CAPE TOWN - Predictably, Sasol’s share price fell 8.38percent on the JSE on Friday to close at R77.11 after announcing a strategy to mitigate Covid-19 and the lower oil price that will possibly include a $2billion (R35.2 billion) rights issue.
Adding to the earnings dilution woes for shareholders was a warning that headline earnings per share were expected to fall by at least 20percent, compared with the R3.72 reported for the year ended June 30, 2019.
Other parts of the strategy included a cash conservation programme, an accelerated and expanded asset disposal and partnering programme.
JSE analysts often say that share prices of good companies invariably recover after a rights issue, to at least the price it was before. Judging by the elasticity of Sasol’s share price in the last few months, this is not at all impossible. The share was trading at R312 on January 3. It fell off a cliff in the global market contagion in March, to as low as R21.88 on March 23, and has since then clawed back some of the lost value.
When the share price was trading at around R30 a share, a friend who does not usually trade shares called me and asked if I believed Sasol was a good buy at such a low price. I told him that the share price was indeed low, but that I wouldn't buy the share.
There were several reasons. There were the large, and well-documented cost overruns at the Lake Charles chemicals plant in the US.
There was the low oil price, which would impact the coal to fuels operations and its inland oil refinery.
There was the falling global gross domestic product due to the Covid-19 pandemic, which will reduce the demand for the more than 200 chemicals products that Sasol produces and exports all over the world as well as environmental problems at its plants.
There was also the uncertainty relating to the impact of Covid-19 on the group and the South African economy.
Also, on a more emotive level, considering how aggressive this group can be in pursuing expansion, I believed its 10 percent dirty air emission targeted reduction by 2030 smacks a little of environmental box-ticking.
And unlike many JSE analysts, I view the state-supported and regulated fuel price as a negative for Sasol, not a positive, because it is unfair to enrich private shareholders at the expense of taxpayers, through regulated, sky-high fuel prices.
As it turned out, I was wrong in my assessment of the share though, and the share price has more than doubled since then, and my friend would have made a tidy sum. Who knew?
Gold mining groups were the major movers on the JSE on Friday, with DRDGold up 3.25percent to close at R17.14, AngloGold Ashanti up 2.85percent to R457.81, Goldfields up 1.96percent to R142.88, while Harmony closed 2.50percent up at R63.10.
The gold mining shares were up even as the gold price fell marginally a day before. At $1727 (R30393) per ounce, the spot gold price on Friday morning still represented a 13.9percent return over a year. The rice has risen strongly from $1471.24 on March 19.
Many analysts believe there remains strong upside potential for the gold price, given the inflation risks associated with governments printing vast amounts of money as they have never done before, in their efforts to prop up their Covid-19 stricken economies.
In this scenario, gold would likely be bought for its more traditional value storing role.
In theory, the analysts are correct. But stubbornly low inflation after all the quantitative easing of the 2008/09 global financial crisis suggests otherwise. The reasons why have been a matter of much debate.
The rand dollar exchange rate is also in the gold miners’ favour, with the rand trading 13.5 percent weaker at R17.79 per dollar versus $15.38 on March 3 this year.
Underground mines will likely go to 100percent of production from next month, in line with the likelihood that the country will move to level 3 of the lockdown at month end. DRD, which mines old mine dumps, is likely already operating at 100percent capacity.
South Africa’s mines are well equipped medically, but there will be challenges, such as how one practices social distancing between some 100 or so miners who need to down into the mine in a cage.
Investors generally buy gold as a way to diversify risk. That said, the gold market, and gold mining share prices in general, are volatile and investing in them requires well considered research on the part of the investor, or by a financial adviser.