Its price plunged with the Coronavirus outbreak. From Moneyweb.
You may have missed it, but history was made this month when the copper price dropped 13 days in a row. The last time that happened was in the early 1970s.
The copper price is seen as a proxy for global manufacturing – or, more precisely, Chinese manufacturing.
China is the largest consumer of copper and the outbreak of the Coronavirus last month interrupted what was a fairly respectable recovery from the lows of September 2019. There is considerable confusion over the severity of the virus and whether it has peaked and is on its way out, or whether Chinese authorities are muzzling a truly frightening outbreak.Read: Copper sees worst losing streak since 2018
The copper price tells its own story. Chinese economic growth will likely slip to 5% or lower in the first quarter of 2020.
International Man resource expert Marin Katusa is long-term bullish on copper, but believes prices will drop lower before they rebound. Copper prices in US dollars are down 12% in the last few weeks to $2.55 a pound, and there may be further downward pressure coming from two of the largest producing countries, Chile and Indonesia.
Labour strikes in Chile resulted in production shutdowns in 2019, and that unrest is by no means over. Anglo American reported a 5% drop in its fourth quarter production in 2019 relative to the same quarter in 2018, although this was due to a range of factors, including a change towards a tolling arrangement with outside suppliers.
Another major copper producer is Freeport-McMoRan Inc, which owns Indonesia’s Grasberg, the world’s largest gold mine and second largest copper mine. Freeport has been embroiled in disputes with the Indonesian government, which forced the mining group to relinquish majority control in 2018 in return for retaining the right to mine until 2041. Last week Barrick Gold CEO Mark Bristow told the Mining Indaba in Cape Town that he is interested in buying Grasberg as it is a high-quality, long-life asset.
All this uncertainty sent the price of copper shooting up by 11% at the start of this year, until the Coronavirus sent it crashing down again.
It may go lower still, but US-based RJO Futures’ outlook report reckons copper is one to watch in 2020 as it is most likely to experience a sustained bull market, in part because of a long-overdue weakening in the US dollar.
Source: International Man
The International Copper Study Group forecasts world copper mine product to grow 2% this year after a 0.5% decline in 2019. Analysts are expecting a robust 4% growth in refined copper production in 2020, after a series of smelter disruptions and shutdowns in 2019, mostly for maintenance and technical upgrades.
The market deficit for 2019 of 320 000 metric tonnes is likely to swing to a surplus of 280 000 tonnes in 2020. That will keep spot prices under pressure over the coming months.
What might change this outlook is a quick containment of the Coronavirus and a bounce-back in Chinese manufacturing later in the year.
This is what has the copper bulls excited.
The following chart shows the steady decline of manufacturing as a percentage of GDP among the world’s leading economies. What it really illustrates is the crowding out of manufacturing by the financial sector.
David Nicholls, newly-appointed chair at the Nuclear Energy Company of SA (Necsa), says restoring financial stability to the company is his top priority.
The former chief nuclear officer at Eskom, responsible for the Koeberg nuclear power station, and before that head of the Pebble Bed Modular Reactor project, says Necsa has a crucial role to play in developing a sustainable energy future for the country.
But before that he wants to restore staff morale and make sure there is enough money to meet monthly expenses. Last year the company asked Parliament for R500 million to cover its monthly operating expenses. The company has been in turmoil since 2018 when the board was dismissed by then-energy minister Jeff Radebe. It has lost an estimated R1 billion due to repeated shutdowns of its medical isotopes production plant.
“Given the present financial crisis at Necsa, there’s very little money in the kitty,” Nicholls told Moneyweb.
“We’re in discussion with the Department of Mineral Resources and Energy and through them other government departments, and also with the banks about getting support. We paid wages last month and all other bills, and that’s going to be a challenge for the next few months.”
Repeated changes in directors and management, coupled with the financial crisis, has taken a toll on staff morale.
Restoring morale and reviving commercial operations are key priorities for the new board.
WATCH: David Nicholls talks to Moneyweb
The NTP medical isotopes division is the main money-spinner at Necsa, but has been shut down for the best part of a year for both technical and regulatory reasons.
It is now up and running, but the supply interruptions caused by the shutdowns have damaged customer relations, which could take a year to restore, says Nicholls. It exports life-saving medicines used in the treatment of cancer to more than 60 countries. The nuclear regulator ordered the shutdown of the NTP medical production plant for several months, due to inadequate paperwork related to safety compliance – a move that was slammed as regulatory overkill by many in the industry.
Another key division is the Pelchem fluorochemical production facility. The plant is in serious need of investment and upgrade, says Nicholls.
The Safari-1 reactor is more than 50 years old and will either have to be shuttered or replaced in 2030. “We have to look very carefully at the long-term viability of that industry to make sure we’re not building something to meet a need that’s going to go away.
“If we’re going to go on being in the business and exporting radionuclides, we need to address that and look at replacing the reactor,” adds Nicholls. “It clearly will not be cheap, so there must be a business case to go along with it. The discussion with government is what is the acceptable cost of the reactor replacement.”
Manufacture of antiretrovirals
Pelchem has a strong customer base and a number of short-term projects that should increase its profitability. It has established, along with Mintek, a business case for the local manufacture of antiretrovirals (ARVs), and these could be brought to market in the near future. Pelchem is the largest manufacturer of fluorochemicals in the southern hemisphere.
Necsa has been dogged by accusations of political interference under Radebe, who fired the board led by then-chairman Kelvin Kemm and CEO Phumzile Tshelane in 2018. Kemm’s suspension, as well as that of another board member, Pamela Bosman, was overturned by the Pretoria High Court in 2019. This is being appealed by Necsa. Tshelane’s dismissal is the subject of ongoing disciplinary proceedings.
The organisation has had no fewer than six CEOs and four chairs in little over a year. In 2018 it had ten board members, but the last four remaining members – including the previous chairperson Phulane Kingston – resigned in January, blaming Minister of Mineral and Energy Resources Gwede Mantashe for his lack of support.
