Weekend: A quick run through...'onest guv' (Coffee) - Sirius Minerals (SXX), Vale, BHP Billiton (BLT) - Dividend Cuts, Anglo American (AAL) , Kaz Minerals, Drax (DRX), Clarkson (CKN), Royal Mail (RMG) SunEdison (SUNE) & Finally JMAT

Good Afternoon,

Another manic week with various bits of news coming out - a speedy run through of what can be remembered:

Sirius Minerals (SXX) - It would be laughable if it wasn't true - from memory Israel Chemical (NYSE: ICL) via Cleveland Potash Boulby Mine raised concerns/objections regarding the application or process for SXX's York Potash polyhalite mine. 

ICL inform the market of the refocusing at the Boulby Mine and will mine polyhalite. With some amusement, ICL have trademarked a brand called Polysulphate – amazingly derived from polyhalite. ICL is listed NYSE and with limited upside, what reasons are their to hold the stock.

Vale / BHP - The trade was the debt at Samarco owned by Vale and BHP Billiton (BLT) - They have been compelled to undertake further emergency tailings dam work. The damage and overall cost implications are unknown although perhaps affordable, the market now should price in a real cut to BLT's dividend. The price has risks...even for Vale, whose leverage is phenomenal but the price is now about right. How will one sleep at night not being short Vale?

South32 (Short32/S32) – updated the market. The same however cannot be said for Anglo American (AAL). AAL own 40% of the venture where they have yet to notify their shareholders of Samancor manganese joint venture issues.  Anglo deem it appropriate to update on the changes to their senior management and ignore the woes of their 40% stake in SamancorCR. 

From South32, the joint venture's South African mines will remain closed until the completion of the ongoing strategic review. Production was suspended following a fatality at the Mamatwan mine on 2 November 2015. 

SunEdison (NYSE: SUNE) - The idea of SUNE being a car-wreck was pooh-poohed when we raised the question "why was SUNE valued near the same as Solarcity?” Our view was that there was limited equity value left for shareholders in SunEdison. In contrast others believed in the solar expansion of the world. 

The markets may be right about solar longer-term, but not with SUNE - they expanded fast, attempted to hold on to projects rather than sell them and have significant leveraged. It's an all too familiar story of elastic expansion that may not snap, but is likely to be a shadow of its former self. 

Despite some inference we had lost the plot in June, July and August, we were vilified by the price action on Friday where SUNE's ability to access capital and outlook has finally been realised. The price still is unappealing but there's no reason to hold the stock unless a white knight can be found. We know it's not Blackstone, they came out and said they weren't considering it on Wednesday (Reuters). 

SUNE's second quarter results released in August only confirmed what the market should have acknowledged debt vs earnings and over-expansion is a recipe for...What are the implications for the yieldco's? Another over-expansion similar to the Chinese co's of yesteryear. 

Barrick Gold (NYSE: ABX) continues to flogs four mines to continue reducing debt. It makes one wonder why they bothered in the first place - See Mining.com Barrick Gold. Their need for cash is keeping the short-interest happy in Acacia Mining (ACA) - from memory ABX still have 64% in ACA and with the significant overhang, would you be a buyer?

Lucara Diamonds in Canada (TSX: LUC) - not only found 1111 Carat Diamond where the share price was muted but then LUC recovered two more diamonds including a 813CT stone. We missed the price action due to travels but what took the market so long to react positively?! Certain traders...tut tut. 

Anglo Pacific (APF) - companies apparently have efficient with their IR - last weekend we had reports in the press that Rio Tinto were threatening to close their Kestrel operationsdown if they did not get approval for Kestrel. APF, by the silence, obviously do not consider the ground water issues in Australia significant enough to update the market on the future prospects of Kestrel. Perhaps the market will be honoured of an update within the Q3's due 26th November 2015 this week coming. 

Kaz Minerals (KAZ) - luckily for them they have a Chinese contractor whom appears to be very flexible. KAZ have been granted a reprieve with some can kicking of liabilities by Non Ferrous China (NFC). Over to KAZ, (bold and italics are additions):

Under the revised terms, $300 million of construction costs which were scheduled to be paid in 2016 and 2017 will be settled in the first half of 2018. There is no change to the overall amount payable to NFC or the project budget of $2.3 billion. Aktogay remains on track to commence production from oxide ore in 2015 and production from sulphide ore in 2017.

Oleg Novachuk, Chief Executive, said: "The deferral of $300 million to 2018 provides KAZ Minerals with additional liquidity during the construction and ramp up of Bozshakol and Aktogay. This agreement also demonstrates the strength of our relationship with NFC and continues our strong track record of securing support from our partners in China for these strategically important copper projects."

We maybe have a different understanding of the term additional liquidity to others, however the directors think it's a positive - John Mackenzie bought 5000 shares, Andrew Southam purchased 99,238 shares and Simon Heale (and connected parties) purchased 77655 shares. Perhaps they feel the purchases will be beneficial and a sign of a recovery in their company - hmm What additional liquidity is there?!?!

