Morning Mumble: They have Phorm, NEXT guidance improvements. Can it get any worse for First Quantum (FQM), load-shedding! + AQP & GKN + DRX

Good Morning,

I would like to apologise to readers for kicking this proverbial dog, but Phorm have Phorm. Today, the can is kicked back with a convertible loan note extension. In essence this is a pre-placing, keep the air conditioning running type corporate action. With little to add to Phorm, EMC: criteria for a huge short March 2014. 

The long-only contingent are celebrating with a stonking trading statement from Next (NXT). EMC: NXT March 2015. Over to Next (NXT), with an increased sales and profit guidance for the full year that supports a timely buy note by Citi on Monday. With no buy back, but the floor raised to £69.62 and a special dividend of 60 pence (2 November 2015). One will sit and wait for the trading opportunities. It’s noted a lack of margin commentary or analysis.

First Quantum Mining (FQM), has received notification of a Force Majeure for the supply of electricity to its Kansanshi operation from ZESCO. With load shedding/supply being reduced 23+% at Kansanshi Operations and Sentinel being reduced the same from 55 to 42. How this affects the guidance and ramp up is another question. A likely 2400 tonnes per day feed through, the costs will move out to the previous $1.77/lb (not C1). Are Vedanta (VED) affected as ZESCO have suggested it’s just in the North West region? Also, was the load-shedding announcement made on the 13th July? 

For the geographically minded, this has been on the cards for some time. ZESCO is reliant on Kariba Dam. Water levels there have been at lows and the outlook isn't great either. There's a material shortfall of 550 MW this year. The problem is likely to get worse, as so far the power reductions are plumb on the middle of guidance, whereas the the grid is showing a 30% deficit in power generation. Perhaps Aggreko can assist? They should be on the phone already, if they haven't already been. That's a significant 'potential' contract...

There's has been an absence of reporting from Vedanta. VED's Zambian operations are not insignificant, nor are Glencore's, who also have an interest in Mopani Copper Mines plc along with FQM. The load shedding issues will not be resolved until the end of the year at the earliest.

The issues have been discussed in the Zambia parliament over recent months by the perhaps outspoken Mr Patrick Mucheleka (MP). Not only taking a significant interest in copper, power generation but more importantly, the acquittal of former President Rupiah Banda. Perhaps to the disappointment of President Edgar Lungu?

A psychic announcement for Lonmin (LMI) thanks to Aquarius Platinum (AQP), whom Q4 production results. The pertinent issue in the commentary from Jean Nel, CEO Aquarius Platinum said (see bold): The fourth quarter was characterised by a particularly good performance from both Aquarius operating mines. Both Kroondal and Mimosa again improved safety, delivered all time fourth quarter production records and reduced costs, in what remains a challenging operating environment. The performance is testimony to a disciplined approach to operations and the operating teams at Kroondal and Mimosa deserve much credit for this. From a macro perspective, the lower metal prices which prevailed during the period and especially post quarter end will not only require an increased focus on safety, cost and production discipline, an approach which Aquarius will remain committed to, but also a focussed assessment of the viability of each shaft at each operating mine to ensure the sustainability of the business in a low metal price environment.

In case anyone is trying to fathom out what calendar AQP work to, today's is Q4. A lot of work has been carried out at AQP. Sadly the share price is unlikely to benefit much from it. It’s a testimony to the capabilities of the staff. The overall outlook won't help AQP, expect more cuts to production from unprofitable shafts. Although near a more realistic valuation than LMI...whom must be haemorrhaging cash! 

GKN results, acquisition and cash placing for another day...but watch that space. The book runners will not doubt suggest the job was difficult in the prevailing market etc.! Of course it was 'Gov.' Rather insightful after yesterday's EMC: JMAT read across for GKN! Drax's half yearly today aren't so bad. Having been a knife catcher on the climate levy changes, and a strategic review under way to consider the long term options for the Group. 

Atb Fraser

PM Bolt-On: One for the train! SXX (limited) & Johnson Matthey (JMAT) absent of depth, amateurish and lacking substance, but all the same.

