Minor metals, major money

It isn’t just the well-known metals that have been on the up in recent years, says Dave Forest of Casey Research. Many of the ones you’ve never even heard of have been soaring too.

Encouraged, no doubt, by the spectacular gains in uranium, many investors have come to realise that there is money to be made outside the centrally traded metals.

A number of the lesser-known metals, flying under the radars of most investors, have quietly outperformed gold, silver, copper and nickel many times over.

Probably the best-known example is molybdenum – a steel additive – which has appreciated over 1,000% in two years. But even iron ore has jumped 71.5% so far in 2005.

There is a host of other “minor metals”, which are less well-known, but, in many cases, equally profitable. The following is a quick reference guide, from antimony to vanadium, to some of the lesser-known metals, covering their uses, production, price history and, of course, the firms that benefit from selling them.

Not all of the companies mentioned are ones that we watch very carefully here at Casey Research, and some therefore haven’t been subjected to our detailed due diligence. Rather, they are included here to give you some “first-pass” ideas for further research. As always, your odds of coming out ahead are enhanced if you do your homework before investing.

Antimony

Antimony is used in flame retardants, plastics, glass for TVs and computer monitors, and in lead-acid batteries. Production is mainly concentrated in China, which accounted for 85% of world output in 2000. The average annual US price for antimony has increased more than 100% over the last five years, from $0.66/lb in 2000 to $1.27/lb in 2004, spiking as high as $1.55/lb in October last year. The current price is about $1.45/lb.

These price increases may not be sustainable as there are a variety of metals and compounds that can be substituted for antimony if prices get too high. As prices strengthened in 2004, global consumption dipped, with use in the US falling to a five-year low. Yet because secondary US production of antimony has fallen 47% in the last five years, US stockpiles in 2004 were still reportedly at a five-year low.

One of the companies we watch, Eurasian Minerals (V.EMX), is currently carrying out exploration in the Zajaca district of Serbia, which has been a large producer of antimony in the past.

Crosshair Exploration (V.CXX) is exploring Newfoundland’s Botwood basin, a region that has significant antimony reserves. Both these firms could benefit from credits on the metal if the price keeps rising.

Beryllium

Beryllium is used to make speciality alloys for electronics, defence applications and the automotive industry, and demand strengthened in 2004, with US consumption rising to 220 tons from 180 tons in 2002.

The metal’s high-end applications give it a small but steady market. Prices are set on contract and have thus remained steady over the past five years. About 65% of beryllium reserves are found in the US, although the only mine production during the past year has come from one private Utah-based firm, Brush Resources. Reserves are also known in China, Kazakhstan, Mozambique and Russia.

Avalon Ventures (V.AVL) recently acquired Canada’s Thor Lake beryllium property and will reportedly soon begin auditing its resource estimates. QGX Ltd (T.QGX) has a project in Mongolia that reportedly contains beryllium.

Bismuth

Bismuth may have significant growth potential as it is increasingly being used as a steel additive and as a non-toxic lead substitute in other alloys. US consumption reached a five-year high in 2004 at 2,400 tons, up 12% from 2003.

The metal is mainly produced as a byproduct of lead ore, which has meant limited production over the past few years, as there have beenfew lead mine start-ups. This may change now that the lead market is is picking up.

The bismuth price rose significantly throughout 2004, averaging $3.43/lb in the fourth quarter – up 19.5% from $2.87/lb in 2003 – and spiking as high as $3.85/lb in New York. If the price stays high, the market may see some moth-balled capacity come back online, notably the Tasna Mine in Bolivia, which is one of only two facilities in the world producing primary ore.

Tiberon Minerals is in the process of completing a final feasibility study on its Nui Phao deposit in Vietnam, and Fortune Minerals (T.FT) is working up a feasibility study at its NICO project in the Northwest Territories. QGX’s Mongolian property also contains bismuth.

Update: Tiberon Minerals was acquired by private equity fund Dragon Capital in 2007.

Cadmium

The market for this toxic metal has shrunk over the past few years, due to tightening environmental controls, with US consumption shrinking about 70% since 2000. More than three-quarters of the cadmium still used for industrial applications now goes into batteries.

The decline in production has recently caused the price to rise to an average $0.60/lb in 2004, up from $0.16/lb in 2000. Most recent price reports show the pace of price increases has accelerated in 2005, with cadmium currently going for as much as $0.90/lb.

The market may soon be hit by an EU proposal to ban batteries containing more than 0.002% cadmium, but consumption for battery making in developing nations may offset this. Klondike Gold Corp (V.KG) holds several mines in British Columbia that have in the past produced some 200 tons of cadmium. Noranda also produces cadmium as a zinc byproduct.

Update: Noranda merged with Falconbridge Ltd in 2005, which was in turn acquired by Xstrata in 2006.

Chromium

Largely used as a component of stainless steel and superalloys, chromium has benefited from the strength of the global steel market, with the average price for chromite ore rising to $100/ton in 2004, up from $54/ton in 2003.

The price rise was partly due to the strengthening of the rand. South Africa produces more than half the world’s chromite, and the strong currency has forced producers to up prices in order to stay profitable.

