Morning Mumble: Should we set up a due diligence Firm of Randgold? + Plus Other News..

Good Morning,

What does it say for the risks of management when companies are prepared to consider joint ventures on assets that are uneconomic? Of course regular readers will remember the EMC: Volte Face Randgold Resources from September... after: EMC: Randgold preferred Fed Arb play. 

To quote:

Whether its Elephant country or not (FT), prudence dictates purchasing a decent asset with a better outlook than Obuasi. Good money after...As a reminder, PWC's Mining Taxes and Royalties (PDF)s  and an article (Ghana Chamber of Mines) that AngloGold Ashanti's might want one to quickly forget.  

Disappointing waste of time on RRS and perhaps losing ones mind! When investors thousands of miles away from the mine can assess the benefits or lack of in investing in Ghana, concerns should prudently be raised. More later...

It would appear Randgold needed to spend significant time and perhaps money conducting due diligence to form the same opinion as EMC. Today, they give an update on the Obuasi Gold Mine. Over to Randgold (Bold Italics and Underline are additions):

Jersey, Channel Islands, 21 December 2015

On 16 September 2015, Randgold Resources Limited (Randgold) and AngloGold Ashanti Limited (AngloGold Ashanti) announced their intention to form a joint venture to redevelop AngloGold Ashanti's Obuasi mine in Ghana, subject among other things to the completion of satisfactory due diligence by Randgold and the agreement of a revised development plan.  After undertaking a due diligence exercise into the mine and the redevelopment opportunity the mine affords, and following the work undertaken on the revised development plan, Randgold has determined that the development plan will not satisfy Randgold's internal investment requirements.  Accordingly, Randgold has decided to terminate the investment agreement entered into with AngloGold Ashanti, with immediate effect.

Chief Executive Mark Bristow said Randgold remained committed to creating real value for all its stakeholders by continuing to invest substantially in its exploration programmes with their proven record of success as well as by investigating potential growth opportunities presented by the market.

What due diligence was needed to formulate the same view as here?? Randgold can now throw in the towel and purchase Amara Mining’s (AMA), Yaoure Project, whom recently gave an update on grade and resource.  

In other news, the AIM loses a director whom had sat on a few boards…one such company, BacanoraMinerals Ltd. Perhaps entities were finding their proverbial taps cut off…same for AfriAgPLC, InspiritEnergy (INSP), EvocutisPlc and RareEarth Minerals. Apologies if they weren't all covered…

We have not ignored the marco news, or iron ore moves, China’s woes with imports/exports, BHP Billiton issues and other areas, merely time rationed. Its interesting to note there are subsidies for purchasing cars if you “live in a rural area.” As migrant work forces are considered as living in Rural Areas, the mainstream media may need to wake up and consider the significance of such a stimulus…bringing forward more purchases by near 3 years!

Atb Fraser

PM Bolt-On: Glencore, FED with fears of Déjà vu, owning American stocks? Lithium (who's taking it?) FMC/SQM/Tanqi, + Gold (not quite a bug) on Randgold.

Good Evening,

Initially it was going to be Glencore’s results on the share placing, but every-man and his dog has covered it and there appears to be a consensus that the debt matters resolved. With the employment and cost issues cropping up on GLEN's care and maintenance proposals, the costs savings might just need a little Tipp-Ex. 

Tomorrow’s news on the Fed could or could not be the impetus and momentum needed commodities. Any deferral in rate rise, will only lead to speculation of when it will raise rates, including the associated risks (Déjà vu). Here the view is, the FED should bite the bullet, but those whom know about all such things suggest its unlikely. 

The question is likely to be, why own American stocks? Justification that cheap money has been used for buy-backs and/or capital returns isn't a sound investment case in its own right. Return on capital employed/invested and return on shareholder funds, isn't hindsight but prudence. 

News is rife with Lithium. The market appears very slow to give some credit to a changing market. Perhaps with the likes of FMC Lithium (NYSE: FMC) on a PE of near 35 it’s enough for now. 

FMC have wisely sold their Consagro operations (Brazilian generic crop protection distribution and sales subsidiary), to ‘Atanor do Brasil,’ the Brazilian subsidiary of Albaugh. A sensible choice as FMC have/had neither scale nor a leading position to leverage off.

