Mining sector shrugs off coronavirus storm

Written by Ciaran Ryan. Posted in Journalism

While global trade is cratering, mining is relatively untouched. From Moneyweb.

Automation and digitisation will be major themes in mining going forward, not just as a way to lower costs but because these technologies support remote workforces. Image: Supplied
Automation and digitisation will be major themes in mining going forward, not just as a way to lower costs but because these technologies support remote workforces. Image: Supplied

PwC’s 2020 Mine report paints a picture of a mining sector in relatively rude health, with Covid-19 likely to shave just 6% off earnings in 2020.

This, after a 4% gain in Ebitda (earnings before interest, tax, depreciation and amortisation) in 2019.

Contrast this with the latest Global Trade Update from the United Nations Conference on Trade and Development, which projects a 27% drop in global trade in the second quarter of this year. The automobile and energy sectors have taken the worst drubbing, with second-quarter trade expected to fall by about 40% and 30% respectively.

The overall health of the mining sector has been lifted by gold’s surge, which has helped offset commodity price declines in other sectors.

Source: World Bank, PwC analysis

Andries Rossouw, PwC Africa Energy Utilities & Resources Leader, says it helped that miners entered the Covid-19 lockdown crisis with relatively strong balance sheets. Had the crisis happened four years ago after a spate of bad acquisitions and large capex investments, the impact would have been more severe. The survey looks at the top 40 mining companies globally.

“It’s because mine balance sheets have been strengthened over the last few years that they will be able to survive this crisis in relatively good shape,” says Rossouw.

“Although mining has been able to keep operating to some extent throughout the Covid-19 pandemic, companies all over the world, including those in South Africa, have had to adapt and evolve. The Top 40 have shown that they can innovate, adapt and respond to this crisis along with the best. Some of these changes include remote workforce planning and a greater use of automation. It is expected that many of these adaptations will become permanent in the long-term.”

The new reality

It may be difficult to envisage social distancing and routine sanitisation as part of everyday mining, particularly in deep-level mines, but this is likely to become the reality going forward. And that, of course, comes at a cost. Automation and digitisation are going to be major themes in mining going forward, and not just as a way to lower costs. These technologies can support remote workforces and reduce on-site presence.

PwC says the Top 40 mines are likely to cut capex by about 20% this year and have allocated $380 million (R6.5 billion) to Covid-19 relief.

One of the key takeaways from the study is the realisation that mining is essential to the economic health of the global economy. Many key mining countries, such as Australia and Brazil, allowed mines to continue operating at a time when other sectors were in lockdown, though SA imposed a one month lockdown on all but the most essential mines (primarily coal mines supplying Eskom).

Despite this positive outlook, the report cautions that mining companies will need to adapt to long-term impacts caused by Covid-19.

Miners may need to think about derisking critical supply chains and investing more in local communities. A shift towards localisation in supply chains and for smaller deals in local markets, as well as different forms of community engagement, may turn out to be enduring consequences of the pandemic.

Derisking supply chains could also come at a cost. There is no doubt that global supply chains helped drive down the costs of mining. Just-in-time techniques, ‘lean principles’ and other production efficiencies allowed mines to lower their supply costs, but the Covid-19 crisis has shown the downside of vesting too much reliance on just one or two distant suppliers.

More support for domestic suppliers

Mining houses such as Anglo American, Nornickel and BHP have already announced initiatives to increase support for their domestic suppliers as a result of the pandemic. Miners are also looking at how they can diversify their markets so they are not reliant on one or two major customers or countries.

Another trend emerging out of this latest PwC study is the need to strengthen ties with local communities in areas where they operate. Mines are doing this better than others, with some providing support of up to $140 million (R2.4 billion) in training, infrastructure and other forms of assistance. Most also placed their health clinics and other facilities at the disposal of local communities during the pandemic. Miners will have to increase investment in local communities for some time, says PwC, as part of the “social licence” under which they operate.

Miners may also find useful lessons that they can incorporate as standard practice. These include: reduced office footprints, an increased local workforce, relocation of non-critical roles from sites, reassessment of investment criteria, redesigned rosters and shift patterns and working groups, as well as priorities towards the large and positive impact mining can have in communities.

