Cut your reading time and listen to a podcast instead. This week's BondCast looks at the latest FIIG originated bond, the outlook for gold and USD bonds issued in the sector
Learn more about which bonds are on the move with this weekly podcast. This week our senior relationship managers discuss the latest FIIG originated bond for a market leading off grid energy supplier, the outlook for gold and the companies involved in the sector that issue USD bonds. See the transcript below on the page.
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Director, Fixed Income Sales
Jake grew up in Ottawa, Canada, where he rose from a teenage bank teller to a portfolio manager overseeing more than $600 million in assets for the Bank of Nova Scotia. With over twenty years in asset management he moved to Australia seven years ago with his family.
Head of Facilitation and Institutional Sales
Lincoln joined FIIG Securities in February 2003. He originally gained experience in a settlements role before moving into a sales role on the Brisbane desk later that year.
Lincoln was appointed to the role of Director - Sales Facilitation In 2010. In this role Lincoln focuses on secondary markets transactions, communicating with institutional investors to source debt opportunities & to provide price transparency & liquidity to our customers.
Lincoln holds a Bachelor of Economics and a Bachelor of Commerce majoring in Finance from University of Queensland. He also holds a Diploma of Financial Services.
Director – Fixed Income
Stephen Mackie is based in the firm's Brisbane office, managing investments for clients, ranging from individuals to institutions.
Stephen has over 25 years' experience in global markets, including his most recent role at QIC where he was a Director - Investment Specialist in the Global Multi-Asset team. Prior to this, he has held a variety of senior roles as a trader and portfolio manager with RBC Capital Markets, Citi, Kapstream Capital and the Commonwealth Bank.
Director – Education and Research
Elizabeth has been with FIIG for ten years and for much of that time has been a corporate and bank analyst. In recent years her passion for education has seen her role shift, to author/ edit FIIG’s “The Australian Guide to Fixed Income” and an online fixed income course for Financial Advisers. She continues to edit FIIG’s weekly newsletter, “The WIRE”.
In her role as Director of Education, Elizabeth has delivered presentations at conferences across Australia. Prior to joining FIIG, Elizabeth worked as an Editor/Analyst for Rapid Ratings, writing daily press releases for Bloomberg. Elizabeth spent five years in London, three working as a credit rating analyst for NatWest Markets.
[00:00:00] Elizabeth Moran: Hello welcome to another edition of Bondcast. My name is Elizabeth Moran, I'm Director of Education and Research here at FIIG. With me today, I have Stephen Mackie, Lincoln Tragardh and Jake Koundakjian. Good Morning.
[00:00:11] All: Good Morning Liz.
[00:00:12] Elizabeth Moran: Today we're going to talk a little bit about, first of all Jem 18, the bond was repaid just last week. Then we are going to talk about our exciting new issue, Zenith. And finally we'll just touch on the gold industry. But starting with Jem 18, now this is quite an older bond. So when the bond was first issued it was investment grade paying 6% plus. Which was a really attractive return. So we had a lot of clients in that bond over many years. Obviously, they liked the cash flow. But now that the cash has been returned, there's really a bit of a question over where they invest. So do you invest in investment grade, do you stick to that mantra or do you want to try and get the high yield? Now, not too many bonds pay over 6%. Most of them are high yield non rated or sub investment grade. And of course we have a new issue this morning in Zenith, Jake. You want to talk a little bit about them.
[00:01:08] Jake Koundakjian: Yeah of course. Thanks Liz. The Jem 18, I had a client that bought the bond seven years ago and they've annualised north of 8%pa. So it's sad to see it go, a longstanding position but you know, fresh capital - reinvest. What do you do with it?
[00:01:24] We do have a new bond available to FIIG investors exclusively from Zenith energy. This is an ASX listed company. They're in the power generation area for mostly mining companies concentrated in gold, LNG, nickel. Steve, you're a gold bug aren't ya?
[00:01:40] Stephen Mackie: I'm a gold bug, definitely Jake. It's the best hedge for inflation out there. It's a proven flight to quality asset and I think just given the geopolitical risk that we've got at the moment with, you know Trump talking down the US dollar trade wars ecetera. You know, we're starting to see countries like Russia, Turkey sell their foreign reserves into physical gold. So I think gold demand looks good.
[00:02:10] Jake Koundakjian: You know while it's important for Zenith as a company because a lot of their revenues come from gold producers like Newmont, Incitec Pivot, Chevron's one of their customers, they've got quite a customer base and of course they provide the power to these remote regions where they've got these mines. You know you've got to have the lights on to run your equipment, to even be able to mine stuff out of the ground. So these guys are providing that power to these remote areas and the bond is an exciting 7.55% paid quarterly. It's an amortising bond which I like as a credit. It means that they're paying down their principal on the way that derisks us as investors. So that will be launched today, it's about a $40 million dollar deal.