FMC poignantly update the market that as a direct result of “continued market growth is outpacing current industry supply capabilities for most of our product lines.” This has improved market conditions to justify a hefty 15% price increase in lithium (Inc. lithium carbonate, lithium chloride, lithium hydroxide and all other products) except speciality products that are rising $3.50 per kilogram.

Tesla are shrewdly conducting deals, signing up off-take/supply agreements at a discount to market and capping the price. Examples being Pure Energy Minerals (TSX: PE) (Sept 16 release), whom today did a deal with Tesla.

Same for Bacanora Minerals (BCN) whom near two weeks ago struck a similar deal supply agreement with Tesla. Although small fry, it’s giving an indication Tesla is working very hard to stabilise the price, admittedly not very well if one compares Chinese prices.  

The price rises are unlikely to help Chinese buyers whom have an import duty of 6.5% on top of the price. It’s difficult to find the appeal of Tesla with their failure to convert sales in China, but Marmite has customers, so why not Tesla.

The price increases are marginal for car producers including the likes of Tesla. Without checking, more recent estimates suggested that Tesla required between 11-16 Kilos of lithium per car. Will Tesla become a gimmick in China, especially as average auto sales prices are dropping, margins down, incentives up but demand contracting? Don't Tesla at some point need volume rather than R&D costs eating into the majority of the unit sales price?

Like energy pricing by the ‘non-cartels in the UK,’ with FMC leading the way, you can be assured that Albemarle (NYSE: ALB) whom bought out Rockwood Holdings (U$D5.7 billion), Global X Lithium ETF (admittedly not exclusively a direct exposure to Lithium producers; noted RD), Sociedad Quimica y Minera (SQM (NYSE: SQM) and Talison Lithium. (Formerly TSX: TLH), will be "compelled" to act...

Talison Lithium, a once upon a time target for Rockwood Holdings, is near impossible to gain exposure to having been bought Chengdu Tianqi Industry Group (Tanqi). Note the indicator was there post any fundraiser of a take out for CDN$850M (from memory.) The Chinese press had reported well before the offer that the Chinese Investment Corps (CIC’s) had approved loans to funds the purchase of Talison by Tianqi well before the event. After all, they'd completed the financing for the mine.

Being prudently reminded of the SABMiller (EMC) commentary. To quote yours truly, “The best hope for SAB is a take-out, over to Anheuser-Busch InBev whom today had a good justification to limit any premium if it were "going to make a move at the end of the month." Today’s news on Anheuser-Busch InBev (ABInBev) SABMiller PLC - Responding to press speculation crystallising ‘most’ of the value.

Whilst not being the biggest fan of gold, Randgold (RRS) today presented with an opportunity to place money (with requirements of safety), with gold steady around $1100/oz, RRS is the preferred Fed Arb, with costs and cash built in even for a longer-term trade. RRS's ability to weather the market and price movements is not to be under-estimated. Even with some citing $775/oz. as a possibility, Randgold may find it tough, but others would quicker fall, causing a shortage of supply. Shockingly, this is likely to be a longer-term investment here.

Admittedly, some see gold as a hedge rather than a supply issue and a store of value. Albeit, the dynamics of the market have always mirrored those of supply and demand. It’s the basics of global risks and perception of risk. With deflation in mining equipment, CAPEX expenditure and energy prices all reducing, it will all assist the unit costs on an all in basis. Obviously save for those producing the equipment reliant on a booming markets. 

Sensibly closing positions in advance of the fed movement today, due to the close nature of any such call, we'll revisit Caterpillar (NYSE: CAT) in due course. The strength in the North America market is facing a wave of deflation in mining and shale costs, caterpillar are not immune, although hedged to some degree by their financing arm.

CAT's Parts may benefit as machines that are run for greater hours per day/week and annum, but insufficient without some form of recovery within commodities generally (read as and/or stimulus). Not forgetting inventory of parts carried by the major miners is also being reduced or managed more efficiently (BHP Billiton a prime example). The destocking on top of pricing pressures won't be positive. We shall reserve comment on Caterpillar's finished goods until 22nd October (Date for Diary). Caterpillar's sponsorship of the Energy and Mines summit is noted.

The recommended reading list is growing and appreciated so please be patience. 

