Morning Morning: Petra Diamonds (PDL), the Fed Simply, Gauntlets to the commodity sector & implications for Glencore Ref: Jiangxi Copper (HK: 0358)

Good Morning,

As a recap to yesterday, Petra Diamonds (PDL) updated on Q1. The diamond sector in the short and mid-term isn't necessarily the place to be increasing ones leverage - Net debt at Period end of $306.2 million (30 June 2015: $171.7 million). 

Considering the updates from De Beers (via AAL) and Alrosa, Petra's were as expected. The lack of a tender in the quarter hasn't assisted Petra - whom acknowledge prices have got weaker (down 8.8%). 

As a poignant reminder, the significance of the Antwerp Diamond Bank should be noted (See EMC: January 2015 Antwerp Diamond Bank. Not only was this underestimated by the market, but evidence is suggesting financing has tightened further. 

Petra should accept the headwinds affecting their buyers' financing and the ramp up of production in the diamond space. Prudently the majors have reduced their expectations on the sightholders. As a result, Petra with their ramp up, are likely to be a price-taker to meet their cashflow demands.

With inventories up, prices down and the delay in tender, Petra need some luck to achieve targets. It’s important to acknowledge why Petra didn't have a tender in Q1? The EMC view is that due to the car wreck of sales by the majors in Q1, Petra delayed their tender. A reminder being that Petra have a standard sales cycle. Whereby they hold one tender in Q1 and two tenders Q2. Will there be three in Q2? For those searching out last year’s Q1 for comparatives, here (Q1), where they confirm the sales cycle as well.

In the absence of an improvement in the financing or balancing of supply and demand, prices are unlikely to recover. Expect some cost cutting initiatives to those miners that ignored the realities of the Antwerp Diamond Bank (ADB) closing. Is there any reason to hold a diamond producer? Certainly not without some glimmers of hope or telescopic belief in a pricing recovery or M&A.

The Federal Reserve threw the gauntlet to commodities sector (in particular) and the markets yesterday. There will now be some revisions across the sector as the outlook becomes more challenging. Somewhat after the horse has bolted but all the same, if the global economy doesn't wobble in and employment numbers stay circa 160K+ the FED is raising rates. 

Fortescue Metals Group (FMG) are buying back debt cheap at between 14-19% discounts. China's Jiangxi Copper (HK: 0358) (China’s main producer/smelter) reported a  -59.79% drop in third quarter net profit. 

Jiangxi's numbers were in-line with the expectations here, but "the read across to Glencore" should be acknowledged. Having recently signed an agreement with state owned China Minmetals Corporation (Las Bambas for those that need reminding), it's an acknowledgement of how tough the market place is. 

As a result of the FED indications, the iron ore producers are going to benefit at an OPEX level. "The four" (Rio, BHP, FMG & Roy Hill) will be expecting an Aussie interest rate reduction  to improve their bottom line. Although it won't offset all the fall in iron prices, especially with current Chinese steel dump and associated prices.

Its only when reading KAZ Minerals Q3 & IMS that one gets a realisation of how bad things are going to get when they results are "in-line." KAZ have been lucky thanks to the devaluation of the Kazakhstani Tenge. The management have been prudent to avoiding giving guidance on cash costs in the IMS Q3 - Thankfully for them they have cash, debt is up. One can obviously look forward to updates on Koksay scoping, along with the production for Bozshakol and Aktogay in H1 2016. 

Finally, we have OPAY come out with some historic personal data breaches - being out at a loss on this, it was not unwelcome. 

Atb Fraser

Morning Mumble: Direlight (DIA), Chemring (CHG), Kenmare Resource (KMR) and Majestic Wine (MJW) their economic moat!

Good Morning,

Dialight have given strategic review & trading update. Over to Dialight (see additions by EMC in bold):

Trading Update

Trading in the three month period to 30 September 2015 was characterised by continued weakness in the oil and gas sector and reduced levels of industrial capital expenditure, particularly in North America. As a result, reported lighting revenue growth for this period was 5%. The cost reduction actions announced on 7 August are on track to deliver their targeted reduction in operating costs and we are encouraged by the strength of our order book. However, with market conditions having become more challenging during the third quarter, and Dialight's financial performance weighted as usual to the seasonally-strong fourth quarter, the Group faces an increased level of uncertainty in the remainder of the current financial year.

But...By the end of 2018, Dialight is targeting to achieve:

• Over 25% annual revenue growth
• Over 40% gross margin
• Over 15% EBIT margin
• Over 80% cash conversion

The market is wising up to the realities. See: EMC: Direlight (DIA) June 2015.

Chemring (CHG) trading update that isn't good news with a "potential" delay in the 40mm contract. The concern being, this is yet another company flag waving a rights issue so far in advance it raises significant questions about any understanding of the market. 

Admittedly, with a bit of good fortune, Chemring could turn the situation around by gain the necessary permits and export approvals associated with this contract, although one senses the board find this highly unlikely. Over to Chemring, additions in bold. 

