Morning Mumble: Hiatuses and...Ken's Mare (KMR) Equity for shareholders? Anglo + De Beers, Glencore and some news about a former Jam Tomorrow Employee Rurelec & Questions for their NOMAD.

Good Morning,

Very busy - although amusingly, there were suggestions we had visited the dark side and started working for a long-only fund! Chance for a recap later this week on the pertinent issues from the 22 November to present, although nothing much has changed, save for news driven events.

Iluka Resources sensibly announced the long-awaited termination of discussions with Kenmare Resources (KMR) - it’s wise for parties to read the RNS. Those followers will be unsurprised by this "news.” 

KMR equity holders have the opportunity to participate in the dreams of the future. So to sugar-coat the dire state of the KMR’s financial position they have announced plans for an investment by State General Reserve Fund (SGRF), a further capital raising, and balance sheet restructuring

Over to KMR (bold, italics and underlining are additions):-

SGRF, a sovereign wealth fund of the Sultanate of Oman, has approved in principle an investment of US$100 million in the firm placing via one of its subsidiaries, subject to and conditional upon, inter alia, agreement of a subscription agreement, agreement of arrangements with the Group's project lenders on the Group's capital structure, procurement of commitments from other shareholders in respect of an additional minimum US$75 million capital, necessary Kenmare shareholder approvals, and finalisation of a prospectus.

Wait….continue reading:

Moma is a world-class asset that encompasses a large, long life ore body. Total invested capital exceeds US$1.2 billion, with the mine producing more than 7% of global TiO2 feedstock supply - being the largest merchant producer of ilmenite globally.

Having invested capital that exceeds $1.2B, and producing 7% of global TiO2 feedstock, it would appear the management are going to hang around to run the next stage of the "KMR turnaround story/saga." This is despite being in charge whilst a transformation of a once multi-million pound company into a small cap with a £12M valuation took place. One has to wonder what the board’s remuneration and bonuses have been over the years in comparison to the returns for shareholders. 

The question that those supporting shareholders should ask is, “are the management right for the future?” If the past is an indicator of the future, prudence would be to have a fresh start with a clean sweep. Those whom played the KMR pub quiz last year on FTML, will no doubt be aware of the dire performance for shareholders.

What’s another $175M in the grand scheme of things? Will the prudential be putting up any ‘wonga’ into the fundraiser? More to the point, is $175M enough?

There remain a number of material matters that need to be agreed to enable Kenmare to deliver the planned capital raising and there can be no certainty at this time that they will be achieved. Kenmare welcomes the indicated support from SGRF and appreciates the support of key shareholders.

We’ll watch from a distance, although if one was short, prudence would suggest closing on the news today. KMR Net Debt must be around $315-332M by EMC estimates.

Continuing with a theme of shareholder value and with some amusement for those following the debacle at LGO Energy. Judging by the latest announcement they’re off to find and/or recognise shareholder value with  a strategic review. 

LGO also update the market on the Trinity Exploration no-deal on the Tabaquite Block by issuing 41,487,776 to Trinity Exploration. Trinity’s statement on Tabaquite Block, Trinidad ends with: 

The decision to cancel the SPA has been considered as part of management's overall assessment of means to better realise the value and future potential of the Tabaquite Block. 

  

We have Glencore (GLEN) updating the market this Thursday. NH and David Sheppard at the FT ran with something a bit more positive, “Glencoreexpects to cut debt ahead of schedule.” - Sensible and common-sense discussion about GLEN's earnings forecasts in the current environment. Pay attention to the terminology used on Thursday, one suspects there may be a few statements coming from the back foot.

Sadly for GLEN's workers Collinsville coal mine in north Queensland, 180 workers are to lose their jobs. Is this an admission of the dire state of the coal industry? It certainly explains why Mick Davis is taking his time with X2 Resources, perhaps to Rio's annoyance. 

