PM Bolt-On: Exclusively Majestic Wine (MJW) - you may need coffee.

Good Evening,

Majestic Wines trading update came in better than expected - fear not, it’s still not great but with the 'strategic review completed' the market has bought into the story. Despite Majestic Wines stating the obvious:

This transformation will take time and require significant investment, so we expect profits to fall before they grow again. However, we are certain that it is the right thing to do for shareholders, customers, staff and suppliers.

The structure of Majestic's pre-Naked Wines meant MJW should have been able to develop a Business to Business (B2B) and an e-offering without having to acquire Naked Wines. Majestic had an established network and logistics already in place – it did not have to spend £70M.  

Majestic's web-based expansion plans are putting shareholder returns at risk (dividends), with the majority of free cashflow likely to go towards customer acquisition - why is the market buying into this? With the company guiding to no dividend until July 2018 at the earliest, there's no urgency to put equity at risks unless you are a true believer in the story. 

The mainstream  ran with, ‘Investors may raise their glasses to toast Majestic Wine’s new boss Rowan Gormley today if he can deliver a much-needed three-year strategy that can deliver on upturn to the group’s finances’ (Telegraph – with apologies). 

EMC's believes in the short-to-mid-term that online wine, text for wine and all web-type-wine-entities offer limited upside. The method of acquisition and enticements do little to promote customer loyalty; resulting in higher costs and ironic reduced loyalty rates. The market appears to subscribe to the "hope value in this being a profitable web based offering", we do not.  

These types of marketing strategies are a bet on a customer relationship lasting long enough to recover the initial outlay and make a profit. Examples of enticements being ‘a free case of wine, ‘£40 off a case', or ‘sign up to paying a monthly fee for discounts’. Has the market not seen this before - including offering rewards for recommending friends? 

The best of the results are normally in the summary, we'll handover to MJW (bold, italics and underlining are additions) and cover some of the balance sheet later:

• Underlying H1 trading encouraging at Majestic Wine whilst strong growth continued at Naked Wines.

• Thorough strategic review now completed, challenging medium term target announced today along with key new initiatives and updated short term cost guidance.

• New management structure and team in place and working well. 

Are Majestic management losing sight of the value of Majestic retail by chasing revenue with Naked Wines? The challenging medium term target implies there's going to be a revolution in online wine sales and the Business to Business (B2B) arena. Established players are very adept at dealing with challenges. We believe there is a good argument for a Majestic (brand specific) web offerin - where customer acquisition costs could be cheaper than if the Naked Trader brand or format was used and with brand loyalty.  

There's undoubtedly value in expanding the B2B offering, but the question remains, why expand within an already competitive online market place? What is Naked Wine's edge in the market place? 

If Majestic asserts that Naked Wine's will be the go to ‘virtual’ shop for online wine, one has to consider the competition - Laithwaites and Virgin Wines (This is Money). In an already competitive market, we now question whether growth will be profitable enough to warrant the investment and the suggested valuations (we have avoided stating shareholder returns at this stage).

Analysts with rose tinted spectacles might like to consider the following: Googled for you -search wine (Search 1) and Googled for you - online wine (Search 2). Please note the positioning of "Majestic's" in Search 1 compared to Naked Wines in Search 2. More so Laithwaites, Virgin Wines  and Tesco all come in above Naked Wines in Search 2. The very position of Majestic in search two (online) questions why there was a need to pay £70M for Naked Wines. EMC ignored the advertisers as well, albeit these are as poignant. 

We note the change in director’s responsibilities and some amusing KPI's with a challenging set of three year targets up to 2019 (see further down). 

Over to Majestic with their Three year transformation plan highlights (ECM's additions are italics, bold and underlined):

• Underlying H1 trading encouraging at Majestic Wine whilst strong growth continued at Naked Wines.

• Thorough strategic review now completed, challenging medium term target announced today along with key new initiatives and updated short term cost guidance.

• New management structure and team in place and working well.

