday, August 7, 2010

The dragon in Africa: An overview of China's presence on the continent

China, an emerging global superpower which will likely become the world's biggest economy within fifteen years, has planted itself deeply into the vast continent of Africa -- a land of huge untapped natural resources and incredible growth potential.

It would seem to be an ideal marriage -- China possesses immense intellectual capital and an inexhaustible appetite for commodities to keep its economic engines running, while much of Africa remains poor and in dire need of external assistance.

“Africa has an abundance of resources and is regarded by many as a frontier market that has strong growth prospects,” said Avior Research (Pty) Ltd., an equity research firm based in Johannesburg, South Africa.

“China is well aware of their need for resources as their own economy grows and, therefore, it is in China’s interest to gain a strong foothold on the African continent if it wants have access to those resources. China’s biggest investments into Africa have been in infrastructure, mining and banks.”

The two-way trade between China and Africa is expected to exceed $100-billion this year -- but that is only a pittance of what the future holds.
China's interests in Africa is nothing new, of course, but only in the past two decades have these giant entities established a firm and burgeoning economic cooperative.

Africa is the source of at least one-third of the world’s commodities, Avior Research estimates, and from the perspective that China needs raw materials “it is understandable that they are determined to build roads, ports, and railroads all over Africa.”

It could be argued that China moved into Africa only after the U.S. and Russia began to scale back their presence on the continent after decades of using it as a 'Cold War' chessboard.

Avior Research explains that as an emerging economy, China is arguably ideologically more aligned to Africa, than what the U.S. or Russia currently is.
“Much of the US/Russian interests arose out of the Cold War crisis between these countries,” Avior stated. “However, once hostilities ceased, a lot of the U.S and Russia’s political drive to economically re-colonize Africa lost momentum.”

In its recent approach to Africa, China could not be more different from the West, Avior Research added.
“It has focused on trade and commercially justified investment, rather than aid grants and heavily subsidized loans. It has declined to tell African governments how they should run their countries, or to make its investments contingent on government reform. China has moved quickly and decisively, especially in comparison to many Western aid establishments.”

In October 2000, Beijing created the Forum on China-Africa Cooperation, which regularly holds summits between Chinese leaders and various African rulers to discuss and formalize deeper relations. China has become one of the continent's leading investors and creditors.

From constructing a housing project in Algeria, to running a huge mining and infrastructure complex in Guinea, to an iron ore project in Liberia, to a massive dam enterprise in Ghana, to a highway construction endeavor in Rwanda, China has its fingerprints all over Africa. Indeed, China has established joint committees in at least 43 African nations to discuss and deepen economic and trade relations.

Of course, China's incursions into Africa has drawn much criticism, particularly from the West which fears that China is simply using Africa to feed her own economy at the expense of indigent Africans (which, of course, was the same charge leveled at the European colonialists for centuries).

Chinese officials have also come under attack for their lack of transparency and accountability regarding its numerous activities in Africa and its apparent unwillingness to reduce political corruption on the continent.

In response to such criticism, Fu Ziying, the senior trade official in charge of China's Africa portfolio, was recently quoted as saying: "China's presence in Africa is becoming more and more market-driven, the actors operating there are diverse, there are many models, and the areas they are in are broad.

The Chinese government is more and more aware that as the economic and trade cooperation between China and Africa evolves, there need to be some laws and protections in place."

In fact, China herself developed and modernized its own economy back in the 1970s and 1980s by talking loans from wealthier powers (in this case, Japan, among others) in exchange for mineral resources and oil. Within a few decades, China became an economic heavyweight and correspondingly became a net importer of commodities, rather than an exporter.

It would appear that the Chinese are now doing something similar with resource-backed lending in Africa (with China now as the dominant benefactor).

In "The Dragon's Gift: The Real Story of China in Africa" a book by Deborah Brautigam, a professor at American University and an expert on China-Africa relations, she points out that while the Chinese presence in Africa is largely benevolent, there are many problems associated with this complex relationship. For one thing, working conditions in many China-funded projects in Africa are very poor; and the Chinese do not seem to view the destruction of the ecosystem and environment with much concern.

However, she also indicates that China has made tremendous infrastructure investments in countries like Rwanda, Kenya and Senegal, which lack significant commodities -- thereby refuting the notion that China seeks only to 'exploit' Africa.

Moreover, China's financial investments remains far below the capital that flows to the continent from Western sources.

Brautigam estimates that in 2007, Chinese investment in Africa totaled about $1.4 billion, far smaller than the outlays by the U.S., European Union and World Bank of $7.6 billion, $5.4 billion, and $6.9 billion, respectively, for that year.

Nonetheless, China will surely deepen its involvement in Africa in the years to come. Only time will tell how much the Africans benefit from this relationship.