Africa: Open For Business
Markets make opinions, the old saying goes. So it is hard to maintain old views on Africa as a place to avoid in the face of so much evidence to the contrary. A few snapshot images from the past few weeks should help you think differently about the continent.
There has already been a record $54 billion in buyouts in Africa this year – not including Wal-Mart’s initial $4 billion offer for Massmart, an African retailer. There have also been a number of Africa-focused funds gathering money of late.
These investments are not fool’s errands. The people behind them are not stupid. They see something: growth and opportunity.
The IMF recently upped its estimate for economic growth in sub-Saharan Africa to 5% for the year and 5.5% for next year. Africa is riding a boom of trade with resource-hungry China, but also with developing economies throughout Asia and Latin America. Money goes where it can get the best return. So far, African investments have offered higher returns. And prices remain far cheaper than developed markets, for similar assets.
Of course, Africa is an enormous continent of 54 countries – a diverse group, to say the least. It hardly makes sense, really, to talk about Africa as if it were a set of similar countries. It isn’t. But there are pockets and regions and broad similarities of experience.
In any event, the opportunity in this vast area of 900 million people is hard to ignore.
Recently, I attended Grant’s Fall Investment Conference in New York. One of the more interesting presenters was Francis Daniels, co-founder of the Africa Opportunity Fund, who delivered a talk titled Reflections of a Value Investor in Africa.
Afterward, we had lunch together and I got to chat with him a bit more about investing in Africa. Daniels is a soft-spoken, modest Ghanaian who left his home country in 1982 to study in Canada. By that time, he had witnessed six coups. The first was in 1966. “It had the tremendous benefit of giving me an unexpected school holiday,” he said. But by the sixth attempt in 1982, he had a different view. “I was tired of coups and exhausted by Africa’s seemingly perennial coups, corruption and mediocre leaders.”
Over his 15-year career, he’s invested in every region in Africa. His reflections included many super-cheap stocks that later delivered some multiple of his initial investment. For a Graham-and-Dodd investor, Africa was a carnival of riches. Price-to-earnings ratios of 2 or 3 times with 20% growth rates. Yields of 30% on convertible debt. All kinds of hidden treasures – such as free real estate or unrealized portfolio gains – lurked in the folds of African balance sheets. Africa, too, was rich in untapped natural resources that the world craved.
Africa, though, is famous for its resources, and a value investor has to figure out a way to apply these principles to natural resources or miss out on a big piece of the pie. Daniels made them work, and some of his best investments came from mining stocks. (Uramin, for example, was a uranium explorer in Namibia and South Africa. It delivered 1,000% returns in two years.)
Here is one of Daniels’ favorite holdings… The stock is Zimplats, a platinum and palladium producer on the Great Dyke in Zimbabwe. It lists on the Aussie exchange under the ticker ZIM.
Zimplats does not produce refined platinum and palladium. Rather, it makes an intermediate product called matte, which it sells to refiners in South Africa. Impala Platinum of South Africa is the second largest producer of platinum in the world and has offtake agreements with Zimplats. It also owns 87% of the shares.
Daniels has owned Zimplats since 2003 and paid an average price of $2.25. Today, it is $12, but Daniels feels it is still too cheap. The stock trades for a price-to-earnings ratio of 10 times. Its enterprise value is $57 per ounce of reserves, compared to $193 for the industry.
Zimplats is also the lowest-cost producer in the world. Costs are $325 per ounce, versus the industry average of $948 per ounce. Zimplats mines from shallow depths at 50 meters below the surface, whereas South Africans have to go at least twice as deep.
Zimplats mines 350,000 ounces a year and plans to reach a million ounces. Its proved and probable reserves will last 67 years at current production. It has about six centuries of resource – yes, six centuries.
Let me finish with a few of Daniels’ lessons from 15 years of investing in Africa, as I think these are applicable to investors everywhere:
- “Macro-time is slower than micro-time. It took a few years for the hyperinflationary logic of Zimbabwe’s fiscal and monetary policies to end in actual hyperinflation.” I think we are seeing the same thing happen in the US. While it’s clear where deficits and money printing ultimately lead (i.e., high rates of inflation), the market has been slow to realize it, as shown by a 10-year Treasury rate still smaller than my hat size.
- “Government paper is riskier than private paper.” This one sounds less surprising than it might have three years ago. But a slew of sovereign debt defaults (i.e., Greece, et al.) shows that, as Daniels says, “Fantastic promises prove to be just that in the long run.”
- “The best way to preserve real wealth in Zimbabwe was to own the equity securities of companies that earned non-Zimbabwean dollars.” Applied to the US, it would be to own the stocks of companies that earn their bread in stronger currencies.
These are just a few. I think Daniels shows a smart value investor can do very well in Africa. Of course, you could just buy his fund, which as I write trades for a 27% discount to underlying NAV. I also think Daniels’ lessons in Africa are worth thinking about, even if you never invest in Africa.