The season of desperation in China is contradicting the Chinese bulls that appear to think the growth train does not need to slow down and consolidate. I maintain that my realistic growth forecasts of 4.2% ish rather than China’s headline of 7+% its simply unsustainable when one factors in real ‘waste’. A primary example being the Country Garden Rights Issue announced earlier and following up on BBerg.
Its difficult to short Chinese companies, so one has to find a correlation, such as OTC or similar listings. What is surprising is the reduction in shorts, some 43M reduction in shares by the end of July compared to now…Current shorts on OTC for Country Garden are around 5M shares…albeit well in the money! I would go as far to suggest its limited to a few savvy private traders ahead of the curve ball!
Yet again a Chinese company has been predictable in its actions for those trading, following more closely they’ll remember the Solar “eclipse” (this blog) folding due to their overproduction and saturation of a market (Ironically they may be doing this again). So the market ignored the significance of Country Garden Bond Offering Delay earlier this year (May 2015). With bonds now trading at an 11+% discount to par and some, the market is waking up to the realities of saturation. Notwithstanding that housing is a “key contributor” to the Chinese Growth story. Looking at the rights issue, and debt payments Country Garden might need to come back to the market unless things pick up within 9 months.
Following on from my Real Estate Transaction Taxation Revenues post it comes as no surprise the decline is increasing and discounts widening. As such, the very predictable elements are coming to the fore as the Developers attempt to entice parties to part with cash for property. What next BOGOF?
So with purchase restrictions on property ownership being removed, mortgage approvals being sped up and most "friends" already utilised to propel the housing boom there's only one thing left! Correction! As a wannabe slum landlord focusing on distressed property, it comes as no surprise similar issues are occurring in China to that of 2008/09 UK & US. This will have a direct impact on Iron Ore demand over the coming months as new builds slow down or come to a virtual halt (it would be wise to watch copper as well). A positive being that this will allow the market to consolidate, albeit the Chinese Government cannot be ruled out of coming forward with a "new" stimulus in providing yet more social housing.
Iron Ore, which you could argue is solely reliant on Chinese demand currently with the massive output proposals, is weakening as the Bulls learn the stark reality of a credit contradiction in the Market. It’s with no surprise that demand has weakened. Reliably it looks like Chinese ore traders are reducing leverage and coming to a common-sense market. The duplicate borrowing (ghost inventory) that has occurred which appears to have exacerbated the drop in finance available from lenders whom have been forced to conduct retrospective due diligence. So with ozzie 62%FE ore now at $88/89t and the Chinese prices following suit, there’s a stark reality ensuing for those lower quality producers in addition to Ebola concerns. London Mining, like AMI need a White Knight, whom this shall be may not come as a surprise to some, but needed quickly.
Staying with the theme of White Knights, Petropavlovsk (POG) (the day I spell this correctly first time will be a truly wonderful day) has announced their Half Yearly Report. This is the Albemarle & Bond of the Gold producing world and its surviving (just). The interims are actually better than I expected.
What should be of concern to an investor is POG's Debt to Equity, I eluded to this yesterday with regard to Kenmare (KMR) and today’s example is a lot worse. If one was to consider POG’s net debt totalled US$924 million as of 30th June 2014, then POG’s Equity attributable to the shareholders of Petropavlovsk PLC being $761.306m gives a Northern Rock example of leverage of 121.35% Debt to Equity position. This leaves on options and expect some rights issue or equity loss for holders of around 50% to the current SP unless someone is will to stump up $400M. If one was to include IRC, the sums would slightly improve to 91.5% debt to equity. Still staggering all the same…perhaps they can “self-cert” the loan?
Today’s piece had to be written in two halves due to a peanut butter on toast incident and my desk, the desk and keyboard lost to a near 2½ year old armed with peanut butter and toast that had escaped the breakfast room.
Amara Mining's H1 & Q2 Results are pretty academic, the question is how long is going to take for Randgold to sort the situation out and pay up! The bets seem to be on post any prefeasibility study! One shall wait and see.
Chariot Oil & Gas’s news suggests partnering is at the engagement state with the wedding to be announced in due course. CHAR Namibia Update.
And finally, Kromek's Final Results suggestion the opinion they listed a year too early was more than likely correct. Cash £6M, suggests save for an exceptional contract, that KMK will need cash within 12 months…
For the humour, a message was left yesterday about me appearing depressed and negative, so why do I invest at all. I suspect they do not grasp how I trade! Thanks for the concern!
Atb Fraser
Fraser- it looks like another trip to the child friendly canal may be required this afternoon and a ducking stool as well... :-)) or perhaps a tazer would stop her in full flight next time before she can get to your keyboard... peanut butter must be a nasty one to remove- good luck.
ReplyDeleteRe AMI/LOND white knights- I guess some are committed here already so they may want to throw good money after bad but as you say iron ore isn't looking pretty at present plus the ebola issues so the investment case isn't v good at all for either of these firms unfortunately. It would take a braver person than me to buy or hold.
Re KMK- Yes- cash looks a little tight but the picture looks brighter, albeit the contracts wont give a linear growth as they are chunky in nature so their rating will reflect this uncertainly. I would be surprised if they weren't gobbled up by a US corp, with the small poison pill possibly being the diverse nature of their three businesses.
Cheers. The Leggie