Morning Mumble: China's (absent) panacea (Off-on-one), Fortescue Metals (FMG) sub AU$2 where next, Central Asian Metals (CAML), Gulf Keystone's disappointment.

Good Morning, 

We had little surprise that China would cut interest rates, now at 4.85% and effect from yesterday. Its China's attempt for secondary stimulus in the housing market and the various benefits of attempting to improve aggregate demand (AD). Although the economic stimuli to date appears to have merely slowed the fall. 

The stock market "readjustment" is now a full-swim aided by pure bear market. The cut in interest rates unlikely to prop the market up, as the bull trend came to a dramatic end. Quite how the Chinese expected to shore up the Shanghai Stock Exchange Composite Index (SHCOMP) and Shenzhen Stock Exchange Composite Index (SZCOMP - the tech related index a k a the Chinese Silicon Valley) is mystifying. 

The SHCOMP has fallen just over 20% at 4,123.484 and the SZCOMP did 22% over the fortnight at 2,404.719, with margin being the most common-phrase around China for those trades. Without any bounce, expect further forced selling on SHCOMP and SZCOMP. 

EMC: China Australia Mirror Trades has a number of similarities including the massive increases on stocks as outlined. What is of concern is the interest rate to GDP growth. With the EMC being far from an economist. It’s prudent to consider if interest rates are 4.85% then should there be a cut in expectations for the GDP of China? Currently expected to be 7%, with a basic trend implying a slowing of growth in China and factory productivity and gate prices far from picking up. 

The Chinese are simply becoming risk averse, and any temptation to buy assets despite the aggregate costs all reducing. Property prices (Sales Prices of Residential Buildings in 70 Medium and Large-sized Cities in May 2015 Chinese Government Statistics) both commercial and residential, continue to fall or simply not sell at all. The measure of the 70 Cities, although is warped slightly, shows falls of between 6.9% and 0.9% on property sold compared to the previous period. What is not measured, are the incentives to progress the sale, which are also eating into developers margins. 

Not only is the stimulus meant to aid the commercial entities, we have the Chinese Local Government near doubling the size of debt swap program. It doesn't mean much, but considering how leveraged and hard up local government (LG) is, any green shoots of cheaper borrowing will be welcome. Where there's a hidden "nearly unemployed" figure that's growing in LG's and SOE (State owned enterprises). 

With the PRC (People's Republic of China) searching for a panacea for a slowing economy that has so far been absent. The PRC have attempted to cover all the corners of the economy, but without any improvement in China's economic climate, expect more trimming of borrowing costs and direct QE, if the latest round has little to no impact. 

As a reminder, the PRC has attempted to improve financial liquidity by injecting cash into the banks. This financial injection also had specific provisions to target development (little impact) also known as pledged supplementary lending (PSL). The PRC has reduced borrowing costs consistently since 2012 (falling asset prices) but also cut banks’ reserve rate ratios (RRR) in an attempt to give greater scope for lending (limited impact). Likewise, the loosening of home ownership and mortgage criteria has not had little if any effect. 

Its ironic, that whilst the Chinese are tweaking their RRR and interest rates, the converse is happening with LG bonds. Where just recently there’s been a confetti like approach, as LG's have issued near the entire amount of 2014 Debt just in the past 7 weeks (11th May-26th June 15), and the market is betting those costs are going to rise.

With the PRC and PBOC (People's Bank of China) now being forced into buying LG bonds to maintain a sense of stability with the wider market objectives it's not going to be pretty. Expected further news of PSL’s in due course, where the PBOC will no doubt have to focus on LG bonds with a targeted rate of circa 3.10% to maintain stability. 

LG's have circa 23 Trillion Yuan of to refinance and in the current market conditions, its going to be a corporate parent styled transaction (PSL). If the PBOC do not get involved in LG bonds, there's a risk of debt costs spiralling and stalling any growth planned or intended by the LG's themselves. It would be prudent to watch the Chinese bond market for a spike later next week if the same trend continues, no doubt after a brief fall. 

For any recovery, one would be wise to look to the National Golden Week (黄金周 (国庆节) (02nd October 2015) to indicate the recovery in the property sector. Typically the peak season for residential property. Will it happen? 

This weekend is all about Grexit, As stated at the time the newly formed Greek government back in January had an agenda. Now with capital controls in place even in the short-term it’s not looking pretty. The referendum, although I though the offer had been withdrawn, is going ahead whether there is a purpose to it or not. The view being that Greece needs to get through their peak tourist season with a Euro. Although the odds of this happening are slowly shrinking. 

The lack of compromise could have wider implications for the wider group of the EU, namely Italy, Spain and Portugal. Where the austerity and inferences of "who is calling the shots at the EU" creating a negative sentiment, that if Greece exits, expect others to consider it. The breaking of even one in the EU ranks (Greece) will have dire consequences, whether risked or just perceived for the entire EU block. 

