PM Bolt-On: Non Farm Payrolls & Weaklings - Freeport & Valeant wth some hindsight on IMIC (International Mining & Infrastructure Corporation)

Good Afternoon,

The UK wasn’t the only place with fireworks this with week. What with the Non-Farm Payrolls (NFP 271,000) increasing the probability of a rate rise – now the odds are looking at 85/15 in favour.

The NFP fanfare has forced investors to consider the risks of heavily leveraged companies and those made vulnerable by the liquidity contraction across emerging markets and/or commodities space.

In the longer-term there may be some reward by investing in restructuring plays like Freeport-McMoRan, but not for the faint hearted. The recovery in leveraged companies isn’t clear cut either, so expect some reality/stresses in the short-term.

Commodities producers reacted this week (selling) –

1. China’s focus on innovation and a limited response to an infrastructure stimulus. (Hopes of higher PE - long the SHCOMP on hopes and/or China 300 only on momentum).
2. Standard Chartered’s (STAN) prudence sticking the knife into the commodity sector and a realisation of avoiding a light in a tunnel or two (Qingdao). We hope for STAN’s sake it’s not a train coming towards them - Currently no reason to hold the stock.
3. Fears being realised of a credit bubble/liquidity contracting in emerging markets.
4. German Manufacturing Data (negative for copper) – answers on a post card.

& Friday’s…

5.  Boom busting NFP figure that was a wildcard and above expectations.  

Companies will need to bolster their balances sheets if they operate in a deflationary market, especially those with significant debt and limited operational free cash flow. Remind you of anyone? Not just Anglo, but the market will now belatedly start focusing on rightful candidates. We had the analogy in the morning call that “certain traders are like a bunch of hyenas!!” As if!

The open secret of “debt to revenue service costs” is finally acknowledged as a risk. Not that the writing hasn’t been on the wall for some time. Admittedly, It’s difficult to find a reason to hold US equities with the dollar strengthening. Those goliaths are going to take a haircut to earnings.

With fears of larger scale corporate default and financial bubbles, the market is now factoring in restructurings whether it be fundraising, equity issues, convertible notes or debt for equity a k a dilution for the weak.

Shareholders should be prudent to the possibilities of losing control via the back door or worse, there being limited equity left for shareholders. Freeport-McMoRan (FCX) are not immune to these woes either, but with Icahn on board at least there’s some form of hope signal for the shareholders.

Valeant - without repeating the woes of Valeant (VRX) verbatim (See Citron Research) – it is the pharmaceutical equivalent of VW as it has so many unquantifiable liabilities. With three + warnings out now, it’s likely a case of the die-hards hugging the stock. "Value seekers" will no doubt be sifting the wreckage and be tempted to trade. 

From a psychological model, with such a nuclear fallout and one suspects more to come, is there any reason to hold Valeant? What is the value? What are the risks? With the market perversely needing to be told of the value or limit the slow motion car wreck, what is the likely outcome? With such a wide range of variables, what pricing methodology does one use for Valeant? The price range here up until Thursday was $56-$103 and now, we suspect there’s more potential liabilities, so have narrowed this to $38-$44 a share.

The damage within the pharmacy/dispensary industry cannot be ignored. Pharmacists may now follow the cost conscious route across all prescriptions, not just related to Valeant medications.

In coming to a price, we’ve considered Valeant’s responses and what we assume Pershing Square may be ignoring. Of course Pershing may be selling/have sold, but in the absence of a notification, we’ll assume they’re holding.

For consideration:

1.       Was Philidor using pharmacy codes for pharmacies it had not (yet) acquired e.g. R&O?  

a.     Did they have permission to use them?

b.   What are the implications for Valeant if they are considered to a shadow director/owner of Philidor? Do the rights that Valeant acquired in Philidor mean they have also liabilities?

2.      Its been suggested that dermatology products sold through Philidor were of average profitability -  if we assume that at least some revenues comprised of generics costing $5 or less, but when combined by Valeant and branded it enabled a charge of $400 plus++. If this is correct, then it becomes very difficult to buy into the average profitability claims suggested as the ‘worst case downside.’

3.   It’s been inferred that Philidor filled/dispensed prescriptions even when they were not required / requested. If Valeant’s revenues were reliant on the revenues of 3 units when only one was needed - what are the real implications on Philidor closing/departing company? Repeat prescription business will in essence be torched?  

4.       There’s been vague disclosures as to what other 'specialty pharmacy' networks Valeant has. Will this have further implications?

In making a few assumptions from the above, it’s easy to come to conclusion that the impact on Valeant profits is likely to be double digit. As a reminder, Valeant in October 2015 disclosed they had $1,420M cash and debt of $30,883.3M. What will earnings be and the outlook? If one conducted a simple calculation, deducting net debt from the market capitalisation, what equity would left for shareholders?

In the small caps it would appear there's a sense of déjà vu. Those that remember the views expressed here EMC: International Mining & Infrastructure Corporation (IMIC). To quote yours truly:

International Mining & Infrastructure Corporation plc (IMIC) loan conversion shows the faith in the company, a mere 30% discount to the SP. One hopes you've sense my irony with the mere...the 1 year chart must surely look like the cellar steps! Next stop 10 pence? 

It would be wise to think how the terms are fair and reasonable as Strand Hanson Limited, the Company's Nominated Adviser (NOMAD), consider that the terms of this transaction are fair and reasonable insofar as the shareholders of IMIC are concerned. Its not something I shall be complaining about having rated this as a sell since they acquired Afferro Mining Inc.