Key points

• Despite significant progress having been made, there is potential for delay to revenues from the 40mm ammunition contract announced on 14 September 2015

• As a result of this and other issues, there is now a realistic prospect that year ending 31 October 2015 ("FY15") underlying operating profit1 could be reduced by approximately £16 million to approximately £33 million

• Order book at 30 September 2015 of £606.3 million; £344.6 million for delivery in FY16, representing more than 75% of expected FY16 revenue of £450 million

• Discussions will be held with debt providers to negotiate amendments to the operation of covenants and the waiver of any event of default that may result from the 40mm contract delay

• Proposed rights issue (the "Rights Issue") of up to £90 million in Q1 2016; fully underwritten on a standby basis by Investec and J.P. Morgan Cazenove

• Resultant medium term target capital structure of 1.0x - 1.5x net debt to EBITDA

The company's debt levels have been a concern and impeded them for some time, so Chemring elect to kitchen sink their issues today with:

"The recent progress of the Group has been impeded by its high levels of debt and associated interest costs. Significant time has been spent managing this debt, at the expense of further operational improvement and fully capturing the longer term growth opportunities open to the Group. We have therefore announced today that the Group proposes to launch a fully underwritten rights issue to raise up to £90 million, the proceeds of which will be used to fundamentally address the high levels of debt and to provide a competitive capital structure."

It begs the questions of why the rights issue isn't now...shareholder value? The cash advance whether recognised in this year or next is immaterial to the overall issues the company are facing. Target price now likely to be near 87 pence. If it quacks like a...This company has a momentual task just to maintain existing shareholder value, 

Kenmare Resources (KMR) forgot to mention some key ingredients within their  Q3 trading update. Namely the pricing environment over and above anything Kenmare can do will remain challenging. Iluka Resources is fully aware of the KMR financial position when such terms as "Super Senior Facility" are utilised it rather suggests who has the stronger hand.

A question: exactly how much time have the "board / management" spent out at Moma? More so, what is the purpose of the board if an external consultant has to be appointed to support and extend this ongoing cost control and efficiency programme? We'll ignore the stock levels and the like for now, as all the cards are in China's and Iluka's hands at the moment. 

In the current environment, Iluka Resources have no need to save Kenmare and there is a real risk of downward pressure on any offer price. For a perhaps more open outlook, please read Iluka's Q3 (see the market conditions section). 

The market is waking up to the realities of Iron Ore, scrap prices are falling quicker, steel prices down. More so, there's now evidence Steel Mills are bringing forward larger maintenance works and/or shutting capacity due to the limited demand. We acknowledge the likelihood of a larger sized steel mill default. 

With two significant events currently under way the 18th CPC and the Fed, there are likely to be considerable trading events. We have Aluminium production in China yet again on the increase, the average operating rates of Chinese copper processors is steady but nothing to shout home about, Zinc inventories in Shanghai, Tianjin and Guangdong are on the up and finally, scrap prices in China fell through the floor evidencing the realities/contradictions of the alleged balance in supply and demand.

Finally, it would be unfair not to consider Majestic Wine (MJW) whom pulled the proverbial plug out of their economic moat of six bottles or more. Apparently, MJW trialled no minimum bottle requirements at 23 stores for 5 months. Its allegedly had no impact of volumes, really?? 

The question is, did the removal of the 6 bottles or more criteria improve sales? Or just increase the cost per sale? Is this a flag waving event where they firmly placed themselves within the supermarket sector where such benefits of 6 or more bottles may have insulated them to a degree. Surely if one is an off-license location is key!

If someone could be so kind as to point out where Majestic announced to the market that they were trialling the no minimum bottle purchase, it would be appreciated. As in yesterday's announcement of a new pricing strategy stated, "follows the previously announced successful trial in selected Majestic stores since Spring 2015 proving popular with both new and existing customers." Perhaps one is just being tardy, a quick email to Majestic's IR might assist. 

With the results out on the 16th, and one has a suspicion there's been a leak to the supermarkets! Quite why Majestic Wine's didn't merely launch their own online offering of wines via post/text is a very pertinent question

Atb Fraser

Apologies for grammar a quick one!

PM Bolt-On: Lonmin (LMI) & Anglo American (AAL) - Kumba, Exxaro, Minas...+ Copper and Chinese Interest Rate Cuts (+waffle) + WPP & Majestic Wines

Good Evening,

Last week, hopes of Lonmin (LMI) being the casualty that the Platinum/Palladium industry needed faded away, with their latest refinancing. Not only would this have removed a significant proportion of the surplus off the market but perhaps improved the outlook favourable. The deal is yet to be inked and with quite a few outcomes it’s not without its risk. 

There's gossip (or hope) of interested parties post the update on trading, business plan and funding. With a number of outcomes, the poignant question is "what equity is there in Lonmin for non-participating shareholders?" The likely outcomes:

1. LMI may raise the monies and based on their cash costs of ZAR10,339 per PGM could have a chance of recovery. Assuming one ignores the past fundraisers that Lonmin quickly burnt through - previously raising in December 2012, 
2. The $817M kept the lights on since -  LMI fail to raise the monies based on shareholders experiences to date - geo-political risk, miner/worker demands, inflationary costs (Eskom's price rises are unsustainable) and the outlook for platinum/diesel associated catalytic converter risks. 
3. LMI raise a partial amount to satisfy the banks in the interim whilst a buyer for LMI is found. The difficulty is determining the value of equity/assets after dilutive equity raise. The risks cannot be totally ignored. 

Lonmin (LMI) -

The Board intends to announce on 9 November 2015 the full terms of the Proposed Rights Issue to provide the new equity funding required of US$400 million and to publish a prospectus and the audited results for the Group for the year ended 30 September 2015. The Proposed Rights Issue is expected to be underwritten on 9 November 2015, inter-conditional with the Amended Debt Facilities.

