Morning Mumble: Rusal's Reality & Ken's mare (Kenmare) with coffee/hangover.

So the press have decided to report that Rusal are attempting to delay the repayment of their obligations (Debt). So when people are thinking about Rusal, it doesn't take a rocket scientist to work out the following:

• Rusal's Russian (No prizes for that one) & has state aid during the crisis in 2008. No surprises with financial avenues contracting. However things haven't really improved for Rusal, save for Norilsk and that has not gone exactly swimmingly. 
• It has significant International Debt at the last toe and finger count it was nearing $11 billion excluding any interests payment due next month.
• Rusal's been well-document and/or well known to be attempting to restructure its debt for 3 months and is yet to reach agreement.
• Aluminium is down 30% since 2012 and lower than 4 years ago when it was obtaining state aid, so it doesn't bode well for commercial tests for repayment.
• Production costs are up unsurprisingly.
•  Market outlook is not good in the short-term for commodities

So what's the news? There is not any, save for yet again the market is not waking up to the realities of common-sense. This is everywhere, we’ve have Albemarle & Bond (ABM) that was a leveraged play on second-hand gold. Works wonders in an appreciating market (one of my largest shorts of 2013) whereby the debt to equity levels got burnt when gold sunk 20%. Restructuring is likely with either a massive placing or debt for equity being the mostly likely options there.

Then in mining there’s yet further leverage Petropavlovsk (POG) (I’ll never spell that) another leveraged play. However look globally and there’s significant leverage that’s been apparently bet on the stimulus globally working. What parties have totally ignored is on every level there is a glut to market of production then prices, yields and earnings all get impacted. Save for the obvious shortages.

So normality is returning and survival of the fittest, unless of course more stimulus is required. China is almost certainly going to have to step in. The leverage in specific sectors is untenable, most notably unregulated and the sale of bonds has been based on “stimulus” money, the same as the UK, Russia, and America.

From a risk perspective, one should be clearly reducing, this is mirrored in part by the number of founders cashing in their holdings in IPO. You only have to look at how many parties are exiting on IPO’s and/or selling down their holdings as Director. Remember, when founders or IPO’s which investors sell large amounts of their holdings including Directors, no matter what reasoning they’re giving for monetising their assets it says they’re derisk, so apply the same principle. The traders would do well to follow Hellermanntyton and Moneysupermarket to get an idea of the performance.

Well it would appear with Chinese defaults increasing and the global spat over Ukraine/Crimea, the commodities market save for Nickel is under significant pressure. Goldman Sachs in the Copper review failed to see the significance that if many have hedged their positions in the market for copper and iron ore, then the excess coming to market would have a significant impact on the price. This in turn is causing issues for the over-leveraged commodities traders, with depreciation in Iron Ore and Copper. 

Just consider the pollution upgrade requirements of Chinese steel mills, with massive leverage. This is impacting on the iron ore prices, but more closer to home and apparently ignored by all media save for the FT is the Stemcor default. Yes it has been on-going for near 12 months, but the resolution and sale of assets gives a clear indication of the leverage issues facing Chinese mills.

Gold, contrary to my view appears to be anticipating that Central Banks in Europe will start selling now the Embargo is lifted. It still amazed me that Gordon Brown sold all the gold at that price. Forget what price was obtain in the market, cover with the “sub $300/oz. phrase” but what’s important the allegedly intelligent person announced it so far ahead of time, you would have not been a buyer. Announced sales have the same reaction as “placings” Wolf Minerals a prime example you would have had to be ignorant of the trading opportunities to not sell down on the realisation. That’s what the market did, and is doing with Defaults in China and debt issues in Russia.

Leggie having caught your Baltic Exchange Dry Index BDI, is a very good indicator, however it also has some conventional and technical movements when going high and low. The Weighted average price over 10 years is creeping up but the overall average stands at $2200 (from Memory). What is of concern when weighing the BDI with the CRB is a (commodity futures price index.) The two were poles apart but with significant corrections occurring. What I prefer as the balance, pre 2008, both BDI and CRB kept a pace, then post 2008 there was a divergence, very predictably as “stimulus” money maintained the cycle for Commodities but the reality of the BDI. There is now a convergence between BDI & CRB occurring and something I would advise people to follow. 

For those that know my negative on everything view until proved otherwise approach, this is something that indicated the “top” of the cycle for Stimulus with realities in Iron Ore, Aluminium and copper bearing down on demand and likewise being mirrored in the lower prices assisted with the Glut to Market. Rio, BHP and the “big boys” have invested heavily, albeit lower guidance a fraction on expansion. With the demand slowing at least in the short-term for commodities and speculation exiting due to “margin requirements” it’s no surprise prices are under pressure.  The smaller Co’s however will suffer where their costs are historical around 25-40% higher and prices obtained “lower” by around 10-25% pending on logistics etc…

Do not get me wrong, the Chinese favour the Australian Iron ore at present and it won’t suffer the declines, but the smaller companies “with less demand and more supply” will. In essence a prime example of the economies of scale lower costs higher prices etc…So on the one hand you have JPM exiting Commodity trading but financiers backing Roy Hill iron ore project with $7.2bn funding. Iron ore was fuelled by the stimulus, Iron ore in essence is being tested for reality by the Chinese allowing Defaults. The market will find the true price save for more stimulus from China to avoid the realities in their leverage.

Moving swiftly on, Kenmare’s (Ken’s Mare) Director Purchases would normally be enticing for an investor. However what exactly have they made in terms of profit or achieved to target in the 25 years (please validate that year) of development of the Moma. Well save for the American DIY season being a driver for ilmenite and associated prices the market does not look good. I’m not here to overview the company but electrical issues, debt, placings and the like….Would you really invest? The knife catchers may offer some support in addition to the Director buys, but sheesh, there is not much of an investment case for a company that has done exactly what?

Well let’s just look at a basic requirement, electricity, which has been a problem, but by getting some generators installed this should overcome some of the power problems. So, just a thought? Why with the power problems is one ramping up production prior to resolving this item? It’s akin to building a house, plastering the walls laying the carpets and then thinking about the lighting? Or have I missed something? Perhaps I’ll be enlightened but looking over the past 14 years of share price history, it does not look good. Admittedly it was a glaring short at 50 pence, 40 pence, 30 pence, 20 pence, but I have to acknowledge its now about the price if you can value a leveraged play with $350M debt and an ABSA debt of $20M due March 2015? What’s left for shareholders? I really don’t grasp the value of the company.

Today should see some consolidation in the Insurers now the realities and common-sense are being applied with the merits of the policy being understood. It presents an intra-day longing opportunity for Just Retirement and Partnership.

A gorgeous day for the UK, clearly something up with the weather...