IMIC was suspended after the resignation of their NOMAD Strand Hanson in October.  As a positive those holding the Afferro Mining Inc. bonds of yesteryear get a few more shares (whether they’re tradable is another issue), with the conversion notice yesterday.  Is IMIC now extinct? Or can they pull off the unthinkable in the current mining space? Perhaps even find a NOMAD?

So whether it’s goodbye or see you in another form? Who knows…It’s wise to keep an eye on the assets of the micro craps, perhaps not the companies that trade them left and right, but follow the assets.

In other news, the South African and Australian “anti-EMC fan club appears to have gone silent!” Surely it’s not the Zumba Iron Ore share price? Atlas or perhaps Slater & Gordon?

The final thoughts go to Anglo American (AAL) having a rights issue?? The odds are getting higher! BHP Billiton (BLT) tailings damn could be a significant liability...what are the implications and costs? We have varying ranges and estimates as high as $2B excluding losts dividends and as low as $450M, 

Atb Fraser

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: Direlight (DIA), Chemring (CHG), Kenmare Resource (KMR) and Majestic Wine (MJW) their economic moat!

Good Morning,

Dialight have given strategic review & trading update. Over to Dialight (see additions by EMC in bold):

Trading Update

Trading in the three month period to 30 September 2015 was characterised by continued weakness in the oil and gas sector and reduced levels of industrial capital expenditure, particularly in North America. As a result, reported lighting revenue growth for this period was 5%. The cost reduction actions announced on 7 August are on track to deliver their targeted reduction in operating costs and we are encouraged by the strength of our order book. However, with market conditions having become more challenging during the third quarter, and Dialight's financial performance weighted as usual to the seasonally-strong fourth quarter, the Group faces an increased level of uncertainty in the remainder of the current financial year.

But...By the end of 2018, Dialight is targeting to achieve:

• Over 25% annual revenue growth
• Over 40% gross margin
• Over 15% EBIT margin
• Over 80% cash conversion

The market is wising up to the realities. See: EMC: Direlight (DIA) June 2015.

Chemring (CHG) trading update that isn't good news with a "potential" delay in the 40mm contract. The concern being, this is yet another company flag waving a rights issue so far in advance it raises significant questions about any understanding of the market. 

Admittedly, with a bit of good fortune, Chemring could turn the situation around by gain the necessary permits and export approvals associated with this contract, although one senses the board find this highly unlikely. Over to Chemring, additions in bold. 

Key points

• Despite significant progress having been made, there is potential for delay to revenues from the 40mm ammunition contract announced on 14 September 2015

• As a result of this and other issues, there is now a realistic prospect that year ending 31 October 2015 ("FY15") underlying operating profit1 could be reduced by approximately £16 million to approximately £33 million

• Order book at 30 September 2015 of £606.3 million; £344.6 million for delivery in FY16, representing more than 75% of expected FY16 revenue of £450 million

• Discussions will be held with debt providers to negotiate amendments to the operation of covenants and the waiver of any event of default that may result from the 40mm contract delay

• Proposed rights issue (the "Rights Issue") of up to £90 million in Q1 2016; fully underwritten on a standby basis by Investec and J.P. Morgan Cazenove

• Resultant medium term target capital structure of 1.0x - 1.5x net debt to EBITDA

The company's debt levels have been a concern and impeded them for some time, so Chemring elect to kitchen sink their issues today with:

"The recent progress of the Group has been impeded by its high levels of debt and associated interest costs. Significant time has been spent managing this debt, at the expense of further operational improvement and fully capturing the longer term growth opportunities open to the Group. We have therefore announced today that the Group proposes to launch a fully underwritten rights issue to raise up to £90 million, the proceeds of which will be used to fundamentally address the high levels of debt and to provide a competitive capital structure."

It begs the questions of why the rights issue isn't now...shareholder value? The cash advance whether recognised in this year or next is immaterial to the overall issues the company are facing. Target price now likely to be near 87 pence. If it quacks like a...This company has a momentual task just to maintain existing shareholder value, 

Kenmare Resources (KMR) forgot to mention some key ingredients within their  Q3 trading update. Namely the pricing environment over and above anything Kenmare can do will remain challenging. Iluka Resources is fully aware of the KMR financial position when such terms as "Super Senior Facility" are utilised it rather suggests who has the stronger hand.

A question: exactly how much time have the "board / management" spent out at Moma? More so, what is the purpose of the board if an external consultant has to be appointed to support and extend this ongoing cost control and efficiency programme? We'll ignore the stock levels and the like for now, as all the cards are in China's and Iluka's hands at the moment. 

In the current environment, Iluka Resources have no need to save Kenmare and there is a real risk of downward pressure on any offer price. For a perhaps more open outlook, please read Iluka's Q3 (see the market conditions section). 

The market is waking up to the realities of Iron Ore, scrap prices are falling quicker, steel prices down. More so, there's now evidence Steel Mills are bringing forward larger maintenance works and/or shutting capacity due to the limited demand. We acknowledge the likelihood of a larger sized steel mill default. 

With two significant events currently under way the 18th CPC and the Fed, there are likely to be considerable trading events. We have Aluminium production in China yet again on the increase, the average operating rates of Chinese copper processors is steady but nothing to shout home about, Zinc inventories in Shanghai, Tianjin and Guangdong are on the up and finally, scrap prices in China fell through the floor evidencing the realities/contradictions of the alleged balance in supply and demand.

Finally, it would be unfair not to consider Majestic Wine (MJW) whom pulled the proverbial plug out of their economic moat of six bottles or more. Apparently, MJW trialled no minimum bottle requirements at 23 stores for 5 months. Its allegedly had no impact of volumes, really?? 

