With Grant Williams Uranium Shares Will Go Critical Mr. McGuire: I want to say one word to you. Just one word. INSIDE: Benjamin: Yes, sir. ISSUE 3 • October 2012

Mr. McGuire: Are you listening? Introduction ...... 1 Benjamin: Yes, I am. Under The Radar ...... 10 Wrap-Up ...... 20 Mr. McGuire: Plastics. Benjamin: Exactly how do you mean? Mr. McGuire: There’s a great future in plastics. Think about it. Will you think about it?

© Copyright Mauldin Economics. Unauthorized disclosure prohibited. Use of content subject to terms of use stated on last page. BULL’S EYE INVESTOR OCTOBER 2012 Sandwiched between the Pearl River Delta and the South China Sea lies one of two Chinese Special Administrative Regions (SAR). It measures all of 426 square miles – roughly a third the size of Rhode Island; however, whilst Rhode Island plays home to one million people, making it the second most densely populated state in America, the Hong Kong SAR crams 7 million people within its borders, which makes it the fourth most densely populated country on earth. Hong Kong is split into three well-defined areas: Kowloon; the New Territories, which extend from the coast of mainland China inland by some 15 miles; and Hong Kong Island, home to one of the world’s most spectacular cityscapes and a thriving business and trading centre which has grown up around one of the best natural harbours in the world. (The name Hong Kong actually translates as ‘Fragrant Harbour’, but believe me – I can tell you, having lived there for three years – it is anything but fragrant.) Hong Kong Island was colonized by the British after the first Opium War (1839-1842), and the boundaries of the colony were slowly extended inland, encompassing the Kowloon Peninsula and what are now known as the New Territories. Apart from a brief spell under Japanese occupation during WWII, Britain ruled Hong Kong until 1997. In that year, as a result of the Sino-British Joint Declaration signed by Margaret Thatcher and Deng Xiaoping in December 1984, Hong Kong was returned to Chinese rule after 156 years. Included in the Sino-British Joint Declaration were the establishment of HK’s SAR status and the implementation of the principle of ‘one country, two systems’, to ensure that Hong Kong’s capitalist model would endure and that it would remain outside the PRC’s socialist system for fifty years. In 1928, the city of Chaozhou (pronounced “chew-chow”) in Guangdong Province in mainland China would have seemed just about the most unlikely place in the world for a boy to be born who would grow up to become Asia’s richest person some 84 years later (and the ninth-richest person in the world); but, on June 13 of that year, that is exactly what happened, when Li Ka-shing entered the world. This boy would grow to become not only fabulously wealthy but also incredibly powerful and deeply respected throughout Asia for his philanthropic donations. Forced to leave school at 15 after the death of his father in Hong Kong, Li secured a job in a plastics factory and worked grueling 16-hour days to support his family whilst saving money in order to start his own business. By 1950, Li had acquired enough knowledge to start his own plastics manufacturing company – though he needed to borrow money from friends and family in order to do so – and he embarked upon a career that would prove the words of Mr. Braddock to be eerily profound: there really was a great future in plastics. How great? Well, there is no better illustration than the remarkable rise of Li Ka-shing. Li’s first products were high-quality, low-cost plastic flowers. After Li learned how to mix colours in such a way as to make his flowers highly realistic, his company grew to be the largest supplier of plastic flowers in Asia. It was this seemingly simple business idea that set Li on his way to a net worth of over US$25 billion. Yes, there really was a future in plastics. In 1958, the lease on Li’s factory site expired. Unable to secure an extension, he was forced to buy and develop a new site for his plant; and it was this experience that persuaded him that there was an even more lucrative future in real estate.

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In 1967, Hong Kong saw a series of pro-communist riots that escalated to the point where armed militia were firing on HK police officers in the streets at Sha Tau Kok, in the northeast corner of Hong Kong, near the border with mainland China. At the height of the rioting, thousands fled Hong Kong and property prices plummeted. Flush with cash from his thriving plastics business, Li was able to buy up huge parcels of land at extremely low prices; and it was the establishment of this land bank that would prove to be the foundation of one of the largest and most powerful corporations Asia has ever seen. Li named his real estate development company Cheung Kong. In 1972, Cheung Kong was listed on the Hong Kong Stock Exchange. Five years later, the company successfully bid for development sites above two of the main MTR stations in Central Hong Kong. In 1979, Li purchased a 22% stake in the multinational conglomerate Hutchison Whampoa from HSBC, which had stepped in to rescue the company from bankruptcy. Hutchison was (and is) a hugely diversified international company that has six key business lines: Ports & related services Retail Telecommunications Property & hotels Energy Infrastructure The company also has an extensive investment portfolio. Hutchison Whampoa owns 76% of the shares of Cheung Kong Infrastructure Holdings Ltd., the largest diversified infrastructure company listed on the Hong Kong Stock Exchange. Six years after the acquisition of Hutchison, Cheung Kong acquired Hongkong Electric Holdings Limited (renamed Power Assets Holdings in 2011), which owned Hongkong Electric Company, one of Hong Kong’s two electricity providers. From those humble beginnings in plastic flower manufacturing, Li’s empire grew to the point where, today, his companies account for 15% of the market cap of the Hong Kong Stock Exchange.

