Ascendis Health: don’t borrow against equity

Ascendis Health, now trading at a record low, provides a stark warning on the dangers of borrowing against equity. Its news feed on the JSE is littered with “dealings in securities” statements in which it says mainstay investor Coast2Coast has been forced to offload huge chunks of the company’s shares to meet obligations to lenders.

For Coast2Coast, with board representation at Ascendis, it is not a pretty picture. A year ago, Coast2Coast forked out more than R700m to buy 37-million newly issued Ascendis shares at R20 a piece. Now, the stock is trading at a paltry R3.26.

Unfortunately, Ascendis’s other shareholders are being forced to share in the pain, as Coast2Coast’s forced sales continue to drive the share lower. Top market commentators are increasingly critical of directors and investors who hold geared positions in their own stock.

Wayne McCurrie tweeted last week that Coast2Coast’s sales reflected “the danger of borrowing against equity”.

In a scathing observation, Karin Richards said: “This is ridiculous and totally unacceptable. Directors should spend their time acting in the best interests of the company they serve, not speculating in its shares.”

Anthony Clark said Coast2Coast “should be censured and avoided in any future listings they do, and the JSE should enact rules on this type of dealing, which they have pondered and dithered on for months”.

Perhaps a change in rules is exactly what investors need, particularly in light of how poorly JSE-listed stocks have performed in 2018.

Anglo American is pushing on with its Minas Rio iron-ore mine in Brazil despite the difficulties it has had with securing permits and leaks on its 530km-long pipeline to the coast.

After a write-off year in which Anglo expects the asset to post a $320m loss, the company expects to get mine and pipeline back into production in 2019, putting an estimated 19-million tons of iron ore on the market, far less than the 20-million tons to 24-million tons Minas Rio expected to produce for 2019.

This is easily the most difficult asset in the Anglo stable and not without its detractors. Anglo CEO Mark Cutifani has said it was not a project he would have bought or built.

The mine is deep in rolling hills in Brazil and the single pipeline, the world’s longest transporting iron ore in slurry form, is a risky proposition, as the leaks showed, shutting the mine since March.

The mine cost at least $13bn to buy and build, coming in late, with permitting delays contributing to the overruns in time and money.

The mine, it could be argued, led to an enormous restructuring of Anglo since 2012 to repay net debt of $13bn threatening the group’s existence. Anglo sold or shut nearly half its assets to address its debt.

The restructuring has created a more profitable and productive company, with a portfolio of solid assets, and a management team far more considered when it comes to thinking about new projects and growth.

COAST2COAST HAS BEEN FORCED TO OFFLOAD HUGE CHUNKS OF SHARES TO MEET OBLIGATIONS