Morning Mumble: What a year! How do you spell Christmas?

Good Morning,

It's been a pleasure and thank you for the many words/thoughts. 

We shall endeavour to post some musings over the Christmas break, what with various items taking priority EMC has taken a back seat. We had our first 'proper' scoop in the western hemisphere the other day, a pleasure and 24hrs before the rest!

The lack of reporting on the "convention" of base metal traders meeting this weekend to discuss...purchasing more metals. One might also need to consider that some out of the money traders will look to take the losses, but at least some Christmas cheers for those long. Expect some adjustments in stockpiling and the reporting of such numbers. (EMC: China Base Metals)

Here's hoping everyone enjoys the festive break and gets some 'R&R.' Li is heading to Macau this year, obviously gambling and the like; who'd have thought it!?! We should feel privileged some declined such opportunity in Macau and are UK bound. No doubt laden with anything duty free like thinking they've got a 'real bargain.'

Yesterday was a proverbial bath with Oxus's failure in their arbitration outcome. The mystery is how Richard Shead kept the RNS professional in light of what some consider a failing in a legal process. 

There will be Oxus update in the new year, but don't expect too much. The monies awarded should cover Calunius's costs, albeit little left over. One would be very surprised if there was an appeal save of course for a curve ball of showing complete incompetence by one of the panel. Is that possible? 

This was not a case of quantum but of reliability of the facts...something that an entity may be able to argue quite cleanly. Fit for practice springs to mind....albeit taking no shine off a stellar year as prudence always suggests taking profits along the way, the beauty of these types of arb type cases. 

We shall await the "trading updates in January!" One cannot help but wonder what the level of inventory in the shops implies for their bottom line. We note the contributors to EMC retail opportunistic survey finding healthy levels in most stores with very few non-food items being sold out (The largest number of contributors we've had - thank you!). 

Does Christmas now start with an E(commerce)?

All the best and Merry Christmas, Fraser

Morning Mumble: Glencore (of course), Countrywide (CWD) and Vedanta + various items needing further analysis.

Good Morning,

With so much going on, there’s no apologies. Admittedly the messages enquiring after my well-being were somewhat amusing. We’ve had oil supply contracting thus the price appreciating - as a result of Brazilian strikes and Libyan woes. As mentioned a few months ago, oil is about the money. With fears of floods in Texas and the like expect, the futures to rally – Hooray for another swallow.

There’s been various discussions regarding commodities trading, some better written than others, Banks face fresh pressure on physical commodities (FT). Positively for Glencore they've been dealing with it sooner rather than later, the implications for their available finance will no doubt pan out in due course. 

Leading in to what was announced yesterday in the US, Streaming Transaction - Antamina with Silver Wheaton. Quite simply, compared to Teck Corporation (TSE/TSX: TCK.B) it’s a scorching deal. No doubt structured tax efficiently as well. Will need to revisit this to do a comparative, but on the face of it the 20% of spot price for a reduction of the upfront monies is a winner for Glencore. The also hint/imply there’s another one in due course. 

With limited time, the Q3 and corporate update by Glencore is pretty much as expected, Debt is starting to be within sensible levels. Perhaps the webcast all those months back should be revisited for a body language lesson, not only in presenting but the reaction to “risks” that were rightly questioned. 

With what Silver Wheaton and Franco Nevada (both listed) are paying, why companies are not rocking up to their door I’ll never know (scuse the pun). What if Silver Wheaton’s tax position is challenged? Not only do we need to consider the implications on the commodity prices they operate in and the flexibility of accepting terms, but what are their investors’ expectations. They are now under the gaze of the EMC followers. 

We had countrywide confirm everything the market knew about Foxtons today, with a profits warning disguised as a trading update. Simply the recovery wasn’t there as they expected and with guidance lower. With this in mind, there’s no reason to buy the stock above 360 pence or hold it! Unless you’re in denial…surely not as a reader of here!!