Coal - The UK Government came out with all coal power stations Technica - coal power plants to close 2025. This doesn't bode well for the industry as a whole nor prices where similar policies are impacted on global prices. Mick Davis / X2 might just be better suited to other projects, but one suspects they smell a bargain on some Australian assets. 

Are Drax (DRX) viable? With risks associated with their subsidies and the general outlook to biomass. Having met with a few private companies recently involved with ports, the outlook certainly isn't encouraging with some owners looking to sell. Implications for HSP (Hargreaves Services), albeit it should be cash generative even allowing for RedCar Steel closures. What is the read across to Associated British Ports and Clarkson's (CKN) etc....etc...

Cliffs Natural Resources (NYSE: CLF) - continued with their views on dumping in the US by China as well as announcing they are temporarily idling iron ore pellet production at its Northshore Mining operation in Minnesota by Dec. 1, 2015. Another company where this is no reason to hold the stock until anti-dumping measures are enforced. One suspects there's others issues at stake so it's going to take longer than the companies under pressure hope for. 

Royal Mail (RMG) - came out with better than expected results. The sector outlook remains competitive and consider RMG, in the absence of significant change, to be a dinosaur. The industry, like most sectors,  is cannibalising their own margins in the search for dominance. Not specifically aimed mail and courier companies - but there appears to be a thirst for expanding into space at the cost of all. See DX Group (DX.) trading update and UK Mail (UKM) half yearly report whom both showed the competitive nature of the market.

Johnson Matthey (JMAT) – Interim results were undoubtedly better with the added bonus of further savings (£30M). The news from JMAT’s Emission Control Technologies division (ECT) was waited for. There have been few/little indicators of how well the diesel market was performing after the current VW issues (whom just increased the number of cars with emission woes).  Our belief that the diesel demand would fall has so far proven incorrect with Europe doing well – more so it appears to be expanding.

There has been continued commentary around NOx emissions from diesel vehicles and speculation as to whether diesel's share of production in Europe may decline.  The proportion of diesel vehicles produced in Western Europe was stable at 51% in our first half (H1 2014/15 50%).

We did not properly consider that lower PGM prices would be so beneficial to the working capital levels.  Nor the true read across from the NOx issues that are a hot topic as a result of VW’s actions. JMAT, like Umicore (EBR: UMI), informs us that 6B + NOx requires additional catalyst technology and increases sales per vehicle for Johnson Matthey by around 20%.

JMAT's Dividends will be hugged in a shrinking market. (bold italics addition) - An interim dividend of 19.5 pence per ordinary share has been proposed by the board which will be paid on 2nd February 2016 to shareholders on the register at the close of business on 8th January 2016.  

The estimated amount to be paid is £39.6 million and has not been recognised in these accounts. The board is also recommending a special dividend to shareholders of 150.0 pence per ordinary share which will be paid on 2nd February 2016. JMAT could have utilised the sale proceeds better, one would hope they’re in the process of one or two acquisitions before the 2nd February.

Have a good weekend, Atb Fraser

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

Pm Bolt-On: A belated Wolseley (WOS) with a soapbox item & Glencore's open secret - lines of credit or nooses of liquidity + Have Roy Hill & Tonkolili gone short iron ore!? Come on KAZ get with it...

Good Morning,

It was hoped that this week would allow a bit more time. 

With all the indicators suggesting some form of doom, why is Gold not up? Liquidity is contracting, outlooks are being adjusted, China's liquidity issues for SOE's are coming out, including their need to export deflation and recession to other countries. 

Wolseley's (WOS) final results weren't all that, with a feeling here that WOS were calling the top of the market. The plumb centre owner reiterated exactly what the market knew. The savages took their profits and retreated to the caves. WOS, a viable company, but the outlook isn't that great. 

Over to WOS with additions from the EMC in bold to highlight the short:

Ian Meakins, Chief Executive, commented:

"The highlight of these results was another great performance by Ferguson in the US where we achieved strong like-for-like revenue growth ahead of the market and a 50 basis point improvement in the trading margin to 8.2%, which is a record.  We continue to face some challenging markets in the rest of the Group and remain focused on improving growth rates and protecting gross margins whilst keeping the cost base tight. 

"Wolseley continues to be highly cash generative and we have adequate resources to fund our capital investment programme, bolt-on acquisitions and growth in ordinary dividends. We are also announcing a £300 million share buyback which reflects the Group's strong financial position and management's confidence in the business."

Commenting on the outlook, Ian Meakins said:

"We expect to generate like-for-like revenue growth of about 4 per cent in the first half.  In the US we expect continued good growth in Blended Branches, Waterworks, HVAC, B2C and Fire and Fabrication underpinned by decent Commercial and Residential markets. However, Industrial markets in North America, which account for about 15 per cent of revenue in the region, were challenging in the fourth quarter and we expect this to continue.  We expect a continued steady recovery in Nordic markets, although the heating market in the UK is expected to remain very competitive with little growth.  Overall, we expect to make continued progress in 2016."

The buyback may offer some support, but is this the best Wolseley can do with £300M? With net debt at circa £805M, prudence would dictate either an acquisition or reducing debt. Then again...with a fall in full-year profits one has to prop up ones share price. 

