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At The Market with Tetrad

Art’s grim picture of things to come

By Brian K Mugabe

OVER the past three years or so the stock market had been on a seemingly unstoppable bull run, fuelled by the now well-documente

d hyperinflationary environment against a backdrop of hugely negative real interest rates. That combination resulted in investors looking for more speculative homes for their monies in a bid at the very least, to preserve, but ideally to enhance, value. During this time then, the stock market, together with the forex, commodity and property markets, came into prominence.

Looking at the stock market specifically, the industrial index went from a lowly 46 352 points at December 31 2001 to a peak of 754 604 points on August 28 2003, a staggering 1 528% gain over the period or an annualised return of 917%. Millions, and in some cases billions, were made as investors either leveraged the embarrassingly low interest rates or used their own funds to generate fantastic returns which, unfortunately, were seldom based on production growth but on paper profits as money was effectively made out an illusion. Company earnings skyrocketed on the back of an insatiable demand for assets as the currency continued to lose both internal and external value and as business took advantage of any distortions that arose in the economy whether these constituted “core” business or not.

What a far cry from the current scenario this was! Since the peak mentioned above, the industrial index has declined significantly to this week’s Wednesday close of 350 116 points, a drop of 54%, and a 2004 decline alone of 13%. Questions of sustainability of earnings which had been casually brushed aside previously have now become highly relevant, a fact confirmed by the publication of negative profit warnings by hitherto strong performers Art and PGI.

Art advised shareholders that the group’s results for the first half of the year were expected to be well below last year’s level. This position had arisen from the significant changes in the operating environment which have negatively impacted on its performance. While details of these significant changes were deferred to the publication of its half year results, it is likely that these revolved around the negative impact of the blend rate then being received by exporters which resulted in most of its exports being conducted at a loss, revaluation of export debtors to reflect the lower blend rate and the punitive tariffs that have so far been charged by Zesa. Falling local demand also played a role in the expected poor performance. PGI’s statement also drew attention to “drastic” changes in the economic environment in the first quarter of the year which have had a severe impact on most business sectors. Initial collapse of domestic demand and “chronically” high interest rates allied with the banking crisis had presented significant challenges. Given these conditions, the company had not escaped the adverse trading conditions and experienced a material reversal of previous trends in the first quarter of the year. As such, the company’s year-end financial performance to March 31 was now expected to be significantly below earlier expectations. Nevertheless, directors and management were in the process of implementing strategies designed to reduce the impact of these adverse business conditions. In both the case of Art and PGI, shareholders were advised to exercise caution in dealing with their shares.

From these two cautionaries it is probably fairly safe to deduce that earnings expectations have to come right down for many companies and that while valuations, particularly on a forward price/earnings basis, may suggest a cheap market a lot of the market’s projected earnings may indeed be greatly overly optimistic. Under these conditions one finds it rather difficult to foresee a short to medium term, sustainable, recovery for the stock market, though once the full impact of this week’s monetary policy quarterly review has been assessed, sentiment towards equities may see some improvement. While both the above profit warnings may have harboured nothing but negative news the boards of both companies must be commended for timeously updating shareholders on the material downturn of their businesses, thereby providing a refreshing change from the usual surprises that creep up on shareholders when share prices suddenly just drop. As always, we hope this ushers in a new era of corporate governance in the country as regards adequate and regular disclosure by listed companies to their stakeholders. Lastly this week we look at the quarterly production report published in the press by Rio Tinto Zimbabwe on Wednesday.

The first quarter of 2004 saw total gold produced declining by 19% to 5 230 ounces. This compared with 6 480 ounces in the first quarter of 2003. This was partly due to the closure of Patchway Mine in 2003, figures of which were included in last year’s figure, but despite that, the remaining Renco Mine operations recorded a decline of 4% as the increase in ore treated of 61 089 tonnes, from 49 147 tonnes, did not translate into an increase in gold produced as the ore grade deteriorated.

Positively, however, nickel production for the company recorded a significant increase with the first quarter production having reached 1 733 tonnes, 61% above the 1 078 tonnes realised in the comparable period of 2003.

The mining industry as a whole, and the gold mining sector in particular, has long borne the brunt of inconsistent pricing and inappropriate exchange rate policies that have kept it on the fence in terms of whether the mining houses making up the industry could continue to operate as going concerns. Like every other industry it no doubt awaits the quarterly monetary policy statement with bated breath as all look for light at the end of what may turn out to be a very long tunnel.

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