PM Bolt-On; VW the unknown (bleugh), Chinese PMI Data + SOE defaults + Copper.

Good Evening,

VW rose - judging by the number of analysts pinning the name to €126-€130 a share, it would appear the world and his dog bought into it. Save for here, where undoubtedly there's trading opportunities, but the end game has yet to play out. We'll close the VW item on some teasers for those willing to burn the midnight oil:

1. What is the cost of a fix per unit, based on 85% recall uptake? We have taken this apart today and come back with various figures from the low side of $450, to the average of $1,500 per unit (remedy).
2. With the press statement and Notice of Violation outline some of the issues. Worth consideration is the Air Resource Board compliance letter. In discussions today with a very helpful lawyer, it was suggested that a mass refund process is unlikely.
3. The law affords most vehicles manufacturers the opportunity to rectify the issues. The sticking point is, not only have VW had the opportunity, but they in essence they obtained an invalid certificate of compliance (COC) by installing the defeat device. What are the implications for breaching the TREAD Act?
4.  Assuming item 2 is correct, there will be a valuation gap that will have to be honoured between the cars previous value and that of today, plus compensation.  If item 2 is incorrect, then it’s a fire sale of a significant number of models.

It’ll be prudent to revisit the VW issues as it evolves.

The Caixin Flash China General Manufacturing PMI™  - below the revised consensus. Despite being conservative on the figures with revisions, the outlook does not look great. 

Its prudent to acknowledge the impact of the WW2 celebrations and athletics, but this was allowed for in most consensus. There was even an attempt to over-shadow the woes with China’s order for 300 beoing planes and a factory.  The PMI is worth a read, and in part, validates the hard work put in to keep ahead.

We have a sense of déjà vu, with China National Erzhong Group defaulting, albeit briefly. The levels of wastage in China have been commented on here for a number of years here, making up for near 40-45% of GDP (this is declining rapidly) - contrary to those Chinese bulls. The situation is now unravelling, not only due to inflation but a liquidity event in the making.

China are going to be compelled to make a significant adjustment to their Reserve-Requirement Ratios (RRR) by a whopping 200 bps. Although this may be conducted with some form of sensibility and over a period of 6 months. Its clear that the Chinese are now starting to tamper with their figures to avoid any suggestion things the economy is stalling (Who’d have thought it!?).

Li suggests those with an interest in China, should look at the number of failed SOE (State Owned Enterprises) and their subsidiaries that have either attempted to uncouple themselves from the state or list part of their operations in Shanghai or Hong Kong. Erzhong did just this.

Erzhong is a prime example why one should avoid the alleged investment case for the majority of SOE’s. We’ve had sub-prime, interest rate rigging, auto emissions, all we need now is some form of litigation on the back of alleged SOE sales pitches implying viability. 

There’s a raft of debt issued or that was rolled over circa 2012, with repayments becoming due. Whether enticing investors into SOE’s is wise for China is another story, unless of course there’s two sets of books.

With a quick glance at the miners suggesting some were breathing a sigh of relief, there’s a number of technical indicators that Rio et al are struggling to hold on to. It would be rude to forget copper and Glencore, or as one chap called it Glenron.

With copper teetering around $5000/t (+1%), $2.29/lb it’s struggling to find support. If we believe the producers the demand and supply mix isn’t as bad as the price would suggest. In that case, with 266K/pa production cuts (assumed), why hasn’t the price sustained a recovery? That would be…

Caterpillar (NYSE: CAT) have a realisation that the rig count and mining woes aren't necessarily a good thing for earnings. Especially as JCB fired the starter pistol on the outlook.

The paired trade for midday - short Umicore (EBR: UMI) and long Johnson Matthey (JMAT) (EMC: JMAT & Umicore). To finish, some wild card (high BS rating gossip) of Intu Properties - allegedly there's some fund or other sniffing. Really? Good luck with that one. The market does love a bit of gossip. 

Atb Fraser

Morning Mumble (with apologies): Kirkland Gold (KGI) &...what comes to mind post trading.

