Metal Bulletin presents the second chapter of this traders' tale.


There was no unseasonal warmth in London two weeks later. Serck went for a pre-breakfast stroll around Mayfair, but was soon driven back to the sanctuary of Brown’s Hotel; he had a breakfast meeting scheduled with one of his investors, the representative of a substantial aristocratic family fortune who had been invested in Leopard-Star for many years. Having got in early, they were sitting on a tidy growth in their funds, and Serck didn’t expect too much stress about the recent turgid performance. He sat in the lobby, waiting for his guest, flicking through the Bloomberg pages on his smartphone. No real action anywhere.

Later, as he sat at breakfast with the elegant, patrician representative of the old money, and ran through the current status of the fund, Serck listened to himself speaking. The other man seemed happy enough, but if Serck were honest, he knew if he’d been sitting in the other chair, he wouldn’t be satisfied. The truth was, Leopard-Star was not doing what it was supposed to do. However persuasively he dressed it up, his investors were doing no better than if they were in any run-of-the-mill index tracking fund. He got through the meeting, but then, after his guest had left, still smiling, he sat on, deep in thought. To the outside world, it might seem strange. Leopard-Star looked like the most blue-chip of hedge funds: it had existed for many years, Serck’s reputation as a smart trader was solid and they had avoided heavy losses. In reality, though, they were living on past glories and had been trying to fight off redemptions for the last 18 months. Today’s meeting had been fine, but during those 18 months Serck had had many far more aggressive discussions with investors who were more demanding. Without something to shift gear, Leopard-Star was heading for the dustbin of history.

A couple of hours later, he left Brown’s, having again read through the report his mining surveyor had sent in reply to the enquiries he’d made, and crossed Piccadilly to go down St James’s Street. Halfway down, on the left, is an elegant Georgian house standing among the more recent development, with a single tree beside it. The unmarked door leads into a hallway, with a porter standing at his post to welcome guests. Serck had been elected to Boodle’s club years earlier, at a time when he was often in London. These days, he was an infrequent visitor; nevertheless, the porter greeted him by name as he walked in. Serck smiled. “Good morning to you,” he said. “I am expecting a guest, a Mr Steyn. I will be in the bar; could you bring him through when he arrives, please?” He walked on, through the drawing room, past the desk on which sat the betting book – the record of all the bets members had made with each other, dating back to Regency times – and into the bar. There were half a dozen members in there, none of whom he recognised, and Serck ordered himself a drink and sat in an armchair next to the window. He mused on the man he was about to see.

DeWet Steyn was a South African mining engineer, who had moved away from his origins to become, effectively, a share promoter. He’d been involved in a raft of junior mining ventures, mostly in the Congo, where he had cultivated serious political affiliations, and eventually he had emerged as the ceo of, and – until its floatation – also the biggest shareholder in, Congo Copper Ltd. That company comprised the rump of the state-owned copper industry, privatised a decade earlier when the state needed cash. Serck had been a consistent investor in Steyn’s ventures for a long time, not because he was convinced by the man’s mining credentials, but because there was no doubting his ability to hype equities; in early and out on the big rally was Serck’s motto when dealing with Steyn companies. But Congo Copper was different; it was a major producer of concentrate, and Steyn had lucked out in a big way, with the help his political connections. Serck had hung onto his position in this one; his focus was industrial raw materials, and he had to be invested in copper, and not only via the big boys like Rio and BHP. The relationship had been further strengthened when Leopard-Star had absorbed Metal-Exx, because the latter was by far the biggest offtaker of Congo’s product. In fact, the Metal-Exx traders almost regarded it as an in-house supplier to feed the voracious appetite of their Chinese smelter customers. Well, it had been voracious; now, the combination of lower prices and reduced Chinese demand – which meant Metal-Exx exercised their options to reduce quantities – had left Congo Copper looking quite exposed. Steyn was still a rich man, from the original flotation, but he was looking down the barrel of a gun in terms of the company’s continued viability.

Steyn appeared in the doorway; Serck stood up to greet him.

“DeWet, welcome. Good to see you again.”

“You too, Jason. It’s been quite a while.”

‘Indeed it has, but I thought it was time to catch up, since we seem to be not only one of your major shareholders but also your biggest customer. So that means we need to be aware of what’s happening in your company. To tell the truth, I probably should have dropped by sooner. But first, what will you drink?”