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Source: Cheung Kong

Today, Li’s Cheung Kong group companies have a total market capitalization of HK$817 billion, or US$105.5 billion (US$1 = HK$7.75). Not bad for a high-school dropout who started out making plastic flowers. So, that’s a little background on how Cheung Kong grew to be one of the largest companies in Hong Kong, but what does the company look like today? Well, in its recent half-yearly results for 1H 2012, which were released on August 2, the company announced a net profit of HK$15.45 billion (US$2 billion) and earnings per share of HK$6.67 (US$0.86) in what it called a ‘challenging operating environment.’ The principal drag on Cheung Kong’s earnings came from Hutchison Whampoa, which saw lower net profits than in 2011, after a large one-time gain the previous year. Without Hutchison Whampoa, Cheung Kong’s profits rose an incremental 2% to HK$10.4 billion, and the interim dividend was maintained at HK$0.53 (US$0.068). The FY dividend has grown at a 7% CAGR for a decade and, although that level looks to weaken slightly to around 6% over the next three years, that still gives a healthy payout ratio of ~30%. Despite the fact that the company’s most recent set of results are unspectacular, there are good reasons to expect Cheung Kong to provide an excellent return going forward, given the historically low valuation at which it currently trades and the strong cash position it maintains, giving it the ability to make accretive purchases and replenish its diminishing land bank.

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Source: Bloomberg/CLSA

That land bank, and the company’s valuation relative to it, are one of the keys to Cheung Kong’s prospects. Cheung Kong’s core business is property development – specifically concentrated in the upper end of the residential property sector. Since Li’s first foray into land ownership and development upon the expiration of his lease back in 1958, the company has established itself as the largest developer of such properties in Hong Kong, with a 35% market share. The success of the empire Li has built over the last 62 years is rooted in the supply/demand equation on that small, overpopulated rock in the South China Sea, allied with an uncanny ability to buy land when the opportunity presents itself and to rarely overpay. The Hong Kong property market is not a place for the faint of heart, as governmental policies to restrict and regulate land use can cause temporary ‘shocks’ and supply/demand imbalances when new structural shifts in policy occur. There is no better example of this phenomenon than the period 1997-2003. Immediately after ‘the Handover’ to China saw British rule of Hong Kong end, Asia endured a crippling economic crisis, which began when Thailand was forced to break its peg to the US dollar. The weakness spread quickly throughout the entire region as currencies slumped, stock markets were savagely sold, and asset prices declined precipitously. In Hong Kong the property market fell 60%. As can be seen from the chart below, which shows Cheung Kong’s development projects, the company steadily increased its holdings during that downturn, picking up prime real estate at sizeable discounts as less-conservative companies were forced to liquidate holdings into what was a buyers’ market.

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Source: Bloomberg

During the boom years since the end of the Asian Crisis, some of Cheung Kong’s property acquisitions raised eyebrows, but the company has maintained discipline around costs, and its development record is exceptional. Today, the specter of another top looms over Hong Kong’s property market again: (Marketwatch, August 26, 2012): As Hong Kong property again sets new highs, it’s getting harder to find any conventional yardstick to make sense of these stretched prices. After a late summer spurt in transactions sent the Centa-City leading index to a new record, last Friday came reports of Hong Kong’s most-expensive-ever property sale. A luxury apartment in the Peak district sold for a staggering 470 million Hong Kong dollars ($61 million) or HK$75,806 per-square-foot, according to the Hong Kong Economic Journal.

But it’s not just the strata-title properties that are soaring, as even modest living spaces are up 100% in the past two to three years. If you want to buy a two-bedroom, 700-square-foot apartment built in the last 25 years close to the Central business district, expect no change from $1 million ... high prices have created a new affordability constraint, as it now requires a small fortune just for the 30% down payment. Today, the average down-payment cost for a first-time buyer is equivalent to 3.3 times the average annual household income.

Page 6 BULL’S EYE INVESTOR OCTOBER 2012 However, Cheung Kong’s development land bank now sits comfortably below the peak levels seen in the period between 1997 and 2000. Instead, the company has been steadily expanding its holdings in China, where not only is the cost far lower but parcel sizes are far larger, affording Cheung Kong the ability to front-load costs due to the multi-phase rollout possibilities inherent in the far-larger projects that China lends itself to. The one notable exception to this policy has been the recent successful bid of HK$9.6 billion to secure 2.4 million square feet of waterfront property at Tsuen Wan MTR station, which, while increasing the company’s diminishing HK land bank, looks to be a fully valued bid. Currently, Cheung Kong’s China land bank extends to a little under 200 million square feet spread out over 21 cities and a total of 47 development projects. Roughly 12% of that land bank development will be completed by the end of 2013 and should generate HK$8 billion in profits, whilst the pipeline of projects looks solid out to 2020. Despite the well-publicized weakening of China’s economy in recent months, property prices have begun to stabilize, as policy moves by the government late last year to lower prices in an orderly fashion whilst increasing volume incrementally have met with some success. This stability looks to have given policymakers the ability to offer further stimulus should the economic backdrop continue to deteriorate. The property market certainly looks to be the avenue that offers the most direct means to inject stimulus and, once the Chinese leadership change has been cemented, focus will undoubtedly turn towards how best to stimulate an economy that has underperformed significantly. The largest contributors to Cheung Kong’s net asset value (NAV) are the six key business lines of Hutchison Whampoa (see chart below), which make a significant contribution to Cheung Kong’s profitability. Though the company has had its share of problems since the turn of the century with a series of ill-conceived and poorly executed acquisitions of 3G telecom companies, it has drastically reduced its reliance on those businesses to generate profit (from 44% of NAV in 2005 to just 14% today) whilst solidifying its retail, energy, and infrastructure operations and expanding its reach in ports and related services. It spun out Hutchison Port Holdings (HPHT SP) in March 2011, which extracted maximum value for shareholders.

