Morning Mumble: China (of course) + Liquidity with some likely sad news for a few Chinese traders, PLUS500 (what are its user costs). The pain of Graphene and GKP!

Good Morning,

Overnight the Chinese authorities have banned listed entities selling stock (if over 5%) in other listed entities for 6 months. So those collateralized loans should be safe for now, with a Band-Aid on the value of them. 

China curbs stock sales in effort to halt market rout and they've dealt with those insurers owed money from brokerages, by banning them from calling their positions (Reuters). The articles doesn't mention the liquidity issues the insurers are suffering as a result nor the Peoples' Bank of China assisting them with emergency funding "for as long as is needed."

The woes of China are causing a "drag effect" across all markets as a race to cash occurs. As seen on the DOW yesterday and other markets with Asian exposure. The FTSE/LSE's will have a similar occurrence. 

In essence, the Chinese are liquidating the positions that are left to cover the woes of being locked in in on native markets. After just a few days, where the Chinese market would have perhaps found a natural level and the issues resolving itself, it’s likely the woes will be engrained for the longer-term. 

Insurers have liabilities, brokers have liabilities and the population as a whole have commitments (rents, mortgages, car payments etc...) This rout or liquidity contraction is being felt across all market classes. The Chinese appear to have been oblivious to the ensuing train wreck and will recoil in terms of risk appetite and exposure to said risks. Same for their purchases, such as cars, food stuffs and luxury items. 

There's a lot of commitment tied up in the market (near $2 trillion). Chinese directors with stock pledged as collateral for loans against the now suspended stock. The Chinese Government, are reported to have pledged "unlimited liquidity." Around the same time as the state media reported this, all commodities rallied, as though a new source of financing had been found or the keys to the safe. The most notable bounce being Copper treading water around $2.50/lb and Nickel jumping above the key $5/lb to $5.15, but felt by all except precious metals. 

One cannot help but wonder if the Chinese Government are trying to patch leaks in the canoe as they appear, rather than taking stock of the situation. The insurers are now expected to shoulder some of the margin issues, along with the China Securities Regulatory Commission (CSR) and  Brokers, Margin houses and banks (PBOC holding the shoe/house). Local Governments have also seen a keen opportunity to tap the Central Government for some cash. 

The woes may be felt further with the "payday" events that have typically occurred in China, but will put further pressure on the system. Historically late payment of wages has been a normal practice, but in the absence of liquidity, this may be outside the normal practices. Especially if some companies were say "margin trading" when they were not expected to be and are now locked in. 

The SHCOMP (Shanghai Stock Exchange Composite Index) traded in a very large range of 3,373.54 - 3,748.48, with the predictable tank on opening with consistent buying throughout the day. Same for SZCOMP (Shenzhen Composite Index), trading in the range, 3,373.54 - 3,748.48.

The saddening part is the news will soon be awash in China of police arrests for "illegal short-selling practices." The scapegoats are going to have little ability to defend themselves with funds frozen already or to be frozen. The need by Chinese officials to find a scapegoat or 8 to lock up for perpetuity. 

Despite the crime being the stupid levels of long margin that was allowed to go unchecked or regulated properly. All that was needed was an 11% contraction to have a confirmed bear market rather than the normal 20%. Whereas to short in China is very difficult, not only restricted but limited to 5% of total stock, with tight controls previously in place. Even on the grey market, shorting was restricted which rather contradicts the Chinese officials’ assertions that it has been the product of a targeted and sustained shorting attack. Sounds good though doesn't it! 

PLUS500 have given a trading update. What the market would be wise to consider is who has deposited the funds a) the customer b) the company or c) an introducer? The number of active customers may have a significant distortion depending on the answer. PLUS500 traders (as per Facebook) are suggesting if you put pressure on PLUS they'll "give you between €100-200" pending on the value of that customer. More so, PLUS500 are believed to be including these "Freemans" as active customers (really?). 

Customers are in essence drawing their monies out, but first obtaining a freebie to fritter away on highly speculative bets, as between 100 and 200 trades/points are required to be able to draw out the €100-200. What is important in today's announce is the lack of Average user acquisition costs (AUAC) that will have to be revised in light of the "retention" attempts by PLUS. Or are PLUS going to introduce another cost item, say "customer retention costs." This has a material impact on bottom line of anywhere between, €9.3M and €18.6M pending on how generous PLUS have to be or have been. With some "whales" allegedly getting near €2.1K. 