• Announcing today a new strategy to deliver sustainable, volume led earnings growth and improved return on capital

• Targeting over £500m sales by 2019. Key performance indicators to demonstrate progress are also published today

• Good progress made on structure, team and key initiatives
• Key elements of the plan include:

• Absolute focus on disciplined investment to generate returns on investment - measured as annual recurring EBIT generated as a % of investment outlay - above our target of 25%

• Change of emphasis from opening new stores to new customer recruitment to drive higher returns from the current level of investment spend

•  Total UK store target reduced from 330 to 230, currently 211

• Reviewing the existing store network for opportunities to unlock value

• Reinvigorating sales growth in mature Majestic Retail stores with a new and simplified pricing policy (including no minimum purchase) and improved customer experience in store and on-line

• Continuing to expand the fast growing and successful Majestic B2B business by winning additional accounts

• Continuing to expand the fast growing and successful Naked Wines businesses in the UK, USA and Australia

We concur with B2B focus and customer relationships managers (CRMs) that have perhaps been underutilised to date. In essence, Majestic will be making the current estate work harder and this is always a positive for shareholders. However, these positives may be offset by Naked Wines that has to acquire customers at a cost - one cannot help but wonder if all the key metrics and words utilised sound a little "Hello Fresh" like in the KPI format (below)

Likewise, reducing store footprint and/or limiting expansion when growing the B2B is somewhat of a contradiction. The ability to deliver and compete would surely be a benefit of further expansion. There is also a marketing opportunity within the B2B that would cost significantly less than the Naked Wine concept that entices customers with a free case of wine or similar etc.

Majestic's KPI's     

Segment	KPI	Current level	Significant improvement by:
Majestic	Customer retention	45%	H2 FY17
Retail	Product availability	67%	H2 FY18
	Store manager retention	77%	H1 FY18
	Wine quality	TBC	H2 FY18
	Proportion of 5-star service ratings	85%	H1 FY17
Naked	Number of Mature Angels	269k
Wines	Net Growth in Mature Angels	+29k
	Retention rate of Mature Angels	66%
	Growth investment in Mature Angels	£1.2m
	Return on Investment in New Mature Angels	112%

Note: Wine quality at Majestic Retail will be measured in future by customer ratings. No current data is available.

Questions;

1. How does Majestic's measure customer retention? 
2. What is the retention measured against - Active Customers? Does it mean incentives are offered to customers to stay? 
3. With a 45% Retention Rate - does one assume then that it is a 55% churn rate? 
4. Will all these retention numbers be stripped out per operating divisions? 
5. How does one check in a shop-based business if someone is a returning customer – store customers are notorious for forgetting to bring their loyalty cards.
6. Product availability? Does this mean Majestic's has to carry sufficient stocks to not be out of stock? Or simply have wine for sale? Being out of stock is only a bad thing if it means a lost profitable sale – what is customer behaviour – do they substitute; or return; or have deliveries to their home? 
7. Are the Majestic stores out of stock because the model relies on limited volumes of attractively priced wine to bring the punters in? Without explanation and analysis ensuring ‘sufficient’ stock could be a Majestic own goal.
8. Store Manager retention - is the limited opportunistic research we've conducted correct, that Majestic are haemorrhaging their talent at significant cost to training?
9. 5 star customer service based on what platform for reviews?
10. Are Mature Angel customers who leave kept on the books for a period of time "just in case they re-join?" Or is their no motivation for Angels to return.
11. Retention of Mature Angels – as per the KPI table - in the cycle of achieving the status of a Mature Angel, does this mean 55% churn/exit before becoming an Angel. Once qualifying, is there an expectation of 35% of Mature Angels exiting. What is the cost to the company for a customer to attain the status of Mature Angel? Or for that matter, the cost to customer?
12. Growth Investment in Mature Angel? Is the KPI the amount the customers have paid in or the amount the company has spent?
13. What's the difference between Naked Wine and any other offering? 
14. Do supermarket models offer less value? We disagree and consider Naked Wines model to funding and monthly payment a hindrance to customer on-boarding and choice. Supermarkets including the discounters challenge the model not just on price and margin but more importantly convenience. 
15. Is the Naked Wine's "customer monthly payment/crowd funding" model the way forward rather than a hindrance? The customers shall decide over time - perhaps it gives some sales outlook and reliability in forecasting
16. Comparatives are hard to find in LFL wine offerings but there are remarkably similar themes. The main benefit being, one doesn't have to pay monthly or become an Angel "to obtain a discounted price" at a supermarket or off-licence. We feel this type of offering / marketing gimmickry may work, in the short term. 
17. A KPI of "average revenue per customer" or "average basket price"- like Majestic used to report would be beneficial. 

