Morning Mumble: Inventory, How much Copper do the majors hold? VEDanta's I've tried to be positive & ANTO'fghastly buys 50% Barrick's Zaldivar

Good Morning,

What is often not considered in commodity cycles is the level of inventories. Admittedly this can act as a float and reserve. How much do the majors hold in inventories, at what price and how is hedged. We know Glencore (GLEN) had 331Kt in the year accounts for copper inventory. 

KAZ Minerals do not separate their inventory but estimates suggest a modest 27,957/t's of finished product, excluding goods in transit. KAZ, are likely to be better managed with their need for cashflow but also they have issues at the current copper price levels, paying the market near 60 cents a lb if one considers their all in costs. 

KAZ had a Q2 & H1 Update yesterday, if you're so inclined or are perhaps are one of the workers FQM are paying to twiddle their thumbs at Sentinel? 

Vedanta want you to believe they're a Nickel producer (at the moment) seeing as all other operating subsidiaries have taken a spanking on price. Over to Tom Albanese, CEO of a bunch of companies held within a complicated structure, with a hope they can get their hands on some Cairn India cash by year end:

"In Q1 we saw continued volatility in commodity prices, but Zinc has held up quite well in view of its strong fundamentals and is now the largest contributor to our EBITDA. We continue to focus on improving efficiency, costs, and enhancing production across our well-invested asset base. We have broken ground at the Gamsberg Zinc project in South Africa, improved production at Konkola mines in Zambia and remain on track to re-start iron ore production at Goa following the monsoons. Our diversified business model supported by strong operating strengths and structurally low cost assets will enable robust long term returns to stakeholders."

So, we'll focus on the good hand (Zinc) as Vedanta do not want us not look at the other hand, we'll keep it short. Vedanta have a very credible mined metal production increased of 42% to 232,162 tonnes, (Q1 2014, 163,131 tonnes), but strangely the bottom line is being punished. 

On the one hand, there's a positive production increase and costs being half decent, significant in numbers in fact, but yet at EBITDA level it’s a paltry 11%. In the absence of an accountancy qualification, is it not fair to suggest costs in the chain have risen somewhere? One has a suspicion the amendments to the Mines and Minerals Development Rights (MMDR) Act, means producers have to shovel more for the same money. 

So with taxation rates rising into 2016 as guided by the Indian Government, VED are going to have to focus further on the bottom line just to maintain existing profitability. Unless one has missed it, analysts are not factoring in the CSR Levy at 2.5%, previously 2% from memory plus the increases in corporation tax? With a campaign going on to lower the District Mineral Foundation (DMF) tax as miners in India are punished, there may be some hope. 

With a bunch of Aluminium producers campaigning for an increase in the import tax on ingots, it’s not surprising VED are are reviewing restructuring some of our high cost operations in the Aluminium segment. (Source: India worth a read with a mention of VED's subsidiary Balco). VED's aluminium contribution at EBITDA is negative. One just hopes for VED's sake there isn't a slump in Zinc prices, as it’s got a very large burden on the balance sheet currently. 

VED's net debt, only up a modest $300M. Over to VED to cover their own financial update, 

Financial Update

The Company had total cash and liquid investments of approximately US$8.2 billion and undrawn committed facilities of US$1.1 billion as at 30 June 2015. Gross debt and net debt was at US$17.0 billion and US$8.8 billion, respectively, at 30 June 2015, slightly higher than US$16.7 billion and US$8.5 billion at 31 March 2015, on account of funding for projects and higher working capital.

As at 30 June 2015, FY2016 debt maturities includes US$350 million of bank loans at Vedanta Plc for which refinancing is in place and US$ 2.1 billion of term debt at the subsidiaries, of which c.$400 mn has already been tied up and the balance is to be rolled over or refinanced through longer term debt. In FY2017, Vedanta Plc has debt maturities of US$2 billion, for which we are in an advanced stage of discussion with the banks and these are expected to be refinanced by the end of calendar year 2015, while subsidiaries have maturities of US$1.3 billion for which we are evaluating different structures and options.

Antofagasta will acquire a 50% interest in Compañia Minera Zaldívar Limitada (Zaldivar), and will become the operator of the Zaldivar copper mine. My question being, is it "expected to be immediately accretive to Antofagasta's earnings and cash flow per share."? Really? Saves Barrick (NYSE: ABX) from flogging some more of Acacia Mining! Or does it? 

The final thought goes to Syrah Resources, would you stump some cash up? 

Atb Fraser

Morning Mumble: First Quantum Mining (FQM) bitter sweet pill, GEM Diamonds, how things change in 2 months.

Good Morning,

First Quantum Mining (FQM) give their Q2 Results, you won't like them, so here's some sugar to help the medicine go down (read as dividend). Not only is the later unaffordable its putting further strain on an already distressed balance sheet, albeit only $18M (ish). 

