Pm Bolt-On: A belated Wolseley (WOS) with a soapbox item & Glencore's open secret - lines of credit or nooses of liquidity + Have Roy Hill & Tonkolili gone short iron ore!? Come on KAZ get with it...

Good Morning,

It was hoped that this week would allow a bit more time. 

With all the indicators suggesting some form of doom, why is Gold not up? Liquidity is contracting, outlooks are being adjusted, China's liquidity issues for SOE's are coming out, including their need to export deflation and recession to other countries. 

Wolseley's (WOS) final results weren't all that, with a feeling here that WOS were calling the top of the market. The plumb centre owner reiterated exactly what the market knew. The savages took their profits and retreated to the caves. WOS, a viable company, but the outlook isn't that great. 

Over to WOS with additions from the EMC in bold to highlight the short:

Ian Meakins, Chief Executive, commented:

"The highlight of these results was another great performance by Ferguson in the US where we achieved strong like-for-like revenue growth ahead of the market and a 50 basis point improvement in the trading margin to 8.2%, which is a record.  We continue to face some challenging markets in the rest of the Group and remain focused on improving growth rates and protecting gross margins whilst keeping the cost base tight. 

"Wolseley continues to be highly cash generative and we have adequate resources to fund our capital investment programme, bolt-on acquisitions and growth in ordinary dividends. We are also announcing a £300 million share buyback which reflects the Group's strong financial position and management's confidence in the business."

Commenting on the outlook, Ian Meakins said:

"We expect to generate like-for-like revenue growth of about 4 per cent in the first half.  In the US we expect continued good growth in Blended Branches, Waterworks, HVAC, B2C and Fire and Fabrication underpinned by decent Commercial and Residential markets. However, Industrial markets in North America, which account for about 15 per cent of revenue in the region, were challenging in the fourth quarter and we expect this to continue.  We expect a continued steady recovery in Nordic markets, although the heating market in the UK is expected to remain very competitive with little growth.  Overall, we expect to make continued progress in 2016."

The buyback may offer some support, but is this the best Wolseley can do with £300M? With net debt at circa £805M, prudence would dictate either an acquisition or reducing debt. Then again...with a fall in full-year profits one has to prop up ones share price. 

The concern here is that companies should be focused on the strength of the business not the ability to leverage to show strength. China have met with similar issues in recent times and company buybacks are simply a waste (view here). We're fully aware of the pros and cons, but in the absence of a viable strategy of investment, take it as a signal that irrespective of outlooks, the management are waving a flag of..."this is the best we can do." 

The writedowns are showing the fragility of the market place across all sectors. WOS's guidance on the Nordic business with writedowns and the outlook for the US business should not be ignored. The outlook contradicts the logical buyback principles. The expansion and acquisition of decent companies would surely be a sensible alternative to enhancing longer-term value. 

It’s acknowledged Wolseley acquired, but buybacks do not improve a business performance, only the earnings relating to each share. This is not always the best measurement, as the EMC has evidenced many times before…

With the FED considering interest rate rises and the alleged strength in the US, the guidance given contradicts some bulls. Reiterated by WOS statement of price deflation in the USA, UK and Central Europe and modest price inflation in Canada and the Nordic.

Glencore have come out with a statement in response to speculation (PDF/in full below). 

Baar, Switzerland 29 September, 2015 

Response to speculation 

Glencore has taken proactive steps to position our company to withstand current commodity market conditions. 

Our business remains operationally and financially robust – we have positive cash flow, good liquidity and absolutely no solvency issues. 

We are getting on and delivering a suite of measures to reduce our debt levels by up to US$10.2 billion. 

Glencore has no debt covenants and continues to retain strong lines of credit and secure access to funding thanks to long term relationships we have with the banks. 

We remain focused on running efficient, low cost and safe operations and are confident the medium and long-term fundamentals of the commodities we produce and market remain strong into the future. (Ends)

So in essence, Glencore have so far had a placing they allegedly did not need to conduct but did to assure investors. Now they're robust and operationally/financially sound. Whatever have Capt. Kirk and Scotty got planned next. 

Well, we're sure that's all fine and dandy. The gossip/rumours suggest all is not as rosy at the mill. Cargill's winding down of their $7bn hedge fund arm (FT) won't have assisted Glencore in the sale of the grains business.

With the current outlook and Russian taxation woes that are likely to have hurt GLEN, the suggested price tag of $12B for the grains business may be a struggle. Then again they got significantly more for the Las Bambas mine in Peru - over to the sales folk. 