With not long to decide, it’s over to those already torched and/or underwriting to strike a price. Could this be a 4:1 dilution?

We had Anglo American (AAL) come out the other day and say just how bad it is. Like Lonmin, Anglo face an uphill battle of immense proportions. There's a number of items to be considered, we shall be coming back to them in due course over the coming weeks, specifically the items the market is ignoring.

Not forgetting that the comparable quarter for platinum production was during a strike, it’s sensible to read right to left on the chart below. Save for the warping of platinum, the results are a disaster for shareholders. There's a real risk of De Beers being sold near the bottom of the market. Admittedly there appears to be some form of resistance from the board to dispose of the main value in Anglo, they may be forced into a corner.

The lack of debt guidance in Q3’s is always an issue, but on results there's an indication that the dividend is going to be toast. Cashflow doesn't look ‘great’ and the outlook isn't much better. We estimate $12.6B in debt currently.

Overview (from Q3)

	Q3 2015	Q3 2014	% vs. Q3 2014	YTD 2015	YTD 2014	% vs. YTD 2014
Iron ore - Kumba (Mt)	11.4	13.0	(12)%	33.9	35.8	(5)%
Iron ore - Minas-Rio (Mt)(1)	2.9	-	nm	5.9	-	nm
Export metallurgical coal (Mt)	5.5	5.1	8%	15.7	16.0	(2)%
Export thermal coal (Mt)	8.8	9.0	(2)%	26.1	25.0	5%
Copper (t)(3) (4)	171,100	176,900	(3)%	527,400	573,300	(8)%
Nickel (t)(5)	6,800	10,700	(36)%	19,800	30,500	(35)%
Platinum (produced ounces) (koz)(6)	614	541	14%	1,739	1,267	37%
Diamonds (Mct)(7)	6.0	8.2	(27)%	21.6	24.2	(11)%

 *See notes 1-7 end of commentary

We’ve previously discussed the issues at Kumba Iron (Sishen Iron Ore Company Proprietary Limited (SIOC), more so the difficulties with cost controls. This should have been implemented earlier.

Kumba’s operating costs target is a fairy tale at circa $40/t. Whether this can be sustained longer-term is another question. In the short-term there's a possibility, but sustaining capital investment can only be modestly be reduced. 

The majority of South African operators are suffering and Kumba’s Sishen FE mine is not exempt from the ensuing operational issues and potential unrest. Kumba had a reduction in iron ore production from the forecast 33Mt to 31 Mt (6%)) and an increase in waste tonnage from 200 Mt to 230 Mt (15%). 

Not only do Kumba/Anglo have lower iron ore prices, lower production and higher costs all unwelcome at the cashflow/profits level. The risks associated with the Exxaro black economic empowerment (BEE) vehicle should not be ignored. (EMC: July Morning Mumble: Anglo's further woes thanks to Kumba/Exxaro). Similar to Anglo's dividends, shareholders should not discount the possibility of any credible dividends from Kumba and consider them toast for the foreseeable future. 

Luckily for Exxaro they have the International Development Corporation (IDC) (Article: Creamer Media Mining Weekly) to bail/refinance them. The IDC do not have the greatest track record of investments, en par with the International Finance Corporation (IFC) whom notably invested in Nyota Minerals (2010). With their entire holding now being worth a paltry £48K (Approx.). Admittedly, Nyota was one of those that many (including here) got wrong at the time, but luckily wised up to.

The Kumba Iron Ore fan club need to consider how distressed the operations are. Moving more earth, for less production etc... The FX beneficiation of the South African Rand is of limited positive and remember, with FX devaluation, asset values in dollar terms will depreciate. As eluded to previously, the ArcelorMittal contract premium was in essence a subsidy / saviour for Kumba. They have now stopped gift-aiding.

Anglo's Minas Rio production was a smidge off the pace, allegedly owing to the drought. However, what Anglo have forgotten to mention the “collective holidays” that the company are utilising. Save for benefit to OPEX costs in the short-term aided in part by the Brazilian Real (BRL), ramp-up expectations should be revised downwards. Minas Rio needs 92+% operational capacity to attain a limited/exclusive status of having a profitable mine (with humour).  

We know that contractors have been delayed and/or appointments to positions not made as has been reported in the press. One expects further downgrades at Minas Rio unless their employment returns to viable capacity to improve ramp-up.

Remembering that Minas Rio is another obligation for capital expenditure on the Anglo balance sheet. Anglo are unable to cut this expenditure without significant write-downs/losses that would also impact on assumed cashflow.

Least we remind ourselves of Roy Hill’s first shipment that was pencilled in for this month that is now likely for November/December. See: GinaRinehart's Roy Hill mine to miss deadline for first shipment

Copper production was better than expect but still down, in part owing to the sale of some assets. Its noted diamond prices continue to fall and De Beers are forced to scale back production to offer some support in the market. 

The Chinese created a trading event on Friday, with the majority of commodity share prices benefiting for 10 or so minutes. That was until the realities sunk in, that as the Chinese had cut its 1 year lending rate to 4.35% (25bps reduction) it raised questions about the very state of the economy. The 6^th rate cut in 11 months.

