Morning Mumble: Camp AV, Evraz (EVR), HSS Hire Group (HSS), Speedy Hire PLC (SDY), Sirius Minerals (SXX), Phorm!! Has Zambia lost the plot? Hargreaves Services (HSP) and NIPT, sensible placing!

Good Morning,

A hot day yesterday at Camp AV! For those that were there a plunge pool and ice baths would have been brilliant addition, perhaps next year? The ice-cream seller was in high demand and certainly a welcome relief.

It was good to catch up with a few people yesterday, some previously unknown and others old timers. The question of the day was, who was the lady with the body guards? We know the inquisitive were just interested in the person rather than the lady's looks! We won't mention those totally fascinated by the lady in question. 

It was a pleasure to listen to some of those highlighting the issues in markets, the Enron chap (CFO) Andrew Fastow. Disappointing that I missed a significant part of but was very good for the little  I did manage to grab. 

The rabble team quiz were jinxed from the off, with the system rushing through questions and not submitting our last set of answers to the total. Not that it would have made any difference to the winners, spending more time revising! To next year...

The holiday season upon us, it’s time to close positions, to avoid any issues and the need for management. One in particular EMC: Evraz, Steel and Sugar (April 2015). The credit here goes to Hugo for our entry point being 205, and today's is no credit here for this trade, it’s down to Hugo's technical analysis. The entry point would have been 187, post breaking 206. An acknowledgement that technical analysis pays 202 it was. Looking at the percentage rate, on the issue of 4-year 15 billion rouble bond (approx. $275 million), it tells the true story of the issues facing EVR. 

EVR have further woes with the South African unit Evraz Highveld Steel & Vanadium (JSE: EHS) that's turnaround hasn't exactly gone to plan. With the share price dropping 95%+ in 3 years, it’s not clear when EVR will write-down the full value of JSE: EHS. 

With the hard work done, it was the day (yesterday) to sell the remainder of Sirius Minerals (SXX). The company planning an update in due course after the approval. With a significant amount of cash needed after an update on the fine print, it suggests limited upside from here at the moment. For those in the longer-term, it’s likely the company will take the asset to full production. If SXX haven't already been on the phone to start the funding, they will be. 

It was a coup yesterday, with HSS reporting on Monday (EMC) the read across wasn't positive for Speedy Hire (SDY). SDY announced a profit warning and a change in the board. SDY have they been unsuccessful in 'divesting' the remainder of the oil and gas division in the middle-east.  Having shut down the equipment hire operation business in the region, one suspects any sale is going for a song now or closure. The board have also identified some contributing factors to 'poor' trading:

• A lack of available equipment during the network optimisation programme.

• A focus on strategic accounts at the expense of SME customers. (*Addition Small & Medium Enterprises)

• Poor customer service caused by disruption during the implementation of a new IT and MI system.

The statements suggest the company's eye has been taken off the ball. With such items contradicting the very survival and purpose. If one does not have the equipment, limited focus on the bread and butter (SME) and "poor" customer service, you're not going to win many friends. 

SDY are quite likely struggling with margins on key accounts as the sector as becomes more competitive. HSS's woes in cooling are not the only thing felt by SDY. Date for Dairy, HSS due to announce on Wednesday 26 August 2015. 

Having previously had woes SDY's with accounting irregularities (gaping hole in the accounts for Gulf oil & gas) and now being forced to be ultra-conservative with forecasts and the overall management of the company. 

Those with a risk appetite may consider SDY's soon to be ultra-conservative approach as a buying opportunity. SDY will have to increase equipment spending to fill the voids it’s identified. Greater customer service costs will impact on margins. 

SDY's relatively low net debt to EBITDA ratio (when compared to HSS) will instil some confidence. Even allowing for a £25M increase in debt to £130M with plenty of headroom in the (recently renewed) £180 million 5-year asset-based revolving facility. Both companies are en par with 35% losses for holders. One hopes their customers don't stick the knife in 'after the news'. 

When should HSS & SDY have informed the market? With contradictory statements by HSS Q1 in line with expectations May 2015. Just 5-6 weeks later, the trading update specifically states that April and May...

The Group's trading performance through Q2 was marginally below expectations, primarily impacted by weakness in Key Accounts customer activity across a number of sectors particularly in April and May, as well as reduced demand for cooling equipment during the period. In June, we have seen customer activity begin to return to more normalised levels, with order books building into the second half of the year.