The price rises have continued this year, with some ores fetching $195/ton. The outlook is good. If prices were to fall, it would probably force higher-cost producers in China and India to shut their doors, thus tightening supply. Noble Metal Group (V.NMG) is planning a drill programme this summer on its Kiethley Creek project in British Columbia. Niogold Mining (V.NOX) also has chromium targets on its Le Tac property in Quebec.

Cobalt

Cobalt is used in a variety of speciality chemical and metallurgical applications, such as jet-engine superalloys and, to a lesser extent, steel.

Cobalt enjoyed a surge in price during 2004: the average price on the year jumped to $24.50/lb from $10.60/lb in 2003. But toward the end of the year, high prices encouraged substitution, causing the price to drop back to its current $16.50/lb.

The cobalt market may be adversely affected by the development of copper-cobalt projects in the Democratic Republic of Congo, a nation that hosts nearly half the world’s cobalt reserves, which have largely gone untapped in recent years. With peace breaking out in the area, these reserves should hit the market – and the cobalt price.

Tenke Resources and International Barytex (V.IBX), both of which we follow at Casey Research, are both advancing projects in the DRC containing significant cobalt credits. Such operations can produce cobalt relatively cheaply as a byproduct and could greatly increase the global supply of the metal.

Update: Tenke was acquired by Lundin Mining Corp in 2007.

Manganese

Manganese is a steel additive and consumption in the US increased by 50% in 2004 to 925,000 tons, reaching its highest level since 1981. Prices have risen accordingly, from an average $2.30 per metric ton unit of manganese content in 2002 to as high as $4.50 earlier this year.

The major driver behind the run-up in the manganese market has been increased steel production, both in China – where output was up nearly 25% in the first four months of 2005, year on year – and the US. Between 2001 and 2004, use of chrome-manganese steels grew 125%. Barring a major collapse in commodities markets, steel – and therefore manganese – should stay strong.

Peruvian explorers Vena Resources (V.VEM) hold the Azulcocha project, which has produced manganese in the past and hosts an estimated 3,295,000 tons of high-grade zinc and manganese ore. The firm is currently completing a feasibility study on the property.

Selenium

Selenium has been one of the biggest movers over the last year, with its price up from an average of $5.68/lb in 2003 to a current $51/lb – nearly an 800% increase.

The metal is used as an additive in glass, in the manufacture of electronics, as a dietary supplement and as a component of alloys. The price has risen even in the face of a sell-off in 2003 of large stockpiles of the metal, which had accumulated during a period of low prices.

Much of the world’s production is committed to long-term contracts, which means there is almost no selenium available on the spot market, a factor that has helped drive prices up as panicked buyers searched for supply. Selenium is almost entirely produced as a byproduct of zinc and copper mining.

This is another reason for the recent price strength; depressed production of these metals over the years meant there was little output of selenium. With base-metals production now ramping up, there are several producers who could put out significant amounts of “sweetener” selenium. As global production of copper, zinc and nickel increases, it is almost certain that selenium output will rise too.

Most of the world’s known selenium reserves are in the US, Canada, Chile, and Peru. Increased prices for the metal have recently breathed life into a number of formerly uneconomic projects, including Yukon Zinc’s (V.YZC) Wolverine deposit in the Finlayson district of the Yukon. Partners Atna Resources (T.ATN) and Consolidated Pacific Bay Minerals (V.CBP) are also working the Ty Property, which reportedly contains selenium.

Tungsten

Tungsten is primarily used in speciality alloys. China is, again, the key to the historically volatile tungsten market. In 2004, the Chinese produced 88% of the world’s tungsten. Given this near monopoly, the tungsten price is vulnerable to events in China. Over the past five years, the Chinese government has moved to restrict tungsten ore exports.

The move has been motivated by greater domestic demand for the metal and by a shift toward exporting finished tungsten products rather than raw ore. In 2004, US imports of Chinese raw tungsten averaged 783 tons per month. In January of 2005, it was only 694 tons.

In 2003, the market was also hit by the closure of the only operating Canadian tungsten project (operated by North American Tungsten, V.NTC). The resulting supply shortage has driven the spot price up from an average $50 per metric ton unit (mtu) in 2003 to recent highs of $220/mtu.

Given this run-up, NTC is now considering reopening Cantung, which, along with another of the company’s deposits, holds 15% of world tungsten reserves. NTC’s share price has skyrocketed, recovering from as low as C$0.15 in late 2004 to a current C$1.42 – up 850%.

Sultan Minerals (V.SUL) recently acquired a mine in British Columbia, and Copper Ridge Explorations (V.KRX) is looking into a project in the Yukon. But the hopes of getting a bigger bang out of the market are looking less well founded, given that NTC is planning to restart production in August of this year, something that will increase the supply by 6.67%.

With that in mind, and remembering that world supply and demand are reported to be close to balanced, it’s unclear how much room will be left for producers coming late to the party. That said, NTC did recently suggest that it had received interest from buyers for significantly more tungsten than Cantung can produce.

