26 JULY 1968, Page 28

loch der Kaiser!


The London market is getting very excited about Kaiser Steel, an American West Coast steel producer. What has suddenly been noticed is that its 36 per cent holding in Hamersley Holdings, the Australian iron mining group, is, so to speak, in the present share price for free. Kaiser Steel currently stands at $75 to $80 a share (New York price), whereas its holdings in Hamersley is worth $93 per share. And at $75 to $80 Kaiser is selling at 13.5 times its earn- ings from steel production, which is about average for that kind of company. Thus even if you add in the dollar premium (now around 40 per cent), which takes the share price up to $109, you are in effect paying $93 for Hamersley and only $16 for Kaiser Steel earnings of $5.70 a share. Finally, just to complete this shortened form of the case for Kaiser Steel, I must get out of the way the confusion which the London prices for American stocks always cause. In London the Kaiser Steel price is $230, calcu- lated as it is in a curious denomination known as 'dummy dollars' which pre-dates the last two devaluations and which includes the dollar premium.

The key to this situation is Hamersley Hold- ings. Kaiser Steel is worth the dollar premium only because Hamersley Holdings has such dazzling growth prospects. For readers who have not been following this part of the Aus- tralian mining saga, I will go back to the beginning. In early 1961 Rio Tinto Mining Company of Australia was told of vast quan- tities of a relatively low-grade iron ore in the Hamersley range of mountains, some 650 miles north-east of Perth. In 1962 Rio Tinto joined forces in Australian with Consolidated Zinc to form Conzinc RioTinto of Australia (caA). It was a CRA team which found in September 1962 the massive deposits later named Mount Tom Price. At this point Kaiser Steel was in- vited in (to be followed later by the public). Present shareholdings in the company (Homers- ley) which was formed to exploit the ore are : CRA 54 per cent (which has put much of the steam behind the Rio Tinto Zinc price in which I already have a stake through my first portfolio), Kaiser Steel 36 per cent and the public shareholders 10 per cent. In 1964 Hamersley signed the first of a series of letters of intent with seven Japanese steel mills for the supply of 65.5 million tons of iron ore. By 6 August 1966 the first ship was loaded, a port and railway line having been built for the purpose.

Hamersley has three types of operation under way or in prospect. The first and simplest is the production of iron ore which, after crush- ing and screening, can be charged directly into blast furnaces. The second variation is to pro- cess the ore into iron-oxide pellets (first ship- ment April 1968). The third stage will be to turn the ore into semi-finished steel at Hamersley, so that steel-makers can halve the weight of their purchases for the same output of finished steel.

What does this mean in terms of profits? Stockbrokers Myers and Company have done some calculations. On present output estimates and conservative estimates of operating costs, pre-tax profits stand to rise from $Al2.4 mil- lion in 1967 to $A23.4 million this year, to $A65 million in 1970 and to $A132 million in 1973. That is looking a long way ahead, but with mining operations geared to long-term contracts it is possible to do so. At $A14.40, the Hamersley share price itself is fully abreast of developments, selling as it does at eighty- five times 1968 earnings and twenty-nine times likely earnings in 1970 This is why there is such charm in investing in Hamersley through Kaiser Steel. The Kaiser Steel price scarcely reflects the investment in Hamersley. When American analysts, who have not fellowed the potential in Australia as closely as we have here, wake up to the situa- tion, I expect Kaiser Steel to move sharply ahead.

I have therefore bought fifteen shares at $106.50 each, including the dollar premium (or at $230 London dummy dollars). These shares are very 'heavy' for British investors. This should not deter. I am putting Kaiser into my second 'speculative' portfolio.

Valuation at 24 July 1968

First portfolio £6,453 (details next week)

Second portfolio 600 Pillar Holdings at 15s 6d £465 500 Negretti and Zambra 'A' at 16s .. £400 700 Gallaher at 30s 6d £1,067 15 Kaiser Steel at $106.50 £660 Cash in hand .. £2,804 £5,396 Deduct: expenses £93 £5,303