PM Bolt-On: SABMiller, Commodities: Iron Ore & Base Metals - China & Glencore's coal neighbour + a little bling! + DOM, CWD & Majestic Wine's realities!

Good Evening,

There's significant demands on time at the moment, so apologies. 

Agreement has finally been reached between AB InBev and SABMiller. A rewarding trade for those going for the overnight 'thrill'. The discount to the £44 deal should not go unnoticed and evidencing how savage the arb market is ncurrently (BG included).

The benefits to Molson Coors (NYSE: TAP) should not be ignored but prudence dictates that profit taking would now be wise. 

Those longer term readers will remember Duncan Fox - who is no doubt relieved that the MegaBrew deal has been inked (*subject to regulatory approval). Duncan was  seen discussing SabMiller the other day (BBerg). Duncan can now look forward to the daily implications and sale of a stake in China Resources Snow Breweries.

In commodities there’s a growing trend that Europe are partially buying the story, the US consolidating it, but Asia are selling it (perhaps Asia is not in denial about the outlook). Iron ore has levelled around $54.5/t, but will not be assisted by the World Steel Short Range Outlook for 2015-2016. Worth a read, rather than taking the media reports.

The World Steel short range outlook factors in a number of assumptions that have yet to occur. Especially as a significant number of major projects are more than 50% complete and delays happening with new projects. All creating a hesitancy in opinion, it’s understandably difficult to measure the longer-term outlook without further flag waving stimulus from the Chinese Government.

Previously with any stimulation, there was a bias towards infrastructure, now with an emphasis on consumption, save for the Housing sector (the maintain stay), there could be a number of wild cards. Expect some focus on recycling, waste management and development of services.

What shouldn't be ignored are the indicators of increased inventories - sales not keeping a pace with production, exports down, imports down and pricing pressures evidencing the low factory gate prices. The only issue is...that's both in the US and China. It’s no wonder that FED rates are looking like they will be lower for longer. 

In Coal, there’s an inkling that a deal isn’t far off between Rio & X2 Resources. Rio's yearning to divest the Allied & Coal assets may, with X2 Resources willingness, have implications for Glencore’s margins. MickDavis (The Sydney Morning Herald), if the time is now, it may just put pressure on Glencore to merge the Australian asset with X2 being the operator.

The synergies are notable and Glencore must be kicking themselves that, save for a white knight, now lack the financial muscle to complete on the Rio deal. It’s ironic X2’s timing of a $2-3B deal, not only could imply the bottom of the market in coal/thermal coal, but more so strong arm Glencore into accepting a joint venture. Rio’s Bengalla sale to New Hope Coal (ASX: NHC) implies X2 would need to pay near $3B, but $2-3B is a sensible range.

Irrespective of such a coal deal, and Glencore's hopes a bull market in commodity prices, the reactions have been muted so far. Glencore’s newsflow continues unabated, and not always welcome, with Jim Chanos coming out and admitting he's "a potential purchaser."

It’s not the headlines that Glencore needed, as it shows Chanos’s is short the stock and highlights their woes. A brave call after such moves, but not without some sensibility in the statements.

The whole idea was if there was a downturn in the commodities markets the trading acumen would help offset the hard assets. It didn’t work that way. If that was the reason to put this thing together one has to question that strategy,” Chanos said.

Not forgetting that Glencore’s actions meant they’ve yet again gone into a corner where others are loathed to go. Remember Glencore attempted to shut in thermal coal production for a longer period and failed miserably. What happened to thermal prices when Glencore turned production back on? Down!

We are increasingly hearing of a drought in diamond financing at the moment, with Qatar being slow to finance new deals the prices are suffering (Idex Online). There is a possibility Qatar's financing options are limited at the moment. In part with the purchase of an agricultural business off Glencore (rumours) and taking a bath in a few stocks.

Retail demand appears subdued, but with contradictory news suggesting its more Global Emerging Markets than Western economies. Validated in part by the Alrosa and De Beers issues ref: Prices including allowing sight-holders to walk away from the tables. 

More to come on this in due course - worth considering why the need for the Dubai Diamond Exchange (DDE) to host a financing event. Is there going to be a recovery or more of a softer lander for prices? Alrosa's and De Beers' prices cuts will not have helped matters and the Russian currency gain is making any form of support difficult, with the Ruble/USD FX benefits.

With updates due soon from De Beers (Anglo American (AAL)), Alrosa MCX: ALRS, Rio Tinto (RIO), Dominion Diamond Corp (TSX/NYSE: DDC), Lucara Diamond Corp (TSX: LUC), Petra Diamonds (PDL) and Gem Diamonds (GEMD) – the market will obviously gain a better understanding of the situation.

