Business Maverick


The Finance Ghost: The Week in Business — life’s a drag at BAT

The Finance Ghost: The Week in Business — life’s a drag at BAT
Exterior view on the headquarters of British American Tobacco (BAT) in London. (Photo: EPA-EFE / Facundo Arrizabalaga)

With every year that passes, it becomes harder to drive revenue growth in the traditional smoking business.

Decades’ worth of medical research (spoiler alert: smoking is bad for you), combined with an increasingly health-conscious world, has put the customer base on a slow but steady decline. Still, British American Tobacco (BAT) is managing to reward shareholders by hanging on to a loyal base of customers (ie addicts) and reducing costs.

There isn’t much room for error, especially when being called to the principal’s office to atone for its sins.

Sanctions aren’t funny and BAT is firmly the butt of this joke, with a staggering fine of $635-million plus interest owed to the US government.

The reason for the trip to the naughty corner? BAT’s activities in North Korea from 2007 to 2017. BAT actually ceased all operations in North Korea in 2017, so this investigation related to the decade before that.

The provision raised at the last financial period was $540-million, so there’s additional pain on the line here for investors. Despite the obvious shortfall, the full-year guidance for the company is unchanged.

Sibanye heads to Finland

For once, something is working out in Sibanye’s favour. The mining giant stopped attracting floods and shaft collapses for long enough to secure the outstanding equity funding for the Keliber lithium project in Finland. Better yet, the project is enjoying local government support.

Sibanye has announced that the Finnish Minerals Group will increase its holding in the Keliber project from 14% to 20%. Sibanye will retain 79% in the project and minority shareholdings will hold the remaining 1%.

An appreciation for sensible deals

It’s time to show some appreciation for Capital Appreciation, a technology small cap that generally does sensible things, ­GovChat issues notwithstanding.

The company is acquiring Dariel Solutions, an IT software services provider that was founded in 2001 and is worth R131-million.

What makes the deal sensible? Well, apart from a trailing price/earnings multiple of 8.1x (assuming the earn-out is met), there’s a clever split of the purchase price into a cash element, an equity element and an earn-out.

The split is relatively even, with a cash payment of R46.9-million, an equity allotment out of treasury shares of R38.4-­million and a potential earn-out of R45.9-million.

Mining production updates

Anglo American deserves a mention for the sheer scale of the Quellaveco copper project, the major driver of a 9% increase in production at group level. Leaving aside the rest of the portfolio, Quellaveco contributed 59,500 tonnes of copper production out of 178,100 group total.

The optionality in Jubilee Metals also deserves a mention. The company has the ability to focus on either copper or cobalt at the Sable Refinery. With cobalt prices having shed three-quarters of their value from the year’s high, the company focused on copper in the latest quarter. Perhaps Jubilee expected this, as the full-year guidance for copper is unchanged despite the tilt in focus.

The story isn’t so great at South32, with production revised downwards for a few commodities and a drop in the share price on the day. Although copper and manganese production was positive in the latest quarter, the weather didn’t play ball elsewhere. Full-year production guidance has been reduced in a few areas, yet unit cost guidance is unchanged despite production pressures.

I do wonder about the share buyback programme in this environment of rising rates, as the cash could be applied to reducing debt instead.

For the sake of South Africa’s economy at a time when load shedding is ruining everything, we desperately need the mining sector to pull us through. DM168

After years in investment banking by The Finance Ghost, his mother’s dire predictions came true: he became a ghost.

This story first appeared in our weekly DM168 newspaper, which is available countrywide for R25.


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