What level of cash generation was assumed for expansion of Cobre Panama, One notes the project is progressing with no change in "capex" at $6.4 billion. With total capex for this year at $1.4B and $600M to be spent on Cobre Panana. There is some good news, in 2016, FQM  focus will be on optimizing the phasing of capital expenditure at Cobre Panama, while keeping the project on track. Obviously no need this year then?

FQM state,   "During the quarter, we launched and completed an equity issue. The decision to do so was based on our belief of a stronger copper market following this period of weakness. Proceeds from this initiative provide the Company with the financial flexibility to continue to build its production base. We are thankful to several long-time and new shareholders whose support made the issue a success, noted Philip Pascall," First Quantum's Chairman and CEO."

So the decision to equity raise was based on "a stronger copper market following a period of weakness"? Phew, one had a suspicion it was as a result of reduced cashflow woes, covenants being suspended (waved goodbye) and a compulsory commitment to significant levels of CAPEX on Cobre Panama. It must be entirely coincidental that of the $1,121B capital raise, $1B was needed to repay debt at a senior level and the remainder equating to the $117M hit being taken on the ENRC $430 million Promissory Note.

EMC estimates of NET debt position as of today are around $4,956.9B allowing for the recent falls in the price of copper, gold and nickel. In the absence of an improvement in the copper price that is sustained and above $2.55/lb, debt levels are likely to be higher than those reported in the financial accounts for 2014.

It’s sensible to consider whether there is a full availability of the undrawn facilities in the absence of covenants? Circa $7B all in. Especially in light of FQM's capex being towards to the higher end of the revised figures for 2015 in the 2014 accounts, significantly reduced cashflow and limited room for cost improvements. We'll ignore the $400M in inventories at year end, perhaps a little hair cut by $100M would be wise, or FQM could alternatively have their fingers crossed, and raise "a further $800M in anticipation of an improving copper market?" 

There's further issues with the closure of Sentinel process plant, pending an evaluation in light of the load shedding on the grid. Sensibly, FQM has seen common-sense to redirect the majority of Sentinel's power allocation to enable Kansanshi to operate close to full capacity. This obviously has implications for Sentinel, likewise the timeframe is unknown and one suspects while delaying the ramp-up at Sentinel. Putting near 150K/t of copper back into next year’s earnings (Cashflow assumptions?)

Having bought into Gem Diamonds (GEMD) recovery (EMC: May) today they update the market H1 trading update that replicates what De Beers experiences (EMC: Anglo 24th July). Having sold and taken a loss on small long, there will be no rush to return. 

We note the market for small stones has softened considerably and is likely to continue to do so with the woes in Asia / China. Ghaghoo sales are down near 20% compared between the first and second sale, admittedly commissioning sales and more so for cashflow. Although they do acknowledge that the next sale will include a higher proportion of diamonds from the main body of the VKSE phase of the kimberlite ore (better quality). 

Ghaghoo is however turning into a row of disappointments, admittedly not far off the main body of ore it’s perhaps one for those with a longer-term perspective and a rosier outlook. With tougher going ground conditions impacting on slot development in the first five production tunnels and constrained production ramp-up, its not great news. More so the need for specialist expertise has been employed to ensure there is no further major ingress of water as the access decline and rim tunnel on Level 1 both begin advancing through the water fissure area in order to gain access to the second production section. Will main Ghaghoo production improves things? 

Wolf Minerals (WLFE) update the market  on the progress on the development of Drakelands. All appeared to be going well save for the price of Tungsten and Tin. It would appear that Wolf Minerals have only just noticed the price of Tungsten dropping significantly since commencing mine development.

Investors will be wise to work through a model of around $200/MTU and tin and $12k/t. rather than what was inferred previously. Although there are significant synergies and production improvements from a 24/7 operation model rather than the 5.5 model that was worked on. Costs per MTU should reduce further than those implied originally, circa $174/MTU. It may be worth WLFE not processing the tin? 

Although the preregistration for the dial in, like that of AO World is not welcomed. With the availability of the web, one could register via a web page or even not be permitted to speak without registration. Whomever is advising of these practices would be wise to reconsider. 

Not time to discuss the vanadium woes nor copper.

Morning Mumble: Anto-fghastly (ANTO) & the markets alleged White Knight (NYSE: FCX) and the magical ingredients, LGO: Why I was wrong to...JKX & SLP, self-harm!

Good Morning,

Today's Q2 Production Report from Antofagasta (ANTO) gives some idea of the woes for the industry. It doesn't look great even allowing for reduction in supplies to market including the recent near 200K/t's drop in guidance from other producers, the Zambian load-shedding (EMC: Yesterday) and ANTO's own guidance revisions downwards to 665,000/t's of copper, as a result of some commissioning issues on the crusher circuit. 

