Sishen Slippen

Sishen Slippen

“The biggest news is that they have suspended their interim dividend, which is terrible news for people who owned them for their dividend yield and for Anglo who used Kumba as a cash cow. The group’s cash break even has dropped from $63/tonne to $45/tonne, the current iron ore price is around $50/tonne. “

To market to market to buy a fat pig. What?!? Surely not, I had a double take at the gold index level after market, down nine and a half percent on the day. Oh dear. It is all happening rather quickly here for the gold price, unravelling in a hurry. What is gold useful for? Since humans first learnt to smelt lead and tin (softer metals) and then later copper (by extension bronze) around 7000 years ago, we have been obsessed with jewellery. It looks great, it shines beautifully and makes people feel special. Of course the uses go far beyond jewellery, for these metals above.

We take it for granted the complicated extraction processes that deals with the gold bearing rocks of the 3200 million year old formations beneath the surface of Jozi. Or let us just say that used to, whilst we are still a pretty sizeable gold producer (South Africa), about the same size as powerhouse Peru, 150 metric tons a year is the current run rate. China produces three times that, and have held the top spot for a stunning 8 years in a row! Australia at 270 metric tons possibly have little chance in the short term of catching the Chinese, one does not necessarily associate China with gold production, right? Russia are in third spot at 245 metric tons, the US with 211 metric tons (according to this article -> 10 Top Gold-producing Countries) are ahead of Canada in fifth place with 160 metric tons.

Below ourselves and Peru is the well known country of Uzbekistan (come on, point it out on an unmarked map of the world!), with a little over 100 metric tons. So it is going to take a serious fall from grace from the local producers to lose the 5/6 spot currently. In 1983 we produced roughly two-thirds of all gold. Now it is around 6 percent. It is twofold, the decline, the emergence of other producers in a huge way, there is still a lot of murky data about Chinese gold mining companies and deposits. Whilst China accounts for around 13.8 million ounces of production globally, the biggest single mine produces less than 600 thousand ounces per annum, the Zijinshan Gold & Copper Mine. 2100 employees mine at relatively shallow depths in this open pit mine. The gold mining industry in China is very fragmented and perhaps this is good for them, I am not too sure. It does probably signal that deposits are not that rich, I have very little knowledge in this regard.

Talking gold holdings, the US have 8133 tonnes of gold reserves. Germany is in second place at 3384 tonnes. South Africa is in 29th place, our reserves are 125.2 tonnes. I am talking about the ability of certain governments to acquire the gold from the producers there, to use as reserves (for historic reasons) and not the gold in the ground. For that measure we come second, to Australia. Noooooo, not again! This graph is from Statista, here is the link: World mine reserves of gold as of 2014, by country (in metric tons).

Interestingly, digging through the sources I came to this page: Global Gold Mine and Deposit Rankings 2013. This page had a US mine, Pebble Deposit, over 300km southwest of the capital of Alaska, Anchorage as the one with the largest reserves, grades are terrible however, the environment is not a fun one to work in. According to that deposit ranking, South Deep, owned by GoldFields is in fourth place, second by production to Grasberg in Indonesia. Grasberg is owned by Freeport-McMoRan and if I am not mistaken is near the end of its life as a mine. With regards to great grades, apparently Tau Tona has the best grades. There is lots of data to suggest to me that I am wrong on the grades, or at least this publication is wrong.

Anyhows, our only interest here at Vestact is not the listed businesses, which we have no investments in, not the gold price, which we have no investments in, rather the country that we reside in, the companies that produce precious (and bulk) commodities. If we continue to see hard falls in commodity prices we will definitely see mine closures, whether or not there is the political will, that is another question entirely. You can have amazing ore bodies, with lower commodity prices and higher costs (moving higher still), they become unprofitable to mine. In the case of the gold miners, being smaller by global standards means inevitably that mines will have to close. That is all part of the cycle, whether or not the powers that be will accept this remains to be seen. We continue to avoid all single commodity stocks. Metal prices seem to have stabilised and as such we should perhaps see some buying here today.