In the weekend press we had Anglo American allegedly slashing their dividend (again and again), talk about echoes – news must be thin on the ground! Anglo’s investors’ day tomorrow (08th Dec). We can no doubt look forward to all the positives of a diversified miner and what this offers investors, whilst struggling with depressed pricing.

With Anglo’s subsidiaries either under water in terms of operational costs (Kumba Iron Ore/De Beers), lacking flexibility in CAPEX (Minas Rio) or needing to deleverage the balance sheet. The future doesn't look rosy. Anglo is now realising the hard choices it has to make and the limited flexibility. Quite why they have not pressed the equity raise/capital injection button is anyone’s guess. Surely they'll want to get in there before all the others?

We note that De Beers have sold Kimberley Mines in South Africa to Petra Diamonds and Ekapa Mining for a rather low sum. If one looks at the capital De Beers spent on Kimberly and the plant etc…it gives a rather good indication of the amount pressure to monetise what assets they have/can sell.  An article from May 2015, makes for an interesting read… Engineering News - De Beers inviting bids for life-extending takeover of Kimberley Mines. Was the USD to South African Rand/ZAR near $1:ZAR5 in 2002/3?

For those that have followed a company Rurelec that we consider jam tomorrow, its not often one gets validated in their views so quickly. Over the weekend attention was drawn to the following announcement on Independent Power Corporation PLC.  See the previous commentary here (EMC) when the IPC was "spun out" or Rurelec to allegedly save costs.

Questions:

a)      When did the Independent Power Corporation PLC, Peter Earl and Anglo Kazakh TransAsian Pipeline Corporation Limited commence discussions? We may be able to update on this shortly...

b)      Was this before or after the spin off?

c)       Was the NOMAD consulted on the “spin-off?”

See the original announcement and terminology 19^th June 2015 - Director Change (Peter Earl) leaving & IPC. Then see the replacement, Spinout of Subsidiary. Albeit it’s somewhat immaterial as the horse has already bolted.

Atb Fraser.

Morning Mumble - belatedly: Chinese Steel - stranglehold continues unabated + Cue increases in Customs Rates & Anti-Dumping measures + Anglo's woes, with Tribal and Shaky Ground in China.

Good Morning, Good Afternoon,

Its been a very busy past week with the travel and meetings.

Continuing on from last Tuesday's theme - disappointingly for British steel producers the impact of China's need to export deflation is now being felt (ITV). Unusually, the ITV have been on the ball for once. With a closure/insolvency at Redcar and now a further 1,200 UK job disappearing at plants in Scunthorpe and Scotland, the end if nigh for higher cost producers.

The majority of steel producers are incapable of competing on a skewed playing field. With "energy pricing readjustments" being the favoured play in China, since the removal of the boron rebate (subsidy). Commercially this made sense, as most western construction companies started to avoid the higher content boron steel as welding joints was an issue (integrity).

China has not just benefit from advancements and investments in technology at the steel plants, but been aided by subsidies and "energy pricing adjustments" enabling them to produce significantly cheaper. the benefits of incentives benefit the . We'll come back to the Chinese energy consumption figures later, as there's a suggestion the economy is still contracting with circa negative 0.3-0.5% in energy consumption in the first 8 months. (The GDP figures will also evidence this.)

India responded in June (Economic Times/India Times) by increasing the import/customs tax increases to attempt to maintain a balance where their native producers. This has had limited impact and India may have to impose outright anti-dumping measures. Initially te India Government are likely to introduce 22-27% customs / import tax and this will be implemented shortly.

In January 2015, the EMC highlighted the issues of dumping of steel in Europe by China. The shorts were ArcelorMittal SA (AMS: MT) and Evraz (EVR) plus 'a few others, albeit thanks to some brilliant technical analysis by Hugo, it was played appropriately. 

Steel stocks, despite buy backs, have had the writing on the wall, where the competition was an tsunami like wave of supply into world markets. The affects have been witnessed in the share prices of almost every producer.

