In prison, cigarettes have always been currency. Now the whole country knows what it’s like. From Moneyweb.

If the idea of the cigarette ban is to preserve the health of the nation, it’s not having much of an impact.

Smokers are getting their fix, albeit it three times the usual price. And they’re trading down. Marlboro smokers are finding the much cheaper RG brand quite acceptable. A carton of 200 RG goes for R650 on the black market, but that price is going up as stock becomes harder to source.

When the ban is eventually lifted – either by government fiat or on the instructions of a high court judge – the cigarette market will likely be forever changed. Some of the 11 million smokers in SA may have ditched the habit, but others will have permanently switched brands, which should be good for lower-cost producers such as Gold Leaf, but not so good for higher-end producers such as BAT.

Sars has been snookered

And, as Tax Justice SA has pointed out, the illicit trade which SA Revenue Services (Sars) has worked so arduously to stamp out has resurfaced with a vengeance. This time, it won’t go away so easily, which means a permanent loss of revenue to Sars, which has already lost about R2 billion due to the ban.

The illegal trade, which never went away, now rules the market. The idea of stamping it out, even after the ban is lifted, seems hopelessly unrealistic.

As one senior business leader commented, this is what happens when bureaucrats and ministers run the economy. The ban has blown jumbo-sized holes in SA’s already porous borders. 

Court challenge

Meantime, the Fair-trade Independent Tobacco Association (Fita), representing smaller producers for the main part, says its court challenge against the government ban is likely to be heard two weeks from now.

It’s being brought as an urgent matter, but the hold-up is on government’s side.

It has been ordered by the high court to provide Fita with a record of decision showing how it came to the decision to impose the ban in the first place. This will allow Fita to supplement its affidavit and government will be given a few days to reply to that. 

Read: Tobacco association brings urgent application to lift cigarette ban

Fita chair Sinenhlanhla Mnguni is feeling the burn of 11 million smokers and eight producers on his neck every day: “Whether this ban is lifted by government or not, we have to go through with the case.

“The real issue here is whether government has the power to arbitrarily shut an industry based on no real data.”

Read: Court cases are piling up against government lockdown

DA leader John Steenhuisen told eNCA that the responsible minister Nkosazana Dlamini-Zuma (Cooperative Governance and Traditional Affairs) appears to be on a personal crusade when it comes to the cigarette ban, and is opposed by other ministers in her own cabinet.

It makes little sense, he says, to lift the ban on alcohol sales from  June 1 but not on cigarettes.

The decision to impose the ban has been made for “health reasons”, but there is no basis in law for such a sweeping interpretation of the Disaster Management Act, according to Fita lawyers.

Several lawyers contacted by Moneyweb have argued the government should be on a hiding to nothing on this case.

Simon Rudland, co-owner of Gold Leaf Tobacco, says the company’s Johannesburg factory is able to operate at 30% staffing capacity, but only for export. “There seems to be very little logic or reason behind the decision to ban cigarette sales, and we find it quite mystifying. We are coming up for the second month where we have to meet payroll and we’re unable to operate fully. I don’t know how much longer we can continue with this, and at what point we have to file for business rescue.”

Rudland says the group’s other businesses in Zimbabwe, Malawi, the Democratic Republic of Congo, Zambia and Kenya are all fully able to operate.

“SA is the only country in the world that has imposed a ban in this manner,” he says.

The losses are huge

In support of Fita’s court case, Gold Leaf CEO Ebrahim Adamjee outlined the impact of the cigarette ban on the company: in April and May 2019 it paid R437 million in excise to Sars, and a further R60 million in Vat. The loss to Sars this year for the same two-month period is likely more than R510 million, in addition to a daily loss of profit of R801 000 to the company, threatening the future of 354 workers and their families.

That story is being repeated across the tobacco manufacturing sector. 

Moneyweb has learned that several other groups may bring legal and other challenges to lift the ban, but more importantly to make sure government is never again able to shut down a part of the economy with no apparent reason.

Had the government invoked the State of Emergency Act rather than the National Disaster Management Act, it would have been subjected to far more scrutiny and restrictions than is currently the case. 

If there is any certainty in this, it’s that this period of SA’s history has launched an armada of legal challenges that will roll out for years to come.

If the 2008 collapse is any guide, this economic downturn will expose a wave of corporate shenanigans. From Moneyweb.

One way to gauge investor suspicions that financial managers are going to start cooking the books is to look at how many are insuring their portfolios against this possibility.

InvestSure, which offers insurance against allegations of management deception and misbehaviour, reported a nine-fold increase in product sales in March and April, at the onset of the Covid-19 pandemic.

“This tells us that investors are nervous and they may be expecting a sharp uptick in corporate fraud,” says Shane Curran, CEO at InvestSure.

The company offers insurance against share price losses arising from allegations of corporate financial deception – whether these allegations turn out to be true or not.

The product payout is triggered by allegations of fraud accompanied by a 10% drop in the share price.

Read: You can now insure your equities against management dishonesty

Curran says economic downturns are typically accompanied by an increase in corporate fraud, and points to the 2008 collapse when Lehman Brothers went bankrupt, and Merrill Lynch, AIG, Freddie Mac, Fannie Mae, Wells Fargo and Citi Bank were bailed out by the US government after their share prices collapsed following the subprime mortgage scandal.

US banking group Bear Stearns was acquired by JPMorgan Chase for $10 a share (far below its pre-crisis high of $133.20 a share) and Merrill Lynch was bought by Bank of America, which was the recipient of a $15 billion bailout from the US government.

Rating agencies S&P, Moody’s and Fitch were all fined for their part in the crisis.

This time around, the cracks are already starting to appear, mostly in China.

Smelling the coffee

In April this year, Nasdaq-listed Luckin Coffee, headquartered in China, admitted to fabricating $310 million in sales for the 2019 financial year. This was after an investigation by US-based short seller Muddy Waters alleging irregularities in reported sales figures at the company which was touted as China’s answer to Starbucks. Initially, Luckin denied the accusations, but later came clean, pinning the blame on its chief operating officer.

In a matter of days, Luckin’s market cap had shed $9 billion (or about 90% of its value), nearly equivalent to the entirety of Standard’s Bank’s current value.

A few days later, Muddy Waters was at it again, this time announcing it had taken a substantial short position on China’s online streaming service, iQiyi, claiming the company had fabricated revenue and user numbers.

There was more to come: Chinese tutoring business TAL Education was the next to admit inflating sales figures to big-up the share price, which promptly fell 18% on the New York Stock Exchange.

This had a knock-on effect on other Chinese company valuations, fuelled in part by China’s refusal to submit to US auditing standards – something the US has been pushing for.

Local isn’t always lekker

South African companies accused of cooking the books in recent times include Tongaat-Hulett, Steinhoff and EOH.

Read: Damning Tongaat Hulett forensic report fingers ex-executives, including Peter Staude

The last events to trigger a payout by InvestSure were in May 2019 when Tongaat warned it would have to restate its 2018 financial results, and in July 2019 when EOH announced it had found suspicious transactions worth R1.2 billion.

InvestSure also paid out on Aspen Pharmacare in August last year when it was accused of being party to anti-competitive agreements in the UK – though this was not related to financial misstatement of results.

