Chris Lee & Partners Ltd

Taking Stock 31 October 2024

WHEN the Luxon government created a fast-track pathway for those projects requiring consent, unsurprisingly, there was some strident protest.

Some of the projects are highly controversial, some previously rejected after extensive consenting data had been submitted.

Indeed my guess is that at least some of the projects on the list have been put forward with a full expectation that the full processing panel will reject the application.

Such rejections might soften the claim that the process is a sham.

Mining, of course, is always opposed by some who believe the process of digging holes in the earth to obtain small quantities of valuable metal is a process almost as evil as blasphemy.

Named on the fast-track list are two projects seeking consent for our biggest mining operators — OceanaGold, the operator of the nation's biggest gold mine at Macraes (near Oamaru), and Waihi (Coromandel).

OceanaGold bought Macraes Mine decades ago. It is a Canadian-listed miner which produces gold from the two NZ sites, and two others, in the Philippines and South Carolina, USA.

Its grades of gold have always been modest, and its production costs extremely high, meaning its nett profits have been low, its dividends low, and its share price low.

However in the past year OceanaGold has indicated it expects to ramp up production, pointing to better grades in the USA. Whereas it has previously produced less than 200,000 ounces a year, it now aspires to more than double that figure.

As a result of that hope and of the surge in the value of gold, Oceana's share price has basically doubled in the past 12 months to its current level of around C$4.

The company is 57% owned by institutions, pays a single-figure dividend, but expects its earnings next year to reach a much healthier 57 cents per share, implying a profit of three times any that it has previously achieved.

At its last available financing reporting time, it had C$211 million of debt and would be on a Price/Earnings ratio of around 10, if it meets its expected increase in earnings.

Analysts believe that if it achieves its forecasts then, given the elevated price of gold, it could anticipate a share price of around C$5.20.

Oceana has two planned extensions to its Macraes site and its Waihi mine, both of which are fast-tracked to be considered.

In the last year, after a long wait, its shareholders have been rewarded for their patience, the share price rise linked to the gold price and the company's anticipation of a much higher grade of gold.

Its problem in New Zealand has always been its very high cost of production, mostly relating to the refractory status of its Macraes gold.

Refractory gold, sourced from ancient, buried rock, is encased in carbon. Burning off the carbon is energy intensive.

Macraes has successfully recovered five million ounces over the past 30 years but the grade has been below one gram per tonne, processing costs high, and much of the ore-bearing rock is accessed only after expensive removal of considerable over-burden, the nil value material below which the rock is buried.

Macraes still has a few million of indicated ounces to pursue.

Meanwhile, Waihi hopes to tap into deeply buried ore below conservation forested land. The proposed mine would tunnel below the forests, leaving scant evidence (air vents) at surface level.

The project is being sold as a source of highly paid employment, benefiting the small town, and generating taxes and royalties for the Crown.

Oceana also believes its mine in South Carolina will soon be ramping up production to a level which would produce dividends for shareholders of perhaps 10 cents!

All of these plans are unlikely to please the likes of the environmentalists in cities.

By contrast, those in Central Otago and Waihi generally have to focus on jobs, higher income, and community development.

I visited Waihi a couple of years ago and conducted a very informal survey in the town pub, persuading different groups of people to chat by ensuring the conversation was not dry. Groups as varied as young men, families, and one table full of delightful not-so-young ladies, contrasted the busy town today with the ghost-town vibes when mining in Waihi stopped in previous decades.

OceanaGold had sensibly joined the local community by donating to all sorts of community groups, and by being courteous whenever it planned an activity that might be noisy or annoying.

My guess is that OceanaGold could have put up a worker in the mayoral elections and won handsomely.

The metrics of OceanaGold’s financial statements might also interest those involved in Central Otago’s proposed mine on private land at Bendigo/Ophir near Cromwell.

Santana will release details of its expectations of the outcomes of mining its much higher-grade, double on average, at least four times greater in some areas, more than OceanaGold's.

Santana's gold is non-refractory, greatly reducing its energy usage, and is much more accessible than at Macraes or Waihi, with significantly less over-burden to be removed.

It is likely to produce surpluses that compare favourably with OceanaGold, resulting in handsome dividends.

If it succeeds with its plan its market capitalisation should reflect its earnings per share, its dividends, and the longevity of its mining life.

The Santana mine will have benefitted from observing the trialling by Oceana of electrified plant. Santana’s electricity will come from the Clutha Dam.

One would expect Santana to have the benefit of other nature friendly processes that OceanaGold has trialled.

Santana aspires to be one of the "greenest" gold mines by potentially adopting the modern methods enabled by technology.

Last week Santana split its shares into three, meaning it now has on issue over 700 million shares, a similar number to OceanaGold.

If Santana can use its superior grade of gold, and its lower processing costs, to produce higher dividends and higher nett profits than OceanaGold, the implication for its market capitalisation would be obvious.

The remarkably high gold price would then be great news not just for Santana's investors. It would also lift the royalties and corporate taxes due to the Crown.

Unsurprisingly stuck in the financial quicksand of rising costs and falling income, the NZ Government would welcome the $100 million (plus) it would receive every year for many years, stretching well beyond a decade.

Investors should watch OceanaGold's third quarter report, due out this month, published on the Toronto Exchange.

Any sign of growth in profits and dividends ought to enthuse those Santana investors who believe the discovery at Bendigo will lead to profitable mining activity.

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IT IS no secret that the Governor of the Reserve Bank, Adrian Orr, has his critics, including a former Reserve Bank executive.

In his case, his criticism is worth reading as his opinion is developed by knowledge, rather than a pursuit of readers.

Orr's job has been awkward. He is there to preserve the stability of the banking system as well as to contain inflation within an acceptable band.

