Member Info for Hounddog10

Was 10,000 FTE equivalent to go. 5,000-6,000 by VR. More have gone by natural attrition and lower “variable FTE resource”. Corporate speak perhaps for less overtime.

Results are quite good (relatively). Costs seem to be moderately under control and RM must be close to cash flow breakeven - perhaps £200m down (they do not say). Share price probably not risen because of decline in volumes - especially parcels - which could be a structural trend, at least in the near/medium term.

Note £200m loss due to strike action.

Out today. Seems to be a consideration of the pre-close trading statement in December. Zeus (house broker) say they remain positive but are suspending estimates and valuations until full year results in April due to uncertainty over projects and profitability. Management have agreed with this action. Make of that what you will.

I wonder who, if anyone, got the licence? Can’t see anything on a Google search. The arbitration seems to be ongoing and is funded by a litigation funder. Perhaps that is holding up the reallocation of the licence. Surely if SMP was mined it would make sense to use NLGM processing capacity (although at the moment it seems at full pelt on volume given grade decline).

Oligarch - yes, I think that is a fair point. I had more in mind the railways with that last bit of the comment where there are many work to rule strikes - but are rarely reported. However, I suspect it is still a little difficult for RM management to bring in agency staff for just a few hours. I think the overall point, however, is that for many the “overtime hours(s)” is seen as part of standard pay. RM has said that the reduction in hours was meant to be funded by greater efficiency - which they say did not happen. So I guess it is part of a standoff to control costs at the expense of service.

It is part of the game. The unions have been progressively getting down the working week hour by hour for the same pay. They claim it is for work/life balance reasons but they know it is difficult for management to manage around. The real reasons are (1) it makes headline pay claims look more reasonable and (2) if the hour is worked (which generally they expect) it will be on overtime. Also I think it means they can take industrial action (refusing overtime) without having to call a strike ballot. This happens a good deal on the railways where there is the same situation and which is particularly reliant on these “overtime hours” as they are called.

https://www.theguardian.com/business/2023/jan/20/lloyds-and-halifax-to-close-40-bank-branches-in-england-and-wales

I think the calculation on final dividends for 2022 will go something along these lines. (The amount of dividend of course being dictated by surplus regulatory capital of which, by far, the most important ratio to worry about is CET1).

Position at end Q3 2022. - CET 1 capital - £31.6bn, CET1 ratio 15.0%
Lloyds have said they manage to an assumed 12.5% CET1 regulatory requirement for the business plus 1% management buffer. So 13.5%. Surplus capital to be returned to shareholders by end 2024.

Following are regulatory changes in Q4 and on 1 January 2023:
- By 31 December 2022 have to rebuild counter cyclical buffer by 1% CET 1 ratio. Reduced slightly because of a regulatory offset elsewhere down to 0.9%
- On 1 January 2023 last bit of regulatory capital relief for new IFRS 9 loan loss accounting goes - increases CET1 requirement by 10bps (last estimate)
- On 1 January 2023 new insurance accounting. Can’t find the estimated figure but seem to remember it would increase need for CET 1 capital by 60bps

So in total 1.6%. That means at end Q3 2022 the above changes were already essentially covered by the surplus 1.5% CET 1.

Say £1.5bn after tax profit/new CET1 capital generated in Q4 2022. Should be a good quarter but is the quarter that suffers the banking levy (a bit over £100m last year). Final ordinary dividend should be double the interim (Lloyds have said that is their policy - so cost would be 67bn *1.6p = £1.1bn. That only leaves £400m spare and it has to be remembered that Q4 gets year end true up of things like provisions eg possibly HBOS Reading and audit adjustments (normally adverse).

There are other (small) balance sheet movements that can impact CET1 capital either up or down but not by much. My guess is that therefore there is not much room to pay a special. As I have posted before I think it is once the pension deficit is paid off (plus if the impact of interest rate rises outrun loan loss provisions) that dividends will really take off (and very strongly) . I am expecting that more in 2024 than in 2023 but if the market sees it coming the share price should have a good 2023 - possibly a very good one.

