Morning Mumble: The Data Dump - China's retail sales Grew...with Golden Week included. + Steel and Defaults - But hey we're not worried!

Good Morning, Good Afternoon,

Unlike the echolalia in the press, we have decided to work backwards from the almighty data dump and finish with a compelling statement of the realities of the situation. 

The market is now pricing in a stimulus - whether this is delivered or massaged into figures is another matter. We shall avoid all references to a “wappy wending” heard recently on a conference call! Li’s mishap was more entertainment than anything else, but gives the realities of the steel situation in China.

We have the mystical deflation that is occurring in food prices, retail and manufacturing both in goods inwards and outwards - Not the model one likes when leveraged and expecting non-stop stellar returns!

On Saturday (the trade data) in conjunction with today’s economic data merely represents the facts. We’ve had disappointment in imports (18.8%), exports (down 6.9%) and retail flat (11% up compared to this time last year).

What with the trade data and dump, we’re back to media copy and paste measures eluded to here and in the odd morning note and call. The PBoC are listening to the cries of those that scream blue murder at “only 6.9%” (yeah right) GDP growth (EMC has always been 4-4.5%).

The PBoC is now left compelled to slash interest rate, massage the Reserve Ratio Requirements (RRR) and stem the capital outflows. Actually, the latter could perversely damage China with a requirement to “bring home the bacon” in terms of revenue. There is now a need to also diversify away from a reliance on an overcooked and slowing economy. Sell China/US? Hmmm compelling argument.

All the above is compounded by an inflation rate, that for saying there’s been X stimulus etc…etc… (We’ll avoid the bore), the inflation rate is falling. Aided to some degree by the price of pork falling…as covered here! Also in part due to producer prices slid 5.9%, declining for the 44th consecutive month. Never mind the inventory issues and wage costs that may have further implications on non-performing loans (remember those last time around?).

With the industrial figure being below consensus, September’s reported 5.7% and near 5.6% the market has looked for reassurance in retail performance - Retail can only be described as flat. The sales however mask an element we’ll be covering here called Chinese Margins, because one suspects they’ve taken a beating as well. Footfall’s and voids at malls, giving a different view on the figures as well. A quick survey of rents paid shows some eyebrow raising questions…why if retail is improving are the very retailers struggling?

The industrial production figure at 5.6 was below September's 5.70 per cent level and below the pencil brigades’ consensus - The data validates China’s need to move towards consumption. The speed of the transition is likely to be the stumbling block for expectations, with some pain and unknown implications for growth.

One needs to see further evidence in the PMI Services for China to start to turn modestly positive of a floor being found in the economy. This may be aided by a massive glut/trend of Private Finance Initiatives/Public Private Partnerships to assist the transfer of wealth from state to comrade. (We’ve covered this previously).

We are also reminded of the Chinese Iron and Steel Association report whereby their members have reported collective losses of near $4.5B. What with the “assistance” they’ve received both in the pricing of energy, rebates and what we shall loosely call Central/Local Government grants - quite staggering if there was a level playing field.

We note that ArcelorMittal pulled the trigger on a rights issue in South Africa, that’s not only bad for Kumba Iron Ore with their revised pricing agreement but gives an indication of sector realities. The Kumba Iron Ore and Atlas Iron fan club have beaten back into action with some meaningful suggestions on occupations for yours truly!

Expect more headlines similar to this on Thursday when China Shanshui Cement Group defaults on its debt. The prudence, as reported by Bloomberg is: China Fund That Gained 24% on Bonds Sees Substantial Correction. Additionally, following on from the EMC piece of steel, where apparently Chinese Steel Mills were reacting to market forces, then we need to consider Baoshan Steel's Loss Highlights Crisis Engulfing China Mills.

As promised, at the beginning (if you’re still reading) – from the Baoshan Article on Bloomberg:

HFT One-Year Open Bond Fund was ranked No. 2 among the 270 bond funds, according to Haitong Securities.

“We aren’t worried about large-scale defaults because the central bank’s monetary policy will stay loose within the coming two years,” Shao said, adding he plans to expand his fixed income team from 16 to as many as 25 within the coming three years.

We’ll just ask readers to consider that again in Italics…and leave it out there:

“We aren’t worried about large-scale defaults because the central bank’s monetary policy will stay loose within the coming two years,” Shao said, adding he plans to expand his fixed income team from 16 to as many as 25 within the coming three years.