[00:02:52] Elizabeth Moran: But the management have had about 30 years in the business and I really like that, that gives me a lot of comfort. They've done a lot of these, I don't know how many are exactly on their books at the moment, but at least a dozen in all states and PNG and they're also starting to bring in renewable energy as well. So they're not just using traditional gas and diesel but looking at renewables and one of the things I got from the MD yesterday was that one of their intellectual property or best reasons they're outstanding in this field is that they can transfer from one energy source to another very seamlessly. So...
[00:03:33] Jake Koundakjian: Yeah I like the long term contracts that are in place. They're on average about eight years providing this energy. These are from what I've read, low cost mines which means that the last thing you do is turn off the lights. So it looks like a good overall risk-reward trade off and hopefully I can secure some for my clients.
[00:03:51] Elizabeth Moran: Yeah well, 7.55%, minimum 50,000 parcel size, 40 million in total...
[00:03:59] Jake Koundakjian: Strong management team as well, with skin in the game. The original founder has been in there for 30 years. Still has a 23% ownership of the company, I believe. So I'd like to see some of these types of things and based on the estimates that our analysts went through, it looks like they've been on the conservative side of their estimates which is also nice.
[00:04:21] Elizabeth Moran: So they listed last year at 50 cents and in a bit over year they're now trading about $1.14, so obviously the equity market likes it and you know, growth trajectory is good.
[00:04:31] Jake Koundakjian: Yeah well, I also think we have to touch on risks as well. This is mining exposure. We're not invested in the miner but we're providing an essential necessity for the miner to run their operations and their clients look like pretty big names overall. But I guess some of the risk is also that they're trying to grow and they have been quite successful in their growth and their revenues are moving up nicely, from what I can tell but that is another risk that we have to accept as investors.
[00:04:59] Elizabeth Moran: Oh absolutely. So you know some of the mines, historically, you know, they can just be shut down if things aren't profitable for them to extricate whatever they want.
[00:05:10] Stephen Mackie: But I think Liz, you know if you look at the technology, this is remote off grid power generation. So it's a pretty exciting field if we look at Australia. The bulk of Australia is uninhabitable. The two things that you need to inhabit a place is water and power. With power you can generate water. So I think for me looking at their development of renewables, as well, that's a strong focus for them. So I think this technology has got a lot of potential to be exported out to Asia and to Africa as well. So it's portable, you can put on a ship, it can be transported by road, by rail... So, there's a lot of uses out there should the mining sector come off the boil. I think for me if we have a think about where we are in the cycle, we're probably not at the late stage a lot of people are talking about. So I still think there is potential for growth, particularly in gold. If you look at the forecast for world gold production, both from the Australian Government and from the World Gold Council is positive going forward. So China's demand for gold has picked up as well. The official sector we talked about earlier, central banks, predominately some of these oil producing countries are Russia and China, they increased their gold purchases and we're talking real gold by 41% year on year. So I think that's demand it's coming out of, you know, the falling demand that we've seen in the consumer sector. But I think as growth picks up again in Asia we'll see more demand for gold.
[00:06:31] Elizabeth Moran: Lincoln, do you want to talk about some of the other gold bonds that we have available?
[00:06:44] Lincoln Tragardh: Yeah Absolutely. We've got a few main opportunities in the gold area. They're mostly in US dollars. So in the investment grade space, we've got Newcrest, which most Australian investors will be well familiar with. They have got a 2022 bond which place somewhere in the 4% region, a little bit above I think. Kinross has a similar credit profile by rating, similar sort of returns, some different maturity dates for that bond. And then if you're looking at high yield opportunity as a company, we like IAMGOLD, quite a nice name and that's up in the sixes so you know for those wanting to take on a bit more risk, there's a bit more return on that one. That trades in the U.S. session, however so it's an overnight job putting waters into that market.
[00:07:34] Elizabeth Moran: Well I think that's a wrap today. Zenith Energy is our new direct bond available from today for wholesale investors only. Certainly it is a high risk, as Jack pointed out, mining services company. One of the risks that we didn't talk about was that this company doesn't carry the cost of the fuel. So it's the miners that carry the cost of the fuel. So one of those bigger risks that you might think of is actually taken out here. But 7.55%pa, we really like the company and its diversity across Australia. Any closing comments guys?
[00:08:14] Lincoln Tragardh: Unfortunately it's only 40 million so get in quick.
[00:08:16] Elizabeth Moran: (laughs) Ok, have a good day.
[00:08:20] All: Thanks Liz.