Source: PwC

The Top 40 have downgraded their copper, nickel and zinc production forecasts by an average of 6-7%. Some of the commodity prices may decline further once Covid-19-related production constraints are resolved.

Gold miners have taken advantage of high metal prices and lower borrowing costs to restructure their balance sheets and finance new projects. In May Newcrest announced an Au$1 billion capital raise. In the same month, the company issued US$1.15 billion of corporate bonds – priced at lower coupon rates – to replace its near-term bond maturities. These recent capital activities demonstrate that while the global economy is facing multiple challenges, capital markets remain relatively liquid, unlike in the global financial crisis in 2008/9 when markets dried up.

China will lead the world out of this slump, with GDP growth in 2020 expected to fall to around 3-4%, surging next year to 9%. There are some risks on the horizon, notably cyber security (as mines become more dependent on automation and data) and tightening ESG (environmental, social and governance) standards. Some big investment houses are divesting themselves of miners with large coal assets, and that is driving a change in mining behaviour.

That said, the mining sector is better positioned than most to ride out the current Covid-19 storm.

SA’s lost decade and how to fix it

Written by Ciaran Ryan. Posted in Journalism

First, approach the IMF for funding, then tear down the walls holding investment out. From Moneyweb,

SA will need to show concrete commitment to the protection of foreign investors. Image: Andrew Harrer, Bloomberg

SA will need to show concrete commitment to the protection of foreign investors. Image: Andrew Harrer, Bloomberg

Thabo Mbeki can look back on his tenure as president and rightfully say: ‘We never had it so good.’

He would be right, of course. He was ousted as ANC president in 2009 by Jacob Zuma, and it’s been downhill since then. Virtually every measure you can think of reminds us of this fact, from GDP growth to state borrowings and foreign direct investment (FDI).

Under Mbeki, foreign investment in 2008 topped $9 billion. Under Zuma – bar two years when commodity prices were surging – it dwindled to around $2 billion. The state capture inquiry, now in idle mode, tells us all we need to know as the reasons why this was so.

Source: Herbert Smith Freehills

And while foreign investment inflows were drying up, South Africans couldn’t get their money out fast enough.

Source: Herbert Smith Freehills

At a presentation on Wednesday on the investment protections needed to secure SA’s future in a post-Covid world, Herbert Smith Freehills partner Peter Leon offered some advice on how to start fixing things. It was, says Leon, a “lost decade” for SA after Zuma came to power, but this need not be the story of the next decade.

SA is approaching the International Monetary Fund (IMF) for $4.2 billion (R69.5 billion) in short-term lending under its Rapid Financing Instrument.

Read: A red line crossed: South Africa seeks aid from the IMF

This must be paid off in three to five years, but chances are we will have to approach the IMF for a much larger longer-term loan of about $18 billion (R298 billion) to truly get the economy back on its feet and to get the fiscus in some kind of respectable shape.

Read: SA entitled to $4.2bn with few strings, IMF says

Big stick

The IMF’s shorter-term lending is relatively mild on conditionalities, but the longer-term loan is the one that carries the big stick.

The IMF’s Article IV report on SA, published in January this year, suggests that SA would be required to implement major microeconomic reforms, especially for state-owned enterprises (SOEs) as well as product and labour markets.

This is where it could get sticky with the labour unions, but government will be forced to take these steps and face down opposition in the ruling party.

Per the IMF script, if the economy is to grow, SOEs will have to be split up, privatised, or weaned off the state teat. The public sector wage bill will have to be shrunk. Labour legislation – and this is the tough one – may have to be revisited, particularly the extension of so-called bargaining council agreements that set wage and working conditions for all businesses in a sector, including those that are consulted on these agreements. Issues such as these are cited as reasons for SA’s low-growth trap, and the IMF will want its pound of flesh.

Life under the IMF

The IMF sees decent upside for SA under a structural adjustment programme: increased per capita income, improved business environment, lower unemployment and poverty, reducing public debt from 2022, lower inflation in the medium term with a stronger rand to offset imported inflation. With that done, there should be greater room for easing monetary policy and reducing finance costs.