It’s important to note that the mere allegation of corporate deception does not mean it’s true.

It often takes months or years to get to the bottom of these allegations, though InvestSure will pay out provided two conditions are met: the allegations of deception are made, and the share price drops 10% within two days of the news being made public.

Read: Stringfellow charged with fraud

Curran says investors are loading up on insurance against possible fraud at virtually all the Top 100 shares, including the major banks.

“Warren Buffet famously said ‘When the tide goes out, you can see who’s swimming naked’. This economic crash will no doubt make it much harder to hide financial fraud.”

The International Ethics Standards Board for Accountants recently issued an ethics guide to accountants, detailing their professional obligations during the time of Covid-19.

The body says accountants will have to guard themselves against pressures to submit false submissions for government Covid-19 assistance, to falsify financial statements and make false declarations to the taxman.

It warns accountants not to side-step the five fundamental ethical principles of the profession: integrity, objectivity, professional competence and due care, confidentiality and professional behaviour.

Curran says InvestSure, which is backed from a risk perspective by Compass Insurance Company, will soon offer its products to the international market. For the time being, insurance is available on SA-listed equities only.

History of claim payouts

Code	Share name	News date	Event	Price at discovery	Trigger price
APN	Aspen Pharmacare	14/08/2019	UK competition authorities investigated alleged anti-competitive agreements	R74	R67
EOH	EOH Holdings	15/07/2019	EOH says corruption probe found ‘suspicious transactions’ worth R1.2bn	R22	R19
TON	Tongaat Hulett	31/05/2019	Tongaat warns of potential hit to 2018 results following a review of its accounting practices	R18	R16
TON	Tongaat Hulett	25/04/2019	Tongaat to restate prior results after accounting review	R30	R27
TON	Tongaat Hulett	24/04/2019	Certain accounting practices under investigation at Tongaat	R30	R27
EOH	EOH Holdings	29/01/2019	EOH shares tumble following Eskom misconduct statement	R32	R29
NRP	Nepi Rockcastle plc*	28/11/2018	Nepi Rockcastle shares slump on Viceroy report over profits	R115	R103
FFB	Fortress Income Fund*	28/11/2018	Nepi Rockcastle shares slump on Viceroy report over profits	R14	R13
MTN	MTN Group	5/10/2018	Nigeria seeks to charge MTN 15% interest on $8bn claim	R89	R80
MTN	MTN Group	4/9/2018	MTN slides on Nigeria’s $2bn claim for unpaid taxes	R86	R78

Source: InvestSure

*Fortress and Nepi Rockcastle are under the Resilient stable.

Suddenly ‘capital efficiency’ doesn’t seem so important. From Moneyweb.

For decades, business schools did a brisk trade promoting courses on capital efficiency. This meant striking the right balance between equity and debt at the lowest possible cost of overall capital.

But suddenly this no longer seems so important. The mantra going forward is liquidity and raw survival, even if this comes at a cost.

Those without access to cash will be the first to stumble.

Over the last two months, virtual boardrooms around the country have spoken about little else. Whether to borrow now and face the day of reckoning later, or tough it out for another few weeks. There is no easy answer.

Read:
Covid-19: JSE to grant payment relief to listed companies
Edcon to file for voluntary business rescue

Among the companies filing for business rescue in recent months are Comair, South African Airways, Edcon and Phumelela Gaming. There will surely be more. Business rescue and liquidation teams can look forwards to years of prosperity as the economic downturn unfolds.

A quick analysis of the cash holdings of the 350-odd companies on the JSE shows a combined cash pile of more than R1 trillion at the end of 2019, a near 70% increase on the figure in 2015.

Corporate cash pile

Research in 2017 by the University of Johannesburg’s Centre for Competition, Regulation and Economic Development put the corporate cash pile at R1.4 trillion, not counting a further R1.6 trillion in reserves from JSE-based multinationals with little actual presence in SA.

Reasons given for the hoarding of cash were shrinking domestic demand, the Zuma legacy and a lack of suitable investment opportunities.

That cash pile, fat as it is, will be winnowed out over the coming months as companies stretch their balance sheets as far as they can to survive the collapse of the economy, with hopefully enough gas in the tank to catch the expected recovery later this year.

Transaction Capital CEO David Hurwitz, presenting the group’s mid-term results to March 2020 last week, offered a taste of what’s to come for corporate SA. The group’s headline earnings were up 19% to R402 million for the six-month period – an achievement that is the envy of the JSE, but it’s clear the real pain of the economic downturn will come in the second half of the year. The group made a non-cash R126 million impairment provision on its taxi loan book, and wrote down its non-performing loan book by R65 million.

Read: How Transaction Capital hit the jackpot with minibus taxis

To ensure it has enough cash to tide it over the coming months, it has undeployed capital of R800 million, of which R300 million is immediately available. Taxi drive time is down by about half during the lockdown, and that impacts the ability of taxi owners to service their loans. On the plus side, taxis will be among the first to benefit from an easing in the lockdown. The loan collections business has seen a drop in promises to pay, and this may take longer to recover.

“Most businesses go bust because they don’t have enough liquidity,” says Hurwitz. “We have a very conservative capital structure. We have R800 million in excess capital on our balance sheet, with an average cost of funding of 10% to 11%. That’s high, and people said we could reduce this.

“We raised money offshore which, converted into rands, cost 12% to 13% in interest. But we opted for diversity of debt funding, and you have to pay for that, but we consider this worth paying for.”

It also helps to have solid, long-standing relationships with funders, and to negotiate repayment holidays where needed. Companies are going to have to staff up their debt collections departments, and even that’s no guarantee of success.

Nicolaas van Wyk, CEO of the SA Institute of Business Accountants, says the lockdown has made capital efficiency one of the most talked-about topics in corporate boardroom.

Debt risk

“Companies are likely to reconsider their capital structure while carefully evaluating their short-term liquidity. However, postponing repayment of debt to secure liquidity does have risks. Rolling debt forward increases the total amount to be repaid at a future point in time. It may be better to take a hard look at the capital on [the] balance sheet and [seeing] if this is still fit-for-purpose, while exploring other sources of liquidity such as salary cuts, unpaid leave and temporary unemployment measures, particularly for companies that do not have cash in reserve. Debt-to-equity and total debt-to-total assets is likely to occupy the minds of boards across the country.”

Van Wyk says an early lift of the lockdown will also assist in improving liquidity.

Companies are likely to reduce margins to generate increased revenue and improve liquidity. This may be a preferred option to deferring loan commitments.

The issue of balance sheet efficiency will not go away entirely. Product lines will be simplified and streamlined, and those products yielding marginal returns prior to the lockdown could disappear. Surplus and marginal assets will be up for sale in cases where companies face a debt crunch. Though debt is cheap right now, the quest for sustainability may drive a prolonged period of deleveraging. Debt at any price is considered a risk too foul for many businesses.

“Companies are also unlikely to open at full capacity; their focus will be on past orders and backlogs,” says Van Wyk.

“Customers can expect a lot less choice and longer waiting periods.”

There’s no question that many companies will not open their doors again, Edcon being the most notable example of an already-struggling enterprise euthanised by Covid-19.

