Ghost Bites (Alphamin | BHP | Grindrod Shipping | Lewis | Novus | Sea Harvest – Brimstone)

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Alphamin was negatively impacted by heavy rainfall (JSE: APH)

Sales volumes were far below production volumes, but it’s a temporary problem

Alphamin produces tin in the Democratic Republic of Congo. With the release of fourth quarter results, we now know that 2023 was a record year of tin production. Sadly, heavy rainfall towards the end of the caused a lot of problems for road haulage, so sales volumes fell far below production volumes in the final quarter (2,046 tonnes and 3,126 tonnes respectively).

The good news is that this is a temporary issue as the rainfall has subsided. Alphamin expects to catch up the sales shortfall in the first quarter of the new financial year.

The full year result was a 1% increase in contained tin produced and an 11% drop in contained tin sold. Average tin prices fell by 15%. Combined with the drop in sales, it’s therefore not surprising to see EBITDA falling by 39%. The company did as much as it could to mitigate the impact of falling prices and sales volumes, with all-in sustaining cost flat year-on-year.

To help investors understand the impact of the sales issue in the fourth quarter, Alphamin notes that this had a negative impact of $14 million on EBITDA. To give context to this, 2023 EBITDA was around $136 million.

Looking at the balance sheet, the company highlights a four-year extension to the off-take agreement with the Gerald Group, which includes a tin prepayment arrangement of up to $50 million. The interest rate is floating and works out to 10.3% currently. There is also a reduced marketing commission under this arrangement.

Thanks to Mpama South coming on stream in the first quarter of 2024, tin production guidance for 2024 is between 17,000 and 18,000 tonnes. That’s a big jump from 12,568 tonnes in 2023. The company estimates that the Mpama South capital expenditure cost will be 10% above budget due to weather and other logistical challenges.

Is BHP’s provision for Samarco high enough? (JSE: BHG)

Media speculation in Brazil suggests that it may not be

The Fundão tailings damn failed in November 2015. It was an absolute disaster. BHP holds a 50% stake in Samarco, the operator of the dam. The other 50% is held by Vale.

As you might expect, the period since the failure has been one of legal action and reparations, with the corporates having to play a delicate game of trying to do the right thing and not being on the receiving end of an outsized financial claim.

BHP’s provision for the failure was $3.7 billion as at 30 June 2023. If Brazilian media speculation is to be believed, it may not be enough.

The Brazilian media is reporting that the Federal Court of Brazil has quantified collective moral damages as $9.7 billion. The original claim was for $43 billion in reparation, compensation and collective moral damages. I’m certainly no expert in this stuff but if just the moral damages are $9.7 billion and BHP is on the hook for half of that, then the provision of $3.7 billion is inadequate.

BHP responded to the media speculation by releasing a SENS announcement noting that the company hasn’t been served with a decision by the court. We therefore don’t know if that amount is correct or not. It would also potentially be open to appeal.

Shipping rates increased at the end of 2023 for Grindrod Shipping (JSE: GSH)

We need to wait for more detailed disclosure to get a proper view on things

Grindrod Shipping is 82.23% held by Taylor Maritime. As Taylor is also listed and releases quarterly updates, Grindrod Shipping always alerts investors to any such updates.

One needs to be careful, as Taylor’s disclosure covers both the Taylor and Grindrod Shipping fleets. At best, we can use this disclosure a rough directional guide. According to Taylor, its net time charter equivalent (TCE) rate increased 15% over the three months ended December. We will need to wait for Grindrod Shipping to release its quarterly results so that a proper year-on-year comparison can be made. That’s the real story, as one would reasonably expect rates in the December quarter to be higher than the September quarter due to retail seasonality.

Separately, Grindrod Shipping also released an announcement dealing with ship sales and purchases. Unless you’re following the company in immense detail, the only relevance of this announcement is the insight that these companies are constantly right-sizing their fleets based on demand. They also do all kinds of interesting transactions, like charter deals rather than outright sales or purchases.

Lewis shareholders suffer an unpleasant UFO sighting (JSE: LEW)

Cash sales have been abducted and credit sales are keeping things going

Lewis is generally seen as a dependable group that manages to push forward in a tough environment, while using clever share buybacks to give shareholders a return that otherwise isn’t available in the furniture industry. This strategy won’t work forever, as conditions in this market need to improve at some point.

In a trading update for the nine months to December 2023, Lewis notes revenue growth of 8.7%. The star here was other revenue, which includes things like interest income and insurance revenue. Thanks to strong credit sales growth in the past two years, this source of income was up 15.2% for the nine months.

That’s just as well, because group merchandise sales were only up by 4.2%. The traditional business (Lewis, Beares and Best Home & Electric) grew 6.6% and UFO fell by 14.5%. The key difference is that UFO is a cash sales business, whereas the rest of the group is dependent on credit sales.

Comparable store sales were just 1.5% at group level over the nine months. For the traditional business, comparable stores sales came in at 3.2%.