Standard life should perhaps be asking how on the one hand trading is in line and then some weeks later it’s suddenly below for the same period? Same for SDY whom initiated a board level review of the business. What led them to this decision and what evidence did they have to conduct a 10 week investigation and not inform the market?

After Phorm's (PHRM) woes EMC March 2014 nothing has changed for the company. To quote in full, to save time.

Leggie, Phorm.....I wanted to do a lengthy piece until I realised Tom W had, for which covers a lot of the items. What I will say is, and as an assurance to Phorm, the fundraiser meets the criteria for a huge short...I look forward to the news with glee.

(Edited: added in Bold).

Having shifted their strategy to China, the annual report reads of a chilling indictment of the views 16 months ago. Over to Phorm to inform you of the operational highlights. 

Operational

• Successful launch of the Company's machine-learning technology offering a solution which can function without the requirement for an Internet Service Provider ("ISP")

• Launched operations in the United States with initial test campaigns being converted into revenue generating commercial campaigns within a matter of weeks.

• Shifted strategy in China to partnership model, reducing cost base by approximately $0.5 million per month.

• Focused the Company's resources on its core markets; China, Russia and the US.

• Global peak daily opted-in users achieved in 2014 of 148 million, including a peak figure of 109 million in China.

• High calibre board appointments in Lex Fenwick, the former CEO of Dow Jones & Co. and Bloomberg L.P. and Johannes Minho Roth, a highly experienced and respected fund manager.

Disappointingly there's limited downside potential for those wanting to acknowledge the facts and ability of this company. Over to Phorm again,

In April 2015, the Company raised £6.00 million gross, via a placing and subscription, to fund the Group's general working capital requirements. As at 30 June 2015, the Company had a net cash position of £0.9 million, which, at the current over-head run rate, taking account of additional funds due and our ability to manage our working capital, is expected to last until early August 2015. The Company is urgently exploring funding options with a view to securing additional working capital in the short term.

Placing at sub 1 pence? Would you!?!?!?!?!?!?!?!

A few companies will be reconsidering their positions in Zambia this week, Barrick Gold (TSX:ABX), Glencore (GLEN) and First Quantum Mineral (FQM). With Zambia yo-yoing between budget deficits and milking the miners, its not going to be easy for Zambian Miners. Zambia from memory scrapped corporation taxes last year (sept/oct) to change to a 20% taxation of revenue (open pit) and 6-8% for underground mining. Yesterday (1^st July) started the reversion back to the 30% corporation tax that is en par with the 20% taxation.

Not only is the corporation taxation an issue, Zambia are now proposing a mineral export ban that have not been beneficiated in the country? How Zambia will manage this will a reliance on hydro power and a shortfall in capacity is another matter.

Had Christopher Yaluma, the Minister of mines, energy & water development thought through his statements, he would have been wise to outline how this "theory" of native beneficiation (processing) will be worked through.

Not only are Zambia in danger of deterring any possible FDI (Foreign Direct Investment), but companies would be wise to consider any further investment on projects. The Government appear to have a complete inability to implement sensible taxation and policy without considering it fully first (aka consultation). 

Little time for Hargreaves Services (HSP), period end trading update with more information to (EMC) review the company. The drop today was perhaps a little harsh, but with the words 'coal', the market is likely to misprice the woes. Staying with coal, the placees in Coal of Africa Ltd (CZA) will be far from chuffed with the failure of Mooiplaats. Of course they're continuing discussions..........................

Premaitha (NIPT) pressing the button at a sensible time with a sensible discount to the sp.

Atb Fraser

Morning Mumble: China's (absent) panacea (Off-on-one), Fortescue Metals (FMG) sub AU$2 where next, Central Asian Metals (CAML), Gulf Keystone's disappointment.

Good Morning, 

We had little surprise that China would cut interest rates, now at 4.85% and effect from yesterday. Its China's attempt for secondary stimulus in the housing market and the various benefits of attempting to improve aggregate demand (AD). Although the economic stimuli to date appears to have merely slowed the fall. 

The stock market "readjustment" is now a full-swim aided by pure bear market. The cut in interest rates unlikely to prop the market up, as the bull trend came to a dramatic end. Quite how the Chinese expected to shore up the Shanghai Stock Exchange Composite Index (SHCOMP) and Shenzhen Stock Exchange Composite Index (SZCOMP - the tech related index a k a the Chinese Silicon Valley) is mystifying. 

