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