Conveniently ANTO don't give their previous guidance, so here it is. For 2015, it was 710,000 tonnes of copper, 250,000 ounces of gold and 8,000 tonnes of molybdenum. Not only do they have the woes of gold prices being at lows, molybdenum price being at a level it's questionable whether it's a viable to process it, and cooper down 45,000/ts. (EMC: Rio molybdenum (Mo) woes). As a result ANTO's cash costs are on the increase due to the MO price and lower than expected production. One would have thought with the USD: Chilean Peso (CLP) strength, there would have been of greater benefit, but this will perhaps be reflected in Q3. 

Luckily for ANTO, there may be some hope for the copper price thanks to the markets white knight known as Freeport-McMoRan (NYSE: FCX). The market may think FCX's planned production and cost cut backs (FCX Site PDF) will assist the cooper market. But with the absence of a magical ingredients, prices are likely to stay lower and for longer, this time. FCX are unlikely, like Rio or BLT, to give up market share for the sake of the higher cost producers. 

Over to FCX, today announced it has undertaken a comprehensive review of its operating plans in its mining and oil and gas businesses to target significant additional reductions in capital spending and operating and administrative costs in response to weak market conditions for its major products. These plans will also incorporate potential adjustments to mine plans and future copper and molybdenum production volumes to reduce costs and preserve valuable resources for anticipated improved market conditions in the future. The company expects to complete this review promptly and will report its revised plans during the third quarter of 2015. 

James R. Moffett, FCX’s Chairman, Richard C. Adkerson, Vice Chairman and Chief Executive Officer and James C. Flores, Vice Chairman and FM O&G Chief Executive Officer, said, “We are responding aggressively to current market conditions affecting our primary products and to the uncertain global economic outlook. These initiatives are focused on maximizing cash flow in a weak commodity environment and on strengthening the company’s financial position. We appreciate the efforts and dedication of our global organization who are supporting our plans to implement revised operating plans. We have a positive long-term view for our markets, the inherent values in our large asset base and are positioning our company for long-term success.”

The copper and wider commodities market are lacking the magical ingredients Chinese speculation and margin. These have been absent for some time (including shadow financing) and are unlikely to return without some significant stimulus from the Chinese Government. All compounded further by a basic approach to commodity back financing that has been in contraction and limited to a basics approach. 

This brings us to the question of those with copper in inventories and/or in transit priced significantly higher either, that had a muted response to the FCX news (VED/GLEN?). Especially those needing to deleverage some $18B of commodity inventories (across the board) to maintain their credit rating and profile! Perhaps GLEN have signed up for an Experian Credit account to "manage" their credit file?

Continuing the theme from yesterday on load-shedding, it would appear Barrick Gold (NYSE:ABX) have forgotten to update the market on the load shedding issues in Zambia for their Lumwana Operations Reuters. Perhaps Vedanta, Impala and Glencore are also immune or do not feel the need. Then again, perhaps Barrick need to work out the cost impact at a C1 level as they will now be marginal. Expect cost revisions near $2.20/lb (C1) and all in near $2.80/lb (EMC estimates, no plagiarism folks). 

Question of the day, seeing as China Securities Regulatory Commission (CNBC) is investigating companies and individuals selling stocks, what can they sell to cover those margins? Cars? Houses?...Also, which Beijing bank (non-state) has the greatest exposure? The hunt is on!

Sylvania Platinum (SLP) have released 4th Quarter results. Operating in the PGM space they aren't great. They've had some cash back from Ironveld, spent some on share for "employees" of shareholders, and its unlikely any dividend will be made. The potential benefit is the selling of a few assets (or divestment) and maybe a low ball offer. As a holder, one hopes you sense my unfulfilled mind-set to this stock. As a punishment to myself, and a form of self-harm these will not be sold (self-harm). 

Finally, JKX Oil release their half yearly results. Dire, although perhaps some hope from the Interim Award International Arbitration Proceedings, it’s still not a stock for any widows. More a bet on a geopolitical and financial improvement in the sector. 

In other news today, LGO Energy drill another well. Having sold this holding and gone short, there's no rush to buy back any time soon. One would be wise to wait until the result to assess the viability of the company. Perhaps we were guilty of being too keen (EMC:) closing LGO Short too early. LGO have given no update on its financing and one has a suspicion revenues will soon be committed to interest and debt repayment. Profitable for the lender perhaps but shareholders? 

Atb Fraser

Morning Mumble: They have Phorm, NEXT guidance improvements. Can it get any worse for First Quantum (FQM), load-shedding! + AQP & GKN + DRX

Good Morning,

I would like to apologise to readers for kicking this proverbial dog, but Phorm have Phorm. Today, the can is kicked back with a convertible loan note extension. In essence this is a pre-placing, keep the air conditioning running type corporate action. With little to add to Phorm, EMC: criteria for a huge short March 2014. 

