Chris Lee & Partners Ltd

Taking Stock 26 September 2024

WHEN the Brit Rob Everett arrived in NZ some 12 years ago to hold the crucial role heading the Financial Markets Authority, many old-timers in the capital markets groaned.

The example of Britain was not one capital market participants would welcome. The UK regulator added immense cost to participants with very little value-add.

The market wondered whether we would find Britain’s clunky regulation replicating itself in NZ.

Prior to Everett, Sean Hughes, an ex-ANZ banker, had generated immense admiration for his ability to tackle the cheats and to absorb criticism, most of which should have been aimed at the FMA’s predecessor, the Securities Commission.

The latter had been a disastrous failure, emasculated by a hopeless minister (Lianne Dalziel) whose understanding of the big issues was Tori Whanau-like.

The Securities Commission appointed inappropriate people to apply governance, had an utterly misguided CEO, Jane Diplock, and to be fair, was hamstrung by a minimal budget, neither the Clark government nor the early Key government seeing any votes in beefing up the Commission with more taxpayer funds.

So Everett arrived following Hughes success in transitioning the FMA into a useful organisation, albeit highly reliant on its senior legal counsel, Liam Mason, by some distance the most useful survivor of Diplock’s regime.

During Everett’s reign, over eight years, he earned respect, displaying a good understanding of market needs and developing an easy relationship with key market people.

He, like Hughes, grew market respect for the FMA.

I lead off with this background to display respect for Everett.

Everett left the FMA to become the chief executive of the NZ Growth Capital Partners fund, a Crown-established fund to support start-ups. Effectively it is a high-risk venture capital fund that tries to sort out big commercial prospects from the daft, arranging to support these start-ups that conceivably could be commercialised.

If you go back 10 years, some of our universities had the same vision, partnering with different groups, the most active being Powerhouse Ventures, which linked itself to Canterbury University to commercialise any useful ideas to emerge from academia there.

Powerhouse was owned and run by largely British entrepreneurs, none of whom had the sort of personal wealth, or in my judgement, the staying ability, to survive regular disappointments.

Powerhouse picked up some great ideas, such as the road markers that turn blue when temperatures are leading to ice, and the cleverly designed turbine that generated electricity from the water flow of tiny creeks on dairy farms.

Sadly, Powerhouse proved to be dreadfully managed, and governed, grossly misled investors, and was deservedly seen as being led by a team of self-serving halfwits.

Venture capital is a dangerous genre, one in which failures outnumber rare successes by a high multiple.

All of this leads me to strongly disagree with the recent plea by Everett to win more support from our KiwiSaver managers, asking them to allocate more of their clients’ money to start-ups.

I dislike this request. We have very few KiwiSaver managers with sufficient funds under management to allocate any sum to a sector that has a high failure rate and is likened by old-timers to backing a first starter in a horse race for those that have never won a race.

Everett was appointed to the Crown fund because of his proven management skills. The Crown entity had developed a sour culture.

This was unsurprising.

Vainglorious, ever egotistical soldiers often find that their self-belief in identifying future winners does not convert to short-term financial reward. Very hastily, they can be spurned by short-term failures.

Finger pointing becomes divisive.

Everett had done a great job in soothing those at the FMA who had aspired to the job he was awarded.

Some fairly prickly people were able to function adequately because Everett was so successful in soothing the bruised egos. It would be a fair bet to wager that Everett was appointed to the NZ Growth Partners Fund not because of any latent skill in forecasting miracles, but because of his ability to unite the staff and bring process to the investment decision-making.

Last week Everett told a parliamentary select committee that he wants to see KiwiSaver funds, and the likes of other fund managers (NZ Superfund, ACC, as examples) make greater allocations to start-ups.

I think he is wrong, certainly in the case of KiwiSaver.

In NZ we have five KiwiSaver fund managers with respectable scale: ANZ, Westpac, ASB, Fisher Funds and Milford.

These funds invest primarily in listed global shares, global bonds, global property, NZ shares, NZ bonds, NZ property, and hold a minimal sum in cash.

They have token sums in the most volatile assets such as venture capital funds, private equity and private credit.

One could argue that they should have no funds in highly speculative investments, though the counter argument is worthy of thought; that a tiny sum with high growth potential might be worth a punt with a few coins.

Very few market people have ability to forecast the future. There are very few sages in NZ.

If someone tomorrow invented a way of restoring memory to those with none, it would be highly unlikely that the commercialisation would be captured by a venture fund run from Ward Island in Wellington harbour.

In my view the ability of any managed fund to pick winners is low, but even lower if the funders are either cursed by Crown manuals, or by organisations that fit the KiwiSaver model.

There is a much better chance that such a miracle idea would be analysed by Gareth or Sam Morgan and funded by them while the risk of failure was high, but the potential returns were extreme.

The even more important question relates to whose money would be used, if fund managers were investing.

If the Morgans believed the start-up was worth backing they would invest with their own money.

KiwiSaver money belongs to those who are saving for their future retirement funds. It does not belong to the managers.

The average KiwiSaver has about $30,000 in their account.

Not even the most empty-headed weekend commentators would advocate that a fund of $30,000 should contain any measurable sum in a start-up that eight times out of ten goes bust, but twice out of ten makes some or a lot of money.