Source: Cheung Kong/Bloomberg

With the 3G business stabilizing to the point where it at least is no longer a drag on earnings, the increased operational efficiency of the rest of the Hutchison Group has meant a substantial 50% increase in non-telecom operating profit since 2009.

Page 7 BULL’S EYE INVESTOR OCTOBER 2012 In addition to the Hutchison business, Cheung Kong spent US$3.93 billion in acquiring the UK utility Northumbrian Water in October last year and a further US$1 billion to buy MGN Gas Networks, a UK gas-distribution company (that deal was approved by the European Commission on September 26, 2012 and will be completed by the middle of October). Despite fears that the Northumbrian deal was perhaps an ill-advised purchase, the company looks set to generate a cash yield of 8.3% in 2013 – not bad in a zero-interest-rate world and more proof that the company has the ability to swiftly integrate acquisitions and get them performing to the benefit of the group as a whole. In 2013, Northumbrian and MGN should, between them, contribute around HK$1.4 billion to attributable profit, according to CLSA. There are certainly headwinds for Cheung Kong to negotiate, including the potential cost and execution risk of replenishing their Hong Kong land bank, which is perhaps the key challenge the company faces in the next 24 months. In addition, the clear weakness in the Chinese economy and political turbulence that may make additional loosening of policy around housing troublesome (or even lead to a reversal in direction towards tightening should price begin to run once again) are factors that have the potential to weigh on the stock price; but with its other business lines contributing solidly to the bottom line, land bank replenishment looks like a risk worth taking – particularly as the need for stimulus in China grows ever more apparent. Currently, the company is trading at just 0.7x its book value (which is essentially the value of its land holdings in Hong Kong and China) and, according to a recent Morgan Stanley report, the cost of that land is so low that a return is ‘almost guaranteed’, which implies that a valuation in excess of book value would be more appropriate. Cheung Kong also trades on just 9.8x forward earnings (though that is a decent increase from the recent lows of just 5x back at the beginning of 2012).

Source: Bloomberg

Page 8 BULL’S EYE INVESTOR OCTOBER 2012 Despite the much-publicized slowdown in China and concerns about declining property prices, and while contract sales were below forecast (HK$10 billion versus expectations of HK$15 billion), margins were higher at 50%. With a much higher GFA (gross floor area) available in 2H (7 million square feet vs. 2.5 million square feet) and increased pressure on the Chinese government to loosen monetary policy in order to stimulate the housing market, the outlook for revenue contributions from the mainland is extremely positive. In Hong Kong, Cheung Kong has maintained its leading position, with 25% of unit sales in 1H 2012 (see chart below). With a net gearing ratio of just 8%, versus its peer average amongst China property developers, which sits at 32%, Cheung Kong is perfectly positioned to once again expand its land bank at favourable prices, should there be any significant weakness in land prices.

Source: Morgan Stanley

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Source: CLSA . . . . . Under the Radar With the incredible proliferation of information that the Internet provides investors in the modern era, it is easy to be overloaded with superfluous material and to miss some of the key stories that, whilst they sometimes seem trivial or even irrelevant, can shape the investment landscape for months to come. It is at the margin that the largest changes take place, and paying attention to those stories may help you alter the playing field. Each month in Bull’s Eye Investor, taking my cue from Things That Make You Go Hmmm…, I will identify a few stories that I feel may have more significance than the breadth of their distribution would suggest. These stories will sometimes be concerned directly with investing, sometimes with political machinations in exotic and unknown places that have the potential to light wider fires and change the world way beyond their borders (who had heard of Aleppo six months ago?), and occasionally with new and interesting technological breakthroughs that may one day be instrumental in shaping the world around us. Hopefully, these brief extracts will entice readers to seek out the full story and send you off down rabbit-holes of your own.

Page 10 BULL’S EYE INVESTOR OCTOBER 2012 This month, we kick things off with a visit to Iran to see what a modern-day hyperinflation looks like. With prices increasing 70% a month, life in Iran is getting more perilous by the day; and with a volatile and unpredictable power structure and an uneasy peace between the religious and political leaders of the country growing ever more fractious, understanding the internal pressures is key to being able to figure out what Iran’s likely next moves are. Fears of a war with Israel are very real, and the financial pressure building inside Iran may well call for a release valve to be opened in an attempt to divert popular attention away from domestic troubles. Historically, such events have not ended well. Hyperinflation: Iran’s way out – possibly UK Daily Telegraph A fifty eighth country will soon have to be added to the brilliant Hanke-Krus hyperinflation table, which documents every known case of hyperinflation to have taken place in the last century. That country is Iran, which according to Steve Hanke, professor of applied economics at The Johns Hopkins University in Baltimore, is now experiencing price inflation of close to 70pc a month. For those interested in taking a look at all the other cases of hyperinflation, click on the table beneath. Enjoy.

