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:
- 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,
- 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.
- 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 6th 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
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