The position in Posco (PKX) common was increased slightly at about a 50% discount to book value. Despite excess capacity and pricing pressure in the global steel industry, particularly in China, Posco's steel business continues to perform relatively well as evidenced by its 7% operating margin in both 2013 and the first quarter of 2014. The company continues to have a strong financial position, and its recent investments in non-steel businesses should start to contribute more meaningfully over the next couple of years, particularly in energy (more on this later in this letter). Posco common accounted for 5.4% of the Fund's net assets at quarter end.
Posco recently experienced a change in management. The new CEO, Oh-joon Kwon, started in March 2014. He had previously been the Chief Technical Officer. His stated mission is to reform the company and, to that end, four out of five board members have been replaced and three new outside directors added. His focus is on enhancing the existing business via organic growth and reducing leverage, whereas the prior CEO's focus was more about empire building. Despite the weakness in the steel business due to macroeconomic challenges, Posco has a substantial non-steel business. For example, via its stake in Daewoo international, Posco participates in the profits of Daewoo's Myanmar gas field which is just starting to ramp up. The field began production in June 2013 and was producing only 20% of potential production capacity in the fourth quarter of 2013. Posco expects the project to provide 150 billion KRW in pre-tax income in 2014, growing to KrW300 billion in 2015. Posco also has potential growth opportunities from its Engineering and Construction business and opportunities to divest non- core assets. Recent media reports suggest the company seeks to raise 2 trillion won by selling assets and is seeking to make an initial public offering of some of its affiliates including Posco Energy, Posco Engineering and Posco Specialty Steel.
From Martin Whitman (Trades, Portfolio)'s 2Q 2014 Shareholder Letters.
