South Africa's energy sector picks

South Africa's energy sector picks and a look at the ANC's investment arm Chancellor House

CHRIS BLAINE: In this Market Review podcast I'm chatting to Peter Major of Cadiz Corporate Solutions. Peter at the beginning of the year you chose Sentula as your pick of the coal sector. Why was that and what's happened to it so far?

PETER MAJOR: Well we had a few talks, Alec and I, what would you be choosing for the new year and usually in this equity business, you look for whatever has run the least or whatever has fallen the hardest because most of these things kind of reverge around a mean and I thought it was pretty obvious that the coal shares had really lagged and there were reasons for it - but those reasons weren't going to pertain going forward. So it started the year we saw Sentula at R280, we saw Wescoal at about 80 cents, OK Sasol I guess was around R300 but just in general, energy was just on a real nice upward trajectory and I mean energy - the oil price and the coal price. So the equities had lagged a bit and I was just pretty convinced that energy prices were going to keep going up and there's always a great rand hedge to our energy shares and the rand is pretty firm at the start of the year. I know it's as firm now, maybe a bit firmer, but those were three pretty good reasons to go for them.

CHRIS BLAINE: Then what's the story there because they're price takers, they're not price makers?

PETER MAJOR: Look, at the end of the day a lot of guys are price takers. A lot more than are price makers and there's nothing wrong with being a price taker if your working costs are 25% to 50% of your selling costs. And with those kinds of margins you've got a lot of latitude. You have a lot of room for downside and our people are making profits with this very strong rand and that means there's a lot of latitude for them to make even more profits if the rand weakens.

CHRIS BLAINE: OK, now what's the story with energy - we see that there's huge demand for energy, but what are the sort of scales that we're talking about - is there room for growth?

PETER MAJOR: Unless you can convince me the population is going to go down or that people's aspirations are going to go down or that the government is going to stop printing money and they're going to have 10 years of deflation - it's fabulous. It's not fabulous for the environment, but it's fabulous for producers and it's fabulous for investors. The world's got seven billion people now and I don't remember the terminology the energy people are using - if it's two terabytes of energy - after gigabytes you go to terabytes or terawatts and I think they say the whole total world usage is two to 2.5 terawatts and that China is predicted to be four to five here in about 30 more years - and they're building reactors and they're building coal fired power plants with that objective in mind. Now if China is going to use double what the world is using currently, and the rest of the world is probably going to use that much as well - so we're of going from two terawatts to maybe eight terawatts, maybe even nine or 10 by the 2050. Now that is a gigantic number - if we only go half that - if we only go a quarter of that, we know we're running out of coal, we know that we're running out of oil so it's almost a question of how can you not be invested in energy. And the world population isn't going to sit at seven billion and when only one billion people in this world are maybe living in first world standards, those other six billion want to come up fast.

CHRIS BLAINE: Now that sounds like a good story but one of the things we've heard - and Charlie Munger (Warren Buffett's partner) is about 85 now - he says that we will see a huge breakthrough in renewable energy before his life is over. Won't that come through and decimate the fuel industry?

PETER MAJOR: I so hope Charlie is right - I hope that he lives long enough to see this, but he's going to have to live to 100 to sere this kind of breakthrough. We're making incremental improvements. Maybe we're even making incremental breakthroughs and rising costs of energy means we don't have to make as many great leaps forward on the alternatives, because if oil goes back to $120 and $150 all of a sudden solar and wind are much more competitive, and only now are we starting to factor in the environmental costs, the environmental degradation and the health costs of our current carbon based energy, but I'd love to see us make that kind of breakthrough but I just can't see it. In the meantime, we're not saying put 100% of your portfolio in energy, but I think you better have 25% in it.

CHRIS BLAINE: OK now for South African investors, what would your choice be for an avenue into exposure to energy?

PETER MAJOR: Gee, Sasol in most of the big fund managers' portfolios - whether it's Nedcor's Rainmaker Fund or the Allan Gray general equity fund or most of their competitors and I can agree with it. Sasol has lagged this run up in the market quite a bit, and that's mostly because of the strong rand and it's got great gearing to the rand. If the rand loses 10%, Sasol's earnings probably go up two or three times that. So Sasol has got to be a holding in about any portfolio except when it's at extreme valuations or except when it's discounting extreme high commodity prices. It's not an extreme valuation, it's not discounting a very high oil price right now, or coal price so Sasol is pretty safe, it's very liquid - that should be maybe a core energy holding in a South African portfolio. And then there are some good little coal companies.

CHRIS BLAINE: Like your pick Sentula...

PETER MAJOR: Yes - that's not a high quality company but it's been so decimated by a lot of things that are out of its control that it's now getting under its control and I know West Coast is virtually a penny stock, but it's now moved to the main board and it's run by a very stable, very respected mining team that is moving into production. They were mostly contract mining, they did a little trading and I know most investors like them quite a bit. I like the guys a lot and the company is well managed and it's probably been the best coal stock from the start of the year - it's gone from around 80 cents to 120 cents - a 50% movement in three months.

CHRIS BLAINE: I'm a shareholder in Sasol so your story about Sasol sounds pretty good. Now sticking with energy though, we just heard overnight that the World Bank granted the loan to Eskom which is curious, because as you said even the ANC is long energy via Chancellor House. But I didn't seem to see any conditions attached to the loan related to Chancellor House. Did you see anything?

PETER MAJOR: Man, nobody has looked for conditions harder than me. I use a magnifying glass that I only use for real serious investigations. No I didn't see it anywhere and I was telling people I'm shocked that there are no conditions attached to that. But now that I think through, the World Bank has made a lot of dubious loans to a lot of dubious countries and people under a lot of dubious circumstances for decades and it's probably not so surprising as I thought it was. But still, the fact that they granted that with no conditions - and no mention - they even mentioned that they were concerned about the environmental impact of loaning money for a coal fired power plant, but there is no mention anywhere that here was a ruling party that was the biggest recipient. I think Helen Zille stated the case so clearly - she speaks very well and writes very well and anybody can understand the contradiction here and she says it contradicts the World Bank's mandate - the World Bank's constitution. The World Bank has not had a great reputation for at least 20, 30 years - there are some very good books written on it. This is not going to do them any good. It's going to make more people less impressed with it.

CHRIS BLAINE: Are you a bit concerned then, yourself?

PETER MAJOR: I am because to me it's rubber stamping that what's happened is OK. The fact that you don't even mention it - and we've seen political parties - the ruling political party here - we've seen them incrementally grabbing more and more business - it's starting to look like the People's Republic of China where the military owned two-thirds to three-quarters of the companies there for decades, and it's slowly getting out, but the party still owns a lot and this is going to make us look more like Burma, I think. When you've got a party involved in companies, and they're making money off of companies that make money from government contracts, from the taxpayers - you can't get more corrupt than that...

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