Vedanta interim results were dire in comparison to Vedanta Limited’s update on the 27 October. Time permitting, we’ll perhaps return this evening for GLEN and VED. Glencore may be out of the woods, but Vedanta need an injection of Cairn Energy cash. Their model without the conclusion of the Cairn India deal has vapours of a debt for equity deal, which perhaps won’t be so kind to equity holders. 

The market really does need to consider the issues being seen across Aluminium, Steel and Iron Ore. Mentioned here awhile back, the subsidies relating to energy pricing and employment are tipping the scales to one of outright 150% anti-dumping taxation to avoid world domination and carnage of localised industries. We recently read that Cliff Natural Resources was looking for their toys outside the proverbial pram with regard to the actions of the Chinese. 

The final thought goes to a strong dollar, copper, and the iron ore price that has a smell of napalm about it, $46.5-$47/t. With China’s GDP guidance now being acknowledged as a realistic 4%, (A win for EMC), we’ll consider the implications over coffee. 

Atb Fraser

Morning Mumble: ASOS - with market muppetry - Genel (GENL) its looking like a turn around but two swallows don't make a summer & VW - the realities + putting Presidential hopefuls media campaigns to shame.

Good Morning, in the morning as well!

Very brief so kept it to bullets...hopefully. 

• ASOS - (ASC) Final Results were out today and they were ahead of EMC expectations - bought into the sell-off. Consideration is, that although they don't justify PE's of a stellar proportions, its common-sense to consider the positives. 

• ASC have finally realised the need for brand loyalty in the online market space with their roll out of ASOS Rewards loyalty scheme. Its negative on margins (50 bps) but does encourage repeat business. With sales likely to be around 17-20% ahead for the year. Over to ASOS:

Following a successful trial, we will launch our new ASOS Rewards loyalty scheme during the next six months, initially for our UK customers. This rewards programme allows customers to build up points on purchases, which become convertible into vouchers for use on our platforms. In addition to this, customers will unlock a wide variety of other rewards such as birthday discounts, free next day deliveries and exclusive content.  

• Genel Energy - (GENL) gave a trading & operational update that was about the market. Swiftly followed by the Receipt of payment for KRI oil exports from Taq Taq field from the Kurdistan Regional Government (KRG). The "if" factor is the need for regular payments to be maintained and the market has had many a false dawn. The costs are being managed and with the current level of KRG payments at least interest payments and debt service is more than likely. 

• GENL - Consideration should be given to the guidance that is implying that supply was shut in until such time as the KRG put up. Time will tell on the latter, but certainly more positive than at the half yearly. 

• Volkswagen AG (ETR: VOW) recent share price support will be tested as news becomes apparent. Reuters - Edmunds.com and associated piece is telling, now consider the implications of the downside in Europe and potential further pressure in China. 

• VW have been very clever in the main - dealing with the crisis in text book crisis management. Credit where credit is due, they've kept the media and associated press articles focused on the marque VW, without the domino effect crashing through Audi, Seat and Skoda. Although, there may be some perception/overlap it will be limited. 

• Research (EMC's - we fund our own so reference it) - The opportunity based research on peoples’ perceptions of car manufacturers suggests that there is a devaluation in the VW marque - Passat/Jetta/Not Polo/Golf and Gold Estate and Sharan with a lesser degree to the Beetle. The irony being the Touareg, where owners 'didn't tend to worry' (we've avoided using the words, do not care).

• The impact and terminology used was more positive on the 3 other marques in the VW stable namely Audi, Seat and Skoda. Although this may change as lawyers grasp the media to force a settlement rather than have a showdown in the court room. This is a significant event risk/crisis management for VW. 

• For those that know a Bentley owner, whom we shall call Indiana. When asked about his perception of emissions on cars. Don't expect many donations to Save the Planet or Greenpeace in his name over the next few years! With a suggestion that he never gets to drive his car! As if!!

• Costs regarding the ‘fix’ for the VW Emissions fixing/rigging are likely to be higher than the initial consensus - Triple Pundit runs with - As Recalls of Volkswagen Cars Begin, Costs Could Climb to $40B. Those early share price targets of buy sub €130 will no doubt be under review. We maintain our target for VW - €87.63 (Euros) a share. The damage is yet to be done to perception. Over to VW's media campaign that will no doubt put some presidential hopefuls’ budgets to shame! 

