Morning Morning: Petra Diamonds (PDL), the Fed Simply, Gauntlets to the commodity sector & implications for Glencore Ref: Jiangxi Copper (HK: 0358)

Good Morning,

As a recap to yesterday, Petra Diamonds (PDL) updated on Q1. The diamond sector in the short and mid-term isn't necessarily the place to be increasing ones leverage - Net debt at Period end of $306.2 million (30 June 2015: $171.7 million). 

Considering the updates from De Beers (via AAL) and Alrosa, Petra's were as expected. The lack of a tender in the quarter hasn't assisted Petra - whom acknowledge prices have got weaker (down 8.8%). 

As a poignant reminder, the significance of the Antwerp Diamond Bank should be noted (See EMC: January 2015 Antwerp Diamond Bank. Not only was this underestimated by the market, but evidence is suggesting financing has tightened further. 

Petra should accept the headwinds affecting their buyers' financing and the ramp up of production in the diamond space. Prudently the majors have reduced their expectations on the sightholders. As a result, Petra with their ramp up, are likely to be a price-taker to meet their cashflow demands.

With inventories up, prices down and the delay in tender, Petra need some luck to achieve targets. It’s important to acknowledge why Petra didn't have a tender in Q1? The EMC view is that due to the car wreck of sales by the majors in Q1, Petra delayed their tender. A reminder being that Petra have a standard sales cycle. Whereby they hold one tender in Q1 and two tenders Q2. Will there be three in Q2? For those searching out last year’s Q1 for comparatives, here (Q1), where they confirm the sales cycle as well.

In the absence of an improvement in the financing or balancing of supply and demand, prices are unlikely to recover. Expect some cost cutting initiatives to those miners that ignored the realities of the Antwerp Diamond Bank (ADB) closing. Is there any reason to hold a diamond producer? Certainly not without some glimmers of hope or telescopic belief in a pricing recovery or M&A.

The Federal Reserve threw the gauntlet to commodities sector (in particular) and the markets yesterday. There will now be some revisions across the sector as the outlook becomes more challenging. Somewhat after the horse has bolted but all the same, if the global economy doesn't wobble in and employment numbers stay circa 160K+ the FED is raising rates. 

Fortescue Metals Group (FMG) are buying back debt cheap at between 14-19% discounts. China's Jiangxi Copper (HK: 0358) (China’s main producer/smelter) reported a  -59.79% drop in third quarter net profit. 

Jiangxi's numbers were in-line with the expectations here, but "the read across to Glencore" should be acknowledged. Having recently signed an agreement with state owned China Minmetals Corporation (Las Bambas for those that need reminding), it's an acknowledgement of how tough the market place is. 

As a result of the FED indications, the iron ore producers are going to benefit at an OPEX level. "The four" (Rio, BHP, FMG & Roy Hill) will be expecting an Aussie interest rate reduction  to improve their bottom line. Although it won't offset all the fall in iron prices, especially with current Chinese steel dump and associated prices.

Its only when reading KAZ Minerals Q3 & IMS that one gets a realisation of how bad things are going to get when they results are "in-line." KAZ have been lucky thanks to the devaluation of the Kazakhstani Tenge. The management have been prudent to avoiding giving guidance on cash costs in the IMS Q3 - Thankfully for them they have cash, debt is up. One can obviously look forward to updates on Koksay scoping, along with the production for Bozshakol and Aktogay in H1 2016. 

Finally, we have OPAY come out with some historic personal data breaches - being out at a loss on this, it was not unwelcome. 

Atb Fraser

Morning Mumble: Shooting Fish in a Barrel (FED) & Ferrexpo

Good Morning,

Last nights decision making by Janet Yellen was enlightening, but an opportunity to shoot fish in a barrel (trading both indices, FX, caterpillar & Freeport McMoran). Not only was there an acknowledgement of the USD zone but more so, China is now an acknowledged risk. 

The fed considering the relevance of China says a lot. Seeing as basic economics is a level attained here on a regular basis (June 2012), its rude not to consider the implications. 

Whilst America considers the implications globally, China will be attempting to re-base its growth forecasts for a much longer period. Any adjustments made by America will be countered by China until they have evidenced growth and control on the economic slowdown occurring.

The scale of the Chinese situation should not be underestimated in anyway. We know first-hand that the economy is under a number of fiscal pressures. Regional Government/Local Authorities laden with debt, struggling with a decline in revenues, are now fearful of being indicted for fraud if they approve major projects. So Beijing, tasked with resolving the issue, not only took back uncommitted budgets, but have returned most of them (not really inspiring confidence.)