The question is, did the removal of the 6 bottles or more criteria improve sales? Or just increase the cost per sale? Is this a flag waving event where they firmly placed themselves within the supermarket sector where such benefits of 6 or more bottles may have insulated them to a degree. Surely if one is an off-license location is key!

If someone could be so kind as to point out where Majestic announced to the market that they were trialling the no minimum bottle purchase, it would be appreciated. As in yesterday's announcement of a new pricing strategy stated, "follows the previously announced successful trial in selected Majestic stores since Spring 2015 proving popular with both new and existing customers." Perhaps one is just being tardy, a quick email to Majestic's IR might assist. 

With the results out on the 16th, and one has a suspicion there's been a leak to the supermarkets! Quite why Majestic Wine's didn't merely launch their own online offering of wines via post/text is a very pertinent question

Atb Fraser

Apologies for grammar a quick one!

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: China's Sensible Mini-Me HK and Retailers...Glencore goes long Copper! (Perversely for everyone else.)

Good Morning,

Last week, Nikkei Hong Kong PMI® was released with the dramatic title, PMI falls to lowest level since April 2009. The last time the data was this negative was in 2002 and 2009. The indicators are not great, with a lowering in new orders enabling companies to complete pipeline work. This may be a swallow in the grand theme of things, but we shall watch for a continuance before we long lithium pharmaceuticals. 

One item from Li, is the factories now avidly marketing their wares (inventories) at rocket bottom prices. From some shoddy capital equipment to very decent drilling machines for oil, all are being marketed with discounts that are notable. Could the shale suppliers being under further pressure? 

We shall revisit this over the coming weeks, now the parade is over and they can continue the witch-hunt. As a simplistic recap, production down, services demand down, innovative development and investment down. China has forced a new low, companies can recommend a buy on their own company – A Chinese investment bank rates its own stock — thinks it's definitely a buy. 

Now who do you believe? Man Group China head says she was not investigated by authorities, but was merely meditating. One had to reread this to make sure there was no confusion between meditating and medicating! Of course Li Yifei "had been attending industry meetings and taken a 5-6 day trip to meditate." So for those that don't reappear, say those that worked at CITIC or similar, should we contact the Guinness Book of Records, not only for the longest meditating period but largest event of its kind? 

We had Markit France Retail PMI® that had very similar themes to the BDO High Street Sales Tracker that was reported Thursday. Although as a snapshot in time, predominantly based on weather, it's not necessarily all bad. With some sectors and retailers likely to be more resilient and / or benefit, but there is a theme, with some buying opportunities presenting. Perhaps when considered against household debt (excluding mortgages), there is a very simple answer for the decline in sales? Save for more holidays abroad.

With retail shoppers making decisions on holidays or retails sales, choices are now having to be made. Watch for those margins, as sales competition hots up, especially if there's discounting the autumn/winter season, more so than normal. 

Associated British Foods (ABF) pre-close trading update gives out the positives, save for FX and sugar. Why is ABF not split into two? The argument for a split is getting ever stronger, save for some improvements in sugar more recently on the back of El Niño (FT)

Earlier in the year retailers evidenced improvements in pricing. These benefits are likely to be offset by competitiveness due to weather (lack of punters) and the need for seasonal stock changes. ABF via Primark have shown they’re not insulated either despite lower prices. Concerning that with their pricing perception in Primark stores, customers want even cheaper clothes!?

BDO analysis suggests inventories up, sales under-pressure and weakness in the wider and or global economy it's not looking great. (The last sentence may apply to different regions).

Like the Hong Kong PMI data, it’s noted that key reports are trending with as "bad as, not since levels seen in 2009 etc...” The read across to Kingfisher and Merlin entertainment does not looking brilliant, over to BDO. 

The strength of the pound is proving somewhat detrimental to high street retailers’ revenues. Consumers are spending more on items abroad to take advantage of the exchange rate, whilst tourists – particularly from the Eurozone – are less willing to spend. The continuing political and macroeconomic uncertainty, coupled with the threat of an interest rate rise in mid-2016, is also weighing on consumers’ minds.

Kingfisher (KGF) may be insulated thanks to a growth in French housing purchases by speculators/investors, although spend is normally lower than those buying a ‘home’. We won’t have to wait too long, with the interims due on the 15 September 2015. One can barely contain the excitement with an update on KGF’s “One” and their 'sharp' decisions in September. 

The news is filled with Glencore. As the share initially shot up today on news of a rights issue that was absent entirely of pricing or indicative terms. Please remember, as per Ivan’s statement it has not been determined whether it will be a rights issue. It does appear to be 100% underwritten (so perhaps the market thinks it’s irrelevant), for now. This is in addition to Glencore’s African Copper - Operational Update.

The market, like in the Platinum Group Metals sector, needs a casualty and Glencore have come up with the answer. Putting two large projects under "Doctors Orders" (Care and Maintenance) until improvement works have finished. 

The suspension of production at Katanga and Mopani for 18 months up until the completion of the expansionary and upgrade projects. This includes the whole ore leach at Katanga and the new shafts and concentrator at Mopani. A suspension of operations will remove approximately 400,000 tonnes of copper cathode from the market. 

Glencore blamed the decline in copper prices on aggressive short-selling in their full year interim results webcast. Today's news is starting to make one think that Glencore did not have any idea of the amount of physical in the market place nor in fact much understanding of the current cycle. More so, the surplus is significantly higher that Glencore anticipated by the very cut of near 400K/t’s. If this was not the case, they would have identified suspending production at Katanga and Mopani in their interim results webcast, rather than belatedly. The copper price has improved a smidge of 4¢ since the interims, so what changed?