Vanadium

Vanadium is mostly used in metallurgical applications and the price for vanadium pentoxide has risen from a five-year low of $1.34/lb in 2002 to a recent high of $22/lb, a gain of 1,542%.

While the surging steel market increased US vanadium demand by about 13% in 2004 (and by an undetermined, but large, amount in China), the market has also benefited from tightness on the supply side following the apparently permanent closure in 2003 of two major producers, including Australia’s Windimurra Mine and South Africa’s Vantech Mine, taking some 11,500 tons of annual production off the market, over a quarter of total world output in 2003.

Chinese output also appears to have played a role; in 2003, mine production from the country dropped to 13,200 tons, down from 33,000 tons in 2002, in the face of increased domestic demand and closures of low-quality operations.

As with metals such as manganese and molybdenum, the fate of vanadium is largely dependent on the steel market. However, there has already been a significant supply response to the increased vanadium price, with global production rising 9% in 2004.

South Africa’s Highveld Steel and Vanadium has announced plans to increase its output of the metal by 30% over the next two years, which would bring 20,000 tons of new metal to market, increasing global output by nearly 50%. As Xstrata, one of the world’s largest vanadium producers, points out, this means that the short-term outlook for vanadium demand might look healthy, but it is “unlikely to be sustainable over the longer term”.

Another development that may speed the decline of the vanadium price is the boom in uranium. Vanadium is often found within uranium deposits. As more uranium mines are brought on stream, more vanadium may begin to turn up. Such operations may be a better way to play the vanadium market, as combined uranium/vanadium producers will be more stable than primary vanadium miners.

Uranium Power Corporation (V.UPC) recently optioned the Sahara uranium mine in Utah, which contains equal amounts of uranium and vanadium. Utah-based Energy Metals holds the Velvet uranium property, which also reportedly holds significant vanadium.

Update: Energy Metals was aqcuired by Uranium One in 2007.

Dave Forest is senior editor at Casey Research

How do you choose between the minor metals?

Obviously there are real investment opportunities to be had in the minor metals. And there are more niche markets than the ones mentioned above, such as rhodium, gallium, thorium and osmium.

But when it comes to non-exchange-traded metals, there are a few important considerations to bear in mind. First, the overall size of the market: while some of the metals mentioned here, particularly the steel-making compounds, have global markets in excess of a billion dollars annually, many minor metals only trade in the millions per year.

This is important, because without a central exchange to buy metal, it’s up to producers to seek out buyers and secure purchase contracts. In a market that only does a small volume of business yearly, it’s harder for a start-up operation (the type speculators look for to yield sizeable returns) to break in. In a billion-dollar market, the range of opportunities is usually larger.

Also consider the diversity of the market for the various metals. Molybdenum, manganese, chromium and vanadium are all mainly dependent on a strong steel sector. If this market turns down – which it could in the event of a significant softening in the US or Chinese economies – prices for these metals will also drop. However, metals like antimony and selenium are used in more diverse applications, and so are more robust in the face of shifting economic dynamics.

Finally, it pays to cast a sceptical eye over pure plays in these metals, given their historically volatile price ranges. Considering that it can take several years to identify, prove up, permit and put a deposit into production, firms just starting now on a vanadium or tungsten deposit may find themselves behind the curve – the price may be falling just as they begin putting out their first metal.

That’s not to say there won’t be opportunities for pure producers; it’s possible that the steel sector, for example, could stay strong for several more years, providing a market for new manganese or molybdenum miners.

Investors shouldn’t get giddy looking at current lofty prices, but must think on a mid- to long-term basis. Ask the management of firms you’re interested in: “How low can the price of the metal go and your deposit still prove economic?”

A number of the minor metals are byproducts of larger-market metals, such as uranium and copper. If you like a minor metal, consider plays in the co-produced, larger-market metals as lower-risk vehicles for investment. If minor metals prices stay strong, these producers garner added profit. If not, they don’t totally lose out.

Land titling in India

India’s Space Program May Help Fix Land Market: Andy Mukherjee

Commentary by Andy Mukherjee

May 6 (Bloomberg) — A rocket head being carried on the backseat of a bicycle.

That’s how French photojournalist Henri Cartier-Bresson’s camera captured the initial years of India’s space program, which began in the early 1960s.

Many of the program’s critics noted at the time that Prime Minister Jawaharlal Nehru was squandering the country’s severely limited budgetary resources on an elitist reverie far removed from the realities of the newly decolonized, poor nation.

Author and former United Nations diplomat Shashi Tharoor described the tension in his 2003 biography of Nehru. “There was no limit to his scientific aspirations for India,” Tharoor wrote in “Nehru: The Invention of India.” “And yet the country was moored in the bicycle age at least partly because of his unwillingness to open up its economy to the world.”

Four decades after Nehru’s death, his economic legacy, especially a dangerous flirtation with Soviet-style state planning, stands largely discredited.

Yet his scientific aspirations are coming to fruition in an India that is twice as open to the world as it was just a decade ago, judging by the flow of trade and overseas investments in relation to the size of the economy.

Last week, India put 10 satellites into orbit in a single mission, creating a new world record.