‘Build reserves’

But for tens of thousands of small businesses with little in the way of cash reserves, these may be the leanest times in living memory. Lauren du Plooy, a director of digital accounting firm Rae & Associates, says the message she is promoting to her clients is to build cash reserves for the future.

Read: The costly business of trying to get accountants of the right calibre

“Even before the lockdown, we were advising clients to set aside reserves so they could survive two to three months of no income. We did not know at the time that the lockdown was coming, but this is just prudent financial management. Going forward, I think just about every company in SA is going to be thinking this way.”

It may be some time before company shareholders see dividend flows again. The focus now is on surviving the next few months and having enough cash in the bank. It’s all about raw survival.

Students of William Gann say the investing legend predicted a market top in 2019. From Moneyweb.

In 2017 Moneyweb interviewed trader Greek-Cypriot trader Alex Antoniou after he turned $50 000 into nearly $500 000 in a week.

We asked to see evidence, which was supplied. Pretty amazing stuff.

Read: Is this the world’s best trader?

It turns out Antoniou is an avid student of William Gann, the legendary investor who set what may be a world record for growing a trading account.

A legend

In 60 days Gann turned $973 into $30 000, and seemed to have an uncanny knack for predicting market moves based on his study of market cycles.

A year before the 1929 market crash, Gann predicted stocks would peak in September of 1929. He was just a month out in his prediction (the actual crash took place on October 4 of that year).

How was he able to predict with such apparent accuracy the end of a major bull market based on nothing more than a study of charts?

Gann had a fascination with cycles, based on much earlier observations by Greek mathematician Pythagoras, who was able to find relationships between numbers, geometry and music. The 1929 crash was almost 90 years after the previous great crash of 1837. For Gann, 60 and 90 years held special significance, and he predicted that the next great crash would come in 2019 – exactly 90 years after 1929.

This is where Antoniou reenters the picture. Like Gann, he predicted a market top in 2019, and actually told us this back in 2017. In fact, the S&P 500 index topped out in February 2020, when it crashed 34% over the space of the next month, before recovering about 18% off its March lows.

It was much the same story for most of the leading market indices. The German Dax peaked on February 19, 2020 and fell 38% over the next month, before recovering 28% from its March low.

So where does that leave us now?

Antoniou says the market is poised to retest the March lows and will likely spend the rest of the year in the red.

Unlike most traders who believe markets are driven by news, Antoniou says news merely amplifies a cycle already in progress.

Using Pythagorean maths, he plots which direction the market will move on any day and sets up his trades accordingly. He gets it right about 85% of the time, which most traders would concede is an astonishingly successful percentage.

Using principles developed originally by Gann and Pythagoras, he modified this to develop his ‘Theory of Eight’ which is a study in cycles. There are 365 days in the year and 360 degrees in a circle. Overlapping these, he is able to map out cycle peaks and troughs – even to the point of predicting price moves over the course of a single day.

“There is no question that it is possible to predict the market,” he says. “Every investor is trying to do this, only some do it better than others. Some use fundamental analysis to do it. I use cycles. The notion that you cannot predict the market means you are playing a game where you do not know the rules. I have been doing this for 26 years, and I wouldn’t be here now if I did not believe I could predict market moves with high certainty.”

New-found respect

Millions of traders around the world are familiar with William Gann’s Price Squares and Circle theories, and use these to guide their trading decisions. There was a time when most professional fund managers dismissed charting (or technical analysis) as a fool’s escapade, but even they now incorporate this into their analytical toolbox.

Given Gann’s prediction of another market crash in 2019 (90 years earlier), traders appear to have discovered a new-found respect for the man. He is reported to have used his predictive prowess to accurately call every president elected in the US between 1904 and the 1920s, and his 1927 book Tunnel Through the Air, though a work of fiction, foretold of an attack by Japan on the US less than two decades later. In 1929 he predicted the market would top out in April, fall sharply, then rebound until September, followed by what he called the biggest crash in history. He then forecast that the subsequent depression would last until 1932 – all of which came to pass.

It is little wonder he is venerated among so many traders in the 90 years that have passed. Gann went to India and Egypt to study ancient mathematics and astronomy, and out of this developed his Law of Vibration which reportedly enabled him to predict the exact prices at which stocks or commodities would trade in any given time frame.

Antoniou has followed in Gann’s footsteps, and has run a number of tutorials where traders can follow his trades in real time.

“I agree with Gann, who agreed with Pythagoras, that there is rhythm in the markets and a natural law of vibration which can, in fact, allow you to predict market prices with high certainty.”

The idea of predicting where prices will be at the close of trade tomorrow, or next week, raises eyebrows among veteran fund managers, who prefer to rely on exacting studies of relative value. Buy a good company relatively cheap, and there’s a good chance you can sell it some time later at a profit.

Understanding how Gann and Antoniou manage to predict the market with such apparent exactitude appears to be something of a mystic art. Not so, says Antoniou. “It’s about numbers and cycles. There are enough people in the market who understand this and profit from it.

“Nothing mystic about it at all.”

SA’s loss is that part of the world’s gain. From Mineweb.

All around the world, the Covid-19 crisis has forced companies to rethink their supply chains, particularly their potentially fatal over-reliance on China.

This is particularly true of electric car makers in North America, who are on the hunt for local sources of key raw materials that have traditionally come from East Asia.

Read: Carmakers urged to invest in mines to avoid battery metal pinch

Things were already looking up for the Tamarack nickel-copper-cobalt exploration project in the state of Minnesota in the US, but the Covid-19 economic crisis has given it new impetus.

What makes this perhaps even more interesting from a South African point of view is that the project is managed by Toronto Stock Exchange-listed Talon Metals (TLO.TSX), which has deep South African attachments.

The South African connections

Chairman Warren Newfield and CEO Henri van Rooyen are both South African and president Sean Werger is married to a South African.

The Talon team (previously through private investor-operator company Tau Capital Corporation) has a long history in SA and Botswana (see below), but Talon’s sole focus these days is the Tamarack high-grade nickel, copper and cobalt project in Minnesota in the US, which is turning out results which has caused a number of electric car makers to approach the company for discussions about potential business relationships.

“The exploration we’ve done so far indicates the presence of high-grade nickel, copper and cobalt along a 1km stretch of an 18km intrusive complex, and everywhere we’ve poked holes we’ve come up with promising mineralisation,” says Werger. “The next phase of the project is to explore south and north of the already identified intercepts.”

The exploration programme just completed shows nickel grades of 7.1% and copper at 2.98%. Also present is cobalt.

This is where it gets interesting.

The electric car market is expected to explode in the next decade, and with it demand for nickel sulphides, which are used in battery manufacturing. The nickel content in batteries has gone from about 20% to 80% in a decade, and will likely increase from there. Manufacturers are racing to improve the storage capacity of batteries, and hence the distance vehicles can travel before recharging. To do that, they need nickel in the form of nickel sulphates (nickel in powder form), and lots of it.

Many companies are now emphasising the importance of domestic supply chains as a result of the disruptions caused by Covid-19. As for Tamarack, there is only one other comparable nickel mine in the US, the Eagle Mine in Michigan. That will likely be mined out in about 2025, leaving no other US domestic source of nickel other than Tamarack, which is expected to come on stream around the same time.