The Hanke-Krus Hyperinflation Table

Month Time Highest Equivalent With Required Start End Monthly Daily Type of Location Highest for Currency Date Date Inflation Inflation Price Index Inflation Prices to Rate Rate Rate Double Aug. Jul. 4.19 x Hungary Jul. 1946 207% 15.0 hours Pengo Consumer 1945 1946 10^10% Mid- Implied Mar. Mid-Nov. 7.96 x Zimbabwe Nov. 98.0% 24.7 hours Dollar Exchange 2007 2008 10^10% 2008 Rate* Apr. Jan. Yugoslavia Jan. 1994 313,000,000% 64.6% 1.41 days Dinar Consumer 1992 1994 Apr. Jan. Republika Srpska1 Jan. 1994 297,000,000% 64.3% 1.41 days Dinar Consumer 1992 1994 Aug. Dec. Germany Oct. 1923 29,500% 20.9% 3.70 days Papiermark Wholesale 1922 1923 May Dec. Exchange Greece Oct. 1944 13,800% 17.9% 4.27 days Drachma 1941 1945 Rate2 Mid- Oct. China2 May Apr. 1949 5,070% 14.1% 5.34 days Yuan Shanghai 1947 1949 Mid- Aug. German Exchange Free City of Danzig Oct. Sep. 1923 2,440% 11.4% 6.52 days 1922 Papiermark Rate** 1923 Oct. Dec. Dram & Armenia Nov. 1993 438% 5.77% 12.5 days Consumer 1993 1994 Russian Ruble

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Month Time Highest Equivalent With Required Start End Monthly Daily Type of Location Highest for Currency Date Date Inflation Inflation Price Index Inflation Prices to Rate Rate Rate Double Jan. Nov. Turkmenistan4 Nov. 1993 429% 5.71% 12.7 days Manat Consumer 1992 1993 Aug. Sep. Wholesale Taiwan Aug. 1945 399% 5.50% 13.1 days Yen 1945 1945 for Taipei Jul. Aug. Peru Aug. 1990 397% 5.49% 13.1 days Inti Consumer 1990 1990 Bosnia and Apr. Jun. Jun. 1992 322% 4.92% 14.6 days Dinar Consumer Herzegovina 1992 1993 May Nov. Mid-Aug Exchange France 304% 4.77% 15.1 days Mandat 1795 1796 1796 Rate Jul. Aug. Wholesale China Jun. 1945 302% 4.75% 15.2 days Yuan 1943 1945 for Shanghai Jan. Nov. Ukraine Jan. 1992 285% 4.60% 15.6 days Russian Ruble Consumer 1992 1994 Jan. Jan. Poland Oct. 1923 275% 4.5% 16.0 days Marka Wholesale 1923 1924 Jun. Mar. Nicaragua Mar. 1991 261% 4.37% 16.4 days Cordoba Consumer 1986 1991 Nov. Sep. Congo (Zaire) Nov. 1993 250% 4.26% 16.8 days Zaire Consumer 1993 1994 Jan. Jan. Russia4 Jan. 1992 245% 4.22% 17.0 days Ruble Consumer 1992 1992 Feb. Feb. Bulgaria Feb. 1997 242% 4.19% 17.1 days Lev Consumer 1997 1997 Jan. Dec. Moldova Jan. 1992 240% 4.16% 17.2 days Russian Ruble Consumer 1992 1993 Jan. Feb. Russia / USSR Feb. 1924 212% 3.86% 18.5 days Ruble Consumer 1922 1924 Sep. Sep. Georgia Sep. 1994 211% 3.86% 18.6 days Coupon Consumer 1993 1994 Jan. Oct. Tajikistan4 Jan. 1992 201% 3.74% 19.1 days Russian Ruble Consumer 1992 1993 Mar. Apr. Georgia Mar. 1992 198% 3.70% 19.3 days Russian Ruble Consumer 1992 1992 May Mar. Argentina Jul. 1989 197% 3.69% 19.4 days Austral Consumer 1989 1990 Apr. Sep. Bolivia Feb. 1985 183% 3.53% 20.3 days Boliviano Consumer 1984 1985 Jan. Feb. Belarus4 Jan. 1992 159% 3.22% 22.2 days Russian Ruble Consumer 1992 1992 Jan. Jan. Kyrgyzstan4 Jan. 1992 157% 3.20% 22.3 days Russian Ruble Consumer 1992 1992 Jan. Jan. Kazakhstan4 Jan. 1992 141% 2.97% 24.0 days Russian Ruble Consumer 1992 1992

