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.

Pm bolt-on: Duncan Fox New Year's Direction.

EMC: Duncan Fox's Tesco call & a little bit more to say. Having sat on my hands for near a month when I found out. Its with great pleasure that Duncan has moved over to Bloomberg Business Intelligence covering consumers and retailers. So one hopes you'll see Duncan's work around, making sometimes brave calls but giving honest and common-sense opinion. All the best in the new role Duncan with circa 30 years under his belt he will certainly be an asset.

Atb Fraser

Morning Mumble: January dieting...Associated British Foods, Atlas Iron (wonders would...) and Oil. ALO forgot to tell the market about

Good Morning, with the market taking priority there will be no future apologies for the tardiness of updates nor urgency placed on any messages enquiring what time its going to posted. 

Morning Mumble: The diets begin in earnest... and the FT runs with Oil projects worth billions put on hold. The high impact drilling has always been questioned even at circa $100, quite why Premier Oil (PMO's) entered into Rockhopper’s Sea Lion on the economics is a question not of hindsight but of value for shareholders that shouldn't have been completed at this time. PMO's share price has gone only one way since Sea Lion Farm In, pre-the oil drop. 

PMO's all-in-costs from there trading and operations update will offer safety to a lot of oil investors. With some alleged low risk drilling (Falklands & Indonesia) and debt without the immediate concerns or RBL criteria, PMO is likely to have some potential upside. Personally, save for intra-day it’s difficult to justify any oil holding in the current market until the market has digested the changes. (See TLW). 

Tullow (TLW) today have come out with similar, giving clearer guidance on costs, albeit one would be wise to revisit their year-end accounts and work through the costs (limited time today). Tullow Oil plc - Trading Statement & Operational Update with write-off's of circa $1.2B and potentially more, one will wait to see what Tullow do next with murmurings in the market this morning. Over to Exxon Mobil (XOM) to acquire on the cheap with limited options for shareholders, the time to strike is "near." having cast their eye over this company before with the upside potential even in today's market. Do not expect the update to do much in the market, without some validated gossip of TLW losing its independence. 

With Game Digital (GMD) showing how margins and sales were impacted by Black Friday (Compete or Retreat), Home Retail Groups (HOME) update was with no hope of an improvement in comparison to GMD.

With Associated British Food (ABF) trading update today endorse repeated debates for divesting the food divisions, declining margins (as expected). The Sugar alone EMC Food Prices would impact and the EMC Duncan Fox ABF summing things up nicely. The company's trading outlook promoting (read as selling) the company nicely:

Trading outlook

This year we expect Primark's expansion to continue and Grocery, Ingredients and Agriculture to make further progress in operating profit on the back of their very positive performance last year. With the fall in EU sugar prices and weakness in the world sugar price, we expect a further large reduction in profit from AB Sugar, but this will put much of the effect of the structural changes in EU prices, seen over the last three years, behind us. We expect a decline in adjusted operating profit for the group but the impact on earnings will be mitigated by much lower tax and interest charges. Sterling's strength against most of our major trading currencies will also have a negative effect and we now expect a marginal decline in adjusted earnings per share for the group for the full year.

It will be interesting to see how my view on the not to short from November pans out! With my belief previous news being totally validated. (Disc: Long) Bold is mine. The market is now ignoring the Sugar and Ingredients divisions, so will look solely at the positives of Primark's performance the star in the group and making valuations difficult for traders. Closing on the news for the myopic trading and banking profits (myself). With little upside on the current SP, it’s wise not to carry profits much past the news. Under review for the short, now January 2015 has arrived.

It would of course be rude not to mention Atlas Iron (ASX: AGO), some of the dedicated have correctly spotted the shorting opportunity post-Christmas. As always, comments on AGO will be published if there are no obscenities and relevant. It is with pleasure that two significantly underwater holders decided to short post the Christmas nonsense appreciation, and have actually banked a break-even on their investment. Having held for their near 3 years from AU$3 they have actually broken even on shorts...have they been converted. Kudos! One hopes lessons have been learnt.

With Crude Oil finding support (and copper), it’s no wonder there's some hope for the obvious leveraged candidates. Brent and WTI both trading near par at $47.40/bbl (approx.). So today, the warning was on the door, the flags were waving, LGO Energy (LGO) conducts a placing to raise £1 million raised for Goudron, and Cedros update. Surely not, EMC LGO & Copper Coverage (Fumes) (Diet begins in earnest) seeing the writing on the wall, today I close my short and await the "constant" news flow again. LGO's Nomad and Brokers will obvious assure us no one knew about the placing and it wasn't broadcast far and wide and there was no selling down to fund the placement. Strangely no matter what they say, LGO has yet again performed predictably. Whatever happened to LGO's credit facility? 

