Mining Index steals the show as Bulls rampage

By Lance Mambondiani

'It is not because things are difficult that we do not dare, it is because we do not dare that things seem difficult' - Anon

OVERVIEW

THE Governor of the Reserve Bank, Dr Gideon Gono presented his Monetary Policy on Monday October 1, 2007. As predicted, the MPS was an exercise in economic gymnastics, attempting to achieve large-scale macroeconomic stability within hyperinflationary fiscal policies.

By the governor’s admission, the past three months were the most trying in the country’s economic challenges. Despite the constant frustration of his policies and criticism from various stakeholders, the Governor has been a consistent and passionate evangelist for economic change previously attempting to centralise economic control and the process of change itself resulting only in peripheral success.

He has risked the credibility of his office through quasi-fiscal activities to resuscitate declining production levels in companies and assisting parastatals on the brink of bankruptcy. Analysts never expected the Governor to ‘bite’ with the same venom, as was the case in 2003, when his corrective measures precipitated the collapse of a number of banks and asset management companies for alleged imprudent banking practices.

The Governor has now adopted a protective role for the financial sector. Distributional cartels, smelling blood induced by the Empowerment Bill, have started circling the banking sector anticipating that foreign banks will be forced to retire 51 percent of their shareholding to local shareholders.

Four of Zimbabwe’s 28 banks are foreign owned, Standard Chartered, Stanbic Bank owned by SA’s Standard Bank, Barclays Bank which is 70% controlled by Barclays Plc in London and MBCA controlled by Nedbank and Old Mutual. Standing to economic reason, the governor has counseled a gradualist approach in reducing the shareholding of banks to avoid a self induced implosion.

In his MPS, the Governor had little choice but to maintain the low interest rate policy supporting government’s consumptive borrowing. Concessionary funding will continue to be extended to critical industries to sustain production with priorities being in the agricultural sector.

Foreign currency retention levels were adjusted 5 percent to 65 percent. This will enable exporters to fund inputs to sustain their operations. The gold support price was also increased to Z$5 million per gram representing more funds to gold producers. Although the money market will remain perpetually depressed, the policy measures will significantly boost the stock market as investors assess option viability.

STOCK MARKET UPDATE

Its official, the ZSE is experiencing a bull run never seen before in the history of the exchange. The question being asked by many analysts is how long will this Bull Run last? Is it quite possible that investors will continue to receive such heavenly returns or will the market come crumbling down? Sometime in the sixties, the Japanese markets set off on a bull run that lasted close to a quarter of a century.

The market closed the week on Friday 28 September on a high, buoyed by the mining index which rallied past the main industrial index gaining 30.23% to close at an all time high of 110,350,979.28 points. Impressive gains were recorded in RioZim, Bindura, Hwange and Falgold The main industrial index closed up 1,90 percent to close firmer at 86,494,551.71 points with the major movers comprising Old Mutual up Z$100000 to Z$1300000, Econet jumped Z$25000 to Z$575000.

The main industrial index was up 1,90 % to close at 86,494,551.71 points with investors taking profits. Predicting little change from the MPS, the market opened the week on Monday 9.49% firmer before jumping a record 39.5 % on Tuesday to close at 132,237,465.46 believed to be the highest in a century.

The mining index also rallied 39.5% on the same day to 171,630,769.70 extending earlier gains. The market rally almost sounds unbelievable; fewer analysts could have predicted the index would break records within the country’s most challenging time. The current rally has certainly been the most sustained and stocks are likely to continue on a surge as latecomers seek to crash the party and pick up cherries of their own, seeking a hedge against inflation and currency depreciation.

As at Tuesday, the value of the shares traded on the ZSE increased 148% to Z$648,2 billion, total market capitalization was at Z$1,169 trillion, figures that are likely to smoke your calculators.

TABLE 1: MOVERS & SHAKERS

MOVERS			SHAKERS
Counter	Price	% Change	Counter	Price	% Change
Celsys	2,000	263.64	Barclays	30,000	0.00
Interfresh	16,000	220.00			0.00
Cottco	110,000	175.00			0.00
RioZim	3,000,000	172.73
Kingdom	136,000	172.00

Source: Coronation Advisory

The Celsys share price jumped to Z$2000 as news filtered that Lonrho had sealed a deal to take over 80% of the shares held by the founder Mr. Gary Shayne. The share price put up a chunky 90.48 % within a day. The Lonrho deal will allow the technology company to expand their local and regional projects with a substantial foreign currency pot. Even at the current price, the share price is still a buy. The share-price is expected to revalue and factor in Lonrho’s contribution to the group.