LTI. Yes there was originally a plan to close the pension deficit with fixed annual contributions by about 2028 or some such date. However, this got changed to one with much lower fixed annual contributions but significant additional contributions if distributions were made to shareholders. So the “plan” is variable but with the current level of dividends/buybacks it means the pension deficit will have gone around end 2023/early 2024. I don’t think the deficit was changed much by the LDI debacle. I think they lost a certain amount by having to panic liquidate investments to post collateral but this loss has been offset by a much higher forward interest rate curve. I don’t believe the Daily Mail £10bn loss - they would have had to RNS it. As you point out after that they have said the funding deficit was not materially impacted by the LDI issue and the CFO has said the £2-2.5bn figure.

The pension fund deficit has already chewed up £2bn of profit in 2022 that could have gone to shareholders. That was the point really of my post to Asperger. Given the current plan Lloyds also needs to consider the impact on regulatory capital of the deficit plan on distributions to be paid soon this year because of the 30% pension “surcharge” on dividends/buybacks.

There are other factors at work where profit needs to be deployed to build up regulatory capital - rebuilding the counter cyclical buffer, new insurance accounting, end of last bit of regulatory capital relief on new loan loss accounting. These have now mainly ended by 1 January 2023 and the position should be clear in February prelims such that investors can look at profit earned as being much more closely aligned with what can be distributed to shareholders.

LTI. They are on an existing plan to plug the deficit - effectively by end 2023/early 2024. It would require around £2bn to go in this year. Unless the deficit is very obviously radically smaller than £2-2.5bn and a new plan can be agreed very quickly I think it will have largely been paid anyway. It requires annual fixed contributions of £800m (paid monthly) and for every £1 distributed to shareholders by dividend/buyback for 30p to go to the pension plans. The regulator will not tolerate large distributions to shareholders without curing pension deficits. Anyway, hopefully they will say more in February. Lloyds have posted a lot of property collateral in favour of the schemes which Is a bargaining chip.

I agree that I think this will very likely end up with the plans overfunded but the regulator’s duty is to pensioners not shareholders.

Asperger. The £2bn “extra” profit you refer to will need to go into the Lloyds’ DB pension plans to cure their deficits. The deficit funding plan for these schemes will need to be renegotiated with the Pensions Regulator based on 31 December 2022 actuarial numbers. Tophat has posted that Chalmers(CFO) has said in a recent banking conference that the remaining deficit is estimated to be £2-2.5bn. If that turns out to be the case then the deficit will effectively clear this year and open up the way for similar £2bn amounts earned in 2024 and beyond to be distributed to shareholders.

In other words the pension deficit overhang is a significant constraint on dividends at the moment but should be about to go shortly.

Asperger. Please put me down again for 87p. At some stage in the next 18 months Lloyds should fly and I think maybe it will be your outlier bet that may come good. Thanks for running the competition.

Picax - I think what happened on the debt is that they got caught out by two production difficulties at New Luika (encountering an unexpected non ore bearing body and problem with defective emulsions (explosives). This, along with a softening gold price, hit New Luika revenues quite hard in 2021/early 2022 and materially lessened the amount of internally generated funds they had planned to have available to finance Singida and pay a dividend. They had already commenced their dividend just at the point the production difficulties started. I think Eric, with his investment banker’s hat on and looking to the future, has been keen to keep an unbroken dividend record as ultimately it is something to boast about when plugging the shares. As you say, the dividend is small and so the benefit of retaining it outweighs the cost even if it seems a bit peculiar to be seen to be financing it with debt.

I think a good deal of problem with the share price is that if you just look at the historical numbers (as shown, for example, in the fundamentals tab) they are not very impressive. Only 2020 stands out as a good year and then back into loss. It is worth noting that in 2020 the share price was much closer to 15p and got as high as 20p or so. Behind the numbers of the difficult years are expensive debt, non refund of ongoing VAT, lower gold price, forced disastrous hedging (due to loan requirements) at precisely the wrong time when the gold price boomed and production difficulties. These issues have now gone although, of course, production difficulties are an ever present issue for miners. However, an investor has to have followed the share for some time to understand that Shanta is now in a very different position.

I also rather think that the takeover interest was rather more accidental than serious. I think these junior miners are always circling each other and an English language Chinese newspaper got a “scoop” which under Blue Book rules forced the takeover rules into action. I think the suitors were being opportunistic and looking to get Shanta on the cheap before the good news eventually got traction. I suspect they were thinking 20p and Eric and long term investors eg Odey had more in mind a minimum of 50p.