The SHCOMP has fallen just over 20% at 4,123.484 and the SZCOMP did 22% over the fortnight at 2,404.719, with margin being the most common-phrase around China for those trades. Without any bounce, expect further forced selling on SHCOMP and SZCOMP. 

EMC: China Australia Mirror Trades has a number of similarities including the massive increases on stocks as outlined. What is of concern is the interest rate to GDP growth. With the EMC being far from an economist. It’s prudent to consider if interest rates are 4.85% then should there be a cut in expectations for the GDP of China? Currently expected to be 7%, with a basic trend implying a slowing of growth in China and factory productivity and gate prices far from picking up. 

The Chinese are simply becoming risk averse, and any temptation to buy assets despite the aggregate costs all reducing. Property prices (Sales Prices of Residential Buildings in 70 Medium and Large-sized Cities in May 2015 Chinese Government Statistics) both commercial and residential, continue to fall or simply not sell at all. The measure of the 70 Cities, although is warped slightly, shows falls of between 6.9% and 0.9% on property sold compared to the previous period. What is not measured, are the incentives to progress the sale, which are also eating into developers margins. 

Not only is the stimulus meant to aid the commercial entities, we have the Chinese Local Government near doubling the size of debt swap program. It doesn't mean much, but considering how leveraged and hard up local government (LG) is, any green shoots of cheaper borrowing will be welcome. Where there's a hidden "nearly unemployed" figure that's growing in LG's and SOE (State owned enterprises). 

With the PRC (People's Republic of China) searching for a panacea for a slowing economy that has so far been absent. The PRC have attempted to cover all the corners of the economy, but without any improvement in China's economic climate, expect more trimming of borrowing costs and direct QE, if the latest round has little to no impact. 

As a reminder, the PRC has attempted to improve financial liquidity by injecting cash into the banks. This financial injection also had specific provisions to target development (little impact) also known as pledged supplementary lending (PSL). The PRC has reduced borrowing costs consistently since 2012 (falling asset prices) but also cut banks’ reserve rate ratios (RRR) in an attempt to give greater scope for lending (limited impact). Likewise, the loosening of home ownership and mortgage criteria has not had little if any effect. 

Its ironic, that whilst the Chinese are tweaking their RRR and interest rates, the converse is happening with LG bonds. Where just recently there’s been a confetti like approach, as LG's have issued near the entire amount of 2014 Debt just in the past 7 weeks (11th May-26th June 15), and the market is betting those costs are going to rise.

With the PRC and PBOC (People's Bank of China) now being forced into buying LG bonds to maintain a sense of stability with the wider market objectives it's not going to be pretty. Expected further news of PSL’s in due course, where the PBOC will no doubt have to focus on LG bonds with a targeted rate of circa 3.10% to maintain stability. 

LG's have circa 23 Trillion Yuan of to refinance and in the current market conditions, its going to be a corporate parent styled transaction (PSL). If the PBOC do not get involved in LG bonds, there's a risk of debt costs spiralling and stalling any growth planned or intended by the LG's themselves. It would be prudent to watch the Chinese bond market for a spike later next week if the same trend continues, no doubt after a brief fall. 

For any recovery, one would be wise to look to the National Golden Week (黄金周 (国庆节) (02nd October 2015) to indicate the recovery in the property sector. Typically the peak season for residential property. Will it happen? 

This weekend is all about Grexit, As stated at the time the newly formed Greek government back in January had an agenda. Now with capital controls in place even in the short-term it’s not looking pretty. The referendum, although I though the offer had been withdrawn, is going ahead whether there is a purpose to it or not. The view being that Greece needs to get through their peak tourist season with a Euro. Although the odds of this happening are slowly shrinking. 

The lack of compromise could have wider implications for the wider group of the EU, namely Italy, Spain and Portugal. Where the austerity and inferences of "who is calling the shots at the EU" creating a negative sentiment, that if Greece exits, expect others to consider it. The breaking of even one in the EU ranks (Greece) will have dire consequences, whether risked or just perceived for the entire EU block. 

With a secondary currency more likely than ever, what next for Greece. Perhaps pain up front is the preferred model? Over to the wider Greek citizens to decide their own sentence. So the Market will ebb and flow based on (mis)information and events over the next week. The resultant impact is already being seen in commodities, with most losing key levels of support. 

