Morning Mumble: SHCOMP, A buffet of commodity woes (Short32) and the implications for Alumina Ltd, Rio's Coal, Hargreaves Services (HSP) and SXX the gamble.

Good Morning,

One may require a nice ice-tea or G&T in certain circumstances. 

Trading on the SHCOMP (Shanghai Stock Exchange Composite Index) was volatile, a plunge from opening of near 5% following by gains of some 10% from the low. Closing near the high for the day at 4,277.223. Margins and leverage appear to be the issue, with the drop being covered post the closing of positions. Has the Chinese Government saved the day? 

Remaining short on Amur Minerals (AMC) but also banking considerable profits, this company is over-priced for the stage it’s at, the cash it has, and the economic potential (or lack of) for the asset . Those following the wider story will note how logistics will become a nightmare and funding is of a scale, that even Sirius Minerals (SXX) with decent support and decent geopolitical headwinds, will still have to be very persuasive about.

AMC PEA (Preliminary Economic Assessment) / PFS (Pre-Feasibility Study) suggested the viability isn't for this time, especially as Nickel has limited to no support and volatile. Maybe in years to come, utilising a telescope and some hope for "guidance." The SRK guidance / consensus of future prices was based on a different climate around 8 years ago. The super-cycle may shift such a degree it becomes economic sooner than envisaged, but the odds are currently against that. 

Nickel is currently trading $5.2231-$5.2345/lb and has been as low as $5.11-14/lb overnight. Those aware of the position of Nickel will not be surprised by the moves over the past week. Concerns regarding the limited growth in the very sectors that are the highest users of Nickel. Watch the $5:08/lb.

For those, including some analysts that have a wish to improve their understanding of the sector (present company included), consider the Nickel Institute (Materials and uses), for a brief helicopter view of the commodity. Often giving a better understanding of the market than covering it with "linked to steel demand." Not the greatest month either for South 32 whose woes despite being Short32 are increasing as commodities take a further hit. 

South 32's (S32/Short32) 'portfolio' of assets produce alumina with the Chinese prices still falling and the Australian prices attempting to keep up, aluminium (sub key $0.80/lb at 0.76/lb), coal (enough said), manganese (anti-dumping investigation and sub critical $2 at $1.93/kg, nickel $5.23/lb), silver ($15.7/Oz.), lead (fairly consistent but trading at a crucial support level of 0.80/lb and zinc (consistent trend currently $0.92/lb). Life isn't too great for South32, although its one to play in any whiffs of recovery. 

The market is not ignorant to the Alumina downgrades across the sector, with producers "almost" scaling back production but never getting round to it. The poker face is in-danger of forcing the wheels off the higher leveraged players. The favoured pure play short is Alumina Ltd that mirrors the market woes. Playing the OTC (OTCMKTS: AWCMY) and ASX: AWC. In the absence of a recovery in both the ex-works price for alumina and such a swelling of inventory in the pacific, ASX: AWC will struggle with share support. 

With Mick Davis buying (possibly) Rio's coal assets (FT), the Yorkshire Post highlights the industry woes where the Hatfield Colliery is closing. This was expected, but the timing has been brought forward by a year or so. The government is unlikely to offer support despite it being tabled in the commons.

Mick's timing is likely to be very well orchestrated. Having sat on his hands and refused to pay anywhere near the expectations of the industry, could RIO's capex needs force their hands with their thermal coal operations. Alternatively, Mick could buy S32 once it's been giving a thorough kicking by the market for being "unfortunately" aligned to the downward cycle of commodities.  

Perhaps time to review Hargreaves Services (HSP), having closed again recently, with Net Assets Circa £150M and net debt around £20M. The company is now priced towards the top end of any valuation, but more than likely nearing the bottom than of this massive drop. With the sentiment in the coal sector and the decision by major investors/funds to avoid any exposure, the stocks have been punished. 

Yesterday was the last opportunity to dump the warrants in Sirius Minerals (SXX) ahead of the committee meeting today. With the stock suspended today awaiting the announcement it's D-Day. With the no person wishing to appear the guilty party, from a psychological perspective on is betting on a deferral to the Secretary of State. 

Having taken profit the outcome is immaterial, the speculators have scope for considerable gains but not without risks. 3 pence circa on refusal. 5 pence on deferral, 38 pence on approval (guesstimates). With an 85% probability of approval/deferral, it shall be interesting! 

The eyes are on Gold at the moment for a place of safety. With dwindling demand and reducing supply in the current climate, it’s that favourite sport of kick the higher cost producers. Tungsten's brief recovery has ended with a damp squid at $217/MTU.

No time to fully cover Obtala Resources' (OBT) final results, with the over-expectation becoming a disappointing reality with this stock, expect further selling after a period of hope. Returns and cashflow are key and in the absence of guidance of earnings, revenues any speculation is limited to hope. Perhaps one for those brave folk that can convince themselves the returns on assets of circa £100M are favourable. Quite how investors are meant to buy a stock with little guidance for an agricultural business also in timber? 

Atb Fraser