In move contradicts the 6.9% GDP figures that came and the Press Conference of the Ministry of Commerce on October 20, 2015. Having discussed previously the need for cuts, expect a reserve requirement ratio cut of 100bps to 17.5% sooner rather than later (although this may now be averaging out, with the real time rate being lower. The interest rate cut has created more fear than confidence.

There's a likelihood of credit becoming cheaper for longer in China, the threat of further monetary easing in Europe and America’s limitations of a rate rise may give some false dawns. With the trade surplus in decline, China’s switch to consumerism/consumption will/ has to be the more rapid. 

China has to adapt to the full blown capitalist model sooner rather than later to sustain growth and sustain some form wage inflation. This will promote employment opportunities and offset the reduction in manufacturing that is occurring - evidenced in part by the reduction in trade surplus.

China’s “competitive edge" as a manufacturing super power is being eroded. The capital outflows from China are triggering a longer-term devaluation of the yuan. Over the coming quarters China will be compelled to reduce the capital/deposit requirements for property, for leases (including autos) and embrace the leveraged ratios considered the norm in the west. Examples being 90-95% mortgages (perhaps even the equivalent of help to buy in mid-lower tier cities. In addition to near nil deposit autos and cheap consumer credit.

With consumerism/consumption being promoted, China has to bet on service, retail, leisure and tourism sectors. In the absence of any consumption type stimulus China will be in a downtrend until at least demand catches up again.

Expect further cuts in the lending rates and RRR, otherwise China’s corporations are heading for default, including SEO and private/public listed companies. We know Chinese Co's are struggling to maintain debt payments.

The MarkitFlash U.S. Manufacturing PMI ™ showed a five-month high for October that is ultimately making any rate increase harder for the Fed. Admittedly the Q3 results for industrials are contradicting the FED’s confidence in the robustness of the US economy.Could the Chinese capital outflows be aiding the US Manufacturing, a Chinese version of QE with a flight to safer climbs?

More to come on WPP, a model based on acquisition? Majestic Wines - the new off-license? Eroding margins where there's a hope people will order between one and five bottles from Majestic Wine's rather than at their normal supermarket? What are the real costs of customer enticements at Naked Wines? With incentives from the likes of Moneysupermarket/Uswitch? 

Atb Fraser

• (1) Saleable production

• (2) Production includes medium carbon ferro-manganese

• (3) Within export coking and export PCI coals there are different grades of coal with                        different weighted average prices compared to benchmark

• (4) Includes both hard coking coal and PCI sales volumes

• (5)Excludes Anglo American Platinum's copper production

• (6) ASCu = acid soluble copper

• (7) TCu = total copper

Morning Mumble: ASOS - with market muppetry - Genel (GENL) its looking like a turn around but two swallows don't make a summer & VW - the realities + putting Presidential hopefuls media campaigns to shame.

Good Morning, in the morning as well!

Very brief so kept it to bullets...hopefully. 

• ASOS - (ASC) Final Results were out today and they were ahead of EMC expectations - bought into the sell-off. Consideration is, that although they don't justify PE's of a stellar proportions, its common-sense to consider the positives. 

• ASC have finally realised the need for brand loyalty in the online market space with their roll out of ASOS Rewards loyalty scheme. Its negative on margins (50 bps) but does encourage repeat business. With sales likely to be around 17-20% ahead for the year. Over to ASOS:

Following a successful trial, we will launch our new ASOS Rewards loyalty scheme during the next six months, initially for our UK customers. This rewards programme allows customers to build up points on purchases, which become convertible into vouchers for use on our platforms. In addition to this, customers will unlock a wide variety of other rewards such as birthday discounts, free next day deliveries and exclusive content.  

• Genel Energy - (GENL) gave a trading & operational update that was about the market. Swiftly followed by the Receipt of payment for KRI oil exports from Taq Taq field from the Kurdistan Regional Government (KRG). The "if" factor is the need for regular payments to be maintained and the market has had many a false dawn. The costs are being managed and with the current level of KRG payments at least interest payments and debt service is more than likely. 

• GENL - Consideration should be given to the guidance that is implying that supply was shut in until such time as the KRG put up. Time will tell on the latter, but certainly more positive than at the half yearly. 

• Volkswagen AG (ETR: VOW) recent share price support will be tested as news becomes apparent. Reuters - Edmunds.com and associated piece is telling, now consider the implications of the downside in Europe and potential further pressure in China. 

• VW have been very clever in the main - dealing with the crisis in text book crisis management. Credit where credit is due, they've kept the media and associated press articles focused on the marque VW, without the domino effect crashing through Audi, Seat and Skoda. Although, there may be some perception/overlap it will be limited. 

• Research (EMC's - we fund our own so reference it) - The opportunity based research on peoples’ perceptions of car manufacturers suggests that there is a devaluation in the VW marque - Passat/Jetta/Not Polo/Golf and Gold Estate and Sharan with a lesser degree to the Beetle. The irony being the Touareg, where owners 'didn't tend to worry' (we've avoided using the words, do not care).

• The impact and terminology used was more positive on the 3 other marques in the VW stable namely Audi, Seat and Skoda. Although this may change as lawyers grasp the media to force a settlement rather than have a showdown in the court room. This is a significant event risk/crisis management for VW. 

• For those that know a Bentley owner, whom we shall call Indiana. When asked about his perception of emissions on cars. Don't expect many donations to Save the Planet or Greenpeace in his name over the next few years! With a suggestion that he never gets to drive his car! As if!!