Glencore have pulled 266K/t's annualised basis from the market, (for 18 months/note for diary) As a result, if copper cannot sustain a comeback to near $2.50/lb and potentially $2.85/lb on the back of Glencore's news, then there is something substantially wrong in the global economy (and/or China).

Is China really sick? Or just slowing? The copper price will give a very good indication over the coming months. Not only immediately will the market react, but due to inventories, a slower appreciation is likely over the next 9 months. (Keep an eye on car sales). A complete gift to Freeport-McMoRan et al (VED, ANTO, KAZ), where any 10¢ appreciate per lb is worth between $300-500M to FCX.

Glencore have come out to state how bad it is, but of course for Glencore it’s not bad at all, Ivan Glasenberg, Chief Executive Officer, and Steven Kalmin, Chief Financial Officer, made the following statement:

"Notwithstanding our strong liquidity, positive operational free cashflow generation, lack of debt covenants, modest near-term maturities and the recent affirmation of our credit ratings, recent stakeholder engagement in response to market speculation around the sustainability of our leverage, highlights the desire to strengthen and protect our balance sheet amid the current market uncertainty.

The measures we have announced today do not affect our core business activities and overall franchise value and have been designed to sensibly accelerate the deleveraging of our balance sheet, maximise future cash flow generation in the current weak commodity price environment and substantially improve our financial and credit metrics, stability and strength, in the event of a prolonged weaker pricing environment.

We remain very positive on the long-term outlook for our business and this is reinforced by senior management's commitment to take up 22 per cent. Of the proposed equity issuance. Copper and zinc are both supply-challenged and an essential ingredient of future global growth. In seaborne thermal coal, a capex drought and low prices have helped rebalance the market. We are confident that thermal coal's position and availability as the lowest cost fuel source for many large economies will underpin its key role in the global energy mix for many years to come.

We have today an extensive portfolio of long-life, low-cost industrial assets, benefitting from the unique capabilities of our marketing business. We reiterate our 2015 full year marketing EBIT guidance of US$2.5 billion to US$2.6 billion and remain confident of our long-term guidance range of US$2.7 billion to US$3.7 billion."

Culling dividends, full year and interim for 2016, cutting production etc...All should have been conducted at the interim results where "Captain Kirk and Scotty" could pull the levers (EMC: Glencore 24th Aug 2015). Have another look at the Webcast from the 25 August 2015, re: Dividend etc...Then consider the news today. 

The fundraising suggests there was an over-confidence in Glencore's senior management at the interims in August. Did they really have sufficient flexibility in the accounting model (in the current market), with some prudence in light of current market conditions? Common-sense?

In the absence of this capital raising, the balance sheet cannot be "stress-tested." Glencore appears very desperate to be doing the fundraising without giving an indication of anything, price, timetable or whether the larger shareholders have approved of such an action. 

If Qatar Holdings, or Harris Associates had agreed to the fundraising, would there have been a need to underwrite? All this of course is allegedly in the interests of the longer-term shareholders, no strong-arming to avoid being diluted!?

What is noteworthy is the significant amount of "debt reduction" in the near-term. Why was this suddenly needed, market confidence? Or common-sense business practice that should have been identified at the interims? Estimated to be near $6B in a very short time frame. So who is next...? Anglo after the dip in diamonds?

Atb Fraser

Morning Mumble: Prozac Anyone? Maybe a Coffee? Dr Copper & all taking a spanking - whilst likening Glencore's webcast to Star Trek's Captain Kirk & Engineer Scotty...plus the need to actually do a full days work whilst on Holiday. RIO finally surpasses the 2200 target price.

Good Afternoon, 

Back up, albeit briefly... 

It's been a while! Although far from inactive - it has been fun to relax and enjoy the holidays.

The views and positions here have pleasingly been validated by the market. A pleasant bet being honoured on RIO hitting (and surpassing) my target price of 2200 pence today! Now, with a tangent look at Glencore, with some analogies to Star Trek.

We'll ignore what the critics stated about the target prices here and on FTML, with some pleasing emails of acknowledgement. Stopped clock or not (as some called it here) there was no deviation. Not because of stubbornness, but the indicators have only become a) apparent and b) a lot worse than even those reading here thought. So why would one change their view over the longer-term? Perhaps revisit the analysis but certainly not change this view, at the moment.

Initial analysis started to appear more positive after Glencore’s webcast on the 2015 half-year report. If you have a position in any stock, in any country, it's sensible to consider the webcast and in particular the defensive body language displayed and the wide range of earnings guidance. Also, as a validation, a quick visit to Fortescue Metals Group (FMG) annual results that aided the selloff in Australia last night.

In the webcast (45 mins onwards (Q&A) section), it was noted that some analysts were rightfully enquiring about the leveraged nature of the balance sheet, specifically what flexibility there is in the working capital. 

The market is now waking up to the acknowledgement of Glencore’s wider guidance of $2.7-$3.7bn (Page 9 in Presentation). Being near 2 months into H2, one surely should have been able to be more specific or is there lot of hope being priced in? It does suggest there's a lack of confidence in their operating divisions including Russian Wheat export taxes, Canada grain harvests and the copper / oil woes and finally, China.  Is this representative of the current wider global theme?

Least we not forget Glencore's thermal coal adjustments. Despite assertions of profitability and low costs, why did Glencore have “no other option but to scale back 18MT’s of thermal coal per annum.” Is it implying that Glencore are not understanding the full extent of the market deterioration in commodities, or perhaps across the board? Not a good thing if you operate in such fields.

