Taking Stock

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Taking Stock 23 May 2024

OF THE two groups of people who buy into discounted share placements, one group usually is signalling long-term belief in the company and is using savings to invest.

The other group usually is signalling a punting gene and is unafraid of borrowing money with which to go to the races.

Believers in the future of a company will be pleased to contribute capital to facilitate company plans, expecting that over time the company will prosper, helped by the additional capital.

Punters are equally welcomed by the company seeking money.

Once banked, the money will be used by the company to progress its plans. The company will have little interest in whose hands the punters’ shares eventually land.

Punting fund managers are those who gamble with other people’s money and rely on occasional windfall gains to feed their bonus pool.

Big punters, especially in Australia, participate in most placements, sometimes taking the view (with other people’s money) that most recipients of placement money will make faster progress because of the money received, and enjoy a share price increase in the short term.

As was the case with Ryman Healthcare in NZ the money raised can be used to extract the company from the demands of its lenders, as well as to contribute to growth.

When Eroad had its placement at 70 cents last year, it had no debt but needed cash to accelerate its marketing in America and, perhaps, to spend on research and development.

ERoad’s shares are now about 20% higher, rewarding those who took up the placement.

By contrast, those who took up the Eroad placement in earlier times, at $5.70 per share, benefited only if they subsequently sold when the shares rose to $6.50 (approx). The share price has since faded to current levels (94 cents at time of writing).

My guess is that Eroad punters using borrowed money, as most punters do, sold out and profited. The punters won. True believers are losing.

In Ryman’s case there should be another placement soon, perhaps priced around $3.50. The believers would participate. The punters would punt. (Some market commentators disagree, believing that banks will not be pushing for capital increases. My view is that reliance on banks is a risky tactic.)

Ryman’s last placement was at $5.20. The shares are now priced around $4.00.

I was reminded of these short-term outcomes of placements that are largely filled by punters after the gold explorer Santana Minerals succeeded with a recent offer, accepting over-subscriptions that most certainly came from punters, the highly successful Regal Fund in Australia undoubtedly the biggest punter in mining stock placements.

Regal has often been Santana’s largest shareholder yet is a fund that trades hourly and rarely holds shares for long.

Regal is a fund manager, arguably Australia’s most successful in terms of high returns. It specialises in feeding its clients’ money to promising miners, backing its research to pick the best prospects with which to trade.

I have no evidence to support this, but my bet is that Regal is always a major sub-underwriter of the placements to which it subscribes and will collect up to 5% in “underwriting” fees. This means if a share is placed at $2.00, it gets paid 10 cents. Thus it can sell out at a “loss” of 10 cents if its bank lending it the money for the punt demands repayment, breaking even because of its sub-underwriting fee.

If it sells at $1.95, it has a nice nett surplus (five cents).

Of course, in a tailwind it sells at more than $2.00 and makes an instant addition to its bonus pool, perhaps sharing a little with those whose money it manages. I am not sure who collects the sub-underwriting fee. I suspect it is not the Regal investor, but the Regal manager.

If Regal were forced to sell at less than $1.90 it might have a loss, but it might not.

Again, I am guessing that Regal often would be “gamed” by its competitors if the opportunity arose. Its competitors would enjoy that rare opportunity.

This could occur if its competitors (i.e. brokers and other fund managers) suppressed demand for a few weeks, forcing Regal to sell when there was restricted buying demand. As Regal itself is not exactly unwilling to “game” others, any losses would be lamented only by those with the kindest genes.

And, of course, there is every chance that Regal might have pre-sold before the placement, at prices well above the $2.00 example, and might simply be happy to lead the price down and pick up any shares at less than $1.90 to replenish its portfolio.

All of this might explain the oddities in pricing that followed the highly successful placement by Santana Minerals, which now has enough cash to complete all of its work prior to its plan to begin mining. Its shares fell until the punters’ unwanted shares were sold, then rapidly rose, when the selling was not being forced by the punters’ lenders.