There's gossip suggesting that Glencore are having issues with suppliers. This is unsubstantiated at the moment, but with credit lines and liquidity tightening globally, it’s with no surprise that rumours are surfacing of a big utility company cutting its credit line to GLEN. If this is true, what are the implications for operations? It will undoubtedly have operational and financial implications. 

One is wise to measure Glencore on its assets, the price of its commodities and marketing, in conjunction with its debt. Simply, the assets, save for coal are tier 2 (EMC view) without significant investment (see African Copper Update) to improve operational performance, and until the development of these assets the outlook will remain challenging. 

With some large IB's and analysts believing that Glencore is a viable business, this won't on its own make for a lower risk investment case and suggests an element of knife catching. Certain Brokerages have advocated that there are participants willing to lend to Glencore in comparison to than Anglo American (AAL). This in its own right isn't necessarily the best comparison, albeit, it does indicate what some brokers/analysts are using as a comparator. The absence of comparatives to tier one commodities companies rather says a lot.

Would it pay to buy Glencore? Quite frankly the unknown operational model poses some risks, but it’s always nice to have some higher risk exposure. It’s noted that personally the risks of being long are greater than having been negative on Glencore since IPO. This doesn't mean there cannot be a share price recovery, with the machine doing the rounds, expect some support. Investors would be wise to keep an eye on commodity prices.

To end on a cheery note, another leveraged play on commodities Freeport-McMoRan (NYSE: FCX). FCX had some good news with the drill head. Their 100% owned Horn Mountain Deep well in the Gulf of Mexico came in on the money The release in any other market would have been positive, more so, if it didn't mean the commitment of $$ to enable production the share price would have perhaps risen. Over to Icahn to break this one up…

Thought for the week - Rio/BHP plus Fortescue Metals Group (FMG), when's the impact of Roy Hill going to bring down the axe on iron ore? Inventories normalising again in China, and so a reducing demand globally. Its noted, Shandong Iron and Steel Group's are now back in production at Tonkolili. Those whom love romance in the market place will remember Tonkolili used to be owned by African Minerals (AMI).

One hopes that the acquisition of the Tonkolili Mine by Shandong was above board. It never rains but it poors (poor I know) for the former-AMI.  AWOKO article - one hopes the 'new' AMI has resolved such minor issues as moisture content, shipping and diesel disappearing. What are the chances of a three-pronged stimulus by China just as ore hits the market? 

Have KAZ Minerals got their cap out yet?!?! Put us out of our misery on the 50 pence rights issue please?!?!

Atb Fraser

Over to the grammar police/time limited and long-days. 

Morning Mumble (Shhh don't tell anyone): Voilà Freeport-McMoran (FCX), Mr Debt with implications for Vedanta, FQM, and the turnaround of HSP? + "The largest "Sale of Things" in 6 years

Good Afternoon,

Whilst no one is looking I've managed to sneak a couple of things in, including the Wolf Minerals (WLFE) call that wasn't that informative if I'm honest. They did highlight the reduction in global output as higher cost producers either close, mothball or are placed on care and maintenance. It didn't help dialling in late as I forgot the time difference. 

Having had my fair share of alcohol on a sunny cliff side restaurant, it dawned on me whilst looking down, what about that rather large entity known as Freeport-McMoRan (NYSE: FCX) Mr Debt! We know and understand leverage, it's not a good idea to be "over-leveraged" in a space of falling commodities nor so where one of the main consumers is "unwilling to pay much of a premium to operating costs."

Often there's a perception that leverage is prudent, it’s got tax benefits etc...Simply, that's a positive in small doses, but to bet the ranch on loans/bonds that in percentage to equity are just plain silly. More so, a common mistake of those trading CFD's/Spreadbets that perhaps have more aspiration than the reality of their consequence. The commodities sector is a prime example of what was wrong with Northern Rock. Plains Exploration simply was a wrong purchase for FCX, not now, but at the time it was wrong, no hindsight is needed. 

The behemoth of companies that have bet on such expansion with debt. They've been covered for a long time, finally the realities are bearing down on these leveraged plays. The Yuan / RMB depreciation is unsurprising, for those following the debacle of the Chinese companies with high inventories as a result of over production and cheap borrowings,. We know too well the outcome, voilà solar panels, housing, copper, iron ore, coal, stock-market, infrastructure projects, government revenue streams declining including corporate taxation and land sales (albeit improving) etc...

With Chinese inventories expanding at factories, gate prices under pressure and limited sales, they've got to entice customers somehow. So why not devalue their entire offering and have a "sale of things." 

The devaluation is the primary example of what "has been banged on about here" for how long, to quote one avid critic. More so, one suspects its as a result of the FED's guidance and strengthening of the dollar, perhaps an FX play that could wobble the potential for America. Least we note forget, the Yuan RMB is "almost" a dollar, commodities, goods, services often represented in USD terms. 