To make matters worse he was subject to the whim of some inexperienced, inept politicians who figured his primary objectives should be shaped by people with aspirations of social change.

His board degenerated into a herd with little relevant experience, effectively forcing Orr to "mother" his directors and politicians, rather than do his job clinically.

He was also required to be tolerant of various loud voices in the media, none of whom have ever been accountable for their opinions, nor required to collate and interpret complex data.

Orr is a "ginger", unafraid of telling drongos to sit down and be silent. He had an extended and much-lauded chief executive role with NZ Super Fund, after a somewhat fiery career with Westpac Bank.

All of this makes his opinions of much interest and relevance, possibly more so than anyone else in New Zealand's capital markets.

Last week while speaking formally as a central banker at an overseas forum, Orr spoke out about the disconnect between current asset prices, and underlying asset values.

He noted that fund managers (playing with other people's money) were overlooking the complex challenges facing the globe.

He would have been referring to extreme and growing debt levels that can never be repaid by applying revenue to reduce them; he would have been referring to the extreme threats to global trade, posed by the likes of tariffs and sanctions, and he would have been referring to the tragedy of regional and global warfare, with all its destruction of lives and infrastructural assets, and perhaps he was referring to the cost of changing weather and rising sea levels.

I inferred that were Orr still heading the NZSF he would most certainly be altering his asset allocations to a position much nearer to caution than adventure.

One hopes that he is either wrong, perhaps oblivious to some miraculous intervention generated by artificial intelligence, or that he is so insightful that global leaders and fund managers should "have a cup of tea" and "cool their jets".

Orr's tolerance with his critics is admirable and on a personal level is a reminder to me of why lesser mortals, of whom I am one, should never aspire to his role.

I cannot imagine being so courteous as to invite people to attend my presentations, who are constantly rude and ill-informed.

Like Christopher Luxon, he has a tolerance level far more forgiving than can be easily replicated.

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Travel

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

8 November – New Plymouth – David Colman13 November – Ellerslie – Edward Lee14 November – Albany – Edward Lee15 November – Auckland CBD – Edward Lee14 November – Arrowtown – Chris Lee28 November – Napier – Edward Lee29 November – Napier – Edward Lee

Please contact us if you would like to make an appointment to see any of our advisers.

Chris Lee

Chris Lee and Partners Limited

Taking Stock 24 October 2024

Cricket, yachting, netball - and now there is evidence that NZ might be displaying good form in the investment world as well.

While the most credible of financial commentators, The Financial Times, is displaying the woes of the messy Private Equity world, New Zealand continues to display one version of Private Equity that is fundamentally sound.

George, now in his 60s, returned from overseas and founded Direct Capital 30 years ago and has been mostly true to his own rules, at meaningful levels. He identifies about 1000 NZ companies that meet his criteria.

He sought to invest capital into successful, proven private companies, that had existing revenues and profitability each year. He sought to raise funds from only those who had a genuine ability to wait a long time for their funds to be repaid. He did not promise liquidity.

Accordingly he sought and won support from the likes of the Accident Compensation Corporation, later the NZ Government Super Fund, large pension funds, KiwiSaver funds and only those wealthy individuals who were not dependent on liquidity.

George’s model therefore matched his funding with the needs of the private companies he bought.

The result has been fair rewards for risk, for the lack of transparency, and for the forfeiture of liquidity.

He has had some spectacular successes, though perhaps his greatest victory was more akin to shooting fish in a barrel (his “stealing” of Scales remains a scalp that others, not he, facilitated).

Direct Capital helped Ryman Healthcare evolve into a multi-billion dollar company.

Today, Direct Capital is nurturing “Wet and Forget”, the cleaning product that does not feed toxins into our waterways.

And he has a new project underway - possibly land-based - as he prepares to release yet another fund. Details will emerge soon.

I admire and respect the commitment of his team to a set of guidelines that have largely satisfied his clients and kept him free of the ugly scenes now being witnessed globally.

The world now observes that Private Equity as an asset class has several dubious characteristics:

1. It is favoured by fewer and looser regulations, enabling PE managers to be greedier, riskier, and less transparent than public-listed offerings.

2. It is clouded by valuations that are often cynically created, valuers not at arms' length, and often "incentivised" to meet target prices (as we saw with property valuers in the lead-up to the 2008 Global Financial Crisis).

3. It is dependent on low interest rates to fund its long-term investment time frames.

4. It escapes scrutiny because of a generally lower level of public attention and media awareness of its progress. Disclosure is much more optional than is the case with listed securities.

5. It escapes true measurement. How often does one read of the comparison between the exit price achieved and the price implied by previous valuations?

The result globally is now messy.

Private Equity funds are increasingly converting to Private Debt funds as often discussed in Taking Stock. The key to this conversion is again the lower level of regulatory supervision and the absence of capital to back risky loans.

More worryingly, PE funds are finding it harder to achieve an exit, either through public or private sale.

This is evidenced by a sharp increase in the “secondary market,” as pension funds seek to offload their PE assets at a discount, and at a much greater level.

For example, currently there are three trillion US dollars-worth of PE investments, a new record.

In the past 12 months, US$150 billion were sold on the secondary market, an increase of 25% from the previous year.

In 2019 and 2020, 4% and 5% were prematurely exited. In 2023, that figure was 14%.

PE funds are rapidly creating new funds to buy the assets of established funds, to enable the disenchanted to exit. The number of impatient investors seems to be growing.

Indeed, The Financial Times described the growth in secondary market exits as “blistering”.

One large US pension fund manager noted that "we have made many investments over the last 25 years in PE. Unfortunately, a material proportion of them have not liquidated in an orderly fashion so we are taking the position that it might be time to get out through secondary sales".

