Taking Stock 20 January 2022

DESPITE their successes in enabling many powerless groups of people to access justice in the courts, litigation funders still receive mixed reactions in high places.

Some politicians regard them as ambulance-chasers, some in the corporate world have a similar view, and some rather hypocritical lawyers regard litigation funders as pests, annoying their big-time clients.

Having seen the just outcomes litigation funders have enabled, I was a fan, even before the latest display of just how valuable such funders can be, as I will describe now.

Readers may be aware of Dilworth School, a private education facility in Auckland funded by generous people many decades ago, with the aim of providing education and guidance for young men made vulnerable by family deficiencies.

The patrons donated large tracts of Auckland land to the trustees who run the school, just one such piece of land being leased to St Cuthbert's School in Auckland, the rent being paid by the Ministry of Education, a reliable tenant, one would have thought.

So Dilworth today has hundreds of millions of dollars worth of land, and it has tens of millions of income from its donated assets.

It still caters for vulnerable youngsters.

It should be a school that can openly celebrate its achievements, helping disadvantaged people to have better opportunities in life.

Sadly, the school decades ago was allegedly exploiting some of its youngsters, occasionally employing paedophiles, and failing to expel such foul people before they did their damage.

Perhaps scores of youngsters suffered lasting damage as a result of a small number of despicable, exploitative, so-called men, in charge of young boys. That is the allegation.

Many years after those foul years, some of those whose lives have been affected spoke out, bravely making their allegations in the papers and on television, in the past year or so.

They had no resources to embark on a legal fight to gain an apology and some level of financial compensation.

Up stepped a litigation funder, displaying an admirable sense of decency.

The funder agreed to pay the total cost of going to court, without any fees, should the case succeed.

This sort of court case costs real money. Quite possibly the fees might reach a million or two, if the Queen's Counsel and the big law firms price their wares at today's extreme costs.

The litigation funder offered to wear the cost, in the interests of achieving some sort of compensation for what might be 100 or more victims.

If there were 100 victims, and each were paid $100,000, the cost of the compensation would be $10 million.

Possibly, if such an outcome were reached, Dilworth would be instructed to pay all legal costs, meaning the litigation funder's best hope might be that in the interests of justice and decency, his underwriting of the cost might ultimately cost him nothing, though the funder seems relaxed about any cost.

To date, the complaints are allegations. No court hearing has taken place.

My affirmation of the value of litigation funders is even less ambiguous than it was before.

Such funders add immense value by facilitating just outcomes for people who otherwise would not have their cases heard.

When the Supreme Court hears an appeal in March from the Mainzeal directors against a potentially huge award for their incompetence and negligence, and a simultaneous appeal seeking an increase in this potentially huge sum, we might see another outcome that illustrates the merit of litigation funding.

This case, brought by the liquidator of Mainzeal, could not have funded itself.

The Supreme Court will announce a finding that will be of immense relevance to public company and public sector directors in New Zealand, the majority of whom are inexperienced and incompetent, often selected to meet social objectives rather than add value to the process of governance.

Whatever the Supreme Court's decision, and whatever the outcome of the Dilworth case, there can be no logical argument about the value of the role played by litigation funders, in my opinion.

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THE value of producing, or hoarding, gold is the subject of lively debate, though the topic is perhaps not as polarising as the value of investing in cryptocurrencies.

Gold, after all, is a metal used in jewellery and electronics, and is a natural element, whereas cryptocurrency is a fabricated token visible to few.

As he has earlier done, with many new technology companies and more recently with gold, the veteran US investor, Warren Buffet, has shifted his view from mocking to investing in gold.

This suggests either that as he nears 90 he is still able to change his mind, or it suggests he is not above the universal game of talking down prices before he buys, a strategy used by many false prophets.

Buffett has done this with technology shares, and with gold. He is now a multi-billion-dollar investor in gold producers, including a Canadian producer.

Buffet is not the only influencer who knows how to mould market thinking.

Any regular readers of this newsletter often will have read of those who exploit the media, knowing that for many of the public the information that appears in the media is the only available source for information-gathering.

All of us who have been in financial markets will still be shuddering when we recall the exploitation of the public in the 1980s, when the biggest buffoons and charlatans exploited the innocence of the media, and the greed of financial intermediaries, to rip off the public.

Outright lies were presented as facts to enable those running evil companies to sell out to innocent buyers, sometimes manipulating the news by pretending to be enthusiastic, informed buyers while surreptitiously selling as fast as they could. I cannot explain how they avoided jail.