Atb Fraser

Morning Mumble: The Rumour Mill in Afren & Gulf Keystone...positives for KEFI? surely not!

Good Morning,

Afren (AFR), appear not to have updated the market on "the likely" outcome of the bondholders with monies allegedly already being discussed. Speculators would be wise to acknowledge the risks associated with the equity going to 3 pence. 

This morning, Leggie rightly points out it's an identical play to Petropavlovsk Plc (POG), whom Deutsche Bank AG put their head above the parapet with 7%. AFR, was once upon a time a darling of EMC, including most of the supporters, logically it was wise to exit. Is there a lesson here about hedging and leverage? 

Sticking with the rumours, Gulf Keystone (GKP) allegedly have some visitors either heading to or currently on site in Kurdistan. With a Competent Persons Report (CPR) due very soon don't expect too much before this but with GKP about the money at the moment, it would perhaps be wise to watch the volumes. 

Eurocel (ECEL) are coming to the market with conditional listing today and unconditionally on Monday. The IPO with the Dutch and management cashing out circa 50% of their holding, we'll leave it to the pundits to assess the viability of the company. With a valuation of £175M gives an implied yield of 6% assuming no growth. Investors would be wise to look that all the previous year’s performance, not just 2014!

A few analysts had some comical backtracking (belatedly) on Fresnillo (FRES) today. The Financial Results for the Year Ended Dec 2014 are as expected, crap. We do not need rocket scientists to point out the obvious between 2013 and 2014 in terms of silver prices, with a 18% decline in realised prices and nearer 32% if one was to include the last 3 months with the average weight price down, towards $17/oz., at best. 

It’s worth noting, with FRES's expansion and long game, it'll give some comfort to long-only holders to top up/average down. The news is a signal for yours truly to close shorts to reappraise fully, FRES's production costs have dropped which helped to offset the grade declines but could not keep up with the price of silver tanking. With averaged prices significantly lower since the reporting period, FRES need to get a handle on costs. Although it's ironic shareholder funds performed better than GLEN, a whopping 5%. 

What are Bacanora Minerals (BCN) playing at? Holders voted with their feet today for good reason and to show their disapproval sold a minor amount to give the board a clear indication of their views. If the board do not take today's price action as an indicator of shareholder opinion, they would be wise to learn. 

BCN may go strength to strength from here is immaterial to the value the company had yesterday. There would have been no successful outcome on the EGM based on a quick poll of decent holders. Having closed spread bets the profit has been left to run in equity, with a different risk profile as a result of the appointment today. BCN can look forward to some Horse Hill type twitter updates. On a positive, with funding readily available for "key" projects and a CEO not far away from for BCN the outlook is positive for the assets only. 

It’s rare to see anything positive for the shareholders out of KEFI but today they have come out with a decent update.. With some easy finance should be available locally for Jibal Qutman, KEFI would be wise to focus some significant effort on pushing the project into production. 

The key for the stakeholders being the oxidised material where recovery rates likely to be in the 80-90 percentile. Hawiah has some appetising comments where KEFI seem to think they can “identify large base metal (copper, gold and zinc) targets at depth." Could KEFI just be turning a corner and warrant a buy? We'll await further base metal analysis. 

Limited time to cover the significant amount of oil hedging currently underway! 

Atb Fraser

Morning Mumble: REM's Desperation & Writedowns lost in the GLEN. Copper Gossip & Spain 2.0.

Good Morning, 

Markets tend to be more confident in the UK as it shrugs of its seasonal affective disorder to start the spring afresh, but not for long! It was yesterday the supreme chartists (exc. Hugo) are now calling for a FTSE 100 retrace to near 4000. To quote Hugo, as it's unusual for him to be consider the FTSE, if there was a retrace it would be circa 5100, nowhere near the 4000 being bandied around. 

REM (Rare Earth Minerals) appear desperate to get above 20% before any such EGM at Bacanora Minerals (BCN). LGO don't have the necessary cash to remove the issue of a vote for the appointment of a Director to the board. The question should be, how much cash do REM have left? No much is the answer…

Having spoken to a few savvy investors in BCN it's unlikely that David Lenigas will achieve the intentions via REM without 20%+ direct holding. All holders should be thanking REM for creating a large illiquid squeeze (do not blame shorters as they were near nil or should have been!) in the stock with the price near doubling. This does not mean they should vote REM or any associates on to the board, far from it in fact.