Mantashe took to Twitter to express his dissatisfaction with the outgoing board, saying: “We can’t allow dysfunctional governance. We must appreciate that correcting governance is painful.”
Though barely three weeks into his new appointment, Nicholls says the court cases and disciplinary proceedings involving former staff will have to be resolved. “I’m taking the view that they must look forward and not backwards. It may be challenging to go through a CEO selection process while we have still got a CCMA [Commission for Conciliation, Mediation and Arbitration] case with former CEO Phumzile [Tshelane].”
Nicholls says he has experienced no political interference, nor does he expect any. “I’ve not to date had any pressures or instructions from anybody. I don’t intend to have any.”
The immediate goals for the new board are to stabilise Necsa, restore staff morale and ensure that Necsa is performing within its mandate from the state.
It should also be returned to profitability and reduce its dependence on state support. “Part of Necsa’s responsibility is its nuclear accountability to the state, such as safety requirements, which may require ongoing state financial support,” says Nicholls.
Necsa has the capability of building nuclear grade components that can supplied to any new nuclear power plants envisaged under the Integrated Resource Plan (IRP), the government’s energy plan for the country. The latest IRP, issued in 2019, envisages 2 500 megawatts of energy supplied from new nuclear power after 2030.
Report by Open Secrets and Shadow World Investigations connects the dirty dots. From Moneyweb.
Listening to the testimony of bankers before the Zondo Commission of Inquiry into allegations of state capture, you might believe they were unwitting victims of the Guptas and acted quickly and virtuously to throttle their corrupt ways by closing their bank accounts in 2016.
It turns out they may have been part of the capture project.
A report by Open Secrets and London-based Shadow World Investigations released on Thursday (February 6) puts bankers, lawyers, accountants and consultants squarely in the frame of the state capture project.
The report outlines the tools of money laundering: smurfing and layering being two of the most common.
Smurfing is where you break up large sums into smaller amounts to defeat anti-money laundering reporting requirements. The money is scattered around in a blizzard of transactions designed to hide the source and eventual destination.
Layering conceals the source of the money through a series of transactions and bookkeeping tricks.
To help cover their tracks even further, the Guptas stoked racial tensions in SA by promoting the meme ‘white monopoly capital’ to divert attention away from their looting.
This reprehensible chapter in SA’s recent history is outlined in gory detail in The Enablers.
Here are the key figures in the report:
R5 trillion loss to the economy over five years through state capture;
Five million job opportunities lost;
R100 billion in lost tax revenue following the attack on Sars facilitated by consulting firm Bain & Co;
R288 million or 82% of the public funds spent on the Estina Free State dairy project was channelled to Gupta-controlled companies in Dubai and SA;
R1 billion a year spent by Eskom on the contract with consulting firm McKinsey, with Gupta-linked Trillian to receive 30% of this despite no signed contract being in place;
R16 billion escalation in Transnet’s 1 064 locomotive deal to facilitate kickbacks;
R600 million irregular prepayment by Eskom to Gupta-owned Tegeta to enable the purchase of Optimum Coal; and
R20 billion irregular expenditure at Eskom between 2012 and 2018.
Lais, lies and more lies
The Guptas and their enablers reportedly made use of money laundering hubs such as Dubai, Hong Kong and the British Virgin Islands. The report lists as an enabler one Stephen Lai, a Hong Kong chartered accountant who helped spirit away the gains of corrupt deals at Transnet.
Lai made little attempt to disguise his fabulous menu of services.
It included hiding one’s identity from the public, shifting funds offshore to reduce tax liabilities to zero and the possibility of never having to submit a report to regulators.
Lai would set up companies for the Guptas and make them look legitimate by, for example, creating a fake history.
Lai pops up as a key Gupta enabler even though he was the recipient of just $11 600 in fees. He set up Regiments Asia and Tequesta Group Limited, both on the same day –June 20, 2014 – and had Gupta front-runner Salim Essa listed as director. Regiments Asia and Tequesta made hundreds of payments to 181 accountants.
The role of SA banks in state capture
SA’s major commercial banks, when approached for comment on their roles as Gupta enablers, offered the kind of self-exculpatory bosh one might expect.
This new report won’t do their reputations much good.
When the four major commercial banks shut down the Gupta bank accounts in 2016, it was left to India’s Bank of Baroda to clear transactions on their behalf via Nedbank.
“Nedbank’s conduct with regard to their relationship with Baroda is curious for many reasons,” say the authors.
Nedbank closed its own Gupta-linked accounts in 2016, citing corruption and money laundering concerns, notwithstanding pressure to keep the accounts open from senior ANC officials. “Despite these overtly suspect circumstances, Nedbank only terminated this relationship in 2018, long after widespread reporting had indicated that Baroda’s SA business was dominated by Gupta companies.”
Transnet locomotive deal
HSBC was arguably the most important enabler of looting at Transnet, having handled most of the transactions for front companies CGT, JJT, Tequesta and Regiments Asia. HSBC only flagged suspicious transactions between CGT, JJT and other shell companies three years after the transactions.
Nedbank’s name pops up again in respect of Transnet’s 1 064 locomotive deal. Gupta-linked Regiments facilitated and arranged a R12 billion syndicated loan from several banks. Two days after this facility was arranged, Regiments organised an “interest rate swap” which was agreed by Nedbank.
This dramatically increased the rates payable by Transnet, generating significant profits for Regiments and Nedbank.
Nedbank defended its participation in the swaps– from which it made about R75 million – saying there was “nothing untoward” about the deal. The report raises doubts about this: a whistleblower reports Nedbank was the only bank willing to undertake the swap, while other banks found it inexplicable that an unknown external consultant, rather than Treasury, would be brought in to handle the swap.
Those familiar with the swap market regarded the fees as “unimaginable” and a “rip off”, not to mention the conflict of interest that arose with Nedbank being both lender and orchestrating the interest rate swap.