Gold producers are not quite in the same league, their lies having been tied to claimed discoveries, rather than future revenues. No credible gold producer would get away with pretending to know next year's gold prices. Nevertheless, there is price manipulation in many of the global markets, with opaque use of derivatives.

Regular readers will know that I have some optimism that New Zealand may be close to announcing that it has a world-class gold resource that should translate to revenue for the Crown, dividends for shareholders, well-paid, sustainable jobs, and add to our quest to improve productivity.

If we are going to have much lower levels of tourism, and seek to reduce our agricultural productivity, we will need activities to replace those creators of employment, wealth and taxes.

On a world scale, gold production here is tiny.

Yet gold has often been our second biggest export to Australia, it generates billions of revenue each year, and it employs thousands of people. Our giant miner is Macraes, now owned by Oceania, which is Australian based, ASX listed.

Macraes has large projects in central Otago, near Palmerston, and at Waihi, near Tauranga. It produces several hundred thousand ounces each year. Production of 100,000 ounces at today's gold price (NZ$2600) represents $260 million of sales.

Macraes was ''discovered'' 40 or so years ago, the exploration led by Homestake, a giant American gold miner whose head in NZ was for a while Warren Batt, a geologist then in his 30s. Batt sought to prove that there was at least a million ounces of low-grade gold mineralisation at Macraes.

Interestingly, after Batt succeeded, Homestake decided the grades at the gold price of the time were too low to pursue. Of course, since those days, gold prices have risen by a factor of about ten. Instead of Homestake mining Macraes, it sold the licence, Macraes was listed and shareholders are still enjoying dividends

Macraes in the past decades has already produced five million ounces at its Central Otago mine and seems to have a similar amount to be extracted in coming years.

Five million ounces of gold at today's price would be worth around $13 billion.

Our wine and fishing and horticultural sectors produce goods worth around $6 billion per year.

Batt, now in his 70s, linked with another veteran geologist, Kim Bunting, to explore rock formations at Bendigo, about 40km west of Palmerston, on the other side of the ranges, a few years ago.

Bunting was optimistic that a similar resource would be discovered in the bowels of those hills where 150 years ago gold miners, armed with shovels, had found enough gold to encourage a small army of explorers to dig down a few metres, looking for gold.

The Todd family (of course) provided the shovels, the huts, the pubs, and whatever other comforts were needed. The Todds were good at that sort of thing and today are pursuing iron ore in Australia, with great vigour.

Bunting, joined by Batt in the last few years, raised enough millions from personal contacts, from other enthusiasts like me, and from a handful of our clients, to begin exploring at the depths available by modern diamond-drilling plant. The tiny drill hole plunges up to 200 metres through beautiful, marble-like, rock. Assaying each cylinder of rocks tells the geologists how many grams of gold are in the rock extracted.

They wanted to prove there would be at least a million ounces of low-grade recoverable gold.

To date the results have been surprising, their ambition now much greater.

The average grade of gold has been at least twice the figure needed to achieve a return (at today's gold price). The break-even figure required is a bit less than half a gram per tonne of rock.

The assaying has revealed better grades and more gold than expected, the latest published results describing ''bonanza'' results, in rare areas exceeding 40 grams per tonne. Forty is the level at which gold explorers use the word ''bonanza''.

To date independent analysts have calculated that the area drilled, just a tiny fraction of the rocks targeted, imply a resource of around 640,000 ounces.

Drilling continues. It would be remarkable if the next release of an independent estimate forecasts less than a million ounces.

By raising more capital Bunting and Batt intend contracting in two more drilling plants. The three drills, operating double 12-hour shifts, seven days a week, will chew through a million dollars each month, perhaps beginning in March. That will hasten the exploration process and bring forward the day when a mining licence is sought.

If the inferred recoverable gold is confirmed in 2022 at millions of ounces, New Zealand would have a new resource worth many billions.

That is the target. It seems to be on course.

The land being mined is privately-owned, but the Crown will have to approve the project, which will be based in an area of no value to farmers, well out of sight, but of possible interest to cross-country motorcyclists.

In granting consent the Crown would need to know that there would be responsible processes to handle the tailings, and to ensure environmental damage was repaired.

There will be a voice that says mining involves machinery, machines burn fossil fuels, therefore mining of any sort should be banned.

Such a voice would be louder during some eras than others.

The gold find would not disappear if the project was temporarily delayed by the attitudes of those who grant consents.

With any exploration process there are risks.

Will the geologists find the gold they anticipated? That risk has fallen.