Staying with the LGO theme, Alecto Minerals (ALO) placing, congratulations to whomever got this away...judging by past performance. Who'd have thought it with the importance of ALO's Completion of Analysis of Historic Drilling Results at Kerboulé Gold Project, Burkina Faso. Can anyone identify what regulatory news is contained within the 6 January 2015 announcement. The company today announces a placing to maintain working capital (read as sustenance) whilst discussions progress on potential joint ventures. ALO could have saved some RNS costs and updated the market on the Burkina Faso issues both with Government (CNT (no joke) and disturbances stopping operations for the Karma Mine operated by True Gold. Obviously other companies would be wise to update the market accordingly, after all gold is highly portable, such as Avocet (AVM) and Amara Mining (AMA), whom I'm led to believe operate not far away or have licenses near. Centamin Egypt (CEY) really need to bring the cosh out and put ALO out its misery...no premium share based takeover. The shareholders would immediately benefit. 

The final thoughts without reading too much into it the third quarter results of Mothercare (MTC) is why do they have shops? Investors should be considering graphite within the lithium squeeze, no cryptic messages just common-sense. Its always pleasing when investors re-read announcements and come back to reality, ZIOC (ZIOC EMC 30th September 2015 with ZOIC typo). (Disc: no positions short now.) Sirius Minerals (SXX) disappoints today with an update harbour facilities application. Perhaps the company can consider the difference between approvals and applications. This decisions is surprising seeing as there is the potential within the process to modify the application. Impatience will punish...

Atb Fraser.

Evening Bolt on: International Mining & Infrastructure Corporation plc (AIM: IMIC) & Tesco (the final update) a double dose of!

International Mining & Infrastructure Corporation plc (IMIC) loan conversion shows the faith in the company, a mere 30% discount to the SP. One hopes you've sense my irony with the mere...the 1 year chart must surely look like the cellar steps! Next stop 10 pence? 

It would be wise to think how the terms are fair and reasonable as Strand Hanson Limited, the Company's Nominated Adviser (NOMAD), consider that the terms of this transaction are fair and reasonable insofar as the shareholders of IMIC are concerned. Its not something I shall be complaining about having rated this as a sell since they acquired Afferro Mining Inc.

Tesco: Buy

One thing that Dave Lewis has just been talking about is the category reset. Basically done one category so far (other than Christmas), which is Home Care. Sounds like they have reduced SKU's by 31% and seen better volumes and lower prices. He then gave the example of toilet paper, where the SKU's were down 44%, but pricing to consumers were down 11%, so volumes well up. Now the manufacturers will have made far more money out of that (or the big players that won) as they have got rid of hi/low pricing, high/low stock levels and so production can be smooth, consistent and ultimately profitable. This will happen in more categories, so big brands should win. Sensible way to go forward, especially when you have c.29% of the market (they have the scale to deliver it).

Shares have had a good run due to no rights issue, many investors were hoping to get some cheap shares on a rights. We certainly can't rule out a rights at some time, but we suspect Tesco will do it from a position of strength, when they have sorted a good chunk of the balance sheet issues out (maybe this time next year). We expect the shares to follow through a little more in the short term, but we must remember that we haven't seen much regarding the profits yet. At some point in February the Group will need to lay out their profits forecasts, all we know is that they will be no more than £1.4bn, we don't know how much less of this number it will be. Write-offs will come through, but underlying profits will need to show the level of investment that Tesco has done to achieve the improving sales performance, we would expect the new Tesco management to throw in as much costs as possible in these historic numbers. Consequently we could see the shares see a small sell-off over the next few days, but fundamentally we still like the medium term story here. Getting the performance back to what it should be will give huge upside in the shares over the next 18 months. We remain a buyer.

Tesco: Buy

We were impressed with the presentation that Tesco has just delivered, not least because it shows a complete change in the culture of how the management are looking at the business. Moving the Head Offices away from their traditional home also signals that the new management team want to be involved far more in the underlying business than they have in the past few years. Here are some of the positives and negatives that we believe came through.

Positives:

One thing that Dave Lewis has just been talking about is the category reset. Basically done one category so far (other than Christmas), which is Home Care. Sounds like they have reduced SKU’s by 31% and seen better volumes and lower prices. He then gave the example of toilet paper, where the SKU’s were down 44%, but pricing to consumers were down 11%, so volumes well up. Now the manufacturers will have made far more money out of that (or the big players that won) as they have got rid of hi/low pricing, high/low stock levels and so production can be smooth, consistent and ultimately profitable. This will happen in more categories, so big brands should win. Sensible way to go forward, especially when you have c.29% of the market and the scale to deliver the potential positives that should come through.