Nedbank didn’t ride this gravy train alone. All SA banks, including several international ones, were on board.
In another Transnet deal, the Guptas used shelf company Bex to facilitate the China North Rail deal with Transnet to supply locomotives. Transnet reported in December last year that it would approach the courts to recover money for locomotives paid for but not delivered. Of 232 locomotives ordered, only 22 had been delivered. Standard Bank set up the Bex bank accounts, and held accounts for other Gupta front companies, including Homix, which has been implicated in laundering kickbacks related to several corrupt contracts.
In his evidence before the Zondo commission in June 2019, South African Reserve Bank official Shiwa Mazibuko said the Homix transactions raised almost every single red flag for money laundering, and that it was inexplicable that Standard Bank did not pick up on these, or, if it did, failed to act on them.
The red flags included a bank account lying dormant for a long period, then seeing a massive spike in deposits which were immediately transferred to other accounts.
The Estina dairy project – the Guptas’ cash cow
In 2013, Ace Magashule, then Free State premier, announced the launch of the Vrede dairy farm as a state-of-the-art facility producing 100 kilolitres of milk a day. Estina was the company contracted to build the farm.
Analysis of banking records and other documents by Shadow World Investigations shows the vast majority of the R280.2 million paid to Estina by the Free State government was transferred into accounts controlled by the Guptas.
There were red flags aplenty from the get-go: Estina had no prior experience in agriculture; was headed by a former IT salesman, Kamal Vasram, who continued working at Toshiba while supposedly setting up a giant dairy farm; there was no competitive bidding process for the project; and 51% of the shares in the project was earmarked for local beneficiaries.
National Treasury investigated the project in 2014 and concluded that no further payments should be made to the project until various risk factors had been identified, such as lack of clarity about the actual deliverables. The Public Protector concurred, but none of their recommendations were acted on.
A decision was then made to transfer the project to the Free State Development Corporation, which should have ended Estina’s role.
Estina relied on an agreement that required further payment of R136 million for services supposedly delivered. The claim was ludicrous.
Estina had spent almost none of its own money on the project, nor had it delivered substantial services of any kind. By May 2016, Estina’s claim for R136 million was settled in full.
The report shows that 64% of all the money paid by the Free State government to Estina was transferred to the Guptas’ Dubai vehicle, 18% to their local vehicle and 11% to Sars for Vat costs. A paltry 7% was spent on other expenses.
Gupta auditors KPMG found nothing wrong with so many glaringly suspicious transactions.
Jail time for offenders
At the launch of the report last week, Andrew Feinstein of Shadow Watch Investigations, said the arms deal was the first example of state capture.
Hennie van Vuuren of Open Secrets says the Zondo commission must secure the evidence in its possession. “We want to see criminal liability for CEOs involved in state capture, and we want a reparations fund to be established to recover stolen money to assist social movements and civil society.”
A key deficiency in SA law relates to public disclosure of beneficial ownership. Shell companies were set up for the Guptas and others both in SA and abroad. The institutions implicated in state capture are conflicted in performing their duties and torn between their obligations under law and the need to protect their clients.
The Companies Act needs to be amended to provide a publicly accessible registry of beneficial ownership, states the report.
“The failure of SA’s financial institutions and professional bodies to prevent grand corruption has meant that investigative journalists and activists have been solely responsible for pursuing transparency and accountability.”
They have been dogged by allegations of corruption for years. From Moneyweb.
On Monday Justice and Correctional Services Minister Ronald Lamola announced that all 15 Masters’ Offices within the country’s high courts were to be shut down for a day while the Specialised Investigating Unit (SIU) conducted search and seizure operations.
The offices were due to reopen on Wednesday. In a statement, Lamola apologised for any inconvenience, adding: “This investigation was necessitated by several allegations of maladministration and corruption and the Mpumalanga case wherein it is alleged that an official in the master’s amassed R1.7 million through fraudulent activities which further highlighted the need for an investigation of this nature.
“As a result, we will be shutting down all Masters’ Offices across the country to enable the SIU to gather, collate and retrieve information relevant to the investigation without any hindrance.”
One of the primary tasks of the Master’s Office is administration of deceased and insolvent estates.
It also administers the Guardian’s Fund, which manages money on behalf of those deemed legally incapable, as well as minors, unborn heirs, and missing or untraceable people.
King Sibiya, head of Lungelo Lethu Human Rights Foundation, which defends the poor against abusive creditor practices, says he has been complaining for years about corruption in and around the Masters’ Offices, which he says are breeding grounds for predators looking to pick at the cadavers of deceased estates.
“We are inundated with cases of widows whose husbands have passed on and who in terms of the law are the rightful executors of the deceased estate. But it is a common practice among banks to have themselves appointed as executors instead, particularly where there is an outstanding mortgage loan owed by the deceased.
“This leads to huge conflicts of interest where banks are deciding how to share the spoils in their favour, with no proper oversight whatsoever from the Master.
“The banks then rush to court to foreclose on a mortgaged property without following the law,” he adds.
“I am obviously extremely pleased that the SIU is now looking into this and that we might finally get some justice for the thousands of people who have been financially ripped off by this kind of predatory behaviour.”
Tony Kay, a KwaZulu-Natal property developer, has campaigned for years for police to investigate the nexus between liquidators and the Masters’ Offices after a Shelly Beach property deal he was involved in went pear-shaped. It was then that the liquidators stepped in.
The property developers in this case, like many others, complained that the auction process was irregular.
The Pretoria Master’s Office last year launched an inquiry into a botched property deal in which Pietermaritzburg liquidator Pierre Berrangé was involved. In recent years, the complaints against liquidators and Masters’ Offices have multiplied – along with the sums involved.
“We want a Master’s Office that will conduct its affairs with integrity in line with Batho Pele [‘People first’] principles and not squander resources meant for the poor and vulnerable in society,” said Lamola on Monday.
