Morning Mumble: Kumba Iron Ore: What's $200M between friends (AMSA), India's restrictive practices? VED, Rhino Resources, Chapter 11 (NYSE: ANR) & The Market Vectors Coal ETF (NYSE:KOL) Whoops! + Fresnillo! & SXX Good News!

Good Morning,

We knew Kumba Iron Ore (JSE: KIO) had difficulties. It appears ArcelorMittal South Africa (AMSA) have won the spat with Kumba over the 20% Sishen, see: EMC: Kumba + Sishen. Just not how it was expected, but they've won conversely/perversely. They did something very shrewd, they are now simply not paying a premium for Kumba's ore any more. What’s $200M of revenue between friends?

The market should be appalled with itself for reacting so slowly to the pricing assumptions of AMSA. Kumba has relied upon a sales agreement with AMSA for near 12 years, whereby 6.5MT was contracted via a supply agreement. Last year’s contract was worth just over $500M to Kumba. Unfortunately, the supply agreement does not appear to be mutually beneficial anymore, and perhaps never will be again. AMSA can simply import iron ore at near 60% less than the price ($80/t EMC assumptions) that they had been paying to Kumba. 

This contractual issue/supply agreement has a number of impacts. Not only does the profit on the supply contact equate to almost all the entire planned CAPEX for Kumba, but more so, this revenue supports the operations at Kumba's Northern Cape operations. With the contract value, assuming Kumba roll-over, being worth near $300M compared to the previous $500+M. essentially at a loss when factoring in an all in cost basis for Kumba.

One suspects the contract negotiations were at an advanced stage when a leak appeared in how AMSA was strong arming Kumba (tut tut that’s just naughty!). As mentioned previously, it's a price setters market (remember this). The Chinese wielded that axe near two years ago.

Kumba have some very difficult choices to make including cuts and/or pricing in respect of AMSA. It’s likely to be far worse for Kumba than it is for AMSA and Anglo America (AAL) (majority shareholder in Kumba). AAL may have the opportunity to fill the void, so perhaps are offering AMSA some attractive terms. AMSA’s location near Saldanha Bay could not be better for them. One analysts suggest AMSA may be tempted by Minas Rio supply.

Additionally, AMSA’s strong arm approach is likely to be punishing, as they are under significant pressure by a global oversupply of steel. If there are no Government protectionary measures put in place soon, not only in South African but India, steel producers will (not could) be forced out of business by cheap Chinese imports. Expect news on import quotas or import levies in due course. Evidenced by the aluminium prices producers in India are already suffering from because of a slump in prices and surge in cheap imports. (BALCO/Vedanta)

With a market capitalisation of $2.6B  ($1:ZAR12.64). Would you be long? There's more woes to come as Kumba’s LOM's are reducing as a result of a change in operational focus. CAPEX under significant pressure, even if they “maintain the AMSA business for another year.” Unless the global price recovers, Kumba, may not be a casualty but certainly a shadow of its former self. The impact for Exxaro may just be more significant…chequebooks please.

With interest, is the Chairman's Statement from the AGM at Vedanta (VED), where there's an emphasis on "Make in India” leading to a bounce today. There's significant pressure on India relating to their import duties that could be described as restrictive. 

India is changing, examples being the relaxation of cabotage rules (Carriage of cargo between two points within a country by a vessel or vehicle registered in another country), but is likely to put pressure on the national operators and producers in the longer-term.

The Indian Government is being pressed externally to review all levies including, agricultural and consumer goods. Complaints are already lodged with the WTO, examples being the application of the Avian Influenza restrictions. (WTO: Indian Avian Influenza). Worthy of a read to grasp the economic outlook of India is the most recent WTO Trade Policy Review: India (2 and 4 June 2015).

Some very good news for Sirius Minerals (SXX) today, with the publication of their corn and soybean crop study . The size of both these markets is material. Potash producers, sit up and take note. With no reason to hold this stock currently, one has to factor in the viability of the polyhalite being a tempting factor. Good news to assist the management in their fundraising.

Can Glencore's woes get any worse? We'll let those more inclined to see what the impairment should be on their thermal coal operations. However, their miners may actually assist the price with planned strikes etc... South African mine union threatens legal action against Glencore’s job cut plans. Remember, Anglo impaired their Australian Coal and Minas Rio assets in July by near $3.5B. Glencore blame ESKOM for the woes, perhaps they should shut some production? FT Glencore South Africa (Optimum Coal Unit). Has GLEN not been so exposed to thermal coal, then they would have fared better? 