Will the project be funded? That risk has been reduced. An Australian ASX-listed miner has succeeded in raising capital when it was required. That company, Santana Minerals (SMI) now owns the project, though there are hundreds of NZ investors on the share register.

Will the gold price remain high enough to make the project economic? So far the gold price far exceeds the production cost.

Will the project be consented, in the years to come? There are no visible barriers currently, but who knows how politicians might behave in the future.

Will the project be able to raise the $100 million or more to convert a find into a working mine? Investors will determine this but in the current environment a consented project addressing a major resource would be a huge boost for NZ, and for the Central Otago area, in particular.

By any standards, the project is exciting, but the project stays under the radar.

It is remarkable to me that our media devotes thousands of words to any company that hopes to build a new computer game for youngsters but is uninterested in a discovery of potential wealth that might create billions of dollars of wealth, hundreds of millions of taxes and royalties, and billions of dollars in exports, as well as hundreds of real jobs.

The media has its own agenda. Who knows how the agenda is set.

Santana Minerals, which owns the project, is carefully remaining silent, releasing its drilling results to the ASX, avoiding any risk of insider trading in the shares.

SMI's care is to be applauded.

The directors who own a big chunk of the company must adhere to protocols. So must I, as a minor (2%) shareholder.

At a time when financial markets face great disruption, and investors have to select companies or projects that would withstand economic downturns, it seems anomalous that even the Central Otago media have not been studying the results, published by the ASX.

Perhaps the media have decided that ambitious mining projects are best ignored until the gold is extracted and sold.

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Seminars

I dread to attract the wrath of Omicron demons, but I plan to present a series of seminars in March.

I would hold one-hour seminars discussing the options available to investors.

Attendances will be restricted by the venues to fully-vaccinated investors, and might be limited to 100 people at each venue. I might hold two seminars in some areas if necessary.

Here is a tentative schedule:

March 3 – Nelson

March 7 – Timaru

March 8 - Christchurch

March 10 – Kapiti

March 14 – Palmerston North

March 15 – Napier

March 17 – Wellington

March 21 – Tauranga

March 22 – Hamilton

March 28 – Whangarei

March 29 – Auckland (North Shore)

March 30 – Auckland (Central)

Please email us if you might attend, with friends or family if you wish, providing numbers, subject to the dates being convenient. The planning of these seminars cannot be casual, given the unusual constraints that might be in place.

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Travel

Michael will be in Christchurch (Russley Golf Club) on Tuesday 15 February.

Michael will also be in Auckland (CBD) on Monday 28 February and then Tauranga and Hamilton in early March. Please let us know if you'd like to arrange a meeting and we'll get back to you once dates and places are booked.

Edward will be in Auckland on Thursday 3 February (Mount Richmond Hotel, Mt Wellington) and on Friday 4 February (Fairview Events Centre, Wairau Valley).

Edward will be in Napier on Thursday 17 February (Crown Hotel, Ahuriri) and on Friday 18 February (Porters, Havelock North).

Edward and Michael are visiting Christchurch in February because Kevin may be on leave and Johnny is on paternity leave, cuddling my latest grandchild.

Please contact us by email if you would like to arrange an appointment for any of these dates.

Chris Lee

Managing Director

Chris Lee & Partners Limited


Taking Stock 13 January, 2022

THE behaviour in 2021 of the next generation of investors has finally been explained in words I can understand.

Perhaps my puzzlement has stemmed from the worst and most visible examples of new investor frivolity that I had noticed: inexplicable support for meme stocks (follow the leader, any leader, in social media), cash burning in non-fungible tokens, blind pursuit of contrived cryptocurrencies, all evidence of unthinking behaviour from what I assumed to be feckless, uninformed younger people.

But a few days ago a young man sitting at the same table as me, on the ferry to Waiheke, brought to me a new understanding.

A tidy young man, well spoken, sitting between his mate's mother and his equally thoughtful mate, he was explaining to his friend how to use his cellphone to gather information that led to successful investing, of what I imagine were modest sums of money. He was using a US platform.

He handed his phone to his mate and helped him through the various news feeds he received from the USA, the portfolio valuations he received almost hourly, and the company news releases he used to make his investment choices.

To my delight he was able to explain why he had faith in the two dozen companies he had chosen, what technologies each company was building, what progress they were making, and why the technologies were important in a world full of challenges.

Clearly he had read widely, read carefully, had made considered choices and had memorised details, enabling him to check on progress rather than just follow share prices. He explained this to his friend at a tempo usually reserved for horse racing commentators.

