Jupiter has a world-class manganese mine – in the wrong country
Patience has its rewards — even in the fast-moving mining sector of the stock market — as can be seen by looking back at a warning here in March that it might best to delay an investment in Jupiter Mines until the froth is blown off the share price.
Floated at 40c a share, Jupiter was the biggest initial public offering by a mining company on the ASX in eight years.
While it is a class act with a stake in a high-quality asset, it was fully priced and more likely to fall after listing than rise – which is pretty much what happened.
For two days Jupiter traded above its issue price, peaking at 43c which, in theory — and by not allowing for holding or transaction costs — represents a profit for early sellers of 7.5 per cent, which is better than nothing… just!
But after the initial flurry, and positive stories in a number of media outlets, the $240 million Jupiter float started to sink — and continued sinking — to the point where it last traded at 32c, a 20 per cent paper loss for initial subscribers.
So much for the bad news, which regular readers of Stockhead would have expected after that March warning about Jupiter facing stiff headwinds:
Is it time to revisit the stock?
“Perhaps” is the only reasonable answer.
Jupiter has been a strong financial performer, and a generous distributor of dividends with more likely to come if the manganese price stays high and South Africa doesn’t become too difficult for mining.
The latest price certainly looks appealing, as does the Tshipi manganese mine in South Africa, the plum asset in which Jupiter has a 49.9% stake.
The manganese price is also strong, albeit lower than when the stock floated.
A glimpse of the strong financial position of Jupiter was contained in an investor presentation released last week which showed Tshipi producing manganese for the steel-making industry at $US2.28 per dry metric tonne unit (the complicated way the mineral is traded) and selling it for $US6.23/dmtu, a handsome gross margin of 173%.
The cash flowing into Jupiter is finding its way to shareholders with $153 million returned over the past two years and another $98 million paid in the form a half-year dividend on October 10 at a rate of 5c a share.
By any measure Jupiter is a cash cow, as management said it would be with a plan to return 70% of profits as dividends.
Why the low share price?
But, if the performance is so good and dividends so generous why is Jupiter limping along at 32c?
The answer does not lie with the project, which is one of the world’s biggest and best manganese mines, nor with management which is driving the business hard on a “lean and mean” budget.
Where question marks arise can be found are in the price of manganese, which is notoriously erratic.
Even though the feasibility study into Tshipi was based on a price range of $US4-to-$US4.50/dmtu and the current price is above $US6/dmtu there have been long periods of time when the price is well below $US4/dmtu.
Commodity-price risk is one issue with Jupiter.
Country risk is potentially bigger because South Africa has become a very difficult country for mining, especially for foreign miners — and it’s likely to get worse.
Fitch Solutions, an arm of the Fitch credit-ratings agency, savaged the South African mining industry earlier this month after the government of the country released what was billed as a stimulus plan.
What Fitch found should be enough to frighten off even the most courageous investor.
A new and restrictive Mining Charter requires ever higher levels of black economic empowerment in mining, which might be understandable given the country’s apartheid history but which will limit investment in new projects.
The latest rules contain a blizzard of confusing regulations such as a requirement new mines be 30% black-owned, whereas existing mines such as Tshipi can continue to operate with 26% — but only during the duration of the mining right.
Within the 30% black owned position, 5% must be given, free-carried, to employees, 5% free-carried to local communities, and 20% to black entrepreneurs (of which 5% must be women).
Other requirements require 50% of the board to be black, and 20% women. Middle management must be 60% black (and 25% women), junior management must be 70% black and 30% women.
Mining companies must also purchase 70% of their goods from black suppliers, and 80% of the services they require.
“Overall, the introduction of the new charter will increase the compliance costs for mines,” Fitch said.
It’s the history of South Africa and the long march to correct past wrongs which has made the country almost a no-go zone for foreign investors and explains why big mining companies are minimising investment there, or selling existing assets.
South32, which started life as a BHP spin-off with a fistful of South African assets, is in the process of selling some of its South African coal mines and investing in US copper assets, a re-direction of capital which speaks loudly.
So, with Jupiter’s strong cash flow business and big dividend payments has it become a stock worth buying at 32c?
Yes, but only because of the potential for a continuation of the generous dividends, you’re not worried about the risks associated with South Africa, or a downturn in the price of manganese if the China v U.S. trade war crimps demand for commodities.