Bad debt, guv, going cheap. Cash Converters, a pawn shop, payday lender and financier of last resort for the less credit-worthy in the community, seems to have a bad debt problem of its own. The company’s half-year report yesterday revealed that:

“In Australia the bad debt percentage of cumulative principal written off (less bad debts recovered) to cumulative principal advanced for the Australian business has increased to 6.3% as at 31 December 2014 from 5.7% as at 31 December 2013. Changes in lending criteria have been implemented by management during the period to reverse this trend.”

And in the United Kingdom it’s worse because of the government’s tightening of the rules around predatory payday lending:

“The bad debt percentage of principal written off to principal advanced for the UK was 17.5% up from 16.6% as at 30 June 2014. This percentage is likely to remain high as the impact of the legislation changes continue to impact the loan book.”

If those losses continue across the company’s 700 or so shops around the world, then it will go out the door backwards unless it gets regular cash infusions. That will come no doubt from its 33% shareholder, EZCorp of Texas, a giant of the pawn store payday lender business with operations across the United States, Canada and Mexico, as well as through the operations of Cash Converters. EZCorp has two of the five directors on the CC board — new chairman Lachlan Given and new CEO Stuart Grimshaw, who were named to their EZCorp posts on February 5. Two other directors are executives of CC, and the chairman is a non-executive director. But according to CC, so are Messrs Given and Grimshaw. Grimshaw is the former CEO of the Bank of Queensland, who upped and fled the company for a post at EZCorp out of the blue last November. — Glenn Dyer

Have I got an iron ore mine for you. Imagine this ad in the for-sale columns of say, The Australian Financial Review: “WA iron ore project, $1.4 billion, associated port and rail network, Vendor very willing to negotiate generous discount, vendor finance”. Would you fall about laughing? Probably, given the weak prices for iron ore at the moment and the depressed outlook for the minerals sector. But yesterday, Aurizon, the big Queensland rail freight group, may have well suggested that approach as it wonders whether it made the right move in joining with Baosteel of China to buy Aquila Resources in 2014 at a cost of $1.4 billion, which bought them a half-stake in the west Pilbara iron ore project, port and railway (Posco of South Korea is another 25% shareholder, with a private company holding the remainder). But the project has always been dicky — Aquila put it on ice in 2013, but Baosteel and Aurizon were gung-ho for it in arguing for the eventually successful offer. In a statement in May, 2014, when the bid was announced, Aurizon’s CEO Lance Hockridge said the deal could “boost jobs, national exports and generate significant royalty revenue for the (WA) Government”. Yesterday, Hockridge wasn’t so effusive — no talk of jobs or exports or government revenue.

Hockridge, in fact, had a very different spiel for analysts and the media yesterday — he said building rail and port infrastructure in partnership with Baosteel would be “challenging” if iron prices remain around $60 per tonne, and that it would only proceed with the project if it made “commercial sense”. Well, it didn’t make commercial sense last year and this year it’s looking very much like a pie-in-the-sky type of project. That $1.4 billion cost was for half the $7.4 billion project (yes, the partners would have been up for another $3.6 billion plus). When the bid was announced last May, Baosteel said the project would be economically viable with iron ore prices at US$80 a tonne — they are now around US$65 a tonne (It was US$106 a tonne at the time of the bid). Aurizon put $211 million into the bid for Aquila but that’s looking shaky. So, down the track, a cash loss is on the cards — and that $1.4 billion is looking ropy, recovering all of it a big ask. This is one for the backshelf and then to be quietly written down/off. The project will never be developed. — Glenn Dyer

Boom goes the iron ore spot price. Ssshhhh, listen, that muffled roaring is the sound of iron ore mining and exporting company executives holding their breath as the global spot price breaches the US$65 a tonne level (on the eve of the long Lunar New Year holiday in China and much of Asia — a time of volatile prices). Overnight, the spot price for Australian iron ore delivered to northern China rose 2.8% to US$65.10 a tonne — the first time in three weeks it has been at this level. Prices rose 2.4% last week. Boom, boom go the bulls. With the weaker Aussie dollar, that’s around A$85 a tonne — a level at which most Australian companies can survive and make a profit. Helping the surge has been the onset of the holidays, which have coincided with a fall in stocks of iron ore in Chinese ports to 96.5 million tonnes, the lowest they have been in 13 months. The spot price is up 6.5% above the 2014 low of $61.10, hit earlier this month. Watch the smile on Fortescue Metals owner Twiggy Forrest and CEO Nev Power when they front the media and analysts later today to discuss what will be a weaker profit from the country’s third-ranked miner and exporter. The surge won’t help Aurizon and Baosteel out of their black hole in WA — who would lend them more than $8 billion to build such a dodgy project? Cash Converters? — Glenn Dyer

Always Coca-Cola (as profits fizz): We’ve told you of the strategic review and changes at Coca-Cola Amatil that newish CEO Alison Watkins has been overseeing after the last years of the decade-long reign of former CEO Terry Davis were marked by worsening performance, sales and odd investment decisions. Some of the clean up started in his last year in the gig in 2013 with a $400 million write down in the value of SPC Ardmona. Watkins took over in 2014 and since then the decks have been denuded of key executives, 400 staff and other sweeping changes including the sale of 25% of the company’s Indonesia business to the buyer of last resort, The Coca-Cola Company of Atlanta (which itself is struggling with weak markets in the US and changing consumer preferences). This morning the results of the changes at the company were produced — underlying profit down 25% and a 25% drop in dividend, which will absorb a very high 85% of that lower profit. That means the board, chaired by the sainted David Gonski, is trying to keep shareholders happy by paying out as much money as it prudently can with regard to the 30% plunge in the share price since mid-2013 to around $10 this morning.

But the real indictment of the old CCA management was to be found in the company’s heartland with the selling of Coke, Fanta, Sprite, Diet Coke, Mount Franklin and other products inside Australia. Sales fell nearly 4% to $2.8 billion, volume 0.9% to 335 million cases — that’s nearly 15 cases for each Australian. Naturally, profit margins and earnings fell. And why? Well, as Ms Watkins told the market last year in her long strategy update, the company lost sight of its most important market; the small stores, vending machines and other outlets that sell Coke at full price. The old Coke management cut costs in this area and sales fell. The strong growth of small outlets over the past five years also took the company by surprise, allowing rival products to make gains. At the same time, dealing with the high volume outlets — Coles, Woolies, Metcash and the big hotel chains — became tougher as they demanded bigger discounts and pricing support, which management resisted for a while before falling over. Then there were the dietary concerns, which management were slow to react to (as was the US parent) and changes in consumer preferences for the size of container and the look. In other words, a litany of management stuff ups, and yet 400 people have lost their jobs as a result. Coca-Cola Amatil promised “no further declines (in earnings per share) after 2014”. Watkins and Gonski will be held to that. — Glenn Dyer

Peter Fray

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