The concern here is that companies should be focused on the strength of the business not the ability to leverage to show strength. China have met with similar issues in recent times and company buybacks are simply a waste (view here). We're fully aware of the pros and cons, but in the absence of a viable strategy of investment, take it as a signal that irrespective of outlooks, the management are waving a flag of..."this is the best we can do." 

The writedowns are showing the fragility of the market place across all sectors. WOS's guidance on the Nordic business with writedowns and the outlook for the US business should not be ignored. The outlook contradicts the logical buyback principles. The expansion and acquisition of decent companies would surely be a sensible alternative to enhancing longer-term value. 

It’s acknowledged Wolseley acquired, but buybacks do not improve a business performance, only the earnings relating to each share. This is not always the best measurement, as the EMC has evidenced many times before…

With the FED considering interest rate rises and the alleged strength in the US, the guidance given contradicts some bulls. Reiterated by WOS statement of price deflation in the USA, UK and Central Europe and modest price inflation in Canada and the Nordic.

Glencore have come out with a statement in response to speculation (PDF/in full below). 

Baar, Switzerland 29 September, 2015 

Response to speculation 

Glencore has taken proactive steps to position our company to withstand current commodity market conditions. 

Our business remains operationally and financially robust – we have positive cash flow, good liquidity and absolutely no solvency issues. 

We are getting on and delivering a suite of measures to reduce our debt levels by up to US$10.2 billion. 

Glencore has no debt covenants and continues to retain strong lines of credit and secure access to funding thanks to long term relationships we have with the banks. 

We remain focused on running efficient, low cost and safe operations and are confident the medium and long-term fundamentals of the commodities we produce and market remain strong into the future. (Ends)

So in essence, Glencore have so far had a placing they allegedly did not need to conduct but did to assure investors. Now they're robust and operationally/financially sound. Whatever have Capt. Kirk and Scotty got planned next. 

Well, we're sure that's all fine and dandy. The gossip/rumours suggest all is not as rosy at the mill. Cargill's winding down of their $7bn hedge fund arm (FT) won't have assisted Glencore in the sale of the grains business.

With the current outlook and Russian taxation woes that are likely to have hurt GLEN, the suggested price tag of $12B for the grains business may be a struggle. Then again they got significantly more for the Las Bambas mine in Peru - over to the sales folk. 

There's gossip suggesting that Glencore are having issues with suppliers. This is unsubstantiated at the moment, but with credit lines and liquidity tightening globally, it’s with no surprise that rumours are surfacing of a big utility company cutting its credit line to GLEN. If this is true, what are the implications for operations? It will undoubtedly have operational and financial implications. 

One is wise to measure Glencore on its assets, the price of its commodities and marketing, in conjunction with its debt. Simply, the assets, save for coal are tier 2 (EMC view) without significant investment (see African Copper Update) to improve operational performance, and until the development of these assets the outlook will remain challenging. 

With some large IB's and analysts believing that Glencore is a viable business, this won't on its own make for a lower risk investment case and suggests an element of knife catching. Certain Brokerages have advocated that there are participants willing to lend to Glencore in comparison to than Anglo American (AAL). This in its own right isn't necessarily the best comparison, albeit, it does indicate what some brokers/analysts are using as a comparator. The absence of comparatives to tier one commodities companies rather says a lot.

Would it pay to buy Glencore? Quite frankly the unknown operational model poses some risks, but it’s always nice to have some higher risk exposure. It’s noted that personally the risks of being long are greater than having been negative on Glencore since IPO. This doesn't mean there cannot be a share price recovery, with the machine doing the rounds, expect some support. Investors would be wise to keep an eye on commodity prices.

To end on a cheery note, another leveraged play on commodities Freeport-McMoRan (NYSE: FCX). FCX had some good news with the drill head. Their 100% owned Horn Mountain Deep well in the Gulf of Mexico came in on the money The release in any other market would have been positive, more so, if it didn't mean the commitment of $$ to enable production the share price would have perhaps risen. Over to Icahn to break this one up…

Thought for the week - Rio/BHP plus Fortescue Metals Group (FMG), when's the impact of Roy Hill going to bring down the axe on iron ore? Inventories normalising again in China, and so a reducing demand globally. Its noted, Shandong Iron and Steel Group's are now back in production at Tonkolili. Those whom love romance in the market place will remember Tonkolili used to be owned by African Minerals (AMI).

One hopes that the acquisition of the Tonkolili Mine by Shandong was above board. It never rains but it poors (poor I know) for the former-AMI.  AWOKO article - one hopes the 'new' AMI has resolved such minor issues as moisture content, shipping and diesel disappearing. What are the chances of a three-pronged stimulus by China just as ore hits the market? 

Have KAZ Minerals got their cap out yet?!?! Put us out of our misery on the 50 pence rights issue please?!?!

Atb Fraser

Over to the grammar police/time limited and long-days. 

Morning Mumble (belated): Is VW Americas new BP? Just in the US? Perhaps with coffee? + JCB, KAZ & BLT.

Good Morning Evening,

Apologies it’s been manic!