The massive increase in the AUAC costs has not gone unnoticed. More importantly, with gossip from certain quarters suggesting there's some settlement by those "armed up with a lawyer" to recover all their losses during the suspension. Will this become a more common-theme? What is the impact or liability for PLUS. This is excluding the unknown quantum of any potential fine that appears to be a material breach of AML procedures. Over to Playtech to ask those questions during their due diligence. Do PLUS 5000 have to update the market on these liabilities both legal and potential fines? 

Centamin Egypt (CEY) gave a better than expected Q2 Production, ahead of guidance but overall guidance wisely remaining the same. With little in the way of costs per ounce guidance, one has to range between $729 and $655 per ounce. AISC (all-in-sustaining costs) should be around $945/oz but with some positive revision potential towards $915/oz. Grades into Q3 are key, as a lack of improvement will shave %'s off the overall FY of 430,000 and 440,000 ounces."

As one savvy analyst has noticed and is likely to give some greater PR to the graphene industry is the Collaboration between Haydale Graphene Industries (LSE: HAYD) and Talga Resources (PDF version) (ASX: TLG). 

With some unfortunate victims of the 'new tech' era, such as Graphene Nanochem (GRPH). whom operate in materials and chemicals such as  Fuel additives , oilfield chemicals and homecare products. Unfortunately for GRPH their margins will be squeeze across the board, whether there's potential out there for further contracts, there's been a sustained level of selling. 

With debt levels increasing, margins being squeezed and a number of plates spinning it would be wise to price in an equity raise. Whether the company are considering this or not, it's going to be no mean feat. Limited cash, debt of circa £30M, expect news of rescheduling of debt and some element of equity raise. The Company has been punished rightly/wrongly for perhaps being listed too soon. Or arguably from a company perspective of being able to access the capital markets. 

There is/was a lot of hype around the Graphene launches, including Applied Graphene (AGM). With no debt, AGM has not been punished to the same degree, however GRPH are at a different evolutionary stage. GRPH's IR needs a significant work-over irrespective of the sustained selling. When comparing, it would be wise to consider GRPH the leveraged play, whilst AGM/HAYD and ASX: TLG appear to be more reliant on the markets for capital than creditors. 

Limited time for Gulf Keystone (GKP) who's output guidance / forecast has been cut. As a positive GKP have received some cash and will hopefully be shipping oil out via the Turkish pipeline soon. The market didn't need reminding that as a result of the 5 weeks suspension production would be down, near as damn it the 10% GKP are guiding on today. With directors departing and the like, this low ball offer is looking more and more likely! Over to GKP TV for those incapable of reading! (Mentioning no names). With certain folks taking the jolly to Paris for the AGM, sobriety will be top of their lists. 

Atb Fraser

Morning Mumble: Sirius Minerals NYMNPA, Platech's cashbox placing & clever play and Anglo's Sherlock Award + Paragon Diamonds "share buyback!"

Good Morning,

Its rather bemusing that the market expected the planning officers report to do anything bar go against the grain and recommend anything! In summary, 

• Officers' policy conclusion is that they do not believe the development represents exceptional circumstances and that the economic benefits and mitigation/compensation do not outweigh the harm caused.

• Officers acknowledge the high level of mitigations, the significance of the economic and social benefits which could attain national significance and the very strong local support.

• Special Planning Committee to meet, as previously announced, on 30 June 2015 to determine the application.

The full report is available: NYMNPA Special Planning Committee Report (PDF). Anyone that did not derisk significantly really needs to consider their approach. With no recommendation, it’s down to the planning committee to determine the result. One suspects that the "no recommendation" is to avoid the potential legal implications of being pro-ante the project. Its down to the test for a ‘Major Development’ that is a key government policy. In the event of refusal, expect SXX to become representative of arbitration value, circa threepence. 