• Rurelec – (RUR) The amount of communications regarding Sterling Trust today is truly staggering. We've had the company down as a jam tomorrow stock since the handling of the International Arbitration and then the spin-out of Independent Power Corporation from Rurelec. 

• Sadly for Sterling Trust lessons of diversification are a little too late. The spin-out/off of IPC contradicted the transaction in the first place. In the absence of further developments that may return a little to shareholders, don't hold out much hope. RUR has been a sell since the international arbitration and does not warrant much other rating bar avoid/high risk punts only. Have IPSA announced similar – one simply cannot be bothered to check.  

• Hochschild - (HOC) new shares hit the market today. With so much leverage, why they only raised the limited amount and didn't elect to shore up the balance sheet is anyone's guess. Perhaps there simply wasn't the appetite for a large fundraiser in the silver space currently?

• Some half decent results for gold miners today, more later once we've found a few additional toes to aide things. Petropavlovsk Plc (POG)’s interim management statement and Polymetal International (POLY)’s Q3 results.

• We’re hearing various bits of gossip regarding Glencore’s Zambia mines - namely Mopani – are GLEN conducting a deal to finance the expansion whilst maintain operations? One suspects not, but any rumours to assist their price won't go unappreciated by the IR department! Perhaps one for the broad-sheets? Anyone up for some Mopani?

• Vale SA – (NYSE: VALE) production report – were described as strong. With records being set in production it’s not good news for the FE (Iron Ore) price. More time needed there.

• Glencore - (GLEN) will be pleased that they "sold" their the Falcondo nickel operations and the Sipilou nickel projects. What with Vale’s nickel production up, Vedanta’s Hindustan Zinc Q2 production announcement hasn't assisted Glencore one bit! What’s the read across to Glencore’s affirmative action? VED need a stronger headwind than just Zinc

• Vale’s Q3 - results here.

Atb Fraser

PM Bolt-On: Was he pushed or did he jump +...FQM & Noble Group (Cap in hand)

Good Evening,

How dare you think it's VW!

It’s rather full on at the moment, for those thinking one twiddles thumbs all day. Thoughts in the morning are limited. It’s around this time I'd kick Li and Ian for their limited input, but hooray, they're working flat out. Hugo's man-flu is in recovery, so almost full-house. 

It was only a few weeks ago we were discussing the conviction of selling short Caterpillar (NYSE: CAT). This has been a focus here for some time, not just because of Mining but Shale and Construction per se. 

When should Caterpillar have updated the market on their outlook? Was the threshold for notifying the market today post a review, or perhaps a month prior to Chris Curfman vice president of Caterpillar's Mining Sales & Support Division's retirement? It’s somewhat immaterial to the outlook but it raises the question of "was he pushed or did he jump?"

Caterpillar et al where stunned when commodities all crashed, and operating costs became all the rage - admittedly the markets attempted to deny this for too longer period of time. This is not hindsight but more a realisation of basic economics. Caterpillar now have to reduce prices, irrespective of their commentary about market share gains. Feel free to catch up with the proverbial sandwich 8-K Report of unscheduled material events or corporate event. 

Points:

1. What are the risks to Caterpillar finance and future planned growth? What inventory levels are they committed to? Are there likely to be stock write-downs in addition to the adjustments for the restructuring.
2. With limited focus on new mine development, plus machines being utilised more efficiently - what are the implications on new sales? Part margins? Service agreements?  
3. With other companies attempting to maintain space in a more competitive market, Caterpillar's premium is at risk. Margins are key...over to the Japanese/China. The latter in terms of machinery has been totally overlooked! 
4. Can Caterpillar reduce costs quick enough? Caterpillar's savings in operating costs have a long lead time and not without significant cost. 
5. With new machinery on a cycle, Caterpillar may find the Aldi and Lidl scenario being played out. Over to heavy machinery manufacturers with better FX outlook (weakening). 