The management has finally realised that you need to get sales growth to deliver shareholder benefits. We were encouraged by how Dave Lewis continually stressed how if they realise internal funds from either cost savings or better execution on the sales line then this would be invested back into price to grow the sales line. Margins therefore will be subdued for the next few years, but if you start gaining significant market share as you use your already strong position to get great prices on brands and own-label, then as time moves on the competition will struggle to invest to keep up. Ultimately this was a simple expression of offering the consumer what they want when they want it, this could make life much tougher for Discounters as they do offer value, but the range is very limited and so maybe they don’t offer consumers always what they want.

The most important comment that was made by Dave Lewis was when explaining the £1.4bn forecast which was put into the market on Dec 9^th. Here he made it clear that this would be the number when you take into account what had been expensed by that date. It was clear that they have therefore funded some Christmas and New Year investments via internally generated funds. The Company wants this to become the key driver in the business, if it does then they will be gaining share and hurting the competition, then many of the other worries regarding cash flow and debt will dissipate pretty quickly.

Finally, regarding debt and the worries over this issue for Tesco, they reminded analysts that they had issued £5bn of debt just after the new CFO arrived in October, so there is no immediate pressure on the balance sheet. We suspect this is why the shares have risen so much on today’s news, but we are still encouraged by all of the other fundamental changes that the  new team has started to make.

Negatives:

Debt is still high, though there is no immediate issue to repay this debt the short term cash outflow (c.£2.3bn) doesn’t make good reading. With lease commitments high, a Pension deficit and underlying debt, they do need to make sure that the underlying business is being run properly so that they can fund the business from that cash flow. Asset sales though can now be done at a time when it suits Tesco rather than the markets.

No final dividend isn’t great either. Here the comments seem to suggest that they will think about paying a dividend once they have the right investment grade, so that doesn’t look great for the short to medium term as it will clearly take time to repair the balance sheet.

We guess there will be some questions as to whether seeing no margin growth and just focussing on what is good for consumers is good for shareholders. Undoubtedly yes. If consumers start to come back to Tesco then cash flow should turn positive quickly, this will allow Tesco to sell assets at better levels, and maybe even have a rights issue on their terms rather than just having one as a necessity to reduce debt. Getting back into this virtuous circle is what investors want and should allow the shares to recover. Tesco has started turning this tanker round. We remain a buyer.

With limited time to highlight items above, thanks to Duncan for some more in depth thoughts.Even

Rare earths and China’s self-correcting folly might be a tad premature with export restriction in the form of permitting rather than quotas I hope to return to this REM, REE and Rare Earths item. 

Tomorrow due to meetings and a few items outstanding it'll be touch and go but it would be rude not to consider the pricing out to 2016 giving an idea what the market thinks for 62% FE. 

Atb Fraser

Morning Mumble: Tesco (Duncan Fox)

Good Morning once again,

Tesco: Buy

These results show that Tesco is starting to recover, though it will be a long haul. The underlying numbers for the period are not exactly good at l-f-l -2.9%, but when you see that during Q2 these numbers were -5.4% you can see the improvement. Also, the results over Christmas were considerably better at -0.3% (six weeks), but for us the most positive aspect of these figures was the growth in fresh food volume for the first time in 5 years. This is staggering as we would assume that this would have been the key thing to focus on in a food retailer, but it shows how far Tesco had forgotten their roots.

We are also encouraged that Tesco will now focus on the 1000 best selling lines, clearly they will make sure that these are available at all times. We have stated many times that Food Manufacturers would accept lower prices for higher and consistent volumes as they can then produce the products far more efficiently, so we suspect that the producers of these brands (and Tesco actually) will make better margins here than anywhere else. Just have a look at today's newspaper (well the Metro anyway), big brands at cheap prices will pull the punter in.

Probably the most important news other than the actual results though is the appointment of Matt Davies as CEO of the UK and Irish business. He has an excellent reputation and will certainly offer comfort to investors as they have been worried that running the whole of Tesco would be too much for a none retailer. We were not too worried about this, but having someone as good as this to concentrate on the business will leave Dave Lewis to get the structure of the Group right. The fact that they haven't had a rights issue today suggests to us that all of the assets apart from the UK and Irish businesses are potentially up for sale. As Tesco doesn't have to pay back any debt for c.18 months, this allows the management time to get the right price for these assets and invest properly within the UK.

Other than the above we have also seen the management announce a cost savings programme that should save £250m at a one-off cost of £300m. Head offices will be sold (they have 29 of them!), and working practices changed to reflect a growing business (incentive based payments). All of this makes us happy to remain a buyer of the stock.

End

As always bold is mine. There's more news to come shortly from Tesco, which may assist with the debt structure and viability of the business. Whether the assets will be sold in their entirety is another question, save for Blinkbox & Broadband. 

Leggie, indeed cherry picking to a limited degree but what has changed in Tesco is a top to bottom approach. Namely how managers are reporting has changed including the openness and clarity to market (they cannot afford to get this wrong), something perhaps that will change the dynamics for the likes of Sainsbury's.

Many thanks Duncan whom we may have a little more to say about later! 

Atb Fraser