Atb Fraser

N.B. We note the Prosecutor on the Tailings Dam is citing Negligence on the radio and in the media…whether BHP can walk away from this is another story. Vale simply cannot afford to as the cashflow or “hope of cashflow is needed.” Samarco debt trading at a near binary bet of existence.

Morning Mumble: The Federal Reserve - Shooting Fish + Steel - the bottom is near! Bitcoins to Randgold with Glencore's mass garden leave project.

Good Morning,

For those having been up most of the night playing the "shooting fish in a barrel game" thanks to the Fed (without complacency). It was an opportunity to take the market reaction to Yellen's inferences on a "potential" December rate rise and short base metals. 

Iron Ore was more resilient, finding some form of support circa $47.5-48/t - we note the hefty discounts now being offered for sub 62% FE grades. One has a suspicion there's an "at any price seller in the market", perhaps requiring cashflow.

The U.S. Department of Commerce "cottoning on" (the phrase will be more poignant later in the year) to the subsidies Chinese are companies are getting. Not only were Angang Group Hong Kong Co. and Baoshan Iron & Steel Co. identified but, perhaps somewhat tongue in cheek a Baosteel Group Corp. spokesman said "the company’s operations are based on market forces." We'll cover it with, "of course they are governor!"

The Chinese labour intensity in metals processing has significant implications for central and regional governments. Especially some regions that have an over reliance upon the mills, processors and smelters (or associated services) + coal fired power stations to maintain some the status quo of employment. As such, there's been a repricing or energy discounts (development grants) and where possible a reduction in local business taxes to maintain the levels of employment

Only yesterday there was a discussion and opportunity to be educated on the benefits of bit coin, after some significant price movements. Before we get a telling off, we haven't become "all things knowing about the BitCoin" but today, it was rude not to attempt to short it only to realise the market was well ahead! 

It appears someone has recognised a slight liquidity/ramp potential. The FT explains it so much better than here, Bitcoin surges as Chinese flock to Russian fraudster’s site. (Izzy, Dan and Robin on the title). It won't do the bull case much good when the manipulation appears to be almost pyramid like...only time will tell. 

We had Randgold (RRS) reporting today with differing views on this this morning. Previously EMC has had a target of 4250, albeit the volte face being because of Ghana, where RRS still believe in exploring a JV. Why oh Why!? Returns were on the low side, with net cash, some production issues and the like...the market sold off on the news not helped by the dollar strength and fall of gold. 

Glencore could be the largest single funded garden leave project in Zambia.See: Glencore Can't Fire Workers at Zambian Unit, President Says. The company should be acknowledged for their hard work, but the space they operate should wisely taper back expectations, one near £2.80. 

Atb Fraser

Morning Mumble: Italics, Copper, along comes a Chinese Stimulus (iron ore?) and Anglo (In brief).

Good Morning,

It’s been about the busiest time on the markets for as long as one cares to remember, more so the demands of one’s time. 

Not only has Glencore's African copper review (ACR) made specific trades a kin to shooting fish in a barrel, but thanks in part by Freeport-McMoRan’s (NYSE: FCX) copper reduction in copper sales of 150 million pounds per year (for 2),  (Circa 68,038T's per annum). There's an avoidance to say much more on copper, at the moment.

One trader that was sweating when Glencore (GLEN) went significantly below 145, can now have a nap whilst the shorts are forced to close by Glencore's lack of confirmation (Shrewd). Are they? Do they need to? How will it be done? Glencore still eyeing options to raise $2.5bn in new equity (FT). We'll await Glencore's updates. Perhaps after they're done unwinding a few items aided conveniently by the ACR, it will give them some clarity on the balance sheet.

China have come out and acknowledged how bad it is (or how good it is about to get), with an intention to stimulate their way out of this rout, glut or downturn (Reuters). You can read this many ways, depending on how one is allowed to write the news. 

Of course, China's stimulus will be supported by the controls that are being introduced by the China Securities Regulatory Commission (CSR) including the soon-to-be married SHCOMP circuit breaker (CNBC). No mention of the reforms regarding to automatic trading? Or selling for that matter! There's more to this, but we're waiting on clarity on a couple of things before commentating further. With some of the tones suggesting there will be limited selling, ever...some long onlys will like this style!

The stimulus woke the iron ore price and likewise the producers appreciated the gesture, RIO/BLT/FMG and even some Jo'burg (JSE) marginal that have formed an EMC fan club. It’s a bounce and a half, perhaps with over-confidence on certain companies that are far from out of the woods. The low cost producers are viable, it's the "leveraged" higher cost crap that is rising that should raise an eyebrow or two. Perhaps, in answer to certain company directors’ prayers, they are now able to consider raising a few quid?  

