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: Iofina (IOF), Diamonds, industry issues (stay awake) and another reason for Grexit to FLOW, VAT? KEFI's Placing and the Sherlock award!

Good Morning,

Iofina's (IOF) production update will no doubt be taken positive, the market should be wise to price in inventory levels and sales rather than "just production increases.” IOF has held circa $3-6M (the lower more recently) worth of inventory as a minimum over the past two years, the decline is also in light of the falling Iodine price.  

In the absence of an announcement of increased sales equal to or greater than today's announcement, expect the next set of results/accounts to show a near 30% increase in inventories. If one didn't know better, it smells of a fundraiser. Holders are reminded of the difference between production and sales, especially in a tight market with low prices and demand growth in the industry limited to circa 3.5%. Perhaps a push into the health market, assuming one doesn’t have certain rashes and thyroid issues.

It is International Diamond Week in Israel (well all two days of it) with the President of the World Federation of Diamond Bourses (WFDB) highlighting a few issues. With various concerns coming out of the conference, and positives. The main factors include:

• Over-grading (Rapaport Diamonds Magazine) by some labs that's caused an issue in reselling and confidence by the customer. Wonders will never cease, those ambulances will feel lonely with some legal practitioners diversifying See: lawsuit. 

• Conflicting diamonds, yes its still going on.

• Money-Laundering, something PLUS500 knows all too well about. Diamonds being highly portable, quite how the WFDB members deal with it is another matter. More so financing, with the formation of the Financial Action Task Force (FATF) back 1986 its still not cleaned the industry up. One suspects the absence of "mainstream" financiers as a result of the Antwerp Diamond Bank (ADB) closing, is compelling some dealers turn to the "non-mainstream lenders."

• The banks (of the ones left) want diamond companies that have traditionally been family owned, to adopt a more corporate structure. 

• Something diamond producers were slow to acknowledge was that lenders wanted diamantaires to put up more of their own capital. The 100% lending is long gone with the norm circa 50-70% pending on quality. Something De Beers expected in their new sales contracts (July 2014) and  EMC: July 2014 De Beers further strengthened in the sightholders and Accredited Buyers contracts including a greater transparency in financial reporting.

Over to ABNAmaro to assist the market, but more so find a structure other industry lenders would welcome and support, rather than maintain the opaque nature of the diamond market. Anyone for “Easy Diamonds plc” type venture, surely the market is crying out for such a well-funded entity in light of ADP disappearing and Dubai/UAE only filling some of the void. The bottom certainly looks near for the diamond industry with all their current woes, financing issues, over-grading and limited compliance with a sensible financial structure.

In a discussion about energy efficiency and far from embracing all things green, it was surprising to see FlowGroup’s (FLOW) model destroyed in one fell swoop by the EU. Does this mean the model is viable at all? It would appear that the VAT rate was the cream that meant the boiler would be able to pay for itself in the current lifespan of products?  Installation(read as profits) warning for FLOW.  

One hopes for the company that FLOW can reduce their costs sufficiently to enable the “'Boiler that pays for itself' model. However, the Government might have to step in with some form of subsidy. It’s noted that INSP (Inspirit Energy) have not commented on this, perhaps due to their target market being more commercial and exempt from the 5% means, there’s no material change?

Today is also the day that the EMC Google Alerts system evidences being a worthwhile addition to broker opinion and the Borg. It’s sensible to consider them even in your office. Having converted quite a few “professionals” to adapt from the all-seeing Borg (Bloomberg) by creating their own systems in conjunction with the Borg.

Having not taken a position personally, it’s a massive hat-tip to a small firm down that spotted this in their alerts and the implications ConstructionManager: U court: 5% VAT on energy-savings products is illegal,  FTEuropean court rules against low VAT for energy-saving equipment & Guardian:Households must pay higher VAT on insulation and solar panels, EU rules. The source being Google Alerts, although not quite turning to the dark side, they did manage to prevent significant losses. 

Imagine that, “yes sir, it was thanks to that public access portal (PAP) known as Google we managed to divest all your holding.” Perhaps Flow were tardy in their EU implications update to market with such material and significant public information?

This morning, on the belief that the Government will create direct subsidies (still permitted in the EU) rather than via VAT system, I have caught a knife (or not). It was tempting argument (risk) to buy into FLOW, albeit a small position. Expect an update from the Government due to the significance of this ruling on a growing and rather larger industry.

KEFI Minerals have completed a placing for £2.8M. (EMC:Plate Spinning & Cashflow April 2015). With AUSDrill International taking part in the placing, although small its giving an indication on who is looking to fund the project.  Admittedly AUSDrill have their own woes, AU$400M of debt, declining revenues and available cash of AU$62.7M. AUSDrill’s share price has been a proverbial ski-slope and in the absence of some decent deals, holders will no-doubt be impatient. Kefi will need more cash in due course.

It would be positive if W Resources (WRES) LaParrilla Definition Study actually had put up some pricing assumptions in their announcement. WRES have either cleverly or stupidly prevented any analysis being possible.