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Month Time Highest Equivalent With Required Start End Monthly Daily Type of Location Highest for Currency Date Date Inflation Inflation Price Index Inflation Prices to Rate Rate Rate Double Oct. Sep. Austria Aug. 1922 129% 2.80% 25.5 days Crown Consumer 1921 1922 Feb. Mar. Bulgaria Feb. 1991 123% 2.71% 26.3 days Lev Consumer 1991 1991 Jan. Feb. Uzbekistan4 Jan. 1992 118% 2.64% 27.0 days Russian Ruble Consumer 1992 1992 Jan. Dec. Azerbaijan Jan. 1992 118% 2.63% 27.0 days Russian Ruble Consumer 1992 1994 Oct. Sep. Congo (Zaire) Nov. 1991 114% 2.57% 27.7 days Zaire Consumer 1991 1992 Sep. Sep. Peru Sep. 1988 114% 2.57% 27.7 days Inti Consumer 1988 1988 Oct. May Wholesale Taiwan Oct. 1948 108% 2.46% 28.9 days Taipi 1948 1949 for Taipei Mar. Feb. Hungary Jul. 1923 97.9% 2.30% 30.9 days Crown Consumer 1923 1924 Oct. Oct. Chile Oct. 1973 87.6% 2.12% 33.5 days Escudo Consumer 1973 1973 Jan. Feb. Estonia4 Jan. 1992 87.2% 2.11% 33.6 days Russian Ruble Consumer 1992 1992 Dec. Jan. Angola May 1996 84.1% 2.06% 34.5 days Kwanza Consumer 1994 1997 Dec. Mar. Cruzado & Brazil Mar. 1990 82.4% 2.02% 35.1 days Consumer 1989 1990 Cruzeiro Democratic Aug. Aug. Aug. 1998 78.5% 1.95% 36.4 days Franc Consumer Republic of Congo 1998 1998 Oct. Jan. Poland Jan. 1990 77.3% 1.93% 36.8 days Zloty Consumer 1989 1990 Jan. Feb. Armenia4 Jan. 1992 73.1% 1.85% 38.4 days Russian Ruble Wholesale 1992 1992 Oct. Nov. Tajikistan Nov. 1995 65.2% 1.69% 42.0 days Ruble Wholesale 1995 1995 Jan. Jan. Latvia Jan. 1992 64.4% 1.67% 42.4 days Russian Ruble Consumer 1992 1992 Nov. Jan. Turkmenistan4 Jan. 1996 62.5% 1.63% 43.4 days Manat Consumer 1995 1996 Jan. Dec. Japanese War Philippines Jan. 1944 60.0% 1.58% 44.9 days Consumer 1944 1944 Notes Sep. Dec. Yugoslavia Dec. 1989 59.7% 1.57% 45.1 days Dinar Consumer 1989 1989 Jan. Jan. Germany Jan. 1920 56.9% 1.51% 46.8 days Papiermark Wholesale 1920 1920 Nov. Nov. Tenge & Kazakhstan Nov. 1993 55.5% 1.48% 47.8 days Consumer 1993 1993 Russian Ruble

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Month Time Highest Equivalent With Required Start End Monthly Daily Type of Location Highest for Currency Date Date Inflation Inflation Price Index Inflation Prices to Rate Rate Rate Double Source: Steve H. Hanke and Nicholas Krus (2012) “World Hyperinflations”, Cato Working Paper no. 8, August 15th. Forthcoming in: Randall Parker and Robert Whaples (eds.) (2013) The Handbook of Major Events in Economic History, London: Routledge Publishing. (expected publication date: Summer 2013).

Notes:

- When a country experiences periods of hyperinflation that are broken up by 12 or more consecutive months with a monthly inflation rate below 50%, the periods are defined as separate episodes of hyperinflation. - The currency listed in the chart is the one that, in a particular location, is associated with the higher monthly rate of inflation. The currency may not have been the only one that was in circulation, in that location, during the episode. - We are aware of one other case of hyperinflation: North Korea. We reached this conclusion after calculating inflation rates using data from the foreign exchange black market, and also by observing changes in the price of rice. Based on our estimates, the episode of hyperinflation most likely occurred from December 2009 to mid-January 2011. Using black-market exchange rate data, and calculations based on purchasing power parity, we determined that the North Korean hyperinflation peaked in early March 2010, with a monthly rate of 496% (implying a 6.13% daily inflation rate and a price-doubling time of 11.8 days). All of these data were obtained August 13th, 2012 from Daily NK, an online newspaper that focuses on issues relating to North Korea. We also acknowledge that our investigation was aided by reports from Good Friends USA, a Korean-American advocacy and research organization, as well as from Marcus Noland and the Peterson Institute for International Economics. (*) The authors calculated Zimbabwe’s inflation rate, from August to November 2008, using changes in the price of the stock, Old Mutual, which was traded both on the Harare and London stock exchanges. The stock prices yielded an implied exchange rate for Zimbabwe dollars, under purchasing power parity. (1) The Republika Srpska is a Serb-majority, semi-autonomous entity within Bosnia and Herzegovina. From 1992 until early 1994, the National Bank of Republika Srpska issued its own unique currency, the Republika Srpska dinar.

(2) Greece’s inflation rate was estimated by calculating the drachma / gold sovereign exchange rate

(3) The peak monthly inflation rate listed for China in the table differs from that presented in one of the authors’ previous pieces on hyperinflation (Hanke and Kwok, 2009). This revision is based on new data from a number of sources, which were recently obtained from the Library of Congress in Washington D.C.