The average KiwiSaver is 39, according to figures quoted by KiwiSaver salesmen.

You could argue that such an “average” investor has an investment horizon of maybe 25 to 30 years, and therefore can invest a little in “saplings as well as trees”.

I would also argue that anyone whose money was used to punt on the outsider should be personally consulted, and be told of the risks before having any of his $30,000 invested in this way.

KiwiSaver funds are not the monopoly money of lightweight salesmen, with which to make ideological/social investments, in search of media adulation or political brownie points. Such funds when they invest must have certainty of value, rarely if ever available in start-ups.

The salespeople simply must see that the money with which they have been entrusted is not to be used “for the good of the nation”. It is to be used for the good of the investor.

If the NZ Growth Capital Fund sees a value in having more invested in the start-ups, it could seek to set up a mirror fund available to individual investors, or to direct money to funds that clearly identify to the investors that the money is going to be directed into long shot start-ups.

Meanwhile, KiwiSaver managers should be sent on a course that teaches them that their personal ideologies, or hunger for public attention/applause, should be funded from their own pockets, not those of clients who may well be completely averse to the risk or to the ideology/social aspirations of the fund manager.

My respect for Everett is undiminished but he should drop the idea of promoting KiwiSaver money as a potential boost to venture capital money.

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ARE the landlords of city and provincial centre property about to learn about the risks in the sector?

For some years, rents collected from those in retail, hospitality and small businesses have been reliable enough to satisfy bankers and landlords.

Rates from the large, well-located businesses in big cities have been largely reliable and for those who lease their premises to the Crown, the years of 2017-2023 were bonanza years, as the public sector numbers grew by nearly a quarter. Unwise and inexperienced leaders had no understanding of the certainty that such false growth would not be sustainable.

One imagines the Crown will not be renewing leases without very significant rent reductions.

But it is the walk through Wellington’s main thoroughfare, from Lambton Quay up Willis Street along Manners Street and down Courtney Place, that highlights imminent changes to the rental market.

Firstly, one notices the For Lease signs, the empty retail space, the closed coffee shops, bars and restaurants. One notices the tiny number of customers in the shops that are open.

Whatever else one might conclude, it is inescapable that lower rents will be the first step of a recovery, not a command from employers to work at their desk. Employees will have less money to spend, not more, when they return to their desks.

The comforting era when ratchet clauses were standard has long passed. Rents will have to fall.

For the foreseeable future, tenants will be exercising their renewal rights only when the rents find a level that generates new tenants.

Banks which have often lent landlords 50-70% of the cost of the buildings’ valuation will now know that even last week's valuations are based on sales that are not occurring.

One building owner, with several buildings, recently displayed the valuations suggesting the buildings were worth in total around $65 million. He confided that there were simply no buyers, no recent transactions, and no hope of imminent sales that might justify the valuations. Who knows for what the buildings would sell?

If his bankers are alert, they will be monitoring his ability to service debt, on a daily basis, and will want to see that he can cope with rental defaults.

Wellington has many scores of tired buildings, over-capitalised by the need to meet earthquake standards, many of them tenanted by businesses with diminishing margins.

If I were a banker, I would be quietly stress-testing the tenants and seeking clarity on potential lease renewals.

Wellington is not unique.

My suggestion to struggling tenants is to renegotiate rents, and to look seriously at the cost of moving to space that has been repriced (lower rents) by desperate landlords.

Property never was, and never will be, a sector that has generated certain cash flow, except at the very highest end, where the Crown is on the hook. Even then, the Crown will have review/rollover rights that allow rental agreements to end.

The banks are feeling stressed about these adverse signals.

Every participant in the property sector will want to see “real” sales (contract created with neither party under duress) followed by credible valuations.

Gone is the era when these property enthusiasts lived by borrowing against revaluation “gains”, pretending that unrealised valuation gains could be spent.

Now is a tough time for over-geared property owners being squeezed by banks and by tenants.

Loan defaults will surely be the signal for changes in bank lending, for changes in rental negotiations, and for relocating the surviving businesses to premises that offer credible rents.

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THE Synlait Milk chairman, Irishman George Adam, will surely be an early contender for New Zealand’s most respected chairman.

He has achieved a great result by bringing together Synlait’s banks, its Chinese majority shareholder, and its other major shareholder (a2 Milk).

It always seemed to me that Synlait’s real value was sufficient to make a credible deal but there are few chairmen of listed companies that would have been trusted to handle the negotiations. Rid of some poor directors, Synlait always had a chance if it could attract a skilled chairman.

Adams can now be identified as one of a small number of modern listed company chairmen with the skill to ward off a potential national disaster.

So Synlait’s business model, refined and stripped of bells and sirens, will survive. Farmers will continue to have an option beyond Fonterra, and NZ will continue to have a model that complements the giant of the sector, Fonterra.

As a former Synlait shareholder, I will have no financial interest in the refined Synlait model.

Years ago as a retail investor in an NZX-listed company owned and governed by Asians, I learned that the Asian governance model is not focused on what might be seen as hangers-on, those people who want the governors to consider retail investors into every discussion.

My view: Synlait Milk should be privatised.