“We are fully aware that the Master’s Office plays a critical role in our communities, it is an office that works for the most vulnerable in our communities, it works for orphans, minor children, and the widowed. We do however request members of the public to postpone their intention to visit the Master’s Office just for a day.”
The accusations against the Master’s Office, some of them aired in the Zondo commission of inquiry into state capture, range from the opportunistic to the criminal.
The surprise search and seizure raid will have caught corrupt officials in the Masters’ Offices off guard, leaving little time to lose files or shred incriminating evidence.
The SIU investigation will also look into the affairs of the Guardian’s Fund, as well as the supervision of the administration of companies and close corporations in liquidation.
The 2018 annual report for the Guardian’s Fund showed assets of R13.6 billion, almost 24% more than the R11 billion it had in 2016. In 2018 it received more than R1 billion in investment income.
One of the reasons the fund keeps growing is that so much of this money remains unclaimed, according to Sean Rossouw, founder of Benefits Exchange.
Benefits Exchange offers a free search engine for those trying to track down pension and other benefits that may be owed to them (the first search is free, while a processing fee of R25 applies to subsequent searches).
The Guardian’s Fund is managed by the Public Investment Commissioner.
In terms of the Administration of Estates Act, the Master of the High Court is responsible for paying out from the Guardian’s Fund.
The SIU investigation will also look into “the supervision of the administration of companies and close corporations in liquidation; the safeguarding of all documentary material in respect of estates, insolvencies and liquidations; the processing of enquiries by executors, attorneys, beneficiaries and other interested parties; and the appointment of executors, trustees, curators and liquidators”.
Last year Business Day reported that 45 000 trust files went missing from the Pretoria offices of the Master of the High Court after a storm apparently blew off the roof at a storage facility.
The SIU will have a lot of paperwork to get through over the coming weeks and months.
It lies in the cryptosphere – and what’s coming should terrify national governments. From Moneyweb.
Every generation or so money goes through an evolutionary shift, and 10 years from now the fiat currencies currently in use will be regarded as relics of a bygone age, much like the fax machine.
Cryptocurrencies backed by artificial intelligence (AI) are about to swarm the world of money, bringing with them a level of stability that central banks promised and never delivered. About to come is a whole new architecture for the world financial system, including investment.
In the world of investing, the days of the brilliant stock picker may be numbered. AI and predictive technology will swallow them whole.
New cryptocurrencies promise everything a unit of money should offer in a technological age: a globally accepted unit of value, instant transfer, anonymity, and security.
All currencies suffer one critical deficiency: their values are unstable. That’s largely a function of central bank control over the issue of new money and the resulting inflation which eats at currency values. This complicates the world of commerce since all trade rests upon a floating barge of variable currency value.
South Africans understand what this means. The rand is the world’s most traded emerging market currency.
Back in the 1970s a US dollar cost 70 cents in the rand. Today one US dollar costs R14.60, which is nearly 21 times more expensive than 50 years ago.
This might be an extreme case, but all currencies in a free-floating system suffer the same problem.
Bitcoin attempted to change all this by removing money issue from the control of any central banks. There will never be more than 21 million bitcoins in issue. Since its launch in 2009, Bitcoin has gone from nothing to more than $12 000, making it the world’s best performing currency in the last decade.
The cryptouniverse has been defined by bitcoin and a few lesser coins powered by speculative interest and wild swings in value.
None so fast as a credit card
But as a payments system, none have been able to replicate the speed and convenience of a Visa card system with payment executed in seconds. That will change as technology and transaction speeds improve.
Lars Holst, founder of London-based crypto exchange GCEX, has studied the future of money for years and believes Africa is ripe for a crypto monetary revolution.
“I don’t think we are far away from replicating Visa and Mastercard payments systems in terms of speed. The whole settlement system in forex is inefficient,” says Holst, who previously worked in forex at Danish-based Saxo Bank.
“Why should it take two days to settle forex payments? And the fees you are charged for this are excessive.
“The fiat money system has been corrupted by central banks printing excessive amounts of money and debasing the currencies.
“Many of the new cryptocurrencies coming to the world take this power out of the hands of central banks. It’s clear that the future is in crypto rather than fiat currencies.”
Bitcoin founder Satoshi Nakamoto and others have applied themselves to the question of a future money system using blockchain technology to verify and validate payments between two people transacting anywhere in the world.
In 2009, Satoshi explained the problem with the current fiat money system that inspired bitcoin: “The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts.”
Identity will be central to the future of money
The current monetary system Satoshi complains about is a relatively modern confection. As David Birch points out in his book Identity is the New Money, we entered the world of fiat currency when Richard Nixon ended the convertibility of the US dollar into gold in 1971. As such, fiat is relatively new. The next evolution is now about to sweep it aside.
“Just as the machine-made, uniform, mechanised coinage introduced by Isaac Newton in 1696 better matched the commerce of the industrial revolution, so we can expect some form of digital money will better match the commerce of the information age,” writes Birch.
Holst argues that fiat currencies, if they exist in 10 years, will have a small portion of the market. “We’re in the era of not just data, but information. We upload information to blockchain in encrypted form so it is not seen by other people. By 2030, we’ll see more private use of what people decide to do with their value. They will have simple keys to keep this information private in a global public network where it is logged but cannot be changed.”
What is about to be let loose on the world should terrify national governments and central banks.
Who in Zimbabwe or Venezuela would not ditch their corrupted currencies for something that is stable, internationally recognised, and beyond the reach of their governments?
The impact of cryptocurrencies on developing countries will likely be huge.
Vodacom and Safaricom launched the M-Pesa mobile money service in Kenya and Tanzania in 2007, allowing users to deposit money into an account stored on their cellphones and transfer funds using PIN-secured SMSs to other users – and redeem cash instantly.
Millions of previously unbanked people now have a payment system that bypasses the banks and is being studied around the world. It’s a relatively small step from this to the cryptosphere and monetary independence.