• Costs regarding the ‘fix’ for the VW Emissions fixing/rigging are likely to be higher than the initial consensus - Triple Pundit runs with - As Recalls of Volkswagen Cars Begin, Costs Could Climb to $40B. Those early share price targets of buy sub €130 will no doubt be under review. We maintain our target for VW - €87.63 (Euros) a share. The damage is yet to be done to perception. Over to VW's media campaign that will no doubt put some presidential hopefuls’ budgets to shame! 

• Rurelec – (RUR) The amount of communications regarding Sterling Trust today is truly staggering. We've had the company down as a jam tomorrow stock since the handling of the International Arbitration and then the spin-out of Independent Power Corporation from Rurelec. 

• Sadly for Sterling Trust lessons of diversification are a little too late. The spin-out/off of IPC contradicted the transaction in the first place. In the absence of further developments that may return a little to shareholders, don't hold out much hope. RUR has been a sell since the international arbitration and does not warrant much other rating bar avoid/high risk punts only. Have IPSA announced similar – one simply cannot be bothered to check.  

• Hochschild - (HOC) new shares hit the market today. With so much leverage, why they only raised the limited amount and didn't elect to shore up the balance sheet is anyone's guess. Perhaps there simply wasn't the appetite for a large fundraiser in the silver space currently?

• Some half decent results for gold miners today, more later once we've found a few additional toes to aide things. Petropavlovsk Plc (POG)’s interim management statement and Polymetal International (POLY)’s Q3 results.

• We’re hearing various bits of gossip regarding Glencore’s Zambia mines - namely Mopani – are GLEN conducting a deal to finance the expansion whilst maintain operations? One suspects not, but any rumours to assist their price won't go unappreciated by the IR department! Perhaps one for the broad-sheets? Anyone up for some Mopani?

• Vale SA – (NYSE: VALE) production report – were described as strong. With records being set in production it’s not good news for the FE (Iron Ore) price. More time needed there.

• Glencore - (GLEN) will be pleased that they "sold" their the Falcondo nickel operations and the Sipilou nickel projects. What with Vale’s nickel production up, Vedanta’s Hindustan Zinc Q2 production announcement hasn't assisted Glencore one bit! What’s the read across to Glencore’s affirmative action? VED need a stronger headwind than just Zinc

• Vale’s Q3 - results here.

Atb Fraser

Morning Mumble - belatedly: Chinese Steel - stranglehold continues unabated + Cue increases in Customs Rates & Anti-Dumping measures + Anglo's woes, with Tribal and Shaky Ground in China.

Good Morning, Good Afternoon,

Its been a very busy past week with the travel and meetings.

Continuing on from last Tuesday's theme - disappointingly for British steel producers the impact of China's need to export deflation is now being felt (ITV). Unusually, the ITV have been on the ball for once. With a closure/insolvency at Redcar and now a further 1,200 UK job disappearing at plants in Scunthorpe and Scotland, the end if nigh for higher cost producers.

The majority of steel producers are incapable of competing on a skewed playing field. With "energy pricing readjustments" being the favoured play in China, since the removal of the boron rebate (subsidy). Commercially this made sense, as most western construction companies started to avoid the higher content boron steel as welding joints was an issue (integrity).

China has not just benefit from advancements and investments in technology at the steel plants, but been aided by subsidies and "energy pricing adjustments" enabling them to produce significantly cheaper. the benefits of incentives benefit the . We'll come back to the Chinese energy consumption figures later, as there's a suggestion the economy is still contracting with circa negative 0.3-0.5% in energy consumption in the first 8 months. (The GDP figures will also evidence this.)

India responded in June (Economic Times/India Times) by increasing the import/customs tax increases to attempt to maintain a balance where their native producers. This has had limited impact and India may have to impose outright anti-dumping measures. Initially te India Government are likely to introduce 22-27% customs / import tax and this will be implemented shortly.

In January 2015, the EMC highlighted the issues of dumping of steel in Europe by China. The shorts were ArcelorMittal SA (AMS: MT) and Evraz (EVR) plus 'a few others, albeit thanks to some brilliant technical analysis by Hugo, it was played appropriately. 

Steel stocks, despite buy backs, have had the writing on the wall, where the competition was an tsunami like wave of supply into world markets. The affects have been witnessed in the share prices of almost every producer.

EMC- Boron (January 2015), its noted that the boron tax rebated ended early January 2015, yet just the other day a reader was amused by the Telegraph on boron in steel (from August)  referencingcontent from 2008. Readers will be aware of the bias here towards other news sources including our own as they are are much more reliable.

In contrast to the economic woes, just down the road from where Tata has mothballed the Llanwern site, Liberty Steel has been reopened the Newport rolling mill site (Times of India). A brave stance with the current outlook. 

In due course we shall look specifically at the Chinese (indirect) subsidies that are causing eyebrows around the globe that making Governments question the ability to produce at such costs. Its something to consider..

With a similar theme, and a quick recap with a decent read across from AccelorMittal and Kumba Iron (EMC: Kumba) - Anglo American are leveraged, operating in 'various entities and sectors' that have experienced pricing pressures. Made worse by a complex structure are operations that are hard to manage, including the allocation of funding and costs controls that provide for limited upside in the current environment. An example being Anglo/De Beer's Diamond operations need considering with the wider company structure below. 