Leon says the way things are headed, he doesn’t see how government will be able to not go to the IMF for a longer-term facility.

FDI flows into SA were not helped by the Department of Trade and Industry (DTI) decision to unilaterally terminate bilateral investment treaties (BITs) with our trading partners.

These treaties provided strong protections against discrimination against foreign investors; ensured them full protection against crime, civil strife and expropriation; allowed them unrestricted repatriation of funds; and gave them recourse to international arbitration in the event of disputes. These protections were reinforced when SA signed on to the Southern African Development Community (SADC) Protocol on Finance and Investment, which came into effect in 2010.

The rights of foreign investors were weakened by the termination of the BITs under then DTI minister Rob Davies, and then again by a 2016 amendment of the SADC Protocol that diluted protections against expropriation, non-discrimination and repatriation of investment returns.

SA’s own ‘structural adjustment’ plans

SA has tried to avoid its day of reckoning with the IMF for a long time, starting with the so-called Growth, Employment and Redistribution (Gear) policy in 1996, and followed up with the Accelerated and Shared Growth Initiative for SA (Asgisa) in 2014 – both of which were forms of home-grown structural adjustment programmes.

There was no real will to push through on these plans, which contributed to the ‘lost decade’, until Finance Minister Tito Mboweni unveiled his growth plan in August 2019. Titled Economic Transformation, Inclusive Growth and Competitiveness: Towards an Economic Strategy for South Africa, it proposed relaxing labour and other regulations on small businesses, and opening the rail and energy sectors to greater private participation.

“If SA is to emerge from the economic devastation of the Covid-19 pandemic, it will need more than investment-friendly rhetoric from the president and his envoys,” says Leon.

He adds that even beyond implementing the structural reforms proposed by the IMF, SA will need to show a concrete commitment to the protection of foreign investors, by doing the following:

  • Amending the Protection of Investment Act to provide for proper investment protection;
  • If not joining the International Centre for Settlement of Investment Disputes by signing the Washington Convention, then entering into new BITs with important trading partners, especially in the EU, or with the EU as a bloc; and
  • Submitting itself to investor-state international arbitration.

The African Continental Free Trade Area (AfCFTA) kicked off last year, initially to liberalise trade in goods and services, and then to tackle the thornier issues of intellectual property rights, investment and competition policy.

This new trade area agreement provides SA with a unique opportunity to develop an Afro-centric model based on best practices, including a single continental rule book for trade and investment, and strong protections for investors while still promoting responsible investment. And, of course, a more suitable channel for dispute resolutions.

It just got much harder to litigate consumers into bankruptcy

Written by Ciaran Ryan. Posted in Journalism

After Western Cape High Court gave Standard Bank the boot. From Moneyweb.

Some lawyers bend over backwards to have their cases land up in the high court, seemingly because they'll earn much more than they would in a magistrate's court.  Image: Moneyweb
Some lawyers bend over backwards to have their cases land up in the high court, seemingly because they’ll earn much more than they would in a magistrate’s court. Image: Moneyweb

One of the most shocking legal abuses in the country is the practice of suing consumers in the high courts for the recovery of outstanding loans. Customers are being sued by the banks in these courts for arrear amounts as low as R6 000, and high court judges have complained long and loud about the unnecessary traffic this brings them.

It’s not so much the loan arrears that kills you, it’s the legal bill.

The National Credit Act (NCA) requires that disputes over credit agreements are brought before the magistrates’ courts, where the allowable legal costs are a fraction of that in the high courts. The drafters of the NCA did this to make justice accessible to all, and affordable.

But that’s not happening in practice. Banks and their lawyers are hauling cases that properly belong in the magistrates’ courts to the high court where they can lump obscene legal costs onto the consumers’ accounts.

High courts are where money is to be made

There’s simply no money for lawyers in fighting cases in the magistrates’ courts, so they use every trick in the book to make sure their cases land up in the high court. Most times they seem to get away with it, and some judges seem curiously more prone to playing along with this than others.