Among the payloads was Cartosat-2A. It’s an indigenously developed remote-sensing satellite that has already begun beaming high-resolution pictures of the Indian hinterland, setting the stage for what may be a revolution in the nation’s finance.

Satellite Communication

India has already made extensive use of domestically developed communication satellites.

In the mid-1980s, satellites made it possible for India to export computer software written in Bangalore to the U.S. In the 1990s, the same technology enabled India to set up a modern, nationwide, electronic stock market circumventing the lack of a robust, terrestrial communication network.

In the southern Indian state of Andhra Pradesh, students in remote villages get access to an English teacher in the city via a satellite link. Later during the day, the same link may be used to set up a video conference between an urban doctor and his rural patients.

Indian scientists have also effectively used images from outer space to map the missing nutrients in barren land so it can be reclaimed for agriculture. The next step is to combine satellite pictures of landholdings with field surveys and create a unified register of property titles.

Land Titles

That’s going to be a key use of the images obtained from Cartosat-2A. These will have a resolution that’s 36 times sharper than that of the images clicked by India’s first remote-sensing satellite in 1988.

“Land is probably the single most valuable physical asset in the country today,” a government-appointed committee on financial-sector development noted last month. “Unfortunately, the murky state of property rights to land makes it less effective as collateral than it could be,” said the panel headed by University of Chicago economist Raghuram Rajan.

Improving the collateral value of land will mean more bank credit to more entrepreneurs at cheaper rates.

The first stumbling block to achieving this goal in India is the absence of reliable visual representations of what a landholder actually owns; surveys in India have traditionally covered farmland because the British rulers had a strong revenue interest in it.

Rural and urban dwellings have largely been left out. Not just that. A survey in Andhra Pradesh found that 9 percent of village maps were either torn or faded; an additional 29 percent were missing from official records.

Gains Forgone

“Unless alternative options — for example, use of satellite imagery — can be explored, reconstituting village maps in the 30-40 percent of cases where these are either missing or not usable will require huge amounts of fieldwork,” noted a 2007 World Bank study. “Given the cost involved, it isn’t surprising that this has rarely been done in practice.”

More than five years ago, McKinsey & Co. warned that India was losing as much as 1.3 percentage points of economic growth because of distortions in the land market, including titles that weren’t legally foolproof.

One of the indirect costs shows up in very small farmers not leasing out their land to those who actually have the stomach for taking the risks associated with agriculture.

`No Assurance’

If the owners of small strips of land were assured that by handing possession of their holdings to someone else they weren’t diluting their ownership rights, they would gladly do so and come to cities to supplement their rental incomes. Urbanization will accelerate; manufacturing industries will gain a competitive advantage from cheaper labor. None of this is happening now because of dodgy property rights.

“Land title in India is uncertain and there is no assurance of clean title,” Ascendas India Trust, a Singapore-based owner of office property in India, told potential investors last year. “Title records provide for only presumptive title rather than a guaranteed title to the land.”

All that may change. The Indian government is planning a mammoth resurvey of all land — partly using satellite imagery — with the ultimate objective of creating a digital repository of all land records.

The spirit of private enterprise that was stymied during Nehru’s rule — and crushed under his daughter Indira Gandhi’s reign — is already witnessing a surge. And it’s getting a boost from Nehru’s insistence on inculcating a scientific temper among his countrymen. Even when the last of the state-owned companies in India is sold off, this aspect of Nehru’s legacy will endure.

(Andy Mukherjee is a Bloomberg News columnist. The opinions expressed are his own.)

Ireka: An interesting play?

My feel is that it depends on what is on the order book, and whether projects are scheduled to come online sooner rather than later. Bit more skeptical on the assigned value of ASPL, not sure the listed firm is worth what it’s worth.

02-05-2008: Ireka - defensive property and construction play

Email us your feedback at fd@bizedge.com

IREKA Corp (RM1.13) is one of the country’s oldest construction companies, tracing its roots back to 1967. Today, the property and construction company has a very different and unique business model - one that is asset-light, with sustainable income streams and relatively defensive in nature despite operating in two cyclical industries.

Its shares are also trading at attractive valuations - at just 5.4 times FY March 2009 earnings (which are sustainable and excludes large exceptional gains in FY08), and 0.5 times book. Dividends are attractive with a sustainable net yield of over 6%. We recommend a buy.

Over the past year, Ireka has quietly undertaken a major restructuring exercise that has unlocked substantial value and created an asset-light balance sheet with recurring income streams.

In January 2007, Ireka sold the prestigious but loss-making Westin Kuala Lumpur for RM455 million cash, setting a new benchmark of over RM1 million per room and clearing the bulk of debts. This was followed in April 2007 with the listing of Aseana Properties Ltd (ASPL) on the London Stock Exchange and the concurrent disposal of four other property assets to the company.

In total, Ireka has unlocked RM673.8 million worth of assets, realised RM203 million in one-off profits and pared all its debts - all for a company with a market capitalisation of just RM129 million. It is now in very good financial shape.