We should at least loosely consider Majestic’s results:

• Net debt and liabilities are currently near £25M – with the aspirations of expansion there is a real likelihood this will increase as marketing/customer acquisitions continue apace.

• All is not lost though - debt is sufficiently serviceable if operational performance remains stable and/or improves in 2 of the four divisions.

• We rate Majestic Wine retail division and consider the commercial division B2B to be of significant future value as it has yet to be fully developed. We can draw possible similarities in the B2B space between Conviviality (CVR) and Majestic's in the future and the potential of such an offerings - perhaps even M&A to command better margins. 

• Ley and Wheeler (L&W)– we acknowledge that L&W could be developed further with the possibility of added to other divisions with the bolt on of specialist fine wine business.

• We have already mentioned the reduction in new store roll out (CAPEX) - one suspects will be directed towards marketing.

Today confirmed the belief that dividends are toast for the foreseeable future – Majestic suggests they intend to return the dividend in July 2018. This validates our belief that Naked Wines does not fit the Majestic model and will be a drain on profitability longer-term.

The hype of the 'internet of things' is not a model we invest upon within the wine space. Retail clothing yes (BooHoo etc…), but wine has so many other competing factors including supermarkets and their discounting cousins. Simply, why add another 'point of sale item' to your weekly/monthly shopping - hobbyists perhaps but the average consumer........? 

Businesses should be viable and as such, Naked Wines needs to prove itself significantly more to warrant us buying in Majestic. If investors feel there are rewards in buying the stock based on two divisions and hopes of an web-based wannabe Goliath (Naked Wines) + specialist fine wine business – then today will no doubt present as an opportunity over the longer-term. 

We do not deny the webcast was well received by the market – however we remain unconvinced. We feel the strategic review was unchallenging and has not gone far enough improve the outlook for Majestic Wine on many levels. Validated in part by the Majestic statement:

We are excited and confident about the future, but I must emphasise that these plans will take time and require investment, which means that we expect profits to fall before they return to growth from a low point in FY16.  We anticipate that our strong cash flow will enable us to invest as needed while continuing to deleverage and restoring the dividend in full by 2018.

In our view, they have not answered how they will manage the supermarket threat to margins (conventional or discounters); or how they will shift consumer perception of their offerings and how the value of Naked Wines is justified. The outlook for Majestic may be changing, but currently there are insufficient indicators to warrant us being a buyer; we have been negative since the acquisition of Naked Wines. 

The benefits of the economic moat Majestic previously had have been eroded - this we felt insulated Majestic's offering with the 6 bottles minimum purchase. This helped establish Majestic’s brand and offering over years and was devalued in an instant; other options were available and should have been explored.

We believed the two models do not fit together for investors. A good percentage of shareholders would have invested on the basis of a very different concept. Expect those in Majestic 1.0 (dividends and modest growth) to sell into any strength of Majestic 2.0 (web-based hopes and expansion). 

Atb Fraser

Weekend: Tous pour un, un pour tous + A Fad of Things, Property, Retail and Wines!

There's no good in the actions of those in France! So it’s limited to - Evening, rather than ‘good evening’.

Tous pour un, un pour tous! Sympathy and thoughts go out to the families and friends of all those affected by the senselessness that occurred in France.

We are losing count of the profits warnings and revisions in guidance on a global scale – especially industrials. The trade this week was Rolls Royce (RR.) where the interimmanagement statement echoed the woes of Fenner et al. A general theme about earnings and outlook that will continue for the foreseeable future (over to Caterpillar after the JCB layoffs).

Themes from the previous week continued all the way through and are now the reality (Weekend's EMC - NFP & Weaklings) - deflation is hurting earnings and causing a nervousness in guidance. Those companies that are leveraged whether in oil & gas, manufacturing, services and support are all starting to acknowledge "the world's largest customer(s) are changing / have changed their appetite." 

In the US the likes of FitBit (NYSE: FIT) is beating the trend (currently), with what we here consider a gimmick formulae. FitBit need to overcome a common theme of fad utilisation with their products, which are often used for not much longer than that of a gym membership - circa 3 months (EMC research) there after being destined for a drawer. 