One hopes EDF Trading Resources gets there $125M from the sale of their share in the Pennsylvania Land Resources Holding JV with Alpha Natural Resources (NYSE: ANR). ANR has natural gas assets that may pay some of the bills, but they can finalise those valuation with a chapter 11 wrapper. Over to Rhino Resources (RNO) to take a kicking as well...This doesn’t bode well for the The Market Vectors Coal ETF (NYSE:KOL) that's performed like a proverbial dog. 

Limited time to cover Fresnillo (FRES) interim results but worthy of further work, especially around the costs on an all in basis increasing. Sensibly, FRES have reduced the exploration budget for this year in light of more challenging precious metals market conditions. It would be wise not to ignore the benefits of the hedging programme either that benefits the bottom line. CAPEX for the full year 2015 has been tapered back but still expected to be in the region of $570m (vs. previous expectation of c. $700m). Whether they can achieve the 570m target is another matter. 

Atb Fraser

Morning Mumble: ManFlu (Death Bed) & Pedra Diamonds & the fall of silver?

Morning, it would appear I've come down with a dreaded lurgy, perhaps its the shock of doing some work! So today it's the odd meeting via cam and recuperation. Its either a lurgy or detoxing is bad for you or worse still I've been infected by a child! As Ian delightfully put it, perhaps I had my food spiked to stop me shorting. I will avoid the graphics...so I have sent my sick note to Ian and Hugo on the basis they can pick up the slack.

Petra Diamonds (PDL) have come up a blinder with a 232 Carat Diamond. With results due on 18th Sept 2014 (brought forward) it could not be better timed for PDL, albeit one will be hoping for more clarification on the capex increases announced and the sale of the 122.52 Carat Cullinan Blue Diamond with the sale process closing on Friday (12th). Admittedly the CAPEX inscrease should improve recoveries. One expects net debt to increase marginally, to around $135M net. with sufficient headroom in agreed borrowings. I'm betting on around £15m for the Blue Diamond as a sales figures, which would assist with cashflow / give sufficient headroom for the changes in capex spending. 

PDL shares have not recovered since the placement of the Awal Bank where the market has not been assisted by the cost overruns and potential 13.2 million shares are only locked in until the end of October. Will there be another sale, I'm told this is unlikely, but unlikely and definitely not are two different things.

Why anyone would want to hold Coal (knife catching) or Hargreaves Services (HSP) is beyond me, but perhaps I'm missing something. Yes profit up which is surprising but the long term trend has not changed, albeit today's results will offer some support to the company longer term. They're significantly better than I expected, so whilst able to muster the energy, I'm closing my short on the HSP (closed 693.4). With the potential return of capital to shareholders, analysts will see this as a positive and turn somewhat bullish in the Preliminary results for the year ended 31 May 2014 its clear the debt is reducing and with the Disposal and Strategy Update offering some hope to shareholders. With all those involved in April 2013 Placing likely to still be holding they're down give or take 10% currently. 

Whilst writing about Fresnillo (FRES)/Hochschild (HOC) this dropped in my inbox from Roger Bade, "Fresnillo (FRES)/Hochschild (HOC) – SELL It is not clear why Hochschild is holding up better than Fresnillo against a falling silver price; it should be the other way round as Hochschild is more heavily leveraged, having higher costs." I have to concur, but more importantly with HOC so heavily leveraged if the key support of $18.98/oz there's some serious problems for HOC. With an all-in sustaining costs of $17.5/oz its not looking good, more so with debt around $260m by my estimates, there's $350m of 7.875% of Senior Notes to be paid for on top of the sustaining costs! Circa. $27.5M in interest alone (adding around a dollar+ an ounce to costs (fag packet). In the current market its hard to justify a price anywhere above 125 pence.

Before the bookkeepers get all upset, I'm aware HOC acquired International Minerals Corporation in 2013 for $271 million and had CAPEX commitments for Inmaculada of $134 million. However this all needs paying for! Those involved in the placing last year (October ish) would be wise to take their 155+ and disappear if Silver loses its vital support. One hopes HOC are hedged to some degree. The market looked to be awaiting clarity on the $18.98/oz silver support with $18.81 curcial. The bottom feeders will be out in due course...wakey wakey HSBC!

I was trying to keep this a Quindell (QPP) free zone, but QPP inform us of the Court judgement won against Gotham City Research. Its interesting there was no defence from Gotham, as such any information they put in the public domain will have been used to assessed the validity of claims and weighed against those of QPP. Due to no-contest I suspect there will be some venting from the longs, shorts and perhaps even those without a position that like to grandstand. Is Non-Contest a win?

