The Boardroom Talk podcast: All about gold

Interview with Moneyweb and Alex Hogg: All about gold

MONEYWEB [Felicity Duncan]: Hello and welcome to Boardroom Talk Podcast. It is Thursday, the 19^th of March and I'm sitting in the studio with Alec Hogg who is going to give us some insight into the events of the week. Alec, let's start talking about the gold price because there were some very interesting moves this week in that area.

ALEC HOGG: Hmm, all over the place. Today was a big day for gold, last night when the Fed decided it was going to spend a whole lot more money, pulled out of thin air, gold bulls got excited, pushed the gold price up $35 and as we're talking right now, coming from a level of around $890, it's now trading $935 to $940. It was interesting on the radio show and the interaction we had with a couple of chief executives from the, well in fact the two biggest South African gold mining groups, both of whom are very bullish on gold. Most bullish is Nick Holland, the chief executive of Gold Fields Ltd. It's interesting to note, I was going through our YouTube channel, that the interview we had with Nick Holland has been very well watched, in fact it's one of our top five interviews.

MONEYWEB: Those gold bugs out there, they just love it, they can't get enough!

ALEC HOGG: Well the Americans, certainly the mid Americans or middle Americans, tend to love gold and they're going for it in a big way. Nick said he'd just returned from America and he heard some fairly reputable commentators over there now talking about $2 500/oz.

MONEYWEB: It's amazing. You know, I heard this week that a Krugerrand back in '79 was R200.

ALEC HOGG: And it's now over R10 000.

MONEYWEB: Like that is serious asset depreciation.

ALEC HOGG: Well in fact it has been probably the best investment that you could have made, certainly in the last couple of years. But what was interesting was the reasoning behind Nick Holland's view. He didn't say it would go to $2.5 thousand, but he also felt that it would go north of a thousand in the not too distant future. He felt that the inflationary boosts that are going on in the United States are likely to have a direct impact on what he produces, but it was interesting, perhaps even more interesting and more supportive of this view, was our discussion with Mark Cutifani, we had a ten minute chat on Wednesday and this was after John Paulson had made an investment of 11% or he paid just over a billion dollars for 11% of AngloGold - Mark Cutifani, the CEO of AngloGold. And what is interesting here and Mark said he met John Paulson in the past, John Paulson, when you start digging into his background, is quite an incredible investor. Forbes magazine rates him as one of the top three. Steve Forbes said that if we were to have a Mt Rushmore for investors, in the United States Mt Rushmore which you well know because you've been there, have got the heads of presidents ...

MONEYWEB: Great big ones, ja.

ALEC HOGG: ... on a mountain and if we had them for investors, he said, it would be Bill Gross of Pimco, Warren Buffett and John Paulson. So that puts him right up in the very top league and not surprisingly because he's only 53 and he's very much a self-made man , started his business in 1995, a hedge fund, his hedge fund bet against the subprime bank owners...

MONEYWEB: Good bet!

ALEC HOGG: Fantastic bet! Well personally he made billions of dollars. Last year he went from position 175 to a position in the top 75 on the billionaires' list and the primary reason for that is that his company, which has come from nothing, has now got assets of $35bn and he's betting on gold and more specifically he's betting on Mark Cutifani's firm, AngloGold Ashanti. So that's a very strong tip for us.

MONEYWEB: Yes, it's fascinating. I heard the interview and Cutifani, when you asked him if he was going to drop the Anglo part of AngloGold, said that they were actually looking around and considering buying more assets.

ALEC HOGG: It is interesting that they are going on that kind of approach. He said nothing imminent yet, which is a bit of a giveaway for us journalists, to say that they're looking clearly quite seriously at some assets and likely to do, again it will be a high quality gold asset, you know that they have sold a few Bardington assets in Australia and one here in South Africa, to Simmers. But to me the big part of this whole thing is that John Paulson who is like a Warren Buffett, makes substantial investment in a South African based company that is in the gold market. And we had support of that as well in another of the podcasts with market commentators through the week and the one that is always the best read is with the Allan Gray commentators and Delphine Govender was explaining that they are overweight gold in the Allan Gray portfolios and overweight AngloGold in the gold side of the portfolios, so AngloGold is also their favourite.

MONEYWEB: They don't miss a trick, although ...

ALEC HOGG: Neither should we!

MONEYWEB: ... they've missed one trick, haven't they, with the news out of Super Group this week and they turned down, was it R17 a share offer ...

ALEC HOGG: It was R10 two years ago.

MONEYWEB: Ja, and then there was the one previously to that... Anyway, they turned down a lot of money for a stock that's now looking bad.

ALEC HOGG: Well it is. It just shows that no matter how clever they are and how good people like Allan Gray are, even they are fallible and I like their approach because they don't hide behind it. It's almost like the Warren Buffett approach that you trumpet your disappointments and speak quietly over your successes and she was very vocal in our discussions about Super Group, explaining that, yes, they didn't do the right thing two years ago when they had the offer for Super Group to be delisted, looking and back on what happened as recently as October where there was R500m was raised by shareholders, put into Super Group at a share price of R4. Allan Gray was one of the biggest of the supporters there...

