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

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: The Mammoth (Rio) attempts to please the market and support its own SP

Good Morning,

Rio's full year got shareholders salivating with the headline "Rio Tinto delivers underlying earnings of $9.3 billion and announces a 12 per cent increase in full year dividend and a $2.0 billion share buy-back." The Australian market action was perhaps the best response, flat. 

With a reduction in CAPEX and debt, plus $500m tender and share buyback $1.5 billion will all support the SP and get the analysts chomping at the bit. Rio have been saved by the aluminium improvements compared to last year, EBITDA up near 55% and earnings a respectively handsome 124%, with copper not performing too badly either EBITDA: 33% and underlying earnings, 11%. The recent commodity falls are predominantly outside of the majority of this periods reporting.   

A quick glance at the numbers, it’s wise to remember prices for iron ore have “nearly” halved in the reporting period and copper slipping significantly, with further dips predicted. Rio believe there's around 125 million tonnes of high cost production from China and non-traditional seaborne suppliers to exit the market in 2014, with further exits anticipated in 2015. This is assured as casualties unfold and give up the fight. China may however find a benefit in supporting native production to maintain the status quo of low prices and reduce monopoly.

With write-downs on foreign exchange debt, reducing CAPEX (likely impact on earnings post 2017) and impairments already in the bag, the underlying earnings were set to benefit. Next year may be a different story, with demand under pressure, aluminium and copper (likely to be under-pressure again soon). 

Indonesia's unprocessed export ban has benefited those operating elsewhere (namely Australia and Philippines) and has created an increased demand for alumina and bauxite (but for how long). China has suffered from a surprising lack of stock and turned to Rio et al to fill the void. Any change in Indonesian policy is likely to impact hardest on Rio. In summary, Rio is now the stimulus and dividend play of the market, putting Glencore's (GLEN's) update yesterday to shame. Over to the share buyback to support Rio's SP in the longer term, just like GLEN’s (sarcasm).

With the share buybacks continuing there's no reason for a realistic 3600 pence tp + some hope value, where perhaps the market should be revising the returns downward in light of the obvious happening within commodities. Before holders gets excited about reversal of impairments (write-backs) in Rio, at $1.049 billion (net of tax) of book value for aluminium and bauxite, its worth remembering they've already been written-down near $29-30 billion. A positive in significant cost improvements and high regional market and product premiums, aka Indonesia's loss is Rio's gain but nothing to shout about. 

BCN (Bacanora Minerals) takes the gloves off and announce EGM requisition with the proposal for David Lenigas to join the board. BCN outline the case simply with the search for a technically orientated CEO, which should be sufficient. REM (Rare Earth Minerals) already have representation on the board in the form of Kiran Morzaria, its wise to read the disclosures (and the respective companies’ performance) to consider the pros of any further REM volunteers and employees being strategically placed.

If REM wish to play hard ball with BCN both entities will only be doomed. BCN may wish to throw a spanner in the works and raise some cash and dilute REM. BCN would be wise to contact those valuing decent projects above any association with REM. Lithium is the way forward, but sometimes the assets have more attractions than the associated parties, see: LGO commentary and Victoria Oil & Gas. 

With Brent, WTI, Gold and Copper all taking a breather whilst everyone has a hug in the Ukraine, perhaps next week will bring more volatility. Its nice to see a stale bull in CPR APR Energy reducing his lithium intake as the stock has a change of direction in his fortunes with the Australian Pilbara announcement. Is the company is on the turn? With mutterings of some positive tendering and perhaps even a quick decision coming out of Libya. Over to Aggreko (AGK). 

SuperGroup (SGP) announce that Susanne Given, Chief Operating Officer, has stepped down from the Board as a director with immediate effect and will leave the business in order to explore other opportunities. We'll leave that one for another day...

Atb Fraser

Morning Mumble: Appliance Online (AO) what next? A short piece...and the week.

For those following the story of Appliance Online, it listed at a massive valuation compared to its profit from the previous year. Appliance Online do just that...white goods and small appliances only. Well my figures do not stack up on that valuation and it comes as no surprise, having modelled the company, that is the reason why I am short. 

The important part that needs to be considered is the expanding offerings from AO. AO, with the "marketing concept" and heavy push means they have to start offering other electrical items within 5 weeks to keep the psychology of the model moving forward. This needs to be continued, almost akin to "Shake and Vac" marketing, for those that know about that advertising benefits of that brand that had astronomical results when advertised at regular intervals...

Its likely within this new offering of TV's that Appliance Online will sell a unique brand as well; say from a company that already produces components and parts for larger and well known manufacturers such as Samsung and Panasonic. So I envisage AO offering a new line called HiSense or similar. They're already selling under that brand in the US and a limited degree in the UK, but I expect them to do some form of quality launch with exclusivity for AO.com leveraging off the back of manufacturing parts for other more well-known companies. 

Whatever appliance online do, in the short-to-mid-term it won't justify the stupid valuation it currently has. Profits are a must and it's not just "about cashflow", shareholders want more, or at least should. It will be interesting to see if the psychology of the AO model means the launch will happen within the 5 week window to keep "the news beat consistent" and maintain people's interest. Only time will tell, but due to the nature of the market, its my a risk I have to factor into the shorts. 

The concept, of warranties must underpin AO more so than any other brand. A dishwasher has a "lifetime warranty" for only £6.95 a month for Dishwashers... that's  £83.40 a year. It's a lifetime warranty so when you cancel you cannot renew it (fear) but more importantly with the average white goods costs being around 450 you're paying for a new one every five years ish. Interesting concept, buy one pay for two just in case on breaks down/has a fault. I won't debate the statutory rights a customer has under the Sale of Goods Act here, but you get the idea. So for now I remain short...but am wary of news so will be looking to close down at points prior to my five week deadline. 

To elaborate further on Friday's commentary, its rumoured there is going to be an APR Energy and Aggreko tie up (I'd give it the caveat of a significant BS Rating). Some, including myself, cannot see the benefits save for the additional savings in one set of group costs. Would the brands be able to hold their share as one entity? Hmmm...A lot of gossip at the moment but time will tell, the main difference could be that APR use gas and Aggreko's main set uses oil a positive when combined in terms of offerings. 

For the shorters than don't just focus myopically on one area it should have been a very good week, in fact exceptional and some stocks benefiting from parties buying back (closing their shorts). There's a renewed negativity in the market that for some strange reason a lot of funds have started to reduce their risks exposure on a very predictable format but as a herd; the outcome is obvious is it not? The question is, what took them so long to realise? Perhaps someone can enlighten me on the situation, but the situation does not look good for the longs, save for the rumblings of MRW being taken private. 

Atb Fraser