With misguided expectations, the ramifications will have wider implications than are being felt in the aluminium sector, steel, plastic goods space etc...etc...The Chinese are now entering the market with oversupply of semi-processed and finished goods. Shipping rates anyone? 

With Freeport-McMoRan guiding on the requirements of $1B of cash required, it would be rude not to consider the fact they need more than that paltry $1B suggested. The balance sheet by EMC estimates is near $21.2B Debt and limited cash (estimates: $340M).

FCX debt is simply unsustainable in the current commodities cycle, especially as Plains Exploration was more prudently called "Pains Exploration." FCX needs around $2.5B and the market should be aware $1B is only a temporary measure, whereas something more prudent would be to raise near $2.5-4B to enable the finalisation of capital commitments on projects and give sensible space and time to a restructuring. 

FCX could even utilise FQM's excuse for a capital raising that was on the basis of "a stronger copper market following a period of weakness"? (EMC: FQM 30 July 2015). Maybe even throw in a bone or two about consensus on WTI being circa $59/bbl in 2016 to tempt those believers and copper at $3.50/lb by year end...

If one was leveraged a la Vedanta (VED) or Freeport-McMoRan (FCX) the outlook isn't great. Vedanta are trying to raid the Cairn India's cash pile. This is insufficient, allowing for all their operations (capex needs) and now zinc suffering with a 10% drop since their announcement that they were rather "upbeat on." EMC: VED (31st July 2015) and FQM's Bitter Sweet Pill (EMC: FQM). 

Will FCX have to offer a large discount or motivate the stock, the latter is more unlikely than the former. Although FCX shareholders appeared to have celebrated FCX needing $1b when it's rather like putting a band aid on a share bite. 

We had a day of comedy yesterday. There was a celebratory notice by Vedanta commencing iron ore operations at Codli in Sanguem Taluka in Goa with 3.1m/t's hitting the market. Are we missing something? Perhaps the get out of jail free card is the terminology "The Company is likely to recommence operations from August 10, 2015." Surely an announcement on the same day and being 5 hours ahead of the UK reduces the chances of operations not commencing? Perhaps that's being too picky, after all, a quick trawl here and grammar and perfection don't exactly go hand in hand.

So with a global surplus, what more did the commodities sector want than more than another 3.1mt's of iron ore with a potential 2M further to come?  Hip Hip Hooray, what next African Minerals (AMI) making a return? Although with humour, one wonders if that was the only commodity to suffer due to a few accounting issues at AMI. This dropped in the inbox yesterday, Theophilus Gbenda Blog (2012), surely not but the infrastructure deal does give food for thought. 

Results out for Hargreaves Services (HSP) that will need more time. See: Closing HSP short Positions. If there were some decent results in the coal space, these were them. 

Fraser

Morning Mumble: Stimulus (you'll need it to read it) & Commodities and the China/UK Financing Switch.

China appears to be vehement about its expansion plans at the risk of other sectors. So, it was around this time last year China introduced a Mini-Stimulus, unsurprisingly it was..."Housing for the Poor & Railways" (why don't they just be damned and open work houses & Almshouses). Now that appears to have done absolutely zip, so guess what they're doing this year? Nope, throw common-sense to the wind, they're not going to let the economy cement its foundations instead roll the risks up and continue to focus on Housing for the Poor & Railways, only 6,500 Kilometres of track...up near 1K on last year. 

One's assuming they can lay track on track? As they surely must be running out of the plausible Railway Expansion zones. Demand will, I'm categorical about this, not meet demand if this type of stimulus continues without consolidation across all sectors. One simply cannot expand and not ignore the fractured foundations of the two tier financing, with defaults here there and everywhere. 

So a thought for the China bulls. A shocking level of companies in China have sold assets to China to fund not expansion but debt repayment. What will they sell next to fund such a necessity of repaying their obligations? One assumes they can't sell the obligation? This has been common-across all the stressed Sectors save for the Solar Industry and belatedly construction. It, put simply, is a train wreck waiting to happen (sorry couldn't resist), one that will be ignored by the "old stimulus" packages they merely reword to keep the "Analysts happy." 

Do not think for a minute its a prediction of the end of the world, more a stark reality that "common-sense" is approaching. All the papers are reporting on the "stimulus" to meet Growth Targets. If one has a lobotomy you could be excused, but there's no news here folks it's a rehash of wording for what was planned in 2013, it was happening 'whatever'. You'll get the idea, as China attracts finance with the promise of riches via the Railways, one would do well to minimise their risks there...It reminds me of the American Railways, but I'll save that for another day and no doubt when I feel Wild Wild West...

