Digging Value is a twice-a-week column where I deep dive into markets, mining, and whatever financial absurdity caught my attention.
If you like your investing insights (not advice!) grounded in cash flows, hard assets, and common sense—but also recognize that markets frequently ignore all three—you’ll probably enjoy this.
Let’s explore the wild world of value investing in natural resources together.
Today’s column: Stealing from Peter to pay Anglo American, the former Kenmare CEO wants his company back, and cocoa farmers turn gold miners.
“Digging for Value, One Story At A Time.”
The Problem With Dividends
The goal of investing is to allocate money today with the hope of receiving more money tomorrow. That “more money” could be capital appreciation, buybacks, or dividends.
And only in natural resources do you find shareholders upset at the idea of getting more money.
From David McKay at MiningMx.com:
“Special dividends are usually grounds for investor celebration. In the case of Anglo American Platinum (Amplats), however, there is reason for pause.
On February 17, the platinum group metals (PGMs) producer announced a R15.7bn payout, equal to R59 a share — a sum that no doubt delighted shareholders, including Anglo American, which is due to demerge its 66.7% stake in June. Combined with an ordinary dividend declaration of 300c a share (R800m), however, the total dividend speaks for nearly all Amplats’s net cash, totalling R17.6bn as of December 31.”
It sounds like Anglo American wanted a huge pay day, but didn’t want to pay for it with their cash reserves. So instead, they took all of Amplats’ money (of which it owns 66.7%) to pay the dividend.
I mean it’s kind of genius? I imagine the conversation went something like, “Hey how much do we want to pay as a special dividend? Oh wait, that’s easy … How much cash is in Amplat’s bank account? Let’s just use that.”
But that’s probably the worst case scenario for capital allocation if you’re an Amplat executive.
‘“Parent Anglo has not made it easy for Amplats,” said Adrian Hammond, an analyst for Standard Bank Group Securities in a note to clients.
“Leaving the world’s largest PGM producer and employer in a net debt position (not since 2017), in a weak price environment, and in the midst of a major capex reinvestment phase, is not good governance, in our view.”
Amplats pointed to having established an “appropriate capital structure” for itself ahead of its demerger from Anglo. It will maintain leverage below 1 times net debt:earnings before interest, taxes, depreciation and amortisation through the cycle; maintain investment to support sustainable returns; and retain the dividend policy as a 40% earnings payout.”
After further review, this isn’t a good look for Anglo American.
Amplats spent decades building a strong balance sheet to weather a cyclical downturn in PGM prices – which we’re in now – only to have its hard-earned cash divvied up amongst their biggest shareholder, Anglo American.
It’s like if your brother owed a bookie and he asked you to help him cover the debts. You agree and ask him how much he owes. He says “$5,000.” You say, “Okay cool.” Then you steal his $5,000, kick him out of your car, and leave him in the Nevada desert.
The article continues:
“Asked what he thought of some analysts implying Amplats had been left “high and dry”, Anglo CEO Duncan Wanblad said in an interview the special dividend followed “a long conversation” with Amplats CEO Craig Miller and his team on what the capital structure “could and should look like”.”
Two things:
- That conversation was probably not that long.
- Amplats capital structure “could and should look like” whatever Anglo wants it to be since it owns 66.7% of the company.
It all goes back to the Trump playbook. “We’re going to {insert what you want done}, and we’re going to make {insert Amplats} pay for it!”
“I Want My Company Back, Please.”
I have a 10-month old daughter, so I’m around a lot of babies and toddlers. And let me tell you something about babies and toddlers – they only want stuff they don’t have.
It’s amazing. I could hand a one-year old her favorite toy in the world. But if she sees another one-year old playing with a cardboard box, she’ll demand the cardboard box.
Does that make sense? Good, because that’s also how some mining CEOs act:
“KENMARE Resources said on Thursday it had rejected an initial €565m takeover bid from a consortium led by its former MD Michael Carvill.
The titanium miner confirmed receipt of a non-binding proposal from private equity group Oryx Global Partners and Carvill regarding the offer. The offer proposed a price of £5.30 per share. Kenmare is currently trading up 43% at £3.94/share.”
Kenmare’s stock (KMR.LSE) jumped 60% on the news and is up ~42% as I’m typing. I don’t know. I’ve seen worse take-out deals in the mining space, and KMR seemed to benefit so far.