The long-only contingent are celebrating with a stonking trading statement from Next (NXT). EMC: NXT March 2015. Over to Next (NXT), with an increased sales and profit guidance for the full year that supports a timely buy note by Citi on Monday. With no buy back, but the floor raised to £69.62 and a special dividend of 60 pence (2 November 2015). One will sit and wait for the trading opportunities. It’s noted a lack of margin commentary or analysis.

First Quantum Mining (FQM), has received notification of a Force Majeure for the supply of electricity to its Kansanshi operation from ZESCO. With load shedding/supply being reduced 23+% at Kansanshi Operations and Sentinel being reduced the same from 55 to 42. How this affects the guidance and ramp up is another question. A likely 2400 tonnes per day feed through, the costs will move out to the previous $1.77/lb (not C1). Are Vedanta (VED) affected as ZESCO have suggested it’s just in the North West region? Also, was the load-shedding announcement made on the 13th July? 

For the geographically minded, this has been on the cards for some time. ZESCO is reliant on Kariba Dam. Water levels there have been at lows and the outlook isn't great either. There's a material shortfall of 550 MW this year. The problem is likely to get worse, as so far the power reductions are plumb on the middle of guidance, whereas the the grid is showing a 30% deficit in power generation. Perhaps Aggreko can assist? They should be on the phone already, if they haven't already been. That's a significant 'potential' contract...

There's has been an absence of reporting from Vedanta. VED's Zambian operations are not insignificant, nor are Glencore's, who also have an interest in Mopani Copper Mines plc along with FQM. The load shedding issues will not be resolved until the end of the year at the earliest.

The issues have been discussed in the Zambia parliament over recent months by the perhaps outspoken Mr Patrick Mucheleka (MP). Not only taking a significant interest in copper, power generation but more importantly, the acquittal of former President Rupiah Banda. Perhaps to the disappointment of President Edgar Lungu?

A psychic announcement for Lonmin (LMI) thanks to Aquarius Platinum (AQP), whom Q4 production results. The pertinent issue in the commentary from Jean Nel, CEO Aquarius Platinum said (see bold): The fourth quarter was characterised by a particularly good performance from both Aquarius operating mines. Both Kroondal and Mimosa again improved safety, delivered all time fourth quarter production records and reduced costs, in what remains a challenging operating environment. The performance is testimony to a disciplined approach to operations and the operating teams at Kroondal and Mimosa deserve much credit for this. From a macro perspective, the lower metal prices which prevailed during the period and especially post quarter end will not only require an increased focus on safety, cost and production discipline, an approach which Aquarius will remain committed to, but also a focussed assessment of the viability of each shaft at each operating mine to ensure the sustainability of the business in a low metal price environment.

In case anyone is trying to fathom out what calendar AQP work to, today's is Q4. A lot of work has been carried out at AQP. Sadly the share price is unlikely to benefit much from it. It’s a testimony to the capabilities of the staff. The overall outlook won't help AQP, expect more cuts to production from unprofitable shafts. Although near a more realistic valuation than LMI...whom must be haemorrhaging cash! 

GKN results, acquisition and cash placing for another day...but watch that space. The book runners will not doubt suggest the job was difficult in the prevailing market etc.! Of course it was 'Gov.' Rather insightful after yesterday's EMC: JMAT read across for GKN! Drax's half yearly today aren't so bad. Having been a knife catcher on the climate levy changes, and a strategic review under way to consider the long term options for the Group. 

Atb Fraser

PM Bolt-On: One for the train! SXX (limited) & Johnson Matthey (JMAT) absent of depth, amateurish and lacking substance, but all the same.

Good Evening,

After a lot of communication regarding Sirius Minerals (SXX), to save replying to everything. 

There's two cases for SXX, one that the longer-term holders whom do not feel the need to trade and can see the value over 5+ years and those short-termers with a differing view. 

Without reading too much into the news today, there's no reason to change ones view. SXX was a case of sell on the approval news on the 1st July. The directorate change and market move update should be welcomed by the longer-term holders. One suspects its getting very near a price where there's a reason to buy. 

With an impending Main Market listing on the London Stock Exchange, this should support SXX's value in raising near £550-700M (pending which way you turn the can). With the strength of the U$D as well, its likely any international investors may be pleased with such an investment.

In the absence of some significant corporate action or fundraising news, SXX with be mothballed, although one may have some purchases near lower prices. It would be very disappointing if this stock couldn't benefit from the potash position and being viable well below the potash current market price. 

Johnson Matthew (JMAT) had Q1 trading update last Wednesday, with the woes of the industry being evidenced by the results. The EMC: JMAT Coverage has been criticised for being absent of depth, amateurish and lacking substance. Those views may be correct, but what has been covered has validated the viewpoint not to hold the stock long and/or short. (See results). 

