ALLAN Gray portfolio manager Sandy McGregor has questioned the wisdom of Northam Platinum’s play for control of Royal Bafokeng Platinum (RBPlat) which he described as “taking place at the top of the market which in our experience invariably leads to loss of shareholder value over time.”
Interviewed on the sidelines of the PGMs Industry Day investor conference held in Johannesburg today, McGregor commented: “We are shareholders in both Northam Platinum and Impala Platinum.
“We have spoken to the managements of both companies and we respect their opinions, but we are very uneasy about this situation. We see the logic in Impala Platinum’s actions given that their operations are adjacent to RBPlat. We do not see the logic in Northam Platinum’s actions although Northam previously invested very competently at the bottom of the cycle which is the right behaviour.”
Addressing the conference McGregor criticised the actions of many mining companies as “participating in a casino”, but then not distributing any winnings when they make them to investors and shareholders.
“What we are seeing in the platinum industry now is ‘peak of cycle’ behaviour when the mines have lots of money and do things they would not otherwise do at other parts of the cycle.
“Investors hate this. We are asset allocators and, when companies do well, we like them to give lots of returns to us.
“Effectively you send the guy with your money to the casino. He puts money on the wheel and he wins. What you want him to do is come out of the casino and give you a share of the winnings. What the miners do is they stay in the casino and put the money back on the wheel again and they lose it.”
Macgregor added that “… from an investor’s point of view we want the money to come out of the industry when it is there. People do not understand just how uncertain the future is.
“You could have a major economic downturn. So if you take on a lot of debt and do a lot of things at the top of the cycle and then the world crashes next year – I am not saying it will but it can happen.
“This is why investors do not like corporate action at the top of the cycle such as taking on debt to make acquisitions and gearing the balance sheet.”
Turning to share buy-backs Macgregor added: “If you can afford to do a share buyback then you should not do it”.