Some Analysts are convinced China is under control now - this is merely a knife catching exercise with hopes of some panacea of a stimulus. However, in the absence of a coordinated approach, not only with infrastructure projects but a commitment to sensible investment and deleveraging, one would be wise to not ascribe too much value to it. This of course won't exempt the market being in denial and momentum. It’s more prudent to consider that “China are attempting to gain some control on the situation.”

Having spoken with Li and his travelling compadre whom have become the roving reporters (read as holidaying).  Working shifts in SOE’s (State Owned Enterprises) and larger factories have been adjusted, resulting in reduced working hours (and pay). The SOE’s are more obligated to maintain employment levels, but the knock on effects are not to be ignored.

Capacity at steel mills has not returned to near the magical 85%, but commitments to produce maintain employment levels. No wonder China wants to open SOE invested permitted, another sector requiring gift-aid status.

The PBOC/China have not only been erratic in their economical actions but limited to the depth. China have prudently loosened in-bound/inward investment rules but its i) not that enticing and ii) simply not enough. The time for China is running out, not only due to corporate leverage being unsustainable whilst deflation occurs, but those with “commitments” being forced to unwind exacerbating the situation across sectors.

Automobile sales are under pressure, with enticements at greater discounts and margins being eroded, how much is priced into our Germanic listed manufacturers’ forecasts? With contradictions of house sales growth in 50 ish% percent of the statistics, when will they deduct off enticements including the costs of mortgages being paid for X months, if you purchase now?

So, like the rest of the world, the Fed is simply forced into waiting to see what China does. Infrastructure on its own is simply not enough. The dollar trading zone is significantly bigger than the economy, and the Fed have woken up to the Chinese and Global Emerging Markets implications.

The US, whatever the trade levels suggests, is much more exposed than the simplicity of trade balances. Thus, any changes in policy without assessing the damage of the US decline in exports, reduction in Chinese growth and depreciation would be flawed. 

Despite the view that companies are simply investing badly evidenced by debt for dividends and share buybacks. Perhaps the QE crack cannot be weaned off the economies and companies that are utilising the low borrowing costs to sustain models that are built on quick sand (leverage). 

Not only does China impact on the dollar in buying a significant percentage of global commodities, but more so, has in direct link with a significant number of economies that also trade with America. Ignoring the situation would be to the detriment of America.

For consideration is Voldemort Zone that's been pinged across a number of times, over recent days. Rather good summary of the situation. The consideration goes a little further, where, if China continues to under-perform as current trading would suggest, then can the US ever attain their 3.5% interest rate projections. Perhaps its a signal for a series off zones a la underground?

Everything Janet Yellen discussed yesterday (Fed linkto press conference) sounded more and more like Japan. Save for China committing to a stimulus, there's limited growth and non-existent inflation. More so, one has a suspicion inflation is but a mere thing of the past in western economies. 

Allowing for the FED projections over the longer term, its going to create a productivity and earnings drive/exodus across every sector. With limited inflation, save for innovation, companies will have a hard look at out-sourcing and GEM manufacturing. China's cost base has increased significantly both on fixed costs and leverage. They are going to remain non-competitive in a number of sectors and without adjustments in their currency and cost base - something China has no aversion of doing.

Ferrexpo (FXPO) come out an inform us today their main bank is insolvent. Is this a risk consideration for Globo (GBO)?  FXPO had $174M with F&C, whom are also their largest shareholder. 

Does anyone smell a distressed seller in the market soon? What about FXPO's ability to make payments? We are led to believe the figure could be reduced a fraction by the timing of payments, circa $15M. Further digging is required, but with suggestions this morning that its wise to right off all the $174M, that would be a sensible place to start. According the National Bank of Ukraine, “According to the National Bank, the lion's share of bank assets was associated with lending business of the shareholder.”

It would appear “a shareholder has failed to fulfill its written commitments to support bank liquidity and standards within the agreed terms, including not reached the recommended indicators of reserve requirements of the regulatory capital adequacy and liquidity.” One assumes this is Kostyantin Zhevago, CEO of ermmm FXPO?

Atb Fraser

No proof-reading unless Indiana is about!

PM Bolt-On: A Chinese missive, from Dudley, through the GDP, to Venezuela and "can you" because Icahn't.

Good Evening,

A gaunt through the week’s events, having only been back at it a day or three and travelling, its taking some time to get back into it. Does anyone else find it concerning how predictable central banks are becoming in their actions for short-term praise? Rather than longer-term policy benefits? Not exactly exuding confidence in the markets, but for the populist investors it’s a license to print money.

Someone got up one morning and realised the dollar impacts on the global economy, l’économie de base/basic economics. Only two days before, William Dudley, head of the New York branch Fed, told a conference that it was “important not to overreact to short-term market developments”.

