Spoorex

October 16, 2017

Photo credits: Thaba Tholo Game Reserve

 

Last year during the market peak in September 2016, the game industry saw a mind-blowing sale. Inala, the Thaba Tholo buffalo bull, was fairly unpredictable to value before going up for auction. Predictions from R40 million to R100 million were rumored among industry insiders. However, exceeding the expectations of all onlookers, Inala sold for R168 million, the largest whole sale of a buffalo to date. Can this immense price be justified? Will the investors ever see a shred of profit from the sale? We’ll walk through the Inala-related sales to date to see if the big horned investment will provide a return to its buyers.

 

Running Costs

 

Most of the costs of keeping Inala are relatively small. Despite the hefty price, it is a bull just like any other and it should eat the same amount of feed as a R100,000 bull. To this extent, the running costs in terms of feed and man hours are such a small percentage of the total that they should not really factor too much in the ROI. 

 

However, we can expect that, given the size of the investment, the animal should be insured against All Risk Mortality. No game insurance provider would have the capacity to pay the 80% insured value at R168 million, as the risk is too high. Some of the riskier firms may have insured the animal at around R100 million (though even this is high-risk). With an insurance rate of circa 5%, the owners will pay around R5 million per year just to insure the bull. We’ll deduct this from the income generated at the end.

 

How much value does Inala add to cows he impregnates? Not much.

 

The first step is to work out how much value add does Inala bring to cows he impregnates. That is to say, how much more does Inala add on to a cow that is being sold In Calf To Inala as opposed to an open cow (or at least in calf to an average bull).

 

As we know, since last year, buffalo prices have taken a serious hit in 2017.

Below we contrast comparable cows from 2016/early 2017 and mid-late 2017 that were sold in calf to Inala.

EARLY: Thaba Tholo 2016, Lot 157, 33″ cow in calf to Inala – R7.5 million

LATE: SGB 2017 (Nyumbu), Lot 87, 33″ cow in calf to Inala – R3.1 million

 

EARLY: Piet du Toit Feb 2017, Lot 44, 38″ cow in calf to Inala – R10 million

LATE: SBG 2017 (Nyumbu), Lot 98, 38″ cow in calf to Inala – R4.9 million

A quick glance at the comparisons above highlight the drop in prices throughout 2017 by around 50%. This drop will affect the profitability of the initial investment. 

 

Inala, by taking another comparison, does not seem to provide a huge percentage increase onto cows he impregnates. Take the following example below:

Wildlife Legacy 2017 (Buffalo Creek), Lot 83, 35″ cow in calf to Inala – R2.2 million

Signature Wildlife (Woody Cape), Lot 32, 36″ cow uncovered – R3.2 million

Despite the inch difference between the two, there is a R1 million price gap, and the more expensive cow is not even pregnant. This comparison suggests that Inala’s unique genes are not adding any major premium to the cows he impregnates.

 

The cows being sold in all of the examples above also have a stand alone intrinsic value. All of them are extremely high quality and would receive high prices by themselves. For example, we would not expect the price for the 38″ cow from Nyumbu to vary too much from R4.9 million if it was left uncovered, or at least covered by any decent breeding bull. The sale from Buffalo Creek serves to ratify the point, as a quality 35″ cow is probably worth R2.2 million.

 

Therefore in terms of additional value to add on to cows, it does not seem like Inala is pulling his weight, and many breeders have sold a similar quality of cow without the Inala genetics and have achieved similar prices. To that extent, the value add from Inala is fairly minimal.

 

The Progeny is where the real money comes in.

 

Ok, whilst breeders may not want to take a gamble on getting prime Inala genetics from a non-related cow, Inala’s progeny is a less risky bet. Unfortunately there have been a very limited number of Inala sons and daughters sold yet to make a more accurate analysis. However, there is some evidence, but we can also use comparisons to other high quality bulls to aid the forecast. 

 

Daughters

 

An Inala daughter was sold by Piet du Toit in February this year and it sold for R5.8 million. It was a 3-year old heifer at 29″, so we can expect it to join the ‘elite’ over 30″ group. The animal was also in calf to Horizon, giving it an additional mark-up. If we adjust for today’s market and subtract the premiums for the Horizon pregnancy, the female can probably be valued at roughly R3 million. We can take this as our benchmark for the elite quality daughters of Inala. The breakdown below gives a table of the prices for elite, mid and low quality daughters and the estimated % that will be born. 

