Friday, 16 January 2015

Evening Bolt On: Afren & MPI + Alleged CU Chaos (Investments)

Good Evening Morning, (forgot to press publish as well)

It was going to post this last night but after a long day and out most of the day don't expect much more. Hopefully copper won't CU you asleep!

Afren Plc (AFR) we know are being pursued by SEPLAT Petroleum Development Company plc (AFR share price movement statement 22nd December 2014). If we think back to EMC over to MPI the curve ball. It would appear the word (city street speak ha ha) in Nigeria (via Ian who is showing discontent and going to Indaba!) is MPI (Significant shareholder in SEPLAT) wanting to maintain its interest in SEPLAT by providing the cash element of any deal. 

What the AFR deal is valued at is down to conjecture and significant speculation. Investors can argue any case of valuation between 6 pence and 85 pence in share valuation, Save for today's close on longs and letting capital equity risk the end game, AFR is will be limited within my trading agenda for the foreseeable future or until a deal is or is not announced finalised.

Yesterday we had the FT China funds bring Chaos to metals markets Henry Sanderson and Neil Hume. This was known about around the time Red Kite's holdings were circa 60% of the LME (London Metals Exchange) copper in October 2014. Not only did it distort the futures market but create the equivalent of a raid effect on a stock commodity that's tightly held and without any natural principles of trading to derive a true market price. 

Investors would be wise to consider the impact not only of Shanghai Chaos Investment Co but 3 major trading houses betting on a long trend from January 2013 with copper bucking all the other commodity trendsChaos Investment was not the distortion in the market it was the reality, the likes of RK Capital Management (Red Kite), Glencore (GLEN) and Trafigura Beheer BV (Trafigura) were the distortion.

The categorical absence of speculation in copper and the hoarding of undisclosed stores of Red Kite, GLEN and Trafigura have in essence created a false market (the three). Aided in part by the closure of Clive Capital (Circa $5B under management) in late 2013Armajaro and Astenbeck performing below par and China not pushing forward their economies of scale that would make for the three being largely immaterial in price controls.

From 2013LME warehouse owners were having to pay premiums to obtain physical deliveries of copper (the same as the other day when EMC commentated on Outcry pricing). For a considerable part of 2013 and most of 2014, the commodities traders forced industrial consumers to speculate rather than take the spot price. This unwound just after Christmas this year including the Chinese premium or risk within pricing (See Codelco EMC comments 12th December 2014)

What is known is there is nowhere near a deficit in coppersupplies and delivery are flowing with limited Chinese speculation. With Chinese speculation until December/January being absent, save for the larger boys funded by the Government for use, limited speculation and smaller funds including Chaos Investments the main elements were physical. The contraction was largely brought on by the Qingdao copper scandal and the three trading houses hoarding/limiting supplyQingdao had a three pronged effect on the market, copper imports contracted notably, speculation reduced as a result of a contraction in financing and a realism returned to the health of the economy and market in pricing.

So with an alleged tightening of copper yet again (read as pricing controls, limitations and price premiums on immediate physical delivery), copper in the absence of Chaos et al with more to the trade than just Chaos see: EMC posts on main demand in China etc...), copper is likely to appreciate until of course a swelling of supply yet again is formally evidenced. So we are reminded of despite copper fall, Las Bambas construction continues, which if I'm correct is set for production end of Q1 2016 (circa 14 months away)

We will leave the discussion for another day on the mines at Sierra Gorda (Owner: KGHM International; Location Chile), Toromocho (Owner Chinalco, Peru), Oyu Tolgoi (Owner Rio Tinto with Turquoise Hill Mongolia) and Minas Ministro Hales (Codelco Chile) all on the ramp up or coming on stream copper supplies won’t be an issue even towards the critical stage of 2018. What is at risk is the clarity in pricing… (Old data so may need ownership structure changing from January 2014.)

Considering the flow of money with higher discretionary spending, we have JD Sports (I can't use fashion in the title apologies) performance following the Christmas trading period. Over to Sports Direct with the investment arm (my view). No time for the obvious CHF Gold benefits nor silver, nor platinum. The Oil technical trading suggests a movement towards $55/bbl in the short-term (and subject to change). 

Atb Fraser

Gossip: Seems IGG weren't the only one caught off-side by the Swiss Roll! 

4 comments:

  1. Fraser seplay gives an indication, http://www.investegate.co.uk/seplat-petdevcom-plc--sepl-/rns/debt-refinancing---operations-update/201501151315022757C/ for the SEPLAT financing with upsizing. Still think what you mentioned about shares being offered or value at 85 pence is fair value. Dan B

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    1. Thanks Dan being limited in time I wanted to mention it yesterday post CHF but cannot comment on everything as when would I work. Seplay, is that their new name!?! With a partial recovery in oil, AFR might just get the 1 SEPL (SEPLAT)Share to 0.85 AFR away.

      What is looking more than likely is a cash deal funded with debt now the gossip suggesting MPI (major shareholder in SEPL) wanting to maintain their holding which was diluted on the SEPL IPO, albeit MPI could fund the cash element of a purchase in addition to stock to maintain their holding with a convertible loan or similar. Cheers F

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  2. Fraser- Hi- some big moves this week so well done on covering everything. A bit quieter today with most brokers high on coffee and some working out if their clients can/will cough up re their CHF bets... FXCM confirmed this am that their clients owe them $225m so Im sure the impact will see a few bad debts over the coming weeks-- good luck with those phone calls guys-- you might find a few disconnected lines if you are not lucky :-))))
    http://www.investegate.co.uk/fxcm-inc/gnw/fxcm-comments-on-swiss-franc-movement/20150116012014H7591/

    Re AFR- everyone expecting a cash bid now $700 warchest is in place but perhaps SEPLATs will be cautious and mix its bid given the net debt position between the two groups or even go down the all share route, which would allow continued development of the assets, and some great prospects even given the oil price turmoil. We will know by Monday, and some counterbids poss too, so lets see.... I would go low an all share (45p start to edge up to final 50p) but that's just my thoughts and SEPLAT and their backers are no mugs.

    Re Copper- v interesting- Zhejiang Dunhe Investment and Shanghai Chaos Investment both in the frame for aggressive short selling when they spotted an illiquid position in copper. Some US traders were named too but these two Chinese hedge funds seem to be at the heart of this move. Copper seems to be heading back towards $6,000 today, so its not quite the rout that the traders played re oil but everyone is quite delicate and looking forward to the weekend on the copper desks.

    Cheers. The Leggie

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  3. Thanks for the thoughts. Could you explain the reasoning behind the accuracy in copper/oil support . We know you were very confident in these figures and it caught most off guard. The target of $6kt is under pressure now trading desks have a cautious optimism about them.

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