There are a number of issues Glencore's copper division appear to have missed. One being that the "sudden" appearance of significant physical, that is suggesting a destocking of inventories. We are even starting to think that it suggests the Asian market had stored significantly more than what the market had allowed for in warehouses and of those cashing out (by pulling levers).

Having had a target price for Glencore of 165 since from Xstrata (XTA) merger completion on the 2 May 2013. The risks are still there in China, Russia, Canada, in fact every area that Glencore has an operating divisions, but more importantly net debt and its ratings, inventory valuations (and consequences of hedging), whilst being in a global deflationary environment.

Glencore are in a position of being forced to sell off assets, allegedly non-prime/central to Glencore's needs. We note Glencore announced the sale of Tampakan, Falcondo and Sipilou on the 14th August. The buyer, a subsidiary of the Alcantara Group (via their subsidiary Indophil Resources NL) appear to have benefited from Glencore's woes. Not forgetting that the sale also proves the case that yet more volume is hitting the market. Or are Glencore and the market believing that Indophil purchased these assets to do absolutely nothing with them? “Give o’er…” as Polonius said in Hamlet!

There's going to be a temptation by funds to start averaging down given the current price compared to the IPO. We'll ignore the warped belief of the investment case for Glencore, but some 'averaging' down will give risk to shorts in the interim. Without further woes in the price of oil, copper and agri-commodities it's “about the price” (for now), with more volume likely around the 150 pence.

Simply, Glencore is no-longer a conviction short, until further testing and understanding. Namely, “how bad is it really in China?” China’s next about turn in policies, devaluation and protectionism is likely to answer that. To the detriment, of course, of their trading partners – both Asian and global.

It’s ironic that Glencore go as far as to blame 'aggressive' short-selling on copper woes. Hang on a minute, don't Glencore have a copper trading desk? It would be a fair statement if they were but a "mere" producer blaming the woes of the market, rather than a fully integrated Goliath.

It’s rather taking the biscuit to point the finger when you have a capital intensive trading / marketing division? Were GLEN the counter-parties of such positions? What is the impact of the Russian export taxation on profits, with most trading houses with active positions from June taking a large hit?

If we liken Ivan Glasenberg to Captain Kirk and Steven Kalmin to Scotty the "engineer" from Star Trek, it is bemusing to review the discussions in the webcast regarding debt, working capital and trading/financing deals (Circa 50 mins onwards). 

When pushed on the debt position, debt rating and the hypothetical situation of $2/lb copper, Capt. Kirk/Ivan explained the benefits of being a trading house etc...Where there is flexibility in business model. Steve aka Scotty was able to step up the power or reduce it accordingly by these magic levers to reduce working capital, change the interest rate on internal lending to trading / marketing or look to derisk financing positions with third parties. Warp speed anyone? Perhaps Scotty in reality is “giving all he can Captain?!”

Admittedly there's evidence in the webcast of both Capt. Kirk and Scotty not understanding the business. Glencore need to reduce their debt by about $8B and essentially by as much as the carrying value of the inventories. Why was there no comment on the reduction in volumes across their divisions? After all it’s essential to trading to have volume.

Glencore’s biggest concern is its inability to call the market. One would have thought the overall theme of a market would have enabled better guidance rather than statements about “China being weaker than anyone envisaged.”

Likewise, Scotty suggested, that one can simply reduce inventories and/or working capital in addition to intra-company loan rates. This may actually be harder than what Glencore have previously done in the past. Especially in light of volumes of commodities available in the short-term. Their selling, could actually warp (speed) the market further (at least in the very short-term).

Glencore have failed to consider the currency benefits of a strong dollar on the marginal producers, that are given (yet more) lifelines. Especially as America “hops along” to an interest rate increase (but no doubt delayed by 9 months+).

The currency beneficiation has not only helped the likes of Kaz Minerals and FQM stay in business, but most other leveraged players. The ability of producers to ramp up to reduce the costs further, whilst  putting a glut on the market, is under-appreciated (at present).

Admittedly there's some hope, Glencore think the worst is over in agriculture - with the new wheat export tax now having visibility. Glencore appear to think there's near balance of supply and demand in copper and the market price is false. Ironically those statements were made just before the PMI data for China (1). The market is waking up to just how leveraged and unstable/weak China was, but one suspects not how weak it is. Could Glencore have been overly optimistic, so far it would appear they are, and perhaps will still be. 

An example being copper piping, where over the weekend Li informs us there's a couple of cargoes going for a proverbial song. Has someone perhaps been caught on the hop contractually? More on this later, if we manage to find out a price.

Yet in contrast to these cargoes (as a snap shot), analysts are banking on China spending on the electricity supply grid and infrastructure. This may actually be a pointless exercise as energy use has reduced near 3%, one cannot see China being able to afford the previous levels of wastage to support the economy.

Whilst avoiding being gleeful of near 4 years work in commodities, one suspects the market is now at risk of capitulating to a bear market, with the wider ramifications needing further analysis.

For copper, there are contradictory indicators coming out of the sector. We have Platt's* on the one hand forecasting growth in 2015 of near 5% whereas ICSG (International Copper Study Group) at negative 3%* (Source: ICSG PDF File). That's some range considering what the implications are at an economic level, although more recently there have been a few production issues in the market that may provide support (based on a reducing supply). 