 

Elite Quality (32″+): R3 million – 10%

Mid Quality (29″-32″): R2 million – 15%

Low Quality (<28″): R1 million – 75%

 

Sons

 

There is even less data available on sons of Inala having been sold. This is primarily because any son that would reach auction would be well into its growth curve and nearing the peak. This would take between 5-6 years, and so the time hasn’t quite elapsed yet for those sons to make it to auction. Though it is not ideal, we can use sons of other top tier bulls that have been sold to assist. Piet du Toit sold ‘Maverick’, a Horizon (55″) and Jessa (38″) son this year for R2,050,000. Robedi Game Breeders sold a Tyson son (53″) at the same auction for R1,600,000. Both of these bulls were reasonably young, but were unlikely to reach ‘elite’ status (48″+). As such, we can class them as Mid Quality bulls. From this and other sales in the Spoorex calculus, we can create another tier table:

 

Elite Quality (48″+): R4 million – 10%

Mid Quality (44″-47″): R1.5 million – 15%

Low Quality (<43″): R120,000 – 75%

 

The low quality animals simply enter the class of ‘Hunting bull’, at which point any genetic premium is wiped out, as the hunter could not care less that he is hunting an Inala son.

 

So How Much Will Inala Make?

 

The assumption is that the owners are pushing Inala to produce at his absolute maximum, and have placed him with 40 cows. If we assume that the Male:Female ratio is 50:50 we can estimate the production capacity for each generation:

 

Daughters:

 

Elite Quality (10%): 2 x R3,000,000 = R6,000,000

Mid Quality (15%): 3 x R2,000,000 = R6,000,000

Low Quality (75%): 15 x R1,000,000 = R15,000,000

Total = R27,000,000

 

Sons:

 

Elite Quality (10%): 2 x R4,000,000 = R8,000,000

Mid Quality (15%): 3 x R1,500,000 = R4,500,000

Low Quality (75%): 15 x R120,000 = R1,800,000

Total = R14,300,000

 

Grand Total: 41,300,000

Grand Total Less Insurance: 36,300,000

Verdict

 

With the figures suggested above, each breeding cycle would bring in roughly 22% of the purchase price of Inala. That means, give or take a few percent, it would take five breeding cycles for Inala to have produced his weight in gold. With an intercalving period of 12 months, to progress through five breeding cycles would take a minimum of 10 years. However, we cannot ignore the time-value of money and the result based on these assumptions would yield an annual investment return of 2%-4% (IRR). This also assumes that the owners will successfully sell every single gene of Inala they ever breed. Of course there are a wide-range of assumptions made in the analysis above, but they are based on the entire body of evidence currently available. Certain variables that will be tantamount to the profitability analysis are the birthing ratios and of course the quality brackets. Inala could end up breeding 50% females and 50% elite quality bulls. Naturally, the reverse could also happen. 

 

Nevertheless, on the evidence based analysis above, it appears as if Inala will take over 10 years before he starts adding to the bottom line. This could all change if the market picks up again, which only time will tell. In the end, those estimating his real worth at around R40 million (which also happened to be Spoorex’s calculation) were probably correct. At that valuation, Inala would have been a money maker after cycle one. However, at R168 million, the price was even inflated at last year’s market price. According to today’s market, it doesn’t seem like it will fetch the returns investors had hoped for.

Key Assumptions

 

The construct above is a very basic model that incorporates several assumptions on the variables that should be made note of.

 

Insurance Value: There is no figure that has been officially declared on whether Inala is insured, let alone at what value. It is possible that Inala is insured at a much lower (or higher) value, or that he is not insured at all.

 

Intercalving Period: For the calculation of the Internal Rate of  Return, the assumption here was that the intercalving period was 12 months. This of course can vary.

 

Sale of all Offspring: The assumption on revenue statistics is that the owners sell all offspring of Inala once possible. This entails that there would be enough buyers willing to purchase Inala genetics, with just under 200 progeny being sold. 

 

Birth Ratio: The model accounts for a perfectly even split of Male:Female birth ratios that may not be realized in practice.

 

Progeny Quality Proportions: We estimated a split between Elite, Mid and Low quality progeny to be 10-15-75. These are purely theoretical and can vary substantially that will have a defining impact on the overall investment thesis.