If it ever delivers dividends to shareholders, or even much growth in value, the explanation would be the willingness of the Chinese-owned Bright Dairy and its NZ partner a2 Milk, to be kind to retail investors, to treat them as “equals”.

To be kind would mean overlooking all the opportunities to switch Synlait’s margin away from Bright and ATM into the hands of the major shareholders.

I guess there is a chance that might happen, but I would not use my money to bet on such a magnanimous outcome.

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Travel

My travel to Christchurch (on Monday October 7), Ashburton (October 8) and Timaru (October 9, all day) has been confirmed. I have several unallocated times available in each centre.

I will be happy to discuss progress at Bendigo for those interested in Santana Minerals.

Next week, Johnny will be in Tauranga and has an appointment available in the late morning, and two appointments available in Hamilton in the afternoon.

02 October – Tauranga – Johnny Lee

04 October – Hamilton – Johnny Lee

04 October – Wairarapa – Fraser Hunter

7 October – Christchurch – Chris Lee

8 October – Ashburton – Chris Lee

9 October – Timaru – Chris Lee

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

Chris Lee and Partners Limited

Taking Stock 19 September 2024

A PENSION fund, or an annuity fund, especially any with a Kiwisaver brief, becomes edgy when it observes the real sages of the world are alarmed about the gap between equity market prices and the underlying threats to equity market values.

Be the cause geopolitics, threats of trade wars, real wars, civil wars or simply threats of tectonic change, alarm bells have sounded for sages.

The likes of George Soros, George Friedman, Neil Howe, Ray Dalio and John Mauldin are all flashing lights about the sustainability of asset values.

Even the lightest weights in our savings industry should pay attention to such people, who have had decades of success in spotting the signals of spiralling asset prices.

The pension funds sector and those running annuities are inured to gluttonous fees from their funds management contracts, especially in New Zealand. So their first response to the threat of lower returns is to switch attention to those sectors which are either opaque (like private equity) or have high short-term returns at the cost of hidden risk (private credit). They will want to protect their mandates and fees if the risk of falling asset prices converts to reality.

Most of a certain generation will recall these scary symptoms from the pre-1987 crash and the pre-2008 crash when alarm bells were deafening.

In the first of these, just in NZ, there were literally scores of “investment” and “property” companies created largely by people who fed off false valuations and hidden fees. Most collapsed.

Just as one reminder, think of Investment Finance Corp, which in 1984 raised $10 million promising to “think about” how it would use the money it had taken from investors. Having raised the money, it owned $10 million cash which the share market valued at $20 million almost the next day, awaiting the implied intervention of the IFC genii.

Of course, IFC collapsed. Various people went to jail. Investors learned to whistle, if somewhat morosely, more like a dirge than a chirp.

In 2006-2008, when the tide was turning, fund managers chased miraculous returns by investing in liar loans created by the likes of Goldman Sachs, who sold the loans while privately placing large bets that the loans would fail.

Pension funds, basing their investment decisions on nonsensical credit ratings, destroyed billions of investors’ money and taxpayers’ money, the latter spent by the likes of the US government to fund managers and investment companies to offset their self-inflicted pain.

One such company, Merrill Lynch, in 2008/9 handed out the US government relief money to their highest paid executives, with bonuses totalling most of the $7 billion (approx.) that Merrill Lynch was given; lovely people.

So here we are in 2024, world sharemarkets priced as though there will be perfect solutions to all issues, share prices at extraordinary multiples of forecast profits.

Soros, Friedman, Howe, Dalio and Mauldin sense a plague of rodents are forming an army.

Various well-respected commentators, watching the inequality grow with these extravagant asset prices, forecast an imminent downturn that would inevitably cause great grief to those least able to absorb the changes.

At least some can see that current debt levels of government (federal and state, and in our case councils) can afford to service EXISTING debt only if interest rates revert to giveaway levels. To bring this to a micro level, the gormless Wellington mayor says she has sold her car to help pay her bills.

The sages sense troubles for corporates, many of whom, as Auckland International Airport revealed this week, can repay existing debt only if they are able to raise more capital or debt.

The US commentariat now place a 40% chance on civil war in the US, due to the unequal wealth transfer of the past decades.

Perhaps that is a topic for another day.

Pension fund and annuity fund managers everywhere always respond first with a switch to the hidden risk of private debt markets and the questionable values of private equity, where values are “declared” rather than visible by daily transactions. Their response may temporarily hide the problem, the equivalent of painting over rust.

Credit delinquency is spreading, like rust. Lowering overnight cash rates will not stop the problem. If there is doubt about it consider this.

There is today US$1.7 trillion in private debt funding for corporates that have wanted lighter covenants or lower margins or longer maturities than the heavily regulated banks would offer.

US$1.7 trillion of private lending is a number that has trebled in recent years.

Some will link this growth to the risk aversion of the fully capitalised commercial banking system, where risk has been offset by the capital demanded by vigilant central banks.

Corporate lending by banks and syndicated lending (where a group of banks share the loan) are being passed over to private lending funds, managed by the likes of Apollo (UK-based) and Goldman Sachs. Small numbers of such faux banks are behaving like banks, without the capital of banks.

Typically, private lending funds are loaded up with money handed over by pension/annuity fund managers, as well as by very high nett worth individuals.