The events unfolding for VW (Volkswagen AG) and the automotive industry as a whole were a complete surprise. The share price decline in comparison to the GM debacle was starting to look overdone until the outing of a further 10.5 million cars with emission issues. Prudence suggests it’s wise to consider the unquantifiable liabilities (irrespective of current provisions).

As per most corporate scandals of late, VW’s algorithmic adjustments were initially implied as being limited to circa 480K cars. Now the very size of the admission raises questions about the dividend and valuations become wide-ranging. Luckily for VW, the Suzuki monies will come in handy and are possibly not factored in by the market.

VW has not been absent of corporate issues before, with the Porsche hedge fund bonfire, union payments/benefits and now false emissions data. It would be a very hard/foolish to catalogue all the actions and conclude, after the fact, that VW was a veritable investment basket case. To do so, would question the very foundations of any investment. Save of course for the macro implications upon a company as large as VW i.e. China / Global auto markets.

With the range of fines and compensation ranges being so vast, some sensibility is needed. If one was to assume the issues of GM and subsequent cost implications, plus those of Toyota with their airbag denial had a similar gravity. Then one can at least ascertain those as being the minimum liabilities that VW can expect to pay. Admittedly, VW have come out with a $6.5B figure to side aside for potential liabilities or circa $590 a unit. Really?

VW and the market have some direction due to GM’s misfortune and currently (subject to further news) suggests it’s likely to cost them less than the worst case scenario bandied around.  The media have not so far implicated VW in any deaths or accidents as a result of their actions.  Having been short across the sector for car manufacturers on the back of the Chinese data, yesterday’s news was totally unexpected (perhaps a lesson...).

The corporates appear to have played right into the hands of the ever tightening grip of the enforcements agencies. Such Agencies/Government Depts. have gained as a result of the poor conduct of corporate entities (banks and autos), with severe financial penalties being imposed since the financial crisis (08/09). So one cannot discount too much of the U$D 37,500 per vehicle penalty, that the US Environmental Protection Agency (EPA) could impose for breaches to Clean Air Act.

Conveniently, America has an option to impose a higher penalty on VW due to the differences in laws governing the actions of VW, GM, Hyundai and Toyota. VW is at risk of being a pawn for the protectionism of America auto manufacturers.

The commentary about the reputation damage often ignores brand loyalty. It shows the limited understanding by some commentators of a sector and brands. A quick look at GM’s market share demonstrates they have maintained near to the level when the ignition faults were uncovered. Albeit, GM lost their key position of circa 25% market share back 2005 and have never recovered since. This was in part due to the diversity of the product offerings in America and quality.

The read across to other markets should not be ignored either, especially from the perspective of a) reputational damage b) potential liabilities and c) enforcement notices. Why would VW “conduct such activities” just in the North American Market? Are they alone in such practices?

VW’s actions have already given rise to questions about an exit from American market. With China in the crapper and Europe at best showing a dull glimmer of hope, what other options do they have? Stay and pay the price or exit?

Perhaps a new plant and improved corporate governance is a sensible approach. The read across of how quick VW’s hands went up, “we’re coming out, please don’t shoot” (Classic text book crisis management), would certainly suggest at this point in time they intend to stay in the US market.

Separately, US authorities have to consciously consider how much investment VW has made and is likely to make within the US. With recent speculation of another plant / operations being built. VW is invested in the US with the Chattanooga Plant, Tennessee (from 2011 onwards)

Chattanooga employs a significant number of people both directly and indirectly and, depending on how business recovers, could build more (but unlikely in the near future). The view in the auto industry is that VW is a big company to weather the storm, and that it's going to make the US work even if it takes slightly longer than planned. The planning stage may just be a slight underestimate, but one cannot knock optimisation.

With the litigious nature of such high profile cases, any costs are unquantifiable at this stage. Having been digging this afternoon, the likely outcome will not only involve X billions of dollars in fines ($4B estimate here), but associated warranty costs and, unless there’s a speedy GM type deal, possible criminal charges for those executives in the know. 

As the situation has been dragging on since August 2014, it would appear VW have been less than open with the EPA investigations. Of significance is the class-action lawsuits by US Drivers whom bought into the "clean diesel." Is there mis-selling? What are the refund liabilities? Do VW have to not only compensate drivers on false promise? Will vehicles over the longer-term be fit for purpose? Can modifications be made to rectify the issues?

The market’s reaction so far suggests there is a suspicion that all manufacturers have been up to similar. Just when the DoJ and American regulatory system are nearing the end of imposing fines on the banks. America have a headwind to attempt some protectionism on the back of VW’s woes. What with the pharmaceutical price gouging and auto defeat devices, US regulatory depts. and enforcements agencies may just have another busy year ahead.

VW have so far have been very clever to avoid putting the matter in context, more so, hands up and we’re cooperating. However, if one is to read across to the settlement of GM.