Taking Stock has for some time pointed out the danger in allowing PE allocations by NZ businesses like KiwiSaver, where there are few with research or analytical experience. I would say the number would be the same if it was doubled, in those cases where the funds invest by rote.

The ACC and the NZ Super Fund, and of course Direct Capital, have highly-paid specialists to enter this market, as does Milford and a small number of other fund managers.

But as the world is now discovering, transparency, valuations established by market transactions, liquidity, and access to expertise have a value, and are prerequisites for successful investing.

Ross George at Direct Capital is to be lauded for building a real value-add model.

_ _ _ _ _ _ _ _ _ _

George’s skills in picking out winners and sticking to credible criteria were not the principal reason he had a windfall from his purchase and subsequent sale of Scales, the company the late Allan Hubbard built and today has a market capitalisation of some $557 million.

The gift of taxpayers’ money came after the Key government had acquired Scales via a quite dreadful Crown error leading to false accusations of fraud against Hubbard.

That error dumped Scales into a pot controlled by lazy Treasury executives and a quite dreadful receivership, and led to infantile, self-serving or simply incompetent advice from lawyers and investment bankers. Key failed to act to prevent the plundering of taxpayer money.

The taxpayers should have recovered far more than they paid out under the Crown guarantee scheme, which reimbursed some South Canterbury Finance depositors. Genuine managers of distressed companies, like Duncan Saville, knew that patience would restore hundreds of millions of more value.

But key assets, especially Scales, were flicked off at absurd prices, just as PWC and Hubbard himself had warned.

Scales was sold by the receiver for SCF, advised by drongos, for $44m, less than the dividends it paid over the coming few years.

Direct Capital and the ACC were the opportunists who captured what should have been taxpayers' value and within years flicked it off with a public issue. It was sickening to observe. The SCF story is told in The Billion Dollar Bonfire.

I guess the only good news was that ACC was a beneficiary. It is a Crown entity, so one could argue the Crown "stole" from the Crown.

Had this transaction occurred in Venezuela, South Africa, Russia, or Uganda (under Idi Amin), one might have wondered if it coincided with a shortage of brown paper bags.

Of course it happened in NZ, where there is no corruption, so we can be easily convinced that it was just miserable incompetence that led to the switch of wealth to Direct Capital and ACC.

The other of George’s odd victories was his buying into the troubled empire of the British opportunist, Andrew Barnes, who had hatched a plan with another opportunist, George Kerr, to buy and then merge Perpetual Trust with other trust companies, including NZ Guardian Trust (NZGT).

To me this seemed like buying trams to form a bigger tram company. Trust companies have no real future, in my opinion.

The investment by Barnes would have been of sufficient size to qualify the ex-Macquarie fellow for a special NZ residency, if he had no other natural pathway to permanence in NZ. He bought Perpetual for $14 million and NZGT for $60 million with expensive finance, including mezzanine finance, the most obvious source of loan repayment being a trade sale of the new group or an NZX listing.

The latter never sounded credible to me, given the sector is in its twilight years and is neither especially profitable or able to add value equivalent to its extravagant fees, in my opinion.

The new grouping, then owned by a Barnes entity, struggled to produce the nett sums needed to service the high levels of debt. An ugly outcome seemed to lurk.

A highly improbable offer to buy the group for about $200 million was documented to include a $20 million non-refundable deposit.

Two Australian lads, with not an iota of trust experience, had cobbled together the deposit and duly donated it to Barnes when the frankly absurd offer inevitably fell over.

Subsequently, Direct Capital stepped in with the clout to add more time for a new resolution, and eventually sold and profited nicely, basically leaving the bulk of the group in the hands of Barnes and now a lawyer, who switched career to be a trust company CEO.

The new group makes a modest profit - a few million - and would face issues if it employed investment staff that won the attention of the big boys in capital markets, who pay big numbers to capture any highly talented analysts. Talent does not head to trust companies very often, for obvious reasons.

Direct Capital's in-and-out role with Barnes' entity was profitable but not consistent with the criteria George espouses when he invests in growing companies with long-term prospects of greater market share and greater profitability.

There are, of course, other examples of Private Equity success. Rangatira, bred from the McKenzie family, has had some victories, as have one or two of the funds run by Lance Wiggs and others run by former Goldman Sachs investors.

On the other side, we have had Powerhouse, a quite disgraceful group created by some impecunious Brits who had neither the wit, nor the substance, to convert a credible idea into financial success.

Powerhouse Ventures had a deal with Canterbury University to help new companies grow, and may prefer to be labelled a “venture capital” firm that has performed dreadfully, rather than a Private Equity fund that has failed.

The difference between Private Equity and Venture Capital is not insignificant but for retail investors whose only investment is via their pension funds, the difference is barely relevant.

Both types of funds seek to employ skilled people able to sort the most promising from the mundane or the improbable.

Direct Capital, under George, has been the best of the best, notwithstanding his oddball exceptions.

_ _ _ _ _ _ _ _ _ _

A constant theme in Taking Stock for some decades has been the absurdity of solving over-indebtedness by borrowing more.

This week, the International Monetary Fund has called for immediate action to reduce global debt.

Here is why:

The world’s indebtedness (as a percentage of GDP) has grown by 90% since 2000 and is projected to keep growing from the current scarcely believable total debt figure of US$100 trillion.

The US debt level will reach high into the clouds, but the G7 countries will not be far behind, both heading for 200% of GDP. Japan is destined to hit 325%, Italy and France heading to 150%.

Notably cautious is Germany, where it is expected to fall to 40% of GDP. Its economy is very likely to be in recession, with minimal improvement over the next two years.

It continues to baffle mathematicians that as the world is wallowing in conflict, with human and asset destruction and wanton waste of resources, financial markets hit record heights, cheered by the ability to borrow ever more, at lower costs.