The private loans are dished out by the likes of Apollo, largely to companies whose risk profile does not suit the regulated banks. Some of these loans ae then sold off to annuity fund managers.

The real issue is capital, or the lack thereof, though banking knowledge may be another important factor in the decision-making loan committee room.

The banks must cover risk with their own capital.

The private lending managers usually have no, or little, capital and a database far inferior to that of the major banks. There is no government guarantee for depositors, as there is for banks.

Private credit managers are loan brokers, in essence.

Some such managers then gear up the money taken off pension funds by borrowing from banks, granting priority to the banks, aiming to bulk up their lending capacity.

Imagine a private lending manager collecting a billion from pension funds and then borrowing another billion from banks. The banks will see their billion-dollar loan as well-secured, as their exposure is reduced by the subordination of the pension fund contributions, effectively the capital, as far as the banks would judge.

The sages watch this pursuit of high short-term returns with often light covenants (rules applied to the corporate borrowers).

The sages would be well within their commonsense boundaries if they pondered how the corporate world can continue to borrow ever greater sums at a time when, to say the least, the globe is balanced on a fragile axis. A few big private credit funders now are like magic banks, barely within regulators’ radar.

Observe these figures.

Share of loans held by a handful of private credit lenders:

2014     10%

2018     20%

2023     32%

2024     50%

Should this be attracting regulator attention? Who is protecting the real owner of the money handed over by pension managers? The real owner is the pensioner!

Note that in recent weeks NZ pension funds have been spruiking the claim that more, not less, of the money they manage should be heading into private equity/debt managers. The public is being conditioned to more risk. The same phenomenon is occurring in Britain as it, too, like New Zealand, observes its listed equity board beginning to shrink.

The NZ Superannuation Fund was a high performer when first Adrian Orr, then Matt Whineray, was in charge. Indeed, Britain is now urging the NZSF to open a branch in London, where private lending is the boom sector. The NZSF, I suspect, will be more cautious than others, though it risks being seduced by the high returns it has had in recent years, but is unlikely to repeat in the foreseeable future.

What can NZ investors do if they do not like the lack of transparency and the hiding of risk by their Kiwisaver managers?

Not much, might be the real answer. At least some of the power is in the hands of the wide boys.

So pester your fund manager. Ask about the amount of funds in private equity and in private lending.

Monitor returns over the coming years, not just on recent months.

Maybe dial back expectations of long-term returns.

_ _ _ _ _ _ _ _ _ _

NOT all future returns require a miracle. Some such potential stars rely just on mathematics.

When next Monday, September 23, arrives, a milestone will have occurred for what is undeniably one of New Zealand’s post-Covid success stories.

On that day, the gold discoverer Santana Minerals will be admitted by Standard & Poor’s to the NZX Small Caps Index, acknowledging Santana Mineral’s financial progress.

At the time of writing its market capitalisation is quoted by the NZX as being $468 million.

Almost exactly four years ago Santana Minerals, a small Australian mining company, took over Matakanui Gold’s licence to explore for gold at Bendigo, near Cromwell.

Santana swapped Matakanui’s licence for about 35 million shares in Santana, along with a commitment to fund more exploration.

At that time Santana’s market capitalisation was around $10 million, the share price around A$0.10.

The difference between today's market cap $468m and the 2020 market cap $10m, is almost entirely attributable to the skills, experience, and energy of two of New Zealand’s greatest exploration geologists, Warren Batt and Kim Bunting.

It was these two men who lived in the barren valleys of the Dunstan ranges, pursuing old tailings that signified historical gold discoveries, testing the soil for anomalies that indicated gold, digging, bagging up rock samples, and engaging drilling rigs in their quest for what they hoped they could prove was “another Macraes”, still New Zealand’s largest-ever gold discovery.

 It was Batt who headed the team that discovered Macraes in the 1980s, when he was a young man in his 30s. He has managed many exploration, discovery, and mining companies since that date, including one company that over time grew from a market cap of around $10m to a cap of a billion.

Bunting, a West Coaster, also in his 70s, has had similarly broad successful experiences in other countries. I see him as the real old-timer, boots, shorts and singlet, living in a caravan (this time in the Dunstan ranges) heating up frozen meals for weeks on end as he explores.

Both these men may soon be judged to be in the same category as Woolf Fisher, Jim Wattie, or Rod Drury, in terms of their contribution to NZ wealth.

Of course it is now well chronicled that Batt’s extensive contacts led to Santana Minerals, a minor explorer in Perth, buying out Matakanui Gold’s licence and providing the tens of millions needed to drill hundreds of holes into rock where Batt end Bunting had sniffed out gold.

Remarkably the seventh Santana drill at hole number 007 (James Bond, as they nicknamed it) converted the project from “interesting” to “exciting”, the independent laboratory results from 007 confirming a bonanza find, capturing worldwide attention, if not, for unknown reasons, the attention of NZ brokers or media. At that point, every newspaper should have been focussed on the discovery.

Continued drilling over the past three years has led to the probability that Santana has made NZ’s largest discovery since Macraes, with a modelled value, at the current high price of gold, of a figure in billions of dollars.

The NZ government stands to make from royalties and taxes a figure of around $100 million every year for at least a decade.

