Good Afternoon,
Back up, albeit briefly...
It's been a while! Although far from inactive - it has been fun to relax and enjoy the holidays.
The views and positions here have pleasingly been validated by the market. A pleasant bet being honoured on RIO hitting (and surpassing) my target price of 2200 pence today! Now, with a tangent look at Glencore, with some analogies to Star Trek.
The views and positions here have pleasingly been validated by the market. A pleasant bet being honoured on RIO hitting (and surpassing) my target price of 2200 pence today! Now, with a tangent look at Glencore, with some analogies to Star Trek.
We'll ignore what the critics stated about the
target prices here and on FTML, with some pleasing emails of
acknowledgement. Stopped clock or not (as some called it here) there was no
deviation. Not because of stubbornness, but the indicators have only
become a) apparent and b) a lot worse than even those reading here
thought. So why would one change their view over the longer-term? Perhaps
revisit the analysis but certainly not change this view, at the moment.
Initial analysis started to appear more positive after
Glencore’s webcast on
the 2015 half-year report. If you have a position in any stock, in any country, it's
sensible to consider the webcast and in particular the defensive body language
displayed and the wide range of earnings guidance. Also, as a validation, a
quick visit to Fortescue Metals Group (FMG) annual results that aided the selloff in Australia last night.
In the webcast (45 mins onwards (Q&A) section), it was
noted that some analysts were rightfully enquiring about the leveraged nature
of the balance sheet, specifically what flexibility there is in the working
capital.
The market is now waking up to the acknowledgement of
Glencore’s wider guidance of $2.7-$3.7bn (Page 9 in Presentation). Being near 2 months into H2, one surely should have
been able to be more specific or is there lot of hope being priced in? It does suggest there's a lack of confidence in their operating divisions including Russian Wheat
export taxes, Canada grain harvests and the copper / oil woes and finally,
China. Is this representative of the current wider global theme?
Least we not forget Glencore's thermal coal adjustments. Despite
assertions of profitability and low costs, why did Glencore have “no other
option but to scale back 18MT’s of thermal coal per annum.” Is it implying that
Glencore are not understanding the full extent of the market deterioration in
commodities, or perhaps across the board? Not a good thing if you operate in
such fields.
There are a number of issues Glencore's copper division
appear to have missed. One being that the "sudden" appearance of
significant physical, that is suggesting a destocking of inventories. We are
even starting to think that it suggests the Asian market had stored
significantly more than what the market had allowed for in warehouses and of
those cashing out (by pulling levers).
Having had a target price for Glencore of 165 since from Xstrata (XTA)
merger completion on the 2 May 2013. The risks are still there in China, Russia, Canada, in fact every
area that Glencore has an operating divisions, but more importantly net debt
and its ratings, inventory valuations (and consequences of hedging), whilst
being in a global deflationary environment.
Glencore are in a position of being forced to sell off
assets, allegedly non-prime/central to Glencore's needs. We note Glencore
announced the sale of Tampakan, Falcondo and Sipilou on the 14th August. The buyer, a
subsidiary of the Alcantara Group (via their subsidiary Indophil Resources
NL) appear to have benefited from Glencore's woes. Not forgetting
that the sale also proves the case that yet more volume is hitting the market.
Or are Glencore and the market believing that Indophil purchased these assets
to do absolutely nothing with them? “Give o’er…” as Polonius said in Hamlet!
There's going to be a temptation by funds to start averaging
down given the current price compared to the IPO. We'll ignore the warped
belief of the investment case for Glencore, but some 'averaging' down will give
risk to shorts in the interim. Without further woes in the price of oil, copper
and agri-commodities it's “about the price” (for now), with more volume likely
around the 150 pence.
Simply, Glencore is no-longer a conviction short, until
further testing and understanding. Namely, “how bad is it really in China?”
China’s next about turn in policies, devaluation and protectionism is likely to
answer that. To the detriment, of course, of their trading partners – both
Asian and global.
It’s ironic that Glencore go as far as to blame 'aggressive'
short-selling on copper woes. Hang on a minute, don't Glencore have a copper
trading desk? It would be a fair statement if they were but a "mere"
producer blaming the woes of the market, rather than a fully integrated
Goliath.