Like in China, are we now going to see the forced selling of stock pledged/secured against loans or mortgages globally? What of the collateralised loans? Or perhaps with a hope of security “in cash” now being forced to sell. An example being the sale by Martin Rowley of First Quantum Minerals. Whatever the reason behind Martin’s sale, one suspects there’s going to be more globally, whether current or former management of most companies. It’s certainly the case in China, Asian and Pacific economies.

Freeport-McMoRan (FCX) are a prime example of expanding into the rout of commodities. They are yet to press the button for equity (perhaps due to lack of interest). Are they waiting for glimmers of hope in the commodity prices? One suspects they cannot wait much longer without a restructuring/raising.

China have significant problems that without a multi-pronged approach to their economy, without some form of foundation building rather than bubble focus, their economy will continue to raise concerns. The next trend (reiteration) is likely to be PFI (Private finance initiatives) or PPP's (Public Private Partnerships).

The Chinese have very cunningly been creating their own supply chains, whether Aluminium, Steel, Copper, Nickel, Coal to petroleum. This is evidenced in Taiwan, where they have felt the might of China in the semiconductor market.

Taiwan’s semiconductor exports were significantly larger than China, their market was near 3 times the size of Chinese in 2009 but is now is en par with the Chinese market. Like solar panels in Germany, this expansion into a commercial space and supply has hurt them. Many Emerging Markets will have to consider the implications of the determination of a weakness in their currency, with a reducing demand and reducing level of investment in their countries. Examples being Taiwan, Thailand, Korea and Japan.

If one considers read across of the semiconductor market in Taiwan to the copper draw/demand on copper in China. Then China’s demand/needs may not change that much, but what may is the demand from predominantly emerging Asian markets that have relied upon China. These markets have only just woken up to the fact their industries have been replaced/replicated.  

One cannot ignore the compliment from a devout critic of the views here, where "the macro environment commentary on China/Asia and India is very accurate and almost psychic here", (to quote one reader. Maybe it's only one reader!

May be a little biased of course, but one would be hard to disagree in light of the carnage on the markets and ensuing ‘recorrection’, reading back and comparing here with the realities of the PMI data and those of the bulls of the commodities. 

Why did this blog post became so popular over the weekend, EMC: Fanya Metal Exchange. What of others? Perhaps it was after this article about angry investors capturing the head of Fanya metals exchange (FT). Quite how much commodity do physical ETFS have, what are the implications for the Jo'burg PGM ETF's etc..With humour, should one be factoring in security costs for under-performing companies?  

Atb Fraser

*Platt's from memory does not distinguish between refined and unrefined copper whereas ICSG is focussed on refined copper. 

1) Add Diary of Release Dates for PMI information to your diary. 

Morning Mumble: First Quantum Mining (FQM) bitter sweet pill, GEM Diamonds, how things change in 2 months.

Good Morning,

First Quantum Mining (FQM) give their Q2 Results, you won't like them, so here's some sugar to help the medicine go down (read as dividend). Not only is the later unaffordable its putting further strain on an already distressed balance sheet, albeit only $18M (ish). 

What level of cash generation was assumed for expansion of Cobre Panama, One notes the project is progressing with no change in "capex" at $6.4 billion. With total capex for this year at $1.4B and $600M to be spent on Cobre Panana. There is some good news, in 2016, FQM  focus will be on optimizing the phasing of capital expenditure at Cobre Panama, while keeping the project on track. Obviously no need this year then?

FQM state,   "During the quarter, we launched and completed an equity issue. The decision to do so was based on our belief of a stronger copper market following this period of weakness. Proceeds from this initiative provide the Company with the financial flexibility to continue to build its production base. We are thankful to several long-time and new shareholders whose support made the issue a success, noted Philip Pascall," First Quantum's Chairman and CEO."

So the decision to equity raise was based on "a stronger copper market following a period of weakness"? Phew, one had a suspicion it was as a result of reduced cashflow woes, covenants being suspended (waved goodbye) and a compulsory commitment to significant levels of CAPEX on Cobre Panama. It must be entirely coincidental that of the $1,121B capital raise, $1B was needed to repay debt at a senior level and the remainder equating to the $117M hit being taken on the ENRC $430 million Promissory Note.

EMC estimates of NET debt position as of today are around $4,956.9B allowing for the recent falls in the price of copper, gold and nickel. In the absence of an improvement in the copper price that is sustained and above $2.55/lb, debt levels are likely to be higher than those reported in the financial accounts for 2014.

It’s sensible to consider whether there is a full availability of the undrawn facilities in the absence of covenants? Circa $7B all in. Especially in light of FQM's capex being towards to the higher end of the revised figures for 2015 in the 2014 accounts, significantly reduced cashflow and limited room for cost improvements. We'll ignore the $400M in inventories at year end, perhaps a little hair cut by $100M would be wise, or FQM could alternatively have their fingers crossed, and raise "a further $800M in anticipation of an improving copper market?" 

There's further issues with the closure of Sentinel process plant, pending an evaluation in light of the load shedding on the grid. Sensibly, FQM has seen common-sense to redirect the majority of Sentinel's power allocation to enable Kansanshi to operate close to full capacity. This obviously has implications for Sentinel, likewise the timeframe is unknown and one suspects while delaying the ramp-up at Sentinel. Putting near 150K/t of copper back into next year’s earnings (Cashflow assumptions?)

Having bought into Gem Diamonds (GEMD) recovery (EMC: May) today they update the market H1 trading update that replicates what De Beers experiences (EMC: Anglo 24th July). Having sold and taken a loss on small long, there will be no rush to return. 