Why would Gotham not dispute the claim having had such conviction for their assessment and assertions? Was it down to not being able to afford a defence? Not recognising the authority of the court? If as Gotham assert it was a clear cut case, a lawyer would not have been required to show the facts. The saga will no doubt carry on for sometime...What I do have concern with is those not being accountable and appear to ignore the legal process. Remember, Gotham will be hard pushed to justify an appeal based on "no response and no defence" despite being aware of the matter. Roll on the next twist in the saga, or perhaps further legal actions as the rumour is.

Back to the sick bed!

Atb Fraser

Edit: please see Morning Mumble: Shorts, Savannah Petroleum & all that glitters is not just gold! Commentary on Petra Diamonds (PDL).

Morning Mumble: I CU all the way...BLT pushing with expansion, and CAML hitting the mark!

Am I missing something with AIM? Admittedly it makes no difference to me, but what are companies doing awarding themselves 4%+ of the company based on??? Tower Resources PLC Grant of Options and Exercise of Warrants Only 75M shares at the placing price from Tower Resources PLC Placing, Acquisition and Preliminary Results from the week before. Where else in the world can you get the ability to buy stock at last week’s prices? It would appear the board room of Tower Resources is one of those places! 

The company wants to be very careful, as its these sort of things shareholders are looking at. Imagine if the placees were told...we've got a brilliant company that needs cash, are you interested? Were they at any stage informed that a significant percentage of those monies would be diluted to award "options." to Directors. The event is so material of the mind-set of the company parties would be wise to flip the stock and go elsewhere.

So back to the markets: BHP Billiton's results  are obviously bullish with the 10% headline increase in production. 

So the race is on to force companies out of the market place not only with Iron Ore but Coal as well, with an additional 2Mt's hitting the market despite it being so dire. The fittest companies will survive, but certainly not those overwhelmed with debt. Copper increasing and I suspect revised guidance upwards is on its way with expansion plans. With RIO and BLT's dividend one would be wise to hold them in a long portfolio. 

BLT's news bodes well for RIO (as they weren't as bullish as BLT in their announcement yesterday). In addition to the news from Mongolia that things are progressing at Rio’s Turquoise Hill Says Parties to Seek OT Funding Extension is the Government finally giving clarity on Royalty, Taxes and the like. Turquoise can then be taken out by Rio, the 1700 workers reemployed and everyone's happy in the bliss that is Oyu Tolgoi. We knew back in March that AMEC were advertising for workers, so one assumes this process is further along than the press realise?

We all must welcome Polypipe (PLP) to the market with Admission to Trading on the London Stock Exchange. Will the founders/PE backers run to the door quickly? A quick look over the market shoulder at the Appliance Online (AO.) share price is positive for me. Will they have to change their name to "Insurance Online?" 

So with Fresnillo and Hochschild's announcing yesterday would you be holding silver stocks long? We have Fresnillo coming out with production inline however its higher cost sector friend Hochschild's results yesterday don't elude to much in the way of any positives nor is there much commentary of the Silver Price down 20% on average over the last 12 months, costs will be key and HOC are now limited in their savings. 

HOC announced in March that their costs were around $18.6 per ounce and that was during a year of "savings/costs focus", with the current silver price not leaving much headroom and after the $27+M annualised interest costs on their Senior Notes, there's little left for shareholders. If you're in profit at HOC, you'd be wise to sell up or switch to FRES with costs around the $5.6 per ounce all in, significantly better than HOC. 

Now who'd have thought Tesco would have been cooking on gas today? Would you have been short going into results final results. Tesco have some relief, but it takes no rocket science to realise the three companies have to transform their pricing perception and offerings in light of significant competition. Asda clearly are winning, albeit all appear to be losing between 4-6% of their turnover to the lower priced offerings of Aldi and Lidl. 

The final thought for the day goes to Central Asian Metals 2013 Full Year Results, with 100% of the Kounrad Copper Mine income being attributable from now going forth, the earnings are set to benefit further. With 9 pence per share final dividend, there are not many around AIM doing what they say! The costs per pound are spot on, albeit I see some increase in these going forward at around 5%, the dividend coverage is more than affordable. Currently in at a fully inclusive cost in Kazakhstan is $1.13/lb albeit last year was $0.98/lb (2012).

Atb Fraser