			Q1	Q1		%
			2015/16	2014/15	%	at constant
			£ million	£ million	change	rates
Sales excluding precious metals (sales)
Emission Control Technologies			478	444	+8	+6
Process Technologies			130	119	+9	+8
Precious Metal Products			85	101	-15	-16
Fine Chemicals			78	78	-	-4
New Businesses			38	18	+107	+126
Eliminations			(12)	(11)
Group sales			797	749	+6	+5
Underlying operating profit1			103.6	103.6	-	-1
Underlying profit before tax1			94.0	95.0	-1	-3

¹ before amortisation of acquired intangibles, major impairment and restructuring charges, profit or loss on disposal of businesses.

JMAT may be the world's largest auto catalysts maker, but having rested on its laurels and not acquired into key markets, it’s lacking diversity.  In revenue terms the drop in profits is more significant that the sector gave credit for. Not only is JMAT impacted by multiple foreign currencies but the decline in PGM prices. This may change sooner than people think, pending on the outcome of Lonmin (LMI) and its backers. (Risk Event)

The question for investing in the bull case for JMAT is whether they are likely to benefit from the European regulation on emissions. Yes undoubtedly, but this is slowing more so and a much more progressive company called Umicore (EBR: UMI) is winning space.

UMI is cutting into JMAT’s competitiveness (Margins). The cycles on Heavy Duty Diesels (HDD) have peaked and the Chinese woes are creating more risks. With Europe’s HDD market in contraction its going to create further pressure. Fleet ages are suggesting an extension on ownership and renewal cycles of near 12-15%, but only a 1% up on 2009 figures. Perhaps truck recovery and parts are the way forward? GKN?

UMI have been able to benefit from location, reduced FX woes and the Euro 6 catalyst production both for passenger cars and heavy duty diesel applications. UMI are expanding into JMAT’s bread and butter environment that is also declining/under pressure. This should be a concern for any JMAT holder, a cash return is simply an acknowledgement the business will be purely cyclical based on demand on its undiversified offerings.

JMAT’s bull case is the cash return, dividend and longer-term performance, but in the absence of one large acquisition, they face being an also ran to the progressive UMI.  So with cash in the bank from  Gold and Silver Refining Business for £118 million and another £256 million for the Research Chemicals Business (Alfa Aesar) by the end of the year. JMAT will have £374M available plus borrowings to go on the acquisition trial.  

It would perhaps be sensible to expand, as catalysts are at risk from ‘alleged’ greener eco-models laden with batteries. The weakness in current events and risks being ascribed to the macro environment will assist JMAT. They are in a position to leverage and warrant a premium to their stock. The caveat being, any small scale acquisition (unless in numbers) will question why JMAT sold its Gold and Silver Refining and Research Chemicals businesses.  

Punished for lacking diversity in technology, metals prices and outlook but economic uncertainty. Time for a management change? No change in position until news. Although, UMI are likely to be under-pressure as well, but one for another time. 

Atb Fraser

Morning Mumble: Oil and Metal woes, Diageo (DGE), China (PMI) & KMR pricing assumptions + Dialight (DIA/Dire)

Good Morning,

With the realities now being acknowledged within the commodity sector (and the analysts) the cycle is starting to enact change, with yesterday's piece in the FT Oil groups have shelved $200bn in new projects as low prices bite and Gulf news Projects worth $200b cancelled due to low oil prices. One suspects the latter was a twist on reporting from FT and CNBC. The theme being in both oil and metals, there is a headwind of efficiencies and stress on suppliers, whether labour or capital equipment. (Impact for support services?).

Having had the opportunity to meet up with a few on Friday, as the chap morphed into a three, its quite clear the consensus is now aware of what can be only described as an anomaly in China's data disclosure. If the GDP disclosure matched that of SEO's public records on profits, then one would perhaps be forgiving. 

In discussions with Li, SEO's are being somewhat generous with the facts of their profits. What has been disclosed is an outright reduction in revenues and profits, contrary to the GDP suggestions.

One could even argue that, if the accounts were fully public, we'd all have to turn into a forensic accountants. The recognition of revenues and profits including those on "goods in transit" to suppliers is near a farce. Something that perhaps capital equipment manufacturers in America have taken lessons on, or with humour, perhaps they've learnt from Diageo (DGE). We'll come back to that another time (Bloomberg: Diageo queried by SEC).

This is the latest for Diageo, earlier in the year as they resorted to a negative cashflow model for all their suppliers, by paying them after 90 days. Something supermarket suppliers have been accustomed to. DGE is under pressure to turnaround a company that has contracting market share in North America. It’s hoped higher prices will offset this, but perhaps they would be wiser to react to market trends than they have been. Being slow to react to flavoured this and that, whilst also offering conventional drinks. The concern being, have Diageo stuffed their supply chain? A temporary beat followed by misses, albeit small, time will tell. 