The poignant part being Dudley accepted that the argument for tightening monetary policy as early as September seemed “less compelling to me than it was a few weeks ago.” (FT :). Fed’s William Dudley cools talk of September lift-off.

With a sense of relief felt by the markets, we had good news for the US economy, with revisions of the GDP to 3.7% (annual equivalent), up from 2.3%. Those in the know are now are campaigning for a rate rise, having only a few days previously been remonstrating for prudence on interest rates are now (WSJ). Just don’t tell the bond king Jeffrey Gundlach.

We have had Venezuela cryingfoul and inferring the need for an emergency OPEC meeting.  With some suggesting American production was going to fall (and inventories), oil about turned and rocketed. The concern being this didn't catch many (if anyone) off-guard, unless of course you’re a trader snoozing at your desk at 4am (GMT) and making significant profit, surely this never happened. 

Was this bottom (bounce) the obvious call for every-man and his dog? It certainly looks that way with all the various commentators agreeing. Momentum and sentiment set the volume alight with a mighty bounce. With the issues of liquidity in China and the realities of emerging markets, it’s likely the markets won’t deny the realities for forever.

All one needs now is further liquidity crisis to impact on the global bounce. What say you for further Chinese market woes, with the suspended bankrupts coming out of the closet or better still, “a large failure?” This will be evident not only in the capital outflows but productivity.

To continue the theme, China'srichest man says its time for government to abandon high growth rate 'fantasy'. Irony really, what with a company built on leverage and the need for growth? With international deals getting bigger, it’s starting to signify a complete cooling in the Chinese domestic market (ex-growth or limited and suspicions of a recession). With Wanda buying the Ironman Triathlonowner for 585 million pounds (if you include the debt), it’s a deepening sign of what is to come for China.

With memories of Japan in the 80/90’s, we have had FOSUN on the acquisition trial with Club Méditerranée (FT)  and partnership with Thomas Cook (Reuters). Remember this is on the back of acquiring stakes in Cirque du Soleil and Jeff Robinov’s Studio 8, plus Meadowbrook  and more (UK Property's JVs to come). Anyone for the high top?

Latterly, we have Albert Edwards via PM@FT, with a suggestion we have a 99.7 per cent probability that we are now in a bear market.  Worse, the professor of economics, Christopher Balding wanting to hug the Chinese, perhaps in sympathy.  What of the Chinese taxation revenues in decline?

There’s suspicions that China isn't perhaps telling all, with a focus on consumption. Whether a valid theme, it certainly questions any significant bounce. Especially in those economies more reliant on commodity sales. Or perhaps one should rephrase, were reliant, leaving shortfalls in their budgets. 

Certain countries are now ‘attempting’ to entice those with wealth to come and buy into the bigger picture, of course without trace. Surely not, the DoJ et al, do need a new dog to kick for compensation as banks have rolled over and coughed up the moular. Whatever next? Dubai property crash?

In the US markets we have Icahn acquiring a stake in Freeport-McMoRan (NYSE: FCX). One of the favoured leveraged miners shorts of 2010-15 (to be exact 4 years in total), now coming back with a decent cost cutting exercise to enable the company to keep the lights on (contrary to EMC thoughts).

Whether one should read too much into Icahn’s8.46% stake is open for debate. Icahn’s ability to buy value in commodities is questionable, as evidenced by their ventures into Chesapeake with 10.98%. It’s not a great call in the short-to-mid-term.  Over the longer-term, there’s a reduced risk of failure in FCX thanks to cost cutting, but why buy into a slump until the variables have played out?

Freeport-McMoRan (NYSE: FCX), have completed the unthinkable in avoiding the “majority” of a fundraiser in excess of the announced $1Billion. Not only does it indicate the bottom of the “trough in their cash demands” as Morgan Stanley seem to think, but give some hope for the future.

If commodity prices appreciate from here, FCX have done just enough to avoid significant issues with their announcement -  spending cuts in response to “Market Conditions”  read in conjunction with their previous Oil & Gas  capital budget commitments.  

What pantomime will next few weeks bring? A predictable element of about turns, anticipated volatility with the big boys "torching each other on a daily basis." Protection anyone??? 

In the current climate, it would be wise to consider business models, especially those “bidding” on certain contracts at the moment. Where the needs of winning a bid should not be at the expense of profitability. We shall be hearing about this later in the year…rest assured, even those larger entities with “currently” good balance sheets.  

Finally, it would be rude not to finish off with a validation, even for "foster carers" of the stock-market, JD Capital are exiting capital southbound!

Atb Fraser