1. GM had 100+ deaths and injuries.
2. Arguably the product defects/flaw are potentially larger for VW.
3. GM’s lawyers and product specialists appeared to be aware of the situation and limited their actions to protect the consumer and general public.
4. The defeat device appears to be installed to circumvent existing emissions controls. Whereas, GM appeared to be after the fact. On the face of it, VW appear to have conspired to ‘beat’ the system and arguable had an unfair advantage over their competitors.
5. Both GM and VW have denied the existence of such a flaw/fault and as such, it has wider implications for the automotive culture of avoiding/taking blame.
6. For consideration in the liability is the multiplier effect - where potentially 2 or 3 owners of the same car could have rights to a claim due to the false statements and/or the practice of utilising the defeat device. So far, estimates here (EMC) suggest it’s likely to be around 14-16.5M owners that are affected by VW’s emissions practices. The issue is, what is the likely class action uptake of this case in comparison to those of GM? 10%? 15?%
7. What of the risks associated with VW’s assets back securities? VW Bank? Lease and financing packages etc…? Woah, over to DBRS / Fitch / S&P on that one, that may need a little tweaking.

Whether VW drivers are stalwarts to a brand is another story, with the reputational damage being another potential unknown. Evidence so far suggests GM are / have recovered in terms of market share since the scandal first emerged.  Their current market share of 17.2% certainly suggests the US consumer hasn’t been too phased by the ignition switch issues.

Once upon a time, German car-makers were known for the reliability, quality and efficiency. As such the sector read across is not great, but all is not lost.  This reputation is unlikely to be irreparable - theme parks and other such operators manage it over the 16-18 month cycle (psychology of risk selection). If one reads across to the psychology behind other brands, irrespective of sector, the norm is circa 12-18 months, more recently towards longer-periods. The poignant part is to avoid complacency, something VW should avoid at all costs.

There’s no two ways in putting it, that the industry as a whole has a crisis to manage. There’s a suspicion that the lack of commentary by other manufacturers suggests that there’s an element of due diligence being conducted currently. This comes with a caveat of conjecture at the moment.

Save for an ever expanding number of vehicles involved, one can look forward to a heavily fed media investigation. The Government agencies will of course cite the seriousness of such actions, outline a hefty fine $4+B and with an unknown quantum for recall and reparation costs.

The class actions may be the sticking point, with a wide range of circa $2-$16B (the latter assuming partial-refunds). In time, VW can invariably look forward to funding some form of "best practice centre on emissions" to remove the Government burden.

One could even draw on the past as an indicator of the future, with a speedy deferred prosecution agreement for three years (a la GM) to avoid further investigation. If one is the market for a new car, the plus being that VW cars may just be a buy (not the stock), as they have to build quality to repair this nightmare shareholder scenario.

The obvious question is which marques in VW's stable are at risk? Audi, SEAT, Škoda and Volkswagen marques. Greater scrutiny will be placed on commercial vehicles under the MAN, Scania, Neoplan and Volkswagen Commercial Vehicles marques?

In assessing the issues, there’s been a number of valuations. On the sums of the parts, discounting VW brand per se, cash etc.…With sensibility, assuming no further news, the worst case scenario based on current news of circa €87.63 (Euros) a share, with potential upside if the matter is put to bed fully, of near €115 a share.

At near €111 it’s very difficult at this stage to believe the issues are fully priced in, albeit expect those with greater risk appetites to be enticed. Perhaps those funds with telescopic calculations based on earnings in 2022 are being enticed? Can VW recover from here? Undoubtedly, but if further problems come to light, it’ll be a proverbial fire sale.

VWs exposure to China / Rest of the World is a story for another day that has not been fully discounted yet.

In other news, the JCB head count reductions and oil rig (including deep sea) count have not gone unnoticed. Kaz Minerals saga is reaching a conclusion with the market belatedly realising the all in unit costs are 20-30% below (edit) above market prices. ($2.80-$3/lb). Anyone for a rights issue? Previously a £5+B company.

Woes being felt in the UK steel industry by Bangkok's SSI and their Redcar plant with sympathies for Teesside workers. Redcar being a casualty of the Chinese steel exports.

BHP Billiton (BLT) Global Debt Investor Marketing Announcement is very well timed – considering Roy Hill is on track etc. raise it whilst you can’t! Did BLT ever update the market on the missing $1.5B capex guidance or is the situation still offline!? Expect more of the same…Copper not assisting Glencore either at circa $2.31/lb currently. 

Atb Fraser

Morning Mumble: Inventory, How much Copper do the majors hold? VEDanta's I've tried to be positive & ANTO'fghastly buys 50% Barrick's Zaldivar

Good Morning,

What is often not considered in commodity cycles is the level of inventories. Admittedly this can act as a float and reserve. How much do the majors hold in inventories, at what price and how is hedged. We know Glencore (GLEN) had 331Kt in the year accounts for copper inventory. 

KAZ Minerals do not separate their inventory but estimates suggest a modest 27,957/t's of finished product, excluding goods in transit. KAZ, are likely to be better managed with their need for cashflow but also they have issues at the current copper price levels, paying the market near 60 cents a lb if one considers their all in costs. 

KAZ had a Q2 & H1 Update yesterday, if you're so inclined or are perhaps are one of the workers FQM are paying to twiddle their thumbs at Sentinel? 