For at least 18 months Santana will not be forced to report quarterly on a supply of cash that might have slowed its progress.

My guess is that if there were to be any more capital raising it would be done in conjunction only with those who would be lending Santana some of the large sum, perhaps $200 million, that it plans to borrow for plant, equipment, new staff, and mine formation, once it gains (if it gains) a consent. 

Pockets full, Santana is now rid of the hurdle of raising funds to continue its drilling programme. That represents a huge breakthrough of the company.

It has filed its resource consent application after completing the intense environmental work that would be required by the “slow” track created by six different Acts of Parliament.

If the project were “fast-tracked”, Santana could not be accused of taking shortcuts. Its environmental work has involved at least 12 independent environmental people.

While Santana may be finished with raising capital, placements and rights issues are likely to be a feature of the next two years, across many sectors, I figure.

If we are to remain in a glum investment mood, and if profits are stalling, in part because of a long-term increase in the cost of debt, then issues of equity will make sense. Equity can be cheaper than debt that is offered with prescriptive covenants.

Very likely the banks will provide debt to those sectors that are fully capitalised and have stable markets. They might not be as friendly when progress is in doubt.

Private equity might provide a tier of debt or capital that signals an elevated acceptance of risk. I am very wary of lending organisations which themselves have no or little capital. If non-bank lenders are looking for funds to lend, their capital funds should be a large buffer for those who provide the money.

Some sectors will find it very hard to raise equity or debt and to survive might depend on an agreement by minority shareholders to allow majority shareholders or newcomers to “steal” ownership of the company, or buy its prime assets.

Synlait Milk might be tickling these thoughts.

In some cases, like the retirement villages, any part or full takeover is likely to come from abroad, where there seems to be more patience and better analysis of what happens in the next economic cycle.

As the late Brian Gaynor so often postulated, quick short-term takeover solutions often prove over time to be very poor bargains!

We are in a bleak era, watching confidence in markets be shaken by dreary economic results that stemmed from an epidemic and quite dreadful financial leadership from people who craved popularity rather than respect.

So placements of equity may well be necessary, either to realise potential, or to stave off the panic reactions of bankers, fund managers, and creditors, who will be watching the growing number of company failures, the building sector heavily represented in this number.

Stress levels are rising. Liquidations are rising. Access to capital is much preferable to accepting strangling covenants imposed by lenders.

Those who can currently forecast long-term survivors have the best chance of being rewarded for their patience. They will need to be alert to real inflation, indefinitely. An aging world, with a falling number of younger people, suggests wage inflation is here to stay. Robots cannot do all of people’s work.

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NEW Zealand lost a respected servant when a previous auditor-general, Brian Tyler, died at his Parkwood Retirement Village in Waikanae last week.

Tyler was widely respected for his analysis and common sense. Few auditors-general are financial market analysts. That is not their role. Brian was an exception.

Nor were all auditors-general paragons of purity. At least one left that office in disgrace in the 1990s, guilty of theft.

Brian Tyler was astute and insightful. He was a thoughtful, interesting, analytical man who was among the first men I met ever to challenge Ryman Healthcare’s business model, during the era when Ryman was the market darling.

He and an Auckland accountant/financial adviser, Michael Connor, saw the danger of building long-term assets using short-term funding, and disliked the Ryman habit of using, in effect, debt to pay dividends, effectively paying dividends based on reversible asset revaluations rather than cash.

Tyler noted the negative cash flows which most of the market accepted, because of the inevitable income from deferred management accruals, payable when residents die.

Mis-matched excessive debt, negative cash flows, and extreme expansion ambitions worried Tyler who correctly forecast a slump in Ryman’s share price.

Tyler lived into his 90s and was well respected by a wide group of people, including me, a public servant from the “old school”.

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PLEASE let your imagination wander.

Imagine that last year you successfully applied for a management role in the public sector.