The market is now nervous of this rout in commodities, with the larger trading houses withdrawing from positions across the board. This is being in part replicate in agri-commodities (Agricultural Commodities). Simply, because we like simple here, the demand for commodities has contracted, more so, rather than keep a healthy balance of stocks, Chinese companies (whether state or private) have learnt from their iron ore trading comrades. Commodities are not in short supply, as the grab for Nickel pre Indonesia's unprocessed ore ban has made them realised.

The question that is now being considered, "if China isn't suffering to the level the west has been informed?" Why is there a categorical absence of speculation on Commodities (deleveraging and margin contraction)? What could be described as a temporary quad-divergence in pricing, demand, production, supply and stockpiles. There appears to be a full on headwind of over-supply, reducing demand, reducing prices and deleveraging, whilst an absence of speculation. On the flip the side, the dollar is talked up, torching those higher cost producers. 

The Caixin Flash China General Manufacturing PMI™ should perhaps be considered the most accurate PMI data for some time. Not only on the basis of a greater understanding of the Chinese economy, but more so the employment concerns that are rising in China. Perhaps the wider press would hire the odd drone hobbyist to fly over a few areas where capital equipment is stored awaiting sale. 

What does the deflationary impact and subsequent deleveraging means on a global scale? Last time the contraction occurred, there was a significant downturn and prices tanked. Whether commodities will go as low is another question, but more importantly, the bulls are not expecting a stockpiling (yet). Whether on leverage (margin), financed deals or more importantly on the bottom line there's something missing. We shall of course be somewhat fixated with the retrospective downgrades in sector and those associated. 

Last week, we have gossip of African consolidation in the Oil and Gas sector, which may actually be more credible and having potential. We had Aggreko (AGK) whom have now shown they are not immune to the cycle of power generation. There's one brave chap that believes 645 pence or thereabouts is what AGK is valued at...whom I am I to disagree. Date for diary, Interim Results for the six months ended 30 June 2015 and its Business Priorities on Thursday 6 August 2015 at 7am (BST).

AGK, may have some resilience and it's perhaps premature to suggest 645 pence is a decent target. After taking on debt to return monies to shareholders, this is just one company that is going to suffer with a focus on its own equity and margins. With AGK's exposure to shale, EMEA and Asia, Pacific and Australia (APAC), whilst considering Japan, revenues are now under pressure. APAC revenues are reliant on a mining model...whilst also being exposed to New Zealand, and Indonesia.

Aggreko is now suffering from previous FDI, in all their operation areas, where energy generation shortfalls have been addressed. AGK's cycle means they're more than likely to survive, whereas APR will, but with a different valuation and reduced ability to generate to revenue (profit). This will be read across the market about cashflow and leverage (debt).

On a similar theme, one had thought Kenmare Resources (KMR) had rented some diesel-powered electricity generators from AGK. Perhaps they can remain fully operational during the Southern Hemisphere summer months of December, January and February when supply is most unstable but not any other times? Were these generators not meant to be on stand-by? Insufficient? 

Iluka Resources, whom have cleverly engineered a waiting game. If Carlsberg did takeovers, Iluka Resources would be the model. They've sat back and let Kenmare Resources (KMR) destroy their value and any argument for a price increase. KMR should simply roll-over. Today's Q2 & H1 2015 Production Report is dire, over to KMR,

Overview

• H1 2015 production was constrained by 57 days of storm related grid power outages in Q1 and sporadic power outages in Q2, as a result of remedial work to the power line.
• Power stability is expected to improve significantly following the installation of new power infrastructure in Q3.
• Ilmenite production in H1 decreased 27% to 324,100 tonnes (H1 2014: 445,600 tonnes).
• Zircon production in H1 increased 11% to 23,800 tonnes (H1 2014: 21,400 tonnes).
• Total shipments of finished products in H1 increased 3% to 412,000 tonnes (H1 2014: 399,000 tonnes).
• Cost control measures succeeding and achieving significant cost savings.
• Project Loan Amendment dated 29 April, 2015 now effective.

Statement from Michael Carvill, Managing Director: 

"Production in H1 2015 was severely impacted by weather related power outages in Q1. Production in Q2 improved, though remained hampered by remedial work to the power line and unofficial industrial action in June - reducing operating hours for the plant. The outlook for production in H2 looks stronger as the national power utility commissions equipment that will increase grid power capacity and stability."

Date for diary, 28 August 2015.

The positive for Iluka/KMR is ilmenite is likely to have some positive support over the coming year. With Chinese domestic production reduced significantly. Remembering that ilmenite is a by-product of Chinese iron-ore mining, with their costs and any by-product credits making production unwarranted. With costs under control, the electrical issues need to be fully considered. If Iluka are to do anything, it will be sooner rather than later. 

