Old Mutual will repurchase up to R3 billion in shares (JSE: OMU)

For context, the market cap is over R61 billion

A quieter day of news gave me the opportunity to dedicate space to digging into share repurchases and why listed companies do them. Old Mutual is the latest example, but by no means the only example or even the best example.

The “why’ of repurchases goes like this: if a company believes that its shares are undervalued in the market, then it makes sense to buy those shares back with excess capital rather than pay special cash dividends to shareholders (or worse, feel compelled to do sub-par projects / acquisitions). This boosts HEPS growth over time, as the number of shares in issue reduces each year.

That’s the theory, at least. In practice, we regularly see situations where companies repurchase their shares even when they aren’t undervalued. Companies in the American market (particularly in tech) are by far the worst, using share buybacks to offset the dilutionary impact of share-based compensation to staff. As the icing on the cake, they then disclose adjusted EBITDA that ignores the expense of share-based compensation, even though there’s a cash outflow from the company to repurchase enough shares in the market to offset the issuances. Be thankful for the use of IFRS accounting in South Africa and especially our local concept of HEPS, as it removes much of the scope for nonsense in corporate reporting teams.

Onwards to the mechanics of how this actually works. Most companies ask shareholders at the AGM for authority to repurchase shares, with Old Mutual having been granted a mandate to repurchase up to 10% of shares in issue (this is normal). The words “up to” are critical here, as it gives the company flexibility. Old Mutual received the authority back in May and is finally getting on with it, kicking off a share repurchase programme of up to R3 billion. This is just under 5% of the current market cap, or approximately half of the authority granted at the AGM.

The way this works is that the company appoints brokers (usually large banks) to sit on the bid and buy shares in the market, with the goal being to avoid doing it in such a way that it artificially pushes the price higher and makes the repurchase less attractive for the company. This is why on-market share repurchases are mainly viable for companies with significant liquidity in the stock. Companies with tightly held share registers are more likely to make specific repurchases in negotiated transactions with shareholders. There are far more regulatory requirements for specific repurchases, as you might imagine.

Old Mutual’s share price is flat over 12 months and is trading on a dividend yield of 6.8%, so it’s probably a good candidate for share buybacks. This isn’t exactly a demanding valuation.

Orion Minerals has increased the size of its capital raise once more (JSE: ORN)

Sentiment has swung sharply in their favour recently

For junior mining companies, access to capital is the difference between life and death. Projects require substantial investment to develop them from dreams in the ground to commodity producing assets. Sentiment can also shift quickly in this space, as it takes just one or two major milestones for a company to go from basket case to junior mining darling – and vice versa.

Orion Minerals was in serious danger of slipping into the “too hard” bucket for the market, which is a dark place that few companies emerge from. After a change of management and a subsequent funding deal with Glencore (JSE: GLN), Orion suddenly finds itself in a position where they’ve upsized their current equity capital raising activities for the second time!

Having originally planned to raise R57 million, they increased it to R89 million based on market demand and now they’ve upped it further to R99 million.

This is the share price chart for the past year and it’s quite a thing, with important further context being that the current capital raise is at a price of 17 cents per share (i.e. below where it is currently trading):

Tharisa to transition the Tharisa Mine to underground mining (JSE: THA)

The increase in life of mine doesn’t come cheap of course

Tharisa has announced that they will transition the Tharisa Mine from a large-scale open pit mine to underground mining. The current life of mine shows that open pit operations will be depleted by FY35, so they need to take action to ensure that the mine has a future beyond that date.

They expect total capital expenditure for this project of $547 million, with a peak funding requirement of $173 million. The project internal rate of return (IRR) according to the accompanying presentation is more than 25%.

The investment is spread out over several years, with Tharisa noting that they will need to use internal cash and external funding lines. At the very least this suggests the use of debt, which is no surprise. There’s no indication at the moment that they would need to raise any additional equity capital.

One of the hardest things about mining comes through in this announcement: the company needs to plan a decade ahead, despite great uncertainty over how commodity prices will move.

Nibbles:

• Director dealings:
  • A number of directors of Truworths (JSE: TRU) sold shares worth R11.3 million to “rebalance their investment portfolios” – if I worked at Truworths, I would also sell every single one of my shares to rebalance away from that business.
  • A director of Thungela (JSE: TGA) sold shares worth R6.5 million.
  • A director of Sabvest (JSE: SBP) bought shares worth R587k.

• Not exactly director dealings in the traditional sense, but a good reminder of the sheer size of the balance sheets of the likes of Christo Wiese: Titan Fincap has bought shares in Shoprite (JSE: SHP) worth R1.05 billion to settle scrip loans. The same Titan entity also entered into a total return swap for the same value.

• Labat Africa (JSE: LAB) has new auditors in place and is finalising the financials for the year ended May 2025. They are planning to release them by 15 October.

• Globe Trade Centre (JSE: GTC) only has trade in its name, not in its listed shares on the JSE. Still, the company has given us an interesting data point for debt pricing, with senior secured notes due October 2030 priced at a meaty 6.5%. This is by no means investment grade debt, but it shows you how much funding pressure there is for lower quality European companies with speculative credit ratings. Globe Trade Centre has recently suffered credit downgrades by rating agencies.