“There is no doubt that electric cars are the future, and a domestic supply chain would be hugely advantageous for carmakers in the United States.

“We believe Tamarack is crucial to the future of EV battery production outside of China,” says Werger.

“Nickel is traditionally used in the manufacture of stainless steel, and that demand is not going away, but we are looking at potentially using Tamarack nickel to supply the electric car market.”

There will be tug of war over available nickel between stainless steel and electric car producers, undergirded by talk of a looming shortage in the market.

That’s only marginally reflected in the international nickel price, which surged in 2019 when Indonesia placed a ban on exports.

The Covid-19 outbreak deepened the sell-off already in play towards the end of 2019, with global stainless steel production briefly grinding to virtually a halt.

The longer-term outlook is more cheerful.

In a US Senate Committee meeting on Energy and Natural Resources in 2019, MD at Benchmark Mineral Intelligence, Simon Moores, said demand for nickel could increase 19 times if under-construction lithium-ion production facilities come online as planned, according to Nickel Investing News.

The US is dependent for 69% of its nickel from primary and secondary imports, and will be scrambling for any domestic production it can lay its hands on post the Covid outbreak.

Nickel production and consumption – US

Source: US Geological Survey, Mineral Commodity Summaries, January 2020

That leaves Tamarack as virtually the only supplier of note in North America.

Nickel price

Source: ShareMagic

Tesla is far and away the market leader in electric cars, producing 103 000 units in the first quarter of 2020, which was 33% above the same quarter in 2019. Sales will likely take a serious hit in the second quarter of 2020, given that its main production plant has been shut for several weeks due to the coronavirus, but this has barely impacted the share price – down only marginally from its February peak of $901.

Elon Musk this week defied the “fascistic” lockdown by reopening Tesla’s California plant, and defied authorities to arrest him.

Read: Tesla shares rally nearly 60% over seven straight sessions

The Tamarack project was initiated in 2002 by Rio Tinto, with Talon Metals initially coming in as a minority 18.45% shareholder and junior partner. It didn’t quite fit Rio Tinto’s size criteria, so it handed the management of the project over to Talon, which completed the first phase of its exploration just before the Covid-19 lockdown in March.

Talon has an option to earn a 51% interest in Tamarack by March 2022, and a further 9% by 2026 to get to a total 60% interest in the project, based on the fulfilment of certain conditions, including the payment of cash and shares to Rio Tinto, and the completion of a feasibility study.

“With just 1km of a potential 18km intrusive complex explored, the real sizzle is likely to come as exploration kicks into high gear along the remainder of the complex,” says Etienne Dinel, head of geology at Talon.

It is more expensive to produce nickel from laterites (which have high iron and aluminium content) than from high-grade sulphides. New planned production in nickel is largely focused on the higher cost laterites, which is expected to drive up prices in the future. Tamarack projects a lower than industry average cost of production due to the widespread presence of nickel sulphides on the property.

History

Talon Metals’s core team goes back a long way in SA mining, having defined the Platexco platinum deposit in the Bushveld complex before selling in 2000 to Implats for about $200 million (R3.7 billion at today’s exchange rate). Many of the same team members were involved in platinum group metals company AfriOre, which was sold to Lonmin in 2007 for about $355 million (R6.5 billion).

The group was also involved in the exploration of the Mmamabula thermal coal project in Botswana, which was sold in 2012 to the Indian-owned Jindal Group for about $120 million (R2.2 billion). The project was originally conceived to supply power to SA, but has been dogged by logistics and power grid issues, and was sold last year to Maatla Energy for a reported $150 million (R2.77 billion).

In yet another southern African project, Talon Metals merged with Saber Energy in 2010 to develop a coal-bed methane project and shale gas deposits in Botswana, that today is Tlou Energy on the ASX.

Cash to go

Werger says the company has C$2 million in the bank, but will need cash top-ups going forward for the next phase of exploration.

The shares trade on the Canadian stock exchange at about 10c. Like all junior miners with no cash flow (until project exit), Talon appears to have a decent speculative following, with some encouraging longer-term prospects.

These cases won’t go away, even if lockdown is lifted, as government is seen to have over-stepped its powers. From Moneyweb.

Nearly two months into the Covid-19 lockdown and the court cases against government are mounting.

The Democratic Alliance is the latest to drag the government to court, challenging the 8pm to 5am curfew, the restrictions on the times public transport may operate, the ‘exercise window’ between 6am and 9am and restrictions on e-commerce.

Civil society group DearSA claimed a key victory on Thursday when the government eased all restrictions on e-commerce, except for cigarettes and alcohol. This was after the group threatened urgent court action unless government responded by Thursday May 14, 2020 to its request for all forms of online trading to be permitted, and outdoor exercise to be allowed during daylight hours instead of three hours in the morning.

In a statement issued on Thursday, DearSA says this is a major victory for civil society, but that the economic health of the country is deepening as the lockdown prolongs. It added it’s illogical to assume that the restrictions on e-commerce could possible slow the spread of the virus.

“As the lockdown progresses, South Africans are understandably concerned at the impact it is having on their lives and on the economy, and we know this because of the surveys conducted on a regular basis by DearSA,” says Daniel Eloff of attorneys Hurter Spies, which is representing DearSA. “There is growing frustration at the needless harm that is being done to the economy and small businesses by the extension of the lockdown to e-commerce platforms.”

Human rights advocate Mark Oppenheimer, who is advising DearSA, says rather than challenge the entirety of the lockdown, the decision was made to tackle ‘low-hanging fruit’ such as the e-commerce ban. “I’m glad that so may people are joining the fight. I have a feeling that someone will challenge the lockdown on a broader front, but our decision to tackle just a part of it has borne fruit.”

Fair-trade Independent Tobacco Association (Fita) is also challenging the government on the ban on cigarette sales. It also declared a partial victory, after government agreed that the manufacture and sale of cigarettes has always been permitted under current lockdown regulations. However, factories are limited to 30% staffing.

Fita had asked the Joburg High Court for a “declarator” that the export of tobacco products and cigarettes is not prohibited, and that cigarette manufacturing can resume. Tobacco manufacturers had closed their factories in response to contradictory statements snd threats from ministers that now appear to have been without any basis in law.

What Fita also managed to tease out of government is that the National Coronavirus Command Council (NCCC) does not vote on matters and certainly no vote was taken on the ban on cigarette sales specifically.

The next phase of the fight is to get a record of decision from government, along with reasons, for deciding to ban cigarette sales. With this in hand, Fita is expected to challenge the lawfulness of the ban and seeks to have it overturned. The reasons for the ban given by government cite “health reasons” – rather than slowing the spread of virus – which Fita’s legal team has argued has no basis under the Disaster Management Act. If cigarette sales are banned for health reasons, the same rationale could be used to ban the sale of chocolates and fizzy drinks.

Earlier this month trade union Solidarity teamed up with AfriForum to approach the Constitutional Court on an urgent basis to appeal a high court judgment allowing the Department of Tourism to give preference to BEE businesses struggling to survive as a result of the Covid-19 crisis.