Glencore's (GLEN) preliminary results 2014 in EMC's view should have taken a huge hit on thermal coal.  The carrying values have warp the overall figures to give a false sense of security for an improvement in the dividend, up 9% today. Viterra saved GLEN from dismal results, debt reductions of circa $5.2b will aided those with myopia and the savings from the incorporation of crap from XTA (Xstrata) are just mystifying. Although when one unwinds the debt, it’s worth noting the sole reduction was down to Las Bambas sale. Had the 'synergies' and CAPEX reductions be substantial enough, the level of debt paid down would have been circa $6.4B and potentially nearer $7b. (Time for a picture, it's dire!) 

The preliminary snapshot sums GLEN up, but doesn't give the whole picture. The market should have been selling into these results. They are dire if you add in coal and the return on shareholder funds, laughable. Roger Bade goes with 4.2% return on shareholder funds. 

Its ironic BLT (BHP Billiton) achieved better than GLEN despite having Short32 to get people's mouths watering. Although, with GLEN's trading division and the level of capital intensity required you'd be a fool to expect the same metrics as Rio/BLT and dare I say it Vale, whom have their own issues.

Roger asks some very good questions about the reasoning or underlying issues within GLEN regarding fees, commissions and pay. Perhaps GLEN was more suited as an unlisted anomaly. Well not for the sellers! It’s very hard to justify a valuation above 265 pence for GLEN, and that's pushing it. So over to the analysts to maintain the status quo with targets of 330-360 pence, obviously not for their own money though!

Analysts are left guessing where GLEN will cut its CAPEX. We'll leave the summary to GLEN, "Responding to the volatile market backdrop, we comprehensively reviewed the appropriate level of capex for 2015. Originally guided to $7.9 billion, we now expect 2015 total industrial capex to be in the $6.5-$6.8 billion range, with reduced spend across the broad portfolio." Coal? Oil? Alternatively OPEX? Marketing? Perhaps more transparency on the marketing fees and 'associated' costs? 

Of course we should end the GLEN commentary on a high note with the largest LMI (Lonmin) short...the in-specie distribution. How has the stock performed since GLEN's in-specie announcement 11 Feb 2015? Those two analysts in RSA (Republic of South Africa) that thought it would be good for liquidity, with a TP or near 240! 

With Mugabe's 91st Celebrations being in the headlines, Mwana Africa (MWA) managed to raise $20M via a bond issue for the smelter restart from ZIM institutionals. One hopes MWA have checked the lead times for the equipment they need in for the smelter reopening in 9 months’ time. 

There's a guaranteed uncertainty coming to the politics of Zimbabwe. It would be sensible to consider this with any investment, irrespective of the benefits of the commodity (namely Nickel). ZANU PF (The Zimbabwe African National Union – Patriotic Front) are in turmoil about who takes over...Even the MDC-T (Movement for Democratic Change) are becoming soft in their old age and wanting to maintain the status quo of ZANU PF, lip-service objections?

Copper gossip via Li in China, Zambia are alleged to be reviewing the overall tax-rate for open-pit mining that has impacted copper production and sentiment on any investments there. After initial discussions with the operators, Zambia are alleged to be reviewing the 20% royalty rate to 12-14%, although ahead of the previous 6% welcomed by the miners. 

Zambia have risked their entire industry in the short-term with the revisions to the Zambian corporate tax and mining royalty regime. With First Quantum's Sentinel mine coming on stream, they have had to revert to their lenders to tweak their covenants. The 12% for Vedanta is still far from positive, and creates risks, despite a recovery in the copper price (currently 2.66/lb)

With Zambia appearing to want to play a hard line on taxation (at least at the moment) Vedanta (VED) is at real risk of being the casualty. Its capital and corporate structure drastically need simplifying/clarifying in order to survive, VED appear have got ahead of itself in the price recovery. 

A few super-yachts cancelled today?

Atb Fraser

Belated Morning Mumble & PM Bolt On: Shaft'ed (SHFT), AAL something's lacking in the sandwich & AHhhhhhhhh'fren + the Alleged amateur of aim...+the paradigm shift in China's iron ore.