In the market, I've missed something, it was disappointing, I had actually considered it thoroughly but forgot to continue the thought process through to the overall impact of the supply China and Australia. I'm more annoyed with myself for keeping my note book in such bad order. The "gap" in the Supply and Demand of commodities is the High Grade Ores, which have had a better than expected performance. This is the norm, but more importantly, is a necessity for the Mills and Producers in China whom have to reduce their pollution. So you have China pushing High Quality through the rood, and 'standard and inferior' only being propped up...this is mirrored the same for Nickel, whom since the obvious happened, has had a nice 19-21% run.

The question is, when will China adopt a realistic attitude to its economy about financing, expansion and maintaining the basic principles of Supply & Demand? From the Amateur, me (smiles), I've been watching the consolidation in China take charge and the bits that are being ignored. So everything that's in the crap now, that has defaulted and/or is, will post 2016 gain again. Solar, Coal and the stronger real estate companies (less leverage) will do well, including Carbon Emission Trading (the lovely intangible). Those expanding, based on the same principles, will (de)falter in due course as their coke fuelled frenzy of bonds dries up. This won't (oops best hedge my bets), isn't likely to be all at once, but will slowly unwind as China "over the next 5-6 years up to 2020 forces the economy to become financially independent. "

China will be akin to your 13/14 year old daughter/son spending all their allowance and then having an advance on next years as well. They're in essence betting on your income being maintained. So the 'buzz' will be no doubt called Environment Enhancement or Environmental Protection (or any such spin) post this five year plan, the Thirteenth Guideline (2016–2020) (Five year plan) will likely be consolidation. One simply cannot continue even without common-sense at the same rate. 

Albeit, as a trader I should be thankful for China additional QE stimulus on the markets. So in essence we've had a bucketload of them. PPI Claims, (I still want to know why they randomly text people are they that stupid), We've had Governmental QE, not only with rescue 'strategic elements of industry' (banks etc...) but we've also had them being able to sell a few assets at bargain basement prices, (many thanks once again).

For the UK, the consolidation in the sector is likely to have a higher impact on the banks than one realises. Bank lending, whether the Government says otherwise is most likely to deteriorate as companies such as Renovo (used to be a Pharma but acquire Ultimate Finance Group their Preliminary Results) and GLIF Plc (Link to Results) come in to their own (Psst I'm long on Both, the former more recently Inspired Capital INSC). For myself, with my cash element I have elected to start funding as well, as the returns are around 7%...much better than the last minute crap you get with ISA's.

This 'secondary' lending, albeit with conditions and pricing, is likely to force the banks to become conventional and dull. Its one reason I don't see Barclays and Barclays Investment Bank staying together. Parties will and have argued that separated they'd be weaker or one poorer, however a divestment were BARC holders get one share in each is likely to be the way forward. Barclays Retail can then ignore any issues with the IB section and just shrug in a very sort of French manner about any other misselling scandals that come to the fore.

Back to the market now, with Dunelm Mill coming in nicely with Interim Management Statement which should provide some support to the stellar performance in its shareprice over 6 years. For Rachel, selling her house and investing (shoving was her word) into Dunelm mill when she went to work in Hong Kong has proved a very savvy move (Congrats).

It looks like Kingfisher is betting on the French/European recovery now with Kingfisher entering into exclusive negotiations to acquire Mr Bricolage. One will be hoping their foray into Europe will be better than Marks & Spencer. Having not really looked at the ownership structure for some time, it would appear it's a very good expansion, with sites in France, Belgium, Argentina, Bulgaria, Madagascar, Spain, and Uruguay it 'could' be a very shrewd deal. 

So on the back of BLT (BHP Billiton's) announcement of their 4 or 5 pillars (depending how many fingers you have) Anglo American (AAL) are now inclined to wave bye bye to their Angloplats operation. Not that this has not been suggested every year since 2008, it's now very plausible. The same as BLT will no doubt do, give the shareholders 1 share in Anglo Platinum for every share they have in AAL. So for the next 12 months, IPO's will be lower, instead crap will be spun out for more people to own the crap. Would you be a holder of a stock that is being held to ransom by the workers? 

Sadly out of time to cover AMI (African Minerals Full Year Results) announcement, polyhalite (SXX implications of Verde Potash), Copper (Central Asia Metals plc Q1 2014 Production Update inline and positive), Uranium support and improvement (improving outlook), Fluorspar (take outs) and Iron Ore (default on deliveries). If life was easy, I would just paid for a narrative...sadly I cannot pay myself to write!