Morning Mumble: Iofina (IOF), Diamonds, industry issues (stay awake) and another reason for Grexit to FLOW, VAT? KEFI's Placing and the Sherlock award!

Good Morning,

Iofina's (IOF) production update will no doubt be taken positive, the market should be wise to price in inventory levels and sales rather than "just production increases.” IOF has held circa $3-6M (the lower more recently) worth of inventory as a minimum over the past two years, the decline is also in light of the falling Iodine price.  

In the absence of an announcement of increased sales equal to or greater than today's announcement, expect the next set of results/accounts to show a near 30% increase in inventories. If one didn't know better, it smells of a fundraiser. Holders are reminded of the difference between production and sales, especially in a tight market with low prices and demand growth in the industry limited to circa 3.5%. Perhaps a push into the health market, assuming one doesn’t have certain rashes and thyroid issues.

It is International Diamond Week in Israel (well all two days of it) with the President of the World Federation of Diamond Bourses (WFDB) highlighting a few issues. With various concerns coming out of the conference, and positives. The main factors include:

• Over-grading (Rapaport Diamonds Magazine) by some labs that's caused an issue in reselling and confidence by the customer. Wonders will never cease, those ambulances will feel lonely with some legal practitioners diversifying See: lawsuit. 

• Conflicting diamonds, yes its still going on.

• Money-Laundering, something PLUS500 knows all too well about. Diamonds being highly portable, quite how the WFDB members deal with it is another matter. More so financing, with the formation of the Financial Action Task Force (FATF) back 1986 its still not cleaned the industry up. One suspects the absence of "mainstream" financiers as a result of the Antwerp Diamond Bank (ADB) closing, is compelling some dealers turn to the "non-mainstream lenders."

• The banks (of the ones left) want diamond companies that have traditionally been family owned, to adopt a more corporate structure. 

• Something diamond producers were slow to acknowledge was that lenders wanted diamantaires to put up more of their own capital. The 100% lending is long gone with the norm circa 50-70% pending on quality. Something De Beers expected in their new sales contracts (July 2014) and  EMC: July 2014 De Beers further strengthened in the sightholders and Accredited Buyers contracts including a greater transparency in financial reporting.

Over to ABNAmaro to assist the market, but more so find a structure other industry lenders would welcome and support, rather than maintain the opaque nature of the diamond market. Anyone for “Easy Diamonds plc” type venture, surely the market is crying out for such a well-funded entity in light of ADP disappearing and Dubai/UAE only filling some of the void. The bottom certainly looks near for the diamond industry with all their current woes, financing issues, over-grading and limited compliance with a sensible financial structure.

In a discussion about energy efficiency and far from embracing all things green, it was surprising to see FlowGroup’s (FLOW) model destroyed in one fell swoop by the EU. Does this mean the model is viable at all? It would appear that the VAT rate was the cream that meant the boiler would be able to pay for itself in the current lifespan of products?  Installation(read as profits) warning for FLOW.  

One hopes for the company that FLOW can reduce their costs sufficiently to enable the “'Boiler that pays for itself' model. However, the Government might have to step in with some form of subsidy. It’s noted that INSP (Inspirit Energy) have not commented on this, perhaps due to their target market being more commercial and exempt from the 5% means, there’s no material change?

Today is also the day that the EMC Google Alerts system evidences being a worthwhile addition to broker opinion and the Borg. It’s sensible to consider them even in your office. Having converted quite a few “professionals” to adapt from the all-seeing Borg (Bloomberg) by creating their own systems in conjunction with the Borg.

Having not taken a position personally, it’s a massive hat-tip to a small firm down that spotted this in their alerts and the implications ConstructionManager: U court: 5% VAT on energy-savings products is illegal,  FTEuropean court rules against low VAT for energy-saving equipment & Guardian:Households must pay higher VAT on insulation and solar panels, EU rules. The source being Google Alerts, although not quite turning to the dark side, they did manage to prevent significant losses. 

Imagine that, “yes sir, it was thanks to that public access portal (PAP) known as Google we managed to divest all your holding.” Perhaps Flow were tardy in their EU implications update to market with such material and significant public information?

This morning, on the belief that the Government will create direct subsidies (still permitted in the EU) rather than via VAT system, I have caught a knife (or not). It was tempting argument (risk) to buy into FLOW, albeit a small position. Expect an update from the Government due to the significance of this ruling on a growing and rather larger industry.

KEFI Minerals have completed a placing for £2.8M. (EMC:Plate Spinning & Cashflow April 2015). With AUSDrill International taking part in the placing, although small its giving an indication on who is looking to fund the project.  Admittedly AUSDrill have their own woes, AU$400M of debt, declining revenues and available cash of AU$62.7M. AUSDrill’s share price has been a proverbial ski-slope and in the absence of some decent deals, holders will no-doubt be impatient. Kefi will need more cash in due course.

It would be positive if W Resources (WRES) LaParrilla Definition Study actually had put up some pricing assumptions in their announcement. WRES have either cleverly or stupidly prevented any analysis being possible.

If one was to factor in today’s price for Tungsten and Tin ($235/mtu and Tin $14425.00/t), the IRR drops significantly to circa 36-41% (fag packet and quick). The economics simply don’t stack up for the FTM (Fast Track Mine) when for a modest increase of $30M on the initial $16M (total $46) WRES can increase production near 4 fold. Equity requirement would be circa $15-20M.

With WRES keeping the lights on with VAT refunds (€388k is expected in Q3), expect a placing soon. No wonder the price dropped on the news, if one cannot be bothered to inform their holders of pricing assumptions when announcing “good news” don’t expect the holders to get carried away. If WRES (Broker(s)) want to get a decent sized fundraiser to develop the asset they’re going to have to do significantly better than today’s announcement.

An award of sorts goes to Metminco (MNC). They have realised sieving the beaches may have produced better results than their original cut-off grade of 0.15% for copper, even as an open-pit operation. Today’s cut-off grade increase to 0.5% Cu should make the punters realise the woeful inadequacy in even attempting to utilise 0.15% as a cut off. With the Sherlock award going to them for pointing out that operating and capital costs will be significantly lower mining higher grades. Shocking Sherlock.

Sound Oil's initialannouncement read as plug and abandon, today we have confirmation of that.  

Finally, something as promised EMC:Dispatches and Dispatches:Supermarket Wars. Something worth a consideration for those long-only supermarket investors.

Atb Fraser