Our friend Kevin Virgil from Pathfinder Capital recently returned from a sojourn to Mozambique.

Africa is a place that interests us in general. Mozambique in particular holds appeal for agricultural investment. To that end we have been exploring opportunities with Kevin and his team.

Kevin just put out a note to Pathfinder investors, and we asked him if we could share it with our readers. So, courtesy of Kevin and his crew…enjoy!

——–

Last month we visited Mozambique in order to further explore the farmland and agricultural sector in this fast-growing country. While our principal task was to refine the strategy for our forthcoming Frontier Agricultural Fund, we believe that the country’s recent history can best be illustrated through our experience at the Mozambique Stock Exchange.

Let’s begin with a quick summary of its recent evolution:

Mozambique has suffered through nearly three decades of continuous war: a liberation/colonial war in 1964–74, the Rhodesian War of 1976–80, and the 1981–92 Cold War proxy war of destabilization. The end result was nearly one million people killed in the 1981-1992 era, and almost one-third of the entire population forcibly dislocated from their homes. Consequently Mozambique entered its post war period in an exceptionally fragile state; during its formative independent stages it was often referred to as a ‘donor darling’ – a reflection of its high initial dependence on foreign aid.

In the ensuing two decades Mozambique has since developed into one of the highest growth countries in the sub-Saharan region, with average annual GDP growth rates of 7-8% since 1994. Foreign investment has also sought exposure to the Mozambique development story, perhaps best exemplified by the USD 2 billion investment in the Mozal aluminum factory on the outskirts of Maputo. Not all foreign investment has been successful; earlier this year Rio Tinto was forced to take a USD 3bn impairment charge – and sacked its CEO – after it badly misjudged its ability to transport coal to the coastal region from its Riversdale project in Tete province.

We believe that a country’s stock exchange can be an excellent proxy for its overall state of economic affairs and governance . Let’s begin our review with some headline facts and figures:

General Details

• The Mozambique Stock Exchange does business as the ‘Bolsa de Valores de Moçambique’ (BVM) and was created in 1998.
• The exchange’s website is here and is is only published in Portuguese. You can go to the site’s ‘Boletim de Cotacoes’ if you want to check daily trading volumes.
• Trading hours are from 9 – 12 am on Tuesdays, Thursdays and Fridays on their live call system with pre-agreed trades taking place between 8am – 4pm Monday – Friday.
• Any company that desires to list on the exchange needs a market capitalization of at least 28 million meticals (USD equivalent 930,000).
• The bourse had an average market capitalization of USD 820 million in 2012, a year-on-year increase of 72%.
• There were a total of 214 transactions in 2012, of which 191 were on the stock market, 21 on the bonds market (12 on treasury bonds and 9 on corporate bonds) and 2 on the commercial paper market. This represented 77% growth year-on-year when compared to the 164 total number of transactions registered in 2011.
• The BVM, perhaps not unsurprisingly given Mozambique’s formative state, has only three listed companies:

1. SABMiller Plc’s Cervejas de Mocambique, CDM (2001) – a brewery and the most traded stock on the BVM. Current market capitalization of USD 462mm, with 121mm shares listed.
2. Cia. Mocambicana de Hidrocarbonetos SA, CMH (2009) – a state-owned oil and gas company. CMH has announced no less than three dividends this year with the most recent one coming in at 20.8%. Very closely held with a current market cap of just USD 5.5mm.
3. CETA (2012) – a construction company, with current market cap of USD 61.2mm.

Our journey to the BVM was an interesting one. Despite having sent repeated emails and calls to our main contact there, we had received no reply or specific invitation to attend – however, our previous experience in such situations has always been that an unannounced visit is acceptable.

The first task was to actually find the place, and this was to prove more difficult than expected. We were keen to beat a hasty retreat from our current meeting at the Ministry for Small and Medium Sized Enterprises (IPEME), which was located in what appeared to be a former communist gulag, and see how the BVM shaped up.

Situated at 1230, Avenue 25 Septembro (most of the streets here are named after various global revolutionaries or associated key events) the BVM is discreetly found on the 5th floor with stairs providing the only access. One must banish any grandiose notions of an easily located, shiny building full of Gordon Gekko impersonators. Upon arrival we were pleasantly surprised to find a relatively well-organized environment with people striding around corridors imparting a sense of purpose. We were lucky to stumble across a pleasant female operations technician named Almeida who agreed to sit with us and explain the workings of the bourse.

In a small twist of irony we found ourselves sitting at the very desk of the contact who had failed to respond to our requests earlier in the week – his unexplained absence perhaps an excuse for the lack of communication. Our conversation with Almeida proved to be extremely useful and she was able to provide some fascinating insights.

Currently there are two new companies that have recently applied for listing on the exchange; although we were not given many specifics we understand that one of the applicants is EMOSE, an insurance company, who are likely to conduct an IPO of at least 10% of their shares. As to the question of why so few companies have actually listed (the exchange has been running for fifteen years now) we were told quite candidly that most companies are actually terrified of revealing their books to official scrutiny. This insight reveals and reinforces the need to apply granular levels of due diligence in frontier economies. Fools can most certainly rush in.

According to the Public – Private Partnership Law 15, which was passed in 2011, all extractive companies must list between 5-20% of their exposure on the BVM. This is a sensible move for a country where some of the world’s largest natural gas deposits were recently discovered. And, with notable companies such as Anadarko Petroleum and ENI SpA already getting involved this represents a clear opportunity for the government to push for further investments into the industry (recent projections for infrastructure spending in Mozambique range as high as USD 30 billion).

For those who might consider trading on the exchange, we were informed that it is possible to open a local bank account, and then trade through that bank directly onto the exchange. Note that there is currently no central depository in Mozambique; instead, local banks hold all the information on trades (i.e. people and entities involved) and report only the volume and prices of the trades to the exchange. This provides the local banks with a striking amount of power and responsibility, and in our opinion is a system in desperate need of an overhaul.

In 2006 the government gave approval under law 25 whereby a central securities depository (CSD) would be created, and for which BVM would be responsible. We asked when this was actually going to be completed and were met with “hopefully next year” – which appears to be a common response from a system that is trying to modernize at exponential rates.

Unfortunately our schedule forced us to leave the Mozambique Stock Exchange before any investment tips could be imparted; however, we left deeply impressed by the optimism and desire there to bring order from chaos. Almeida will begin a Masters in Economics program in Stockholm later this year (she remains very enthusiastic despite our warning that the Swedish winter would not be as kind as that in Maputo). Such optimism must be matched with restraint, for whilst Almeida represents the future potential of Mozambique she must be contrasted with the fact that the majority of her fellow citizens have little or no financial literacy.

Very few Mozambicans have a basic understanding of what an equity market is, or does. We were starkly reminded of this with one final anecdote regaled to us at the door, whereby an executive of one of the three listed companies had recently phoned up the exchange to complain that the price of their stock had fallen – he directly blamed the exchange
for his company’s misfortune.

In summary, our brief sojourn to the BVM was fascinating and some of the insights we received were truly revealing. Mozambique is still in a nascent stage of development but if the attitude and organization of the management of BVM is anything to go by then it is heading in the right direction.

——–

Chris again… We’ll look deeper into Mozambique in the future, and we’ll count on our friends at Pathfinder to help provide further insights.

– Chris

“I met a sheik from mozambique who led me to the Congo. He dreamed to go to Mexico and sample a burrito.” – ZZ Top