It would be a surprise to me if the Santana project at Bendigo is not named as the “poster child” for the fast-track legislation that the government introduces on October 18.

In part this is because of the quantum and high grade of the discovery, which differentiates it from any discoveries for many years.

Perhaps, just as importantly, the find is on private land, in a valley of the Dunstan ranges well away from local housing, visible by binoculars from the opposite distant hills around Hawea. The land is hardly pristine. It comprises loose rock, infertile soil, heather, gorse, thorny bushes, rabbits and very little pasture.

If consent is forthcoming, the next steps, final feasibility, mine pit design and funding, may seem linear events.

Of course, the modelled extraction success needs to be proven.

And nobody knows the future price of gold.

One must ignore the forecasts of the world's mineral users, some of whom have an expectation of even higher gold prices.

Does all of this explain the rise in market cap of an explorer/discoverer of a high quantum/high grade crop of mineralised rock? From $10m to $468m in three years is a rare source of excitement on the NZX scoreboard.

The $468m is a figure that acknowledges the discovery but discounts the value were Bendigo to be a producing mine in two years.

Disclosure: Various members of my family are shareholders in Santana Minerals.

_ _ _ _ _ _ _ _ _ _

FOR comparative purposes here are the market capitalisation values of various companies last week.

Delegats 585m, Scales 531, Tower 474, Restaurant Brands 469, Santana 468, Tourism Holdings 453, NZX 430, Warehouse 423, Hallensteins 379, Sky TV 367, Sanford 363, Colonial Motors 228, Michael Hill 215, Scott Technology 173, Steel & Tube 154, Marsden Marine 138, NZ King Salmon 137, PGG Wrightson 136, Seeka 116, Comvita 82.

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Contact Energy – Green Capital Bond Offer

Contact Energy (CEN) has announced it is considering an offer of up to $200 million of unsecured, subordinated, green capital bonds.

More details, including an indicative margin and tenor, are expected to be announced next week. At this stage, our expectation is for a coupon around 5.25% to 5.50%, and a likely term of five years.

Please contact our office if you would like to be added to the list for further information.

Travel

20 September – Christchurch – Fraser Hunter

27 September - New Plymouth – David Colman

02 October – Tauranga – Johnny Lee

04 October – Hamilton – Johnny Lee

04 October – Wairarapa – Fraser Hunter

7 October – Christchurch – Chris Lee

8 October – Ashburton – Chris Lee

9 October – Timaru – Chris Lee

16 October – Albany - Edward Lee

18 October – Ellerslie – Edward Lee

29 October – Takapuna – Chris Lee

30 October – Ellerslie – 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 12 September 2024

IF YOU wanted to emasculate the New Zealand economy, destroying the dairy sector and banning the All Blacks would be a very strong starting point.

Dairy exports are roughly 25% of all NZ exports and the nett contribution to GDP was $11 billion in the year ending March 2023.

(I will refrain from another conversation that might discuss the $150 billion that the public sector is said to contribute to GDP. The way GDP is calculated pretends that whatever the cost of the public sector by definition is a dollar-for-dollar contribution to GDP.)

Dairy is to New Zealand what the auto industry is to the world's fourth biggest economy, Germany.

Germany's GDP is around €4 trillion of which the auto sector accounts for around 500 billion, though that figure is falling.

Germany exports around 2.5 million cars a year, primarily around Europe, China and the USA.

Cars contribute around €270 billion to Germany’s export sector (total exports €1.5 trillion), and it employs around 275,000 people (2023 figures). By far its biggest auto company is Volkswagen, once the world's biggest car manufacturer.

Destroy the German car industry and you are in danger of demoralising Germany and destroying its continued underwriting of the various European cot-cases, like Greece, and Italy.

Furthermore, countries like the Czech Republic and Hungary have auto sectors linked to German cars.

The message is: don't undermine Germany’s auto industry.

Yet in 2014 Germany’s biggest carmakers did their best to destroy the sector, cheating in the laboratories to pretend that diesel engines were cleaner and more efficient than was true.

After Volkswagen was outed, BMW and Mercedes-Benz fessed up to the same sort of cheating.

Falsifying the data led to multi-billion euro fines, immense reputational damage, and a period of penance, shortened only by Volkswagen’s commitment to focus on electric cars and battery development.

All of this was, to put it mildly, somewhat surprising.

As a regular visitor to Germany for decades, with a trusted small network of business friends, I had judged Germany to be functional, transparent to a degree not found in most countries, intellectual, problem solving, and pragmatic.

Volkswagen, BMW and Mercedes-Benz did not so much as rock that boat, as plunge ruddy great holes in the hull.

But none of these problems seemed relevant when I was mopping up the tears of my friends in Germany a few weeks ago.

It is now China that is holing the hull of the sector.

Having developed (or stolen?) the advanced technology, using much cheaper labour (wage cuts in China are occurring as I write), and benefiting from its immense scale, China is surging towards the imminent year when, as Elon Musk of Tesla surmises, there cannot be any response other than tariffs that would save the auto sector in any competing country.

Volkswagen in recent days has reacted. For the first time in its nearly 90-year history it is to close a manufacturing plant in Belgium.