We note the market for small stones has softened considerably and is likely to continue to do so with the woes in Asia / China. Ghaghoo sales are down near 20% compared between the first and second sale, admittedly commissioning sales and more so for cashflow. Although they do acknowledge that the next sale will include a higher proportion of diamonds from the main body of the VKSE phase of the kimberlite ore (better quality). 

Ghaghoo is however turning into a row of disappointments, admittedly not far off the main body of ore it’s perhaps one for those with a longer-term perspective and a rosier outlook. With tougher going ground conditions impacting on slot development in the first five production tunnels and constrained production ramp-up, its not great news. More so the need for specialist expertise has been employed to ensure there is no further major ingress of water as the access decline and rim tunnel on Level 1 both begin advancing through the water fissure area in order to gain access to the second production section. Will main Ghaghoo production improves things? 

Wolf Minerals (WLFE) update the market  on the progress on the development of Drakelands. All appeared to be going well save for the price of Tungsten and Tin. It would appear that Wolf Minerals have only just noticed the price of Tungsten dropping significantly since commencing mine development.

Investors will be wise to work through a model of around $200/MTU and tin and $12k/t. rather than what was inferred previously. Although there are significant synergies and production improvements from a 24/7 operation model rather than the 5.5 model that was worked on. Costs per MTU should reduce further than those implied originally, circa $174/MTU. It may be worth WLFE not processing the tin? 

Although the preregistration for the dial in, like that of AO World is not welcomed. With the availability of the web, one could register via a web page or even not be permitted to speak without registration. Whomever is advising of these practices would be wise to reconsider. 

Not time to discuss the vanadium woes nor copper.

Morning Mumble: Anto-fghastly (ANTO) & the markets alleged White Knight (NYSE: FCX) and the magical ingredients, LGO: Why I was wrong to...JKX & SLP, self-harm!

Good Morning,

Today's Q2 Production Report from Antofagasta (ANTO) gives some idea of the woes for the industry. It doesn't look great even allowing for reduction in supplies to market including the recent near 200K/t's drop in guidance from other producers, the Zambian load-shedding (EMC: Yesterday) and ANTO's own guidance revisions downwards to 665,000/t's of copper, as a result of some commissioning issues on the crusher circuit. 

Conveniently ANTO don't give their previous guidance, so here it is. For 2015, it was 710,000 tonnes of copper, 250,000 ounces of gold and 8,000 tonnes of molybdenum. Not only do they have the woes of gold prices being at lows, molybdenum price being at a level it's questionable whether it's a viable to process it, and cooper down 45,000/ts. (EMC: Rio molybdenum (Mo) woes). As a result ANTO's cash costs are on the increase due to the MO price and lower than expected production. One would have thought with the USD: Chilean Peso (CLP) strength, there would have been of greater benefit, but this will perhaps be reflected in Q3. 

Luckily for ANTO, there may be some hope for the copper price thanks to the markets white knight known as Freeport-McMoRan (NYSE: FCX). The market may think FCX's planned production and cost cut backs (FCX Site PDF) will assist the cooper market. But with the absence of a magical ingredients, prices are likely to stay lower and for longer, this time. FCX are unlikely, like Rio or BLT, to give up market share for the sake of the higher cost producers. 

Over to FCX, today announced it has undertaken a comprehensive review of its operating plans in its mining and oil and gas businesses to target significant additional reductions in capital spending and operating and administrative costs in response to weak market conditions for its major products. These plans will also incorporate potential adjustments to mine plans and future copper and molybdenum production volumes to reduce costs and preserve valuable resources for anticipated improved market conditions in the future. The company expects to complete this review promptly and will report its revised plans during the third quarter of 2015. 

James R. Moffett, FCX’s Chairman, Richard C. Adkerson, Vice Chairman and Chief Executive Officer and James C. Flores, Vice Chairman and FM O&G Chief Executive Officer, said, “We are responding aggressively to current market conditions affecting our primary products and to the uncertain global economic outlook. These initiatives are focused on maximizing cash flow in a weak commodity environment and on strengthening the company’s financial position. We appreciate the efforts and dedication of our global organization who are supporting our plans to implement revised operating plans. We have a positive long-term view for our markets, the inherent values in our large asset base and are positioning our company for long-term success.”

The copper and wider commodities market are lacking the magical ingredients Chinese speculation and margin. These have been absent for some time (including shadow financing) and are unlikely to return without some significant stimulus from the Chinese Government. All compounded further by a basic approach to commodity back financing that has been in contraction and limited to a basics approach. 

This brings us to the question of those with copper in inventories and/or in transit priced significantly higher either, that had a muted response to the FCX news (VED/GLEN?). Especially those needing to deleverage some $18B of commodity inventories (across the board) to maintain their credit rating and profile! Perhaps GLEN have signed up for an Experian Credit account to "manage" their credit file?

Continuing the theme from yesterday on load-shedding, it would appear Barrick Gold (NYSE:ABX) have forgotten to update the market on the load shedding issues in Zambia for their Lumwana Operations Reuters. Perhaps Vedanta, Impala and Glencore are also immune or do not feel the need. Then again, perhaps Barrick need to work out the cost impact at a C1 level as they will now be marginal. Expect cost revisions near $2.20/lb (C1) and all in near $2.80/lb (EMC estimates, no plagiarism folks). 

Question of the day, seeing as China Securities Regulatory Commission (CNBC) is investigating companies and individuals selling stocks, what can they sell to cover those margins? Cars? Houses?...Also, which Beijing bank (non-state) has the greatest exposure? The hunt is on!