Moneyweb is in possession of information on one case, where a consumer has been lumped by the bank with a R180 000 legal bill, all over the recovery of arrears of about R20 000 (and even that is in dispute). The legal bill is nine times the arrears claimed, but that’s a story for another day. Had this case been brought before the magistrates’ court instead of the high court, the legal bill would have been less than R15 000.

Consumer activists have argued for years that the practice of suing in the high court violates constitutional rights of access to justice, and the intention is to bankrupt consumers through litigation.

That will now become a whole lot harder.

A sharp-eyed court registrar in the Western Cape High Court recently put Standard Bank to the boot after it sued six customers for the recovery of vehicle loans. The registrar noticed that in all six cases, Standard Bank’s own agreements specified the magistrates’ court as having jurisdiction in the event of a dispute, and referred the matter for a hearing in open court.

Read: Standard Bank accused of ‘double dipping’ in home repo case

Acting Judge Thulare of the Western Cape High Court agreed, and transferred the matters to the magistrates’ courts, where they should have been in the first place. “The parties agreed to protect the defendant against the unnecessary use of the more expensive forum (court), that is, the hardship of being subjected to unnecessary and expensive proceedings often far out of town,” reads the judgment.

Stephan van der Merwe, senior attorney at the University of Stellenbosch’s Law Clinic, says this is a major victory for consumers: “It is encouraging to see that the registrar refused to rubber-stamp a default judgment [where the consumer puts up no defence] without applying [their] mind to the matter, as has so often been the case in the past. One of the main reasons that we have seen such rampant abuse of debtors and consumers in this country has been as a result of unscrupulous creditors exploiting the good nature – or lack of legal knowledge – of court clerks and registrars to obtain these judgments, without proper consideration of the merits or for any due process.”

This is not the first time banks have had to be reminded from which table they can eat.

Given the choice between KFC and Tasha’s, they have routinely chosen Tasha’s, leaving the consumer to pick up the tab. Van der Merwe says the latest ruling by Thulare follows a similar 2019 ruling in the Eastern Cape High Court in Nedbank v Gqirana, which determined that “the Magistrate Courts to be the Court of first adjudication of all NCA matters to the exclusion of the High Court as a Court of first adjudication save only in the event that there are unusual or extraordinary factual or legal issues raised which in the opinion of the High Court warrant them being heard first heard in the High Court”.

Violation

But in the Western Cape High Court judgment issued last month, Standard Bank was found to be violating its own written agreements in choosing to bring the cases to the high court, never mind the NCA.

Consumer and legal activist Leonard Benjamin says there remains considerable confusion over which court has jurisdiction in credit agreement disputes, but that this “confusion” is deliberately propagated by the banks. In truth, the law is abundantly clear, he says.

Read: The days of banks suing you in the high court are over

“Essentially, Section 29 of the NCA says a magistrates’ court has jurisdiction in respect of any matter entailing the enforcement of a credit agreement. It does not matter what amount is being claimed,” says Benjamin.

“The mere fact that it is a credit agreement means it must be heard in the magistrates’ court. In other words, even a credit agreement in which the outstanding amount being claimed is R10 million can be heard in the magistrates court. The so–called ‘consent to Magistrates’ Court jurisdiction clause’ is a throwback to pre-NCA times, when the clause was actually required. In a credit agreement it is simply superfluous.”

Logic

“In my view, the agreement is as to which forum must be used by the parties. This is akin to an arbitration clause in an agreement. Should one of the parties sue in a court instead of subjecting the matter to arbitration, the other party to the agreement can rightfully ask for the court to direct that the matter be resolved by arbitration,” says Benjamin.

“This approach recognises that the parties must be held to their contracts, which is exactly what the judge in this case did.”

Which court has jurisdiction over credit agreements is no trifling matter.

Tens of thousands of homes and vehicles have been repossessed since 2008, because the exorbitant costs associated with arguing cases in the high courts has deterred consumers from opposing the matter.

It turns out these cases should not have been brought in the high courts in the first place. This has made it unaffordable for consumers to challenge matters, particularly when relatively small amounts of arrears form the basis of the claim.