What's a few days? It was meant to be commented on the other day, but FQM holdings in company. Now one could be forgiven for the odd day, but 232 days after passing the threshold to report? 

Some VW: Some comments on EMC: VW that's worth noting (comments sections). More soon on Chinese liquidity, global inventories and borrowing as a percentage of company assets. 

Finally, we have Noble Group (SGX: N21) where rumours are rife that they sounding out investors for a Glencore type rights issue. Noble Group are allegedly cap in hand for $750-$1B. Would you? Not on your Nelly! In the absence of being able to roll-up their debt, expect some clever enticements for investors. (Glencore 2.0). 

Common-sense caveats apply about trading gossip...although with their balance sheet looking like a train wreck and other "issues", admittedly disputed, one suspects it’s got some plausibility to it. 

Atb Fraser (Tired so if the spelling/grammar police are out, feel free to correct.)

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

Good Evening, 

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

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

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

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

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

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

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

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

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

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

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

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

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

Atb Fraser

Morning Mumble: QE...the amateur simpletons view & WRN...+++Rio, BLT, Monitise, Fever tree and Euroscepticism.

Good Morning,

Its coming and the bets are on but with the Swiss National Banks (SNB) decisive actions on Friday the market is looking for something a bit more charged. Putin will be praying for a significant cold spell, perhaps even planning a late 2015 re-entry where he can obtain leverage. QE is likely to assist this conversely promoting inflows of investment (where possible). The markets are getting hooked on drama rather than consistent and solid performance (read as also investing in crap!) with common-sense being applied. 

Unlike America where the culture may have ranges (diversity) but similar agendas, the Eurozone does not have this luxury with contrasting voters and more so agendas of protectionism (read as Germany and France albeit not a united front). 

Without pretending nor even attempting to be all things Euro or Macro, it’s looking more and more like an inverted pyramid with Germany propping up the fragile economies of the Eurozone. When considering the outcome, the markets will be cooking on gas again until they're taken off the market welfare assistance (QE). The real risk is the incapable governments utilising excuses to justify their spending rather than address their budgetary needs quicker to re-correct the fundamental issues within their economies.

The sticking point is who will be responsible for each member states debt. Its ironic that in alleged harmony the wealthier members do not want to share the load (read as take the load). So whilst the finer print is muddled through one can't help but wonder if the EU is in for some re-branding, to European Disunion. 

The conflict of interest is disliking all things EU, with yet another tier of bureaucracy where if the costs of the EU were stripped out it would be a long-term form of QE anyway. For every country contributing there's a net benefit to 2 by their membership in the EU, its a wonder its lasted this long. The EU may or may not have a determination of strength in due course if QE does not work. 

The issues of high level unemployment (Circa 10%+*) are unlikely to be improved by the EU's bond purchases as greater focus on the issues within each country are needed. France has yet again (for the third time) asked for an extension to deal with its deficit. The French are notoriously difficult to deal with when they're doing something or not...(yes thought was put into the phrase). So in the absence of economical stimulus with a focused approached its unlikely to be as effective bar a few KPI's  (Key point indicators). These are likely to be superficial living standards and welfare claimants measures (distorted by in work benefits).

In the markets today, we had Worthington Group (WRN) (still suspended pending a prospectus which should have been out by now) update on CPS Energy Resources. The question should be, with the information (surely) to hand why was it not specifically excluded in in the Company's calculation of consolidated assets, profits, sectors or geographic locations announced on the 9th January 2015. After all the deal was announced back in October 2014. 

Is this one for the regulatory team of AIM...even as far as the FCA. The company made no exemption for CPS in their calculation of the net asset value for mining, oil and gas within the announcement on the Friday 09 January, 2015. Today, in the RNS only four areas are now included: property, litigation claims, new economy and emerging markets, yet 13 days previously it includes oil, gas or energy, oops and also mining now! If you hold the stock it would be wise to call an EGM and force disclosure of everything including the prospectus. Actually why bother, if you own this stock don't read on, close the page!