Solidarity’s chief executive Dirk Hermann said the awarding help based on race is bizarre. “It is scary that there could be Constitutional grounds in a crisis like this which allows the allocation of emergency funds to take place based on race.”

AfriForum chief executive Kallie Kriel says the organisation decided to approach the Constitutional Court directly, as the small tourism businesses owned by members of minority groups, just like all other small tourism businesses, are in urgent need of assistance. “If the case drags on, countless small white-owned businesses will go under and government will be complicit. Figuratively, it is economic murder of minorities,” according to an AfriForum statement.

The organisation says it wants legal clarity on whether discrimination against whites is permitted, even in times of crisis, and will approach the United Nations’ Committee on the Elimination of Racial Discrimination if its efforts do not bear fruit in the local courts.

Fita, too, says it plans to continue with its case even if the ban on cigarette sales is lifted. “There is a legal principle we need clarified,” says Fita chairperson, Sinenhlanhla Mnguni. “Even if the ban is lifted, we could once again find ourselves in Alert Level 5, and we cannot take that chance where our members’ businesses can be shut down by a minister, based on irrational decision-making or poor data.”

The DA papers before the Pretoria High Court points to the economic cost of the lockdown: between three and seven million jobs could be lost, depending on how long the lockdown lasts; one-third of the resources that were productive in February this year are now lying idle; and the average daily transactions through the payments system is down by half.

The Freedomfront Plus (FF+) party is also taking government to court on an urgent basis “to challenge the validity of the National Disaster Management Act and to request the court to find that the government is abusing the Act, which will mean that the announced state of disaster and the associated regulations are unconstitutional.”

The FF+ says it has become evident that the government is abusing its powers by invoking the National Disaster Management Act instead of the State of Emergency Act, which places limitations on the length of time allowed for a state of emergency, while requiring parliamentary approval and oversight on regulations. It wants the government to disclose the data on which the state of disaster is based and the reasons behind the timelines for the different levels of lockdown were determined.

The original reasons for the lockdown appear to have achieved their primary aims. Why then, does the lockdown still continue, the party wants to know.

This is likely just a taste of what’s to come in the next few weeks as the level of desperation resulting from the lockdown plumbs new depths, along with open defiance of the lockdown (which is already happening as many businesses reopen regardless of the consequences).

Some trade unions are likely to exit this lockdown crippled. From Moneyweb.

Nothing breaks the spirit of the labour movement like retrenchments, and there were enough of those over the last 12 months, even before the Covid-19 outbreak.

This is why union members pay their monthly dues. They expect their union leaders to guard their interests in good and especially bad times. Those leaders are now being tested as never before.

Last week the National Council of Trade Unions (Nactu) said the lockdown was “diabolical” and called for its immediate lifting to arrest the devastation caused to business and employment.

As jobs are lost, so too are union members.

A few months ago, some business leaders may have cheered a weaker labour movement but, oddly enough, on the lockdown they now appear to be of one mind. The calls for lifting the lockdown grow more shrill by the day.

Last month the South African Reserve Bank said the economy could lose 370 000 jobs,  and 1 600 companies, as a result of the lockdown. That’s a rather hopeful view. Business for South Africa says the economy could contract by 16% this year and see four million jobs lost. The only way to avoid this outcome is for a rapid easing of lockdown restrictions.

Read: Kingston calls for faster reopening of SA economy

The longer the lockdown, the more devastating it is for organised labour. “Workers are being furloughed, and many have been retrenched, and this means they are unable to pay their union dues,” says Nactu secretary-general Narius Moloto. “So, in addition to shutting down thousands of businesses, small and large, this lockdown represents the greatest threat to our freedoms since the birth of democracy in SA.

“In one fell swoop, the decades of struggle for workers’ rights have been nullified,” says Moloto.

“It now appears the government has massively overreacted to this virus.

“Like most South Africans, we were initially cautiously supportive of President [Cyril] Ramaphosa’s efforts to contain the spread of the virus, but the costs to the country are now becoming clearer.

“The lockdown now begins to take on the shape of sabotage, and there must be accountability for government ministers who have crashed the economy while still drawing their state salaries, paid for by taxpayers,” says Moloto.

Like many others bearing the brunt of this crisis, he is furious over the lockdown. He says government ministers are completely insulated by their cushy salaries from the travails of ordinary South Africans, many of whom have no food.

Read: Lockdown: Poking the bear?

If there’s one ray of hope in all this, it’s that trade union representatives have now been allowed to resume work – in other words, to represent workers.

But there is scant celebration in this: workers in many sectors have not been paid by their employers. A survey by the National Employers Association of SA (Neasa), representing roughly 10 000 small and medium-sized businesses, shows that only 47% of employers that had applied for Unemployment Insurance Fund (UIF) relief had received funds, and often only partial payments. This scheme was set up by government to ensure employers could pay their workers during lockdown.

Read: Employers ‘angry, frustrated, horrified’ by Ters process

Some trade unions will fare better than others. Those in the mining sector, 50% of whose members have been recalled to work, should be able to survive with some dignity. So too the National Education, Health and Allied Workers’ Union (Nehawu), and the trade unions servicing public sector workers.

Those likely to feel the pain include the Building Construction and Allied Workers Union, where it is estimated that up to 30% of jobs could be lost if there is a prolonged lockdown, and the National Union of Metalworkers of SA (Numsa) – also facing a potential barrage of retrenchments.

Most unions suffering … but silent

What Moloto finds particularly troubling is that while the lockdown is also killing the labour movement, most trade unions are silent on the long-term impacts, and are actually applauding the government’s “massive overkill”. While many unions have been critical of aspects of the lockdown, few have challenged the devastating impact to their membership over the long term.

In April the Association of Mineworkers and Construction Union (Amcu) brought a court case against the government to impose industry-wide safety standards to protect workers from the Covid-19 virus, but later withdrew this when lockdown exemptions granted to 129 mines were passed into law. It later supported the government’s plan to allow mines to ramp up to 50% production, provided workers’ safety was not imperilled.

On Friday, the National Union of Mineworkers berated those companies issuing Section 189 notices (in terms of the Labour Relations Act) to retrench workers. “Our position is that 50% of the workers that have not been recalled must be paid either by the companies or through the [UIF] relief fund, said the union in a statement.

Conflicting concerns for health worker union

Last week Nehawu, many of whose members are at the frontline in battling the virus, expressed concern over the number of healthcare workers infected by Covid-19. Health department figures show that 511 staff working in the sector had become infected and 26 were receiving treatment. But while a chorus of South Africans has called for an easing in lockdown regulations, Nehawu urged government not to relax restrictions on the sale of cigarettes and alcohol, so as not to overburden the health care sector.

According to research by the Southern Africa – Towards Inclusive Economic Development (SA-Tied) programme, the sectors most likely to suffer from a protracted lockdown are construction (about 30% job losses), and finance and manufacturing, which could see a 15% reduction in annual employment.

Source: SA-Tied

Moloto says the already-precarious status of construction workers due to weak investment in the sector may now suffer irreparable harm due to the lockdown. The only way out of this is for government to initiate a massive infrastructure programme to reclaim some of the jobs lost.

Read: Covid-19 impact on construction sector will be ‘catastrophic’

A Neasa survey among its members shows that only 18% currently support the lockdown, though the initial support was overwhelming.

