Good Morning,
There appears to be a lot of misinformation surrounding
South32 in the press, where the journos need to take their socks off. There's no
way in the world BLT could have loaded Short32 with any more debt,
without significant risk to its debt rating and/or higher borrowing costs.
Worse, the press have ignored the level at which BLT would have created a
defaulting structure that would breach the legal requirements of corporate
governance.
The press ignore the fact that BLT have to
ensure that South32/Short32 must be able to operate as a going concern. The
commentators prefer to 'believe' that BLT are doing Short32 a favour by
reducing the debt. When the sums of the liabilities are put to a total, they
are in fact higher, merely labelled differently.
For those not wishing to split-hairs, the liabilities are
higher than 'consensus' with rehabilitation and closure ($1.5B and that may be
circa 15-17% on the low side) plus debt of $674M, taking the liabilities and
debt to $2.174B, with a $1.5b revolving credit facility being made available.
When one considers the on-going liabilities, excluding those clearly labelled
debt, its going to make leveraging (without dilution/equity raise) for
any acquisitions very difficult, irrespective of the alleged financial
prudence attached. Let’s see how the dividend policy goes.
BLT define South32, as having high quality metals that will
be a cash generator, that allegedly the "larger investors" welcome.
We'll ignore the volatility of the entire asset class, with a cursory prompt
for readers to check the price movements of aluminium recently, manganese is
under pressure and coal is not without its significant woes; not so enticing
when put in context. Of course Short32's dividend policy will entice the low
risk miss-believers into acquiring the stock.
With Manganese, Silver, Lead, Zinc and Alumina making up
near 38.6% of Short32’s EBITDA, Short32 may benefit from the Bauxite supply
issues thanks to Indonesia's unprocessed ore ban, and declining stocks of
Aluminium/Bauxite and Alumina, but how have silver, lead and zinc performed?
With any further slowdown in China, don't expect too much in the way of price
appreciation, more so a levelling out of both Nickel and Aluminium.
Staying with mining, and an indicator of the state of the
market, Rio yesterday put a tender out for a cargo of high alumina SP10 iron
ore cargo. Suffice to say this cargo has had limited interest. The Chinese
simply are not prepared to take it without a huge discount, in fact, many
aren't/weren't prepared to accept it.
Higher alumina (circa 3.5%+) content in iron ore causes the
slag to become 'rather' fluid during the steel-making process. Processors can
be blend the higher grades with lower grade. Simply put,
pollution/environmental regulations restrict these deals and limit the price. 5
years ago, some savvy traders would have combined the deal with some low
alumina ore from Vale, blended it and made a profit. In today’s commodity cycle,
it’s simply not worth the effort or time for most, without a decent discount
circa 10%+
Antofagasta (ANTO) have surprised the market with worse
than expected preliminary results (2014). We'll save the readers from
obtaining an accountancy degree and wade through the waffle in machine gun like
fashion. Copper prices down near 14%+ on the corresponding period, taxation in
Chile up (it’s only been in force since 1st October 2014/PWC did a very good
peace around this time). With margins under pressure and desalination likely to
increase costs per pound, what were the markets hoping for today? Simply put,
if the investors haven't already priced in lower expectation, they should be
from now one in, but all is not lost!
ANTO's Los Pelambres issues will have an impact on the next
set of accounts. With a trending reduction in oil/energy costs, ANTO only
managed a cash costs before by-product credits at $1.83/lb, a modest were 2.2%
higher than the previous year despite a decline peso. These costs will grow as
the wage deals / salary increases kick in over the next 4 years and the declines post reporting period in the copper price.
On a positive, any weakness in the Peso will benefit the
reporting cash costs and CAPEX/OPEX expenditure with net cash costs, including
by-product credits being a healthy $1.43/lb. The potential upside from
Antucoya, Encuentro Oxides and Centinela should not be ignored. One might just start to turn positive on ANTO
with its cash costs being an envy, save for any more radicalisation and issues
at Los Pelambres (and the El Mauro tailings dam). The reoccurring theme of grades should not be ignored though but better than management guidance,
nor for every 1% movement in the PESO (CLP), it equates to $0.0075 cents
P+ve/N-ve to production costs at the current USD Vs.CLP (Chilean Peso).
Unnecessary cheer at Lonmin (LMI) with the appointment of COO Ben Moolman and Bowleven (BLVN) finally have the cash in the bank. The market "may" just re-rate the company, albeit past performance and sector/industry woes will hinder any blue skies beliefs. Juridica Investments (JIL) disappointing the market for no particular reason with their final results. A long-term hold with some very good dividends so far, illiquid so one for the traders as well!
Atb Fraser