A wider look from Bloomberg©. - Click on Image to Expand.

Anglo Corporate Structure

The market has appropriately read across from BHP Billiton's (BLT)'s recent debt Hybrid Part 1 & Part 2 and now acknowledges the mammoth task of Anglo's debt/leverage.  More to come for certain on this with Q3 due out 22 October. 

Thanks to an on the ball chap/analysts noticing the Rapaport item - there are reports of yet more carnage for De Beers (Anglo Diamond division). Rapaport has suggested that De Beers (owned by Anglo but more importantly the previous saviour of the group) has suffered at the last sales event. Additional reading: Current rough prices unsustainable and unacceptable.

The car crash being that prices were off yet again, suggestions of "larger diamonds being on the tables and the prices still taking a hit. So what did the buyers/sightholders do? Leave with near 70-75% of allocated diamonds on the tables. Revenue won't be near consensus of $450M but likely to be 200-250M on the last sale. Now De Beers/ANGLO can't even tempt buyers with larger/better stones at a discount. (EMC view).

We highlighted Dominion Diamond Corp (TSX/NYSE: DDC) last Tuesday as well. For those followers of fashion, it’s worth noting Rio Tinto has a 60% interest in Diavik Diamond Mine and numbers came in below expectations. With diamond production down 15% but more so, recoveries down 25%. Mind you, at least they'll have less to hold in inventory. 

Today, continuing on from our view on the profits warning in Tribal Group back in June May, EMC: TRB 15 May 2015. The company's theme has not changed at all. There is a trading update that's best to leave to Tribal to explain -

Tribal Group plc ("Tribal"), a leading provider of student management systems and services for education management, issues a trading statement to update its outlook for the second half of the year ending 31 December 2015.

In recent years Tribal has been successful in winning large software projects in our chosen markets. The expectations of our larger customers continue to evolve and attract the interest of new competitors, and our success in winning large contracts remains difficult to predict. At the same time, despite being well positioned in the market, the focus on our larger customers has resulted in Tribal being less successful in building a pipeline of medium-sized and smaller opportunities to complement these large deals.

We have also seen the extension of certain large customer programme timelines, which has resulted in the deferral of revenue and higher project delivery costs.

In light of these trading conditions, we now expect our revenues for the current year to be lower than the prior year, and we expect our operating profits to be significantly below our previous expectations.

The Board initiated a review of the Group's operations in the summer. Despite implementing initiatives to drive sales and increase our operating efficiency, we have been impacted by the more difficult trading environment. We are strengthening our sales leadership, fundamentally reviewing of our sales priorities and processes, and better aligning our cost base with our ongoing activities.

The process to appoint a new Chief Executive is advancing well, and an update will be provided in due course. [Ends]

One has a suspicion that the Chief Executive search hasn't gone as seamlessly as thought. What is the debt position of the company and more so....see bold (additions from EMC) that should be thought provoking. There are some positives, we didn't need to highlight the entire announcement. That's Tribal's third strike on the bases of profits/performance updates and as such the caveat of caution applies, expect a kitchen sink approach upon appointment. 

To save time, we'll merely edit the view from EMC May...

Tribal Group (TRB) gave an update into the AGM. a trading update. With timelines going out further, one would be wise not to ascribe too much value in light of a second third warning about the timing of and Keith Evan's departing departure, the warning signs were there! Having missed the previous year’s targets, the terminology is far from positive, but with a new 'man soon to be at the wheel' there's some hope, after a kitchen sink episode and some hope of an improvement in outlook. Yet another company struggling with its guidance and outlook. 

We'll leave the GDP announcement for China to the wider press, having already formed a view last week, there's some items that will need more time, than allowed currently. 

Thank you to a reader, this CNBC item Chinese property is worth noting. China’s economy built on shaky ground. There's some useful insights that were missed at the end of clip but worth finding...

Atb Fraser

PM Bolt-On: SABMiller, Commodities: Iron Ore & Base Metals - China & Glencore's coal neighbour + a little bling! + DOM, CWD & Majestic Wine's realities!

Good Evening,

There's significant demands on time at the moment, so apologies. 

Agreement has finally been reached between AB InBev and SABMiller. A rewarding trade for those going for the overnight 'thrill'. The discount to the £44 deal should not go unnoticed and evidencing how savage the arb market is ncurrently (BG included).

The benefits to Molson Coors (NYSE: TAP) should not be ignored but prudence dictates that profit taking would now be wise. 

Those longer term readers will remember Duncan Fox - who is no doubt relieved that the MegaBrew deal has been inked (*subject to regulatory approval). Duncan was  seen discussing SabMiller the other day (BBerg). Duncan can now look forward to the daily implications and sale of a stake in China Resources Snow Breweries.

In commodities there’s a growing trend that Europe are partially buying the story, the US consolidating it, but Asia are selling it (perhaps Asia is not in denial about the outlook). Iron ore has levelled around $54.5/t, but will not be assisted by the World Steel Short Range Outlook for 2015-2016. Worth a read, rather than taking the media reports.

The World Steel short range outlook factors in a number of assumptions that have yet to occur. Especially as a significant number of major projects are more than 50% complete and delays happening with new projects. All creating a hesitancy in opinion, it’s understandably difficult to measure the longer-term outlook without further flag waving stimulus from the Chinese Government.