(**) We calculated the Free City of Danzig’s inflation rate by using German inflation data, since the German papiermark was in circulation in Danzig during this time. It is worth noting that Germany and Danzig experienced different peak months of hyperinflation. This is because the last full month in which the German papiermark circulated in the Free City of Danzig was September 1923. Germany continued to circulate the papiermark beyond this point, and subsequently experienced its peak month of hyperinflation (October 1923). (4) The data for many of the post-Soviet countries were only available in the World Bank’s Statistical Handbook: States of the Former USSR. In this publication, the authors stated that the data should be viewed with an extra degree of caution because the statistics were taken from the corresponding official internal government source and not independently reviewed by the World Bank. However, these statistics are official and are the only source of data available for the corresponding time periods for each country.

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True enough, Iran is not yet up there with the best of them – at the height of the Hungarian hyperinflation of 1946, prices were doubling every 15 hours – but it is getting there. Iran gave up issuing official figures on inflation a while back. That’s what governments do when inflation gets out of control. Alternatively, like Argentina, they lie about it. In any case, we no longer have any entirely reliable way of knowing what’s happening to prices, beyond on the ground anecdotal evidence. Professor Hanke bases his assessment on the black market exchange rate. Two years ago when President Obama signed the Comprehensive Iran Sanctions, Accountability and Divestment Act, this roughly correlated with the official exchange rate at around 10,000 rial to the dollar, but since the summer, it has diverged sharply and the currency is now self evidently in some kind of death spiral, wiping out purchasing power. At the time of writing, it was at around 35,000. As I say, it’s virtually impossible to understand fully what’s going on in the Iranian economy. We know that Iran is close to hyperinflation, but we don’t know precisely what’s causing it. Western officials like to think of it as indicative of the success of economic sanctions, and it may indeed be the case that scarcity of imported goods is causing prices all round to rocket. It’s horrible for the Iranian people, but this kind of economic warfare is presumably preferable to the real thing. Whether it will have the desired effect in toppling the regime and halting nuclear advancement is another matter altogether. Much of the experience with sanctions is that they don’t work. It’s the foreigner, not the government, that gets the blame for the economic hardship they cause. In some instances they seem only to harden support around the ruling regime. Does anyone honestly believe Castro would have remained in the saddle in Cuba for so long without American sanctions? Much the same thing might be said about North Korea, which incidentally, is the last recorded case of hyperinflation. This has failed to topple the regime. Be that as it may, the Iranian people have plainly lost all confidence in the rial. Trust in a currency is much like trust in a bank. Once it goes, there is little the authorities can do about it. Precisely what caused the latest, sudden lurch downwards is still not entirely clear, but it seems to have been government attempts to acknowledge the reality and offer importers a realistic exchange rate through official channels…. Mysterious Mariano Spain’s prime minister battles against the break-up of the euro and his country The Economist A GALICIAN, the Spanish like to quip, is the sort of person you meet on the stairs and you don’t know whether he is going up or coming down. Such ambiguity, or retranca, can make for entertaining and ironic speech, and an attitude of caution, even suspicion. For Mariano Rajoy, the Galician-born Spanish prime minister, playing to this archetype is a way to survive and manage conflicting demands. Whether it is the character trait Spain needs to overcome its agony is open to doubt.

Page 15 BULL’S EYE INVESTOR OCTOBER 2012 Mr Rajoy frustrates many with his prevarication over a fresh euro-zone bail-out, which now comes with a conditional promise from the European Central Bank (ECB) to help bring down Spain’s stifling borrowing costs. France wants him to take the money; Germany tells him not to. Before walking through the door Mr Rajoy wants to know that Germany won’t shut it on his fingers, and to be sure about what lies beyond. What will the ECB do, and what conditions will be imposed on Spain? Asked this week about a leaked report that a bail-out request could be imminent, Mr Rajoy responded with Galician retranca. There are two options, he said: either the news agency is right, and it has better sources than the prime minister, or it is wrong. “I will tell you ‘No’. But you can still think what you deem best, because you may guess right.” So did he really say no, or was it a yes? Many wonder whether Mr Rajoy has any strategy to restore confidence in markets and among Spaniards. With a deficit of about 9% of GDP last year, an unemployment rate surpassing 25% and a protest movement that is showing flashes of violence, some worry that Spain is being sucked into a Greek-style death spiral. Others are convinced that the Spanish public sector still has much fat, that unemployment statistics are inflated and that the shock-absorber of Spanish society, the family, remains strong. Still, Mr Rajoy’s problems are getting worse, not better. On top of the economic crisis, he must now confront an unexpected constitutional one. Mr Rajoy’s attempt to rein in spending in Spain’s highly autonomous regions, which provide big-ticket services like health and education, has rekindled nationalism in Catalonia, one of Spain’s most indebted regions, and one of the biggest net contributors. A surprisingly large pro-independence rally in Barcelona last month saw banners proclaiming Catalonia as the next member of the EU. The region’s president, Artur Mas, thwarted in his demand for a better fiscal deal, raised the stakes by calling early elections on November 25th and threatening a ballot on the right to self-determination. This weekend’s “El Clásico”, the football derby between the old rivals FC Barcelona and Real Madrid, will be more emotionally charged than ever. Nobody quite knows where the nationalist surge will lead; Mr Mas himself is vague about his ultimate objective. So the mysterious Mr Rajoy must seek to avert twin tail-risks: the break-up of the euro zone on the rocks of Spain, and the break-up of Spain itself. A former land registrar and ex-minister, Mr Rajoy was defeated in 2004 and 2008 by the Socialist leader, José Luis Rodríguez Zapatero, but came to power with a thumping majority for his conservative People’s Party in last November’s election. Mr Zapatero had long lived in denial about the bursting of Spain’s vast property bubble. But Mr Rajoy hardly hurried to repair the damage. He waited for the end of the month-long transition to name a cabinet, with a messy two-headed economic team. He irritated leaders at his first European summit in March by unexpectedly announcing he would miss his deficit targets (though these were later relaxed). And he dragged his feet until April before producing his first budget. One reason for the poor start is that Mr Rajoy delayed bad news in the hope of delivering the estocada, the matador’s final sword thrust, to the Socialists in regional elections in their heartland of Andalusia. In the event they kept Andalusia, while Mr Rajoy skewered his own credibility. Last month was, at last, supposed to be his moment of clarity: with the help of external consultants Spain announced its banks needed about €40 billion ($51 billion) of public money (well below the €100 billion already offered by the euro zone), produced a plan to clean up the sector, drew up a budget to bring the deficit down to 4.5% of GDP next year and launched a new round of structural reforms. Yet some analysts still question whether the banks’ stress-tests were stressful enough. And there was disbelief about the government’s budget based on a contraction of just 0.5% next year; most independent analysts forecast a drop two or three times larger….