FIGURE 1: MINING AND INDUSTRIAL INDEX

Source: Coronation Advisory

Kingdom’s share price also responded positively to the cautionary statement on Monday, October 1, announcing the shareholders’ irrevocable agreement to the proposed merger. The share price put on 60% on Tuesday to close at Z$120,000.00. The counter’s YTD since January this year is now at 302 122%. It is impossible to find any matching return to shareholders anywhere else in the world except perhaps in the Kingdom of heaven.

The flurry of activities on the ZSE has seen a lot of investors smiling. If you are just joining us, where have you been? Market sentimentalism dictate that most investors are driven by greed, the record levels will see a stampede of new individual investors buying on the crest. Without due care and advice you may get seriously burnt, financing long-term investors’ profits.

However, gains on the ZSE will most likely be cyclical as investors lock profit away ahead of year-end. Thursday trade when the market registered losses across all counters is an example. The industrial index shed 10.84% as investors went shopping. It’s like playing ‘Who wants to be a Millionaire’, when you have made good money, the common instinct is to bail out in case the market has overheated. These short cycles will represent buying opportunities to latecomers and for existing investors to average out.

The downside is that because 90% of investors on the ZSE are institutional investor, if a few companies were to take profits, this will cause a domino effect on many counters prompting a selling frenzy. The leveling may even be self-induced, with companies seeking a fresh opportunity to buy cheap. The level of corporate involvement is ironically also the upside, acting as insurance to small time investors. As companies and pension funds jostle to revalue their portfolios in an act of corporate cannibalism, prowling for profits, investors will be carried in the waves. Sometimes it pays to Buy, Sit and do nothing.

Coronation Top 5 Picks

Celsys
CFX
NMB
Bindura
FALGOLD

STOCK MARKET OUTLOOK

The Mining Index has now officially overtaken the main industrial index, rallying a record breaking 30,23 percent on Friday or 25 615 364.83 points to new all-time highs at 110 350 979.28 points. A number of factors have contributed to this rally. The devaluation of the dollar in the supplementary budget, firming global metal prices on the back of a falling US dollar and the review by the Governor of the gold support prices to miners in the Mid-term MPS have been the catalysts for a major trot.

There is also an expectation that gold prices will break record levels by year-end reaching a high of US$800 per ounce and break an all time high of US$850 by mid-2008. Mining now appears the business to be in. Whatever is happening in the US economy is unlikely to affect international commodity prices. China and other parts of Asia are developing at a breathtaking speed demand for metals and other commodities is likely to remain high. Analysts have predicted a 10-20 year commodities ‘super cycle’. It is not only gold counters that will benefit.

Rising metal prices will benefit gold and diamond miner RioZim, nickel miner Bindura and even the perennial dark horse, Hwange. All these counters have experienced an adjustment to their share prices during the mining rally. Some analysts have predicted the mining index has overheated and is likely to experience a short-term correction, this appears likely, but current trends favour a sustained rise in resource prices.

Our analysis is that the correction will happen on the main industrial index now playing catch-up. In essence investors on the main industrial index will stand to benefit, with the mining index trading a historic price to earnings ratio of 1 605 times against average industrial index PE ratio of 1,27 times, as at September 28.

The increased activity on the ZSE reflects investor positivism post MPS. The Governor retained the current low interest rate policy to support fiscal expenditure required to fund ailing parastatals and resuscitate the economy. Indications that money supply growth was well above 17 000% for July 2007 indicates the inflationary pressures of the monetary policy.

The central bank will seek to sustain its heavily subsidized credit facilities such as the Basic Commodity Intervention Facility (BACOSI), in addition to the Agricultural Sector Productivity Enhancement Facility (ASPEF) and the Agricultural Mechanisation Program. In the short term, counters that are likely to benefit from the MPS include agriculture-linked counters, exporting counters and producers of basic commodities. Long term, the mining counters are likely to continue benefiting.

