What does BHP’s offer for Anglo American tell you?
Or, more importantly what is the opportunity?
I expect you to get this.
I’ll give you a minute to think.
And while you’re thinking there is a housekeeping item this week. At the bottom of the post there is a poll I need you to answer regarding the YWR Summit in September.
Most would say BHP’s bid is a validation of the scarcity and value of copper assets.
OK. True. But that isn’t the trade. And we own Glencore, so we’re there. Maybe Glencore ends up bidding for Anglo too, which is fine.
But that’s not what I’m thinking.
BHP wants to buy Anglo for £25/share. The structure is you get 0.7 shares of BHP and then BHP dividends out to you AngloAmerican’s shares in their two listed subsidiaries, AngloPlatinum and Kumba Iron Ore.
Read. We want the South American copper mines, DeBeers and the Brazilian iron ore and will give you back everything in South Africa. We don’t want it. We don’t want anything to do with the place. AngloGold Ashanti (The AngloGold Turnaround) was the same. They sold all their South African gold mines and moved the HQ out of Joberg to Denver.
So how do we make money?
#1 AngloPlats: Anglo Platinum ($ANGPY) is a unique asset. If the deal happens and BHP spins it out to shareholders who dump it, there could be an opportunity. It’s an open pit, low cost platinum and palladium mine. And we all know the scarcity of PGM assets (South Africa, Zimbabwe and Russia). Maybe BHP turning its nose up at platinum is a great contrarian signal and they will wish they’d kept it when they had the chance.
But I understand if you’re tired of waiting for platinum to work. Maybe you want to get paid to wait.
#2. South African Government Bonds yielding 12% (SAGB R2035).
This aversion to South Africa shows up everywhere. It shows up in 12% a 12% yield to maturity on the local 10 year and 18/$ on the Rand.
Which means maybe now is a good time to go the other way and buy the 10 year. Go long SA.
The spread between Treasuries and local 10 YR South African bonds is over 8%. That’s near the historical high, especially absent any market turmoil.
It might surprise you, but South Africa is running trade surpluses. High gold prices don’t hurt.
No one believes it can last, but South Africa reported a primary budget surplus.
And South Africa’s debt to GDP trajectory is getting revised….
Downwards.
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Inflation is stable at 5% and line with the South African Reserve Bank target of between 3 and 6%.
Despite inflation in line with the Reserve Bank’s target of 3-6% the local yield curve is steep. The yield curve is saying investors expect Rand depreciation will continue forcing the Reserve Bank to raise rates further to defend the currency.
But it leaves the door open for considerable juice if the Rand were to go the other way and strengthen.
Then you’d have 12% yields compressing quickly to 10% (step 1) and then next stop 8% (or lower).
12% yields, budget surpluses, trade surpluses, gold price working. Could this be a temporary top in US$/Rand?
Could we make money 3 ways at once?
12% Yield to Maturity with an 8.9% coupon.
Yield compression (bond price).
Rand appreciation.
#3 There is another way to play this, and maybe it’s more fun.
Take your $’s and buy a beachfront apartment in Cape Town. Then AirBnB it out to European tourists.
YWR Summit Poll
The Summit is coming up in September and the YWR logistics team needs to starting booking a venue.
So where do you want to have it?
Have a great Bank Holiday Weekend!
Erik
What about Sylvania Platinum in South Africa? Would that work as a proxy trade? It is paying you an 8.2% dividend yield with a very healthy balance sheet. It is still making decent free cash flows in the difficult environment.