Page 16 BULL’S EYE INVESTOR OCTOBER 2012 Anglo American Platinum sacks 12,000 striking South African miners Staff fired by text and email after three-week strike while two deaths reported amid latest unrest UK Guardian The world’s biggest platinum producer has sacked 12,000 workers by text message and email at its largest South African platinum mine following three weeks of strikes over pay and working conditions. Bosses at Anglo American Platinum, or Amplats, a subsidiary of London-listed Anglo American, made the decision on Friday on another day of violent clashes between South African police and workers that left one person dead. The strike has shut four of the firm’s five mines in the Rustenburg area, 70 miles from Johannesburg, costing Amplats production of 39,000 ounces of platinum, worth £51m, according to the company. Two more mines owned by Amplats were closed as the strikes spread, with the firm unable to guarantee the safety of staff who reported for duty. What started as a platinum mining issue has now extended to other industries, with the oil group Shell declaring that it was unable to honour fuel deliveries after 20,000 truck drivers continued a two-week strike. Strikes are also under way at gold and iron ore mines and production of 2,000 cars was lost after a wildcat strike at the Toyota plant in Durban. Amplats decided to sack the miners four days after issuing an ultimatum to the 26,000 strikers to return to work. Only 20% of workers returned, meaning that the mines remained shut. Those who failed to turn up for work were given a second ultimatum to attend disciplinary hearings, but 12,000 decided against being represented and were dismissed. Workers are demanding higher salaries, claiming that rival firm Lonmin has set a precedent. Last month, Lonmin gave its staff a 22% pay rise after weeks of unrest that saw 34 people shot dead. An inquiry into the killings began last week. The Lonmin dispute threatened to reignite on Friday after a National Union of Mineworkers official was shot dead in what NUM spokesman Lesiba Seshoka described as an “execution-style” killing. On Thursday night, an Amplats worker died in clashes. He was thought to have been struck by a police rubber bullet. The unrest led to protesters in a shanty town near the Amplats mine barricading streets with rocks and burning tyres, having burned down a training centre and two conveyor belts, making it harder to restart operations. Amplats bosses have refused to offer a pay rise similar to Lonmin’s, although the chief executive, Chris Griffith, did suggest that a salary review due next year could start earlier. He said: “The company is committed to participating in the platinum centralised engagement structures driven by the Chamber of Mines, as well as exploring the possibility of bringing forward wage negotiations within our current agreements.”

Page 17 BULL’S EYE INVESTOR OCTOBER 2012 The sackings are unlikely to bring stability to the company, which has seen its share price fall by 13% since the unrest started. On Friday night, shares closed down 1.5p at £18.12. And any resolution does not guarantee a revival. Lonmin shares have plummeted nearly 27% since August, despite its strike ending. Anglo American is understood to be considering closing some of its South African mines as it weighs its future in the country. Credit Suisse analysts suggested last week that the company could shut two or three of its five operating shafts. Shell effectively said the situation was too dangerous for it to meet its delivery contract: “There is fuel available across the country, so the issue is not fuel supply, but the challenge is delivering it safely to our retail sites.”… All that glitters is gold China Daily Each year, Tina Yang, who works for a US consulting firm in Beijing, buys a fewpieces of jewelry, from expensive diamond necklaces, platinum earrings to cheaper silver bracelets. “I do not care about the price. As long as it is within the affordable range, I consider buying it,” says the 31-year- old Yang. “Just like different perfumes for different occasions, one also needs different jewelry to go with different clothes, which are not just decorative, but also exhibit the wearer’s personality and temperament,” she says. Like Yang, many Chinese, particularly women, are wearing jewelry to look prettier or to flaunt their possessions. This growing appetite for jewelry has contributed to the continuous growth in jewelry sales in China, making it not only the world’s most competitive jewelry maker, but also one of the largest jewelry consumers. According to Gems & Jewelry Trade Association of China, sales of jewelry in the country reached 40 billion yuan ($6.33 billion) in 2011, an increase of 33 percent year-on-year. Industry insiders believe that jewelry sales in the country will sustain this brisk pace of growth over the next decade, and jewelry will become the most sought-after possession after real estate and automobiles for China’s growing middle class. “With the surging demand for jewelry among its consumers, China is very likely to replace the United States to become the world’s largest consumer market for jewelry by 2020,” says Shi Hongyue, vice-president of Gems & Jewelry Trade Association of China. Jewelry consumption in the country has maintained a double-digit growth rate over the past few years. Shi says that in developed countries such as Japan on average every person owns three to four pieces of jewelry. But in China, every 10 people own just one piece of jewelry, so the market potential is huge as Chinese get richer. “Although per capita jewelry purchase in China is far behind that in developed countries, the growing purchasing power of Chinese consumers will provide the fundamentals for rapid market growth,” Shi says. The improvements in domestic jewelry products and the entry of more foreign jewelry brands have given Chinese consumers a much wider range of options today.