With its new corporate structure in place, Ireka has a steady stream of sustainable earnings, balanced with cyclical construction profits. From ASPL, it will earn annual fees from managing its US$250 million (RM795 million) assets, dividends and upside from performance fees. Through ASPL it also has access to a large war chest for future investments in Malaysia and Vietnam.

The construction arm’s order-book will grow from RM360 million to around RM860 million by May, with the inclusion of the Seni Mont’ Kiara project. This is likely to grow further given the pipeline of new projects in Malaysia and Vietnam undertaken by ASPL. It is turning more aggressive as the strengthened balance sheet allows it to bid for bigger and better projects.

Earnings outlook
In FY March 2007, Ireka posted a net loss of RM33.3 million, largely from some external construction projects that were hit by rising costs. These losses continued in 1HFY08, but have since ceased as all external projects have been fully completed. The construction arm now caters for in-house projects, namely those developed by ASPL.

We expect Ireka to post a net profit of RM172.7 million in FY March 2008, or a sizable RM1.52 per share, boosted by exceptional gains from the disposal of properties to ASPL. After being distorted by exceptional gains though, FY09 will provide a more realistic picture of future and sustainable earnings.

We expect construction revenue of RM350 million, with pretax margins of 6%. Together with IDM’s management fees, we estimate Ireka’s total FY09 pretax profit at RM32 million, net profit at RM23.7 million and EPS at 20.8 sen. This translates into a very low P/E of just 5.4 times and 0.5 times its projected book value of RM2.36.

Undervalued, with high yields
At the current market price of US$0.88, the 19.6% stake in ASPL is worth RM138 million - more than Ireka’s market capitalisation of RM129 million.

This means no value is accorded to its other assets, namely the construction arm and stream of management fees - both of which will drive Ireka’s earnings going forward. In fact, investors are effectively buying into ASPL at a 7% discount through Ireka, and the other assets come free.

We estimate Ireka’s RNAV at RM2.33 per share - more than twice the current share price. If we accord a 25% discount to RNAV, its shares should be worth RM1.75 over the longer-term.

Ireka is not only undervalued, but is a fairly defensive stock with relatively good and sustainable dividends. We expect dividend payout rate of 31%-34% in FY09-10 - on a sustainable basis - which translates into net dividends of 7 sen and 7.5 sen per share, respectively. This will provide investors with high net dividend yields of 6.2% and 6.6% respectively.

The banker’s comp uproar

The FT, this morning has another  op-ed, this by William Cohan, the author of the Lazard history, arguing that regulators should step in to regulate banker’s pay. This is the same line of attack that Raghuram Rajan has been taking.

The reasons given are the following:

1. Bankers take risks with shareholder money, are rewarded when things go right, but don’t pay a price when things go wrong.

2. Pay should be contingent on longer term outcomes of deals and loans.

3. If all the banks do it, then the big fear that they will lose top talent to competitors is unfounded. Where else would banker’s earn what they do?

Underlying all of this is a belief that bankers are paid more than they are worth anyway, and the industry is due for a correction in wages.
While I do think banker’s are overpaid, and I do agree than long term comp should be tied to results of deals, I doubt that the regulation remedy will be effective.

Firstly, bankers already do have downside when things go badly. Base pay at a bank for a director is about US$150k. Bonus for the average MD is about US$1 mil. In a bad year, when an MD is not paid a bonus, he bears the opportunity cost of not working somewhere else where he would have been paid that bonus. And US$150k does not go far in most financial capitals.

Secondly, bankers are currently underpaid. That’s right. A survey of graduates at any business school will tell you that everyone wants to work at a hedge fund. Guys who stay long term at banks these days consciously make a decision to give up the opportunity to make more money in return for a more stable career. This is a risk return decision. If you look at the job opportunities available to intelligent, highly educated A-type personalities it would read:

Private equity, hedge fund, investment banking, management consulting followed by a senior corporate position, Senior corporate position, entrepreneurship

Each of those professions has a different risk return curve, but all of them have high absolute levels of compensation. Pay bankers less, and they would move to professions where they would be paid more.

Longer term compensation structures may end up costing more to shareholders than the current system.  If you pay someone a percentage of profit on a deal, and it’s written into a contract instead of being discretionary, then you may end up getting some truly amazing comp structures especially for the outperformers. Are you really ready for billion dollar payouts to individuals? Because that is what will happen with deferred payouts. A single guy in a bank who made the right decision at the right time may walk away with more than the entire 10,000 employee pool. The employee pool at a bank is like a store of out of the money call options. You pay the option premium with the hope than a few of those options convert in any one year and massively pay you. But the guys who are always in the money will demand and get more and more of that premium.

Finally, regulation will bring with it both transparency on pay and better protection for employees. This is going to be horrible for bank shareholders. Opacity rewards those in possession of better information, and currently bank HR departments have much better information than their counterparties: the bankers. Better protection for employees will result from them being able to take banks to court if they are not in line with regulation, which is different from the current arbitration system where a panel of people with vested interests in keeping payouts low adjudicates. This will be horrible for bank shareholders, as the amount of dirty laundy to be washed in court will be immense.