COMPANY NEWS

Mashco considers IPO – The agro-industrial group has announced that it intends to revisit plans to list on the Zimbabwe Stock Exchange. The group has a branch network of 34 outlets spread throughout Mashonaland East, Mashonaland West, Mashonaland Central and Manicaland retailing agricultural inputs and hardware materials. The company also owns a logistics firm Browns Transport; MashSec a security company; and commodity broker MFC Commodities. Mashco will benefit immensely from access to additional capital for expansion purposes and will unlocking shareholder value. The company has made previous attempts to list on the stock exchange without much success. Based on its current structure, the company’s listing in unlikely to generate significant interest in the market.

NMB has a Mutual friend - There has been many takeover rumours at NMB. The bank is vulnerable after the disappearance of US6, 3 million through alleged fraudulent activities in the treasury department. Regional giant ABCH was at one time reported to have tabled a proposal to pump in US$7 million in the banking concern in exchange for equity. Recent reports now suggest Old Mutual is considering a US$2,3 million bailout package for the bank which will bring their stake in NMB to 34% depending on the outcome of the valuation.

Old Mutual is currently the largest shareholder in the bank with a 21,76% shareholding, followed by Cornerstone Trust (10,55%), Alsace Trust (10,55%), Wamambo Investments Trust (8,89%), The top three shareholders represent the split up shareholding of the NMB Directors, Dr Julius Makoni, James Mushore and Francis Zimuto.

The other investors are; Drakmore Investments (6,85%), Messina Investments Ltd (4,19%), Elisha Investments (3,34%), Martcap Investments (3,19%), Local Industries Pension Fund (3,18%) and Palisades Ltd (2,64%). The constant speculation has caused a revival in the NMB share price. Investors have awakened to the latent value in the former blue chip counter and the possibility that a tie-up is imminent. Compared to its peers, at Z$4500, the counter is still trading at a huge discount. We still recommend this as a buy.

Celsys – Lonrho is reported to have sealed the transaction to take over 80% of the technology company. In a released statement, Lonrho announced that it had completed the acquisition of an 80% stake in Blueberry International Services, an offshore company for US$5,45 million in cash. Blueberry controls 60 % of Celsys Limited.

Kingdom Meikles Africa Limited (KMAL) – Meikles Africa, Kingdom Financial Holdings, Tanganda Tea Company and Cotton Printers released a cautionary statement on Monday to announce that they had agreed on the terms of the merger. The Merger will result in a monster conglomerate, the largest in Zimbabwe with a market capitalization of Z$900 trillion.

With shareholding representing 86% of the share in Kingdom and 55 % in Meikles Africa and 58% in Tanganda having given an irrevocable undertaking to support the proposed transaction, it now looks certain the merger will go through. For a transaction as humongous as this, analysts have been surprised at the speed at which this transaction is moving; nonetheless, the statement was exciting news to a market previously skeptical about shareholder consensus.

FOREX MARKET

The central bank governor announced a renewed crackdown on forex dealers as the Zimbabwe dollar continues to lose ground on the parallel market amidst fresh buying demand.

FIGURE 2: PARALLEL MARKET RATES

Source: Coronation Advisory

After closing the week on Friday 28 September 2007 at Z$905 000 to the Pound Sterling, the dollar breached the Z$1 million mark on Monday, holding firm for the rest of the week. Since last Friday, the dollar has slid 16.02 % to close this week at Z$1,050,000.00 to the GBP approximately 3032.62% higher than the official rate. Going forward, rates will continue to be influenced by demand and supply dynamics. The absence of any significant improvements in the foreign exchange inflows in the MPS will sustain the status quo, with demand expected to outpace supply as the country attempts to fund critical supplies.

The South African Rand was bid at 6.90 to the United States dollar from 6.87 continuing last week’s strong run as the USD continued to falter. When the JSE closed on Monday, gold was quoted at $733.78 a troy ounce from $747.60/oz at the last close. The increase in the foreign currency retention levels for exporters to 65% was greeted as a welcome relief. The balance can be exchanged at the official rate of Z$30,000 to the USD with an incentive to invest the proceeds at the overnight rate of 800%.

Lance Mambondiani is a Director of Coronation Financial Holdings, a financial advisory company registered in the UK. He can be contacted at coronation.uk@btinternet.com or on +44 790 329 3227
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The foregoing has been prepared solely for information purposes only based on independent research by Coronation, no representation or warranty; express or implied is made to its accuracy or completeness. Coronation therefore accepts no liability for any loss arising, whether direct or indirect, caused by the use of any part of the information provided. To discuss any of these investment options in detail please contact Coronation Financial Plc. Reg No. 06342947.

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