But Kenmare said no:
““The board of Kenmare, together with its advisers, considered the terms of the proposal and unanimously rejected it on the basis that it undervalued Kenmare’s business and its prospects,” said Kenmare in a statement.
“However, in order to facilitate the consortium improving the financial terms of the proposal, the company has offered to provide the consortium with access to limited due diligence information,” it added.”
What information does a 38-year company veteran and former CEO not have at this point?
Anyways, Kenmare is one of the world’s largest producers of titanium minerals. It’s flagship mine, Moma, is one of the world’s largest titanium deposits.
To put it in perspective, the company expects to mine Moma for another 100 years at nameplate production capacity.
The company has also done something most mining companies can’t even fathom: returned capital to shareholders (no, not the Anglo American kind, the good kind).
“The company has returned approximately $280m (€259m) to shareholders through dividends and share buy-backs since 2019.”
That’s a 74% total return on today’s market capitalization of GBP 347M (not bad!).
The stock, on the other hand, has gone nowhere since 2015.
This whole story is like a mining version of Tenet – Carvill has lived this moment before, just on the other side of the table:
“This is not the first time Kenmare has been in the M&A crosshairs. While MD Carvill rejected a shareholder suggestion the firm’s board consider their strategic options, saying the business was not for sale. Then trading at £3.21/share, Carvill said the company was mispriced by the market.”
Maybe Carvill is right this time. Maybe KMR is better off as a private company. After all, it’s returned 3/4ths of its current market cap back since 2019 and the stock has done nothing in the meantime.
I can hear Carvill now.
“I know the last time I was CEO I said no to a similar deal. And I know that our stock was trading at a similar price to what it is now. But trust me. This deal is right.”
Gold Is The New Cocoa
Imagine you’re a cocoa farmer in West Africa.
You’ve spent years tending cacao trees, coaxing beans out of the humid earth, selling them into a global supply chain that turns your harvest into chocolate bars for people who complain about $5 lattes.
It’s hard work, and lately, the pay’s been lousy—cocoa prices are down 30% from their highs, costs have soared, and the middlemen still take their cut.
What if you just, I don’t know, started mining gold instead?
“The price of chocolate is likely going to go up as cocoa farmers are abandoning the crop in favour of illegal gold mining, courtesy of sky high gold prices.
Reported on Wednesday, the bump in illegal gold mining, which the locals call ‘galamsey’ in Ghana, have also resulted in increased pollution of cocoa-bearing land.
The price of gold has risen 37 per cent in the past 12 months due to central bank purchases, geopolitical distress, concerns about US debt, inflation, and a shift by some nations towards de-dollarisation.
The rise of galamsey is intensifying a crisis that caused cocoa yields in the West African country to drop 20 per cent last year. Crops in Ghana and the Ivory Coast produce more than half the world’s cocoa.”
This is the hallmark characteristic of every great momentum trader, right? Sell what’s going down and buy what’s going up.
The economics are brutal and obvious: Cocoa might fetch you $2,000 a ton if you’re lucky; gold’s sitting at $2,500 an ounce. A single nugget could beat a season’s harvest.
But it’s not as easy as “hey let’s stop farming cocoa and grab shovels to mine this gold.” Nothing ever is.
“Illegal gold mining has also caused significant economic damage in Ghana, primarily through the loss of tax revenue.
The government is unable to collect taxes from illegal mining, depriving the state of income for public services and infrastructure. Furthermore, the practice’s environmental effects harm both farming and fishing industries, leading to reduced productivity in these sectors.
Additionally, the tourism industry, reliant on Ghana’s natural landscapes, suffers due to the destruction of ecosystems, diminishing the appeal of key tourist destinations.
The health costs associated with the hazardous conditions in illegal mining areas includes exposure to mercury and other toxic substances. This puts a strain on public health resources.”
Here’s the rub – you can’t blame the farmers! They’re not sitting around reading ESG reports or debating commodity cycles—they’re trying to feed their kids. Gold’s not a career change; it’s survival. One commodity can meet their needs, and the other one can’t.
This brings up a much larger discussion on resource allocation and incentives. Miners follow incentives. If governments give free money to mine “green tech” metals like lithium or copper, guess what metals will get the most investment?
At that point, investment decisions aren’t motivated by “what can make me the most money?” but “what will cost me the least amount of money and can I get the government to subsidize that cost for me?”
Incentives matter.