As you perhaps already knew, furniture at this end of the market is only a profitable model because of the ability to sell on credit. This means that collection rates are critical to the business performance. The collection rate was 80.7% in this period, down from 82.0% in the comparable period. It also costs a lot of money to manage a debtor book, with those costs up by 59.8% for the nine months.

Lewis continues to find ways to compete in this market, with shareholders rewarded by a high dividend yield along with share price growth over time. The pressure on South African consumers only seems to be getting worse though, so watch that collection rate.

Novus declares a special dividend (JSE: NVS)

Remember this when looking at share price charts in future

When a company is in “value unlock” mode, there are often special dividends along the way. This is typically just a way to return cash to shareholders from sources other than profits. A special dividend is often the outcome of a sale of a division, for example, or some other major strategic change.

Novus has declared a special dividend of 50 cents per share. The source of cash is the sale of property and the reduction of working capital in the print division. On a share price of R4.75, that’s a meaty dividend.

The payment date is 19 February.

When you look at share price charts in future, remember that you need to add back the special dividend to see the true return to shareholders. This is also true for ordinary dividends if you want to consider a total return vs. a share price return. The difference with a special dividend is that it has the effect of causing a substantial drop in the share price because the company is deliberately making itself smaller. The impact on share price return vs. total return is thus more pronounced.

Sea Harvest and Brimstone release the circulars for the Terrasan deal (JSE: SHG | JSE: BRT)

And no, this isn’t a combined circular

You may recall that Sea Harvest recently released the most overcomplicated SENS announcement I’ve ever seen. For whatever reason, it detailed every restructuring step taking place at Terrasan as a pre-cursor to the Sea Harvest deal. The net result is that barely anyone in the market actually understood the transaction.

The circulars have now been released for the deal. There are two of them, as Brimstone as the controlling shareholder of Sea Harvest (with a 53.37% stake) needs to release its own circular to shareholders.

The simple version of this story is that Sea Harvest will acquire 100% of certain Terrasan subsidiaries that catch, process and sell pelagic fish, as well as 63.07% of Terrasan’s businesses that farm, process and sell abalone. The combined purchase price is R965 million. R365 million will be settled in cash and the rest through the issuance of Sea Harvest shares at R10 per share. The current Sea Harvest share price is just below R9.

There are also two deferred consideration payments based on financial targets for the year ended December 2023 and ending December 2024. The maximum possible payments are R98.5 million and R157.5 million.

The pelagic business that is the target of the acquisition is known as Saldanha. It operates on the West Coast of South Africa and employs over 600 people. Its 15-year fishing rights were recently renewed. Sea Harvest has just 0.6% of the anchovy quota and 2.7% of the pilchard quote, whereas Saldanha holds 11.51% and 5.05% respectively. This acquisition therefore give Sea Harvest much higher overall fishing rights.

The abalone business is called Aqunion and it has farms in Hermanus and Gansbaai. It employs 430 people. Sea Harvest is acquiring 63.07% of this business and the remaining 36.93% will be held by Agri-Vie.

Overall, these transactions help Sea Harvest improve its scale and diversification. Terrasan has held these investments for a long time and is looking for a liquidity event.

The pro-forma impact on Sea Harvest from this transaction is a 37% increase in diluted HEPS. That shouldn’t come as a surprise when big chunk of the deal is funded in cash – they are literally buying earnings. The net asset value per share is a useful metric here as well, with that due to decrease by 3%. Of course, the bigger focus will be on strategic benefits going forward.

Sea Harvest doesn’t seem to have used much in the way of corporate finance advice here, but the lawyers (in this case Webber Wentzel) did very nicely with a R8.8 million fee just on the legal advice and drafting. Total transaction costs of R15.6 million really aren’t bad for a deal this size.

From a Brimstone perspective, the important thing here is that the group will be losing control of Sea Harvest as part of this transaction. This is because Sea Harvest has to issue many new shares, so Brimstone will only have a 47.5% stake after the deal. The intrinsic net asset value (INAV) per Brimstone share doesn’t change as a result of this transaction. This is because Brimstone values the stake based on the listed share price and hasn’t taken into account a control premium. The counterargument is that even if a premium had been recognised, it would probably still be there as a 47.5% stake is as good as a 53% stake in practice, as shareholder meetings never have a 100% attendance rate.

And yes, in case you are wondering, shareholders of both Sea Harvest and Brimstone need to approve the deal for it to go through.

Little Bites:

• Director dealings:
  • Executives at Spear REIT (JSE: SEA) are buying shares in the company, with the CEO buying shares worth R28.8k and the CFO buying shares worth R209k.
  • The CEO of Santova (JSE: SNV) now holds more than 5% in the company. I find it odd that the announcement says that this was due to an acquisition of shares, as I couldn’t see a director dealings announcement. I think it’s more likely that the wrong template was used for this announcement and that the 5% threshold has been reached due to share buybacks and there being fewer shares in issue.

• The SARB approval for Frontier Transport’s (JSE: FTH) special dividend has been obtained. The payment date for the dividend of 137.38 cents per share is 12 February.

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