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: Iofina (IOF), Diamonds, industry issues (stay awake) and another reason for Grexit to FLOW, VAT? KEFI's Placing and the Sherlock award!

Good Morning,

Iofina's (IOF) production update will no doubt be taken positive, the market should be wise to price in inventory levels and sales rather than "just production increases.” IOF has held circa $3-6M (the lower more recently) worth of inventory as a minimum over the past two years, the decline is also in light of the falling Iodine price.  

In the absence of an announcement of increased sales equal to or greater than today's announcement, expect the next set of results/accounts to show a near 30% increase in inventories. If one didn't know better, it smells of a fundraiser. Holders are reminded of the difference between production and sales, especially in a tight market with low prices and demand growth in the industry limited to circa 3.5%. Perhaps a push into the health market, assuming one doesn’t have certain rashes and thyroid issues.

It is International Diamond Week in Israel (well all two days of it) with the President of the World Federation of Diamond Bourses (WFDB) highlighting a few issues. With various concerns coming out of the conference, and positives. The main factors include:

• Over-grading (Rapaport Diamonds Magazine) by some labs that's caused an issue in reselling and confidence by the customer. Wonders will never cease, those ambulances will feel lonely with some legal practitioners diversifying See: lawsuit. 

• Conflicting diamonds, yes its still going on.

• Money-Laundering, something PLUS500 knows all too well about. Diamonds being highly portable, quite how the WFDB members deal with it is another matter. More so financing, with the formation of the Financial Action Task Force (FATF) back 1986 its still not cleaned the industry up. One suspects the absence of "mainstream" financiers as a result of the Antwerp Diamond Bank (ADB) closing, is compelling some dealers turn to the "non-mainstream lenders."

• The banks (of the ones left) want diamond companies that have traditionally been family owned, to adopt a more corporate structure. 

• Something diamond producers were slow to acknowledge was that lenders wanted diamantaires to put up more of their own capital. The 100% lending is long gone with the norm circa 50-70% pending on quality. Something De Beers expected in their new sales contracts (July 2014) and  EMC: July 2014 De Beers further strengthened in the sightholders and Accredited Buyers contracts including a greater transparency in financial reporting.

Over to ABNAmaro to assist the market, but more so find a structure other industry lenders would welcome and support, rather than maintain the opaque nature of the diamond market. Anyone for “Easy Diamonds plc” type venture, surely the market is crying out for such a well-funded entity in light of ADP disappearing and Dubai/UAE only filling some of the void. The bottom certainly looks near for the diamond industry with all their current woes, financing issues, over-grading and limited compliance with a sensible financial structure.

In a discussion about energy efficiency and far from embracing all things green, it was surprising to see FlowGroup’s (FLOW) model destroyed in one fell swoop by the EU. Does this mean the model is viable at all? It would appear that the VAT rate was the cream that meant the boiler would be able to pay for itself in the current lifespan of products?  Installation(read as profits) warning for FLOW.  

One hopes for the company that FLOW can reduce their costs sufficiently to enable the “'Boiler that pays for itself' model. However, the Government might have to step in with some form of subsidy. It’s noted that INSP (Inspirit Energy) have not commented on this, perhaps due to their target market being more commercial and exempt from the 5% means, there’s no material change?

Today is also the day that the EMC Google Alerts system evidences being a worthwhile addition to broker opinion and the Borg. It’s sensible to consider them even in your office. Having converted quite a few “professionals” to adapt from the all-seeing Borg (Bloomberg) by creating their own systems in conjunction with the Borg.

Having not taken a position personally, it’s a massive hat-tip to a small firm down that spotted this in their alerts and the implications ConstructionManager: U court: 5% VAT on energy-savings products is illegal,  FTEuropean court rules against low VAT for energy-saving equipment & Guardian:Households must pay higher VAT on insulation and solar panels, EU rules. The source being Google Alerts, although not quite turning to the dark side, they did manage to prevent significant losses. 

