Among the holdings in the Bearbull Income Portfolio, the contrasting fortunes of Manx Telecom (MANX) and Pan African Resources (PAF) are reminiscent of the ramblings of Polonius, the old fool in Shakespeare’s Hamlet, who could not tell a tragical play from a comical one, nor a comical one from the tragical sort.
I pick these two companies because they are the current strugglers in the income fund. Yet even Polonius – who, as every schoolboy knows, was stabbed by Hamlet through the arras – might have spotted that the present affairs of Manx Telecom are tragical-comical, while those of South African gold miner Pan African are closer to comical-tragical.
The difference is profound. Sure, there is the making of a personal tragedy lurking behind the poor performance in Manx Telecom’s shares – the news that the finance director, Danny Bakhshi, “is subject to criminal proceedings unrelated to his duties as group CFO”, as the company’s announcement coyly put it. This, it turns out, is a charge that Mr Bakhshi has been concerned with the production of cannabis.
Nevertheless, there is also something comical about the finance director of a quoted company being up on a soft-drugs offence. And one wonders to what extent the rumour of Mr Bakhshi’s misfortunes were behind the mysterious 16 per cent drop in the company’s share price in the six weeks to end-July even though Manx put out an acceptable trading statement during that spell. The Isle of Man’s dominant telecoms supplier – both fixed-line and mobile – traded in line with budget and management said nothing that would threaten maintenance of its 10.9p dividend, which generated a 6.3 per cent yield when the price was at its lowest. And, once the news emerged, the shares bounced; their price has recovered 12 per cent and is now back to 193p.
Meanwhile, such comedy as there is in the affairs of Pan African Resources would appear to be borrowed from Graham Greene’s The Comedians, which deals with corruption at the heart of ‘Papa Doc’ Duvalier’s Haiti. True, Jacob Zuma’s South Africa hasn’t descended to those levels. Yet there is something so grotesquely comical about President Zuma, about his survival of eight parliamentary motions of no confidence, about the level of state support for his six present and former wives and about the conflation of defending charges of corruption with the struggle against apartheid that it obscures South Africa’s decline. Even so, the rainbow nation is so clearly on the wrong road that it’s inconceivable that, in this year’s annual report, Pan African’s chief executive, Cobus Loots, will single out South Africa’s “world-class constitution”, its “functional and stable democracy” and perhaps even its “excellent infrastructure” for the praise that he gave them in the 2015-16 report.
In reality, the state of South Africa isn’t any sort of laughing matter. Its tragedy – apart from the little matter of, say, an unemployment rate of 28 per cent or levels of income inequality that aren’t exceeded globally – is that it makes it so difficult for good businesses to function well. And it’s not as if mining for gold is low risk in the first place. That’s especially true for a mid-size operation such as Pan African, which does not have a sufficient range of interests to be able to smooth away production problems here and there.
Thus, in the year to the end of June, political protests disrupted production at Pan African’s Barberton gold mine – the bigger of its two mines – and, more than once, South Africa’s Department of Mineral Resources stopped production ostensibly on safety grounds. Meanwhile, there was a serious safety issue at its other mine, Evander, when an employee was killed in a mine-shaft accident in February. As a result, underground production at Evander stopped for two months and management – for the second time in 2016-17 – cut its estimate for gold production. For the full year, gold sales ran out at about 173,000 ounces (oz), 16 per cent less than 2015-16’s, admittedly exceptional, 205,000 oz and 14 per cent lower than management’s original expectations.
This points to profits and dividends for the year just ended also well below original forecasts. Broker Edison now expects a pay out of 0.58p compared with 0.88p last year and its initial estimate of 1.2p.
Still, miners are nothing if not optimistic and Pan African’s bosses reckon that production will top 190,000oz this year. Then, in the following year, there is the first output from the company’s Elikhulu tailings project to look forward to. That could add over 50,000oz to annual production.
These are reasons to stick with Pan African’s shares, though their commanding attractions remain the original ones – that they offer something different to the conventional staid performers of an income fund; they move to a different beat and they provide some insurance against the uncertain world of Donald Trump via their correlation with the gold price (see Bearbull, 3 February 2017).
● Meanwhile, regular readers have heard me praising the merits of indolence in investing – that doing nothing is often more rewarding than being active. A nice example stumbled my way this week. My tardiness in buying shares in Inmarsat (ISAT) – Bearbull, 28 July 2017 – meant I bought the income fund’s holding at 736p each, over 6 per cent cheaper than if I dealt promptly two weeks ago.