Copper woke up this morning, I suspect with some draw from gold and the dollar weakening. Iron ore minnows were getting a kicking, whereas Rio and BLT shrugged off the obvious and went on an easy trading run. In the absence of traders and pension funds would Rio and BLT be circa 2,500 and 985 pence respectively? Although there’s starting to be a good argument for near bottom of cycle buying that I disagree with. Rio's ramp up and inventory sales support their thesis on expansion, will it continue?!

BLT having further issues with Manganese as Roger Bade pointed out, prices down circa 10%. Over to the Atlas Iron (ASX: AGO) whom had opportunity to get out considerably higher thanks to the DCE (Dalian Commodity Exchange) extension in trading hours. Gold and silver both stabilising and awaiting the next indicators its over to ECB QE. Oil likely to benefit as well with the steady appreciation continuing, appreciating to circa $55/bbl give of take 3% drift between WTI and Brent.

AB Foods (ABF) finally giving in to common-sense with significant selling. Does it really take that long to digest the results? EMC view January 15, 2015, who'd have thought it and time to quote myself: "With little upside on the current SP, it’s wise not to carry profits much past the news. Under review for the short, now January 2015 has arrived." Will a DRIP (Dividend re-investment plan) assist? I doubt it...

Hulme Capital had a few issues this morning with the 'wording', for which having wanted to find out more had some diplomatic clarification from two companies in RNS REM & UKOG after this morning's Dismissal of Adviser REM & UKOG. By sheer coincidence both with a related party associated to both companies, Mr David Lenigas.

Monitise's (MONI) trading update & initiation of strategic review, informs us its up for sale with the price reacting in the right manner. With UK Mail (UKM) coming out the reporting starting blocks 10 days ago Royal Mail (RMG) Nine Months Trading Update had little in the way of surprises and was the long to the news. With little commentary (in fact none) on fuel cost benefits, RMG have missed an opportunity to promote their own stock, improving margins and energy costs reducing. 

Limited time for some, including Tullow (TLW) and Gulf Keystone (GKP) but to my left eye Malcy has saved myself via his blog today. Fever Tree (FEVR) pre-close update come with no surprises from a quality label. FEVR are the Carlsberg of tonics in my view! Having been drinking FEVR tonic for a good time, its about the only additive to gin I can differentiate in taste save for Hendricks Gin and Adnams Copperhouse Gin after one.

Atb Fraser

*Unemployment stats: Greece 25%, Spain 23%, Cyprus 16%, Croatia 16%, Portugal 14%, Italy 13%, Slovakia 12%, Bulgaria 11%, Ireland 10%, Latvia 10%, France 10%....all 17 others sub 10% with an average of circa 10%. 

Evening Bolt on: International Mining & Infrastructure Corporation plc (AIM: IMIC) & Tesco (the final update) a double dose of!

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.

Tesco: Buy

One thing that Dave Lewis has just been talking about is the category reset. Basically done one category so far (other than Christmas), which is Home Care. Sounds like they have reduced SKU's by 31% and seen better volumes and lower prices. He then gave the example of toilet paper, where the SKU's were down 44%, but pricing to consumers were down 11%, so volumes well up. Now the manufacturers will have made far more money out of that (or the big players that won) as they have got rid of hi/low pricing, high/low stock levels and so production can be smooth, consistent and ultimately profitable. This will happen in more categories, so big brands should win. Sensible way to go forward, especially when you have c.29% of the market (they have the scale to deliver it).

Shares have had a good run due to no rights issue, many investors were hoping to get some cheap shares on a rights. We certainly can't rule out a rights at some time, but we suspect Tesco will do it from a position of strength, when they have sorted a good chunk of the balance sheet issues out (maybe this time next year). We expect the shares to follow through a little more in the short term, but we must remember that we haven't seen much regarding the profits yet. At some point in February the Group will need to lay out their profits forecasts, all we know is that they will be no more than £1.4bn, we don't know how much less of this number it will be. Write-offs will come through, but underlying profits will need to show the level of investment that Tesco has done to achieve the improving sales performance, we would expect the new Tesco management to throw in as much costs as possible in these historic numbers. Consequently we could see the shares see a small sell-off over the next few days, but fundamentally we still like the medium term story here. Getting the performance back to what it should be will give huge upside in the shares over the next 18 months. We remain a buyer.