EMC- Boron (January 2015), its noted that the boron tax rebated ended early January 2015, yet just the other day a reader was amused by the Telegraph on boron in steel (from August)  referencingcontent from 2008. Readers will be aware of the bias here towards other news sources including our own as they are are much more reliable.

In contrast to the economic woes, just down the road from where Tata has mothballed the Llanwern site, Liberty Steel has been reopened the Newport rolling mill site (Times of India). A brave stance with the current outlook. 

In due course we shall look specifically at the Chinese (indirect) subsidies that are causing eyebrows around the globe that making Governments question the ability to produce at such costs. Its something to consider..

With a similar theme, and a quick recap with a decent read across from AccelorMittal and Kumba Iron (EMC: Kumba) - Anglo American are leveraged, operating in 'various entities and sectors' that have experienced pricing pressures. Made worse by a complex structure are operations that are hard to manage, including the allocation of funding and costs controls that provide for limited upside in the current environment. An example being Anglo/De Beer's Diamond operations need considering with the wider company structure below. 

A wider look from Bloomberg©. - Click on Image to Expand.

Anglo Corporate Structure

The market has appropriately read across from BHP Billiton's (BLT)'s recent debt Hybrid Part 1 & Part 2 and now acknowledges the mammoth task of Anglo's debt/leverage.  More to come for certain on this with Q3 due out 22 October. 

Thanks to an on the ball chap/analysts noticing the Rapaport item - there are reports of yet more carnage for De Beers (Anglo Diamond division). Rapaport has suggested that De Beers (owned by Anglo but more importantly the previous saviour of the group) has suffered at the last sales event. Additional reading: Current rough prices unsustainable and unacceptable.

The car crash being that prices were off yet again, suggestions of "larger diamonds being on the tables and the prices still taking a hit. So what did the buyers/sightholders do? Leave with near 70-75% of allocated diamonds on the tables. Revenue won't be near consensus of $450M but likely to be 200-250M on the last sale. Now De Beers/ANGLO can't even tempt buyers with larger/better stones at a discount. (EMC view).

We highlighted Dominion Diamond Corp (TSX/NYSE: DDC) last Tuesday as well. For those followers of fashion, it’s worth noting Rio Tinto has a 60% interest in Diavik Diamond Mine and numbers came in below expectations. With diamond production down 15% but more so, recoveries down 25%. Mind you, at least they'll have less to hold in inventory. 

Today, continuing on from our view on the profits warning in Tribal Group back in June May, EMC: TRB 15 May 2015. The company's theme has not changed at all. There is a trading update that's best to leave to Tribal to explain -

Tribal Group plc ("Tribal"), a leading provider of student management systems and services for education management, issues a trading statement to update its outlook for the second half of the year ending 31 December 2015.

In recent years Tribal has been successful in winning large software projects in our chosen markets. The expectations of our larger customers continue to evolve and attract the interest of new competitors, and our success in winning large contracts remains difficult to predict. At the same time, despite being well positioned in the market, the focus on our larger customers has resulted in Tribal being less successful in building a pipeline of medium-sized and smaller opportunities to complement these large deals.

We have also seen the extension of certain large customer programme timelines, which has resulted in the deferral of revenue and higher project delivery costs.

In light of these trading conditions, we now expect our revenues for the current year to be lower than the prior year, and we expect our operating profits to be significantly below our previous expectations.

The Board initiated a review of the Group's operations in the summer. Despite implementing initiatives to drive sales and increase our operating efficiency, we have been impacted by the more difficult trading environment. We are strengthening our sales leadership, fundamentally reviewing of our sales priorities and processes, and better aligning our cost base with our ongoing activities.

The process to appoint a new Chief Executive is advancing well, and an update will be provided in due course. [Ends]

One has a suspicion that the Chief Executive search hasn't gone as seamlessly as thought. What is the debt position of the company and more so....see bold (additions from EMC) that should be thought provoking. There are some positives, we didn't need to highlight the entire announcement. That's Tribal's third strike on the bases of profits/performance updates and as such the caveat of caution applies, expect a kitchen sink approach upon appointment. 