Previously with any stimulation, there was a bias towards infrastructure, now with an emphasis on consumption, save for the Housing sector (the maintain stay), there could be a number of wild cards. Expect some focus on recycling, waste management and development of services.

What shouldn't be ignored are the indicators of increased inventories - sales not keeping a pace with production, exports down, imports down and pricing pressures evidencing the low factory gate prices. The only issue is...that's both in the US and China. It’s no wonder that FED rates are looking like they will be lower for longer. 

In Coal, there’s an inkling that a deal isn’t far off between Rio & X2 Resources. Rio's yearning to divest the Allied & Coal assets may, with X2 Resources willingness, have implications for Glencore’s margins. MickDavis (The Sydney Morning Herald), if the time is now, it may just put pressure on Glencore to merge the Australian asset with X2 being the operator.

The synergies are notable and Glencore must be kicking themselves that, save for a white knight, now lack the financial muscle to complete on the Rio deal. It’s ironic X2’s timing of a $2-3B deal, not only could imply the bottom of the market in coal/thermal coal, but more so strong arm Glencore into accepting a joint venture. Rio’s Bengalla sale to New Hope Coal (ASX: NHC) implies X2 would need to pay near $3B, but $2-3B is a sensible range.

Irrespective of such a coal deal, and Glencore's hopes a bull market in commodity prices, the reactions have been muted so far. Glencore’s newsflow continues unabated, and not always welcome, with Jim Chanos coming out and admitting he's "a potential purchaser."

It’s not the headlines that Glencore needed, as it shows Chanos’s is short the stock and highlights their woes. A brave call after such moves, but not without some sensibility in the statements.

The whole idea was if there was a downturn in the commodities markets the trading acumen would help offset the hard assets. It didn’t work that way. If that was the reason to put this thing together one has to question that strategy,” Chanos said.

Not forgetting that Glencore’s actions meant they’ve yet again gone into a corner where others are loathed to go. Remember Glencore attempted to shut in thermal coal production for a longer period and failed miserably. What happened to thermal prices when Glencore turned production back on? Down!

We are increasingly hearing of a drought in diamond financing at the moment, with Qatar being slow to finance new deals the prices are suffering (Idex Online). There is a possibility Qatar's financing options are limited at the moment. In part with the purchase of an agricultural business off Glencore (rumours) and taking a bath in a few stocks.

Retail demand appears subdued, but with contradictory news suggesting its more Global Emerging Markets than Western economies. Validated in part by the Alrosa and De Beers issues ref: Prices including allowing sight-holders to walk away from the tables. 

More to come on this in due course - worth considering why the need for the Dubai Diamond Exchange (DDE) to host a financing event. Is there going to be a recovery or more of a softer lander for prices? Alrosa's and De Beers' prices cuts will not have helped matters and the Russian currency gain is making any form of support difficult, with the Ruble/USD FX benefits.

With updates due soon from De Beers (Anglo American (AAL)), Alrosa MCX: ALRS, Rio Tinto (RIO), Dominion Diamond Corp (TSX/NYSE: DDC), Lucara Diamond Corp (TSX: LUC), Petra Diamonds (PDL) and Gem Diamonds (GEMD) – the market will obviously gain a better understanding of the situation.

Will Dominoes pizza (DOM) follow in the footsteps of Gregg's reporting and appreciate tomorrow? There's a lot of hope and expectation built in - with an early exit in the Rugby by England and the X factor / Strictly benefits losing appeal, will the pricing perception finally sink it? 

What justifies Countrywide's (CWD) premium rating? Not a lot...and looking more like a sell. With the capital markets day going down by certain preferred analysts like a damp squid, its getting hard to justify any premium to the valuation. 

And Finally, the market has awoken to the realities of Majestic Wines (MJW) yet again, with such headlines as Naked Wines Launches "Text for Wine" service, would you be long? No doubt some more consolidation due in the sector in due course. 

Atb Fraser

Apologies re: Grammar.

Morning Mumble: Chinese Auto's (Designs) - reduction in sales tax + housing stimulus + Vedanta (Iron ore), Glencore (Thermal Coal + PGM) and Centamin

Good Morning, 

Near all mining/resource stocks rose until the last hour yesterday where profit-taking took place. In part due to the Chinese machine waking up in what would have been near 12hrs later.  With one day of trading before a weekend, the markets will be looking to some indication of the Chinese outlook. In addition of course to the PR (Glencore) and the overall commodity price actions. The SHCOMP finished up near 3% in thin but positive trading.

With shorting currently limited in China it’s unlikely anyone has been impacted significantly and in fact, their market is likely to have profited. There will be a read across to the higher material costs to Chinese manufacturers and producers. Despite thin volume, iron ore has been slipping and with margin requirements being higher, don’t expect too much of a recovery with supply increasing.

We've discussed the decline in liquidity in China for some time, whether in SOE's (State Owned Enterprises), private sector or Local Government, there’s a very consistent theme. The FT has highlighted what has been known about for some time: China futures market decimated by trading curbs. All the same worth a read, but more so to keep an eye how things pan out. 

News is apparently flowing out of China that new stimulus packages were announced whilst the Golden Week Holidays were in full flow. It wasn’t this week at all, the policy came into effect on the 1st October, just in time for the Golden Week! One wonders when people will read the press releases properly.