“It is time for bold, honest and very strong leadership,” says CEO Gerhard Papenfus. “Those with ulterior motives need to be exposed.

“The political leadership may decide to continue to cultivate the current narrative, but that will result in an even more rapid erosion of trust.”

The combination of machine learning and cloud is freeing accountants from the shackles of number-crunching. From Brainstorm magazine.

Hennie Ferreira became an accountant almost by accident. He previously ran an online digital marketing company, leaving the accounting work to the so-called experts – until he realised the expert he had hired to run his books had made a royal mess of things.

Ferreira decided to learn the accounting game himself, and studied under the Chartered Institute of Management Accountants, before going on to specialise in tax.

His wife Melissa studied through the Association of Chartered Certified Accountants, and pretty soon their careers had taken an entirely new direction. Ferreira realised it would be wise to also learn coding so he could automate as much of the accounting grunt work as possible.

The couple co-founded Osidon with the aim of building the ‘world’s first online digital accounting firm’. Having seen the sloppy end of accounting for themselves, they realised that most companies and their accountants are battling to remain compliant amid an ever expanding forest of regulations.

Osidon started using AI and machine learning to automate routine bookkeeping functions and make sure clients remain on the right side of the law. This was pioneering stuff. “We didn’t quite realise what work was involved in automating accounting services when we started, so we were learning as we went. But what we achieved was a world first and we’re still improving.”

Having tested the concept in SA, Osidon is about to take its business concept to the US and UK. It’s currently signing up close to 20 new clients a week, most of them attracted by the low cost (less than R1 000 a month for the basic service) and dissatisfaction with their existing accounting provider.

Focused on the small business sector, Osidon makes it affordable for clients to get the kind of accounting and compliance services that normally cost several times what it charges. Says Ferreira: “We’ve built a custom system that automates 65% of practice accounting work and soon it will be 85%. It integrates with (cloud-based accounting platform) Xero, but our system does all the heavy lifting. This system manages our staff and also does a lot of the actual tasks that our accountants no longer have to do. This helps them focus more on consulting with clients.”

There are scores of software products on the market designed to electronically capture and smooth business workflows, but Osidon has picked what it deems to be the best of these and integrated them.

The complete package

Once a new client is on-boarded, the client’s legacy system is integrated and parked in the cloud, using Xero. All the compliance issues are automated, from tax and VAT submissions, to annual financial statement returns to the Companies and Intellectual Property Commission, labour and compensation return funds. Osidon does all the accounting, annual financial statements and payroll, with a legal hotline to keep clients on the right side of the law and provide advice. Monthly management reports and tax structuring complete the package, providing intellectual insights into areas of greatest efficiency and weakness in the business.

What used to take an accounting team weeks or months to accomplish is now being done in hours. “A huge amount of the accounting and compliance work being done in-house by companies is simply too slow, inefficient, and costly. Most of these tasks can be automated. We’ve added our proprietary AI to further automate workflows and transactions and give managers a much deeper understanding of what drives their business. We set out to build a network of prosperous clients, and it was always our intention to show them how they could perform better. This is where the real value lies, not just in being a record keeper for our clients.”

All this is completed offsite, saving clients multiple salaries that kept the accounting department buried under a tower of paper. Not your typical accounting outfit, Osidon operates a busy Facebook page with regular updates and interviews with inspirational business leaders going out via livestream to more than 100 000 people. The menu of services is being expanded to offer pension, investment and financial products to clients through partnerships with specialist providers.

This is the future of accounting, says Nicolaas van Wyk, CEO of the SA Institute of Business Accountants (SAIBA), which has more than 8 000 members, most of them accountants in business or practice. “Osidon is a great example of the model we encourage our members to emulate. I think the accounting profession has generally been weak in staying abreast of technological changes. It’s now becoming clear that the accountant is an endangered species. Many of the functions performed by accountants today will be done by machines in three to five years’ time.”

In recognition of the changing role of accountants, SAIBA has set itself apart from other professional bodies by fostering an entrepreneurial culture among its members.

It recently launched a number of specialist licences, creating new business opportunities for accountants in practice. Van Wyk says his goal is to make millionaires of all his members.

For example, some SAIBA members have become immigration specialists, others are acquiring licences to become business rescue practitioners, while still others are specialising in providing accounting officer services to schools, farms and churches. The accountant of the future will look more like a stock analyst than a nerdy accountant and had better know something about data analysis and coding.

The future

Adriaan Basson is a chartered accountant who abandoned his cushy job with one of the ‘big four’ accounting firms to set up a small accounting practice, armed with a grandiose vision of where the accounting profession was headed. Rather than spectate from the sidelines, he decided to give it a guiding hand.

He set up Wingman Accounting five years ago and, like Ferreira, saw the importance of automating basic accounting functions. “We’re more a tech company than an accounting provider,” he says. While most accountants sell hours, Wingman sells subscription packages, which allow it to scale up without incurring massive overheads. In fact, many of his staff don’t even have an accounting background.

They don’t need to. What they need is a sound understanding of Wingman’s systems and data analysis.

Wingman’s basic package starts at R3 500 a month, rising to R12 000 a month for more sophisticated services. The basic package includes soft ware fees for Xero, Receipt Bank, which automates the capturing and posting of expenses to the relevant ledgers, and SimplePay, an online payroll soft ware package.

The real sizzle comes in the management reporting and strategic analysis that Wingman is able to provide. Basson wants his clients to prosper; failing clients don’t make good referrals. He isn’t shy to fire clients that don’t share his vision of automated accounting, backed by deep dive analysis of operational and financial progress. Most clients want face-to-face time with their accounting provider, so the idea of a fully digital accounting service may be some way off.

“I doubt you’ll ever completely eliminate the human element in accounting. Your clients want your input and advice, but they don’t want the headache of having to pull together the monthly accounts and ensure that all the compliance boxes have been ticked.” New clients come mainly by word of mouth, which is the best and cheapest marketing you can get, says Basson. “We set out to offer something that wasn’t available to small and medium-sized businesses.”

For small businesses, the big technological leap in accounting software involves moving to the cloud. Packages like Intuit QuickBooks and Xero have invested heavily in building systems that offer some of the functionality of much costlier enterprise resource planning platforms such as SAP, which track real-time workflows across gigantic operations. Oracle owned NetSuite is pitched at the medium-sized enterprise market and has captured more than 40% of the financial management system market.

E-commerce and integration with customers and suppliers – all available on a single dashboard – was once an expensive luxury available only to deep-pocketed corporations. That’s now changing as technology costs and soft ware functionality reach into the lower end of the market.

If accounting is the science of good order and traditional accounting functions are being taken over by machines, the accountant of the future must become a master at interpreting machine data. As SAIBA’s Van Wyk points out, their survival as a profession depends on the speed with which they embrace this new world, and migrate from being pure record-keepers to elite advisors.

As machines take over the world of investing, data analysts and coders are fast becoming the new rulers. From Brainstorm magazine.