You arrive at your desk in Wellington, excited by the opportunity to justify your extreme salary by making contributions using your experience to bring about better financial results.

Now imagine that for several months you are left to twiddle your thumbs, given no real tasks, not required to commute daily from, say, Levin to Wellington, indeed even encouraged to stay at home most days. Your manager ignores you, but you remain paid, just not employed. 

Eventually you crack. You go to your manager in the huge government department and confess that you have nothing useful to do.

Your manager is horrified. She sees potential for you to develop mental health problems from the stress of having nothing to do.

She arranges for you to attend a meeting, at which several other men and women are seated. You expect to be told what tasks you will be given, to earn your extreme salary.

What then happens seems so absurd that I am persuaded not to provide details of what the real, idle fellow alleges. It is sufficient to describe the sessions as farcical, ideological mumbo-jumbo.

Repeated meetings over ensuing weeks follow the same pattern.

If the “intervention” were unique, one might hope that the errant chief executive simply resigns for overseeing such nonsense, clearly having little respect for taxpayer money or his staff.

Perhaps the media needs to check out this alleged intervention.

What on earth was put in the public sector water when greenhorn politicians appointed a new group of public sector leaders who would preside over this sort of bunkum?

Is this a unique example of absurdity, or a symptom of a modern version of ideology that widens the brainless distribution of tax-payers money?

Or is it just the manager who is deluded?  The matter should be investigated.

The focus on waste in the public service would seem utterly justified, if his account is the full story.

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My last seminar is in Christchurch this Monday 27 May, 1.30pm, Burnside Bowling Club. Currently there are around 30 unclaimed chairs!

Thank you to the people who attended seminars at Cromwell, North Shore, and Kapiti.

The final seminar will discuss our somewhat bleak economic prospects and include a more encouraging discussion on the history of Central Otago mining, and the aspirations of Sanatana Minerals, potentially an NZX Top 20 company, if (when?) it dual lists.

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Infratil Limited – 7.5-Year Senior Bond

Infratil has announced it plans to issue a new 7.5-year senior bond. Full details of the offer are expected to be released on 27 May 2024.

Infratil is an infrastructure investment company with significant holdings in Digital Assets, Renewable Energy, Healthcare, and other infrastructure assets. It anticipates earnings for FY2025 to be approximately one billion dollars.

While the initial interest rate has not been announced yet, we expect it to be above 6.50% per annum based on current market conditions.

Infratil will likely cover the transaction costs for this offer, so clients will not be charged any brokerage fees. This will be confirmed next week.

The offer will comprise two separate parts:

- New Firm Offer: Expected to open on 27 May 2024, reserved for new investors. The Firm Offer is expected to close at 11am on 30 May 2024, with payment due the following week.

- Exchange Offer: Expected to open on 31 May 2024 (following the Firm Offer). Under this offer, all New Zealand resident holders of the IFT230 bonds maturing on 15 June 2024 will have the opportunity to exchange some or all of their maturing bonds into these new bonds.

If you are interested in being added to the list for these bonds, please contact us promptly with the desired amount and the CSN you wish to use, and we will pencil you in on our list.

If you are an existing IFT230 bondholder and would like to exchange your bonds into this offer, please inform us at the time of your request.

Next week, we will send a follow-up email to anyone who has been added to our list once the interest rate and terms have been confirmed.

Travel

Our advisors will be in the following locations on the dates below:

27 May (am) – Christchurch - Fraser Hunter

28 May – Christchurch – Chris Lee

29 May (am) – Christchurch – Chris Lee

29 May – Wellington – Edward Lee

30 May – Levin – David Colman 

5 June – Nelson (FULL) – Chris Lee

6 June – Blenheim – Chris Lee

11 June – Tauranga – Chris Lee

19 June – Lower Hutt – David Colman

25 June – Napier – Chris Lee

Please contact us to arrange a meeting office@chrislee.co.nz   

Chris Lee

Chris Lee & Partners Limited

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