They chatted inconsequentially as they stood with their drinks; they had no wish to be overheard. Then Serck led them upstairs to the dining room. He nodded to a few members in here whom he recognised, including an old acquaintance from LME trading who was sitting near the door to the room with a couple of friends. Serck’s table was at the far end of the room, and as they settled, menus in front of them, he looked across at Steyn.

“DeWet, I’m beginning to get a little concerned about Congo Copper. We know you have difficulty producing at current prices and, being honest, we were over-optimistic in our expectations of the market this year. We all expected to see it begin to firm after mid-year; but there still seems no prospect of that. So you don’t look too good at the moment, and that has a direct impact on us. And on both sides of the business. For sure, Congo Copper is not a major deal for Leopard-Star; we own a fair chunk, but we can live with that. Hell, we’ve had to live with it for a few years now. But for Metal-Exx, it’s a bigger deal. After all, let’s not forget that the reason we came to own Metal-Exx at all is to a large part because of problems in their relationship with you guys (see “Meltdown”, Metal Bulletin October 2015). So I wanted to have a chat with you about what is going on, what you guys are doing to get back on track and when you’re going to start making money again.” He smiled, but the smile didn’t touch his eyes. Jason Serck was a very tough player, and Steyn, for all his self-confidence, knew he was going to face a difficult hour or two.

“Well, Jason, there’re really two issues that you touch on there. First, as you say, prices are lower than we expected; well, we can’t change the price. Frankly, you guys at Leopard-Star have got more chance of moving markets than we do. We’re just miners; we get the stuff out of the ground and then we sell it. We can do some forward hedging – mostly via Metal-Exx – but in the end, we produce, your guys take it and pay us the market price. Right now, the market is weak, so the price isn’t good. And what makes it worse is that, the weak price being an indicator of weak demand, the quantity you want to take from us is reduced. All those contracts we have with Metal-Exx give them the option to reduce quantities, sometimes quite significantly, and right now, you’re not taking too much more than the minimum obligation. The way our economics work is that the more we produce, the lower our unit cost becomes – well, we’re not unique in that.

“So right now, we’re being hit twice. The price is low, yet our production cost is higher than it should be because we are operating at too low a percentage of our capacity. We just have to swallow it until the market turns.”

Serck looked hard at him. “Yeah, except that you don’t swallow it, do you? We do, the shareholders. When did you last pay a dividend? What have you done to reduce your cost of production?”

“Well, we reduced the headcount at the mines, we reduced some of the welfare payments we make, we’ve adjusted our ore grades, but the reality is that it costs more to mine our copper than it does in Chile or Peru or Indonesia. That’s a simple fact of geology and geography. When prices are high, it doesn’t matter, but now, we have to bear the pain. But Jason, you know all this; you’ve always known about our production cost, even if we have managed to keep the precise details out of the public domain. Back when prices were high, we made a stack of money for the shareholders – and we will again. You just have to keep faith.”

“Mmm. I’ll tell you honestly, DeWet, I don’t like what I’m hearing. Sure, you laid off some Congolese miners and you’ve cut welfare payments to people who are already struggling. I know I have a reputation for hardness, but I don’t like what you’ve done there, not least because you will stir up resentment and that breeds industrial unrest. But worse than that, your cost-cutting stops in Africa; the miners don’t cost you much anyway. But here in London, your HQ is still in that very smart building, the headcount hasn’t gone down, the limos still roll in and out, the first-class travel, the helicopters – you’re still treating yourselves here as if copper was at $10,000 a tonne, not 4,000. Right now, you’re living off the shareholders. What are you doing to protect their interests?”

“Come on, Jason; head office expenses? What difference would it make if we ran it out of the back room of a newsagent in South London? We’re a decent mining company; we behave like it, that’s all. And anyway, a lot of those people in the head office are working on the projects we have coming up to try and diversify the company, so we don’t get caught like this again through being a one product company. That’s what we’re trying to do to work for the shareholders. And the truth is, our share price has performed pretty well, especially since the Brexit referendum; people understand that our earnings are in dollars, so that strengthens our position. Things aren’t great, but we’ll come through this. I’ve got a good team in place.”

“OK, so let’s focus on the diversification projects you have. What can you tell me that’s going to make me feel more confident?”

Steyn slipped easily into promotional mode; playing the spiel to investors was his strongest suit.

