Good Afternoon,
Whilst no one is looking I've managed to sneak a couple of things in, including
the Wolf Minerals (WLFE) call that wasn't that informative if I'm honest. They
did highlight the reduction in global output as higher cost producers either close,
mothball or are placed on care and maintenance. It didn't help dialling in late
as I forgot the time difference.
Having had my fair share of alcohol on a sunny cliff side
restaurant, it dawned on me whilst looking down, what about that rather large
entity known as Freeport-McMoRan (NYSE: FCX) Mr Debt! We know and understand
leverage, it's not a good idea to be "over-leveraged" in a space of
falling commodities nor so where one of the main consumers is "unwilling
to pay much of a premium to operating costs."
Often there's a perception that leverage is prudent, it’s
got tax benefits etc...Simply, that's a positive in small doses, but to bet the
ranch on loans/bonds that in percentage to equity are just plain silly. More so, a common mistake of those trading CFD's/Spreadbets that perhaps have more aspiration than the reality of their consequence. The
commodities sector is a prime example of what was wrong with Northern
Rock. Plains Exploration simply was a wrong purchase for FCX, not now, but
at the time it was wrong, no hindsight is needed.
The behemoth of companies that have bet on such expansion with debt.
They've been covered for a long time, finally the realities are bearing down on these leveraged plays. The Yuan / RMB depreciation is unsurprising, for those
following the debacle of the Chinese companies with high inventories as a
result of over production and cheap borrowings,. We know too well the outcome, voilà solar
panels, housing, copper, iron ore, coal, stock-market, infrastructure projects, government revenue streams declining including corporate taxation and land sales (albeit improving) etc...
With Chinese inventories expanding at factories, gate prices
under pressure and limited sales, they've got to entice customers somehow. So
why not devalue their entire offering and have a "sale of things."
The devaluation is the primary example of what "has been banged on
about here" for how long, to quote one avid critic. More so, one suspects its as a result of the FED's guidance and strengthening of the dollar, perhaps an FX play that could wobble the potential for America. Least we note forget, the Yuan RMB is "almost" a dollar, commodities, goods, services often represented in USD terms.
With misguided expectations, the ramifications will have
wider implications than are being felt in the aluminium sector, steel, plastic goods space etc...etc...The Chinese are now entering the market with oversupply of
semi-processed and finished goods. Shipping rates anyone?
With Freeport-McMoRan guiding on the requirements of $1B of
cash required, it would be rude not to consider the fact they need more than
that paltry $1B suggested. The balance sheet by EMC estimates is near $21.2B
Debt and limited cash (estimates: $340M).
FCX debt is simply unsustainable in the current commodities
cycle, especially as Plains Exploration was more prudently called "Pains
Exploration." FCX needs around $2.5B and the market should be aware $1B is
only a temporary measure, whereas something more prudent would be to raise near
$2.5-4B to enable the finalisation of capital commitments on projects and give
sensible space and time to a restructuring.
FCX could even utilise FQM's
excuse for a capital raising that was on the basis of "a stronger
copper market following a period of weakness"? (EMC: FQM 30 July 2015). Maybe even throw in a bone or two about consensus on WTI
being circa $59/bbl in 2016 to tempt those believers and copper at $3.50/lb by year end...
If one was leveraged a la Vedanta (VED) or Freeport-McMoRan
(FCX) the outlook isn't great. Vedanta are trying to raid the Cairn
India's cash pile. This is insufficient, allowing for all their operations
(capex needs) and now zinc suffering with a 10% drop since their announcement that they were rather "upbeat on." EMC: VED (31st July 2015) and FQM's Bitter Sweet Pill
(EMC: FQM).
Will FCX have to offer a large discount or motivate the stock, the latter is more unlikely than the former. Although FCX shareholders appeared to have celebrated FCX needing $1b when it's rather like putting a band aid on a share bite.
We had a day of comedy yesterday. There was a celebratory notice by Vedanta commencing iron ore operations at Codli in
Sanguem Taluka in Goa with 3.1m/t's hitting the market. Are we missing something? Perhaps the get out of jail free card is the terminology "The Company is likely to recommence operations from August 10, 2015." Surely an announcement on the same day and being 5 hours ahead of the UK reduces the chances of operations not commencing? Perhaps that's being too picky, after all, a quick trawl here and grammar and perfection don't exactly go hand in hand.
So with a global surplus, what more did
the commodities sector want than more than another 3.1mt's of iron ore with a potential 2M further to come? Hip Hip Hooray, what next African Minerals (AMI) making a return? Although with humour, one wonders if that was the only commodity to suffer due to a few accounting issues at AMI. This dropped in the inbox yesterday, Theophilus Gbenda Blog (2012), surely not but the infrastructure deal does give food for thought.
Results out for Hargreaves Services (HSP) that will need more time. See: Closing HSP short Positions. If there were some decent results in the coal space, these were them.
Fraser