Smart young men are not a mystery to me. I have some dozen or more in my wider family who meet this description.

But I was so impressed, as an eavesdropper, that I interrupted and asked the young bloke what career he planned. ''Something using financial technology,'' he replied. He had just a few credits left to complete his degree and would pursue more degrees but only after he had joined the work force.

Another eavesdropper, aged around 50, was so impressed she asked the youngster for his advice on what to do with $500,000 she had in the bank. Youngsters know lots but they do not know the danger of offering advice to strangers.

''I would split it between Microsoft, Apple, Amazon, Alphabet and Tesla,'' he opined. ''Over time you would never lose. Hold them forever. Maybe buy NFTs but not cryptos though a friend of mine made $100,000 in a few days in cryptos.''

(Please note that the young man was offering advice that Taking Stock would not endorse.)

The ferry reached the island. Four days later I can still see his earnest, focussed look, hear his clear words about his technology shares, and envy the speed with which he used his cellphone as his financial encyclopaedia.

For too long I have assumed that youngsters using their phones and their Sharesies technology were displaying no useful knowledge, buying meme stocks or other highly speculative investments, with no rationale behind their gambling.

It often seemed to me that they were doing something because they could, effectively throwing Moet bottles at a concrete wall because they could. Or lighting cigars with hundred-dollar bills.

This young fellow's approach gave me fresh thoughts.

He was using technology to build his knowledge, committing his learning to memory, developing a habit far more desirable than using a cellphone to tweet about what he had for breakfast, or which pop singer he fancied.

Perhaps in 2022 those young, naive investors who remain fickle and invest randomly will learn the hard way but clearly there are other youngsters who are harnessing technology to get ahead in their lives. They are going to need to be smart to advance in a troubled world.

The year of 2022 offers some mighty hurdles. Inflation, rising debt costs, supply chain problems, labour shortages, Covid, massive global indebtedness, climate change, inequality, China, Russia, energy shortages are in the range from which you can chose how deep your migraine might become.

Yet it is not realistic to ignore signs of hope.

Medical research is offering great advancement in health improvement, with subsequent massive cost savings; artificial intelligence promises to reduce greatly the costs of many goods, and promises to reduce dangerous labour practices; genetic modification of food might help reduce starvation and poverty; and new technologies promise to reduce emissions.

There has to be hope in 2022 that political popularism will prove to be a childish selection method, and that governance in all sectors will succeed in becoming logical, fair and inclusive.

How long before the world unites to combat absurd consumerism and mindless abuse of the oceans and the atmosphere?

On a more specific subject, how long before a genuinely wealthy, brave, community-minded New Zealander applies some of his wealth and time to building a new shipping company, to restore control of our trade. Electric ships? Hydrogen? Air ships?

When there are threats, there are opportunities.

A young man heading off to Waiheke to stay at his mate's place shines a light on a technology (I-phones) that certainly enables moronic behaviour but can also provide a platform for those who are pursuing solutions.

May 2022 be the year when NZ recognises the need for real leadership and embraces technologies that relieve our worst fears.

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WHILE the youngster was displaying the skill of acquiring and using available information, the New Year was reminding us of some of the stupid practices we older people have accepted.

From New Year 2021 we will recall how a brain-absent global index fund signalled it would buy a large number of NZ ''green'' energy shares, ignoring the obvious consequence of being ''gamed'', forced by its own rules to pay any price to meet its signalled intention.

Contact Energy and Meridian shareholders had the choice of selling at a contrived high price and buying back weeks later at the normalised price.

This January, after a few days of sharemarket window dressing by fund managers, investors were told the technology company ERoad would be joining the NZX50 (top stocks).

Kiwisaver funds and simple index funds without the prescience and wisdom to foresee this then had a limited number of days to buy large dollops of ERoad shares, forcing the share price to rise un-naturally to $5.52. Of course a few days later the price fell to $5.00, now is even less, rewarding those whose only skill, hardly a value-add in the bigger sense, was to seize the opportunity and sell to the hapless index funds, buying back later (or not).

If this achieved nothing else, surely it highlighted that index funds and some Kiwisaver funds employ no thinking people and thus deserve no rich rewards. Such funds do not add value, do not use analysis or research, and do not employ the clever people who do the hard work involved in discovering value. The salaries of such people should be at clerical level, not the seven-figure riches that hide behind these organisations.

