Tag: BHP

Should You Invest in Disreputable Companies?

Yesterday Glencore (GLEN) announced that it had agreed to pay US$180 million to the Democratic Republic of Congo to settle claims of bribery and corruption. This follows an investigation by US, UK and Brazilian authorities over the activities of the company. The result included a $1.1 billion payment over the US claims. But the impact on Glencore and its shareholders was not high because Glencore is making many billions of profits from coal mining – which many people see as a disreputable business even though it is not illegal.

Leaving aside the issue that it is mainly the shareholders who are suffering these penalties when it should be the individuals involved in bribery and corruption the question one has to ask oneself is should I invest in a company with a historic poor reputation? It looks very cheap on a prospective p/e of 4.4 and yield of 8.4%.

I have decided to hold by nose and buy a few shares in the company. In reality there are few large mining companies that do not have some skeletons in the cupboard. BHP was blamed for a major dam failure in Brazil which created an environmental disaster and has also admitted to a culture of sexual harassment of staff. Rio Tinto managed to destroy the Juukan Gorge in Australia in 2020 – a major cultural heritage site for aborigines for which Rio has been apologising ever since and paying compensation.

BHP and Rio Tinto have taken steps to ensure similar problems do not happen in future and Glencore likewise claim to have reformed. Let us hope they have done so.

I see Purplebricks (PURP) have received a requisition for a general meeting to remove the existing Chairman, Paul Pindar, as a director. Given the financial track record of the business this is not at all surprising. The requisitioners claim that since its flotation the company has raised £200 million of equity capital of which approximately £40 million remains and the company continues to lose money.

Is this a management problem or simply that the business model has never worked? I suspect the latter in which case changing the Chairman may not improve matters. To quote Warren Buffett: “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact”.

I only held shares in Purplebricks very briefly and I sold because of concerns about the reputation of the business and some of the decisions it made. I was never convinced it would make a profit.

What should shareholders in Purplebricks do now? Certainly there is little point in allowing the current board to continue in the vain hope of a recovery. A revolution is the only likely way forward so if I was a shareholder I would vote for the general meeting resolutions.

Postscript: Glencore is giving a presentation today (an “Annual Investor Update” – available from here: https://www.glencore.com/publications ) that gives a good background on how the business is developing. There was an emphasis on the worldwide shortage of copper production which makes for a huge opportunity for the company. They are also aiming for a “responsible” decline in coal production – halving production by 2035. Overall they aim for net zero carbon by 2050 and claim to be more advanced than their major competitors in that regard. They are clearly saying all the right things to improve their reputation.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Big Miners and How Far Ahead Do You Look?

The last couple of days have seen a jump in the share prices of big miners such as Rio Tinto (RIO) and BHP (BHP). They have risen as much as 5% over the last two days, after falling substantially from their peaks at the start of June. The price of BHP shares has been affected however by the free distribution of shares in Woodside Energy (WDS) on the 1st June to BHP shareholders.

I had a quick look at the current forecasts for RIO and BHP and Stockopedia gives a forward p/e of 5.1 and 6.3 respectively and dividend yields of 14.0% and 13.3%. These are not dividends that are obviously at risk because earnings cover their dividends so surely the shares appear to be selling at bargain prices? But the reason the shares are apparently cheap is no doubt because they are heavily dependent on the price of iron ore and the demand for steel and copper.  In both case EPS are forecast to fall in 2023. The long-term outlook for copper demand is high as the world electrifies but there is short-term concern about iron ore demand and the price has been falling sharply of late. This is because construction activity in China has been falling and the Chinese Government has taken steps to reduce production of steel.

But as in any commodity market, prices are influenced by two things – demand and production and while demand can vary quickly production cannot because developing new mines takes years. Production can only respond to demand relatively slowly – that’s why prices of the commodities have been racing ahead.

Investors have the problem of forecasting not just one or two years ahead (because the shares look good value on those horizons) but even further in the future and that is the difficulty. Will the big miners still enjoy a favourable market and political environment with high commodity prices a few years hence? That is the question that investors need to ask themselves.

But the answer is unknowable which is probably why the sector looks cheap. For example, who could have forecast the recent turmoil in the UK political scene and the abrupt departure of a Prime Minister who had won a large electoral mandate just a couple of years ago?

The cover of the BHP Annual Report states (see image above) states “The Future is Clear” but that is far from the truth.