Van der Merwe says this latest judgment is another victory for consumers, though it beggars belief that disputes over which courts have jurisdiction have to be argued at all.

Stellenbosch University’s Law Clinic has successfully waged several legal cases on behalf of consumers, and in December 2019 won a landmark case in the Western Cape High Court that stops credit providers unlawfully loading consumer accounts with interest and other charges. The case also provides legal certainty on what charges are allowable.

Read: Court decision opens the way for consumers to get billions in fees back

The next time you get summonsed to a high court over a credit agreement, flash this ruling in the judge’s face. It might just save your bacon.

Is economic power shifting to the East?

Written by Ciaran Ryan. Posted in Uncategorized

Ciaran Ryan moderates a discussion between Michael Power, strategist for asset manager Ninety One, Jakkie Cilliers, founder of the Institute for Security Studies, and political commentator Moeletsi Mbeki. Michael Power says China will surpass the United States in economic size within the next few years – a trend accelerated by the coronavirus outbreak – and will in fact add 25% to its GDP in the next 3-4 years, while the US will remain relatively stagnant. Jakkie Cilliers says we should look out for the post-China story, which is India’s emergence as a global economic power. Moeletsi Mbeki agrees that China has grown phenomenally in the last 40 years, but asks: “So what?” Regions rise and fall in the economic terms, but we should be careful what lessons we learn from an authoritarian China that rides roughshod over its neighbours and trading partners.


No thanks, say informal-sector entrepreneurs to easy loans offer

Written by Ciaran Ryan. Posted in Journalism

Government’s precondition is to register for tax and UIF. From Moneyweb.

The sector is regarded with hostility by lawmakers, but when the Small Enterprise Foundation granted a payment holiday to clients, about 60% still paid their dues. Image: Moneyweb
The sector is regarded with hostility by lawmakers, but when the Small Enterprise Foundation granted a payment holiday to clients, about 60% still paid their dues. Image: Moneyweb

Government is showering money on informal sector businesses to tide them over the Covid-19 crisis, but many township entrepreneurs seem less than enthusiastic about the offer.

To qualify for the relief offered by the Department of Small Business Development, they will have to obtain a licence to operate from the local municipality.

They will also need to register with an alphabet soup of regulatory agencies – including the Companies and Intellectual Properties Commission (CIPC), the South African Revenue Service (Sars) and the Unemployment Insurance Fund (UIF).

And they will need a bank account – a red flag to many micro enterprises that deal only in cash.

A survey by the Small Enterprise Foundation (SEF), which has 216 000 informal sector entrepreneurs on its loan books, found only 12% had bothered applying for business permits. SEF founder John de Wit says this means even fewer will likely have applied for loans.

“In our discussions with informal sector entrepreneurs, we are finding that very few of them are willing to go through the process of moving from the informal to the formal sector, mainly because they don’t want to be hounded by the taxman going forward.

“They’re quite happy flying under the radar and not having to comply with all sorts of regulations and having to pay tax,” he says.

Motive?

“We find it incredibly impractical and irresponsible to be offering assistance at this time to informal sector businesses on the condition that they formalise themselves, and it makes us wonder what is the purpose of these programmes – to genuinely assist businesses or to rope them into the formal sector,” says De Wit.

The Department of Small Business Development has launched a number of initiatives to assist small businesses, including the SMME Debt Relief Scheme, a Spazashop Support Scheme and more recently, a scheme to support township and village businesses.

The department’s website says the SMME Debt Relief Scheme closed recently, with R513 million approved for funding and nearly 13 000 applications received, of which 4 840 are currently being processed. A further 21 200 applications were incomplete, resulting in delays.

‘Underwhelming’ response to state relief

The response appears to be underwhelming says De Wit, based on a sampling of businesses in the SEF network. More than half of informal sector entrepreneurs had returned to work in the last two weeks, and the figure will likely jump to 100% in June, he says.

“The policing of the lockdown has been a mess, with some police trying a blind-eye to workers trying to eke out a living, and others preventing people from doing so,” he adds.