Meanwhile a genuine value-add fund manager, Infratil, was enjoying a ''profit'', made of the finest, indeed invisible, silk, resulting from its use of a company valuer which declared that Infratil's 48% shareholding in the Canberra Data Centre was in 2021 worth more, by about $700 million, than it had been worth the previous year. This magical value was not established by buyers clamouring to buy the asset but by a valuer's model, guessing that in a stable world a buyer would have to pay the new higher amount, if indeed a buyer existed.

I could argue that a buyer wanting to buy my wife's and my home would have to pay multi millions because we like living in our home. Of course I do not imply any buyer would indeed pay a silly amount, nor do I imply that there is any buying interest in our home.

Valuations are tricky enough without then making another leap of logic, saying that the enhanced ''value'' is the equivalent of a cash profit and should be shared, in cash, with the manager of the asset.

Yet on the basis of all this hypothetical stuff, Infratil's manager, the well paid and skilled Morrison and Co, was entitled to a cash bonus of about $70 million, payable in two years.

Presumably Infratil's bankers will provide the $70 mill.

There should be no surprise that this sort of fund manager bonus is occurring now but my guess is that the Financial Markets Authority will be lobbying hard to ensure such exploitation does not survive in the future.

As an aside, I admire Harbour Asset Management, where the fees are less extravagant and no bonus element is claimed.

I accept that Infratil would argue that its occasional windfall successes have provided investors with much higher returns than Harbour, despite excessive fees and bonuses. Harbour, I expect, would politely note that leverage and risk are key components of high returns. 

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THE New Year began with the spokesman for the NZ Shareholders Association, Oliver Mander, lobbying public companies to desist from appointing Managing Directors, in preference for use of the title of Chief Executive.

By definition an MD sits on the board.

The NZSA believes governance of a company should be separated from executives and that CEOs should report to the board, but not be part of it.

In response the low profile but accomplished chairman of Fisher & Paykel Healthcare, Scott St John, politely observed that FPH would be most unwise to exclude from its board its MD, who undoubtedly has more knowledge of the company and its challenges than any other human being, having led the company well for a decade or more.

St John simply noted the company had processes to ensure governance was distinct from management.

The real point the NZSA should make is how to ensure transparent governance that complements an MD's role, rather than replicates it. The NZSA is clearly correct when it observes so many new, diverse, company directors with no special knowledge, no industry expertise, and no relevant commercial experience, yet well paid to rubber stamp, cluelessly.

Without wanting to be impolite, the NZSA might look at the likes of Air New Zealand, Abano, and Z Energy to see examples of companies whose governance shortcomings are signalled by a reliance on mediocre external advisers, or by decisions that highlighted a lack of experience when selling assets at what should be fully-tested prices.

Real boards resist mediocrity.

The NZSA probably needs to question the director and chairman selection process and ponder the trade-off between desirable trends (diversity) while maintaining a primary focus on commercial excellence (expertise, experience and demonstrable value-add).

The large company board of directors in the financial markets which impresses me most has an ex CEO as chairman, has had the same core of directors for many years, includes its admirable Managing Director, and embraces ''diversity'' only when the potentially ''diverse'' director can demonstrate high standards, valuable experience, knowledge and wisdom. And value-add.

Its clients, its staff, its bankers and its shareholders have no wish for change in the board, in pursuit of artificial objectives.

There is small wonder about this. It achieves compounding growth in nett assets and profitability, over some years, of an annual figure nearer 40% than 20%, while retaining key staff, key clients and holding virtually universal respect for its products and services.

It certainly does not engage third rate consultants to guide the board, to devise strategy, raise money or negotiate with external parties.

The year of 2022, it is said, will be a year when stock-picking - eliminating the mediocre, concentrating on sustainable excellence - will be the hallmark of success.

Smart young beginners will be learning process by using their tools to gain knowledge.

Smart, established investors will place their faith in proven, wise, knowledgeable people, operating with transparency and accountability.

Much hope will rest on the speedy adoption of new, cost-saving environment-improving technologies.

Perhaps 2022 will be recalled in years to come as the year when the latest iteration of leveraged speculators discovered how much they could truly afford to lose when markets have fake elements.

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Travel

Edward Lee will be visiting Christchurch next week – on Friday 21 January. He will be at the Russley Golf Club. Please contact us if you would like to arrange an appointment.

Edward also plans to visit Auckland on Thursday 3 February (Remuera area) and Friday 4 February (Albany area). He will be in Napier on Thursday 17 February (Crown Hotel, Ahuriri) and Friday 18 February (Porters, Havelock North).

Please contact our office for an appointment.

Chris Lee

Managing Director

Chris Lee & Partners Ltd


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