We have to acknowledge one reader’s wife’s commitment to use her for an eternity! Although if you’re stuck for a present for your beloved, you too can do your thing for wearable revenues! Wearable tech undoubtedly has mileage across the sector, but with competition, what’s in it for shareholders? Those reliant on one arm (scuse the pun) of the sporting sector are limited in their traction, where they’ll have to compete with the likes of Nike+ etc.…

For some investors, they have been rewarded with the Fossilacquisition of MisFit, but for others it’ll be a cycle of confetti issuance for equityraisings a la FitBit.  There is perhaps a hope of being acquired rather than having to justify being a viable business that warrants a decent valuation.

FitBit’s placing (and discount) was expected and the price is understandable when one has a quick look at the accounts. Innovation costs money, especially where there’s a theme of a “fad of things” emerging. The EMC considers FitBit to have an over reliance on novelty and gimmickry that drives sales – Christmas is upon them where they should do well. We will not comment on Fitbit inventories levels, receivables and trade payables, they appear to be insignificant to investors – but not those that bought into the equity issue.

Rocket Internet (ETR: RKET) call these “proven winners” (Rocket Internet terminology from the lengthy CMD) - but we have HelloFreshbeing withdrawn (FT). Bringing into question the valuation of Rocket’s “proven winners.” The market is getting wise to the actions of companies, especially those that issue discount vouchers like confetti pre-IPO.

Within the commodities space we have the Icahn’tseries of Freeport McMorran (NYSE: FCX). When a major investor tries to bet against the global outlook; one should pay attention. The market is changing, oil will stabilise as will copper, but significant bets against a global trend are often unwise (in the short-to-mid-term). We note the two brokers that criticised our approach - being 40% down from our commentary, are we not validated?

We also have trends occurring in retail space in the US that have yet to present themselves fully in the UK - albeit consumption has been brought forward by Help to Buy (H2B) scheme. This is propelling the results of the house builders, but with a muted response from the market Inc. BarrattDevelopments Trading Update (BDEV), RedrowAGM Statement (RDW) and GreatPortland Estates (GPOR). This Tuesday (17 Nov 2015) sees British land (BLND) reporting half yearly, a stalwart that shouldn’t be ignored.

US retail space are admitting the need to entice consumers with discounts and showing the price-sensitivity in the market – evidenced in part by Macy’s and NordstromQ3 Results. Big ticket items impacting on retail - Walmart, Nordstrom and Macy's all showing a similar story. By big ticket, we mean houses, cars, home refurbishments and extensions, electronics and smartphones – yes this is a retail driver in China as well (missed by most!) and will have consequences to this.

In the UK these themes have already hit the likes of Kingfisher, Travis Perkins, Speedy Hire, HSS and as a wildcard Halfords. Two companies in that list haven't helped themselves either (Speedy & HSS), but we'll save that for those accounting gurus with more time on their hands. 

Retail will also be hurt by the rise in student debt, where there is a suspicion that student registrations rose because of the recession rather than a yearning trend to improve oneself. The student leverage and consequences mean that a few generations are going to skip a housing purchase until later in life.

If society loads a student with debt the consequences will impact an entire generation, especially where wage growth is slowing or deflationary. Student Fees on the increase, student loans on the increase…remind yourself of the purpose of education?

Pearsons (PSON) education is showing the realities of the market place. See PSON interimresults graph for a trade plan courtesy of Bloomberg ™® and one shrewd trader.

We have Majestic Wines (MJW) reporting tomorrow - with the trading update from Conviviality(CVR) – have they cannibalised MJW’s margins? Majestics have erased their economic moat of six bottle minimum purchase – we will start to see the implications of this tomorrow and average spend.

Some poignant questions for Majestic Wine’s – if the removal of the 6 bottle limit didn’t impact on revenue, will it maintain them longer-term? What is the customer acquisition costs of Naked Wines? Are Majestic’s in a declining space where novelty type drinks are on the increase? We have insufficient data for a conviction trade. We won’t comment on their limited response from IR either and will maybe comment further tomorrow. …

Atb Fraser

In trading or taking a view, the impact of being laid off, made redundant or hurt by the actions of some idiots may appear to be ignored. These are never forgotten, including the implications for the families. 

Morning Mumble: Direlight (DIA), Chemring (CHG), Kenmare Resource (KMR) and Majestic Wine (MJW) their economic moat!