Kirkland Lake Gold Concludes Strategic Review Process

So Kirkland Lake Gold (KGI)) have concluded the "Strategic Review" and the conclusion is: While the Company received several expressions of interest, a transaction did not materialize. Well I am no mining analyst merely a trading perspective but lets face it, if you “cannot find a buyer for exceptional value at low cost” there are only so many reasons why:

• The market is suffering a depression and not valuing opportunities.

• There is better out there in terms of assets.

• It was not marketed in a way that parties did not see the benefits.

• The acquirers (potential) wasted the time of the management.

• The asset is not worth anywhere near what shareholders would expect.

• Its going nowhere…

• Another reason?

Admittedly, I haven’t looked at this company for some time so I'm making a number of assumptions about costs. Yes things are improving but I cannot help but wonder if "small scale mining is outdated". 

What has been shown is they are able to reduce their costs, but that's based on a headwind of consistent grades and achieving their forecasts. Something that potentially interested parties do not have a belief they will be achieved or a sale/merger would be ensuing now. 

The stock has travelled up significantly, but for me it's time to face facts after today. KGI is significantly ahead on any potential it has, and most certainly ahead of any likely dividend payouts. So when will the market re-rate? I believe today's RNS on the strategic review will be the start of it, but it will need momentum before this is confirmed. 

EMED, Leggie et al, will be waiting for the market to recognise the value of the final permit . One can hope there leggie, however if you look at the volumes, it looks to me as though parties are selling down those cheap shares “whilst there is support.” The timing of such an announcement didn't assist things either...people looked, thought "this is good news" and then went to the pub!

What surprises me is the obvious shorts appear missed by most. What was difficult to work out with Intu Properties Plc Publication of Prospectus for Rights Issue. Firstly there was Barclays, where to quote one chap, "I'm bloody daft and I'll lose the shirt off my back" when discussing Barclays as a short. 

Now we have INTU Properties with 2 for 7 shares at 180 pence coming to market. It's not rocket science in terms of parties flipping is it? No wonder its underwritten at that price...Well it would appear so, especially as the Rights Issue is so heavily discounted. yes the companies progressing but forget all the fundamentals and just look at the SP, when it was announced it hit £3 ish, so its on-going and guess what it hits today? 282 ish. So is it "based purely on probability going up or down? Common-sense prevails. 

Similarly Royal Sun Alliance have done what? Just a thought, sometimes trading negatively is no more than common sense. Just as I’m typing this, a decent shorter comes out the woodwork GuevouraFund Limited Short-Selling Disclosure has a small position, I assume it’s a hedge but either way will make significantly post Rights Issue. Would you be long? I certainly wouldn't at the moment without a 3 for 8 or similar hedge. i.e. the best of both worlds :-).  

The final thought of the FT Article Glencore closer to iron ore ambition By Katrina Manson in Nouakchott and Javier Blas in Geneva. Common sense prevails here, there’s a startling over-supply growing and as such this does not bode well for this African Project. 

GLEN may well know Africa well, however just look at the issues Rio Tinto and Vale have had in Guinea albeit the transport won’t be as “bad a problem” as Rio and Vale suffered. With the quality of the ore, GLEN are surely looking long beyond the surplus issues? The Glut to market could have significance to all producers as every MT’s surplus must be near 50 cents of Iron Ore? Just a fag packet calculation. Glencore went hard into Coal, Crash, now the same for Iron Ore? Hmmm

All the best, Fraser

As a postscript, I wonder what the issue is with Rurelec's listing? I do wonder if it's easier to sell a bargain basement story at 4p to a market than all in around 10+pence. It will be 2 months post the award whereby Rurelec are left with £10M give or take. Bolivia are likely to be Electioneering soon which won't bode well for prompt payment. 

It's always nice to see a company in the throws of being clubbed by the bank, something that GKP needs within 4 weeks was my estimates (cash). I'm trying to remember my commentary on the report into reserves, but it was something along the lines of "why wouldn't you get a well-known firm to do it." Well it would appear they listened and so did the market.