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OPINION

Doing the Trump

Doing the Trump
March 6, 2018
Doing the Trump

Maybe I should have maintained the fearful note because there is an alternative scenario in which dysfunction is replaced by efficiency as the president’s entourage morphs from being a warring collection of relatives and hangers-on who know little about the levers of government into one dominated by Washington insiders who can work the machinery and know that their progress depends entirely on being the ones able to make the president’s fantasies real.

And perhaps last week we saw something of the way things will be when Mr Trump announced his intention to slap steep tariffs onto imports of steel (25 per cent) and aluminium (10 per cent). Certainly it rattled the financial markets. That said, the president’s plans may be more about appearance than reality. At least there was – typically – confusion at the centre of his thoughts.

The tariffs would be applied for reasons of national security, he said. But if so, then why tax imports of steel? That’s because (a) the US does not import much of the stuff – only about a quarter of its annual consumption; (b) an even lower proportion of the high-quality metal needed in the defence industry is imported; and (c) most US imports come from Mexico, Brazil, Canada and South Korea, none of which is a security risk. In addition, the US has free-trade deals with three of these (the exception is Brazil) so imposing tariffs onto their steel exports to the US would be illegal. The implication is the three would get an exemption clause, but that undermines the whole rationale of the tariffs in the first place.

Nevertheless, as equity markets genuflected to this particular Trump-eting, shares in defence suppliers – big consumers of steel and aluminium – were hard hit. Shares in air-plane maker Boeing (US:BA), the top performer in the Bearbull Income Portfolio these past 12 months, dropped 3.5 per cent on the day and have since fallen further to $339.

This is irrational to the extent that the national-security concerns that exercise Mr Trump should – if anything – benefit Boeing, which derived 22 per cent of 2017’s $93bn revenues from defence. Well, yes, except that factor must be pretty well played out already – it was partly behind the amazing progress of Boeing’s shares in the 15 months since Mr Trump was elected. Their price has risen 126 per cent and, despite the dip, they are rated at 25 times forecast earnings, surely a vulnerable level. My response is to further tighten the stop-loss level on the income portfolio’s holding. As things stand now, just another 4 per cent drop and they are out, so – obviously – some close monitoring is needed.

Meanwhile, I already have a sell signal from the portfolio’s holding whose purchase was much influenced by the Trump factor. This is South African gold miner Pan African Resources (PAF), whose price has pretty well halved in the past five weeks as a result of further disappointing trading news.

Pan African’s main shortcoming is that, as a mid-sized gold producer, it lacks the spread of activities afforded to big players. It has just four plants – two mines and two ‘tailings’ operations, which re-process mine dumps for leftover ore. Thus when one of these runs into problems – and in the past 12 months Pan African has been inundated with production and labour issues – the impact hurts. As a result, gold production, which was 205,000 ounces in 2015-16, is likely to be just 180,000 ounces in 2017-18. Meanwhile, cash costs are pushing up. In the first half of this financial year they rose 18 per cent to $1,099 per ounce, which is dangerously close to the average gold price that Pan African received in the period.

As ever, Pan African’s bosses talk a good story. The chief executive, Cobus Loots, says the past 12 months have been a “watershed period”. With production problems sorted at its biggest mine and an important – and expensive – new tailings project set to come on stream in August, he promises that things will improve in the second half of 2017-18 and beyond. Maybe. Or perhaps it will be another instance of gold tomorrow.

The moral seems to be that I bought Pan African shares for the wrong reasons. In theory they offered “protection against Trump’s vandals”, as I put it in February 2017, thanks to their close correlation with the price of gold and to the possibility that the gold price would be resilient to the worst effects of Mr Trump. In that sense I bought a high-yielding insurance policy. The logic may have been sound but it paid insufficient attention to what, operationally, could – and did – go wrong. In effect that meant the premium on the insurance proved to be prohibitive because it rose all the while the share price fell. Meanwhile, the dividend was slashed in 2016-17 and will be cut further this year so it is doubtful that Pan African is a high-yield stock any more. Put simply, the shares have to go.