It has warned that next up it will close a major plant in Germany.

It has told its labour force that unless it can achieve a 6% reduction in costs by the end of next year, it cannot retain banking support.

Volkswagen is deadly serious.

It does not believe the proposed (by the European Union) 100% tariffs will solve the problem.

It has opened manufacturing plants in China, exporting jobs, in a bid to survive.

It is having rude debates with its unions who by German law have a voice at governance level, and a loud input to strategy.

The unions argue that VW has made strategic errors that can be corrected without job losses.

VW threatens its relationship with the union by mocking this response.

Destroy the auto sector; demoralise Germany.

A large part of the problem is the success China is having in selling hybrid cars, the public voting with its purchases to step away from electric cars to hybrids.

VW was pursuing the electric market and argues that ultimately electric cars will supersede hybrids.

Germans love their autobahns, which are built for high speed and long distances. Last month I chatted to a couple over dinner who had driven 400 kilometres that day to spend a few hours in a spa centre. They observed that the 400 kilometres of travel took LESS than three hours!

Currently hybrids, not electric cars, are the preferred choice.

Will VW be right in moving to China and spending billions on electric cars and battery development?

Amongst all its other issues - funding the EU, funding Ukraine, coping with immigration, pitifully low reproduction rates (0.8 children per couple), loss of Russian gas, austerity displayed by a government cap on fiscal deficits - it is the auto sector that might be the best signal of whether Germany succumbs to a far-right swing (the AFD party - Alternative for Deutschland).

Germany is the dominant European country.

It is worth following this story!

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WHEN NZ included crowd funding in the financial services officially approved by legislation (Financial Markets Conduct Act 2013) NZ became one of the first countries in the world to approve of this form of fundraising.

Not only was NZ one of the first, it was one of the boldest, basically allowing crowd funding with no need for financial accounts, and virtually no accountability for woolly claims by the offerors.

Given the strictly designed and policed regulations regarding other forms of public issuance, it seemed almost unbelievable that NZ could create a pathway to the public’s purses that was so pitted and potholed.

Who will forget the crowd funding of a shoe shop that produced fanciful sales and stock figures and had incinerated investor money within a year or so?

Crowd funding platforms, seeking the extreme brokerage offered by improbable ventures, grew in number up until 2020, around the time one of the many crowd funders licensed was barred (Equitise).

Regulated by the Financial Markets Authority, the providers have to exhibit some level of process and integrity.

But the seekers of money are not monitored by the regulators and by definition are those who have no access to mainstream lenders or equity arrangers.

Most alarmingly, one of the remaining two providers now measures its success in how much money it raises for businesses run by women.

The other measures its success by how much money it raises.

Pardon me for assuming that success is defined by the outcome for investors - getting their capital repaid and a handsome return for the immense risk they take when random issuers rely on the bottom tier of regulated platforms to raise their venture capital.

Throughout I have believed the concept is an abomination, a clear departure from the possibly over-strict regulatory environment that seeks to protect investors who buy into listed debt and equity securities.

It seems to me that we have extremely loose controls on crowd funding, private equity, wholesale certification, unlisted property syndication and, arguably, Kiwisaver management behaviour.

Yet we have almost absurdly strict constraints on much more transparent investment opportunities in the listed sector.

For example, we have absolutely ludicrous rules demanding expensive and unread disclosure on matters to do with the environment, with equally ludicrous penalties.

Any listed company with assets exceeding $60 million must produce tens of pages disclosing their carbon outputs, including estimates on the carbon emissions caused by employee travel.

It costs hundreds of thousands to produce this verbiage.

Penalties for information errors include huge fines, and potentially criminal convictions/jail for directors and executives.

I surveyed a few analysts recently about a report (of dozens of pages) included by a bank trying to obey these regulations.

None - not one - had done more than flip the pages.

The Financial Markets Authority has done much to improve the odds for retail investors, going right back to Simon Power’s Financial Advisers Act in 2010/11.

Any cowboys are now fairly easily identified.

Yet it allows those seeking crowd funding to provide often highly questionable information and allows the crowd funders to measure their success on how much they raise from often hapless investors, and how much they raise for women.

Perhaps we need quarterly reports on the FMA website publishing how many of these issuers have survived, how many are growing profitably, and how many have achieved their targets.

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COUNTERING all the flak aimed at the ANZ bank must surely be the bank's skill in finding outstanding people to fill the role of chief economist.

The South Islander Cameron Bagrie was for many years the most credible of the various banks’ chief economists, unblinking and unafraid of disturbing political and central bank people.

He spoke in English, he engaged with the real people in sectors like agriculture and manufacturing, and he often was insightful, reaching opinions that proved prescient.

When he left the ANZ he was replaced by an equally skilled and insightful economist, Sharon Zollner, who was also unafraid to point the finger at New Zealand politicians, including the do-nothing leader (Key) who, when he left politics, became chairman of the ANZ’s New Zealand branch, an appointment cynically made, in my opinion.

Zollner has recently spoken out about the errors made by Ardern/Robertson when they were confronted by the Covid bogeyman. She always does so, politely.

Many other economists made the same sort of remarks, perhaps less politely.

But what differentiates Zollner in my opinion is the breadth of her overview of our economy.