Amur Minerals (AMC) gives an update on Kun-Manie. One is a little confused by the optimised design as there's a number of assumptions which contradict the current viability. Kun-Manie will no doubt be viable 'at some point in the future' but it’s certainly not soon. With limited time to cover it full, it's wise to look at the assumed costs. 

AMC have not adjusted the SRK Pre-Feasibility Study (PFS) assumed price from 2007 for the price of Nickel. There's a lot happened since then and the Nickel sector has changed considerably. Not only is AMC up their results and the update, but one must assume that investors have considered the fact the project is uneconomic. 

Nickel is currently $5.45/lb, well below the $5.60/lb support considerably away from the assumed pricing of US$7.50 per pound (US$16,534 per tonne) and US$9.50 per pound (US$20,940 per tonne), Internal Rates of Return (IRR)(post-tax) of 21% and 32% respectively, or a minus figure at current rates! There is no reason to change the view on this stock! The company need buckets of cash to develop this asset, and in the current market, who would be a lender? 

Lonmin's managed sale by Glencore should be given an award. How they managed to achieve the price they did is staggering! The company, holders specifically are waking up to the realities of not only doing business in South Africa but of assets that are borderline uneconomic in the current climate.

The PGM prices failed to recover globally despite LMI being on reduced production. So there's unlikely to be any change with them going full guns. With a growing unsavoury contingent burning workers buses and cars, its not looking rosy for LMI! 

Central Asia Metals's (CAML) Kounrad production update isn't good news. 

During normal production activity a problem occurred in the solvent extraction (SX) section which resulted in a significant quantity of the organic inventory being lost to the dumps within a very short time frame. After inspection, it was identified that one of nine weir plates in the recently commissioned SX mixer settler had fallen out of position, resulting in the ability of the organic inventory to escape from the circuit via the raffinate and onto the dumps. The reasons for the failure of the weir plate are currently being investigated by site management.

On Saturday the problem was rectified and the plant was started again but at a much lower flow rate. This will continue for several more days until the site team can stabilise the plant and determine the full extent of the loss of organic inventory, any impact on the pipeline infrastructure and the duration of time that the plant will need to operate at reduced production capacity before the organic inventories can be replenished.

If one is currently investigating the failure, surely the rectification of the problem raises the question of the risk of it happening again. Hmmm...Would it be wise to consider the director sales again? With impaired production and reduced capacity, mining is never simple. Forecasted production will not be 13K/pa this year, one suspects it’s likely to be 11,700 with a finger in the air. 

The market was expecting a lot more from the Gulf Keystone (GKP) update, where cash is not where it needs to be. The production and marketing update is positive, but likely to be insufficient in cashflow terms. Essential for a producer with limited cash of US$68.7m with intentions to fund increased output to 100Kbopd. 

One hopes GKP will get their payments (both present and historic), although they state they're in discussions with the Kurdistan Regional Government's (KRG) Ministry of Natural Resources (MNR). Perhaps instead of discussing, they could just obtain payment from the MNR? 

In the absence of payments coming soon, expect GKP's assets to be sold for limited upside. A producer that's cashflow is limited by other entities, that appear uncontrollable? Also, as a final thought, is the third party oil transaction a related one to previous management? Just a thought? 

The bears finally got their patience rewarded in HSS Hire with a trading update that is not positive at all. The company was only IPO'd 9 February 2015. Christmas cards all round for another IPO that raises questions over the valuations. Hat-tip to JPMorgan for flogging prudently. 

With corrections across the indices over the weekend, led by woes in China, the FTSE and DJI all took a battering. Reminds all round to be aware of weekend volatility on positions. 

Petroceltic (PCI) contemplate a bond issue. One supposes it wise to state that, although it does exude confidence in the bond market, or are the terms just accepted as being dire. One to watch...this could have issues if such a bond issuance fails and the banks come a knocking for $50M+. Does it also suggest a deal is being done on the Ain Tsila development? Surely it would have been sensible to grab all the monies at once, especially for Ain Tsila? Unless of course PCI are dipping their toe in the water!  

Finally, Fortescue Metals Group (FMG) breached its AU$2 a share market closing at AU$1.93. The bears are out with their trumpets for all to hear with predicts as risky as $20-30/t. The Chinese clearly gave out their indications with a cautionary warnings from Xinchuang Li (EMC) and EMC Mundane Iron Ore Again.

Atb Fraser