Taking stock: George Media meets Noah Greenhill

There is an African saying, “do not measure the timbers for your house in the forest,” which can be aptly applied to many of the small- and medium-sized companies listed on the Johannesburg Stock Exchange (JSE) today. The application of such advice, in moving past historically westernized investment philosophies and addressing the abundance of news reports that regularly change tact on whether or not these companies are set for success, is a thoughtful one. GM’s meeting with Noah Greenhill, head of marketing and business development for the JSE, offers valuable insight into how and how not to judge an exchange’s merits based upon the moves of the companies listed on it. As Greenhill rightly says, when it comes to listing assets in Africa, “a lot of excuses are often put on the table; exchange control, nationalization, and others.”

“My response to those? The assets, the minerals and the commodities are in Africa,” Greenhill says.
“Foreign shareholders should of course participate in the upside of those resources, but as Africans and South Africans we also want to participate. It is our responsibility to partner strategically so that we can all benefit from the upside.”

The JSE is taking its responsibility very seriously and the results, including a strong base of resources companies listed and a flurry of success stories in 2010, are clearly defined. In the wake of a highly promising Mining INDABA 2011, Greenhill talks to GM about what is on offer for companies on the JSE today, how the buyer/seller relationship ought to be judged amidst speculation on how healthy the exchange is and hints at the wealth of opportunities and good news to look forward to from the exchange in 2011.

George Media: Let’s begin by looking at why the JSE is an attractive option for resource companies considering listing or dual listing with the exchange today? What are the draws here and what portion do they make up of the total exchange?

Noah Greenhill: There are around 70 companies in the resource space listed on the JSE. That is out of 406-odd companies. The interesting thing is that the combined market capitalization of the JSE is about R6,5 trillion and the resource companies make up about 30 per cent of that. It’s quite significant. The challenge is that of those 70-odd companies, around seven account for about 95 per cent of that 30 per cent. The other five per cent is made up of the smaller companies and you can look at that negatively, or remember that every single large company was once a small company.

Let’s never forget that every producing mine today was once an exploration company. You have to have both [types of companies] in my view to maximize the value you give to shareholders or potential shareholders. On the one hand you want the majority of your portfolio in blue chip producing mines, but you also want the alpha opportunity in the exploration/junior mining space. We have only been in a position over the last four or five years to be able to offer junior mining companies with owners outside of Africa, the opportunity of dual-listing within South Africa. Prior to four or five years ago, a lot of assets were owned by foreign shareholders, such as from England, Australia and Canada, and they were listed on their domestic exchange without the possibility to list on the JSE—purely down to our exchange control requirements. That has been relaxed and now we can list and dual-list foreign-owned company on the JSE. We started to see a bit more traction in these companies coming to Africa to list.

We were rated, according to the World Economic Forum’s competitive survey that they do every year, No. 1 in terms of securities regulations out of 132 countries. We’re a world class stock exchange. We’re liquid and the rules and regulations are world class, as is our settlement and surveillance. We really have an incredible value proposition.

GM: With this in mind, how do you account for the current state of demand for miners listing their assets on the JSE?

N.G: Often the challenge is not the exchange, but the access to capital and that’s where one of our challenges has been. Prior to 1994 we were a closed economy, and at that time all of the large mining houses held all of the exploration assets. Investment in South Africa didn’t actually have to take exploration risk—that was taken by the mining house. Juxtapose that with the investment philosophy of the English, Canadians and Australians who were taking direct exploration risk: They understood it and the risks associated with it. Our economy has since opened up and we’re playing catch up in educating our fund managers and investors that exploration by its nature is risky. Out of 10 investments, six will fail miserably, two will be average and might result in something, and two will fly. Theoretically the two that fly should make up for the other eight. It takes time and effort to educate the money about this investment philosophy and the way to look at these types of companies. That’s always a challenge.

GM: I read recently that in reference to new listings share performance on the JSE and the critics who point out that few are trading at a premium to listing price, you say it is wrong to look short-term, and we ought to consider them long-term undertakings. Please can you tell me a bit about the perception issues here?

N.G: Certainly with new listings, and certainly in the hot IPO period, there’s a tendency towards a view of instant gratification. There’s a will to invest a rand and take five rand out by the end of the day. That’s a function of hot IPO periods and listing should not be about share price on Day 1—it’s a long-term strategic initiative. It’s about raising capital to achieve what you set out to, certainly in the short-term, and capital might not be the only rationale. It could also be profile, BEE, succession planning and a whole host of reasons. If the multiple is the criteria you use to determine whether or not you should list, I think it is important and you have to put a number to the value of your business, but giving up a little bit on the listing to maximize the value in X period of time is logical.

From an investor perspective yes, you can come in and stag new listings and exploration-type companies, but you have to understand that as staging, not investing. Investing is buying the company—not the share. Understand what they do. Understand who the management are. Understand where they’re actually exploring. All of the investment criteria to make an informed investment decision must be considered and acted on. By acting on it, not buying is also an action decision.

GM: As we go to press, the JSE has enjoyed some strong commodity prices over the past week and analysts have notes that it is these which will ‘sustain’ the exchange, rather than local retail stocks. What are your thoughts on these speculations?