Tesco: Buy

We were impressed with the presentation that Tesco has just delivered, not least because it shows a complete change in the culture of how the management are looking at the business. Moving the Head Offices away from their traditional home also signals that the new management team want to be involved far more in the underlying business than they have in the past few years. Here are some of the positives and negatives that we believe came through.

Positives:

One thing that Dave Lewis has just been talking about is the category reset. Basically done one category so far (other than Christmas), which is Home Care. Sounds like they have reduced SKU’s by 31% and seen better volumes and lower prices. He then gave the example of toilet paper, where the SKU’s were down 44%, but pricing to consumers were down 11%, so volumes well up. Now the manufacturers will have made far more money out of that (or the big players that won) as they have got rid of hi/low pricing, high/low stock levels and so production can be smooth, consistent and ultimately profitable. This will happen in more categories, so big brands should win. Sensible way to go forward, especially when you have c.29% of the market and the scale to deliver the potential positives that should come through.

The management has finally realised that you need to get sales growth to deliver shareholder benefits. We were encouraged by how Dave Lewis continually stressed how if they realise internal funds from either cost savings or better execution on the sales line then this would be invested back into price to grow the sales line. Margins therefore will be subdued for the next few years, but if you start gaining significant market share as you use your already strong position to get great prices on brands and own-label, then as time moves on the competition will struggle to invest to keep up. Ultimately this was a simple expression of offering the consumer what they want when they want it, this could make life much tougher for Discounters as they do offer value, but the range is very limited and so maybe they don’t offer consumers always what they want.

The most important comment that was made by Dave Lewis was when explaining the £1.4bn forecast which was put into the market on Dec 9^th. Here he made it clear that this would be the number when you take into account what had been expensed by that date. It was clear that they have therefore funded some Christmas and New Year investments via internally generated funds. The Company wants this to become the key driver in the business, if it does then they will be gaining share and hurting the competition, then many of the other worries regarding cash flow and debt will dissipate pretty quickly.

Finally, regarding debt and the worries over this issue for Tesco, they reminded analysts that they had issued £5bn of debt just after the new CFO arrived in October, so there is no immediate pressure on the balance sheet. We suspect this is why the shares have risen so much on today’s news, but we are still encouraged by all of the other fundamental changes that the  new team has started to make.

Negatives:

Debt is still high, though there is no immediate issue to repay this debt the short term cash outflow (c.£2.3bn) doesn’t make good reading. With lease commitments high, a Pension deficit and underlying debt, they do need to make sure that the underlying business is being run properly so that they can fund the business from that cash flow. Asset sales though can now be done at a time when it suits Tesco rather than the markets.

No final dividend isn’t great either. Here the comments seem to suggest that they will think about paying a dividend once they have the right investment grade, so that doesn’t look great for the short to medium term as it will clearly take time to repair the balance sheet.

We guess there will be some questions as to whether seeing no margin growth and just focussing on what is good for consumers is good for shareholders. Undoubtedly yes. If consumers start to come back to Tesco then cash flow should turn positive quickly, this will allow Tesco to sell assets at better levels, and maybe even have a rights issue on their terms rather than just having one as a necessity to reduce debt. Getting back into this virtuous circle is what investors want and should allow the shares to recover. Tesco has started turning this tanker round. We remain a buyer.

With limited time to highlight items above, thanks to Duncan for some more in depth thoughts.Even

Rare earths and China’s self-correcting folly might be a tad premature with export restriction in the form of permitting rather than quotas I hope to return to this REM, REE and Rare Earths item. 

Tomorrow due to meetings and a few items outstanding it'll be touch and go but it would be rude not to consider the pricing out to 2016 giving an idea what the market thinks for 62% FE. 

Atb Fraser