With the appointment of John Ensall as the Lender Approved Non-Executive Director. We could "perhaps suggest" a few areas where some savings could be made. With the board costing near $2.2M year, is a little headroom, save $1.5m attributable to three directors. 

Lonmin (LMI) continues to fall, flying through the FTSE 350 quicker than it did 250. LMI needs cash at all levels and with its work force and furnaces now considered a liability, one would be wise not to catch the knife. It'll no doubt bounce or be bought out, does anyone need to rush or pay much of a premium? We'd be surprised. 

With Nickel dropping below its key $5/lb support level, should we start to consider the likes of Horizonte Minerals (HZM). with their price assumptions on the PFS. Remembering its sensible to sell projects on past economics with "headroom" and cream for an increasing price  Just how much cash does the company have left? EMC: HZM Sarcasm, how times change both in Nickel and viewpoint. From previously being a bull in the Nickel space, when the Chinese withdrew from being a buyer in the Market (October 2014). 

At the weekend I was asked about my view for Dialight (DIA), today's  half yearly report validates the . EMC view (January 2014) and EMC June 2015 . Although as we're now being respectful, we'll ignore the abuse at the time. Its certainly getting there, and the view has not changed. We call this progressive long-term investing, just short. Perhaps one could be described as a stale short in DIA?

Atb Fraser

Hopefully it makes sense...

Morning Mumble: Profitability (MERL).

Good Morning,

For regular readers, Merlin Entertainment (MERL) trading update after the accident at Alton Towers in June. MERL belatedly update the market on the trading environment as a result. In full below, (EMC: MERL 2 June 2015), 

It was surprising that Merlin Entertainment (MERL) have not updated the market on the casualties at Alton Towers yesterday, with 4 serious casualties in an incident around 2pm yesterday. One wishes them a speedy recovery, but with suggestions about the health of rides and how the company has dealt with concerns, could this have further ramifications for MERL's theme parks per se. (BBC) One certainly to watch as the HSE will become involved if they haven't already. 

(Item's in bold are addition today). 

Research in one key area, showing it pays to go the extra mile rather than balance sheet analysis and assumption. MERL will also likely suffer as a result of a weaker Euro, not only from us natives going abroad, but more so less visitors to their themes.' 

Over to Merlin Entertainments to cover the impact, 

.

Action is being taken to rebuild momentum and re-engage with our customers. However, based on most recent trading and our assessment of the likely trajectory over the key summer trading period, the 2015 EBITDA for the Resort Theme Parks Operating Group is now expected to be in the range £40 to £50 million (2014: £87 million). The magnitude of the financial impact is the result of both a significant reduction in revenue and the requirement to maintain an appropriate investment in customer service and marketing through peak season.

MERL go as far to suggest that 2016 profitability will be impacted as well, which is wise but a completely unknown variable with current media trends suggesting people will remember the event. MERL state, "Although difficult to assess at this stage, we believe that there may be some continued adverse impact on the Resort Theme Parks Operating Group profitability in 2016". 

The financial impact couldn't have happened at a worse time, this was the build up to peak season. Unfortunate for those employed locally reliant on the incomes of the visitors. There could be other issues as a result of the HSE investigation, with recommendations that could be costly to implement across the estate, not just Alton Towers. 

Whether the management were right to suspend marketing etc...is another matter. Quite what the justification was/is may have further implications. Theme parks on the whole generally have a good safety record, certainly in Europe. 

The question is, do we have another PLUS 500 type scenario of a suitor seeing a potential opportunity on MERL? Taking the cash today on the news when the market digests the results. 

Will be back later!

Atb Fraser

Morning Mumble: Turning Japanese - FT, Anglo and Lonmin: Yuck.

Good Morning,

Importantly for everyone that reads the pink pages (via whatever medium), the FT is Turning Japanese. Amusingly, being well off the mark thinking it was Reuters, four city folk were bang on the money. The concern being, that it was never suggested that to gain entry to the city trading houses, one had to know the lyrics and Turning Japanese as a desktop short-cut. We'll remain silent on what that infers for those in city! Whatever next...

After enquiries about IT errors and the like, as a reminder this is a channel for views, pending time. 

It is appreciative that people source the views, whether they agree with them or not, it's a pleasure to read people disagreeing without referring to status or position with insulting terms. With apologies being accepted, and thank you for them, its time to look forward. Perhaps, the EMC will not be a dirty secret of a reference point in future, before penning ones analysis. 

Fear not though, there's a suspicion we shall disagree, but now with a mutual respect. We'll see how it goes this afternoon, meeting with a city chap whose views have differed slightly to here. Especially on copper, iron ore, nickel and zinc. Who picks up the tab is another story and will there be a bun fight!?