30th June beckons...where Members of the Authority will make a decision on the application, based on their own views of the planning balance, and have the option to resolve to approve, defer a decision or refuse the application. One suspects it will either be approve or deferral, refusal has significant consequences on a number of levels. 

Playtech (PTEC) have announced a placing that should be considered a cashbox and has only aided the short component in PTEC. With greater scrutiny over PTEC and analysis of its core business (including PLUS), PTEC's model needs cash. The commitment to buy PLUS is one of a binary nature, both shrewd and well-timed or simply, a stupid gamble where the product offering could have been replicated with a better perception of brand. 

As PLUS has had so many issues, its "plug and play" type model is now ruined (in regulated markets) expect some significant revisions and reconditioning on growth forecasts. With a vast amount of convertible loan notes/bonds in existence at circa £7.25 and the placing. Wonders would never cease if the placing was at the convertible price level?

PTEC holdings at 9.36% in PLUS. The market simply should price in the takeover happening now, as PTEC are merely saving themselves near 5% of the offer price in market. Clever? if it turns out a good buy not goodbye, time will tell. With 44.96% voting in favour now, they need a smidge over 5% to do the deal. Unfortunate for a few funds, some of which had the opportunity to avoid such a calamity. Alas, don't consider the amateurs knowing a thing or two!

Apparently, Anglo American (AAL) shareholders pressing for more cost savings, Investors press Anglo American chief executive for cost cuts. It’s taken a considerable length of time to realise the returns of 15% ROCE (Return on Capital Employed), are but a mere hope. One was in a quandary about whether to give the Sherlock Award to the company or the shareholders believing in the unachievable target, with the asset class, commodity price and OPEX costs. 

The performance to date suggests Mr Cutifani has over-suggested/promised in a backdrop of misery for asset sales and rationale of costs for a producer with little hope of cost savings in its current structure. Alternatively, it could have been much worse? Unlikely. It may have been safer for the Australian to stay at Ashanti Gold.

In the current climate it would be unwise to sell De Beers in the current cycle of diamonds. Having been in place for two years two months, it’s mystifying what has taken shareholders so long to realise what has not happened. 

The obvious has occurred, dire performance, coupled with the disposal of assets that are very unlikely to achieve anywhere near was is hoped or implied price. Anglo's other entities operate in a depressed market with the outlook clouded by contradictory data from China and slump in ore prices. 

Examples of sales, the Mantos Blancos and Mantoverde mines, as well as its 50.1% stakes in El Soldado mine, and the Chagres smelter have been slow. Its alleged Codelco have trumped X2's offer of $486M. Although unlikely as Codelco's natural fit is Chagres, with their smelter division and need to create value in their own offering/assets.  AAL (management) could just be forced to take fire sale prices to appease their shareholders. 

Other analysts and reporters suggest the Mantos Blancos and Mantoverde mines won't achieve anywhere near the $1B hoped and there's an offer by Glencore and X2 Resources around $500M. Any expectations of a value of near $1B save for some 'wannabe' conglomerate, are unlikely to become a reality. Although the wildcard goes to GKR Corporation, whom may come through as a strong contender, being well financed and having not completed a deal for near 12 months. 

GKR purchased the Navachab Gold Mine in Namibia from AngloGold Ashanti in June 14. Not necessarily the best timed purchase, and minor in the grand scheme of things. Mantos Blancos and Mantoverde mines, as well as its 50.1% stakes in El Soldado mine, may have economies of scale for GKR and certainly fit their remit. Over to the Qatari advisors!

Is the time right to buy Anglo? Perhaps as pressure mounts, although the South African issues cannot be ignored nor can the likely hit on the bottom line by divesting such assets into a separate entity. AAL must now be considering a perfume dowry of financing to cover up the quality of the South African assets and lack of returns.  Sound familiar? South32? Whom managed to obtain funding lower than Rio's! 

AAL is perhaps a buy as its near the target of 905 pence, being near or thereabouts, there's limited downside for the shorts, neutral perhaps or knife catcher. Certainly not short from now until further news. 

Paragon Diamonds (PRG) announced 'debt financing' to commence a share buyback programme and "to support short term working capital requirements" whilst the Company progresses the acquisition of the Mothae Diamond Project in Lesotho from Lucara Diamond Corporation (the “Mothae Acquisition”) which was announced on 5 May 2015. 