There is plenty of talk about money moving into the digital age, but we’re already there: cash accounts for only about 4% of the total money in the system. The poor – those without bank accounts – rely heavily on cash, but this comes at a cost.
Going fully digital removes the cash register, the ATM and the cash transit vans.
Cash is acceptable to vendors because its value is certain and, while counterfeit notes are known to exist, they are insufficiently plentiful to disrupt commerce.
Enter the stable coin …
Gregor Kozelj is the developer of the X8 stable coin, one of several stable coins offering currency stability by spreading assets over the eight top currencies in the world as well as gold.
Kozelj is a former portfolio manager who spent several years developing a technique for portfolio risk management that did not rely on predicting whether asset prices would go up or down, but on measuring and limiting downside risk. He then translated his system to investments and banking, where treasury systems could be stress-tested in milliseconds rather than the months it previously required.
It was out of this experience that he developed the X8 stable coin. Backed by AI, it is designed to fight inflation through artificially intelligent reweighting of the eight underlying currencies and gold.
As its name implies, the X8 stable coin is not intended to shoot for the stars, as many investing in bitcoin are hoping for. It is designed to hold its value, neither rising nor falling no matter what turbulence befalls the underlying currencies.
Many companies attempt to replicate this by spreading their cash over multiple currencies, but this is both expensive and unwieldy. There are simply too many moving balls to do this efficiently. Each time someone invests in X8, new X8 coins are ‘minted’ and cash is transferred into the eight underlying currencies and held at custodian banks. Once you are part of the stable coin universe, you are able to make payments on the blockchain without using bank transfers.
Global money decentralisation
“Many people say we are entering the age of AI, but we are already there,” says Kozelj.
“I don’t see much future for fiat money 10 years from now. Fiat will probably still be in use, but I see the global monetary system being decentralised and taken out of the hands of central banks, which was the original vision of bitcoin and blockchain. In a decentralised world, anyone will be able to mint their own currencies. Whether they will be accepted by others or not is another question. But there will be many different cryptocurrencies that will achieve broad acceptance.”
There are more than 5 000 cryptocurrencies, and a handful of these are stable coins.
Tether was first to be launched and is a crypto coin that aims to be linked 1:1 with the US dollar. Then came True USD, USD Coin, both linked to the US dollar, and Stasis Euro, backed by the euro.
Investing in this new world
Just as money is going through an evolutionary shift, so too is the world of investment. Advances in AI and quantum computing will connect us based on an intimate profile of each individual’s investment risk tolerances and appetite, and furnish opportunities not presently available, says Kozelj.
“AI will be able to track movements of capital and changes in competitiveness of economies around the world and adjust your stable coin weightings at any given moment to provide money where it is needed, where it is most productive, so it is working for you. It will likewise revolutionise the world of investment by measuring in real time opportunities to maximise returns and growth on a global basis.
“Where Bitcoin has got it wrong, it accused central banks of printing money,” says Kozelj. “But central banks have a mandate to support their economies with whatever it takes.”
He adds: “History shows us that if you are not adapting to the changing economic environment, you need new money to purchase new productivity growth, which includes innovations. If the same amount of currency is in circulation, people cannot buy the new things even if such innovations would change lives and businesses for the better. It blocks progress.
“Every time we went back to the gold standard, which happened a lot in history, it was abandoned. Is gold that bad? No, it only failed because you cannot adjust the volume of gold in synchronicity with the rate of innovative, real productivity growth to keep the economy and prices stable.
“Naturally, runaway money printing isn’t good, yet fixed money supply is just as dangerous and both invariably lead to instability. Bitcoin has and will continue to have the same issue – it will have a fixed supply in the future. AI-driven stable coins are one way to overcome this problem.”
Rescue practitioners for other Gupta companies say it’s unable to repay R402m loan. From Moneyweb.
Business rescue practitioners for the eight Gupta companies under rescue have applied to the Johannesburg High Court for the winding up of Oakbay Investments, one Gupta company that avoided being placed under rescue.
The application is being brought by Tegeta Exploration and Resources and Islandsite Investments, both of which were placed under business rescue nearly two years ago.
This is the third time the practitioners have applied for the winding up of Oakbay. The first application in September 2018, claiming R2 million in rental and services owed by Oakbay to Tegeta, was withdrawn when the claim was settled. In February 2019 a second winding up application claimed Oakbay owed R3.8 million, but it too was withdrawn when the bill was paid at the last minute.
When Oakbay was initially unable to settle Tegeta’s above-mentioned R2 million claim, its acting CEO Ronica Ragavan admitted that the company was unable to pay, according to an affidavit by Kurt Knoop, one of the business rescue practitioners. Despite Oakbay later settling the claim, acknowledging being unable to pay constituted an act of insolvency.
This act of default triggered a claim for repayment of a loan of R402.3 million, a figure that was determined after an external forensic analysis.
The attorneys for the business rescue practitioners demanded repayment of the loan in September 2018, to which Oakbay replied that it was not liable. “The denial of liability was laconic in the extreme, without any elaboration,” says Knoop’s affidavit.
Oakbay formed part of the Gupta empire, and ran into trouble after SA’s commercial banks closed its accounts, citing reputational risk and the potential breach of banking regulations. The Gupta companies then relied on banking facilities provided by Bank of Baroda, which conducted a correspondent relationship with Nedbank. Bank of Baroda notified Oakbay of its intention to terminate its transactional banking facilities in 2017, and would thereafter close its SA branch. This left Oakbay and the Guptas without any banking facilities, forcing them into business rescue.
Oakbay was the holding company for the Gupta empire, and was reliant on its underlying businesses for survival.
Its main asset is Tegeta, which holds shares in four companies: Optimum Coal Mine, Koornfontein Mines, Optimum Coal Terminal and Shiva Uranium, all of which are under business rescue. Cumulatively, these companies owe R4 billion to creditors and are currently under care and maintenance.
Oakbay’s other assets include: Oakbay Resources and Energy, which had a share in Shiva Uranium; Westdawn Investments (whose sole source of income was from mining contracts it had with Optimum Coal Mine); and two labour broking companies.