Imagine that, “yes sir, it was thanks to that public access portal (PAP) known as Google we managed to divest all your holding.” Perhaps Flow were tardy in their EU implications update to market with such material and significant public information?

This morning, on the belief that the Government will create direct subsidies (still permitted in the EU) rather than via VAT system, I have caught a knife (or not). It was tempting argument (risk) to buy into FLOW, albeit a small position. Expect an update from the Government due to the significance of this ruling on a growing and rather larger industry.

KEFI Minerals have completed a placing for £2.8M. (EMC:Plate Spinning & Cashflow April 2015). With AUSDrill International taking part in the placing, although small its giving an indication on who is looking to fund the project.  Admittedly AUSDrill have their own woes, AU$400M of debt, declining revenues and available cash of AU$62.7M. AUSDrill’s share price has been a proverbial ski-slope and in the absence of some decent deals, holders will no-doubt be impatient. Kefi will need more cash in due course.

It would be positive if W Resources (WRES) LaParrilla Definition Study actually had put up some pricing assumptions in their announcement. WRES have either cleverly or stupidly prevented any analysis being possible.

If one was to factor in today’s price for Tungsten and Tin ($235/mtu and Tin $14425.00/t), the IRR drops significantly to circa 36-41% (fag packet and quick). The economics simply don’t stack up for the FTM (Fast Track Mine) when for a modest increase of $30M on the initial $16M (total $46) WRES can increase production near 4 fold. Equity requirement would be circa $15-20M.

With WRES keeping the lights on with VAT refunds (€388k is expected in Q3), expect a placing soon. No wonder the price dropped on the news, if one cannot be bothered to inform their holders of pricing assumptions when announcing “good news” don’t expect the holders to get carried away. If WRES (Broker(s)) want to get a decent sized fundraiser to develop the asset they’re going to have to do significantly better than today’s announcement.

An award of sorts goes to Metminco (MNC). They have realised sieving the beaches may have produced better results than their original cut-off grade of 0.15% for copper, even as an open-pit operation. Today’s cut-off grade increase to 0.5% Cu should make the punters realise the woeful inadequacy in even attempting to utilise 0.15% as a cut off. With the Sherlock award going to them for pointing out that operating and capital costs will be significantly lower mining higher grades. Shocking Sherlock.

Sound Oil's initialannouncement read as plug and abandon, today we have confirmation of that.  

Finally, something as promised EMC:Dispatches and Dispatches:Supermarket Wars. Something worth a consideration for those long-only supermarket investors.

Atb Fraser

Morning Mumble: Anglo Pacific belated...

Good Morning,

My daughter's bug impacting on the this mornings items slightly, where she wanted to sit and comforted with honey and lemon. So the world stopped for 5 hours and now back to normality whilst she sleeps or until she wakes.

A few weeks ago EMC Anglo Pacific Isua license & General Nice Development Limited was announced by all and sundry but not the royalty holder. Whether they had additional news or not, it would have been sensible to have updated the market about any discussions. If APF's Isua Project lien was on the title (the norm), irrespective of ownership, APF's royalty should have been good. APF belatedly update on the Isua Project being sold to General Nice Development. 

It should be noted the lack of a reversal in the $15M (write-down) and the absence of any impairment for the loss of $30M for a change in ownership. Anglo Pacific's assets are a play on a bull market, the price "looks" about right for now (but). Investors may have their patience significantly tested if Rio Tinto has a change of mind as APF's fortunes are expectant on the performance of Kestrel  (update 21st January 2015). It does show there's some potential but APF has not exactly warmed to the investors. Judging by Rio's intentions not to lose market share APF will benefit. Its looking like its time to turn just a little positive on APF.

As a seller of GEM Diamonds (GEMD) yesterday (EMC) they give a Trading Update for Q4 2014, with deterioration in prices, near 18-24% pending on view. The contraction in part is a 45-62% reduction in financing by the Antwerp Diamond Bank (ADB*) that seeks to exit the sector. With buyers being sought and opportunity being seen by investors this contraction is likely to go through but improve with June/July 2015 *(EMC forecasts) likely for a fuller recovery; save for significant changes in global economics and Russia.  