At the end of the day, only junior bankers really need banks to gain experience and build reputation. Senior bankers can usually bide their time till they can write their own ticket somewhere else. And people hate getting insulted by being paid less than they think they’re worth on an order of magnitude.  See Mark McGoldrick

The straight talk on talent shortage

I loved this quote in the WSJ today:

“When executives talk about a talent shortage in their ranks, they’re really talking about a commitment shortage,” which stems partly from pay inequality, says Rakesh Khurana, an associate professor at Harvard Business School. “The greater the inequality, the less willing employees are to learn specific company ways of doing things that aren’t going to be useful to their next employer.”

He says less than one-third of M.B.A. graduates from elite business schools are pursuing corporate management jobs, compared with two-thirds in 1970.

WSJ Link

Unbelievably true. I’ve seen this in every damn company in Singapore and Asia. As Chief Exec of a corporate, you’ve gotta hold down costs, meaning the compensation of the people who work for you, while keeping your staff.  Keep em happy enough to stay with you, but pay them as little as possible…

The second point, that less than one third of elite b school grads head to corporate jobs, is absolutely true. WSJ surveys of b schools for example, which are somewhat different from other surveys because they ask corporate recruiters which b schools they like, show HBS and GSB at the bottom, because students there have many other options than the typical corporate training program. Notably consulting, private equity, hedge funds and investment banking.

Kevin Hassett’s misguided Regulation FD rant

This is probably the most idiotic article I’ve ever come across on Bloomberg. Kevin Hassett mouths off about Reg FD in such a convoluted misguided way that it makes me wonder… If he’s a adviser to John McCain, then the US is going to be headed for some real economic trouble if McCain wins.

In the old days, if you were a big customer and heard speculation that a firm such as Bear was in trouble, you might call up the boss and ask him about it. If the rumor was that the firm was flat broke, then he might invite you to his office and show you his list of assets to calm you down.

Alternatively, if a chief executive received a number of troubling phone calls, he might summon a highly respected analyst to his office and open up his filing cabinets. If things checked out, the analyst would then issue a report saying that the bad rumors were unfounded. If he tried to get cute and profit personally from the opportunity, then insider-trading laws would apply.

Such a common-sense response to false rumors is now a crime. The law makes innuendo-based attacks far too easy.

Well, why can’t you just publish your news on Bloomberg? Tell everyone that you are OK, instead of just sharing it with one or two people? The law certainly makes widespread publishing OK.

What Mr. Hassett is really saying is that there are reasons why a company should not disclose information in the full public domain. Those reasons include legal liabilities that the information must be true (ie the company cannot spread counter-rumors). In effect, Mr. Hassett says that short sellers can use rumors to drive prices down, but the company cannot now use rumors (ie assertions not completely evidenced) to counter.  And he blames Regulation FD.

Oh boo hoo. First and foremost, there is absolutely no damn reason that any company should not be able to announce anything it wants to the broader market under FD. Just beware, no favoring privileged insiders.If that affects disclosure standards by companies, tough. If you really want to make them disclose more, just modify accounting standards or laws. Anything they disclose on their own is optional anyway, and you are dependent on an illusory faith in good governance.

A second stupid part of this article

A study by economists Armando Gomes, Gary Gorton, and Leonardo Madureira of the Wharton School at the University of Pennsylvania found that earnings-forecast errors for small companies skyrocketed after Reg FD was passed, suggesting that it is mucking up information transmission even in normal times.

Yeah no shit. But Mr. Hassett assumes that information transmission is of the utmost importance. This is patently untrue. If information transmission was the only factor in market design, one would actually allow insider trading. Insiders would be able to transmit their knowledge most efficiently by trading on the stock. The stock price would then reflect all information, both public and private. Efficient market hypothesis, strong flavored.

He of course does not discuss why information transmission could be secondary to fairness.

I can’t believe this guy is a director of anything.

Dismal long term view from the Roach

Insight: Watch out for aftershocks
By Stephen Roach

Published: April 14 2008 17:15 | Last updated: April 14 2008 17:15

The author is chairman of Morgan Stanley Asia

But do not confuse that possibility with an all-clear sign for the real economy, stock markets or the political cycle. As the US slips into recession, a chain of increasingly powerful feedback effects is likely to follow. The after-shocks of this crisis will shape the landscape for years to come.

Financial markets have breathed a sigh of relief that the worst may now be over. Maybe that is the case for the crisis, itself.

Every financial crisis is different, but at some point, they all end. It is hard to know if the end of this one is at hand, but there are grounds to believe the worst of the fire-storm may be burning itself out.

Among the reasons: liquidity injections by central banks, especially the US Federal Reserve, have erred on the side of overkill. Moreover, some of the actions have been unconventional, especially the opening of the Fed’s discount window to investment banks for the first time since the 1930s.

And the failure of Bear Stearns is reminiscent of similar catharses that have marked the bottom of earlier crises, from the failure of Herstadt Bank in 1974 to the demise of Long-Term Capital Management in 1998.

However, there is far more to the macro end-game. This crisis has been big enough to have triggered a host of feedback effects that should endure long after financial markets begin to heal.