The entire business foundation of Oakbay has failed and is unlikely to ever recover as a business, says Knoop.
Business rescue practitioners have been unable to access company records and financial statements for Oakbay.
As Moneyweb previously reported, the remnants of the Gupta empire are facing multiple court battles, one of them from Westdawn for the liquidation of Optimum Coal, and another from black-owned mining group Lurco, which is asking the court to interdict the sale of Koornfontein to Black Mining Royalties for a much lower price than Lurco is offering.
Fund managers surveyed by Bank of America Securities are bullish SA on bonds, but bearish cash. From Moneyweb.
There isn’t much for investors to celebrate in South Africa, with economic growth lumbering along at a forecast 0.8% this year and 1.1% in 2021.
But there are a few pockets of hope amid the gloom. A recent survey of 15 fund managers by Bank of America Securities shows two-thirds believe SA bonds are undervalued (against 33% a month ago). The last time fund managers were this bullish on bonds was in 2013. There was consensus among the managers that SA 10-year bonds were a buy at 9.5%.
This comes on the cusp of a possible further credit downgrade by Moody’s, which cut SA’s sovereign rating from stable to negative last November. A further downgrade will bump SA from the FTSE World Government Bond Index (WGBI), resulting in a predicted sell-off as high as R117 billion.
Moody’s cited high unemployment, income inequality and distressed state-owned companies, notably Eskom, as causes of its disquiet.
Fund managers surveyed by Bank of America (BofA) appear to agree with these sentiments, with more than half expecting SA to leave the WGBI in 2020. If we survive this year, the likelihood of being dumped from the index next year recedes, according to fund managers.
Only 7% of those surveyed have any hopes of government accelerating reform, and less than half see equities being higher within the next six months.
The forecast for the repo rate over 12 months is 6.12%, with bond rates forecast at 8.75% and the rand at R14.85 to the US dollar.
John Morris, South Africa investment strategist for BofA Securities, says one of the key risks for fund managers is the weak earnings outlook in 2020, with Eskom’s well publicised troubles looming large over the economy. Less than a third of the fund managers surveyed have any hopes of a financial or operational solution to Eskom.
John Morris, South Africa investment strategist for Bank of America Securities. Image: Moneyweb
“If Moody’s downgrades SA, bonds can rally,” he says. “That tells us that a downgrade is already priced into the market. We’re also bullish on the rand, which is the most shorted currency among emerging market currencies. We may see a rally in the market in the first quarter of this year which could then peter out. Investors want to see evidence of government reforms and policy certainty before investing. But a bit of positive news can push prices by 20-25%.”
Fund managers have turned bearish on cash over the last month, turning their affections to bonds instead. They expect earnings growth of 8.1% over the next 12 months, which is better than the expected 6.4% recorded a month ago. For the third month in a row, fewer fund managers see the equity market as undervalued, though there are more buy and sell opportunities, making it a stock pickers’ market.
NHI risks ‘still some way off’
Sectors that are expected to perform are tobacco, health care, banks and precious metals. Morris says BofA recently upgraded Netcare and Life Healthcare, notwithstanding the uncertainties facing health providers with the introduction of national health insurance. “National health insurance risks are still some way off,” says Morris.
Optimism has returned to the bombed-out retail sector, with BofA recently upgrading Massmart on its announced restructuring plans. Pick n Pay, Spar and Mr Price are other retailers showing promise as we head into 2020.
Real estate, life insurance and gold are the least preferred sectors.
Some 40% of fund managers expect the economy to improve this year, with nearly half expecting inflation to rise.
Two-thirds of fund managers say monetary policy is too restrictive and would like to see interest rates drop to boost the economy. There is a consensus view that the SA Reserve Bank will cut interest rates in 2020.
A third of fund managers expect the February budget to bring more bad news.
Some submissions to the legislature’s email address have been blocked for “unacceptable content”. From Groundup.
Parliament announced, on Thursday, that it has extended the deadline for public comment to 29 February on the land expropriation with compensation proposal, apparently bending to pressure after numerous submissions were blocked by parliamentary IT servers for “unacceptable content”.
The extension comes after several people attempting to make submissions to the designated parliamentary email address got a message back saying their emails were blocked for “unacceptable content”.
Most of the public submissions are being channelled through participative democracy organisation Dear South Africa, which offers a platform for the public to make submissions to Parliament. The submission page can be accessed here.
“The fact the Parliament has decided to extend the date for submissions on land expropriation without compensation is a victory for participative democracy,” says Dear South Africa founder Rob Hutchinson. “Dear South Africa and many other citizens protested the fact that emails were being blocked for ‘unacceptable content’. When we looked at the content, we could find nothing objectionable. This is worrying that Parliament’s servers appeared to be rejecting submissions for reasons that are vague and lacking transparency. We’re pleased that the extended deadline gives the public more time to make their voices heard, but we are watching closely to ensure that submissions are not being blocked for spurious reasons.”
GroundUp is in possession of several of these bounced emails and they all share one thing in common: they are opposed to the proposed amendment to the Constitution. There appeared to be nothing offensive in the emails, other than some strident language in opposition to corruption and land expropriation without compensation.
Dear South Africa has compiled more than 160,000 comments on the proposed change to Section 25 of the Constitution which would allow the state to expropriate land without compensation. More than 80% are opposed to the amendment, which is substantially higher than the 57% opposed to it when a similar campaign was launched by Dear South Africa a year ago.
GroundUp sent questions to Parliament’s IT Services department about the blocking of submissions but had not received a response at the time of publication.
In a previous response to Dear South Africa over the blocking of submissions, Parliament’s IT Services department said one email was blocked for undesirable content flagged by “proactive filters” operated by its internet service provider. It was unable to say what was undesirable about the submission as such messages are deleted after three days. On further investigation it was found that Parliamentary servers blocked the domain from which the submission had been sent.
