Pallinghurst look­ing bet­ter

Var­i­ous fac­tors com­bin­ing to bring more cheer to share­hold­ers, writes Char­lotte Mathews

Financial Mail - Investors Monthly - - Feature -

Gem­fields is ex­plor­ing in Colombia for emer­alds, Ethiopia for emer­alds and Sri Lanka for sap­phires

P atient Pallinghurst Re­sources share­hold­ers, whose in­vest­ment has more than halved if they held it since its 2008 JSE listing, will re­ceive their first re­ward in March via a dis­tri­bu­tion from key port­fo­lio hold­ing, Jupiter Mines.

Pallinghurst will re­ceive about R150m from Jupiter’s spe­cial dis­tri­bu­tion of ex­cess cash, which takes the form of a share buy­back. It would pass on a “ma­te­rial por­tion” of this to its share­hold­ers as a maiden dis­tri­bu­tion, if there were no ad­verse mar­ket con­di­tions.

This year, at least two of the three in­vest­ment pil­lars on which Pallinghurst was built are show­ing early signs of de­liv­ery. Pallinghurst and its co-in­vestors own about 85% of Jupiter Mines, which has a man­ganese mine in SA and iron ore projects in Aus­tralia; 42% of SA plat­inum miner Sed­i­belo; and 75% of emer­ald and ruby miner Gem­fields, which is listed in Lon­don.

Pallinghurst was put to­gether in 2007 by SA min­ing leg­end Brian Gil­bert­son, for­merly of Gen­cor and Bil­li­ton, and Arné Frand­sen, an in­vest­ment banker who was CEO of plat­inum em­pow­er­ment con­sor­tium Incwala.

It listed on the JSE in Au­gust 2008, when its shares touched R12.21. They are now at 417c but have al­most dou­bled over the past year in line with a re­cov­ery in com­mod­ity prices.

Ac­cord­ing to the lat­est an­nual re­port, Christo Wiese and his im­me­di­ate fam­ily own 19.6% of Pallinghurst while Oa­sis holds 8.97% in its as­set man­age­ment di­vi­sion and an­other 6.22% in Oa­sis Cres­cent Cap­i­tal. Old Mu­tual is also a long-term share­holder.

At end-June, Pallinghurst’s NAV was R5bn, or about 650c/share, but this took into ac­count a sig­nif­i­cant write­down on Jupiter and Sed­i­belo be­cause of volatile mar­ket con- di­tions. Man­age­ment has plans to list Sed­i­belo and re-list Jupiter (which was delisted from the Aus­tralian ex­change in Jan­uary 2014) when mar­ket con­di­tions are more favourable. Gil­bert­son told The Aus

tralian a relist­ing would be rel­a­tively easy be­cause Jupiter had re­mained an un­listed public com­pany, but Pallinghurst had also re­ceived “ex­pres­sions of in­ter­est from other play­ers in the min­ing busi­ness”.

Jupiter and Gem­fields are start­ing to look like good in­vest­ments but Sed­i­belo needs a re­cov­ery in plat­inum group met­als (PGMs).

Jupiter’s 49.99% in­vest­ment in Tshipi Borwa man­ganese mine in the North­ern Cape has ap­pre­ci­ated as a re­sult of the out­per­for­mance of man­ganese prices over the past year. The mine cur­rently pro­duces about 2Mt/year of man­ganese, about 7% of the world seaborne sup­ply. In the past year man­ganese touched a peak of above $7/dry met­ric ton unit (dmtu) from last Jan­uary’s low of $1.50/dmtu.

By the end of Fe­bru­ary it is ex­pected to hold R1.5bn of cash, with no ex­ter­nal debt, and will dis­trib­ute R1bn of this to its share­hold­ers. Jupiter ex­pects that if av­er­age man­ganese prices hold at lev­els of $4.26/dmtu and output rises to 3Mt, it will end its 2018 fi­nan­cial year with $94m cash. If prices are $7/dmtu, cash will be $272m at year-end. That makes it “highly likely that the re­main­ing in­vested cap­i­tal may be re­turned to share­hold­ers in the next fi­nan­cial year”, it said.

Jupiter has iron ore projects, Mount Ida and Mount Ma­son, in Aus­tralia, and it said the re­cov­ery in iron ore prices and a more favourable ex­change rate war­ranted re­view­ing them.

Gem­fields owns 75% of the Mon­tepuez ruby de­posit in Mozam­bique and two mines in Zambia: 75% of an emer­ald mine called Kagem, which sup-

plies more than a quar­ter of world pro­duc­tion, and 50% of the Kariba amethyst mine. Over the next three years Gem­fields plans to ex­pand pro­duc­tion to 40m ct of rough emer­alds from Kagem from 30m at present and to 20m ct of rough ru­bies from Mon­tepuez, against about 12m now. It is ex­plor­ing in Colombia for emer­alds, Ethiopia for emer­alds and Sri Lanka for sap­phires. Gem­fields also owns the Fabergé jew­ellery brand.