On to the carnage from of the market Lonmin (LMI), whom cut this, reduce this, care and maintenance (C&M) that and look for further savings. If someone has not thought of it already, perhaps shutting up shop would support the entire industry. There cannot be much more to cut can there? LMI have been sensible in placing those operations on C&M with least initial cost (contractor mining). How LMI can make money including financing costs etc...at anything below 1185 (under review as well), is anyone's guessing. 

LMI's Q3 2015 Production update is woeful on all levels. With the management now "defending" the value of shareholders. Had this come in 2011 then perhaps we'd have been discussing something very different. LMI is a prime example of inefficiency whilst attempting efficiency. So, without pulling apart the numbers, its fair to say LMI are paying the market to produce PGM's. 

As mentioned in, EMC: Kumba Iron ore one suspect there's going to be an increase in Lost Time Injury Frequency Rate (LTIFR). Sadly LMI workers have been impacted by this as well, with cost cuttings all round, there's a difficult balance between profitability, productivity and viability. Sympathy to the families involved. 

Some contradictory statements, but over to LMI refinancing

We are reviewing the appropriate capital structure for the Company in the new pricing environment as we consider the need to re-finance our debt facilities. The Board is considering the full range of options available to secure long term capital and expects to update the market by the time of our full year results in November 2015.

If any financial institution will stump up (via refinancing) any monies (debt) without a commitment from shareholders, they'll be brave. 

Lonmin Chief Executive Ben Magara said:

"Lonmin is defending value for all stakeholders in responding to the platinum pricing crisis by taking swift, decisive even though difficult measures. Losing jobs is not pleasant but everyone is having to take significant short term pain to preserve optionality for the long term. All costs have to be reduced including labour and I hope our formal consultation process will come up with mitigations to minimise job losses.‎"

Ben's got his hands full, with a growing discontent in South Africa, it's not going to be easy to "minimise" job losses. With the number of unprofitable operations, it’s hard to minimise what needs C&M on a grand scale. LMI, in my view, is not going a concern. The surplus in the global PGM industry (far from assisted by Russia) will make it difficult to justify any investment. If one hasn't noticed already, in the absence of a Chinese aid package (and its being touted), opps one means investment, LMI is destined for AIM at the very best. 

In summary, to go long, without acknowledging all the geo-political, economic and commodity related woes, would require one’s head being looked at. Good luck to those on any form of book build. The facts are clear, even with yet more cash, will it resolve LMI's profitability? Yes, but only if operations are shrunk to an AIM sized entity. 

Continuing in the same vein, we have Anglo America (AAL) reporting H1 results today. Handily, if we do a quick copy and paste from LMI, with the addition of "impairments, write-downs and flog this and flog that" its makes life easier. So, AAL, whom cut this, reduce this, flog this, care and maintenance (C&M) that and look for further savings here and there, are not in the same boat, but it looks like the same boat race. 

We'll summarise quickly with net debt up at a staggering $625 million to $13,496 million and a loss reported for the entire year. Admittedly, there's post-period receipts for the sale of the Tarmac division of $1.6B, which are being applied to debt (like they had a choice). 

If anyone ever speaks to AAL anymore, could they be so kind as to ask them to bump up the P&L reporting to near the top of the page. As a few savvy analysts have realised it's stashed down the pile. 

So AAL have....Commodity price-driven impairments of $3.5 billion after tax, including $2.9 billion at Minas-Rio. Productivity improvements and indirect and capital cost reductions accelerated, with disposals being progressed. 

AAL have very wisely spotted that iron ore is at a cross-roads. With higher cost producers disappearing from the market, these have been replaced by newer lower cost producers. Kumba's lack of dividend is going to exponentially hurt AAL, nevermind the Exarro Resources woes. 

De Beer's couldn't even save the day this year compared to last, "De Beers saw a continuation of the market weakness of late 2014 during the first six months of 2015, resulting in a 25% underlying EBIT decrease. In response to these market conditions, the business has revised production guidance for 2015 to 29 to 31 million carats, while continuing to focus on its operational metrics. De Beers also reduced unit costs by 10% in dollar terms. Read across to smaller producers...

Why AAL is up on anything but the dividend today is a mystery, and that is questionable why it's being paid. The Dividend can only be paid on the assumption of sales receipts from other assets, failing this they'll have to scrap it. This questions the sensibility of such a policy rather than improve the balance sheet. We'll leave the summary to, at 30 June 2015, Anglo American's ratings were Moody's Baa2 (negative outlook) and Standard & Poor's BBB- (stable outlook).

Question of the day, were RIO/BLT were wise to machine gun their way to capacity just to survive? An example being Roy Hill, with Gina Rinehart continuing unabated despite some issues with the family trust that may or may not need resolving. 

Maybe more time later, although that's becoming a reoccurring theme.  

Atb Fraser