First and foremost, there is the impact on the real economy. This is particularly true of the US, where income-deficient, housing-dependent consumers are caught in a vice between a cyclical erosion of labour income and the bursting of housing and credit bubbles. Add to that a steep recession of homebuilding activity, and risks have tipped decidedly to the downside for fully 78 per cent of the US economy. As a result, corporate profits should fall well below expectations, especially for the non-financial component of the S&P 500. As indicated by the recent earnings shortfall at General Electric, such optimism, in the face of recession, points to especially painful feedback effects for the stock market.

Second, there are lagged impacts on the broader global economy. In an era of globalisation, the world economy has become tightly linked through cross-border flows of trade, financial capital, information and labour. Export-led developing Asia has been a big beneficiary of the surge in global demand and world trade over the past five-and-a-half years. Now that the global business cycle has turned, Asia will have a very hard time decoupling itself from a consolidation of the US consumer.

Third, it seems quite likely that bruised and battered financial institutions will have to contend with an additional round of pressures. Until now, financial intermediaries have been hit mainly by crisis-related disruptions on the credit front. But as is typically the case with erosion on the demand side of the real economy, a cyclical deterioration in loan quality for households and businesses is coming.

Fourth, feedback effects could also hit commodity markets – the sole surviving bubble in an increasingly bubble-prone world. By now, most are convinced that commodities are in a permanent “super cycle”, with the limited expansion of supply failing to keep up with a growing appetite on the demand side of the equation sparked by commodity-intensive economies such as China and India. However, with global GDP growth in 2008-09 likely to fall well short of the near 5 per cent average pace of the past five years, a cyclical correction in the prices of oil, base metals and other non-food commodities seems likely.

Fifth, a political backlash to this crisis is likely to lead to a new wave of re-regulation. Just as the bursting of the dot-com bubble and an outbreak of corporate accounting scandals led to passage of Sarbanes-Oxley Act of 2002, US politicians now seem equally committed to a recasting of the regulatory framework governing financial markets. The US Treasury has already fired an opening salvo in what is likely to be an intense and drawn-out debate. As an added twist, look for the US Congress to rewrite the Fed’s policy mandate to make the central bank more accountable for avoiding destabilising asset bubbles in the future.

ADM Capital: What happened last year?

Asia Debt Management, one of the oldest Asian distressed debt funds, seems to have had a rather bad year last year. From what I can tell, the fund missed its 15% hurdle, and had a few senior people leave.  It seems like the top dogs stayed on, but the thirty somethings, the core of the fund business, seem to have evaporated.

Justin Ferrier ends up in Myo capital, Mary Schroeder joins Och Ziff. That leaves you with the just the 4 principals of the fund. I’m not sure which deals blew up on them, but they did some darn innovative work along the way, one of the first Indian restructurings led by a foreign party, and all sizes of stuff all over South East Asia.

Mary Schroeder

Mary Schroeder is a corporate recovery consultant with substantial experience implementing debt restructuring plans and performing forensic accounting of financially distressed companies in the U.S. and in Hong Kong. Prior to joining ADM, Mary worked for KPMG’s Corporate Turnaround Department for five years, where she was involved in the refinancing of a PRC oil refinery, liquidation of an U.S. auto parts manufacturer, and the asset sales program of a Hong Kong construction company. Prior to joining this group, she worked in KPMG’s Assurance Services Department as an auditor. Mary is a graduate of the University of Notre Dame, where she obtained double degrees in Business Administration and Chinese Studies.

Mr Christopher Botsford,

Co-founder and CEO, ADM Capital

Christopher Botsford is a co-founder of ADM Capital, CEO of ADM Capital and a member of ADM Capital’s Investment Committee. Before establishing ADM Capital, Chris ran the Asia-Pacific regional debt and derivatives operation for Republic National Bank of New York. In 1995, he was a founding board member of the Asian arm of the International Swaps and Derivatives Association, the self-governing body for the derivatives industry. Chris holds an MA and BA from Cambridge University.

Hong Kong-based hedge fund firm Myo Capital is gearing up to launch an Asian-focused fund that will focus on undervalued credit strategies.

The Myo Capital Master Fund is set to debut on April 1 with $50 million in assets under management, according to Asian Investor.  The new Asian-focused (ex-Japan) vehicle will have four sub-strategies including high-yield credit, distressed, special situations and event driven.

The new fund is being headed up by Justin Ferrier, a former director at hedge fund shop ADM Capital.

“For example, if we are looking at a distressed credit, our Thai or Indonesian analyst will provide local intelligence, while Alfred, our trader, provides the market pricing and can source the credit from a large number of participants,” Ferrier told Asian Investor.

Other principals in the fund include Geoff Lee, who previously worked with Ferrier at Peregrine Capital and will run the special situations portfolio for the new fund; and Alfred Miu, formerly with UBS’s global credit strategies group, who will run the high-yield portion of the fund. In all, there will be 12 members of the team.

The fund is targeting returns of 13-15% net, with a volatility of 7% and a Sharpe ratio of 1.5-2. To start, it will not use leverage, but add use up to 150% as time goes on. The fund has a target close of $500 million.