No doubt Trev and John Clarke have the answers.

The world does not know how lucky "we are". We can all borrow more!

Next up the Trump election.

_ _ _ _ _ _ _ _ _ _

Travel

I am giving a talk to a group in Arrowtown on November 14 and would enjoy meeting individually with clients before the 3.30 pm meeting. I have some available times in the afternoon.

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

1 November – Lower Hutt – Fraser Hunter8 November – New Plymouth – David Colman13 November – Ellerslie – Edward Lee14 November – Albany – Edward Lee15 November – Auckland CBD – Edward Lee14 November – Arrowtown – Chris Lee28 November – Napier – Edward Lee29 November – Napier – Edward Lee

Please contact us if you would like to make an appointment to see any of our advisers.

Chris Lee

Chris Lee and Partners Limited

Taking Stock 17 October 2024

INVESTORS will know, and possibly everybody who was an adult in the 1990s will know, that until the 1990s bank managers and bank executives were almost exclusively men. 

The task of widening the management group, and the potential to discover future managers and executives, barely started before the 1990s. 

It took at least a decade of providing the experience, confidence, and the opportunity for the talent pool to be doubled. 

Even in the years between 2000 and the Global Financial Crisis (GFC) in 2008, the search for talent was largely within just a half of the population. 

Of the 60-odd finance companies that existed in 2006, very few, if any, as I recall, had female chief executives and women were a tiny percentage of directors in the sector. 

The GFC might have been the trigger for change. 

For many years now our banks have been led by women. 

A cynic might link this rise to the simultaneous rise in angst amongst male bankers, regulators, shareholders, and society. 

An increasingly female-dominated television, radio, and print sector was also highly aggressive towards men, some managers almost hounded out of office. 

A cynic might argue that finding the right talent with the gender that does not have a Y chromosome helped banks to quell the angst with the regulators and the media. 

This might also have been a hat-tip towards women leaders with a relatively clean slate, much lower levels of entitlement, and a desire to penetrate glass ceilings, resulting in hard work and great attitudes without expectations of gross overpayment or absurd expense account claims.

(Remember the male bank CEO who claimed removal costs for his wine collection, and remember the era when the likes of Merrill Lynch and Macquarie paid such absurd bonuses to mediocre people that the word larceny comes into conversations?)

Some diabolically unexceptional people now boast about the wealth resulting from nonsensical bonuses.

So today we have women managing our biggest banks and in recent weeks we have observed discussions with reporters that were not just platitudinous or trite corporate waffle. 

Antonia Watson, ANZ's chief executive, raised the extremely topical subject of tax on REALISED capital gains. She was careful to emphasise "realised" gains and not blunder into goofy discussion on impossibly unwise "wealth" taxes, or taxes on unrealised "valuation" gains.

She probably recognised that "wealth" taxes are as improbable as a tax on those who use the free drying process of a clothesline.

Within minutes of her sensible comments, talkback radio and, sadly, mainstream media had converted her careful words into a plea for a capital gains tax, or a wealth tax.

She said no such thing. The media was ascribing to her an ideology to which she does not subscribe, neither does the woman who is CEO of the ASB, Vittoria Shortt, who also sees the need for reform.

Investors will find this need for tax reform important. Two of the women running our biggest institutions are not the equivalent of the appearance of a single swallow pretending change is in the air.

The world is over-indebted, running fiscal deficits as though more debt was a solution to excessive existing debt.

France has responded by cancelling its annual indexed rise for pensioners and beneficiaries, effectively breaching a promise.

France plans to cut spending over two years by NZ$110 billion, with around $15 billion in social security cuts, $25 billion in state spending cuts, and $6 billion in cuts from local government.

It plans to increase its tax revenues for two years by raising $22 billion with a special tax on large companies and a further $5 billion from new taxes on households.

The Finance Minister said: "The French economy is holding up, but our public debt is colossal. It would be both cynical and fatal not to see, say it and recognise it."

He plans a "temporary" levy on some 440 large profitable companies with annual revenue exceeding NZ $1.6 billion. It would generate $12 billion in 2025 and a further $6 billion in 2026.

An "exceptional" tax on maritime transport companies would apply, raising nearly a billion in each of those years.

The government proposes a special tax on air travel and on private jets.

Because of France's huge sovereign debt, and its ongoing fiscal deficits (5% to 6% of GDP), it pays a penalty margin for its sovereign debt of 80 basis points more than Germany. On a trillion of debt that would cost France an extra $8b per year.

Germany's deficit is just south of 3% of its GDP, 3% being the highest figure allowed by the European Union, without penalties.

So France has reacted, and also acknowledged the weather is changing.

The Netherlands has reacted, with a similar attitude towards travel. Its solution is to ban any advertising of cruise ships or air travel.

France has not reacted in just a negative way towards new taxes.

The CEO of Total Energies, France's fourth largest company, accepted a proposed 1% tax on share buybacks.

"There needs to be a response to the sense of growing inequality," he told the media. "But all these extra taxes must be accompanied by higher cuts in public spending."

To revert to the socially wise, carefully couched comments of our female banking leaders, their suggestion was for a new tax on realised gains (where cash is available to pay the tax).

And they saw a need to tackle the national pension, surely in need of means testing, and a review of the age eligibility, perhaps splitting the pension into a universal component and a means tested top-up.

Multi-party agreement must precede such a change.

By coincidence I met last week with a distinguished New Zealander who had lived in Switzerland when it had introduced a capital gains tax that included a tax on profits from the sale of the family home.

He recalled how Switzerland had an allowance for an untaxed amount of the gain and, as so often happens with ground-breaking tax systems, a most unwise anomaly.

It allowed a home to be sold to another family member for a gain that was not taxed at all.