Good Evening, 

With Indaba and a few other items going on it’s been extremely busy week with meetings and teleconferencing from the UK. Today a slide show was emailed around with myself to be "formerly" known as the Amateur of AIM. It’s a pleasure to drink their gin this evening, but restricting the consumption to a few rather than two cases (apology accepted). 

Shaft Sinkers (SHFT) hit the wall with a financing update at 12:32, just a few weeks after a "yoff" (read as person younger than I in a position I'd have loved when I was his age) challenged the EMC analysis of the company and why it hadn't gone bust!?! SHFT is dogged with its inability to share the risks of contracting with the miners, creating an imbalance in returns and something contractors need to learn (mail box for a quote to understand this; its not cheap!). 

SHFT's issues were endemic of commodity prices declining (receding super-cycle), opex/capex cuts, the South African strikes whilst not forgetting the Kazakhstan contacts were totally misunderstood by the market and lack of risk sharing in contracting. It was one of the favoured shorts, kick the dogs. The employees and staff should be ok, it would be wise for investors to note a few key names from the board in their journal for future reference.

Anglo American (AAL) Full Year Results 2014 is/was abysmal. The write-down on Minas-Rio of $3.5 billion is laughable when the company state Minas -Rio is ahead of schedule in October [2014] and expect to bring the project in $400 million below the revised budget. Do the company have a handle on costs at all? Revising costs up, then coming in significantly below the revised budget. Sounds pretty much like a blank cheque. 

The savvy will start questioning whether AAL's net debt target of $12B is realistic in the current environment. With debt set to peak at $15.5 billion (EMC estimates) by end of year, commodities and free cashflow are going to have to significantly improve before one becomes positive on this stock. De Beers should be called Long32 (to mimic BLT's short32/south32) and be divested to support the balance sheet whilst there's value in the market. The market stupidly reacted today, and will ignore the realities. Up near 20% off its lows anyone would be thinking it’s going great guns. 

Afren (AFR) has had a lot of rumours abound today, as per FTML it was proven to be BS, save for the low ball offer that SEPLAT (SEPL) were offering. Afren shot out the gate with little option to maintain but to maintain there's value, with offer talks being terminated. SEPL announcing they had completed extensive due diligence on Afren and made a written proposal to the Board of Afren that provided critical and significant near-term liquidity and value for the stakeholders of Afren. Value for stakeholders...loose term for "not the shareholders"? 

It would appear David Lenigas has started a snowball on Bacanora Minerals (BCN) after the recent request to gain a seat on the board via REM (Rare Earth Minerals). A decent holder said today, they'll reconsider the viability of BCN if David Lenigas gains a seat on the board. Voters would be wise to think where their money is best placed. There's a number of items going on the side lines with BCN and good to follow as the big boys (exc. REM) start to play...its best to leave that one there, however if you're widow(er) or orphan you'd be advised to avoid.

With oil's absolute focus on rig counts it’s a speculators licence to print money as oil was propelled above $60/bbl (Brent) with the Euro-zone giving it a little squirt. Why it's rocketing away is purely down to a bounce with the surplus even allowing for a reduction in production still out gunning demand. The market is rushing to price in a reducing rig count, some "weather issues" (as Malcy eluded to in his blog) creating a better balance. 

The final thought of the weak (scuse the pun) is the iron ore short and the Vale gaining permission to utilise their giant ore carriers to China on Monday. Obviously this has nothing to do with some agreements with Cosco (China Ocean Shipping Group) and the related transactions. 

It’s rare to be able to quote EMC directly, so here's with a little clip from today:

"If China subsidises native production by 30$ a tonne for 125mt it effectively causes over supply and a short to $55/t. The subsidy via development grants will be partially offset by the 700mt at the lower price.  

China have just shorted Rio and BLT by allowing the super ore carriers in on Monday (9th) something Rio et al forgot to mention in their updates! Expect Cosco (China Merchants Energy Shipping state owned), to get further involved in the low cost super/giant carriers the deal with Vale from last year showing they're willing to apply pressure on Australia . The deal with Vale/Brazil has in essence reduced the need for 30% of Australian ore alternatively they [Rio et al] must slash prices.”

We'll leave it there...see you on Monday! 

Atb Fraser

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