Vedanta want you to believe they're a Nickel producer (at the moment) seeing as all other operating subsidiaries have taken a spanking on price. Over to Tom Albanese, CEO of a bunch of companies held within a complicated structure, with a hope they can get their hands on some Cairn India cash by year end:

"In Q1 we saw continued volatility in commodity prices, but Zinc has held up quite well in view of its strong fundamentals and is now the largest contributor to our EBITDA. We continue to focus on improving efficiency, costs, and enhancing production across our well-invested asset base. We have broken ground at the Gamsberg Zinc project in South Africa, improved production at Konkola mines in Zambia and remain on track to re-start iron ore production at Goa following the monsoons. Our diversified business model supported by strong operating strengths and structurally low cost assets will enable robust long term returns to stakeholders."

So, we'll focus on the good hand (Zinc) as Vedanta do not want us not look at the other hand, we'll keep it short. Vedanta have a very credible mined metal production increased of 42% to 232,162 tonnes, (Q1 2014, 163,131 tonnes), but strangely the bottom line is being punished. 

On the one hand, there's a positive production increase and costs being half decent, significant in numbers in fact, but yet at EBITDA level it’s a paltry 11%. In the absence of an accountancy qualification, is it not fair to suggest costs in the chain have risen somewhere? One has a suspicion the amendments to the Mines and Minerals Development Rights (MMDR) Act, means producers have to shovel more for the same money. 

So with taxation rates rising into 2016 as guided by the Indian Government, VED are going to have to focus further on the bottom line just to maintain existing profitability. Unless one has missed it, analysts are not factoring in the CSR Levy at 2.5%, previously 2% from memory plus the increases in corporation tax? With a campaign going on to lower the District Mineral Foundation (DMF) tax as miners in India are punished, there may be some hope. 

With a bunch of Aluminium producers campaigning for an increase in the import tax on ingots, it’s not surprising VED are are reviewing restructuring some of our high cost operations in the Aluminium segment. (Source: India worth a read with a mention of VED's subsidiary Balco). VED's aluminium contribution at EBITDA is negative. One just hopes for VED's sake there isn't a slump in Zinc prices, as it’s got a very large burden on the balance sheet currently. 

VED's net debt, only up a modest $300M. Over to VED to cover their own financial update, 

Financial Update

The Company had total cash and liquid investments of approximately US$8.2 billion and undrawn committed facilities of US$1.1 billion as at 30 June 2015. Gross debt and net debt was at US$17.0 billion and US$8.8 billion, respectively, at 30 June 2015, slightly higher than US$16.7 billion and US$8.5 billion at 31 March 2015, on account of funding for projects and higher working capital.

As at 30 June 2015, FY2016 debt maturities includes US$350 million of bank loans at Vedanta Plc for which refinancing is in place and US$ 2.1 billion of term debt at the subsidiaries, of which c.$400 mn has already been tied up and the balance is to be rolled over or refinanced through longer term debt. In FY2017, Vedanta Plc has debt maturities of US$2 billion, for which we are in an advanced stage of discussion with the banks and these are expected to be refinanced by the end of calendar year 2015, while subsidiaries have maturities of US$1.3 billion for which we are evaluating different structures and options.

Antofagasta will acquire a 50% interest in Compañia Minera Zaldívar Limitada (Zaldivar), and will become the operator of the Zaldivar copper mine. My question being, is it "expected to be immediately accretive to Antofagasta's earnings and cash flow per share."? Really? Saves Barrick (NYSE: ABX) from flogging some more of Acacia Mining! Or does it? 

The final thought goes to Syrah Resources, would you stump some cash up? 

Atb Fraser

Morning mumble: Déjà Vu with Oil, Copper and Kaz! BAObab

Good Evening,

It’s been a busy period, so apologies as it was planned to cover more. The obvious happened with oil being impacted by inventory levels but with a significant amount of speculation anywhere near $60/bbl (Brent) and $48/bbl (WTI).

The market keeps waking up to the realities of another false dawn but over to the Baker Hughs rig count to install some more hope. The support levels are being defined currently, aided in part by storage not necessarily for speculation save for security of supply. The market is attempting to get ahead of itself with the speculation of drilling rig declines, what next? Well Counts via Baker Hughes? Surely not...

KAZ Minerals (KAZ) announced the audited results (for 31/12/14). Cuprum Holding have taken the crap and allegedly left the good within KAZ. As things are not going to plan, KAZ's backers have kindly been willing [waived] to forget about the covenants on gearing until Bozshakol Mine gets off the ground, so they continue in the same vein until 1st July 2016. Had KAZ added 5 days they could have timed it nicely Capital City Day in Kazakhstan. Not because of the changes in Capital City, but more so the need for capital! (Poor I know...)

KAZ's gearing has shot through the roof, more so than expected, in part due to the copper price falling more than those conservative parties thought! Shareholder funds written down, debt down a paltry amount, but gearing doubling as a % of shareholder funds and by EMC estimates surpassing the 70% as of today. It took the market quite some time to read a simplistic announcement and realise the concerns. With Kaz's currently cost per lb, they'll be hoping for better data out of China on the back of the PMI data.

