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    Seed Weekly - Kumba - Nerves of Steel Required

    Kumba Iron Ore Ltd is the only pure play iron ore company listed on the JSE, and it operates across the entire value chain including exploration, extraction, beneficiation, marketing, sales and shipping of iron ore.


    Kumba can trace its roots back to the parastatal steel company Iscor, which established the Thabazimbi mine in 1932 and the Sishen mine in 1954. The Sishen-Saldanha rail link, developed by government in 1976, enabled the easy transportation of iron ore to the Saldanha port for export.

    Following Iscor’s privatisation in 1989, it was unbundled into Iscor and Kumba Resources. Kumba was listed on the JSE in November 2006 as the result of the further unbundling of Kumba Resources’ iron ore assets.


    The Company operates three mines – Sishen and Kolomela in the Northern Cape, and Thabazimbi mine in the Limpopo Province.
    Sishen is the flagship operation, has a 19-year life of mine and at 14km long is one of the largest open pit mines in the world. Kolomela mine, although the newest mine, is going from strength to strength in terms of production and has a 25-year life of mine.

    Thabazimbi, in operation since 1932, is no longer cost-efficient, with difficult mining conditions increasing safety risks. As a result, Kumba has initiated the process of closing the mine down completely.

    Latest Financial Results

    Kumba recently released its results for the six months ended 30 June 2015, and it is clear that the company is under a lot of pressure due to the falling iron ore price.

    Revenue fell by 23% to R 20.5bn, resulting in a drop of 53% in operating profit and a substantial 61% decrease in Headline Earnings Per Share. Volatile trading conditions and the need to maintain some financial flexibility resulted in the board not declaring an interim dividend.

    On the positive side, production decreased by only 1% to 22.6Mt, export sales were up 18% to record levels, and controllable costs were brought down by 16%.

    The graph below illustrates the drivers behind Kumba’s change in revenue over the reporting period:

    The iron ore export price dropped dramatically, down 41% from $104/t in 1H14 to $61/t in 1H15, resulting in an R11bn decrease in revenue. Shipping revenue reduced by around R 500m to R 1.6bn.

    Offsetting these negative effects were higher sales volumes, resulting in a net increase of R3.9bn, and a weaker ZAR/USD exchange rate.

    Outlook and Fundamentals

    The company is in the process of reconfiguring its operations in light of the very challenging market environment. It will attempt to bring down its cash breakeven price from $63/tonne to $45/tonne by reducing overhead costs, reinforcing capital discipline and maintaining its focus on product quality.

    The difficult mining conditions at Thabazimbi was worsened by a recent slope failure, and as a result the mine has reached the end of its economic life and will now be closed down.

    With demand from China ever slowing and competitors in Australia and Brazil increasing supply, the iron ore price is expected to remain under pressure in the foreseeable future. This leaves only one, very challenging, option – increase production while reducing marginal costs and waste volumes.

    The share has collapsed from over R600 to just over R100. This has meant that despite the collapse in earnings the historical PE has declined to just over 5 times, which appears very cheap compared to the JSE’s 17.9. The dividend yield, which has peaked at over 20% early in July, has dropped to 7.4% with no interim dividend declared.

    Kumba is currently held in the Seed Equity Fund, with the high Dividend Yield, Earnings Yield and Cashflow/Price ratio earning it a place in the Value portfolio.

    Kind regards,

    Cor van Deventer

    Tel 0219144966
    Fax 0219144912
    Email info@seedinvestments.co.za

    Seed is hiring: Click through to our LinkedIn profiles to see vacancies at Seed Investment Consultants and Seed Analytics


    Permalink2015-07-28, 12:04:09, by Mike Email , Leave a comment

    Seed Weekly - Investment Greats - Peter Lynch

    Peter Lynch was born in 1944 in the USA, just before the end of the Second World War. He is most well-known for his management roles and especially the fund management role at Fidelity Investments Inc.

    His father died when he was seven so at the age of 11 he got his first job at caddying golf to help his mother to pay the bills. This eventually gained him a contact to an internship at Fidelity after graduating from college.