So a $1 million house purchase, which over the years might increase in value to $5 million, could be sold to one's family for $5 million without tax. The house could later be sold back to the original family owner for $5m, meaning any future sale to non-family would be taxed much less from the higher start point.

That reminded me of the tax distortions that arose when Jim Bolger and his Finance Minister Ruth Richardson introduced a surtax on the national pension for those whose separate income exceeded $14,000. This occurred in the early 1990s and gave birth to vast numbers of off-the-shelf family trusts.

At the time, I had a client in a rural centre who was able to lend his capital to his daughter at 1%, thus leaving his extra income at less than the $14,000 threshold.

But his daughter then paid his rates, his power bill, his insurances, his grocery bill, his fuel bill, car registration and his cosmopolitan club membership. He had low income, but no bills, no surtax and lived very cheerfully on the pocketmoney from his national pension.

The point here is that stupidly designed, hard to collect, unreasonable tax systems lead to creative avoidance.

Our female bank chief executives, oozing common sense, should be co-opted into a committee to design sensible new taxes and redesign our pension scheme.

Investors need to know what levels of risk they need to take to meet their after-tax spending habits. 

My guess is that just as the banks courted political, regulatory, and media popularity by removing "fat cat" men from the equation, so too might the next advances in tax fairness be proposed and defended by successful women from the financial sector.

Change is inevitable.

Nobody would want commercially incompetent political leaders, of whom we have had many, to be left in charge of devising sane structures and trying to sell it to the public, fed by the minorities which make up our media.

_ _ _ _ _ _ _ _ _ _

A FEW years ago I hosted a private dinner with many of the business leaders whose achievements and views I admired.

I recall that after several hours of discussion focused on the major issues of global debt, weather change, China's expansion, geopolitical tensions, NZ's dreadful leadership, and inequality, we then focused on what was the most threatening of these concerns.

Those in the room had combined wealth probably exceeding a billion dollars.

Their biggest concern was . . . inequality.

Envy taxes would never work to ease inequality.

But as our female bank leaders noted, a tax on REALISED capital gains might be a great starting point.

_ _ _ _ _ _ _ _ _ _

FALLING employment, rising costs, and absurd house prices might explain the financial markets' views that interest rates will fall quickly to a level where 5% mortgages may be possible.

The view may be that only "free" money can jump start (or sugar rush) a revival in consumer spending.

There are many changes occurring in financial markets that confuse those whose jobs it is to forecast rates. 

Changes are occurring globally such as:-

-Private debt funds taking on high-rate, high-risk lending, funded by pension funds (other people's money).

-Open banking, possibly allowing barely capitalised organisations to enter markets.

-Crown guarantees of bank deposits, possibly resulting in a transfer of default risk from depositors to the Crown.

-Fierce debate about the inexplicably high margins applied to the agricultural and horticultural sectors, that margin in NZ being around 5% higher than mortgage margins.

-A mountain of global corporate bond debt to be refinanced within the next 12 months. Will private credit, funded by pension funds, chase the rates implied by higher risk?

New Zealanders anticipate bank deposit rates around 3-3.5% and senior bond rates around 4%, mortgage lending rates around 5%.

Yet there is no evidence that the world would subscribe to NZ government bonds to fund our huge deficits and growing debt at rates below 4%.

The same applies to 10-year US debt where the rate still is around 4%.

These anomalies suggest that a return to low cost of debt might be a dream.

Yet another woman, Nicola Willis, will need to figure out these conundrums. 

_ _ _ _ _ _ _ _ _ _

Travel

Chris is giving a talk to a group in Arrowtown on Nov 14 and would enjoy meeting individually with clients before the 3.30pm meeting. He some available times in the afternoon.

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

29 October – Takapuna – Chris Lee

30 October – Ellerslie – Chris Lee

1 November – Lower Hutt – Fraser Hunter

8 November – New Plymouth – David Colman

13 November – Ellerslie – Edward Lee

14 November – Albany – Edward Lee

15 November – Auckland CBD – Edward Lee

14 November – Arrowtown – Chris Lee

28 November – Napier – Edward Lee

29 November - Napier – Edward Lee

Please contact us if you would like to make an appointment to see any of our advisers.

Chris Lee and Partners Limited

Taking Stock 10 October 2024

RARELY does it happen twice in a week but two of New Zealand's award-winning business journalists performed a really useful service for investors last week.

Pattrick Smellie raised the very topical point of transparency in the share markets, when short selling is relevant.

And Tim Hunter displayed his courage and observation skills when discussing the outcome of the dreadful rorting of investors when Intueri, a tertiary education provider, was listed in 2014. The outcome revealed last week was that the gutsy LPF litigation fund had succeeded in restoring much of investors’ capital from the insurers of the law firm and the accounting firm that blessed a quite dreadful prospectus.

With some help from the likes of the late Brian Gaynor, Smellie founded BusinessDesk, a grouping of an eclectic bunch of business journalists. He sold out to the NZ Herald, pocketing some handy shillings for his trouble, and is now the figurehead for the business section of the NZ Herald, if no longer the manager who looks after administration.

Of retirement age now, Smellie's career did involve a stint in the real world where he would have learned something about the challenges thrown at business leaders, whose task is to find solutions.

He wrote an important piece regarding the short selling of Spark's shares by opportunists who seek to exploit the fund managers who buy or sell based on indexed weightings of various shares. The involuntary trading is outlined in the covenants (promises) it makes to index investors, thus informing market participants of likely future buying or selling pressure.

This enables the non-index fund market participants to game the index managers, by preparing early for the forced buying or selling.

My thoughts on all of this are well known. I have been over-ridden!