As a positive, Fortescue Metals Group’s (ASX: FMG’s) white knights may now just be tempted to pay somewhere near Twiggy’s asking price. Shorts would be wise to note this potential event, with the Australian FIRB (Foreign Investment Review Board) unlikely to find any issues with an infrastructure deal. FMG have little choice but to do conduct a deal soon or risk the surplus over the longer-term weakening their hand.

Andrew ‘Twiggy’ Forrest may dislike the current offer on the table, but any deal circa $2.5B+ back on the balance sheet will give the stock more confidence. BaoSteel (EMC: June BaoSteel) are the likely front runners although, China's Hebei Iron & Steel Group and Tewoo Group (separately), will not discount any such deal.  

Keeping with the tone, Anglo American (AAL) has risen today, on the back of "selling" Rustenburg. Whether it'll be cash, shares or a mix, is immaterial to the market celebrating that AAL have removed a boil on the balance sheet. The carrying value from memory was well over £300M (please check), so there's circa £240M of Tipp-ex required on AAL’s part.

What the market should perhaps pay attention to is Sibanye. This company has in essence been "given" a liability, if one is to believe the value of the deal. Sibanye are obviously confident that they can return the operations to profitability, by the very structure of the deal. However, they won't have lost anywhere near as much as AAL! 

Have AAL sold/flogged or gifted an "asset" away when the PGM sector is starting to look like it may actually bear some modest fruit (FT: Platinum output to be hit by investment cut). 

If Sibanye can return the mine to profitability, it will be a testament to the managements understanding of mining and operations. Sibanye have a very good understanding of legacy assets, with keen eyes. It will obviously raise very sensible questions about whom should be running AAL, in the event of a turnaround. More so, what of the Scoliosis and White-Finger class action suits? Has this liability been passed on with the asset? Or are AAL fully on the hook for $1 billion.  

All for now, noted on Monitise. As a side thought, what's the unit cost for Vedanta (VED) on its iron ore operations?

Atb Fraser

Morning Mumble: Its all positive, Jubilee Platinum (JLP) IRR30%? Based on what?, Polypipe (PLP) & Scotgold (SGZ), have they gone into printing?

Good Morning,

Jubilee Platinum (JLP), a company whose share price has bounced, allowing for the platinum price and overall industry outlook. In support of the share price movinement, JLP put out an announcement confirming financing discussions are progressing, "almost" all the financing is there, but better, the surface treatment returns are a whopping 30%. This may be so, but based on what calculations? See below...

The Platinum Surface Projects target to process 80,000 tons per month of platinum containing surface material delivering an estimated production of 42,000 ounces of PGM's per annum. The Platinum Surface Projects are expected to achieve an IRR in excess of 30% net of taxation.

One is fully aware of the efficiencies of the ConRoast process and how this benefits recoveries. How has a NOMAD (SPARK Advisory Partners) signed off on this IRR expectation? Based on what numbers? What is the platinum price assumption? $950/oz ? What is JLP's expectations of the PGM prices? What is the prill split*? Admittedly, JLP’s outlook is a a lot better than previously, although is JLP a company where the assets/tech should be valued not the management? 

The acquisition of Nuaire by PolyPipe (PLP) is very good for both businesses. The market, is wise to rate it on a number of levels including the purchase price and earnings enhancements. Not often that deals are conducted at levels that are sensible in today's markets. 

It’s rare to read a bankable feasibility study (BFS) on AIM with some sensible assumptions. Recognition has to go to Scotgold Resources's (SGZ) Cononish Gold and Silver Project, Having wanted a cheeky short (intraday) on SGZ previously, the company have to raise some cash but financing on the back of the BFS looks more positive. SGZ, post financing is likely to look like it has potential. These sort of BFS numbers make financing a lot easier. 

With amusement, when one was looking for the Appendix to the BFS, unless SGZ have gone into printing, the perhaps would be wise to give their correct company website in announcements. SGZ’s website is http://www.scotgoldresources.com.au/ not as quoted, http://www.scotgold.com/ (printing company).