N.G: I think it’s very difficult to define one thing as being behind the sustenance of companies and/or a market. There are so many factors at play. High commodity prices, producing mines love. Consumers of the goods think, this is starting to get expensive. It’s Newton’s Law; for every action there is an equal and opposite reaction. Defining one act and/or attributable factor to what is driving the market is wrong. Ceteris paribus never really applies—only in textbooks.

TABJ: You have come fresh from Mining INDABA 2011 which, of course, anyone mindful of investing in African mining has been watching intently. How have you found this year’s meet and what has the JSE’s message been throughout?

N.G: I think that INDABA was one of the most positive events I’ve been to in some years. Certainly compared to two years ago it is remarkably more positive. In fact, it borders on frenzy really. The analogy I’ve made is akin to after a lion kills its prey and all of the females come to eat. They’re all there chewing and getting at the prey. That’s what this year’s INDABA was like: everyone is excited and looking for those opportunities. That’s a good thing, of course at the same time over exuberance is never a good thing. It can sometimes result in disaster when people get stupid with asset pricing, and purchasing. It is a function behind justifying high commodity prices which means real commercial rationale for doing a transaction goes out of the window.

Our philosophy at the JSE is quality over quantity. We’ve never been an exchange to encourage people to list because it’s quick, easy or cheap. We’re much more about quality play. If you want to list on the JSE we would love to have you, but we also want to understand your business model, the value you will bring to the exchange, to South Africa, to see the listing raising capital to create liquidity in South Africa and to see the listing is for the right reasons. We certainly wouldn’t turn anybody away if they met the listing requirements, but we really like to engage with companies as to the rationale for listing with us. We’ve had some very successful listings. Last year we had Optimum Coal (JSE: OPT) which has been great. We’ve had Royal Bafokeng Platinum (JSE: RBPlat) which has been another great listing. We’ve had less good listings, but due to the share price being under pressure and that’s a function of the market. For every seller there has to be a buyer on the other end of the transaction to pick up the stock, else the share price won’t move.

GM: As your Equity Market Overview for 2010 states, the past year has been a time of increased global uncertainly throughout the world’s exchanges in many respects, but there are a number of aspects for which the JSE will be remembered positively. Let’s look at some of these.

N.G: Trading volume has gone up. The listings of companies have included some really large companies on the JSE. The derivatives market has been further consolidated and real strides have been made in putting real trade on the market rather than being reported to the market. We are consolidating the interest market, so from a JSE holistic perspective we’re really making our value proposition more and more efficient. We’re one of a handful of worldwide exchanges that is able to offer this suite of products—not just spot equities, but spot equities, derivatives, commodity derivatives, financial derivatives, interest rate derivatives and currency derivatives.

GM: Side-stepping from focusing exclusively on resources and the JSE, let’s talk a bit about how healthy your AltX board, designed for small to medium-sized companies and developed and launched by you in 2003. AltX is getting a lot of attention right now, some good, some less so. Perhaps you can clarify for us.
N.G: It is a product diversification play and like any business or product, or walking into a bank which has a silver, gold and platinum account, there’s certain criteria to meet to procure a given product and each offers a different value proposition. It’s the same with the JSE. We have our main board for large companies and AltX for small to medium companies—it’s about appropriateness.

There have been reports speculating on AltX’s success, but what are the criteria for that? If the criteria for success is index value, that’s a function of supply and demand and that’s out of our control. Looking at deeper success attributes, in my view, you have to look at the fundamentals of the businesses listed there. Again a market by its very nature, whichever it is, will have companies that fail. Not every single company on the NYSE is a resounding success and we should be comfortable with that fact for any market. We must not attribute the failure of a company to a listing either. A listing enables a whole host of things within a company and that’s the rationale for coming to the market—you raise the capital. If for some reason you squander the capital, that’s not a function of the listing. That’s not a function of AltX; it’s a function of poor management.

It’s important to look at the success stories and the company that have achieved what they set out to do. I think that the majority of companies that are on AltX, notwithstanding the fact that their share price might be under pressure, have on the whole been able to achieve what they needed to grow, to acquire other assets. Of course some haven’t done so well, but harping on the odd failures will prevent us from progressing at all. Smaller companies are where large companies come from. Microsoft and Google were not the size they are today on Day 1. Somebody took risk with those companies.

GM: Thank you for explaining that part. Now onto the future for the JSE and the exchange’s plans for 2011. What are the exchange’s core focuses for the coming months?

N.G: We’re very focused on our technology infrastructure and the strategy around that. Then of course it’s business as usual. Our mantra at the JSE is that there are two parties that count: the issuer and the investor. It’s not just the issuer of shares, or in other words companies, it’s the issuer of bonds, derivatives—whatever the case may be. We’re the intermediary and we have to add value to both sides of that value chain. If we’re not doing that we shouldn’t be in that space, and our objective is to ensure that the JSE finds value there.   

George Media thanks Noah Greenhill of the JSE and Victoria Williams and Kamantha Pillay, both of Corporate Communications Consultants (CorpCom) South Africa, for their assistance with this feature.