In the case last week of Spark, the company has seen its share price slashed. The real fund managers lent their stock to short sellers. The short sellers keep selling far more than normal buying can absorb. The price slumps.

The index funds have to keep selling so the buyers at the new artificially low prices are exploiting the index funds.

What value does this add?

Smellie called for the NZX to require transparency in short selling, publishing weekly a list of all stocks that have been linked to short sellers.

The Australians have this level of transparency.

Perhaps the NZX CEO, Mark Peterson, can weigh the merits of Smellie's proposal.

The subject is very definitely important to investors. We know this from the level of daily communications we receive from investors.

Hunter's journalism was also an example of what NZ so lacks.

He is a veteran, a quiet sort in his 60s, like Smellie a multiple award-winning business journalist.

His enthusiasm for research is such that he is certain to have been offered much better wages to move to the large broking houses and be part of a research team. Presumably, he prefers the life of a business reporter.

He also has written insightful articles, revealing a good memory and a willingness to beaver away silently, sifting through documents.

Last week he noted that those who had been duped by the Intueri story 10 years ago have achieved compensation on the steps of the High Court. Funded by LPF, our only meaningful litigation funder, investors had challenged the veracity of the information published when Intueri raised around $170 million a decade ago.

The prospectus had described and promoted a tertiary institution funded by government grants, pretending that the rules that led to the grants were all being met. In truth the grants had been wrongly made as the claimed students enrolling for the courses were often not staying long enough to be eligible for Crown funding.

Chapman Tripp helped with the prospectus, lending its reputation to what was a phoney story.

BDO Spicers validated the numbers.

Only the most trusting investors, and the most careless fund managers, supported the capital raising. As was the case when TV3 was listed in the 1990s, most market participants could see the long-term outcome and left their purses fastened.

My guess is that the insurers of the directors, Chapman Tripp and BDO Spicers, put up a mighty fight, arguing that the Financial Markets Authority had implicitly endorsed the prospectus.

I surmise that LPF played hard ball, perhaps mentioning that a High Court hearing on compensation might lead to revelations that would be unhelpful to the defendants.

Whatever, the trial was called off and a very large compensation cheque was clearly paid. We know this because LPF would have refused any settlement offer that failed to reinstate most of the investors' money.

Hunter, in the National Business Review, explained all of this carefully, modestly not referring to his work years ago in which he identified all the anomalies in a prospectus that was almost the gold standard of dubious figures.

Hunter, like Smellie, has often walked where others feared to explore.

Nearly two decades ago Hunter edited The Sunday Times which wrote an excellent article to help investors, addressing insider trading.

Regrettably the article mentioned one character whose various skirmishes had never included any convictions for insider trading. He should not have been included in the list of villains that the article mentioned. The result was a defamation claim, an allegedly record-breaking settlement, and the end of an era when The Sunday Times had the stomach to have an authentic business section.

The decision to conclude coverage of real issues has never been reversed.

If I judge what interests real investors by reading the hundreds of emails we receive each week, I can faithfully say that the likes of Stuff virtually never seeks to attract the readership of real investors.

Smellie and Hunter deserve the respect of the capital markets.

Obviously they are excluded from boardrooms and have to work around the platitudes with which "business" people respond to the media.

Yet they raise real issues and rarely revert to quoting those platitudes.

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THE issue of gaming the index funds may also explain the extreme volumes and volatility in the shares of Santana Minerals in recent days.

This newsletter is directed towards our clients rather than the wider audience that reads it.

Our newsletter told clients and readers that Santana had been admitted to a very minor S&P Small Caps index as a result of its rising market capitalisation.

At the time around 2 million shares traded each week in a band of around 10 cents.

When the index news was published, the turnover doubled, and the share price rose by around 50%.

The public would know who bought the shares only if a buyer reached 5% of the share registry, at which point disclosure is required.

But there is no logical explanation other than that impatient involuntary buying by index funds, insensitive to price, using other people's money, led to this pricing anomaly.

Once the buyer or buyers had been sated, the price fell and at the time of writing was close to where it sat before Santana joined the Small Caps index.

From all this excitement what can one infer?

1. That index funds are vulnerable to gaming (remember Synlait's price reaching $15, Ryman $16), meaning those managing other people's money are not accountable for assessing value.

2. That lack of transparency enables market participants to exploit others (i.e. would sellers of Santana have held back from selling to obtain the full benefit of index buying rules?).

3. That price and value coincide, but not always.

Was the Santana price rise and fall caused by index buying, day trader frivolity, or a single undisclosed company wanting to obtain a 4.9% shareholding before the Crown showed its hand when it named those companies it intends to refer to the fast-tracking process?

Will we ever know? Believers in the long-term merit of Santana's project might ask "who cares?" Their attitude may be that in a year or two today's pricing games will have been long forgotten.

_ _ _ _ _ _ _ _ _ _

THE sudden collapse in interest rates has NOT been caused by short selling or index funds.

Rightly or wrongly, those who provide the bulk of the money for bond issuers now believe that NZ's central bank will cut rates by two lots of 0.5% before Christmas, leading to a similar fall in bond rates.

Cash rates and long-term rates are not synchronised.

Cash rates matter, long-term rates move more slowly, but the reality is that benchmarks like the 90-day bill rate, and the separate subject of margins for risk, have a hefty effect on the rates that are quoted.

My guess is that the benchmark base rates may fall but the margins for risk may rise, meaning the likes of business lending rates may remain elevated.

I expect bank deposit rates to fall a little, perhaps to 4%, home mortgage rates to settle around 6%, but business overdrafts for medium-sized businesses to remain in double figures.

A slight fall in bond rates will help those who bought bonds at yields of around 2% after the pronouncements of the likes of Robertson and Orr warning of negative rates.

The trading banks spent more than $200 million to cope with negative rates.