Page 18 BULL’S EYE INVESTOR OCTOBER 2012 Although gold, diamond, and jade jewelry are still the favorites with Chinese consumers, jewelry made from other materials, such as colored gems, are gaining popularity as an increasing number of buyers look for personalized jewelry, says Fu Yonghe, director of the jewelry design department of Beijing Institute of Fashion Technology, China’s first jewelry design school. “In the past, people were more concerned about the material used to make a piece of jewelry, but with a wider range of jewelry available in the market, people, especially fashion-conscious young white-collar workers, are paying greater attention to designs and workmanship,” Fu says. To cater to the tastes of a more diversified consumer group, jewelry makers have been compelled to be innovative, especially in gold jewelry products that were considered old-fashioned. “In recent years, domestic gold jewelry makers have shifted from traditional homogeneous to bold and modern designs with the use of other materials, making more young people fall in love with them,” Fu says. In the past, elderly people were the main buyers of gold jewelry, which they believed provided a shield against inflation, he says, though they also bought them for sentimental value. In recent years, however, youths have started sporting stylishly designed gold jewelry because they are “trendy”. While the traditional jewelry market for women is competitive, Fu says the male jewelry market in China is catching on as men in big cities show a growing fondness for jewelry, especially diamonds. A De Beers report shows that 67 percent of Chinese men aged between 30 and 44 years wish to own diamonds. “Though the development of the mainland jewelry market for men is relatively slow, its growth potential cannot be underestimated,” Fu says. “This new demand requires enterprises to make more efforts to innovate products.” This is especially important because moneyed Chinese consumers are gradually veering toward branded jewelry. A KPMG report says French, Italian and Hong Kong jewelry brands are now the top choices for the mainland’s luxury-conscious consumers. “High-end Chinese consumers like brands that have a history, for they think it guarantees quality,” says Li Mingyan, brand manager of Chow Sang Sang Holdings International, a leading Hong Kong jeweler. The company’s retail sales on the mainland reached 4.53 billion yuan last year, an increase of 64 percent year-on-year…......

Page 19 BULL’S EYE INVESTOR OCTOBER 2012 Wrap-Up

The Hong Kong property market is in a league all of its own when it comes to the supply/demand dynamic and the mechanics of acquiring and developing land, but Cheung Kong has proven itself to be the market leader in what is an extremely lucrative sector. Restricted land and a population that has grown relentlessly (chart below) for five decades, and will only continue to do so as Hong Kong moves irresistibly towards full integration into China over the next 35 years, ensure that Hong Kong’s property market will be a key driver of Cheung Kong’s profitability. The company’s proven ability to successfully navigate periods of weakness through the prudent management of cash and the ability to use these periods to replenish their land bank, as well as their market-leading development position, make the company one of the most attractive of all the Hong Kong property developers.

Source: HK Census

Page 20 BULL’S EYE INVESTOR OCTOBER 2012 Owning Cheung Kong is not without its risks, though. Whilst the current level of availability of high-end residential property and governmental policy to expand property supply in Hong Kong have put a damper on the strong growth the company has seen over the past ten years, their earnings and project growth are expected to continue (albeit not at the same pace as pre-2010). The company’s strong position in China, where their cost of land is exceptionally low, means they have the wherewithal to offset any fluctuations in Hong Kong and use the softening prices to replenish their land bank at favourable prices. The company’s revenue growth from mainland development has increased nine-fold, reaching $9.8 billion in 2011. This strong growth is expected to increase into 2013, but the risks of excessive tightening on the part of the Chinese authorities are very real and must be factored in to the investment case. The contribution to earnings from a steadily improving Hutchison Whampoa business is crucial, and the recent foray into infrastructure development through the acquisitions of MGN and Northumbrian Water will contribute to lower-risk, higher-yield business practices. The cash generated from these projects will undoubtedly lower Cheung Kong’s exposure to business-cycle and credit-tightening risks.

Cheung Kong has climbed to HK$115 in the past two weeks; but should the stock retrace to $110, I would recommend buying it with a target price of HK$128.50. This could be done through selling a HK$110 put, which is currently bid at HK$2.70. In addition to the outright investment, investors should consider selling a HK$102 put in order to average the price lower, should any upheaval occur around the Chinese leadership transition in November and translate into weakness in Hong Kong.

Grant Williams Chief Investment Strategist . . . . .

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