Other emails originating from Gmail and Telkom servers have also been blocked.
Hutchinson says it may be a technical issue behind the recent rejection of submissions, with Parliament’s spam filters set too high. These are filters that reject incoming emails containing certain key words, or emails sent from suspicious domains.
“As a participative democracy organisation, we are completely agnostic on the question of land expropriation, but we want to make sure that as many voices as possible are heard on this vital issue for the country. We don’t think Parliament should be deciding what views are acceptable or unacceptable.”
Human rights advocate Mark Oppenheimer says land expropriation is an emotive issue for many South Africans, and the way the matter is being handled is being closely observed around the world. “This has huge implications for South Africa going forward and how we are seen to handle property rights will undoubtedly impact foreign investment in the economy. If government is seen to be trying to smuggle the issue through Parliament in the dead of night, as it tried to do last December before the holidays, or to obstruct the public participation process, this certainly opens it up to legal challenge if the amendment goes through.”
Hutchinson says South Africans will have to live with the consequences of the land expropriation vote, and Parliament must be seen to be doing everything in its power to encourage debate on the subject.
British-born David Nicholls is highly respected in the industry. From Moneyweb.
Minerals and Energy Minister Gwede Mantashe’s appointment on Friday of former Eskom chief nuclear officer David Nicholls as chair of the troubled Nuclear Energy Corporation (Necsa) was a surprise move.
It followed the resignation of the previous board a week ago, leaving the organisation rudderless, though Ayanda Myoli continues as acting CEO. A week ago the remaining four members of the Necsa board who hadn’t already jumped ship (there were 10 board members in 2018), sent a letter to the minister berating him for his lack of support. The four directors who resigned were Dr Pulane Kingston, Dr Pulane Molokwane, Matlhodi Ngwenya and Bishen Singh.
Mantashe fired back on Twitter: “We must reinstate Necsa into a functional state. We can’t allow dysfunctional governance. We must appreciate that correcting governance is painful.”
Necsa has been in turmoil since late 2018 when former energy minister Jeff Radebe sacked the previous board, including Dr Kelvin Kemm (chair), CEO Phumzile Tshelane and finance director Pam Bosman, on dubious grounds of “defiance”. In August last year the Pretoria High Court overturned Radebe’s suspension of Kemm and Bosman, but made no ruling on Tshelane’s status as a disciplinary process was still ongoing.
Moneyweb is in possession of an invoice from MNS attorneys, Necsa’s legal advisor, for R1.7 million related to Tshelane’s disciplinary hearings. This may explain why Necsa’s legal battles with former staffers seem to have no resolution, says a company insider.
Hopefully, Nicholls can bring some sorely needed stability to the company and resolve the mess initiated by Radebe.
Nicholls is highly respected in the industry and regarded as a non-nonsense leader who gets things done. As chief nuclear officer at Eskom he was responsible for the new build programme at Koeberg power station in recent years – and was always fair and diligent in his dealings, says an industry insider who asked not to be named.
While at the utility he revitalised the Pebble Bed Modular Reactor (PBMR), an area in which South Africa was a world leader.
Nicholls was one of nine executives let go as part of a programme to cut Eskom’s wage bill, according to a 2018 Eyewitness News report.
He had worked his way up through the ranks at Eskom, working in its nuclear engineering department in the early 1980s before being appointed as technical support manager at Koeberg in the early 1990s. He headed up the PBMR project before it was put on the back burner during former president Jacob Zuma’s tenure. He was later appointed chief nuclear officer at Eskom, and has experience managing Koeberg, which is the lowest cost provider of electricity to the grid.
Others appointed to the Necsa board are Dr Namane Magau, James Maboa, Senamile Masango, Joseph Shai, Letlhogonolo Noge-Tungamirai and Dr Gregory Davids.
Maboa is reportedly well respected by the largest trade union at Necsa, the National Education, Health and Allied Workers’ Union (Nehawu), and some on social media endorsed Masango as a progressive nuclear scientist. Davids has a background in human resources.
Zolani Masoleng, branch chair of Nehawu at Necsa, said the union welcomed the appointment of the new board.
“This is a very important step in restoring governance and stability in the organisation. It gives all of us another chance to turn Necsa around from the destructive path under the previous board, and place it once more in the path of growth and sustainability.
“We are making a clarion call to the board to lead by example in inculcating a culture of good corporate governance and to at all times place the interests of Necsa above those of their own. None of them should individually or collectively act in a manner that dishonours the organisation.
“As the majority union we will work with the board to make Necsa a prosperous organisation. We wish them all the best.”
There is lingering uncertainty over the fate of the board members sacked by Radebe – Kemm, Tshelane and Bosman – all of whom remain in legal dispute with Necsa.
In August last year the Pretoria High Court ordered the reinstatement of Kemm as chairman and Bosman as head of audit and risk. The effect of the judgment was to dissolve the replacement board, according to legal experts.
In October last year the Portfolio Committee on Mineral Resources and Energy chimed in, saying there was no board at Necsa. It told management and labour to work out their differences in the interests of the company.
The replacement board’s letter of resignation claimed Necsa had been technically insolvent since 2014 and had been making losses since 2014 – a claim that Kemm refutes: “In the last year that I was chairman, before being removed by Radebe, we made a R300 million profit. This resignation letter is a load of nonsense that attempts to shift blame to my board. It is also an insult to the Auditor-General which gave us a clean audit report as well as to the Institute of Directors which gave us an award for our outstanding governance.”
Kemm continued: “It is such a pity what has happened to Necsa. We had a stable, profitable company under my board and then Jeff Radebe was appointed minister and started to give us operational instructions, which we objected to.
“Political interference in the running of a state-owned company just does not work. I wish Mr Nicholls all the best in his task ahead’.”
Necsa has been dipping into funds ring-fenced for rehabilitation of the nuclear reactor. Kemm says under his chairmanship, Nedbank demanded collateral of R100 million from the ring-fenced funds for a loan of R60 million to tide it over a cash flow shortage. The R60 million was repaid and the collateral released.