Good Evening,

After a lot of communication regarding Sirius Minerals (SXX), to save replying to everything. 

There's two cases for SXX, one that the longer-term holders whom do not feel the need to trade and can see the value over 5+ years and those short-termers with a differing view. 

Without reading too much into the news today, there's no reason to change ones view. SXX was a case of sell on the approval news on the 1st July. The directorate change and market move update should be welcomed by the longer-term holders. One suspects its getting very near a price where there's a reason to buy. 

With an impending Main Market listing on the London Stock Exchange, this should support SXX's value in raising near £550-700M (pending which way you turn the can). With the strength of the U$D as well, its likely any international investors may be pleased with such an investment.

In the absence of some significant corporate action or fundraising news, SXX with be mothballed, although one may have some purchases near lower prices. It would be very disappointing if this stock couldn't benefit from the potash position and being viable well below the potash current market price. 

Johnson Matthew (JMAT) had Q1 trading update last Wednesday, with the woes of the industry being evidenced by the results. The EMC: JMAT Coverage has been criticised for being absent of depth, amateurish and lacking substance. Those views may be correct, but what has been covered has validated the viewpoint not to hold the stock long and/or short. (See results). 

			Q1	Q1		%
			2015/16	2014/15	%	at constant
			£ million	£ million	change	rates
Sales excluding precious metals (sales)
Emission Control Technologies			478	444	+8	+6
Process Technologies			130	119	+9	+8
Precious Metal Products			85	101	-15	-16
Fine Chemicals			78	78	-	-4
New Businesses			38	18	+107	+126
Eliminations			(12)	(11)
Group sales			797	749	+6	+5
Underlying operating profit1			103.6	103.6	-	-1
Underlying profit before tax1			94.0	95.0	-1	-3

¹ before amortisation of acquired intangibles, major impairment and restructuring charges, profit or loss on disposal of businesses.

JMAT may be the world's largest auto catalysts maker, but having rested on its laurels and not acquired into key markets, it’s lacking diversity.  In revenue terms the drop in profits is more significant that the sector gave credit for. Not only is JMAT impacted by multiple foreign currencies but the decline in PGM prices. This may change sooner than people think, pending on the outcome of Lonmin (LMI) and its backers. (Risk Event)

The question for investing in the bull case for JMAT is whether they are likely to benefit from the European regulation on emissions. Yes undoubtedly, but this is slowing more so and a much more progressive company called Umicore (EBR: UMI) is winning space.

UMI is cutting into JMAT’s competitiveness (Margins). The cycles on Heavy Duty Diesels (HDD) have peaked and the Chinese woes are creating more risks. With Europe’s HDD market in contraction its going to create further pressure. Fleet ages are suggesting an extension on ownership and renewal cycles of near 12-15%, but only a 1% up on 2009 figures. Perhaps truck recovery and parts are the way forward? GKN?

UMI have been able to benefit from location, reduced FX woes and the Euro 6 catalyst production both for passenger cars and heavy duty diesel applications. UMI are expanding into JMAT’s bread and butter environment that is also declining/under pressure. This should be a concern for any JMAT holder, a cash return is simply an acknowledgement the business will be purely cyclical based on demand on its undiversified offerings.

JMAT’s bull case is the cash return, dividend and longer-term performance, but in the absence of one large acquisition, they face being an also ran to the progressive UMI.  So with cash in the bank from  Gold and Silver Refining Business for £118 million and another £256 million for the Research Chemicals Business (Alfa Aesar) by the end of the year. JMAT will have £374M available plus borrowings to go on the acquisition trial.  

It would perhaps be sensible to expand, as catalysts are at risk from ‘alleged’ greener eco-models laden with batteries. The weakness in current events and risks being ascribed to the macro environment will assist JMAT. They are in a position to leverage and warrant a premium to their stock. The caveat being, any small scale acquisition (unless in numbers) will question why JMAT sold its Gold and Silver Refining and Research Chemicals businesses.  

Punished for lacking diversity in technology, metals prices and outlook but economic uncertainty. Time for a management change? No change in position until news. Although, UMI are likely to be under-pressure as well, but one for another time. 

Atb Fraser