She notes our frightening reliance on importing labour (both skilled and unskilled), the cracks in our education system, in our apprenticeship system, in health, mental health . . . “You name it,” she records.

In drawing attention to failing government services and their impact on our economy (present and future) Zollner does us a favour.

She displays traditional economic analytical skills but also displays social awareness and personal fearlessness.

The ANZ bank’s lenders and technology may have cost the bank hundreds of millions of dollars’ worth of claims or fines, but the bank can take a bow for its track record in appointing bold chief economists.

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Travel

18 September – Lower Hutt – David Colman

18 September – Nelson – Edward Lee

19 September – Blenheim – Edward Lee

20 September – Christchurch – Fraser Hunter

27 September - New Plymouth – David Colman

02 October – Tauranga – Johnny Lee

04 October – Hamilton – Johnny 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 5 September 2024

WHENEVER government makes dreadful decisions, or even reasonable decisions that fall apart, Wellington buzzes with opinion on whether it is a naive Prime Minister and Minister of Finance who is the cause, or Treasury.

It is now nearly 40 years since NZ had highly qualified, insightful people in Treasury, able to explain to politicians what they had to do to rebuild the nation's financial credibility.

Treasury at that time had good leadership and was powered up by several from the private sector who contributed to the successful plans that transformed NZ from Muldoonism.

The late Sir John Anderson, Ron Trotter, Alan Gibb, and Doug Myers were all key providers of advice to Treasury, which in turn succeeded in empowering the likes of Roger Douglas, David Caygill and Richard Prebble to take transformative action.

In recent years Treasury, and the Reserve Bank, have acquired fewer academically distinguished people.

Major positions have often been filled for political or social reasons rather than for the demonstrable excellence of the applicants.

As far back as 2005, the major errors were proving costly, just one example being the abject failure to manage the Crown’s liability under its 2008 deposit guarantee scheme, another being the moronic mismanagement of the South Canterbury Finance collapse, under John Key’s lamentable leadership.

Political and Treasury/Reserve Bank leadership at the time was almost of Donald Trump standard.

There is much to be repaired, all these years later.

Yet the chance arises now, as the current leader, Caralee McLiesh, returns to Australia after a period when staff morale fell, when staff turnover was high, and when Treasury was unable to explain the likely (and eventual) multi-billion losses resulting from Grant Robertson’s inexperience in commerce.

Whether Robertson will or will not be seen as our worst ever Minister of Finance is a question that might be in the same sentence that questions the failures of Treasury.

However, McLiesh in her farewell speech has raised two issues that suggest it was the political behaviour, not her recommendations, that should be examined.

She recognises two crucial truisms:

1. Our tax base does not collect enough to supply the services the public believe they should enjoy.

2. Our national superannuation scheme is unaffordable and should be refined.

Specifically, McLiesh identified the need for a capital gains tax.

Perhaps she should have added a capital gains tax based on realised gains.

Because she has wisdom, she ignores the “wealth tax” which she might correctly observe would be very difficult to implement and might make any advocate into an outlier, unelectable.

Anyone who has ever run a business that employs people knows that you can spend only the money that your “sales” (or “taxes”) raise.

Those who spend what they do not have are likely, henceforth, to be known as Du Vals.

One hopes that McLiesh’s replacement has the intellect, energy and status to ensure governments come to grips with the notion of generating enough revenue to meet all the essential expenses, given a new level of wisdom on spending the taxes.

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THE three listed trusts, Kingfish, Barramundi and Marlin, were created by Fisher Fund founder Carmel Fisher two decades ago as closed trusts, aimed at generating high returns in exchange for very high fees and, frankly, absurd performance fees.

Carmel Fisher has retired.

The three funds are now chaired by investment banking veteran Andy Coupe, previously chair of TVNZ, and still a board member of the successful Briscoe Group.

Over the years Coupe and I have worked together a few times, during his time at UBS, the Swiss giant.

As chairman of the three Fisher listed trusts, he has contacted me, pointing out that my criticism of the Fisher fees overlooks the fact that the funds rebate a little of their fee should any of the funds underperform a benchmark.

That rebate is capped, as is the bonus of up to 10% that is claimed when the fund outperforms that benchmark.

Here is my concern.

The benchmark is the NZ 90-day bank bill rate. 

Of what relevance to an equity fund is the bank bill rate?

Surely there are equity benchmarks that might be relevant.

My view remains that the three funds should always trade at a discount to nett asset value because of the excessive fees.

Any such listed trust that trades at a premium to asset backing would be so priced because of the perceived excellence of the manager.

Kingfish, Marlin and Barramundi have no competitive advantage, certainly not in management excellence.

If they persistently trade at a discount to asset backing they should be liquidated, investors then being returned asset backing, minus a tiny administration fee.

There is no value-add unless there is management of such excellence that the fees become irrelevant.

Andy Coupe, soon to hit 70, might then retire after a long career. Perhaps he could then write a book about his experiences in some fairly interesting decades in a sector into which the public and the media rarely have insight.

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THE proposal by Santana Minerals to split shares into three means no change in anything except every existing shareholder would own three times as many shares, each worth one third of what they were before the split.