It begs the question of the sensibility of such an arrangement, when PRG are starved of cash and could only raise £130K in March. Over to International Triangle General Trading LLC whom control the shots. Perhaps its more to fund the flights to and from Lesotho whilst creating a squeeze in the stock to get another placing away post the Mothae acquisition? Who knows...in the absence of news, the price is about right. 

The cost of such a deal me simply outweighs the benefits to shareholders of a modest increase in SP, and one would be wise to factor in a few risks in this type of irrational corporate action. Surely if the company has prospects and potential the market will rate this on results "not" hopes. With the expense of borrowing, warrants and costs, why this was done now is bemusing!

Atb Fraser

Morning Mumble: PLUS500, A special side order of numerical confusion, where have they all gone?!?!? Potential US Liabilities? & Add-On...

Good Morning,

In March Trading Update PLUS500 (PLUS) had 67,667 active customers but as of close of business on Monday, 8 June  PLUS today announce they have had approximately 23,000 customers log into their account since May 18.

Where have the “other” 44,667 ‘active customers’ that one assumes appear relaxed and happy not to “log in” to their PLUS500 account since the 18th May (and suspicions are earlier than this date based on PLUS500’s Facebook account). In essence, 66% of PLUS’s customers have not logged into their account for 3 weeks.

Of the ones that have “logged into their account since May 18”, only 10,147 of the 23,000 (just over 44%) have “completed the remedial AML procedures." We’ll call the remedial AML Procedures RAMLP. Out of the 67,667 active customers, only 10,147 customers had completed the RAMLP, why have the “other active customers not completed the procedure?!?!”

Of the 10,147 that have completed the RAMLP (just under 15% of PLUS’s total ‘active’ customers from March), 8,457 customer accounts have now been fully reviewed by the remediation team and unfrozen, thereby enabling those customers to trade and to deposit and withdraw funds.

Out of the active client base that are now free to trade, 5,205 have resumed trading (61% of the approved RAMLP or ) and 457 have cashed out all their funds (5% of the approved RAMLP). PLUS have omitted to mention what turnover or revenue they are gaining from the 5,205 customers (or 7.5% of the total active customer base from March) that have resumed trading. 

What are the 1795 of “approved” customers that have not resumed trading nor cashed out doing? After 3 weeks? More importantly, what of the combined 92% or 62,253 (approx) customers, that are either not logging in, not completing RAMLP nor trading. 

Playtech (PTEC) would be wise to raises questions about the activity of a customer base that doesn’t log in for 3+ weeks. What has happened to a massive 66% of the customers that “were reported as active” at the end of March, but now only 5205. 

If there have only been 23,000 customers logging into their account since 18th May, what is PLUS’s real churn rate? Please note, since the 18th May, no new customers have been onboarded (assuming correct). Then the churn rate is massive if one assumes that 44K+ would have been a casualty of losses/churn.

What of those clients that may be domicile in the US that would have been prevented from trading assuming AML was in place. What are the implications for PLUS/PTEC, whom are not unknown to such issues. 

Have PLUS got any US liabilities in light of what could be deemed a weak/poor client onboarding process? Based on today’s figures and the desire to complete by September 2015, is the deal already looking wobbly and does the RNS today infer a Material Adverse Effect (MAE) based on the numbers that do or don’t log in and those that are active?

Applying make-up to a pig, doesn’t change the facts. PTEC would be wise to look at the “customer withdrawals prior to the anti-money laundering procedures (review/remedial action) took place.” There is some speculation about a “mass” exodus prior to ‘the implementation of the ‘RAMLP.’

Atb Fraser

Add-On: 14:04: As a result of the Financial Conduct Authority review/recommendations, one assumes that Cyprus Securities and Exchange Commission and Australian Securities and Investments Commission will have to commence a review the onboard processes (if not already).

In light of the transferring of accounts out of the PLUS500UK to Cyprus that have been alleged to have happened, it raises the question of legality. To be able to transfer an account out of PLUS500UK means the client should already comply with the FCA AML procedures before a transfer can take place.  Although it’s suggested this is on an opt-in or out basis, where if one declines the transfer, then AML documents have to be resubmitted. Cyprus will no doubt be raising questions about this process/policy anyway.