Merrill Lynch will serve as prime broker for the new Myo fund; Maples and Calder and Simmons & Simmons will serve as lawyers; and HSBC will be the administrator.

What does sustained high energy prices mean for the world?

Oil hits a record US$112 a barrel today or thereabouts. It’s now at its inflation adjusted high. And Goldman thinks its on track to hit U$200 barrel within two years.

What does this really mean for the world. Sure more expensive gasoline, higher air ticket prices, but how is the face of the world going to change?

The ten biggest changes are probably going to be:

1. The death of suburbia: The high cost of fuel is going to force consumers to relook allocations of monthly budgets. As the fuel bill becomes larger, long run consumer choices are going to be skewed towards shorter daily commutes, living nearer the office. Bigger cities will expand dramatically. This should be the death knell of small town middle america as high transportation costs reduce the viability of communities.

2.  The resurgence of local manufacturing for some goods. The cost of trade overall is going to increase, and fewer low value goods are going to be exported over time. Value density of exported goods will increase. Some manufacturers of low value goods are going to site them closer to their consumers.

3. A drastic increase in fuel efficiency of vehicles. Within 5 years, what the US Senate has been unable to legislate for the last 20 will occur. Consumers will naturally prefer high fuel efficiency cars. This should be the last stand of the SUV.

4. An increase in the power of oil producers: No brainer. But this is also going to lead to a world which needs to be much more sensitive to the needs of Muslim communities over all.

5. Big infrastructure projects that reduce travel time and cost which depends on oil. The Kra Canal, the Silk Road rail project, perhaps even an Artic Route from Russia to the US. Spending US$100 billion on the Kra would not seem that much if were compared to the 7-14 days saved by every ship through the Straits of Malacca for the next 100 years.

6. Increases in food prices to levels never before seen. There is going to be a tight coupling of the world’s food, energy and arable land markets. Tough choices are going to have to be made by governments and consumers on what kind of crops and for what purpose is to be planted. Food is going to take up a much larger chunk of income.

7. Decrease in disposable income, and increase in poverty. Or at least a moderation of the current trends if not a reversal. If poverty be defined as lacking access to basic necessities of food, shelter and water, then high oil prices are going to push people into poverty as the basic necessities are going to cost more.

8. Resource arbitrage. Should you use a barrel of oil of energy to produce 100 gallons of drinking water from the sea? Or to produce fertilizer. Skewed incentives on the part of governments may make one activity more profitable than the other.

Indian Distressed Opportunities

MUMBAI: India is becoming a hot destination for ‘scavenging’. Cash-rich private equity distress funds are hovering atop the $35-billion distressed asset market in the country sighting enormous wealth-creation opportunities.

According to experts, 2006 has been an eventful year for distress funds as estimated investments in non-performing assets have grown from around $1 billion in 2005 to over $1.7 billion. It has been a safer bet for private equity (PE) players investing in distressed assets as many have fair potentials of recovery and are largely secured against tangible assets including high value real estate.

“The trend kicked-off with Asian Development Bank (through its Asian Development Management Fund) investing close to $100 million in India Cements in mid-2005. We have seen a handful of sizeable deals in sectors like cement, pharma and textiles in 2006,” said Arun Natarajan of Venture Intelligence.

Year 2006 witnessed the UK-based international fund Spinnaker Capital investing Rs 125 crore in IG Petrochemicals (IGPL). According to sources, the debt of the company was around Rs 640 crore at the time of buyout. The Hyderabad-based Pennar Industries also received an aid of Rs 120 crore from Spinnaker Capital and Eight Capital in July 2006.

As per the agreement, the funds will together pick up a 27% stake in the company after 18 months, something that Spinnaker is also doing in IG Petrochemicals, where it will pick up a 14.83% stake within a year. Sanghi Cement (GE-led foreign consortium investment of $160 million), Binani Cement (JP Morgan’s investment of $57 million), Kopran (Clearwater Capital Partners Investment of $20 million) and Shetron (Citigroup investment of $10 million) were the other major PE investments in stressed assets in 2006.

Despite the restrictions, funds continue to be active, especially, on the single-credit front, where some 15 to 20 of them are said to be operational at the moment in the country. “PE players have evinced tremendous interest on distressed assets over the past two years. There is still enough space for quite a lot number of players in the sector. The sector will be more interesting to watch once private asset reconstruction companies give more opportunities to existing lenders to recoup some part of their losses,” said Siby Antony, executive trustee, Stressed Asset Stabilisation Fund, a subsidiary of IDBI Bank.

According to experts, high debt burden of takeover assets (as a result of the recession in 1990s), rise in valuation of distress assets, multiplicity of lenders while taking over and unknown and unclear liabilities of takeover assets are the challenges faced by the investors.

Gautam V Patel, vice-president, Deutsche Bank AG, said, “The initiatives taken by regulators to empower lenders with SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act) and CDR (corporate debt restructuring) system have been successful by far. But a lot more has to be done. The regulators should also allow change of management under the SARFAESI Act. We should initiate changes in the judicial process to weed out hassles of unclear liabilities and other legal wrangles.”

India - Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 - SARFAESI Act

ARCIL