Sylvania Platinum (SLP) have released 4th Quarter results. Operating in the PGM space they aren't great. They've had some cash back from Ironveld, spent some on share for "employees" of shareholders, and its unlikely any dividend will be made. The potential benefit is the selling of a few assets (or divestment) and maybe a low ball offer. As a holder, one hopes you sense my unfulfilled mind-set to this stock. As a punishment to myself, and a form of self-harm these will not be sold (self-harm). 

Finally, JKX Oil release their half yearly results. Dire, although perhaps some hope from the Interim Award International Arbitration Proceedings, it’s still not a stock for any widows. More a bet on a geopolitical and financial improvement in the sector. 

In other news today, LGO Energy drill another well. Having sold this holding and gone short, there's no rush to buy back any time soon. One would be wise to wait until the result to assess the viability of the company. Perhaps we were guilty of being too keen (EMC:) closing LGO Short too early. LGO have given no update on its financing and one has a suspicion revenues will soon be committed to interest and debt repayment. Profitable for the lender perhaps but shareholders? 

Atb Fraser

Morning Mumble: BHP Billiton (BLT) Production set to increase & South 32's Misnomer

Good Morning,

There's a lot around about BHP Billiton (BLT) this morning. Although some are missing some pertinent elements including BLT's costs. If one cannot produce and sell a product without incurring freight and royalty costs, why are these not included in the cash costs? 

BLT's $16 a tonne is wrongfully considered a pain to the industry. The marginal producers will suffer, that's a given. BLT's total costs are not near $16/t! Without going into details analysis, BLT and RIO's all in cash costs are nearing $35-40/t pending on weather and energy cost movements.  

The commitment to Port Hedland of additional $240M is not to be sniffed at, this isn't included in freight or royalty costs. They have committed to the purchase of additional tugs and a new "tug harbour" to improve the reliability of the port. 

Iron ore will be under further pressure. With most commodities the gap between cost of production and sales price narrows over time. The Chinese are not speculating on Iron Ore, in fact most commodities, this has had a notable effect on commodities prices. 

Although BLT is still increasing to capacity of 290Mtpa and forecast to production of 270Mtpa for 2016. Whether the production increase improves costs (or efficiencies) any more than have already been expressed is another matter. 

Last weeks impact for Onshore US assets $2B and a net loss recorded on the demerger of South32 (Short 32) are now realised. This will be addition to the copper writedowns that appear to be exploration related are not to be sniffed at.

As Rio is slowly being recognised as ex-growth, it may be premature but all the same, BLT is looking like a cash model rather than a growth company. 

The marketing update is worth consideration as there's a glaring significant theme, please not all comparative years and half years. 

Average realised prices(6)	FY14	H1 FY15	H2 FY15	FY15	FY15 vs  FY14	H2 FY15 vs  H2 FY14	H2 FY15 vs H1 FY15
Oil (crude & condensate) (US$/bbl)	102	85	52	68	(33%)	(49%)	(39%)
Natural gas (US$/Mscf)	4.35	4.21	3.29	3.77	(13%)	(33%)	(22%)
US natural gas (US$/Mscf)	4.10	3.89	2.59	3.27	(20%)	(46%)	(33%)
LNG (US$/Mscf)	14.67	13.76	9.40	11.65	(21%)	(36%)	(32%)
Copper (US$/lb)(7)	3.22	2.98	2.61	2.78	(14%)	(16%)	(12%)
Iron ore (US$/wmt, FOB)	103	70	53	61	(41%)	(45%)	(24%)
Hard coking coal (US$/t)	131	110	99	105	(20%)	(18%)	(10%)
Weak coking coal (US$/t)	111	92	85	88	(21%)	(18%)	(8%)
Thermal coal (US$/t)(8)	74	61	56	58	(22%)	(21%)	(8%)
Nickel metal (US$/t)	15,273	16,905	13,688	15,301	0%	(18%)	(19%)

South32 (S32/Short32) quarterly results are today as well, with little mention as BLT have overshadowed their results. This could be a cunning format for hiding crap. 

South 32 were notified by BHP Billiton that non-cash, pre-tax impairments of South32 assets totalling US$1.9 billion were recognised effective 6 May 2015. Largely offsets prior fair value uplift of US$2.1 billion recognised for Australia Manganese and South Africa Manganese. 

A couple of issues here, firstly are S32 not recognising BLT's $2.1B impairment on S32, but more so, if South32 are limiting manganese production because the prices are so dire, then the uplift in valuation should be reversed even more so than the impairment. Perhaps S32 accounts department need to remove their socks before attempting the full year accounts. We'll have to wait until the interims to find the other $200M. 

With all miners rushing to capacity rather than cash efficiency and security of supply, expect significant pressure of caps on commodities. In the absence of some significant casualties, the market is set for lower prices for longer. Oh and the Chinese stimulus...being a risk. 

Something of significance that isn't being widely reported yet, but has started to be unwound after the Government investigation. Speculators would be wise to consider is the unwinding of ETF's back by physical metals in China (Fanya Metal Exchange). This is significant in the REE/REM (Rare Earth Elements/Rare Earth Metals) space, but one should consider 'certain' copper trading houses where some of the investors have had a liquidity issue. 

With an increase in trade disputes on commodities exchanges, at what point does the Chinese Government get involved in these issues. More so with fraudulent trading companies springing up, what are the risks to the market with alleged guaranteed returns on commodities of 50% in a day. 

China had Qingdao issues with Copper financing (ghost financing), that have not only seen a spike in LME / Global warehouse supplies, but more so a reduction in financing for metal trades. Pacorini Metals Asia Pte spike in inventory, across the spectrum of metals is not uncommon globally.

Atb Fraser