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...
No comments:
Post a Comment