MONEYWEB: Yes, they followed it, I remember.

ALEC HOGG: Now you've got to put this in context, that was R500m in fresh capital that was put in in October. The market capitalisation of Super Group today is 278, so ...

MONEYWEB: Value destruction...

ALEC HOGG: ... not only has half of that money, the fresh money that was put in, gone, but whatever it was worth at that stage when the rights issue was done, has disappeared. I thought Larry Lipschitz was disingenuous when he was on the radio, saying that everything started going wrong when there was a $5m liability from an Angolan operation that went bad. Now $5m doesn't collapse a whole firm...

MONEYWEB: No, it's not big enough.

ALEC HOGG: This firm's been going bad for a long time and Delphine is convinced that with the operations now having been cleaned up with all of the problems being taken out, that Super Group is in a position where it's going to make money, the management have got a long, long way to go to rebuild any credibility, as you would imagine, from a company that's come from R22 a share, to 45c.

MONEYWEB: Now he signalled that he might be leaving, Lipschitz, I mean he was a bit evasive about it, but he did seem to say that it was a possibility.

ALEC HOGG: Well if you presided over value destruction on that scale, I'm surprised that he actually sticks around and he did say he's doing that because of the 12 000 employees, he feels a sense of loyalty towards them and he wants to see this thing through and to his credit - there were many who felt as recently as six weeks ago, there was a strong rumour in the market that the banks were going to pull the plug on Super Group. So they've somehow miraculously managed to stay afloat. It looks with the billion rand extra that's going - now remember, a company worth R278m today, another billion has to be put into it just to keep it afloat...

MONEYWEB: It just shows...

ALEC HOGG: But with that going in, they feel that they will be able to turn the ship.

MONEYWEB: And it's a dilutive offer, right, four to one at 45c, so if you don't follow your rights, you're going to be vastly diluted.

ALEC HOGG: Well if you take it back to where you were in October last year and this brings in the black economic empowerment partner, Peu, Peu borrowed money from Deutsche Bank internationally, it had to sell a whole bunch of shares in October 2007 to pay part of the interest one presumes or, well who knows, but anyway, if you borrowed money to buy Super Group shares anywhere north of R5, you've got to be in big trouble now. So one doesn't know, is Super Group going to lead to the destruction of Peu? Well we've heard nothing from Peter ...... and his people. All Larry Lipschitz could say to me yesterday was he believes the Super Group shares are unencumbered, which is not surprising because they're not worth a whole lot anymore, but if you've got so much capital and you're trying to develop it and grow it, you would presumably be using that as collateral in other areas. So I think we are going to see some spectacular BEE collapses - Peu must be one of the favourites.

MONEYWEB: Absolutely. Now, there was a lot of nefarious corporate news out this week and one of the most interesting was the Huge Group, I know there was a huge story about their single-stock future misbehaviour. Do you want to maybe explain that?

ALEC HOGG: It's a very good story and it's one that shows so easily how you can confuse the public. I know they are trying their best, the two fellows behind Huge, to put a positive spin on it, but in essence what happened was that the two of them decided to cash in part of their shareholding. It was something that was offered to me in fact here at Moneyweb as well, when things were going up, the perpetrators of this kind of nefarious crime because that's really what they were, came to me and said, take part of your Moneyweb shareholding, sell it and then take single-stock futures to offset the amount that you sold and in that way you can release capital that you've got tied up in the business and of course single-stock futures, you buy them in at a pretty low level, so as they go up, you make your money.

MONEYWEB: Voila! And you hold your shareholding, you don't get diluted or ...

ALEC HOGG: And in theory it sounds good and of course as the share price went up, what happens with futures is that you get credited every day with the value of the growth. So all of a sudden from being worth maybe 10m or 20m, these guys were worth 40m, 50m and the money comes into your bank account, which you then presumably spend and it's happened in a lot of cases. But when the reverse occurs, where are you going to find the money to repay the cash that has come from you? Because as share prices go down, you have to keep topping up the margin and this is exactly what happened with the Huge Group. They did some kind of a deal with a stock broking company called Watermark, where the Huge company bailed out effectively the two directors at a price of 362c a share. That share today is trading at R1.20. The stock exchange has forced Huge Group to go back to its shareholders and ask them, "Would you be prepared to endorse the decision by these two directors for the company to buy these shares at 362c", and no shareholder who has got any sense whatsoever, is going to endorse that.

MONEYWEB: Absolutely, using the company money to protect your own...

ALEC HOGG: Some would say that it's fraud. The stock exchange is certainly throwing the book at these guys and it's not going to have a happy conclusion.

MONEYWEB: Well that's all we have time for, unfortunately, this week, but we will definitely hear some more from Alec Hogg next week, Thursday. So from the Moneyweb Boardroom Talk podcast, we hope you enjoyed it.