It’s rather taking the biscuit to point the finger when you have a capital intensive trading / marketing division? Were GLEN the counter-parties of such positions? What is the impact of the Russian export taxation on profits, with most trading houses with active positions from June taking a large hit?
It’s rather taking the biscuit to point the finger when you have a capital intensive trading / marketing division? Were GLEN the counter-parties of such positions? What is the impact of the Russian export taxation on profits, with most trading houses with active positions from June taking a large hit?
If we liken Ivan Glasenberg to Captain Kirk and Steven
Kalmin to Scotty the "engineer" from Star Trek, it is bemusing to
review the discussions in the webcast regarding debt, working capital and
trading/financing deals (Circa 50 mins onwards).
When pushed on the debt position, debt rating and the
hypothetical situation of $2/lb copper, Capt. Kirk/Ivan explained the benefits
of being a trading house etc...Where there is flexibility in business model.
Steve aka Scotty was able to step up the power or reduce it accordingly by
these magic levers to reduce working capital, change the interest rate on
internal lending to trading / marketing or look to derisk financing positions
with third parties. Warp speed anyone? Perhaps Scotty in reality is
“giving all he can Captain?!”
Admittedly there's evidence in the webcast of both Capt.
Kirk and Scotty not understanding the business. Glencore need to reduce their
debt by about $8B and essentially by as much as the carrying value of the
inventories. Why was there no comment on the reduction in volumes across their
divisions? After all it’s essential to trading to have volume.
Glencore’s biggest concern is its inability to call the
market. One would have thought the overall theme of a market would have enabled
better guidance rather than statements about “China being weaker than
anyone envisaged.”
Likewise, Scotty suggested, that one can simply reduce
inventories and/or working capital in addition to intra-company loan rates.
This may actually be harder than what Glencore have previously done in the past. Especially in light
of volumes of commodities available in the short-term. Their selling, could
actually warp (speed) the market further (at least in the very short-term).
Glencore have failed to consider the currency benefits of a
strong dollar on the marginal producers, that are given (yet more) lifelines. Especially as America “hops along” to an interest rate increase (but no doubt
delayed by 9 months+).
The currency beneficiation has not only helped the likes of Kaz Minerals and FQM stay in business, but most other leveraged players. The ability of producers to ramp up to reduce the costs further, whilst putting a glut on the market, is under-appreciated (at present).
The currency beneficiation has not only helped the likes of Kaz Minerals and FQM stay in business, but most other leveraged players. The ability of producers to ramp up to reduce the costs further, whilst putting a glut on the market, is under-appreciated (at present).
Admittedly there's some hope, Glencore think the worst is
over in agriculture - with the new wheat export tax now having visibility.
Glencore appear to think there's near balance of supply and demand in copper
and the market price is false. Ironically those statements were made just
before the PMI data for China (1). The market is waking up to just how leveraged
and unstable/weak China was, but one suspects not how weak it is. Could
Glencore have been overly optimistic, so far it would appear they are, and perhaps will still be.
An example being copper piping, where over the weekend Li
informs us there's a couple of cargoes going for a proverbial song. Has someone
perhaps been caught on the hop contractually? More on this later, if we manage
to find out a price.
Yet in contrast to these cargoes (as a snap shot), analysts
are banking on China spending on the electricity supply grid and
infrastructure. This may actually be a pointless exercise as energy use has
reduced near 3%, one cannot see China being able to afford the previous levels
of wastage to support the economy.
Whilst avoiding being gleeful of near 4 years work in commodities, one suspects the market is now at risk of capitulating to a bear market, with the wider ramifications needing further analysis.
For copper, there are contradictory indicators coming out of
the sector. We have Platt's* on the one hand forecasting
growth in 2015 of near 5% whereas ICSG (International Copper Study Group) at negative 3%* (Source: ICSG PDF File). That's some range considering what the implications are at an
economic level, although more recently there have been a few production issues
in the market that may provide support (based on a reducing supply).