Yet, even with the dire moves in the gold prices, the index yesterday reflected what you know already, South African equity markets are no longer dominated like they were thirty odd years ago by gold miners. The market locally gained half a percent as industrials led the charge. Times have changed, that is good for all of us that there is choice and diversity. This morning there is a yet another reminder of how single commodity stocks can get thrashed, more on Kumba Iron Ore below. No interim dividend, what does this mean for Anglo American, the parent company? We will see today, I cannot imagine good things however, I suspect a little blood letting.

Kumba released their Interim Results For The Six Months Ended 30 June 2015 this morning. It does not make for pretty reading. The biggest news is that they have suspended their interim dividend, which is terrible news for people who owned them for their dividend yield and for Anglo who used Kumba as a cash cow. The group’s cash break even has dropped from $63/tonne to $45/tonne, the current iron ore price is around $50/tonne.

Further pain is being felt due to Sishen moving into more unprofitable seams of ore, where their waste to ore ratio is increasing. Waste mined increased by 24% and production decreased by 5%. The share is down 4.5% this morning and I don’t see it recovering in the near term due to supply increasing faster than demand – Iron Ore Supply to Overwhelm Weak China Demand, Goldman Says. This stock highlights how quickly things can change and that not all stocks rise all the time.

Over the seas and far away stocks were looking better until half an hour to go in the session, still ending positive on the session, ever so slightly though. The S&P 500 ended up only 0.08 percent, nothing really to write home about. PayPal listed, unbundling from eBay, I can see quite a few people really liking them at the moment. The eBay price adjusted accordingly, down from 66 Dollars to 28.5 currently. PayPal has a market cap of more than Netflix and trades on a price to revenue of 25 times, it trades on a multiple of 46 times. Remember that there was an Elon Musk involvement here from way back, Peter Thiel and the rest of the board ousted Musk whilst he was in the air on the way to the Sydney Olympics. Nice guys, well done. We forget that at the heart of many businesses, mostly new ones, there is an entrepreneurial streak and individuals pulling strings in all directions. If there is a difference of opinion then that can have a negative impact on the outcome. For older and established businesses, it depends on the culture and brand.

Linkfest, lap it up

Have a look at what rent costs in different parts of the world – This Is What $1,500 A Month In Rent Would Get You In Cities All Around The World. I was surprised to see how expensive China was.

The world is quickly moving away from Coal powers stations, given that they are dirty and away from Nuclear given the huge fall out if something goes wrong! – Half the world already gets more power from renewables than from nuclear. South Africa has huge potential on the renewable energy front.

Starbucks is a brand that is associated with giving back and here is another way they are building on that brand – Starbucks to opening stores in Ferguson, low-income neighbourhoods. The stores will need to be profitable but will probably only just be profitable. They are probably playing the long game, where by investing in the community, the community thrives and that results in Starbucks getting bigger profits. For that to happen they will need many other companies to take the same view and be patient.

Home again, home again, jiggety-jog. This is my sideswipe at the team from Durban. They had to go further south and past the wild coast to take on a lone Aussie surfer at Jeffreys Bay. Sharks take on surfer in backyard, still can’t score. Stephen Saad is chairman of the Sharks rugby right? It says that he had a stint of professional rugby in Ireland, Saad that is. So it is not like he knows nothing about rugby, unlike all the experts that I met on Sunday, who possibly struggled to hold on to the orange peeler (left back in the change-room?) position in the third team at school. Funny that? Pretty much like throw away comments about the stock market made around the coals, I have heard many.

Stocks are about flat this morning. I am reminded that it is summer in the Northern hemisphere when watching the tour de France, the place looks gorgeous. I suppose that is why people in cold countries “enjoy” summer more than we do, there is less of it.

Sent to you by the Vestacters, Sasha, Michael, Byron and Paul.

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