Admittedly, not expanded on from this morning is the split between operations or countries and/or entities in terms of active numbers. PLUS do not separate where the revenue derives from nor what the split to each entity is. One has assumed the majority (92+ %) revenues have been affected by the client on boarding issues.

Opportunity research has shown that customers in Holland, Spain, Taiwan, Israel, Belgium, Denmark, Germany, UK, Finland, Bulgaria, Ireland (Dublin), Italy, Sweden, Venezuela, Portugal and US, have all reported they have had their accounts suspended at various times pending ‘verification’ or ‘other issues’. More so, even when they believe or disclose they are verified the customer discloses they are unable to trade, add or withdraw monies. It’s acknowledged the reported location and actual location may differ from Facebook. However, there is little to assess the implications as the update is vague to say the least. 

There are a number of assumptions on the basis of churn and a lack of new customers, which suggests the last disclosed active customer base figures of 67,667 is more accurate as the total. Simply put, no onboarding has taken place, at least in PLUS500UK entity and one suspects in most western regulated markets for some of that time. Or at best, with increased onboarding protocols slowing down customer revenues/spend and also perhaps deterring the "instant" revenue the previous procedure "was more friendly towards."

In reconsidering the figures for today, the significance is that only 10,147 customers that have completed the remedial AML procedures (RAMLP) and only 83% (8,457) of these are approved and 50% (5,205) of the RAMLP utilising the approval to then trade. If one was to read this across to other active operations, there's a possible range of clients between 41K and 20K (currently). Whether this improves is another question, PTEC/PLUS seem to think so (Oh and ODEY).

The overall total number trading is of more significance than any total active customer numbers. What is absent is the number of suspended accounts outside of the UK that have appeared on Plus500’s own social media. Research is suggesting that a significant proportion are being “re-verified”, causing disgruntlement.

The FT article by Dan (greater depth and consideration) Plus500 thaw update looks at the total breakdown from the total number of clients, 106,000 and the subsequent possibilities of the revenue split. There has been nothing to suggest that suspension and the subsequent repercussions have not happened in other countries. More so statements to the contrary, as per Facebook validation of disgruntled customers stating their account has been suspended etc…including trend monitoring services and twitter. 

It would be risky to assume that the split between frozen/suspended accounts (pending verification) and those specifically relating to PLUS500UK is at the lower end or differs from some form of “global re-onboarding process.” Evidence so far, admittedly by opportunity sample*, is suggesting the scale of the problem is greater than what PLUS have disclosed today in their limited release today. Thus the lack of clarity about trading and operations ‘outside’ of PLUS500UK.

Allowing for 50% of the revenue being derived from the UK operations, the reporting factor is suggesting that ex-UK operations are also affected to some degree. Contradictory factors, in the preliminary results, where “the majority of revenue is made up of UK and Western EU countries.” One should consider the impact of suspension on the EX-UK revenues as well. PLUS stated when the issues came to light that c.45% of Plus500UK's customers have passed Plus500's electronic verification process and are therefore allowed to trade, which contradicts today’s announcement.

The question still remains, what constitutes a Material Adverse Effect for PTEC. 

Atb Fraser

*Admittedly opportunity sampling around negative events is down to emotional disclosure on social media, as the old adage goes about bad news travelling faster etc…

Morning Mumble: Curve Balls from Israel (PLUS500 & Playtech (PTEC tie-up)), Beowulf, Patagonia's departure, Aureus Mining & Republican Fishing!

Good Morning,

A bizarre event when you read an RNS and think, is that exactly what I've been saying (self-admittance) of a company in dire straits. PLUS announce that Playtech (PTEC) are buying them for 400 pence per share. Shareholders have no choice, there's significant warnings in the RNS (bold is an addition): 

• On 18 May 2015, Plus500 announced that the UK Financial Conduct Authority ("FCA") had required a review of its Anti-Money Laundering ("AML") financial sanction systems and other related regulatory controls which led to Plus500UK Limited ("Plus500UK") prohibiting all transactions for existing customers until additional AML procedures have been completed. As a result, Plus500UK ceased on-boarding new customers.

