The Ingham Analytics Weekly Letter on Sunday - 23 August 2020

Sunday, 23 August 2020

We apologise that the Ingham Analytics Weekly is only being emailed to you today, Monday. Technical problems within our electronic distribution system over the weekend prevented it from being able to load and be sent out on Sunday. Our IT people rectified it this afternoon. 

Welcome to another Ingham Analytics weekly research summary, highlighting pertinent local and international financial newsflow, recent notes that we have published, and what has been among some of the most read notes in the past few weeks or months.

Among the many dreadful JSE announcements this week Sasol for us tops the pops. And the sad thing is you can't throw the COVID-19 sink at it for blame.

Sure, there was some demand destruction effect and, yes, the oil price was weaker, but by a modest 17% in rand per barrel terms. But the USD price of oil was still higher than in 2017 by 3% and the rand was 15% weaker than in 2017 and 22% weaker than in 2018.

Aspects such as higher depreciation charged to the P&L because of Lake Charles we'd already factored in and took account of it anyway in cash flow. The other ups and downs to earnings are the stuff of business - you win some, lose some, but you've got to manage them.

This poor result is the culmination of a series of missteps over several years and a "leadership" team asleep at the wheel, clearly not practicing what they piously preach. The 2019 Sasol annual report is chock full of touchy-feely guff - the word "sustainability" appears 108 times, "sustainable" appears 62 times, and "governance" 126 times (we kid you not).

Shareholder wealth destruction is the most painful. In market capitalisation loss Sasol matches Steinhoff in rand.

Shareholder equity as of 30 June is 43% less in US dollar than the year before and that probably won't be the end of it.

The best that could happen is that it gets taken over by some foreign oil major (please China National Petroleum, Total, Aramco, Rosneft, anyone) - heaven forbid it gets nationalised like an SAA; state bureaucrats could hardly do a worse job than the incumbents.

On Tuesday we said that the Sasol annual results presentation seemed as though it came from a parallel universe to the one long-suffering shareholders live in. We pointed also to the equivocation on a likely rights issue, meaning we're going to have wait months before we get clarity. Dividends will be a long wait too - months ago in notes we said a two years cessation at the minimum, it now looks like five years at the earliest, which is an opportunity loss of around R70 per share. A question of going concern is raised. To us, Sasol has become uninvestable. You're far better off with ExxonMobil if you want an oil company share to own.

We mentioned in the previous Weekly that Australia has made its own luck in mining, riding a buoyant price for iron ore and gold, benefiting from mining policy coherency and good political governance.

Like New Zealand it also does a mighty fine job in agriculture (or rather agri-business), adding value and growing the sector across several fronts - which goes to show you can be a rich country on a per capita basis whilst still exploiting "commodities" for your terms of trade and foreign exchange earnings. Australian wine exports by value are three times that of South Africa and the biggest market is China with high-value wines typically preferred at an average price of AUD9 per litre.

What is striking is how much Australia has climbed in gold rankings - now the number three producer according to the World Gold Council and close to joint-equal with the Russian Federation.

Australia now produces 325 tonnes a year (Russia 329 tonnes) with China at 383 tonnes.

South Africa meantime continues its descent to barely in the top ten, producing 118 tonnes last year - 17% less than Ghana. AngloGold Ashanti has decided to completely exit South African mining and transfer remaining local assets to Harmony Gold.

It's taken less than twenty years for South Africa to fall from the world's top gold producer and since 1970 the fall in production has been close to 90% whilst since 2000 it has halved compared to a 26% rise in Australia.

Gold production - tonnes per year.

Commodities is a sunrise industry for Australia and a sunset industry for South Africa, including mining and agriculture. This is a consequence of choice.

South Africa has the second largest reserves of gold in the world after Australia, more than Russia, and three times as much as China. Geological constraints aren't the issue - if they were Western Deep Levels would never have existed (4 km at its deepest point and a technological marvel if you've ever had the opportunity to visit the mine and go underground).

South Africa was once the unassailable superpower in mining, a role that Australia has long since taken over.

The foreign exchange markets tell a story. If the rand had tracked in line with the Australian dollar it would be around R14/USD today, not R17/USD.

The chart below shows the Australian dollar in purple and the rand in blue. Both are based to 100 against the USD at the start of the year. The Australian dollar at one point dropped to AUD1.80/USD as COVID-19 panic took hold in March but has since strengthened to AUD1.40/USD and broadly back to where it started the year. The rand meantime has lost a quarter of its value and trades at over ZAR12/AUD versus around ZAR10/AUD at the start of the year.


ZAR/USD exchange age rate.

In mining investment, this is why we like BHP or Fortescue in iron ore whilst in gold on the Australian Stock Exchange you may wish to consider Alacer Gold, Aurelia Metals, Bellevue Gold, Evolution Mining (Galaxy Resources if you like a play on lithium), Gold Road Resources, Newcrest Mining, Northern Star Resources, Saracen Mineral, Regis Resources, and others. Many of these have chunky market values too - Newcrest has a AUD27bn market cap, that's five times bigger than Harmony Gold on the JSE.

Gold (yellow) and iron ore (grey) based to 100 at the start of January 2020.


We issued a strategy piece this week entitled "Stimulus surge takes the sting out of COVID-19" and referenced Moody's who pointed out that COVID-19 is driving business activity in America through both policy actions and behaviour. US monetary and fiscal stimulus is exploding. The M2 measure of money supply expanded by 48% on an annualised basis in Q2. Anthony Fauci has advocated simple but effective things to combat COVID-19 and that if people don't take heed then we shouldn't be surprised if the business takes another hit. There could still be a sting in the tail. We also used the analogy of the bifurcation between the Nasdaq Composite (Tech) and the Russell 2000 index (small-cap US companies), which have an oblique analogy for these warnings.

Watch out for Andrew Kinsey's latest note where he analyses the Federal Reserve's latest minutes and the implications of that for asset prices in the US and around the world. There is a good reason the note is entitled "Fed fortune cookie follies."

Thank you all for visiting us.

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