Copper being the trade on PMI data, responded well to HSBC Flash China Manufacturing PMI. Copper's move mirror/validated factory production being well up and the Chinese New Year bringing fresh hopes of positives. Noteworthy the PMI data is contradicting the shipping, factory gate prices and company profits with production being up for the first time in 5 months. We should read into that that native demand is stronger than exports. 

Shorts were wise to cover on the China PMI data as the economy starts to benefit from the commodity drops. Copper is/was the weight of the PMI data, it responded well bouncing to just shy of $2.70/lbs (5% jump). The point to be wary of is housing is the driver for Chinese copper, it's stalling and this will dampen spirits in part. 

The market is now learning myopia creates volatility, as such speculators are looking further east of China to Japan and America for more solid copper indicators. China's issues are known and priced into the market. Japan and America are anticipated to spend, copper will trend (P+ve) for the long speculators, tapered in part by the Chinese known issues. Save for any issues causing risk off volatility. Additionally, the price is being supported by almost all the majors suffering from a drop in grades and alleged lower guidance (even fractional). 

With the gap narrowing in the supply and demand (for the interim), its wise to take profits. We are led to believe that the Zambian spat will be resolved shortly, so Barrick et al can ramp up production once again, putting some breaks on coppers appreciation. 

Baobab's (BAO) largest shareholder strikes and crystallises losses for every long-term holder if selling today (including here). Having seen value in the asset, the proposed delisting and cash offer is a disgrace to a decent asset. Unfortunately is what the market is as the market allegedly struggles to find financing. Booking a loss on BAO today is not with disappointment but more a caveat towards the directors (whom will for decent investors become uninvestable). 

BAO's Directors for some reason have an agenda to delist, if both proposals fail *(unlikely) it’s worth kicking the directors into touch. It’s asserted $12M will be difficult to raise within the current market, which rather sums up the capabilities of the management. If you see such parties on the header of anything trade-able, add a risk caveat. One can but hope for another bid? But don't hold out much hope...

More later, but for those following my SIPP dullness, Blue Solar Income Fund release their unaudited Condensed Consolidated Interim Financial Statements for the Six Months Ended 31 December 2014, bang on the money...

No time for WLFE, GLEN, RIO or Vale, but later?!?!

Atb Fraser

Morning Mumble: Chinese Property Bonds &....wonder will never cease, oil revisions downwards.

China's overseas property investment to reach $20 bln in 2015-study As Kaisa defaults, Goldman sees value in the property builders. The property slowdown is forcing the insurers and larger Chinese developers to diversify their holdings to an international hedge. Its wise to consider this the top of the property cycle as the leverage is unlikely to be paid with internal growth faltering.

Li put it simply , "there's just so much on the market a buyer is being deterred from the off ings". Li I am sure meant offerings but you get the idea. Li's been tracking the property market since the clamp down on corruption in China and the charts are staggering, dropping almost identically from 18 March 2013 to today. Surely the Chinese housing situation isn't directly linked to corruption that the dropped started 4 days after Xi Jinping became president?!

Today, Royal Dutch Shell (RDSA) announced there 4th Quarter and Full Year 2014 Unaudited Results and with it a very logical  update balancing growth and returns to address the sector issues they are experiencing was the license to print money for those short on the news. RDSA's prudence in their sales was more fortune than well-timed divestments. 

RDSA buybacks are scrapped (wisely) the investors (long only) are now the ones to take the pain, with earnings significantly under pressure and limited further divestments, I have to wonder if RDSA will be on the acquisition trail very soon, there is some very well-placed gossip of a very large acquisition. Over to UBS to get the ball rolling. Over to the Industrial Engineering components to react appropriately. 

Glencore (GLEN) appear to not know what to do with their coal operations. Glencore considers cuts at South Africa coal unit Optimum, having tried closing its Australian operations for 3 weeks, why did they bother opening it again? Now they're considering South Africa (RSA). 

GLENs asset classes should be considered tier 2. Over to GLEN to meander through with an inconsistent strategy. Had GLEN had the understanding of the market like they should do, the only benefit was to the short-term price where as soon as the news of the restart came the price gave up any support. We'll blame China for the thermal coal prices, rather than the entire change in global demand. The one saviour may be that RSA could be compelled to buy / take these struggling assets off miners hands to shore up the ailing economy, with the Rand like to depreciate further there's going to be a few bargains*.

For those whom dislike the shorters, they'd be wise to check the prices of PDL (Petra Diamonds) and Gem Diamonds (GEMD), the market has awoken to the fact the sale of Antwerp Diamond Bank to a Real Estate company (Yinren Group) didn't go as planned (a year ago). 

Of great significance, Shanghai, Hong Kong shares fall as China launches new probe into margin trading China Securities Regulatory Commission (CSRC) perhaps have found something in the alleged routine checks. 