Will Dominoes pizza (DOM) follow in the footsteps of Gregg's reporting and appreciate tomorrow? There's a lot of hope and expectation built in - with an early exit in the Rugby by England and the X factor / Strictly benefits losing appeal, will the pricing perception finally sink it? 

What justifies Countrywide's (CWD) premium rating? Not a lot...and looking more like a sell. With the capital markets day going down by certain preferred analysts like a damp squid, its getting hard to justify any premium to the valuation. 

And Finally, the market has awoken to the realities of Majestic Wines (MJW) yet again, with such headlines as Naked Wines Launches "Text for Wine" service, would you be long? No doubt some more consolidation due in the sector in due course. 

Atb Fraser

Apologies re: Grammar.

Morning Mumble: Sirius Minerals (SXX), Hargreaves Services (HSP) and Petra Diamonds (PDL)

Good Morning,

Apologies for not responding to emails, work and mornings are the essential hours. The luxuries of putting people in a coma have been limited, plus travel not helping. 

Sirius Minerals (SXX) recent share price moves have been validated as Redcar and Cleveland Borough Council (RCBC) the planning office has recommended approval for 23 April 2015. Current reports of approval are premature as the meeting is next week. Roger Bade yet again being the only one to notice the difference between recommendation for approval and approval. SXX could just be a success story for AIM investors, caveats apply and yes my position is bias, but not without acknowledging the risks. As such, 50% of SXX was taken off the table, with the remainder being left there for the longer term. 

It’s the day to close Dec-Jan short positions in Hargreaves Services (HSP), and hopefully have time to review later in the month. EMC sentiment remains the same, albeit one is wise to acknowledge debt is being paid down and there is the potential for returns post any disposals. The conviction of why anyone would hold such a stock (EMC Sept 2014) is validated, coal, bulk transportation, it's not a case of being out of favour, it's simply a case of low margins and a dire market.  

Octopus Investments Nominees Limited have seen the light in HSP and judging by the volumes, others have cut their losses, now cleared, there may be some light. With that in mind, its best to bank further profits, as it appears Schroders are back in the market, there's a risk of upside. 

Petra Diamonds (PDL) give a trading update. Readers will be aware it’s not a favoured diamond producer. PDL ignored the issues with Antwerp Bank financing hole back in January (EMC: Antwerp Diamond Bank ADB) and today those issues became a telling reality or perhaps acknowledged openly. Simply put in a strained market, if you've not got quality, you're prices (read as revenues) will and have been impacted. 

PDL have reduced production guidance modestly, the matured mining areas will have an impact but this should not be forever. Although PDL now note the woes of ADB absence. The issues will not go away in the short term with a strong dollar and potential liquidity squeezes. It will be offset by growth in the Chinese diamond market and Dubai and Russian banks entering the sector boding well for positive speculation. Today's weakness could just be a buyers opportunity, the conference call was almost a verbatim repeat of the trading update, save for the Q&A.

Diamond inventories are higher because of March tender timing and as a result lower debtors. Liquidity and net debt has been positively reduced, cash up, debt down and available headroom. Concerns about lower grades towards 2019 are valid, apparently the new ore is "extremely well understood" and PDL are confident of limited dilution in the fresh ore. Declines are unlikely to be seen to the same levels in the current grade of ore. The drop in prices seen up Christmas of a 9% decline has not continued (positively), and apparently has stabilised with green shoots of financing being seen.

CAPEX spend is in line with guidance, any hopes the benefits of oil price are unlikely.  With fuel costs lower one would assume this should have improved bottom line albeit as production is so heavily weighted towards labour, power is a small proportion of the operating costs. Timing of tender on inventories and strong finish to the year are crucial and PDL are well aware of this!

Odds are there's likely to be a strong finish to the year, but not without risks of Alrosa and De Beers mismanaging their supplies to market (oops and Rio). Not one for those ignoring the risks, as protests become more widespread PDL by location may be insulated (to a degree). The weakness will present a buying opportunity for those incapable of calculation a return on shareholder funds. 

The more recent bets on Madagascar Oil (MOIL) over the last 4 months or so have finally paid off, albeit it might be wise to derisk on the news! Hat tip Leggie, their Tsimiroro Development Plan has finally been approved, at long last!

Oil was rather self-fulfilling with contracts needing a certain level...and guess where it closed. 

Atb Fraser