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J#41: My thoughts on how to treat ‘money’ for what it is, realizing a 5.7% gain in Gazprom, and how you’ve just got to love Jupiter Mines.

Gazprom Refinery in Moscow

A while back, we took a virtual trip to Russia via journal #38. I was talking about a Russian company that the Double Digit Dividends Fund purchased for reasons I explained in the journal.  That company is Gazprom (PJSC:LSE). It’s a Russian integrated energy company, and we had bought US$199,988 worth of Global Depository Receipts (GDRs) in Gazprom on 18th of May. We did so on the expectation that their dividend yield would soar from a mere 4.8% to 10.2% next year. 

These GDRs enable the Fund to obtain exposure to Gazprom via the London Stock Exchange.  GDRs are a foreign-traded instrument that offer exposure to Gazprom’s ordinary shares, providing for the free floating of the Company’s shares on international stock markets.

Both HSBC and Goldman Sachs were bullish on Gazprom’s earnings forecasts.  We followed their recommendations and as with all our investments, we set out a strategy of when to enter and when to exit a trade. For ease of reference, I’ve reproduced it below:

  1. Invest in the company. We have acted! We deployed fifteen percent (15%) of our current assets under management to buy this investment.
  2. Wait for the next dividend announcement. The company pays an annual dividend and historically, the announcement date is in June each year, so we do not have too long to wait.
  3. We should, at a minimum, expect to receive a 4.8% yield based on the current yield. This is my downside risk expectation.  More likely, the dividend for 2020 will be hiked.
  4. Expect a yield heading towards 10.2% by June next year. My expectations are supported by Goldman Sachs and HSBC’s earnings and dividend estimates, among others.

If next month’s dividend declaration is headed in the right direction, we will simply hold the investment.  If next month’s dividend announcement is disappointing, we will sell our holdings, and hopefully, ceteris paribus, pocket a yield of 4.8%.

We have done steps 1 and 2, and as expected, on the 10th of June, Gazprom approved dividends of 12.55 rubles per share during their AGM (or 25.1 rubles per GDR, as one GDR represents 2 Gazprom shares).  With our purchase price of USD 6.92, it would have resulted in a yield of 4.0%, a tad short of our expected 4.8% and our downside risk expectations. 

Gazprom also announced that they expected earnings to rise by 50% this year, details of which can be read here.  Whilst a 50% rise in earnings is impressive, we need a DOUBLE in the company’s earnings (as forecasted by Goldman Sachs) for a double-digit dividend yield to be possible for next year.  

Accordingly, we stuck to our exit strategy and we SOLD our entire position in Gazprom on 21st June for USD 212,371.  We saw the opportunity to realize a 5.7% capital gain and acted on it rather than wait for the 4% dividend to be paid.

The sale resulted in USD 11,446 in profits (or a 5.7% gain) after execution fees.

Not too bad for a position we only held for 2 months.  —  Trade confirmations of our purchase and sale of Gazprom are produced below.

The monies from the sale were immediately reinvested into our other holdings. More on that in upcoming journals.

Now let’s look at Jupiter Mines and other holdings in our Double Digit Dividends Fund.

Jupiter Mines: 

I called this stock “Jumping Jupiter” in my recommendation, almost exactly a year ago because of its soaring dividend yields (17%).

To refresh our memories, Jupiter Mines is the visionary Aussie miner (ASX: JMS) that, just like us here at Double Digit Dividends, searched for rich opportunities along roads not normally taken.  Back in 2007 the company secured a 49.9% stake in a company that managed to acquire mining rights to the largest single manganese mine in South Africa.  To date, over 60% of its market capitalization upon listing on the ASX has been paid back to shareholders by way of dividends over four years.  That is a bragging right that few companies have!

You might think, why manganese? As you might be aware, this metal is a key component in steel making.  A 5-year chart of iron ore and manganese prices is provided below. Although there is a low correlation between iron ore and manganese prices, with the strong (and record high) iron ore price and demand, the case for manganese demand being supportive can be made.  

Iron Ore and Manganese historical chart
Source: https://tradingeconomics.com/commodity/iron-ore

I have been following this company since I recommended it in July last year, and have been giving you updates which you can find here and here.