The companies mentioned are affected by political events in China which are even more unpredictable. In summary, the companies look cheap because there is great uncertainty about their future. Big miners have looked cheap in the past but then have been hit by economic recessions and investment in new production which came on stream as demand fell. It’s in essence a tricky sector in which to invest. Will big miners continue to show restraint over new capital investment or acquisitions which they have not always done in the past? Will the management forget the history of the sector and expand production based on rising commodity prices?

I already hold the companies mentioned but I am not rushing into buying more of their shares while the worldwide economic outlook looks poor. But investors who desire the dividend income may find them attractive at present.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Paul Myners Obituary and BHP Unification Meetings

Lord Myners has died at the age of 73. He had a big hand in the rescue of the banks in the financial crisis of 2008 as a Treasury Minister in the Labour Government after becoming the socialists’ favourite capitalist. He was also responsible for the Myners Report into institutional investment which had some influence on corporate governance and institutional stewardship in the UK.

I met him a few times and he had a very persuasive personality but as the comments from Lord Rose below indicate he was not always straightforward. That included evasive answers in Parliament. For example, this comment on the nationalisation of Northern Rock: “The essential intention in taking Northern Rock into temporary public ownership was to stabilise the banking system and to reassure people that a deposit placed with a British bank is a safe deposit”. His forceful actions during the banking crisis which resulted in the effective nationalisation of big UK banks were not appreciated by many.

Stuart Rose made extensive comments in an adulatory article in the FT on his work with Myners during the attempted takeover of M&S including this: “The climax of the takeover battle, following the shareholder presentations and the massively attended annual meeting at The Royal Festival Hall, was the final board meeting. Paul’s sure-handed chairing saved the day. Using a combination of wisdom, wit, guile, persuasion and patience we saw off Green’s opportunistic approach”.

BHP Meetings

I watched the General Meetings of BHP Plc (BHP) today where there was a vote for unification of the Australian and UK companies. BHP will retain a UK listing but it will only be a “standard” listing so will no longer be in the FSTE-100. AGMs will only be held in Australia although on-line access will be provided.

This prompted a question regarding future “engagement” with the board from a shareholder who expressed concerns that hybrid AGMs reduced interaction with the directors and made follow-up questions difficult. He was certainly right in that regard. On-line access is not nearly as good as being physically present and clearly most investors will not find it practical to fly to Australia to attend in person. This is one of the few downsides of the unification, but it otherwise makes sense. The result of the voting is still awaited at the time of writing.

Postscript: There was overwhelming support for the unification by both Ltd and Plc shareholders.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Big Miners, Moneysupermarket and Winning Against the Odds

Looks like we are back to a normal English summer – rain every other day and cool. But there are a few things to talk about.

Yesterday BHP Group (BHP) published their results to the end of June yesterday. Revenue and earnings were slightly below forecasts and the dividend was reduced by 10% as profits were down. But hey, when so many companies are cutting out their dividends altogether this is surely not going to worry many people. They still managed to achieve a return on capital of 17% and underlying eps was up. The shares fell only slightly as a result.

Today Rio Tinto (RIO) reported that production of refined copper in 2020 is now forecast to be lower by about 30% due to delays in restarting a smelter after planned maintenance. The share price is actually up today slightly at the time of writing, perhaps because copper is a relatively small part of their portfolio.

Both companies are very reliant on consumption of commodities such as iron ore in China, and China is still forecast to have economic growth this year despite the Covid-19 epidemic, unlike many other countries. Both companies are working hard to improve their ESG credentials after some recent mis-steps. Ignoring that, these companies still look good value to me (I hold both).

I used to be a holder of Moneysupermarket (MONY) shares but sold most of them in March when I was cutting my exposure to the stock market and weeding out the underperformers in the epidemic rout. Recently my house insurance came up for renewal and the broker I had used for many years gave a renewal quotation that was up 12% on last year. So I thought I would look for a cheaper quote on Moneysupermarket. They produced three quotations only one of which was cheaper and they insisted we replaced our newly installed alarm system for reasons I could not understand. So I then looked at other alternatives and got a quote from LV (Liverpool Victoria as was) that was less than 50% of all the other quotations. The moral is that it can be cheaper to go to direct providers. Is this why Moneysupermarket has not been growing earnings of late? Perhaps they are not producing competitive quotations?