    After serving two years in the military he went on to finish his MBA studies in 1968 at the University of Pennsylvania. He returned to work for Fidelity Investments as an investment analyst, eventually working himself up to the firm's director of research. Thereafter Lynch was named manager of the (then little known) “Fidelity Magellan Fund” in 1977 which he continued to manage until his retirement in 1990. During his management tenure, the fund's assets grew from $20 million to $14 billion while he outperformed the S&P 500 Index benchmark in 11 of those 13 years, achieving an annual average return of 29% - making it one of the best performing mutual funds in the world.

    His most famous investment principle is simply, "Invest in what you know". He had a chameleon-like investment style in that he adapted to whatever investment style worked at the time. He worked around the clock, talking with company executives, other investment managers, industry experts and analysts. Always keeping an eye out for opportunities, he found many investment opportunities when not in his office, during everyday life while out with his family, driving around or making a purchase at the mall. "If you stay half-alert, you can pick the spectacular performers right from your place of business or out of the neighborhood shopping mall, and long before Wall Street discovers them."

    He dedicated himself to a high level of due diligence and company research. "Investing without research is like playing stud poker and never looking at the cards." He disregarded market noise and concentrated on a company's fundamentals rather, using a bottom-up approach. "Go for a business that any idiot can run – because sooner or later, any idiot is probably going to run it." He believed it futile to predict the economy and interest rates. "If you spend more than 13 minutes analyzing economic and market forecasts, you've wasted 10 minutes."

    He avoided the “long shots” rather investing for the long run and paid little attention to short-term market fluctuations. "Absent a lot of surprises, stocks are relatively predictable over twenty years. As to whether they're going to be higher or lower in two to three years, you might as well flip a coin to decide."

    Over the course of his life he is widely written and quoted. He’s known for coining the phrase "ten bagger" which refers to an investment which is worth ten times its original purchase price.

    Perhaps his most famous book you might find on any investor’s bookshelf is "One up on Wall Street" (1989). This book as well as “Beating the Street" (1993) and “Learn to earn” (1996) are widely considered to be mandatory reading for any investor.

    Following retirement, he continues to work part-time as vice chairman of Fidelity Management & Research Co., spending most of his time mentoring young analysts. He has also been an active participant in a variety of philanthropic endeavors (which he sees as social investment).

    Keep well,

    Lourens Rabé

    Investopedia, Bloomberg, Wikipedia

    Tel 0219144966
    Fax 0219144912
    E-mail info@seedinvestments.co.za

    Seed is hiring: Click through to our LinkedIn profiles to see vacancies at Seed Investment Consultants and Seed Analytics


    Permalink2015-07-21, 11:06:23, by Mike Email , Leave a comment

    Seed Weekly - The Seed Flexible Fund

    We recently celebrated the Seed Flexible Fund’s five year track record and this week I will be shedding some light on its ins and outs. The fund is a multi-managed unit trust that targets a return of 5% pa after inflation over rolling 5 year periods. The Fund sits in the ASISA South Africa Multi Asset High Equity category alongside most balanced unit trusts.

    Process and Asset Allocation

      The investment objective is to provide investors with long term capital growth over a full investment period (5 years). Third party specialist managers are appointed to manage segregate mandates, including strategies that are not otherwise available to retail investors. The Fund is managed as a Regulation 28 compliant Fund and is suitable for investors in retirement products. The net equity weighting (including international equity) will never exceed 75% of the total market value of the fund. The Fund’s asset allocation is determined using Seed’s proprietary developed Tactical Asset Allocation (TAA) process, where those asset classes that offer the best risk/return prospects are over weighted versus a Strategic Asset Allocation (SAA) and vice versa. We do not take an “all or nothing approach” and therefore expect more consistent risk adjusted returns than strategies that aren’t always diversified across asset classes. Below is a graph depicting our current weights (as at 30 June 2015) in each of the asset classes (the blue bars) vs our historic highs and lows (green and red lines.)
      With local equity being on the expensive side, it makes sense that our allocation here is close to the historic minimum. On the local property side we are overweight (vs the benchmark) while being underweight local bonds and cash. We are almost fully invested in offshore (including Africa) assets. Fund Metrics

    Below is a risk reward plot showing the Fund vs its peers and some larger funds in the range. What is notable is how the Fund differs to its peers. It is clear that for similar returns (the y-axis), investors in the Seed Flexible Fund have experienced less risk. Some other advantages, which has been extensively covered in previous articles, includes our size (being relatively small (R792m) vs many peers (10 funds in excess of R10bn, with the largest one over R100bn)) as well as the fact that we make use of a multi-manager process.