Happily, sanity prevailed, and the money printing machines were turned off, meaning borrowers had to make sensible decisions, rather than just bundle up "free" money.

Remember Switzerland reached the point of LENDING at negative rates.

My expectation is that falling household disposable income, elevated unemployment, some degree of responsibility in government spending, and a slowdown in immigration, will lead to a period of lower inflation, lower deposit rates and slightly lower debt servicing costs.

Those who bought these 6% to 7.6% fixed interest investments will be relieved to have some years of above-market interest returns.

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Kiwibank - Perpetual Preference Shares

Kiwibank (KWB) has announced that it is considering making an offer of perpetual preference shares (PPS).

The PPS are expected to constitute Additional Tier 1 Capital for KWB’s regulatory capital requirements and to have an investment grade credit rating.

This investment is perpetual, with a likely redemption date in 5.5 years’ time.

The initial 5.5-year distribution rate has not been announced, but based on comparable market rates, we are expecting a rate of around 7.00% per annum.

KWB will be paying the transaction costs on this offer; accordingly, clients will not have to pay brokerage.

More details are expected on 14 October.

KWB has a strong credit rating of AA.

If you would like to be pencilled in on our list, pending further details, please contact us promptly with an amount and the CSN you wish to use.

Indications of interest will not constitute an obligation or commitment of any kind to acquire this investment.

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Travel

I am to talk to a group in Arrowtown on Nov 14 and will enjoy meeting individually with clients before the 3.30pm meeting. I have available times from 11.30am to 2.15pm.

16 October – Albany - Edward Lee

18 October – Ellerslie – Edward Lee

29 October – Takapuna – Chris Lee

30 October – Ellerslie – Chris Lee

14 November – Arrowtown – Chris Lee

Please contact us if you would like to make an appointment to see any of our advisers.

Chris Lee and Partners Limited

Taking Stock 3 October 2024

AT a time when the low-cost investment trading platform, Sharesies, has succeeded in raising several more million dollars to ensure its survival, it may be time to bow to its success.

The platform was created by tech whizzes with the audacious ambition of attracting hundreds of thousands of new investors from a demographic group that historically had no interest in investment.

By developing an app that was easily used by people highly connected to their devices, the Sharesies tech people have achieved what to my age group seems a miracle. They have made it easy enough, and even attractive, for a demographic - young people - to set aside cash to dabble with in financial markets.

More than 500,000 young people and a number of others have portfolios, most totalling hundreds of dollars.

The value to them will appear if they so enjoy the experience that they progress to be interested in corporate information, market research, and analysis.

The value to humanity might follow if we were to see a switch from random consumption to sensible savings, enhanced by the willingness to invest.

I will not dip my footwear into the dangerous practise of defining my vision of wasteful consumption. We should leave each to work out their own definition.

So Sharesies has done remarkably well in executing its plan to entice newcomers into a low-cost, technology-driven, trading platform.

Furthermore, a high number of these newcomers have become interested in reading about opportunities.

I can infer this by watching the number of requests from our clients to share our copyrighted newsletters with grandchildren.

The proof may also be in the rumoured thousands of investors with Sharesies who own between 25 and 500 shares in the gold discoverer Santana Minerals.

There has been only one source of information and research on this project.

Those investors who have found and shared this research is more evidence that the low-cost platform is attracting curious and ambitious youngsters.

The nominee company that holds all of these smaller individual parcels is now amongst Santana's top ten investors.

So Sharesies has built a resilient platform and has sold its story well, engaging skilfully with the media, whose reporters are likely to be clients.

It has achieved scale and some financial resilience by attracting those with real money to provide the necessary survival capital. Its three co-founders have retained around 15% of the company as their reward for their vision and ambition.

Quite what Sharesies would be worth with a trade sale or an NZX-listing is anyone's guess. It has yet to make an annual profit but that might be remedied soon.

The next step in the evolution towards the status of a real investor is the thirst for knowledge, research and analysis.

The cost of providing such services is included in annual fees and real brokerage charges of sharebroking businesses.

Such costs are unaffordable to an investor with a low level of savings.

We think we may have two of the possible solutions for the conversion of a novice into an informed investor.

As most of the readers of our newsletters are parents/grandparents they should read on.

_ _ _ _ _ _ _ _ _ _

AFFORDABILITY is an obstacle for those seeking knowledge and analysis.

Another obstacle is accessibility.

Our company charges its clients seeking advice and analysis $595 plus GST per annum, irrespective of their wealth.

However, to be helpful, we allow a client to bring along a family member at the same address without additional cost.

We observe many parents/grandparents now seeking to nominate a younger person to have that access.

That might help address the issue of affordability for newcomers with modest portfolios.

There may be another low-cost service of help.

Over the past two decades the NZ Shareholders’ Association has grown its offerings to its members, who pay $145.00 per year for membership (or $45 with student ID).

Over two decades the NZSA has attracted slightly more than 1,000 paying members, enabling it to engage a paid chief executive.

The NZSA had been created by the colourful Auckland accountant, Bruce Sheppard. He did a great job in getting noticed, wearing Viking gear to annual meetings, fearlessly attacking poor performers, and enduring all the mocking of the Old Boys Network, which always has a crack at silencing critics.

Sheppard sometimes displayed unwise judgement, but from nothing he built a voice for retail investors that today is often audible.

Various people have taken on the role of NZSA's spokesman, the latest being Oliver Mander, an unlikely capital market voice, but one who has advanced various objectives of the NZSA.

Mander's displayed CV talks of a career in IT, in marketing, in Boy Scouts leadership, and in stints with larger companies. He is not a capital markets participant but he is energetic and has quickly been adopted by young reporters seeking an opinion on corporate matters, giving the NZSA presence, if not yet gravitas.