GEMD sees this trending going forward into Q1 2015. With the slack yet to be filled by ADB* it will take some time for a recovery in finances for the market liquidity, with a risk the traders preferring the absence of speculation with greater upside from the lower prices. The concern being that Petra Diamonds (PDL) seems to not consider the ADB exit of  the mark as significance. One would expect them to be aware of this as they have an office in the International Diamond Council (IDC) Building in Antwerp.

With circa 70-80% of diamond firms having accounts with ADB its wonder prices held up so well. An ending of tradition that's last since 1934, why KBC Bank N.V (the parent) couldn't find a buyer for the portfolio and ADB as a whole.

First Quantum Mining (FQM) update on its production and sales for the three months and year ended December 31, 2014 and production and capital expenditure outlook for the full year 2015. Over to FQM's First Quantum's CEO and Chairman Philip Pascall, 

"The financial and commodity markets have started 2015 with high volatility on concerns about the global economy, demand for natural resources and companies' liquidity positions. As a result, our share price, along with others in the sector, has been materially affected. While we have high confidence in the mid to long-term outlook for copper, we are mindful of the current concerns.  As always, we pay close attention to the Company's financial position to make sure there is sufficient flexibility despite having an active project development pipeline.  At Cobre Panama, we have substantially reduced the planned capital expenditure for 2015 to $600 million without compromising the project's progress. We also maintain strong and supportive relationships with our principal banks that have worked with us throughout the development of the Company and through several economic and commodity cycles,"

Zambia's Kansanshi's mine (FQM 80%/20% Zambia Consolidated Copper Mines (ZCCM) is still hampered by smelter capacity. Things are progressing with first pour at Sentinel (also Zambia) and forecasted production of 150-200k/t's later this year (circa August). We'll shudder at the costs per lb which must loss making at the current price. 

Then in December (2014), the atmospheric leach tank at failure at Ravensthorpe (Nickel) (FQM 100% Western Australia) doesn't bode well either. Quite how one scales back $600m at Cobra Panama (copper 80% FQM/20% Korea Panama Mining Corp (KPMC)) without compromising the projects progress questions the previous expenditure. Its wise to be picky, but common-sense is never absent from investments (certainly not here), then why were they spending the extra $600M? With production on the decline in the final quarter, sales in copper were only modestly lower than the previous year (consistent with global trend). At $2.54/lb for copper, the market will ignore the woes and buy into the stock. 

Iron ore depreciating and Fortescue Metals Group (FMG) (Why iron ore won’t rebound any time soon). having a moment of carnage before recovering on the ASX with Rio and BLT having the knife put to them as well. With the price well dropping in futures a further 5% the market might need to revise price expectations. Can you convert bulk shipping into a floating production, storage and offloading (FPSO) facility? Please note the sarcasm. The FT ML fans will of course prefer Neil's commentary on the topic Iron ore falls to lowest since May 2009 on weak China demand. Implications for steel anyone?

Goldman I don't think expected their short-term bullish comments on gold to be so short with the drop. Goldman Sachs See Short-Term Strength In Gold, Remains Long-Term Bearish.

Who'd have thought Afren at near 6 pence...anyone!?!?! Yes, proudly here EMC: Evening Bolt On: Afren & MPI + Alleged CU Chaos (Investments). Today's update validating some shrewd positions with a Review of Afren's Capital Structure out today its reading like a slow motion train wreck. 

The no news but sensible decision by United Utilities (UU.) to accept the final determination. With the RPI target on dividend being a comfort to the dull goliath investment funds wanting income, the price is about right. Although the wise will have under review due to the appreciation over the last 12 months. Private Equity and Sovereign Wealth Funds will now be able to cast an accurate rule of the likes of UU. and SSE.

Atb Fraser

Antwerp Diamond Bank (ADB*) is owned by KBC Bank N.V and unlisted, EPIC attributable for the use within the article and not associated or inferred as being to another company.