    Source: Morningstar Direct

    The Fund’s performance has been excellent in the recent past (3 and 1 year) mainly due to equities and property generating returns well in excess of their long term averages. These asset classes comprise 70% of the Fund’s allocation and therefore have had a large impact on performance.

    While past performance is no indication of future returns, we pride ourselves in taking utmost care by utilising qualitative and quantitative research, combined with investment experience, to make prudent investment decisions.

    Kind regards,

    Renier Hugo

    Tel 021 914 4966
    Fax 021 914 4912
    Email info@seedinvestments.co.za

    Seed is hiring: Click through to our LinkedIn profiles to see vacancies at Seed Investment Consultants and Seed Analytics


    Permalink2015-07-14, 11:45:34, by Mike Email , Leave a comment

    Seed Weekly - Local vs Global

    It’s an age old question, “Should I invest locally, or abroad?"

    While this appears to be a fairly straightforward question, it is one that can be attacked from various angles. As a general case, Seed would typically have at least a small allocation to both, because the diversification benefits obtained by investing across geographies greatly enhances an investor’s expected risk adjusted returns. What we continuously grapple with is the relative weighting to each of these geographies (bearing in mind that ‘global’ in itself is made up of a multitude of regions) when considering an investor’s specific requirements.

    Let’s start with the local market. Over the course of the past few years we have often written about the composition of the local market and how it is no longer just exposed to the local economy (it now has greater exposure to foreign economies). It has changed dramatically over the years. Everyone knows that South Africa relies less on resources now than it did in the past, but the chart below taken from BCA’s latest Quarterly Report was quite eye opening.

    In the space of 7 short years the composition of the local market (using the MSCI index – which is comprised of only those companies with a primary listing in South Africa, i.e. excluding British American Tobacco, SABMiller, Glencore, Richemont, BHPBilliton, Anglo American, etc) has changed from being dominated by materials (primarily resource companies) to one that is dominated by consumer discretionary companies (Naspers, Steinhoff, etc).

    When looking at the composition of the more commonly referenced ALSI in the chart below – a similar trend can be seen. As a result, a lot of historical analysis on the local ‘market’ has to be discounted to a certain extent.

    A conclusion from these charts is that the South African market is no longer a good proxy for South African company earnings. Also, the broad composition of any index can and does often change quite dramatically over time. While resources were once of major importance for any local investor, they are now less important than consumer services, financials, and consumer goods! Equally, indices around the world are often not representative of the country’s underlying economy. Investors should therefore be wary of blindly investing into ‘market’ indices.

    Another important determinant of where one should invest is valuations. In this regard BCA also look at various valuation measures. The chart below shows how global markets are currently approaching expensive territory while local markets, despite the recent correction, are also still very expensive when applying Seed’s various valuation measures.

    Again, the definition of ‘global equity’ is very broad and will incorporate regions that are more expensive and cheaper than the average shown above. With global equities closer to being ‘expensive’ than ‘fair’ or ‘inexpensive’ it is fair enough to ask why our Funds are typically overweight global equity. The short answer (backed up by other, independent, research) is that most other assets are also expensive, and that equities at least offer the patient investor an opportunity to participate in a growing income stream.

    Markets have evolved to such an extent that investors can no longer just ‘look at the box’ when making investments. At the bear minimum they need to ‘look inside the box’ to ensure that they are, in fact, exposing themselves to their desired risk drivers. Professional managers allocate significant human resources to fully understand these dynamics, and then construct portfolios that blend and diversify the various risks on offer to generate superior risk adjusted returns.

    Take care,

    Mike Browne

    Tel 021 914 4966
    Fax 021 914 4912
    Email info@seedinvestments.co.za

    Seed is hiring: Click through to our LinkedIn page to see available vacancies


    Permalink2015-07-07, 10:51:12, by Mike Email , Leave a comment