Michael Lewis is best known as the quirky fund manager depicted playing drums in his office in the movie The Big Short. He predicted – a little too early – that the US housing market was headed down the drain, and managed to make a fortune betting against the banks. It became clear to Lewis and others that the banks were recklessly doling out mortgage loans, often to people without jobs, and then bundling these loans together and off-loading this junk as AAA-grade mortgage-backed bonds to big institutional investors. It was one of the great scandals of the early 21st century.

Lewis’ next opus was a book called Flash Boys, which explores the relatively modern phenomenon of high-frequency trading (HFT). HFT, as defined by Investopedia, is ‘a method of trading that uses powerful computer programs to transact a large number of orders in fractions of a second. It uses complex algorithms to analyse multiple markets and execute orders based on market conditions’.

Lewis describes how a US company called Spread Networks invested $300 million building a 1 330km cable from Chicago to New York with the aim of reducing data transmission latencies from 17 to 13 milliseconds. That was in 2010, and marked a huge improvement in transmission speeds available at the time. In 2011, Hibernian Atlantic announced that it was building a transatlantic cable between London and New York to shave five milliseconds off transmission speeds.

There is a limit to how fast these speeds can get, and that limitation is the speed of light. The only way to increase speeds is to shorten the cable, which is exactly why HFT firms started taking up office space just metres away from the stock exchange computers. Being so close to the action means they can execute trades almost at the speed of light.

Those closest to the stock exchange engines are first to receive data, process it through their algorithms, and then execute trades. It’s reckoned that HFTs account for up to two-thirds of all stocks traded in the US, and perhaps a third on the JSE.

Closer to home

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“It’s going to be much more difficult going forward for high-frequency traders to make the kind of money they made in the past, so intelligent algorithms are going to have to find new ways to identify profit-making opportunities.”

Fanie Harmse, FX & Project Management

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In 2013, the JSE launched its colocation services, which allows traders to position themselves within shouting distance of the market infrastructure. It boasts a round-trip co-location latency of less than 100 microseconds (0.1 milliseconds) and, to all intents and purposes, bypasses the telco providers. To level the playing field, all cables to the market engine are of equal length, and time synchronisation ensures everyone receives the same information at the same time.

The JSE won’t divulge any stats around HFT – in fact, the algorithms behind HFT are as close to top-secret as you’ll find in the financial markets. Those in the business aren’t saying much, but we can get a sense of where this is going from the JSE’s colocation stats (not all of these trades would be HFTs).

The ‘flash crash’ of 2010, which was the second worst intra-day drop in stock exchange history – a trillion-dollar crash affecting multiple stock markets and lasting 36 minutes – was partly blamed on high-frequency traders. That said, regulators agree other factors were also at play, such as a mistakenly large sell order for US consumer goods company Procter & Gamble.

In 2015, the US Department of Justice laid 22 charges of fraud and market manipulation against trader Navinder Singh Sarao. As the case played out, we were introduced to high-frequency trading terms, like spoofing, layering and front-running.

Layering is where a high-frequency trader places multiple bogus orders, which are quickly cancelled to fool the market into believing a big price move is underway. Spoofing is a similar (and equally illegal) tactic where the trader places hundreds or thousands of orders for an asset to trick other traders into jumping on the bandwagon to drive prices either up or down. The spoofer has no intention of executing on these fake trades.

Front-running is where a trader has advance knowledge of information that might move an asset price. Front-running can occur when a broker receives a large order to acquire stocks on behalf of an institutional buyer. The order is large enough to move the market price, so the broker can front-run it by placing an order of his own before executing the large institutional order, knowing he can make a quick profit from the subsequent movement in price. Front-running, a close cousin to insider trading, is illegal in most markets. HFTs have been accused of all these transgressions, and more.

Research by Markus Baldauf and Joshua Mollner at the Kellogg School of Management at Northwestern University points out that only big hedge funds or investment banks can afford the heavy technological cost of entering this market. They conclude that HFTs have reduced the ‘spread’ costs of trading (the difference between the price of buying and selling an asset) and are therefore a benefit to the broader market. On the downside, HFTs were found to amplify market moves already in play, and that can distort markets. Their recommended solution is to introduce slight delays in the release of market data to avoid this kind of market arbitrage, or profiteering by jumping onto a stock slightly ahead of the pack with a view to making a profit at the expense of the laggards.

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“HTF accounts for a growing percentage of total JSE trade, perhaps 35% to 40% of the total.”

Tshepo Maseko, Legae Peresec

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Rules? What rules?

There have been attempts to regulate HFT in Europe and the US, but new rules have done little to curtail the tsunami of trade from these machine-generated trades.

Tshepo Maseko, head of trading technology at financial securities firm Legae Peresec, says high-frequency trading in SA isn’t yet as sophisticated as in the US, but it’s getting there. “HTF accounts for a growing percentage of total JSE trade, perhaps 35% to 40% of the total. Most of the HFTs are in the most liquid top 40 stocks. Market participants use a variety of different algorithms to profit under certain market conditions, although a lot of the strategies are linked to the news cycle, since this is the main driver of price changes.”

There are thousands of algorithmic strategies. For example, an algorithm might trigger a buy on tech stocks when they drop to a predetermined price level, knowing this is where other traders generally buy.

Fanie Harmse, operations director for Swiss-based FX & Project Management, a crypto and financial trading tools company, says HFT has made intra-day trading less consistent than was the case in the past. He refutes the suggestion that HFTs have much influence over long-range market trends.

“High frequency algorithms can’t influence prices in a sustained matter. Their goal is to get in and out as quickly as possible, making a tiny gain on each trade. They benefit through extremely fast execution that normal traders don’t have access to. In the longer term, price movement is largely controlled by big international banks, governments, corporations and hedge funds. These big players aren’t interested in intraday noise, even though they will often have systems to benefit from it through market-making. For political, economic and other reasons, they’re more interested in longer-term trends.”

Muddying the waters

Harmse says the widespread use of algorithms and artificial intelligence has reduced any competitive advantage, making it harder to profit from market moves that happen in milliseconds. That’s a view born out by international research – HFT profits have dwindled over the last decade. FX & Project Management has developed an algorithm called Access that picks up only major market moves, which occur roughly 20% of the time. “The reason most systems fail is that they’re over-active in the market, and we know that the market is essentially moving sideways 80% of the time. It’s difficult to consistently make money in a sideways market. Our systems are designed to identify trends and ride these until the trend is over. I think it’s going to be much more difficult going forward for high-frequency traders to make the kind of money they made in the past, so intelligent algorithms are going to have to find new ways to identify profit-making opportunities.”

High-frequency traders have rejected claims that they’re a threat to financial markets, or that we’re sitting on a financial Hiroshima waiting for another trigger, as happened in the ‘flash crash’ of 2010.

Most of the HFTs are privately-owned companies and therefore don’t share their secrets, but by their own words they are a force for good. They provide liquidity when needed. Many of these HFTs are market makers, meaning they will both buy and sell assets, as and when needed. They make money on the ‘spread’, or the difference between the buy and sell price.

David Scholtz is a full-time private trader. He says: “HFT is definitely a growing phenomenon all around the world, but I don’t see it as necessarily evil, as is often claimed.”