Kaz Minerals Q4 production report from Roger Bade gets the chocolate teapot award. For myself, you'd be rude if you didn't agree there is no guidance on currency or costs. The market has to look over its shoulder at the all in net cash costs of $2.04/lb (not all in costs circa $2.75/lb EMC estimate) of the interims last August. With prices stabilising and likely to appreciate over the next 12 months, save for more economic woes and the Greek issues, plus Bozshakol Copper Project and Aktogay Copper Mine coming on stream there should be an element of knife catching now. 

Kaz's debts should not be ignored with the Chinese Development Bank (CDB) funding there's room for discussions. Kaz location to China is obviously strategic for both parties, time to start considering the positives.

Atb Fraser

Morning Mumble: Food Prices (partial), CU lower soon + Market Items

Good Morning,

Apologises for the delay, Game Digital (GMD) stating the obvious sentiment in margin and bundles in the Christmas trading update. Many thanks to the GMD IPO (although a repeat listing) aiding 2015. Along with KAZ Minerals the short benefiting today's market joys with Credit Suisse yesterday commencing the kicking. 

VED (Vedanta) ( as EMC'd yesterday) was known to be closed early, it had hit the target price for a long term short circa 7 months. It does need a revisit for intra-trading but one has to take money off the markets with strict discipline. Its a muppets disease not to bank significant profits and that includes the institutional readers whom think the trend is forever, yes you too can be a Muppet. Glencore, my short on the basis GLEN's (Glencore) copper beliefs were out of touch with the market nevermind their "tear" of assets (poor I know). 

The herd shall follow in due course, but its wise to consider their coverage if they cannot get the obvious right. With coal getting a kicking again...GLEN's earnings are looking that great with greater capital intensity. Kudos to Liberum Capital whom I suspect didn't expect 240 pence, Investec might need to review their switch from Rio to GLEN

Below are some brief out-takes for something I did in June 2013/Jan 2014 and July 2014, for which I've adapted this morning. For those that know about Pork Riblets, Semi-Meaty (I'm trying to make it sound luxurious)...December has been the hit by a quadruple whammy that has continued unabated, positive for the pocket and for retail sales and more so if the trend continues. Retail will see cheaper goods (consumer durables/white goods) and higher demand as well (see  EMC thoughts on shipping costs) with greater disposable income. Global deflation/zero inflation is a risk to western economies more so than developing countries. Save for the developing nations weakness in currency (about time I must say) eroding a good 50% of any price price reductions.

So with oil now mirroring a lot of commodities with speculation being stripped out to leave a realistic market (over supply) even in the short-term, copper as the indicator of growth has fallen back. Readers cannot say they were not given the warning  in November/December. So the indicator (Dr Copper as most refer to it) of global health is pricing in more realistic growth patterns (see Chinese trade growth) nearly bang on my estimates at CampAlpha). Even with the EU's intentions of Economic stimulus etc...America's demand may however support China (perversely). 

So with the decline in commodities positively impacting on food prices for the consumer both in agriculture (inc fertilisers and other associated harvest costs), supply chain logistics (in its entirety) and point of sale costs (including energy and staff costs re: recent hourly rate declines in the US), there's only one likely beneficiary. This theme will continue for some time, with the FAO (Food & Agriculture Organisation of the United Nations) indices mirroring (to a degree) iron ore and belatedly copper. Other sources but limited time so apologies.

See FAO Food Commodity Price Indices (left), showing significant drops in prices there's a real risk of further drops as bio-fuels are awash in the market and with limited / static demand creating a surplus in animal feed as well the alternative demand does not look positive either (grain feed/food ingredients). Plus a significant pressure on the fertilisers likely to drive costs/prices lower as producers hold out for better deals and the market being in oversupply (although recently tightening). 

With record harvests across feed grains, soya and meats (if one is allowed to call them a harvest), save for coffee(long), Cocoa (only short-term) and citrus fruits (Florida Harvest issues inferring one of the worst crop every. Prices are set in trend for the next 12 months save for any major issues. We have Soybeans dropping 3.6% After USDA Supply Report (WSJ) So for the dinner party live enthusiasts you will finally not have to pretend to substitute meat for your vegetarian guests. 

The global super-cycle is moving through commodities to food and is taking hold . With commodities the first to give, then food prices, forcing the factory gate prices in decline. (Simplified version). When considering the below, also consider the global impact both to Grocers but also to the consumer. 

Just a summarised bit on what I'm able to share in terms of food prices, please feel free to ignore or digest (I know).

Today we saw the risks presenting in copper with the tank, EMC copper's real risk could not have summed it up better, taking larger positions on the way down...in the absence of any support $2/lb. is the next station. 

Limited time for the other items. Its worth commenting on the iron ore price for those thinking the summer would last longer. All the majors were down, save for Atlas Iron the second coming, with massive volume, it would be wise to pause and plan (you vultures!). With the energy crisis of over supply (Energy rout I think CitiGroup called it) guess what's happening with Coal. With a few changes to increase the liquidity in LME coming into force on the 19th of this month, traders would be wise to read the manual:-).

Risk off? Gold on? hitting the support line of $1239/oz and retreating quickly. Cost deflation is going to impact gold, its only a matter of time!

Atb Fraser

It would have been respectful for certain individuals to acknowledge the source of their information in emails, reports and articles rather than just copying and pasting.