With the newly established Interactive Brokers account for the Double Digit Dividends Fund, we have acquired A$286,425 worth of shares in Jupiter or about 12% of our Assets Under Management.  A copy of Interactive Brokers’ Trade Confirmation Report is provided below.

We remain a buyer of Jupiter (up to a price of AUD0.35 per share) based on the following:

Reason 1:  The Chairman has, for the third time, increased his holdings In Jupiter.

As I wrote before, whenever a Chairman invests his own money, it shows how confident he is about the future of the company.  It also strengthens the alignment of his interests with those of other shareholders. 

Well, the Chairman, Brian Gilbertson, has recently bought another AUD999,000 worth of shares.  The Australian Securities Exchange (‘ASX’) announcement can be read here.  He now holds 24.8 million shares or 1.2% of Jupiter.

Reason 2:  Jupiter Paid out $58.8 million in dividends despite 2020 being a tough year.  It currently has a trailing yield of 10.1%. 

At the time of writing, Jupiter shares are trading at AUD0.30, and therefore remain a strong BUY (we recommend a buy up to AUD0.35).

Source: MarketWatch (1 year chart)

Jupiter had its share of Covid-related restrictions when the South African government imposed a lockdown on mines from the 26th of March last year. After a little over a month, it was able to resume operations at the beginning of May, but the company also faced challenges due to excessive rainfall and flooding in its pit.

Even with the temporary hiccups in its operations, the company ended its financial year 2021 in February with sales slightly up compared to the previous year (3.42 tonnes of ore versus 3.41). Manganese prices were down, but Jupiter managed to pay out $58.8 million in dividends (with a current yield of 10.1%).  As the dividends are classed as ‘conduit foreign income’, there are no withholding taxes for the Double Digit Dividends Fund and other investors who are not Australian resident taxpayers.

Reason 3:  The company has done what it said it would do and demerged the Central Yilgarn iron ore assets and provided Jupiter shareholders with a special dividend.

The special dividend was by way of a demerger and an in-specie distribution of Jupiter’s Central Yilgarn Iron Ore Assets to an entity listed on the Australian Securities Exchange (‘ASX’) called Juno Minerals Limited.

On 7 May 2021, Jupiter completed the demerger.  Juno is no longer is a wholly owned subsidiary of Jupiter but Jupiter’s shareholders automatically owned Juno Minerals by receiving 1 Juno share for every 16.325 Jupiter shares they held on the ex-distribution date.

This was not an easy task.  The demerger, at one stage, was halted as a major shareholder of Jupiter, Stichting Pensioenfonds ABP (‘ABP’), which did not meet the regulatory requirements of the Foreign Investment Review Board (FIRB’), said it did not wish to submit to FIRB requirements.  Jupiter’s solution was simple — Jupiter’s other major shareholder, Ntsimbintle Holdings, bought out ABP’s shareholding.  This is a good example of how fast and how determined Jupiter’s management is in enhancing shareholder value.  They do what they say they will!

Jupiter Mines Limited Annual Report 2021
Click on the image to read the latest annual report

Note: If you bought Jupiter Mines after I recommended it and had received your shares in Juno Minerals Limited, my recommendation is for you to SELL Juno Minerals.

Juno historical chart
Source: ASX.com

That’s because Juno as an investment is inconsistent with our mandate – it does not provide a dividend.  Juno’s share price chart since the demerger is reproduced here.  Its price has not materially changed since the demerger and hence you should not book a material gain or loss. 

Many people have said to me they are wary of investing in Jupiter Mines, because they – like the rest of the world – can see that South Africa has all sorts of challenges as a country.

Indeed, last week, an alleged insurrection attempt by the children of jailed former President Jacob Zuma, and the Economic Freedom Fighters (EFF) a militant off-shoot of the African National Congress (ANC) which has ruled South Africa since the end of apartheid, exploded onto TV screens and internet feeds all over the world. Widespread looting in certain parts of the country aimed at destroying the food distribution chain and denying the availability of food to the populace took place. The situation has since calmed down, but people remain on edge.