In an effort to stop the rot and improve the decline in car sales (See: CAAM Chinese Association of Automobile Manufacturers), they have cut the sales tax on passenger vehicles to 5% (from 10%). The criteria is limited to engines below the 1,600CC and time limited until the end Dec 2016. 

With a degree of humour, VW might have some good news - China are likely to implement additional incentives for cars that don’t meet the emission standards. We obviously avoided calling the scheme scrappage.

For Western Manufacturers importing or operating under a JV there will be some positives. The main beneficiaries are likely to be the Chinese manufacturers with small engines. Feel free to check out the designs see: Great Wall Automobile Company, Guangzhou Automobile Group Co., Ltd (GAC), Zhejiang Geely Holding Group, Changan and SAIC Autos (MG Rover etc...). We are obviously not qualified to comment on the design or quality, perhaps there’s some cultural differences one needs to acknowledge?

Considering the last time (2008/09) such a specific stimulus was implemented, sales peaked near 40%, albeit declined 50% year on year until now being reduced back to normalised single-digit growth.

With consumption being the key focus, a mobile population will be incentivised to spend hard. Whether it be an increased numbers of shopping trips, holidays (driving holidays are on the increase), eating or visiting family, it’s a delightable feast for the economy and the tax revenues!  Assuming of course that the Chinese buy into the enticement / tax cut.

With income growth slowing, deflation and risk of redundancy or job sharing in most sectors, being enticed to take on the liability of a car with a) via credit or b) utilise savings – it’s going to be hard to entice new customers.

Until more recently similar contractions have been seen in the housing sector, where buyers have been unwilling to buy in significant numbers. What with the newly married “living” with parents situation is on the increase again in China.

Property buyers in China know all too well about paying over the odds for assets. Last week’s adjustment to the down payment requirements for a home will aid the property sector. With a reduction to 25% from 30% it’s a notable enticement for some. Although only likely to benefit those whom are well on the road to purchasing a property – albeit purchasing off the Government is still the preferred method with such hefty discounts available.

China now has an emerging tier 1 and 2 divide (North-South Divide), where prices of property in small cities and towns are falling, whilst larger towns are seeing a renewed interest. Aided in part by a reduction in prices, free-goods and price reductions that the tier 1 market has barely had to adopt to motivate sales. (See Top 10 below – if you have to buy)

1. Hong Kong
2. Shanghai
3. Beijing
4. Shenzhen
5. Guangzhou
6. Shenyang
7. Qingdao
8. Nanjing
9. Tianjin- this may however change as investment is focused elsewhere. 
10. Chengdu

We had Vedanta seeking permission to export more iron ore from Goa. Why they’re bothering with prices at $40/t FOB, is anyone’s guess with Roy Hill and Tonkolili (Shandong) firing up. One suspects they have to be at full capacity to make their operations modestly cashflow positive.

Just as Glencore’s had plugged most of the holes, yet more market woes. NH@FT’s article on Australia thermal coal price at 8-year low has been followed by Coal Problems Being Made Worse by Global Slowdown, Glencore Says (BBerg) - not the best timing for Glencore. However, one is minded to think conservatively with regard to thermal coal.

Its best to avoid sticking pins to prices specifically, especially the likes of coal where so many have been burnt before. It’s prudent to test the theory that the prices are perhaps near to the bottom - over to X2 Resources and Rio.

Like many in the commodities space, the marginal producers have been saved by costs that are reflected in dollar terms, with a benefit from a weak local currency for labour and energy/fuel costs reducers. The operators have averted (delayed) the inevitable pressures to shut in production/mothball. As the situation reverses, expect a tightening in supply to benefit pricing.

Glencore’s discounted offering is as a result of declining demand in once upon a time more stable markets that had some degree of clarity in outlook. Japan’s restart of Nuclearreactors  benefited the likes of Tohoku Electric Power, whom have just agreed with Glencore for premium thermal coal contract at $64.60/t.  A near 14% discount to the previous contract has not gone unnoticed.

The issues being experienced in South Korea and Taiwan won’t have helped the bargaining power of the thermal coal producers. Asian countries, with a majority of trade bias towards China are starting to see a tightening of liquidity in part because of reduced trade with China.

As a positive Oil, save for any major uplift in crude supply (Shale operators be warned) that would impact on pricing, its likely to have found some form of a floor. With shale producers having an appetite to hedge their production around current prices, its suggesting production is reaching some form of normality - contrary to the earlier opportunities that were missed.

Glencore appear to not be pushing the news they’ve shut in production at the Eland platinum mine in South Africa, with the loss of 818 jobs.

Over to gold - Centamin Egypt (CEY) Q32015 Preliminary Production Results reminding the market why it’s sensible to factor in lower on grades, production or machinery woes. CEY’s grades weren’t near the reserve average, so suspect costs to be impacted to a small degree.

Given a sensible headwind in grades, CEY are likely to just drag themselves over the 430K bottom line guidance by near 2K ounces, assuming production of near 110K+ ounces in the 4th Quarter. A reminder that production was meant to have annualised at a rate of 450K ounces by the 3rd Quarter if not the 4th. As stated in the Q1 production results. Date for diary, 11th November 2015.

Finally, a positive result for Northern Dynasty Minerals, where a report by Former US Senator & Secretary of Defense William S. Cohen has been released. Suffice to say it doesn’t read well for the conduct of the EPA.   

Atb Fraser