Like in China, are we now going to see the
forced selling of stock pledged/secured against loans or mortgages globally? What of the
collateralised loans? Or perhaps with a hope of security “in cash” now being
forced to sell. An example being the sale by Martin Rowley of First Quantum Minerals. Whatever the reason behind Martin’s
sale, one suspects there’s going to be more globally, whether
current or former management of most companies. It’s certainly the case in China, Asian and
Pacific economies.
Freeport-McMoRan (FCX) are a prime example of expanding into
the rout of commodities. They are yet to press the button for equity (perhaps
due to lack of interest). Are they waiting for glimmers of hope in the
commodity prices? One suspects they cannot wait much longer without a
restructuring/raising.
China have significant problems that without a multi-pronged
approach to their economy, without some form of foundation building rather than
bubble focus, their economy will continue to raise concerns. The next trend (reiteration) is likely to be PFI
(Private finance initiatives) or PPP's (Public Private Partnerships).
The Chinese have very cunningly been creating their own
supply chains, whether Aluminium, Steel, Copper, Nickel, Coal to petroleum.
This is evidenced in Taiwan, where they have felt the might of China in the
semiconductor market.
Taiwan’s semiconductor exports were significantly larger
than China, their market was near 3 times the size of Chinese in 2009 but is
now is en par with the Chinese market. Like solar panels in Germany, this
expansion into a commercial space and supply has hurt them. Many Emerging
Markets will have to consider the implications of the determination of a
weakness in their currency, with a reducing demand and reducing level of
investment in their countries. Examples being Taiwan, Thailand, Korea and
Japan.
If one considers read across of the semiconductor market in
Taiwan to the copper draw/demand on copper in China. Then China’s demand/needs
may not change that much, but what may is the demand from predominantly
emerging Asian markets that have relied upon China. These markets have only
just woken up to the fact their industries have been replaced/replicated.
One cannot ignore the compliment from a devout critic of the
views here, where "the macro environment commentary on China/Asia and
India is very accurate and almost psychic here", (to quote one
reader. Maybe it's only one reader!
May be a little biased of course, but one would be hard to
disagree in light of the carnage on the markets and ensuing ‘recorrection’,
reading back and comparing here with the realities of the PMI data and those of
the bulls of the commodities.
Why did this blog post became so popular over the weekend, EMC: Fanya Metal Exchange. What of others? Perhaps it was after this article about angry investors capturing the head of Fanya metals exchange (FT). Quite how much commodity do physical ETFS have, what are the implications for the Jo'burg PGM ETF's etc..With humour, should one be factoring in security costs for under-performing companies?
Atb Fraser
*Platt's from memory does not distinguish between refined
and unrefined copper whereas ICSG is focussed on refined copper.
1) Add Diary of Release Dates for PMI information to your diary.
Finally!
ReplyDeleteHi Fraser- welcome back- I saw the markets this morning and thought of you, believe it or not :-))))
ReplyDeleteA good day for me at Trent Bridge today, the dark clouds threatened all day, the umpires stopped Notts from using their quicks all afternoon but the pressure paid off and the innings win was snatched. It was thrilling in the same way some would have viewed todays market swings.
Good work re GLEN and the metals field again- some serious issues but they seem manageable and would be better understood if the Chinese fessed up about their real GDP numbers and stopped their panic measures re markets- the news about the national pension fund being allowed to invest 30% in shares did seem to add to the panic overnight, completely counterproductive and amateurish.
The August factor of having deputies in change of funds in London again added to volatility, as in the past. No doubt the bosses will stay in their villas and send back nasty emails to the minions. The fund managers love this as it proves their worth.
Another TB day for me tomorrow, I would expect a calmer day, but lets see as some interesting anomalies have popped up re certain stocks today.
Cheers. The Leggie
Evening Leggie, the markets stopped it raining gin last night! Pleased you're enjoying TB, with 2 day test matches I assume you got some money back:-).
DeleteWhat the market hasn't allowed for in this band aid stupidity where plasters are now used an amputation. China has perhaps rightly caused the following:
1) A lack of confidence in Chinese data.