In this context it is important to note that Jupiter’s operations were not affected. It operates in the sparsely populated Northern Cape region. It serves export markets. And, most of its ore is ore is shipped out via ports other than Durban, and Richards Bay which are located in the state of KwaZulu Natal, which was a flashpoint for the riots and looting.

In short, I am not concerned by the political situation in South Africa as it pertains to Jupiter. Indeed, the stock price was unmoved by the violence we sadly witnessed last week. 

Other Updates: 2 new investments made by the Double Digit Dividends Fund

Both investments are China-based businesses and with their inclusion, our portfolio gets further diversification.  One of the investments is a machinery manufacturer that is essential to China’s infrastructure build-out, the one-belt one-road initiative, and the company exports products to over 40 countries.  The other investment is a manufacturer of coke (the fuel mainly used in iron ore smelting during steel making) and coking coal by-products.

Message for My Children

This is now my 40th journal and up to this point, I have not had the chance to discuss with you the importance and role of money in our lives.  It would be irresponsible of me, as any parent, to not talk about it. 

I started writing these journals to document my own financial journey and to encourage or motivate you, my children, to become financially independent.

Money, at times, makes people behave in peculiar ways.  It can be very destructive if you do not have a grasp of what it can do, how you relate to it, and what it can do to people you interact with. 

I have been in three protracted legal cases (these things take years to be resolved) in Malaysia, Singapore and Australia helping family members on ‘money matters’.  They (and I) are battle hardened and we fought the legal fights that needed to be fought.  Often, the road of kindness (sic, not the “road to kindness”) had to be repaved by establishing ‘boundaries’ pertaining to how people should behave, as money had taken control of their personal ‘values’.  

I have also seen friendships jeopardized by ‘friends’ developing a nasty habit of not being willing to pay for their cup of coffee during periodic get-togethers, marriages broken due to perceived insecurities over money, and business deals lost over the failure to foot the bill of a business lunch.  I have also seen peoples’ physical and mental health be ‘eaten from within themselves’ when a large portion of their financial worth was lost through a failed business investment.  To reiterate the above:

 Money, at times, makes people behave in peculiar ways.  It can be very destructive if you do not have a grasp of what it can do, how you relate to it and what it can do to people you interact with.

Christians and non-Christians often quote the phrase “The love of money is the root of all evil.”  The phrase is from the Bible’s New Testament, 1 Timothy 6:11.  Mark Twain countered this statement by saying, “The lack of money is the root of all evil.” And there is truth to that too (Mark Twain is a clever cookie, isn’t he?).

In both situations, money can take control of people. What is important is that you treat money for what it is, that is:

Money is just a commodity and it should not become your master and equally you should not be a slave to it.

Without enough money you will not have the capability to do what you want in life.   Should you have a sufficient amount of money it would be fool-hardy of you not to take advantage of that blessing to actually do what you want in life.  After all, true wealth, and the key to happiness, are the relationships you build and the memories and lessons you make.  This is far more valuable than those digits on your bank account.  My business partner, Tim, often quotes Rita Brown as she said it succinctly:

“Happiness is pretty simple: 

someone to love,
something to do, and
something to look forward to.“

Nowhere in Rita Brown’s quote is there mention of the digits in your bank statement.

Another interesting aspect about the correlation between money and people’s behavior can be seen in this  video from the BBC.  Statistically, the more money people have, the less connected they become to others and themselves. But it is not always that way and it does not have to be.  Your father is fortunate to have met wealthy people during my career and some of them are very well-grounded and connected to the community. It is important to surround yourself with these types of individuals.

Your grandfather, I believe, had a similar view about ‘money’.  After all, when he had enough to be financially independent, he decided to quit his high-profile career as a prominent politician in Malaysia, an accountant and land developer. He retired at the age of 48 to migrate to Australia and focus on his children.  He would from time to time say, “family first, and do not be possessed by your possessions.”  You can read more about your grandfather here.

In summary, my two children, remember that it is important to strive to be financially independent and to treat money for what it is – it is simply a commodity, and, it can be a dangerous and destructive commodity if not managed well.  At all times you should be the master of money and never be its slave!