Another good book for summer holiday reading is “Winning Against the Odds”, the recently published autobiography of Stuart Wheeler. He died in July and had a very interesting career.  He was a big gambler and founded IG Index which developed into a major spread-betting company from which he made many millions of pounds eventually.

One section of the book talks about his visits to Las Vegas where he made money by using a card counting technique on Blackjack. But he clearly liked to bet on almost anything.

I visited Las Vegas several times for computer software conferences. But I avoided the gaming tables and slot machines.  I did have some interest when a teenager in betting but not after the age of 18. To win at card games, betting on horses or sports results requires a great deal of hard work to be successful. I think there are easier ways to make money such as betting on stock market shares.

One of Stuart Wheeler’s friends was the late Jim Slater, financier and author of books on stock market investment. One of his sons is Mark Slater who runs a fund called the Slater Growth Fund, and others. I don’t hold them because I prefer investment trusts to open-ended funds but he is certainly a good “active” manager. They sent me the latest update on the Growth Fund today and it’s good to see that their fund asset chart over the last few months appears to match my portfolio. At least I am keeping up with the professionals.

The latter part of Wheeler’s book covers his involvement with politics although he seemed to have no great adherence to any political stance, apart from his belief in capitalism and his desire to depart from the EU. He did donate £5 million to the Conservative Party which was the biggest donation at the time to them. But they later expelled him from the party after he started to support UKIP.

Politically the last few years have been some of the most exciting in my lifetime. Politics used to be a very boring subject but now it has captured the imagination of the public with everyone forming opinions on the parties, their leaders and their policies. Rational analysis often gets lost in the fierce debates. Brexit alone was and is a very divisive subject. 

The leaders have been a very mixed bunch indeed and Wheeler sticks the knife into both Jeremy Corbyn and Theresa May. But he was careful not to say a lot about Boris Johnson. I think he might have preferred Michael Gove as Conservative Party leader but I do not see him as being very electable.

In summary, it’s an interesting book and an easy read.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Exchange Market Size in Stockopedia and BHP plus RIO

I noticed that the share prices of BHP Group (BHP) and Rio Tinto (RIO) jumped this morning – at least for these behemoths of the FTSE-100 they moved substantially at 2.8% and 3.4% respectively. I only noticed because I recently purchased some of the shares in each company.

These are of course very large mining companies so they are dependent on the price of metals and metal ore, particularly iron ore. The last time I looked at these companies was two or three years ago when they were laden down with debt and had poor returns on capital. But they have certainly had a change of heart since then and seem to be more focused on generating real profits and cash flow rather than building ever bigger holes in the ground. Debt has been cut substantially in both companies.

With the profits mainly coming from overseas, they are a good hedge against any form of Brexit, and yields are high for those who like dividends. I am not a great fan of commodity-based businesses where predicting future prices of the products is not easy and they typically go through boom and bust cycles as such companies all invest in new production capacity at the same time as prices go up. Soon after when all the new capacity comes on stream there is a bust of course. But I made a small exception in this case.

But why the share price jump this morning? Are investors moving from growth to value as other commentators have suggested? Have value shares such as BHP and RIO suddenly started to look attractive, as they did to me? Or has Nigel Farage’s impossible demands for a deal with the Conservatives to ensure Brexit over the weekend suddenly encouraged investors to look for Brexit hedges?

Stockopedia have released an updated version of their “New” software. It now includes the Exchange Market Size (EMS) which is a useful parameter to look at when trading in company shares, particularly smaller ones. Note that Exchange Market Size was previously called Normal Market Size.  It is the maximum size in terms of share trade volume at which a market maker is obligated to adhere to their quoted share prices. It is a very good indicator of the liquidity in the shares and how easy they will be to trade. When trading electronically on most retail platforms, this is a useful number to know as it will affect whether you can trade automatically, have to set a limit order or get a dealer to trade for you. In addition, any trade bigger than the EMS might be done at prices higher or lower than you expect.

This number can be very small for some AIM stocks. For example on Bango (BGO) which I hold it is currently only 3,000 shares (less than £4,000 in value) when the EMS for BHP and RIO is more equivalent to £20,000 in value.

The new Stockopedia software version has other improvements although I still seem to be having problems with the Stock Alerts feature that I use every day. Perhaps there are still some issues that have yet to be fixed but you can still revert to the old version.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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