“These are desperate times and you cannot stop people from trying to put food on the table. Law enforcement officers and government officials need to understand this.”

Excellent informal sector data resource

SEF is a non-profit organisation that has lent more than R10 billion to some 650 000 entrepreneurs over the last two decades, and keeps excellent data on the health of the informal sector.

Its bad debt ratio is an astonishingly low 0.22% over the history of the organisation, far superior to anything achieved by the commercial banking sector.

It is able to keep bad debts to a minimum by ongoing contact and mentoring of informal sector businesses, and by arranging borrowers into cells of five or six, all of whom are expected to vouch for each other and stand good for each other’s loans if one members of the cell defaults.

SEF granted a repayment holiday in May for those unable to work and meet their repayment obligations, but still about 60% paid their dues.

Sector accounts for around one in six of all jobs

According to a study published by HSRC Press, ‘The South African Informal Sector: Creating Jobs, Reducing Poverty’, the informal sector provides employment and income for 2.5 million people, or about one in six of all jobs in the country, and contributes an estimated 6% of national GDP.

The figures are likely outdated, particularly since the onset of the Covid-19 crisis, but the study paints a picture of a sector that is regarded with hostility by lawmakers keen to control everything that moves.

Crucially, the informal sector is the last refuge for those unable to find entry to formal sector employment and is also a vital backstop for workers in the formal sector who have lost their jobs.

There is a hierarchy within the informal sector: lower tier firms are more survivalist in nature while upper tier firms are more growth oriented and enjoy higher earnings, according to authors Nwabisa Makaluza and Rulof Burger.

While rudimentary entry-level firms predominate, growth-oriented firms accounting for roughly a quarter of the total.

Tobacco court case only likely to be heard in two weeks’ time

Written by Ciaran Ryan. Posted in Journalism

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

Consumers are switching brands. Image: Gillianne Tedder, Bloomberg
Consumers are switching brands. Image: Gillianne Tedder, Bloomberg

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.

Investors gird themselves for an onslaught of financial fraud

Written by Ciaran Ryan. Posted in Journalism

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

Accountants may find themselves under pressure to submit false Covid-19 relief claims, falsify financial statements and make untrue tax declarations. Image: Shutterstock
Accountants may find themselves under pressure to submit false Covid-19 relief claims, falsify financial statements and make untrue tax declarations. Image: Shutterstock

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

CodeShare nameNews dateEventPrice at discoveryTrigger price
APNAspen Pharmacare14/08/2019UK competition authorities investigated alleged anti-competitive agreementsR74R67
EOHEOH Holdings15/07/2019EOH says corruption probe found ‘suspicious transactions’ worth R1.2bnR22R19
TONTongaat Hulett31/05/2019Tongaat warns of potential hit to 2018 results following a review of its accounting practicesR18R16
TONTongaat Hulett25/04/2019Tongaat to restate prior results after accounting reviewR30R27
TONTongaat Hulett24/04/2019Certain accounting practices under investigation at TongaatR30R27
EOHEOH Holdings29/01/2019EOH shares tumble following Eskom misconduct statementR32R29
NRPNepi Rockcastle plc*28/11/2018Nepi Rockcastle shares slump on Viceroy report over profitsR115R103
FFBFortress Income Fund*28/11/2018Nepi Rockcastle shares slump on Viceroy report over profitsR14R13
MTNMTN Group5/10/2018Nigeria seeks to charge MTN 15% interest on $8bn claimR89R80
MTNMTN Group4/9/2018MTN slides on Nigeria’s $2bn claim for unpaid taxesR86R78

Source: InvestSure

*Fortress and Nepi Rockcastle are under the Resilient stable.

Fatter cash cushions: The balance sheet of the future

Written by Ciaran Ryan. Posted in Journalism

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

For tens of thousands of businesses, these may be the leanest times in living memory.  Image: Shutterstock
For tens of thousands of businesses, these may be the leanest times in living memory. Image: Shutterstock

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.

Yes, it is possible to predict the market

Written by Ciaran Ryan. Posted in Journalism

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

Image: Shutterstock

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.”