2) Concerns about financial liquidity, (I'm working through this with Li at the moment and may be able to share.) The main themes seem to be “financing and liquidity in SEO’s” (State owned enterprises, implying a greater contraction that some would give credit.
3) How much has the "infinite finance company" and their related entities spent...here we know the answer, perhaps the market is waking up to it. P.S. Goldman Sachs are wrong, very wrong.
4) At what stage do funds (with Emerging Market/Asian and Australian exposure) have to start selling down just to avoid forcing their fund to close? I suspect it is now…and will continue, albeit some buying on the ethos of Buffet, greedy when fearful etc…
5) With the data of Southbound monies (China to HK) maxed out, where else can the Chinese investors hide? Gold?
6) The “goliath” Chinese State Pension Company now buying shares (and crap) what are the longer-term implications.
7) With the declines in the Chinese Markets, what are the implications for Car Manufacturers? Retail? More importantly, to Europe, that some "analysts" think is insulted at present. (I'd disagree, but this is something we're working on at the moment.)
8) With the money flows to dollar, at what stage does China have to meddle not only with a currency devaluation, but reserve requirement ratio (RRR), state infrastructure spending, and the "now planned near $360B Bond issue to fund "China." Yes, a mere exclusive here at EMC :-).
9) There's a number of risks to commodities, one being that African trade is also starting to suffer, with reports of a few 'cancelled and paused' projects that were going to be financed by the Chinese.
10) With the old adage of Buffet's buying when others are fearful etc. There are without a doubt opportunities presenting for buying. However, that is something that is better to miss than gamble without further clarity on the future. (i.e. buy on News of "a multi-pronged approach).
11) One has suspicions of a forthcoming default in a "commodity" company in the event of copper stays sub $2.40 for longer than 6 months (save for a +billions rights issue). Considering every 10¢ up or down on FCX Freeport-McMoRan by my estimates is worth $350M. The impact of Oil and Copper, FCX are in essence (perhaps the wrong wording but you get my idea) trading whilst heading for the wall?
The concerning part being the market is starting to agree with me!
Cheers Fraser
More to come on the above. With some offers to do a few webcasts, we'll see how commitments and time pen out!
DeleteThanks again Fraser- it is clear you are enjoying yourself and that you and your man Li see what is happening a lot clearer than almost everyone else-- its far too complicated for the likes of me but its clear it probably needs a high profile casualty or two to get past this phase and into a stage where some real form of recovery is possible.
DeleteI have a couple of glaring Buys to put through in the morning but will watch the Far East reaction beforehand, especially the official Chinese moves, which seem to come daily now.
Cheers. The Leggie
At some point, Short32’s results will be worked through...limited by time constraints and cannot commentate on everything.
ReplyDeleteSuffice to say, if parties were long on this junk, grab a tin hat! http://www.investegate.co.uk/south32-limited--s32-/rns/final-results/201508240701108402W/
Results say it all...."cost savings" is about positive as it gets. The reduction in sustaining capital expenditure is insufficient. Dividend is likely to be toast for the foreseeable future.
Over to Short32, "South32's strong balance sheet is a key point of differentiation and we value it highly. Our simple capital management framework and dividend policy ensures our shareholders will be rewarded as financial performance improves."
With the “mother ship” (BHP Billiton) reporting tomorrow, handily it gives a very good indication of the terms to be used. Cost reductions, Cost Optimisation but importantly for those “long only” BHP worshippers, what of the dividend. Prudence! Perhaps an opportunity to sell on the news? Any further writedowns (whether the market wishes to ignore this or not) will only increase the “debt to equity” percentages.
With a gearing ratios being the sensible place to start in the results…and work back. Why BLT didn't buy BG Group, regrets over the longer-term, even allowing for the debt it would have created.
Any increases in production of the entire basket of production will be distorted by today's realities. So the market may get over-excited. A rousing Evening/Morning, pending if you are capable of being awake at 4.30PM AEST. Where can one hide the Ghastlies? Page 18? Watch for “production declines” and “cost savings/maximisation/efficiency.”
Atb Fraser