It may have only 1,200 paying members but the NZSA holds proxies for 14,000 investors who authorise the NZSA to exercise their votes at public listed company meetings. It is now established, though not yet a mature organisation. However, its members are real investors with a genuine stake in investment markets.

The NZSA board looks somewhat eclectic to me, with no obvious capital market credibility. It does comprise a lawyer, who should be helpful, and a woman with public company governance experience.

Doubtless it will in time coerce skilled people to enhance the NZSA's credibility. Imagine how it would be effective if its board comprised people like the late Brian Gaynor or Sir John Anderson.

Its budget is enhanced by generous corporate donations, implying the moneyed end of town wants the NZSA to grow into a credible voice on corporate behaviour.

Corporates also help by supplying executives to the various local branches of the NZSA, which regularly hold investment gatherings and occasionally arrange visits to company headquarters.

Obviously, the NZSA needs to increase its membership to a level which would add credibility to its voice.

Mander has succeeded in attracting media attention.

On virtually any corporate subject he is now asked to opine, he obliges.

Fairly obviously those who strategise and execute behind boardroom doors have rarely been happy to talk to media beyond very generalised levels. Most of the best-informed simply decline, or offer written answers to the media, unwilling to be taken out of context or misquoted. 

Perhaps this reveals their view on their obligation to upskilling reporters and explains the platitudinous response they provide when asked by the media to respond to banal questions, like assessing political slogans. Very rarely do we see insightful comment offered.

Perhaps it reflects the experience of previous misunderstood discussions. Their absence leaves a gap.

So the NZSA's progress in reaching a level of credibility when explaining or opining on corporate matters should be watched with optimism.

If it can attract directors with capital market experience and skills, people not afraid to speak out when their views are well-informed, and a fee-paying audience of say, 10,000, paying perhaps $50 per year, then the NZSA could become the organisation that helps the Sharesies clients convert them to enthusiastic, informed investors.

_ _ _ _ _ _ _ _ _ _

THOSE of us of us of a certain vintage recall fondly the days when the NZ Stock Exchange regularly offered trading in rights and options.

Such trading could offer leverage. It could offer a "free" or low-cost punt.

Imagine if Xero, when it listed, had granted free options with a five-year horizon, convertible to shares at $10. (The original offer price was $1.20.) Many in the market might have preferred buying the options for a few cents. Both securities would have traded vigorously.

Perhaps the same would be true if Santana Minerals today offered its investors tradeable options to convert to shares in 18 months at $3.00.

Ah, the good old days!

For many years renounceable rights have been overtaken by wholesale placements with a block reserved for existing shareholders.

Part of the explanation has rested with banking syndicates.

Banks wanting to see capital increases always want to have certainty.

Underwritten placements create certainty, enabling the company to obtain debt with suitable covenants when it seeks a large or syndicated facility.

 I do understand the other explanation, that an abbreviated subscription time reduces the risk of a force majeure event (like a Middle East full-on war), thus making the underwriting issue less risky and less expensive.

Yet it matters not a hoot what the old-timers like me might prefer. Our opinions do not matter. Most certainly such deals are not influenced by the mainstream media, let alone social media.

As Infratil, Auckland Airport and Fletcher Building have all displayed in recent weeks, when they collectively have raised around $3.5 billion, they will organise their issues in what they see as the most advantageous manner for the companies and their shareholders.

One hopes that all companies, especially Fletcher's, will have learned the stupidity of buying back their own shares in benign times, only to sell more shares at a discount at the times when markets are stressed.

Going right back to Hugh Fletcher when he was in his pomp, and back into the Norris/Adamson era, Fletchers will be recorded as the worst governed and worst managed Top Ten NZX companies since Chase, Equiticorp, Jones and Judge.

Let us hope the $700 million discounted capital raise is the catalyst for a new era of governance competence at Fletchers.

(Fletchers bought back $408 million in shares at intervals in the last five years, at an average price exceeding $7. It has now sold shares for $2.40. In rough terms the buyback decision has cost Fletchers a third of a billion.)

_ _ _ _ _ _ _ _ _ _

New Issue

SBS Bank (SBS) has opened a new 5.5-year senior bond.

Based on current market conditions we are expecting an interest rate of approximately 4.95%.

SBS will be paying the transactions costs for this offer, accordingly clients will not be charged brokerage.

The bonds will be listed on the NZX and will have an investment grade credit rating of BBB+.

We have uploaded more information on this bond issue to our website on the link below.

https://www.chrislee.co.nz/uploads//currentinvestments/SBS030.pdf

The offer closes Thursday, 3 October at 10am.

Payment would be due no later than Wednesday, 9 October.

If you would like a firm allocation, please contact us promptly with an amount and the CSN you wish to use.

_ _ _ _ _ _ _ _ _ _

Travel

I will be in Timaru on October 9 and have times available throughout the day. I have hired a boardroom at the Grosvenor Hotel. This will be my final visit to the area for 2024.

I will be in in Takapuna (FULL) and Ellerslie October 30 – a couple of appointments still available.

I will be in Arrowtown on November 14 and am available to meet with clients between 11.30am and 2.30pm.

04 October – Hamilton – Johnny Lee

04 October – Wairarapa – Fraser Hunter

7 October – Christchurch – Chris Lee (FULL)

8 October – Ashburton – Chris Lee

9 October – Timaru – Chris Lee

10 October – Wellington – Edward Lee

16 October – Albany - Edward Lee

18 October – Ellerslie – Edward Lee

29 October – Takapuna – Chris Lee (FULL)

30 October – Ellerslie – Chris Lee

14 November – Arrowtown – Chris Lee

Please contact us if you would like to make an appointment to see any of our advisers.

Chris Lee and Partners Limited