Much of the volume generated from HFT shops is benign – providing liquidity when needed, or for portfolio rebalancing. For example, if there’s demand for Anglo American shares and very few people are selling, market makers will step in with stock on hand to sell. For that, they will want to collect a fee. Without this liquidity, the shortage of stock could drive stock prices higher than would otherwise be the case. In this sense, HFTs smooth the bumps in the road and have made it easier to acquire stock. High-frequency traders say the reason the ‘flash crash’ corrected so quickly was because algorithms picked up the market anomaly and reversed it.

The more egregious aspects of high frequency trading, such as spoofing and front running, have been banned, though will never be completely eliminated.

One thing is for sure: the machines are taking over the world of investment, and that’s not going to change.

In Namibia – with Namibian and South African managers, Australian technology and Canadian money. From Mineweb.

One has to ask: where have the South African mining investors gone?

Right under our noses, Osino Resources – managed primarily out of South Africa and listed in Canada – has pulled off a potentially stunning gold find in Namibia.

Osino raised $15 million (R276 million) from Canadian investors in January, sufficient to complete its exploration programme within the next 18 months. The exploration company is targeting an initial resource of 1-2 million ounces with potential upside for much more, and indications so far are that this is now within reach.

Gold mines of this size are few and far between, which has thrust Osino onto the radars of North American mining investors – but none from SA.

The gold majors have had a spectacular run over the last two years, with companies like AngloGold Ashanti quadrupling in price. Now the attention is shifting to junior companies with quality assets.

Osino is a junior mining company founded by CEO Heye Daun, a South African resident who grew up in Namibia and served time at AngloGold Ashanti, Rio Tinto and Gold Fields, before striking off on his own (interestingly, he is also the nephew of Steinhoff founder Claas Daun).

’10 times’ potential

With gold prices nudging towards $1 800 per ounce, and the Bank of America forecasting a price of $3 000/oz within 18 months, Osino is being touted by some analysts as a potential 10-bagger (stocks that appreciate ten times their initial purchase price). The share currently trades at 86c, having shot up fourfold over the last 15 months.

The reason for the excitement: the exploration results coming out of the group at its Twin Hills area in Namibia, about 25km from the producing Navachab Gold Mine sold by AngloGold Ashanti in 2014 to QKR. Osino has exclusive rights over an area of nearly 7 000 square kilometres on the Karibib Fault Line, about 200km north-west of Windhoek.

Five of the seven holes drilled at Twin Peaks have yielded promising mineralisations, indicating a strike length of 11km. This will likely expand as exploration continues.

A unique aspect of the exploration is that drilling is being carried out through the hard calcrete cover which is common in this part of Namibia.

The samples are sent to Australia for assaying, where a relatively new ultra-low grade detection technology has illuminated what appears to be one of the biggest gold discoveries on the sub-continent in a decade.

The grades so far vary between 0.65 grams a ton (g/t) to 2.2g/t, but have been found to occur over a massive area.

This is a shallow deposit, allowing for low-cost open pit mining, and hopefully a relatively inexpensive gravity separation processing method.

Read: World’s deepest gold mines on a ‘cliff’ as virus curbs output

This is Daun’s second foray into Namibian gold exploration, the first being the advancement and definition of the Otjikoto resource which was sold in 2011 to another Canadian mining group, B2Gold, for nearly $200 million (R3.6 billion). B2Gold invested nearly $300 million (R5.5 billion) to develop the mine, which last year produced 178 000 ounces, roughly 20% of the group’s total gold haul for 2019.

Sweet spot

The sweet spot for any new gold mine is a resource of at least one million ounces. With gold prices now on the rise, investors are scrambling for good assets. This puts Osino in the pound seats. There are hundreds of junior mining companies, many of them operating out of Canada, but it is also a field strewn with dodgy characters. As Mark Twain remarked: “A gold mine is a hole in the ground with a liar standing on the top of it.”

“The only way to survive as a junior mining company is build a solid track record and we have that,” says Daun. “Our investors are highly respected and our geological team, led by Jon Andrew and Dave Underwood, is among the best in the business. This explains why we have managed to close four separate rounds of funding, the latest being $15 million, which we secured in January.”

Osino was the first to explicitly apply the so-called orogenic approach to gold exploration in Namibia. This implies a geological approach based largely on structural geology and a new understanding of how fault lines occur and how this can point to the location of mineral deposits. Historical gold exploration in Namibia tended to be model-driven and somewhat dogmatic and Osino’s open-minded, first-principles based exploration approach has now yielded fruit where large mining houses previously working this area were oblivious to the riches beneath their feet.

The Damara sedimentary belt on which Twin Hills is located is part of the Pan-African belt which extends through East Africa to Sudan and Egypt, and has been known for more than 100 years as a heavily mineralised belt containing copper, uranium, gold and other minerals.

It wasn’t exactly a hunch (or near-ology, as it is often referred to in the industry) that got Daun and his team to start looking in the area – but almost.

The fact that Twin Hills is located about 25km from the functioning Navachab mine meant it was a reasonable bet that gold was likely much more widespread. Taking into account that orogenic gold systems usually occur in clusters and not just in isolation, Underwood, Osino’s head of exploration, directed the company to start looking along the large, regional structural trends connecting Otjikoto and Navachab, which bookend Osino’s licence holding. He assumed that gold could also occur in sequences that had previously been overlooked and Osino thus started a large regional soil and calcrete sampling programme.

In these desert conditions, millions of years of surface evaporation of ground water pulls tiny particles of gold to the surface, giving an indication of what’s lying beneath – which is exactly what was found.

Unlike the thin hard rock veins found in the Free State and Witwatersrand, the gold in Twin Hills is disseminated in tiny fragments over a very large area.

In 2018, Osino’s soil sampling indicated that it had hit the motherlode and Daun went to Canada in search of funding to allow for the start of a drilling programme. “We got the funding we needed and then started drilling holes every 25 metres, going down to depths of five to 20 metres,” says Daun. “It was at this point we realised the extent of the mineralisation.”

Indicators

Although no formal resource modelling has been done yet, the footprint and grades of the discovery so far indicate the potential for a 1-2 million ounce deposit with significant further upside. Daun is confident further exploration will see this increase. Osino plans to rapidly advance the project to feasibility stage and then to seek an operating partner or even on-sell to a mining major, as Osino’s founders did previously.

Based on a rule of thumb calculation of $100 million for one million ounces, the deposit could fetch $200 million to $300 million (up to around R5.5 billion).

As was the case with the other two Namibian gold projects, further exploration and infill drilling should also lead to an increase in grades by discovering further high grade zones and extending the ones already identified.

Namibian upside

Operating in Namibia has two major benefits: it is cheap to mine due to likely easy metallurgy and the weak exchange rate allows for cheap operating costs.

US dollars go a lot further in Namibia when converted to local currency than they would in most other countries.

Osino trades on the Canadian Stock Exchange at 87c a share. It is difficult to value junior mining companies with no cash flow, so a useful rule of thumb is to assess what other investors are paying. The initial investors bought their shares at 20c in 2016, followed by another round at 38c in 2017. The latest round in January 2020 for $15 million was concluded at 78c a share, only slightly better than the current share price of 85c.

Read: Inflow into gold ETFs accelerates

To access the shares you would have to open an account with a local broker that gives you access to the Canadian stock market.