“Well, we have two routes to take to diversify our company. Right now, we are effectively a single product, single country company. We mine copper, and we mine it in the DRC. So we have two alternatives: we can look for other minerals, or we can look in other places. Frankly, we have good relationships in the DRC, with businesses, with politicians, and I think we would struggle to replicate that beneficial situation elsewhere. I’ve spent a big part of my life in that country, and that all gives us a strong base.

“So we really want to look at other minerals, in the same general location. Well, we all know that the DRC is geologically a rich seam to mine, not just copper. Cobalt, zinc, diamonds – all there.”

Serck looked at him. “Yeah,” he said, “lots of other minerals, and lots of other people already involved.”

“You’re right. Which is why that’s not what we’re looking at. I want real diversification; products where the prices don’t move in step.” Steyn paused for a moment and took a drink, looking for a second into the deep red colour of the wine. “You know I’ve been involved with many ventures before Congo Copper – well, you were shareholders in some of them. But even before that, when I first started working in the DRC – Zaire, as it was – I acquired some leases up on the Ugandan border. We did a certain amount of work up there, but then I teamed up with some guys down in Katanga and we started putting together some copper prospects, so I let the other stuff lie, for the time. Now, I still have those leases – I’ve always kept them alive, it cost me no more than a little gift to the administrators to enable me to get round the laws about non-active mining leases – and that’s where I’m concentrating our efforts. This is not non-ferrous; these are deposits of industrial minerals. Vermiculite, barytes, clays – not very sexy in the mining or trading world, but a steady consistent market. Frankly, we don’t really even have to mine it. It’s a surface operation, just a mechanical process, with cheap equipment and labour. We’ve got the rights over a huge area, and we can strip it real easily. Our margin of profit on that will be high; high enough to help the copper business through this dull period. It’s a quick, easy solution to the immediate difficulties. There’s really not much we have to do before we can send in the diggers.”

“What about access? Can you get the stuff out? Or do you have to build roads?”

“It’s pretty good, actually. There are already roads in place; we will probably have to agree to improve them, but that won’t be a huge cost. Then we can get to the railroad going down to the ports on the coast in Kenya or Tanzania.”

“You haven’t so far told the shareholders about this project. Why not? You have obligations to do that.”

“Yeah, we do. You’ll find in our last financial statements that we refer to ‘other properties which are mineable’, which covers us for the moment. Obviously, we will have to give fuller disclosure when we actually press the green button. Hey, you’re a big shareholder Jason; it’s in your interest as well that we manage this in the best way for the stock price.” He grinned wolfishly. “We can all make some money.”

“Mmm. And Metal-Exx can take this stuff from you?”

“Yeah, they handle some industrial minerals. It’s not a big business, but for us it’s the margin that is attractive. And the fact that the price doesn’t really vary much.”

They talked on around the prospects for Congo Copper and its markets, until eventually Serck brought the discussion to a close. He had learned what he needed to know, and once back in his room at Brown’s, he called Max Eisenstadt again.

“Max, first of all, how much do you know about industrial minerals? Do we trade them?”

“What, clay and all that sort of shit? Yeah, we have a couple of guys downstairs who handle that business. It’s not really trading, more of a simple logistic business; freight’s normally as important as price, I believe. But it’s not big volume, like iron ore or alumina, for example. Hey, there you go; I’ve told you all I know about industrial minerals. We make a constant bit of money out of it. Why?”

“Just curious. Now, more important things. How much scope do we have to cut our offtake from Congo Copper?”

“Cut it? If we do that any more, we’re going to push them into big problems. We’re taking more than we strictly have to, just to keep the mines ticking over. We don’t want to destroy the company. We’re helping them through a tough period – like we always have. But we’re already well down on what we could take, if the market were better.”

“Yeah, OK. So we could take less? And it’s entirely our option?”

“Yeah, sure. We wrote the contracts – we gave ourselves every option we could think of.”

“Do we need the material at the moment?”

“Not really. The market’s still very soft, so we’re actually stockpiling, both at the mines and at some of the ports. We don’t think China is going to pick up for some time. But now we’ve got the aluminium financing business back on an even keel, we can afford to stockpile copper concs if it makes overall sense.”

“Mmm. Well, look, Max, I want to stop helping Congo Copper for a whi
e. DeWet needs to understand his real position, and as long as we keep holding his hand, he’s protected.”

“Well, you’re the boss. But it really is better if we assume the risk of the material in our book than the one of a bankrupt supplier. Might be OK now, but we will need their material again, so it’s in our interest to keep them alive.”

“I know that Max. There are reasons.”

Chapters III-VII will follow daily this week.