If one was to factor in today’s price for Tungsten and Tin ($235/mtu and Tin $14425.00/t), the IRR drops significantly to circa 36-41% (fag packet and quick). The economics simply don’t stack up for the FTM (Fast Track Mine) when for a modest increase of $30M on the initial $16M (total $46) WRES can increase production near 4 fold. Equity requirement would be circa $15-20M.

With WRES keeping the lights on with VAT refunds (€388k is expected in Q3), expect a placing soon. No wonder the price dropped on the news, if one cannot be bothered to inform their holders of pricing assumptions when announcing “good news” don’t expect the holders to get carried away. If WRES (Broker(s)) want to get a decent sized fundraiser to develop the asset they’re going to have to do significantly better than today’s announcement.

An award of sorts goes to Metminco (MNC). They have realised sieving the beaches may have produced better results than their original cut-off grade of 0.15% for copper, even as an open-pit operation. Today’s cut-off grade increase to 0.5% Cu should make the punters realise the woeful inadequacy in even attempting to utilise 0.15% as a cut off. With the Sherlock award going to them for pointing out that operating and capital costs will be significantly lower mining higher grades. Shocking Sherlock.

Sound Oil's initialannouncement read as plug and abandon, today we have confirmation of that.  

Finally, something as promised EMC:Dispatches and Dispatches:Supermarket Wars. Something worth a consideration for those long-only supermarket investors.

Atb Fraser

Morning Mumble (Via Email): Petra Diamonds (PDL), Graphene Nanochem (GRPH) when's the placing? Stans Energy mareva being lifted...& BPTY

Good Morning,

Just when you start to look at a long in Petra Diamonds (PDL), you're reminded of their woes but the time is not been wasted. The company now state the strategy for addressing the low grades is not working nor is improving.

PDL’s woes came out in the analysts call back in February/April (would have to check notes) were the concerns for the grades ‘whilst in transition’ on the mature ore. Today’s confirmation of what one analyst (hat tip) spotted that PDL should have considered before the market update. If memory serves me correctly PDL were meant to have a good understanding of the ore.

The grades are lower with fewer high quality stones and the bulk being smaller carats is going to result in lower revenues. EMC: PDL April 2015 noted that a PDL lacking quality then revenues will reflect this. With yet another downgrade in guidance (previous Q3) not in quantity but the quality. As the profits warning strike rule applies, any positives seen are now eroded by the management’s guidance. The market would be wise to price in another, especially whilst the rump is now 2017+

Unless some degree of luck is on PDL’s side with exceptional stones, it’s hit and miss on revenues, and the weighting towards end of year, results will now need to be very good. Date for the diary is the full year 2015 trading update (Production and Sales Report) and annual guidance announcement on 27 July 2015.

The surprise will be if PDL can do $120M in the final quarter. The shares should be about 150 pence after today’s news. Consideration should be given to the potential sale of De Beers and balance sheet needing to look ‘better’, expect a cap on pricing up to Christmas.

The average price per carat in Q3 for Cullinan was $106/CT, after today, a prudent measure would be to downgrade expectations to around Finsch’s Q3 numbers of $88/CT and strip out the majority of any “hope” in the recovery of exceptional diamonds. Translating to $405-410M full year not $420M or $105m ish Q4.

Graphene Nanochem (GRPH), when reading accounts, its mystifying what the market is up to. GRPH’s preliminary results are out and the award of a new tender for $28M over 3 years.  GRPH state they are “Well positioned to capitalise on the growth potential in the oil and gas ("O&G") market.” 

GRPH future revenues may have some potential, but unless the window seat has changed its outlook, GRPH operate in O&G, have net debt of circa $28.2M and do not make a profit. Fundraiser anyone?

On the back of Stans Energy third party litigation funding agreement with Calunius, the Ontario Divisional Court has set aside the Mareva Injunction over the Centerra shares. Although freezing order has been applied for. The appeal, as Stans Energy point out was set aside by the Court on procedural grounds, not on the merits of the case. Being informed its likely they'll win the appeal, without being versed enough in the law its a binary bet at this stage.

What are the odds of bwin.party digital entertainment (BPTY) being bought out now? Of course one sells 6% of the company’s entire issued share capital because there’s a premium coming. Perhaps march madness (in June). SpringOwl Gibraltar? (Poor I know!).

Security at Lonmin's (LMI)'s car parks might be a long-term additional expense as cars/buses were torched in protest at redundancies. Now the managed sale is over of GLEN stock, its back to the realities for LMI. LMI's market cap is now at a level to set up operations would be near 4 times as much $. If one was sensible, resolving the Furnace issues with a revisit of the ConRoast tech (held by JLP) the costs per ounce and long-term maintenance could be significantly reduced. Are analysts going to start to acknowledge the need for cash? For that matter, the company? 

No time again and again for Gate Ventures (GATE) with a placing underway, would you?!?! Or PureCircle! However no reason to change the view that there’s “no reason to hold” EMC: Purecircle 10 September 2014. We can look forward to their trading update towards the end of the month/beginning of next.  

Atb Fraser