With a secondary currency more likely than ever, what next for Greece. Perhaps pain up front is the preferred model? Over to the wider Greek citizens to decide their own sentence. So the Market will ebb and flow based on (mis)information and events over the next week. The resultant impact is already being seen in commodities, with most losing key levels of support. 

Amur Minerals (AMC) gives an update on Kun-Manie. One is a little confused by the optimised design as there's a number of assumptions which contradict the current viability. Kun-Manie will no doubt be viable 'at some point in the future' but it’s certainly not soon. With limited time to cover it full, it's wise to look at the assumed costs. 

AMC have not adjusted the SRK Pre-Feasibility Study (PFS) assumed price from 2007 for the price of Nickel. There's a lot happened since then and the Nickel sector has changed considerably. Not only is AMC up their results and the update, but one must assume that investors have considered the fact the project is uneconomic. 

Nickel is currently $5.45/lb, well below the $5.60/lb support considerably away from the assumed pricing of US$7.50 per pound (US$16,534 per tonne) and US$9.50 per pound (US$20,940 per tonne), Internal Rates of Return (IRR)(post-tax) of 21% and 32% respectively, or a minus figure at current rates! There is no reason to change the view on this stock! The company need buckets of cash to develop this asset, and in the current market, who would be a lender? 

Lonmin's managed sale by Glencore should be given an award. How they managed to achieve the price they did is staggering! The company, holders specifically are waking up to the realities of not only doing business in South Africa but of assets that are borderline uneconomic in the current climate.

The PGM prices failed to recover globally despite LMI being on reduced production. So there's unlikely to be any change with them going full guns. With a growing unsavoury contingent burning workers buses and cars, its not looking rosy for LMI! 

Central Asia Metals's (CAML) Kounrad production update isn't good news. 

During normal production activity a problem occurred in the solvent extraction (SX) section which resulted in a significant quantity of the organic inventory being lost to the dumps within a very short time frame. After inspection, it was identified that one of nine weir plates in the recently commissioned SX mixer settler had fallen out of position, resulting in the ability of the organic inventory to escape from the circuit via the raffinate and onto the dumps. The reasons for the failure of the weir plate are currently being investigated by site management.

On Saturday the problem was rectified and the plant was started again but at a much lower flow rate. This will continue for several more days until the site team can stabilise the plant and determine the full extent of the loss of organic inventory, any impact on the pipeline infrastructure and the duration of time that the plant will need to operate at reduced production capacity before the organic inventories can be replenished.

If one is currently investigating the failure, surely the rectification of the problem raises the question of the risk of it happening again. Hmmm...Would it be wise to consider the director sales again? With impaired production and reduced capacity, mining is never simple. Forecasted production will not be 13K/pa this year, one suspects it’s likely to be 11,700 with a finger in the air. 

The market was expecting a lot more from the Gulf Keystone (GKP) update, where cash is not where it needs to be. The production and marketing update is positive, but likely to be insufficient in cashflow terms. Essential for a producer with limited cash of US$68.7m with intentions to fund increased output to 100Kbopd. 

One hopes GKP will get their payments (both present and historic), although they state they're in discussions with the Kurdistan Regional Government's (KRG) Ministry of Natural Resources (MNR). Perhaps instead of discussing, they could just obtain payment from the MNR? 

In the absence of payments coming soon, expect GKP's assets to be sold for limited upside. A producer that's cashflow is limited by other entities, that appear uncontrollable? Also, as a final thought, is the third party oil transaction a related one to previous management? Just a thought? 

The bears finally got their patience rewarded in HSS Hire with a trading update that is not positive at all. The company was only IPO'd 9 February 2015. Christmas cards all round for another IPO that raises questions over the valuations. Hat-tip to JPMorgan for flogging prudently. 

With corrections across the indices over the weekend, led by woes in China, the FTSE and DJI all took a battering. Reminds all round to be aware of weekend volatility on positions. 

Petroceltic (PCI) contemplate a bond issue. One supposes it wise to state that, although it does exude confidence in the bond market, or are the terms just accepted as being dire. One to watch...this could have issues if such a bond issuance fails and the banks come a knocking for $50M+. Does it also suggest a deal is being done on the Ain Tsila development? Surely it would have been sensible to grab all the monies at once, especially for Ain Tsila? Unless of course PCI are dipping their toe in the water!  

Finally, Fortescue Metals Group (FMG) breached its AU$2 a share market closing at AU$1.93. The bears are out with their trumpets for all to hear with predicts as risky as $20-30/t. The Chinese clearly gave out their indications with a cautionary warnings from Xinchuang Li (EMC) and EMC Mundane Iron Ore Again.

Atb Fraser