Friday 3 July 2015

African Gold! (Portfolio Buy)

Having become a bit disillusioned with the performance of my 'high yield' Exchange Traded Funds (ETFs) in the DIY Income Investor portfolio, I've decided - for the moment - to go back to doing what I seem to have done best: buying individual high-yield securities.

This time, I'm back to dividend shares, although these are slightly over-represented in the portfolio (which is intended to be split broadly 50/50 between dividend shares and fixed-income securities of different types).

I wish I could say that I put a lot of work into choosing what I buy, because that would make me sound more like a 'serious' investor. I used to, but now I am a lot more relaxed about it. In any case, the short-list of potential 'buys' more or less selects itself.

I now use the free Google Finance Screener, setting up the following criteria:
  • United Kingdom
  • Yield between around 5% and 15%
  • P/E under 20
I would guess that this eliminates around 90% of shares quoted on the London Stock Exchange. But it usually gives me about 100 quoted shares which I can then rank in order of yield on the screen. Ignoring VCTs and Investment Trusts, that gives me a handful of companies to look at in more detail (usually including a couple that I hold already - this corner of the market is not very large!).

Then comes that bit that makes or loses money: looking for a reassuring story. My investment approach is based on the observation that high yield goes together with high risk: in other words, the Market has decided, for some reason, that it does not like the companies. Inevitably, some of these high-yield shares are going down the toilet.

But most - in my experience - aren't basket cases. In fact most of them restructure, regroup, refinance and recover. The share price rises again, the yield falls - then you sell and make a nice capital gain. In the meantime you have picked up a nice dividend for your patience.

Back to the search for a reassuring story, in particular, one without a fatal flaw. Company management always want to put a good spin on results, but reporting requirements being what they are, there is usually quite a lot of information in the Annual Reports and Trading Updates. So this is where you need to spend a little bit of time:
  • can you identify what the key problem was that scared the Market?
  • has the company faced up to this problem and are they doing something about it?
  • do they have medium-term financing? (i.e. are the banks likely to pull the plug?)
  • is the company large enough/rich enough to weather the storm?
  • beyond the immediate problem, is there something interesting for the future in the pipeline?
  • how is cashflow looking?
  • using your own appreciation of global trends, is this a good business to be in?
  • has the price recently dropped? (and stabilised?)
  • how strong is the company's commitment to maintaining the dividend?

Most companies I look at fail one of more of these tests, so I guess I am quite selective. I do still make mistakes, of course - but not so many.

It sounds a lot of work written down like that, but it really isn't. For example, my latest purchase - which was quite substantial - was done in half an hour or so (in bed, I'm embarrassed to say, like all of my investment!).

The latest addition to the DIY Income Investor portfolio is new to me: Pan African Resources (LSE:PAF), which has a current yield of 8.4% and a forecast yield of 7.7%, plus a P/E of around 10.  The price has fallen significantly in the last month.

To quote Google Finance: "Pan African Resources PLC (Pan African) is a South-Africa based gold mining and exploration Company. The Company focuses on exploitation of high grade ore-bodies that yield high margins with a low cash cost base through experienced management teams." The Company’s operations include two gold mines and one platinum mine in South Africa.

I'm not a big fan of gold as an investment (after all, it just sits there) - but I don't mind owning a bit of a gold mine, as long as they pay me to hold the shares. [I did hold African Barrick Gold (LSE:ABG) - now called Acacia Mining (LSE:ACA), and now with a rubbish yield - for a while, but didn't like the price fluctuations (linked to the gold price) and sold out (apparantly too soon).]

The Trading Statement issued 8 June 2015 provides an up-to-date picture of what is going on:
  • currency fluctuations are responsible for a 6% negative swing in results
  • EPS is expected to be 40-60% down on the previous year, due to a temporary low-grade ore cycle and technical issues at one plant
  • however there are good results from recent exploration work at an existing mine
  • long-term financing is in place
  • agreement to buy an existing, operating colliery (providing some product diversification)
  • "The Company’s progressive dividend policy is expected to be unaffected by the trading statement and acquisition referred to in this announcement."
In a separate announcement, a major shareholding by China Investment Corporation is identified - the new move to acquire a coal mine is perhaps eyeing that market?

So, this ticks my selection boxes - plus I don't have much in the portfolio from South Africa. And this emphasis on raw materials is in line with my current big bet on Anglo-Pacific Group (LSE:APF), which specialises in mining royalties.

[Purchase price £0.0955 - I now own literally tens of thousands of shares!]

I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.


  1. An interesting buy. I had not bumped into this company before. I may take a better look at it if I get the time.

    That being said, I am not a big fan of gold miners at present. But, if gold prices drop even lower, I may make a modest push in that direction as a gold proxy. We will see. Good luck with it!

  2. Well, it dropped about 10% since your purchase, and the Greek business may shortly be resolved, which is why I bought some this morn. Perhaps our boats will rise on the tide as well. Or not. I was surprised that you ever went for African Barrick Gold - not your style at all, I thought. I did make a couple of quid on it but it always seemed like horse racing, with the price whizzing up and down for no obvious reason. Let's hope APF soon recovers from its market beating..

    Happy punting!

  3. Having lost a fair whack (on paper) on various mining type shares and funds since the fall in commodities prices, I am pleased you see your confidence in this sector now with your latest purchase. I suppose I too still maintain some confidence, as otherwise I should have sold all those losers. The main point that sprung to mind with this company was the "South African platinum mining" aspect which I associate with violent striking miners and gun firing police...Maybe that's one of the reasons why I drifted away from individual share picking to passive investing.

    Your blog is always thought provoking and helpful with my own decision making.

  4. Brave Buy. Google screen now shows a yield of 11.61% and a p/e of 8.51 whilst the share price now sits at 7p. Gold and Platinum falling too.

  5. Gold recovering recently. ZAR too against GBP but dividend has been cut. Still comfortable with your investment?

  6. Gold rallying strongly recently. Divi has been reduced here recently. You still comfortable with your investment?

  7. Enormous blog you individuals have made there, I entirely appreciate the work.