Yet more Fortescue Metals Group (FMG) speculation, last time it was Baosteel and CITIC Group. This time round its China's Hebei Iron & Steel Group and Tewoo Group (separately). Over to the FIRB (Foreign Investment Review Board). Being both state owned entities and FGM wanting to derisk minority stakes at mine level or the rail and ports assets, there may be a good chance of a deal, but do not expect anything to be concluded at speed. Hebei would perhaps be the favourite, but does Tewoo's need to diversify/distance itself from Real Estate...? 

FXPO noted, but limited time. 

Atb Fraser

*Prill split, is platinum group metal ratios of production including PT (Platinum), PD (Palladium),, RH (Rhodium), AU (Gold), PGE (Platinum Group elements), RU (Ruthenium) and IR (Iridium). Note: PGE, RU and IR are often excluded from the prill split.

Morning Mumble: Pressure Technologies (Another profit warning), Vedanta and the "continuation of the paradigmatic shift for Iron Ore."

Good Morning,

Pressure Technologies (PRES) gave an update on trading and notification of interim results. It’s dire, with a material deterioration in the immediate prospects for the Group's Precision Machined Components and Engineered Products divisions. Worse, the Alternative Energy Division has now been completed but the division has experienced delays in securing new orders which will impact its performance in the current year. EMC: PRES December 14 (in addition see PRES Labels). 

With limited liabilities and cash at circa £5m the company is not going to go bust immediately, but in the absence of orders across the entire company the prospects are not looking good. After their update in February, things have clearly got worse. Valued at around £30M and a tightly held stock, there's likely to be limited support in the short-term, save for some speculative buying (knife catching). Simply put, any improvement in their divisions will be hit or miss. 

No doubt the technical analysers will be looking at the gap between 270 and 211 overnight, however the price appears to be overvalued as a result of today's announcement. The company has great potential for holders, simply not at this price with too many unknown risks, and that includes the businesses inability to forecast future revenue in light of the oil tumble. PRES is a well-run company, with an unfortunate set of events working against it, it will be overly punished. 

Today, Vedanta's (VED)'s update is an example why VED's structure is so difficult (perhaps even complex) that it needs to transfer equity between subsidiaries in order to enable "cash" to target the required resource. VED's structure appears to have limited tax benefits, so one would be wise to ask why exactly is the structure so complex. (See below: Vedanta). In simple terms it’s a corporate dinosaur with little in the way of synergies between entities. Today's actions appears to be "robbing Peter to pay Paul."

The "paradigmatic shift in iron ore" is likely to be played out very soon. With gossip a joint Baosteel and CITIC Group (China International Trust and Investment Corporation) "are likely to gain full FIRB (Foreign Investment Review Board) approval" for a direct investment in FMG. Expect some nationalistic issues about Chinese investments to be negative for Australia (close the stable door after the horse has bolted). 

China's selection of 'favourites' in the iron ore sector is a shrewd move. Not only does it weaken BLT/RIO's hold on price (if there was any left), and place a long-term low cost (ish) supply in their hands, it maintains a significant diversity in the market. As evidenced by the backtracking by the China's on view on the Valemaxes fleet with the recent deal with the Chinese. A complete backtrack on the part of the Chinese. (See: Aquila Resources BaoSteel deal)

Johnson Matthey's (JMAT) results are better than envisaged, but still overvalued. JMAT has been a technical short off 3475 for near 6 months. Irrespective, the revenues are down circa 10% (allegedly as expected) which contradicts the sell-off this morning. 

Stripping out the sale of the gold and silver refining business, profit was a head at £422.8M (£406.6M), near 4% on the previous year. With such a "positive year" despite a reduction in expenditure net debt was up £265.2 million to £994.4 million (net debt to £1,037.6 million if you include pension deficit and bonds). 

The divi-will support the share price, although 2% is supported only in part by the sale of refining business. Debt on the increase there are a lot of assumptions on the positive outlook that contradict the wider vehicle market including trucks including fleet age cycles. 

With the HDD (for those layman's: Heavy Duty Design) trucks being in a positive renewal cycle, JMAT will benefit as the older fleets are being replaced especially in America with economic 'recovery.' Remember, fleet renewal cycles are being run for longer, will JMAT  be impacted as the fleet renewal cycle peaks to the current level but in the short-term will benefit. 

Can growth keep pace with the increased age of heavy duty trucks in the longer term is another matter. Perhaps the answer is a reduced seasonality which will assist manufacturers in planning. This of course is contrast to the average age of cars declining by 12.5% over a 14 year period. No change in the view that there will be limited growth and the potential for adverse currency movements. So banking profits on a technical basis, it’s wise to review the position. 

Atb Fraser

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