To save time, we'll merely edit the view from EMC May...

Tribal Group (TRB) gave an update into the AGM. a trading update. With timelines going out further, one would be wise not to ascribe too much value in light of a second third warning about the timing of and Keith Evan's departing departure, the warning signs were there! Having missed the previous year’s targets, the terminology is far from positive, but with a new 'man soon to be at the wheel' there's some hope, after a kitchen sink episode and some hope of an improvement in outlook. Yet another company struggling with its guidance and outlook. 

We'll leave the GDP announcement for China to the wider press, having already formed a view last week, there's some items that will need more time, than allowed currently. 

Thank you to a reader, this CNBC item Chinese property is worth noting. China’s economy built on shaky ground. There's some useful insights that were missed at the end of clip but worth finding...

Atb Fraser

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: Chinese PMI Services & Manufacturing Data (deflation), the western capital ducks fly home.

Good Morning, Oops, Good Afternoon after typing up and forgetting to publish. 

With such a glut of PMI data, the inbox was rammed with everything from the positives of the Czech data to the woes of China and Nikkei India Manufacturing PMI™. 

The Chinese Caixin General Services PMI™ & General Manufacturing PMI™ data pre-empted the sell-off in Rio Tinto (RIO), BLT (BHP Billiton) and Fortescue Metals Group (FMG) in Australia. This was whilst the profit taking on oil occurred (the money for old rope trade of August). Why papers are suggesting traders got torched, when in all probability, the shorts caused the spike en mass closing.

Chinese/Indian PMI data has not supported the Iron Ore (FE62) price, in fact adding greater discounts to inferior products (discount for lower quality iron ore) - watch out Atlas Iron at 3 Aussie cents a share, the graph won’t look too bad! The FE62 price has had some support, thanks in part to a redirection of supplies because of Chinese WW2 celebrations and the Athletic events in Beijing. 

The events impacted/distorted orders provided some market support thanks to the air pollution orders covering August 20- 3rd September? There was also immediate premium applied to the majority of commodities handled at Tianjin after the explosion. Tianjin’s major imports after cars/autos are light trucking and containers, are Ethylene (15% of national supply), 15% of Wheat imports and 30% of the domestic steel exports. Not a minor port, but capacity easily filled elsewhere. 

There appears to be a conflict in the Chinese leadership, one perhaps that could end with a few changes. As one new source of information put it, the Chinese are now witch hunting people even for saying "sell" on Chinese Bulletin Boards. 

We had known for a while about the issues in the Chinese stock market. Likewise, Li's trading accounts being suspended and his two or was it three interviews with "regulatory forces". Now Li now has no working trading account. On the plus side, Li's one of the lucky ones being "permitted/allowed" to withdraw all his monies. 

The actions of the Chinese Government is now one of fear, with arrests across all areas of the stock market. The charges are listed as, i) manipulation ii) profiting from the Chinese Government intervention iii) assisting others to profit iv) spreading rumour (whether false or accurate) v) accepting bribes to provide information of Government intervention. 

We'll just rephrase the i-v, i) Chinese Government purchases, ii) alleged Chinese senior government selling stock amazingly just as the "Government Team" is buying, iii) brokers and "team Government" assisting all iv) Chinese news channels encouraging buying and open threats to those considering selling anything v) as item ii, where "the senior hierarchy" have been almost immune to the stock market movements. 

Risk off today? Why not, we love a market that's incapable of assessing fundamentals and is merely crowd driven. Although the disappointment is coming to those with South Africa exposure. Not only have wage and energy costs not helped matters, but more so the political outlook and 'uncertainty' may impact on operations as redundancies become more significant. 

Anglo American's woes have been made worse thanks to Alrosa. Anyone want to buy a 'once upon a star decent entity known as De Beers?' It would appear not...not only the price reduction, but Alrosa it appears have realised 'forcing ones contractually obliged long-term sight-holders to purchase might be a bad idea!' 

Atb Fraser 

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