FTSE 350 = FTSE 100 + FTSE 250.

A good summary. I would add a couple of things:
- I think Eric has also promised a “conceptual” mine plan for Ramula in early 2023. If I remember correctly originally a mine plan for WK was promised for Q3 this year but it seems they may be trying to bring matters forward;
- Dividend. So long as everything is broadly on track I think Eric will up the final dividend. Doubling it, for example, would only cost an extra $1.2m.

I think as the year goes on there will be an increasing focus on WK plans, how much it will cost and be financed. I doubt Shanta will be able to finance the equity element all from internal resources so absent a takeover or farm-in I guess there will need to be a placing towards end 2023/2024. Once WK financing is sorted the Tanzanian businesses could offer dramatically increased opportunity for dividend payments.

I see the Daily Mail is saying that City analysts are pencilling in £650m losses for RM for the year. That would be significantly up from the £350-450m range IDS has previously given for RM. If likely IDS will have to update the market shortly.

The directors have yet to exercise their (thrice extended) share options. These have exercise prices of 12.5p and 4.5p and so generally have been heavily in the money. The 4.5p ones still are. I can only assume that they are not prepared to risk their money (because it would tank the share price if they exercised and quickly sold - so they have to hold the resulting shares for a reasonable period) until they are rock sure as to SYM’s prospects.

Yes, it is very bullish - particularly as it talks about December trading and that the £14m annualised revenue run rate will be achieved in Q1 next year - which is hardly far away. However, as always with SYM, they have missed their numbers - and badly. We were not told about certification problems in their ME partner’s factory - we were led to believe it was up and running and what is going on with Bimbo? Only £0.1m of d2p bread sales when the Bimbo contract was meant to have started about six months ago. For me that is the most surprising aspect of the trading update.

The Silver Stream agreement for selling NLGM’s silver production has always been a bit puzzling. Although it has a minimum silver commitment for Shanta to deliver over 6.75 years and was seemingly signed in May 2016 the f/statements also clearly state that this commitment ends in 2022. For a May 2016 agreement this should take them to end 2023/early 2024. I think, however, the 6.75 period was set to run from an earlier date than the agreement - presumably end March 2015. The overall agreement runs for a period 10 years and I take from the f/statements’ disclosures that Shanta is still obliged to give up their NLGM silver production until (I assume) March 2025 subject to getting 10% of sale proceeds. In the past they have had insufficient silver production to make up the minimum and have to pay cash/buy physical silver to cover the shortfall. About $300,000 per annum recently and nothing for H1 2022.

At 30 June 2022 Shanta had a total liability of $3.3m in loans and borrowings for Silver Stream which is presumably for the (estimated) liabilities to deliver silver to the end of the agreement. In the past it has dented the p&l because in addition to the cash costs of making up minimum silver amounts, there are accounting charges for interest (it is effectively a collateralised loan again silver) and for reestimating the liability. Most of this is going fast or has gone and, along with the convertible redemption, is another bit of tidying up of past expensive financing.

Yes very much how India works. Lots of people on stage. Long, meandering questions - so it is unclear if the presentation is understood. And, at the end, Laurier gets a metal plaque for his wall and a pot plant for his desk.

I come at it this way in terms of rough cash flow:
Production: 100,000 oz
POG: $1,800 oz
Operating costs: $900 oz (3Q figure)
Cash profit pre tax - $90m
Tax at 30% - $30m
Capex - $15m (5 year plan amount per New Luika, Singida - none or very small)
Drilling - $10m (per this year)
Loan repayment - $5m ($20m over 4 years)
Dividend - $5m (doubling current dividend)
$25m therefore is left after this. So I suppose FCF adding back dividend is $30m or around $3 per share. I suppose you might add back the drilling as well but they are rather committed to that.

This is going to the lower end of production, opex may be too high - I think Singida has lower projected opex than $900 oz (but can’t find a figure), does not take account of back VAT return (not very optimistic on that). Effective tax rate is around 35% over the statutory rate of 30% but I take it back to statutory as my cash profit does not take account of capital allowances.

Every $100 oz change in gold price = $7m after tax.