Last week’s resignation letter to Mantashe appears to suggest the company has had to find as much as R554 million from loans, overdrafts and borrowing from emergency funds to meet its liabilities.
New report says auditors need to go beyond scepticism and become suspicious of clients. From Moneyweb.
A report by former head of the London Stock Exchange Sir Donald Brydon published in December says it’s time to split audit from accounting and establish it as an independent profession with its own standards and qualifications.
The new, improved audit should be a profession separate from accounting with its own governing principles, qualifications and standards. “At present it is an extension of the accounting profession, whose ethics and (arguably) mindset it largely adopts,” says the report.
It would embrace non-financial disciplines such as cybersecurity and environmental behaviour and provide more informative reports to different interest groups. Gone are the days of executives being responsible only to shareholders, as economist Milton Friedman suggested. Auditors need to go beyond scepticism and become suspicious, says Brydon.
There is unspoken acknowledgement in Brydon’s report that the audit profession is failing as a public watchdog.
Shareholders want to know how the watchdogs failed to pick up the signs of accounting fakery at Tongaat and Steinhoff, to name just two fairly recent examples.
Part of the problem is the nature of the audit itself: it is expected to provide a reasonable level of assurance that the financial statements are fundamentally true and fair based on a tiny sample of transactions. That said, audit teams are expected to identify areas of high risk and focus on these. New technologies are fast emerging which allows a far higher level of sampling and, aided by blockchain technology, we may soon be able to verify all transactions in real-time.
Many of these problems of the external audit could be improved by strengthening internal audit teams. But here again, there are difficulties: overbearing CEOs often surround themselves with weak internal auditors who can be bullied. Audit committees are supposed to buffer against executive bullying but this too is no guarantee of independence.
The profession has long been dogged by suspicions of corporate capture.
No matter how robust the audit standards, there is a perception that audit independence has been compromised by the accounting business model: the Big Four firms undercharge clients for audit services in the expectation of picking up higher-paying work elsewhere. As Richard Brooks points out in The Bean Counters: The Triumph of the Accountants and How They Broke Capitalism, every crisis is an opportunity for the Big Four accounting firms, whose profit and revenue growth barely skipped a beat during the 2008/9 financial crisis.
Breaking up the Big Four to separate consulting from audit (which would raise the cost of auditing);
Mandatory audit firm rotations; and
Establishing an independent body to appoint and reimburse auditors, rather than allow companies to select their own auditors.
Nicolaas van Wyk, CEO of the SA Institute of Business Accountants (Saiba), says the entire concept of the audit needs to be reformulated. “There should also be different audits for different users of information. As things stand, the audit is designed to satisfy all users of the information but it is severely lacking in the kind of detail different users require.
“For example, if the company wants to take out a loan with a bank, it should provide an audit that specifically addresses the kind of information that the bank requires.”
The Independent Regulatory Board for Auditors (Irba) has introduced mandatory 10-year audit firm rotations (MAFR) as one method of maintaining audit independence. CEO Bernard Agulhas says as of September 2019, 21% of companies on the JSE had rotated auditors – with 41% of those companies citing the early adoption of MAFR as the reason for rotation. All listed companies have until 2023 to comply with mandatory audit rotation.
The Big Four accounting and audit firms – EY, PwC, Deloitte and KPMG – account for the vast majority of audits of the 40 largest JSE companies and 100% of FTSE 100 firms.
“The cost of MAFR will always be insignificant when compared to the cost to investors and pensioners when there is an audit failure, resulting in billions of rands lost, as illustrated by recent failures,” says Agulhas.
“The lead time allowed for the introduction of MAFR of five years has allowed companies and audit firms to plan for this process and for firms offering other prohibited services to cool off in compliance with the Companies Act in order to be eligible to take on audits where they previously did not audit.”
Irba is also in favour of ‘joint audits’ to allow smaller firms an opportunity gain experience and break the Big Four stranglehold. That, however, is easier said than done.
The overwhelming dominance of the Big Four as a repository of skills and know-how may take a generation to overturn.
There have been several radical suggestions in recent years to strengthen the audit: Professor Piet Delport, retired professor of mercantile law at the University of Pretoria, suggests making the audit voluntary, with different stakeholders demanding more focused audits as and when they are needed. Asking audit firms to provide audits that satisfy all users is no longer feasible. If you’re a bank being asked to extend a credit facility to a company, you will want an audit that looks at the company’s realistic ability to repay the loan. Banks are already having to adjust published financial statements to firm up estimates and non-cash transactions – something accounting standards setters have battled with for years.
Auditors not paid enough?
Jodi Joseph, divisional executive at audit and financial software group CaseWare Solutions, says auditors simply aren’t paid enough to provide the kind of audit expected of them. “I think the auditors of the future are going to have to be well versed in data analytics, for the simple reason that technology is going to be a vital part of the audit going forward. The sample sizes are going to have to get bigger. Blockchain will form part of the solution since it can help verify what is a trusted transaction.”
One of the key changes recommended in the Brydon report is to redefine the audit as a means to “establish and maintain deserved confidence in a company, in its directors and in the information for which they have [the] responsibility to report, including the financial statements”.
Agulhas says Irba supports this redefinition and “in particular has been stressing the importance of aligning the audit function to investor needs”.
He explains: “Projects are underway to look at strengthening the fraud risk identification standard, as well as auditor competencies. It may be that more training and competency is required in the area of identifying fraud, which up until now has not been an auditor’s responsibility.”
Principles instead of rules
Another key recommendation from Brydon is the creation of a corporate auditing profession governed by principles rather than rules – for the simple reason that rules are too rigid and easily side-stepped, while principles (such as ‘Do not lie’) are more difficult to fudge.
Irba recently adopted an updated and strengthened code of ethics that was already principles-based. It is also looking at ways to expand the audit beyond financial reporting to provide assurance in areas such as environmental compliance.