Santana Minerals is governed from Australia, though its only meaningful asset is its major gold discovery in the Dunstan Ranges at Bendigo/Ophir. 

One wonders if such a share split is an Australian game that appeals to Australian day traders.

All shareholders will vote on the proposal soon.

My preference would have been for Santana to announce a 1 for 10 options issue based on the registry records on September 30, this year.

I would list these options here and in Australia, price them at A$2.00 each, with a settlement date in mid-2025, by which time consent will have been considered.

Assuming consent is granted - and I assume it will be - then Santana would convert 20m options into more shares (approx.) raising a little over A$40 million, easily sufficient to satisfy those bankers who will be banking the goldmine.

The company would then have no further need for share placements, thus avoiding the ritualistic gaming of the share price whenever placements seem needed.

Santana, by its own calculations, would be a very important company in NZ if its consent application were successful, if its extraction forecasts proved to be accurate, and if the gold price remains near current levels.

Accepting these issues, not yet certain, I calculate the value of its find might be rather more than the $2 billion so far estimated, as the body of mineralised rock continues well beyond the area tested.

Mathematically it would be improbable that the last random drill hole coincides with the last of the mineralisation.

If I accept Santana’s modelling I conclude Santana Minerals, with 40% of its shares held on the NZX, could conceivably be in the NZX 20 index, meaning many index funds, without an exclusion clause for mining shares, would be researching and buying a holding equal to Santana’s NZX weighting.

So the miner is getting close to being a highly significant contributor to NZ, and a chunky component of the index.

The split seems to me to be unnecessary, almost frivolous.

An options issue, eliminating the games played by day traders, would be a more meaningful security and one that might draw attention to the project across a wider audience.

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CLEARLY the Bendigo gold project is the poster child for the plans of the Government and the Minister of Resources, Shane Jones.

He has visited the site and, like the Prime Minister, sees the project helping to fill the nation's tax tin, and provide highly-paid jobs in Central Otago, especially for Maori.

Maori comprise an elevated 40% of the workers in mines in New Zealand, while they are just 16% of the general workforce, if that.

Their average wage in mines exceeds $100,000 p.a.

In the South Island Ngai Tahu already is involved in many gold mining projects, either collecting royalties or as an investor, or both. Naturally it supports high paid jobs for iwi.

So Jones has reason to support a project that has great potential.

Perhaps it is this project that led to the sober interview he had recently with the veteran radio programme presenter, Kathryn Ryan, now heading towards 20 long years in her current role.

Jones spoke quietly and sensibly to Ryan about highly controversial projects involving seabed mining, emphasising the extreme value of the rare minerals off the South Taranaki shores, and of the crucial phosphate pebbles now sitting undisturbed off the Chatham Islands, apparently not carcinogenic, and not multiple thousands of miles from our farms.

Obviously Jones wants these two projects to be considered by unemotional competent people who will weigh both the environmental and financial repercussions.

He politely recognised the alternative view of those environmentalists who mostly are sincere and disciplined and he took no pot shots at the loonies who seem to me to be from the same club as those mourners who turn up at random funerals for a sausage roll and four whiskeys.

Jones was careful to point out the Bendigo project leaves much less room for protests than projects that would disturb the seabed or pristine Department of Conservation fauna.

Many years ago Jones had spoken without discipline, courtesy, or even common decency to a large audience of business analysts, at an Infratil annual presentation that I used to attend. (Edward attends, these days.)

At that Infratil function I figured he was a crazy clown clad in commercial clothing. He behaved as though he was in a public bar filled with grog-fuelled young men.

In the radio interview with Ryan he was careful, polite, well-informed, and convincing.

Those who want to see NZ monetise more of its mineralisation will be hoping the Resources Minister has found a more effective language to win support.

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Westpac Bank – Perpetual Preference Share Offer

Westpac (WBC) has announced its offer of perpetual preference shares (PPS).

The initial distribution rate will be approximately 7.00% per annum, fixed for a five-year term, with quarterly distributions. The final rate will be determined on Friday, but if the rate were set today, it would likely be around 7.18% per annum. 

This investment is perpetual, with a likely redemption date in five years. It is worth noting that our expectation is that it will be repaid at that time.

Westpac will cover the transaction costs for this offer, so clients will not have to pay brokerage.

The investment will be listed on the stock exchange under the code WNZHA and should be relatively liquid, allowing investors to sell at any stage.

The PPS will constitute additional Tier 1 capital for Westpac’s regulatory capital requirements and will have an investment-grade credit rating of BBB+. Westpac Bank itself has a strong credit rating of AA-.

As interest rates are falling quickly, this could be one of the last opportunities to invest in a security with a rate of around 7.00% per annum.

If you would like a FIRM allocation, please contact us with your CSN and an amount no later than 10am Friday, 6 September (tomorrow) and we will add you to our list.

Payment would be due no later than Wednesday, 11 September 2024.

Full details of the offer can be found on our website.

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Travel

18 September – Lower Hutt – David Colman

18 September – Nelson – Edward Lee

19 September – Blenheim – Edward Lee

20 September – Christchurch – Fraser Hunter

27 September - New Plymouth – David Colman02 October – Tauranga – Johnny Lee

04 October – Hamilton – Johnny Lee

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

Chris Lee and Partners Limited