• Further to this, recent events and associated publicity have meant that Plus500 has become the subject of increased scrutiny and has received additional requests for information from its regulators in the jurisdictions in which it is licensed. Whilst Plus500's products, technology and marketing skills remain strong, the recent regulatory scrutiny placed on Plus500 has highlighted the advantages of expanding the operational infrastructure to support a business of its size.

• Playtech intends to provide Plus500 with access to its market leading technology and infrastructure, in combination with its expertise of operating a multi-jurisdictional regulated business.

• Plus500's Board now expects group revenue for 2015 to be lower than in 2014, with margins expected to be significantly lower due to maintained marketing spend.

For those unhappy PLUS holders considerably higher, what are you unhappy with? You've been saved! The market has kindly reacted to PTEC with some short-term profits, with PLUS overshooting as some buy back, almost LFL to the shorts on PTEC. Akin to QPP, whom in my typo and CwC’s offering was more accurate than realised!

The price is either too expensive or shrewdly timed. PTEC are obviously betting on lower churn and think they're able to mitigate the damage by a typical public house like "under new management sign." It would appear they're now prohibiting all transactions until AML procedures are complete. 

Apparently because of publicity, PLUS 500 have come under increased scrutiny, which its more than probable they should have done at the start. Worse, is a complete admittance that PLUS is lacking the expertise of operating a multi-jurisdictional regulated business. 

Time for some rereading of those broker notes that were significantly lower that today’s guidance would suggest, was it Liberum (admittedly house). The plus (poor I know) is everyone should have made money, the shorts and the longs (a rare occurrence). Simply, if shareholders reject this, they're stuffed! 

Does this corporate action remove the need for PLUS to give a profits warning substantially outside of what has already been suggested? The most notable statement from plus is the absurd commentary "Whilst Plus500's products, technology and marketing skills remain strong, the recent regulatory scrutiny placed on Plus500 has highlighted the advantages of expanding the operational infrastructure to support a business of its size." So all those shorts run over to PTEC to dissect and analyse the "potential benefits" with some easy money when the shorts ran to the door 400+ on PLUS! 

Its been some time since Beowulf (BEM) was looked at, with the tin likely to be rattled soon EMC: BEM 1 December 14. The announcement would be encouraging had iron ore been near the $90/t (circa), without a surplus in the iron ore industry and China going hell for leather. 

BEM's Kallak project would be somewhere near viable, perhaps in 5+ years. With near £180K cash left post deduction of liabilities, there "may be a need for some cash in the meter to keep the lights on!" Thankfully, shareholders in the last placing can look forward to the prospects of BEM advancing  "other value creating opportunities." 

Its with some sadness that Bill Humphries is stepping down from the board of Patagonia Gold (PGD). Perhaps retirement or other opportunities. PGD directors have on the most part kept skin in the game, supporting the company even when the market has been against them. I've never met Bill or anyone from PGD, but all the same, AIM have lost a decent fellow. Admittedly their chart looks like an admirable piste, but perhaps some potential? 

Aureus Mining (AUE) announce first pour at the Liberty Gold Project, as expected earlier in the month, EMC: 11 May 15, the shares have responded positively, but there may be some more in there yet. As always, its wise to close the higher risk positions into rises and leave the longer-term monies to work. 

Surely not, hook line and sinker, Fishing Republic, a fishing business with 7 shops and online presence. With a resilient market, consolidation is going to be difficult, but one perhaps to follow with admirable plans, whether they turn out to be a tail or not is another matter! 

Over to Northland Capital, with 72.5% held tightly by family, its a tiddler (I know) with potential volatility, perhaps even potential if acquisitions are priced well/in non-dilution form (possible?). The fishing market should not be ignored, with a die-hard following. 

Limited time for the  Gulf Keystone (GKP) appointment that may puzzle a few nor the Sunrise Resources (SRES) "Bonanza", which if one was suspicious would now be followed by a placing. The grades are good, but bonanza? They're chip samples! Some more time needed on Sierra Rutile (SRX) positive results of Sembehun Dry Mine study.

Atb Fraser

Disclaimer.