Global de­mand for ru­bies has held up well, the lat­est auc­tion in De­cem­ber showed, though the De­cem­ber auc­tion of emer­alds had to be post­poned to Fe­bru­ary be­cause In­dian buy­ers were ad­just­ing to new gov­ern­ment poli­cies.

Gem­fields says the mar­ket for emer­alds, ru­bies and sap­phires has tre­bled since 2009, with China, In­dia and the US the big­gest mar­kets, im­port­ing about $1.2bn each a year.

Pallinghurst’s orig­i­nal plan in 2007 was five years of in­vest­ing in its as­sets and five years of har­vest­ing them. Asked if it would con­sider more ac­qui­si­tions — it has been spec­u­lated, for ex­am­ple, that Wiese might seek to in­ject re­cently delisted di­a­mond pro­ducer Trans Hex into it — Frand­sen says the core fo­cus is to de­liver op­er­a­tionally for its three ex­ist­ing plat­forms.

“We have achieved a lot al­ready in this re­spect, but we con­tinue to im­prove the prof­itabil­ity of our op­er­a­tions — I don’t be­lieve in a half-done job. We aim at be­ing firmly in the low­est cost quar­tile and se­cure that we are sus­tain­able and have a long life of mines. Do­ing this, we en­sure our share­hold­ers will have re­ceived ap­pro­pri­ate and at­trac­tive re­turns.”

He says Pallinghurst’s con­sis­tent strat­egy is to be “builders and cre­ators, not fi­nan­cial engi­neers or op­por­tunis­tic spec­u­la­tors.

“Ac­quir­ing and build­ing min­ing as­sets is not like or­der­ing fast-food. Our three plat­forms — PGMs, steel-mak­ing-ma­te­ri­als and coloured gem­stones — were iden­ti­fied from the be­gin­ning as our likely cor­ner­stone in­vest­ments, and for the past decade we have fo­cused on those.

“So while the ini­tial 10-year pe­riod is com­ing to an end, it was an­tic­i­pated from the start that it could be ex­tended. As man­age­ment, we are there to man­age share­hold­ers’ money and make sure all re­ceive an at­trac­tive re­turn.”

Pallinghurst and its part­ners ac­quired and built the Tshipi man­ganese mine, “ar­guably one of the most at­trac­tive man­ganese mines in the world”. At Sed­i­belo, it had put to­gether 100m oz of shal­low re­sources and built and op­er­ated the mine “through the tough­est pe­riod the in­dus­try has seen, with no debt and no cap­i­tal calls to our in­vestors”. In Gem­fields, Pallinghurst’s largest in­vest­ment plat­form, it had cre­ated the world’s largest emer­ald and ruby pro­ducer.

“While the mar­ket con­di­tions have im­proved in the past 12 months, we are nowhere back in ‘su­per-bull-ter­ri­tory’. We are in har­vest­ing and exit mode, but as the say­ing goes: ‘You can pick your price or your tim­ing — but never both’.”

Adam Ebrahim, Oa­sis As­set Man­age­ment CEO and chief in­vest­ment of­fi­cer, says Pallinghurst man­age­ment is fo­cus­ing on oper­a­tional de­liv­ery in its three dif­fer­ent plat­forms and Oa­sis sup­ports that strat­egy.

He says in its first few years, Pallinghurst’s man­age­ment built up its in­vest­ment port­fo­lio. Pallinghurst is now in the cash gen­er­at­ing phase, which is ev­i­dent through the re­cently an­nounced dis­tri­bu­tion from Jupiter Mines. Oa­sis be­lieves man­age­ment will re­alise the best value for share­hold­ers over time.

Oa­sis is not im­pa­tient for Pallinghurst to exit its in­vest­ments, he says. Prices of steel­mak­ing com­modi­ties and gem­stones are just start­ing to re­cover while PGM prices are ex­pected to re­act in time to in­creas­ing deficits, as the ma­jor pro­duc­ers have not been able to in­vest in main­tain­ing or ex­pand­ing pro­duc­tion over the past few years of low prices.

The Oa­sis Cres­cent Fund is a long-term in­vestor and has gen­er­ated an av­er­age re­turn of 19% a year for the past 18 years. Pallinghurst has been a value ac­cre­tive in­vest­ment for the fund and Ebrahim be­lieves it is on the thresh­old of gen­er­at­ing even greater re­turns from it.

Kagem emer­ald mine in Zambia sup­plies more than a quar­ter of world pro­duc­tion

Pi­lanes­berg Plat­inum Mine, part of the Sed­i­belo group

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