Good Morning,

Dialight have given strategic review & trading update. Over to Dialight (see additions by EMC in bold):

Trading Update

Trading in the three month period to 30 September 2015 was characterised by continued weakness in the oil and gas sector and reduced levels of industrial capital expenditure, particularly in North America. As a result, reported lighting revenue growth for this period was 5%. The cost reduction actions announced on 7 August are on track to deliver their targeted reduction in operating costs and we are encouraged by the strength of our order book. However, with market conditions having become more challenging during the third quarter, and Dialight's financial performance weighted as usual to the seasonally-strong fourth quarter, the Group faces an increased level of uncertainty in the remainder of the current financial year.

But...By the end of 2018, Dialight is targeting to achieve:

• Over 25% annual revenue growth
• Over 40% gross margin
• Over 15% EBIT margin
• Over 80% cash conversion

The market is wising up to the realities. See: EMC: Direlight (DIA) June 2015.

Chemring (CHG) trading update that isn't good news with a "potential" delay in the 40mm contract. The concern being, this is yet another company flag waving a rights issue so far in advance it raises significant questions about any understanding of the market. 

Admittedly, with a bit of good fortune, Chemring could turn the situation around by gain the necessary permits and export approvals associated with this contract, although one senses the board find this highly unlikely. Over to Chemring, additions in bold. 

Key points

• Despite significant progress having been made, there is potential for delay to revenues from the 40mm ammunition contract announced on 14 September 2015

• As a result of this and other issues, there is now a realistic prospect that year ending 31 October 2015 ("FY15") underlying operating profit1 could be reduced by approximately £16 million to approximately £33 million

• Order book at 30 September 2015 of £606.3 million; £344.6 million for delivery in FY16, representing more than 75% of expected FY16 revenue of £450 million

• Discussions will be held with debt providers to negotiate amendments to the operation of covenants and the waiver of any event of default that may result from the 40mm contract delay

• Proposed rights issue (the "Rights Issue") of up to £90 million in Q1 2016; fully underwritten on a standby basis by Investec and J.P. Morgan Cazenove

• Resultant medium term target capital structure of 1.0x - 1.5x net debt to EBITDA

The company's debt levels have been a concern and impeded them for some time, so Chemring elect to kitchen sink their issues today with:

"The recent progress of the Group has been impeded by its high levels of debt and associated interest costs. Significant time has been spent managing this debt, at the expense of further operational improvement and fully capturing the longer term growth opportunities open to the Group. We have therefore announced today that the Group proposes to launch a fully underwritten rights issue to raise up to £90 million, the proceeds of which will be used to fundamentally address the high levels of debt and to provide a competitive capital structure."

It begs the questions of why the rights issue isn't now...shareholder value? The cash advance whether recognised in this year or next is immaterial to the overall issues the company are facing. Target price now likely to be near 87 pence. If it quacks like a...This company has a momentual task just to maintain existing shareholder value, 

Kenmare Resources (KMR) forgot to mention some key ingredients within their  Q3 trading update. Namely the pricing environment over and above anything Kenmare can do will remain challenging. Iluka Resources is fully aware of the KMR financial position when such terms as "Super Senior Facility" are utilised it rather suggests who has the stronger hand.

A question: exactly how much time have the "board / management" spent out at Moma? More so, what is the purpose of the board if an external consultant has to be appointed to support and extend this ongoing cost control and efficiency programme? We'll ignore the stock levels and the like for now, as all the cards are in China's and Iluka's hands at the moment. 

In the current environment, Iluka Resources have no need to save Kenmare and there is a real risk of downward pressure on any offer price. For a perhaps more open outlook, please read Iluka's Q3 (see the market conditions section). 

The market is waking up to the realities of Iron Ore, scrap prices are falling quicker, steel prices down. More so, there's now evidence Steel Mills are bringing forward larger maintenance works and/or shutting capacity due to the limited demand. We acknowledge the likelihood of a larger sized steel mill default. 

With two significant events currently under way the 18th CPC and the Fed, there are likely to be considerable trading events. We have Aluminium production in China yet again on the increase, the average operating rates of Chinese copper processors is steady but nothing to shout home about, Zinc inventories in Shanghai, Tianjin and Guangdong are on the up and finally, scrap prices in China fell through the floor evidencing the realities/contradictions of the alleged balance in supply and demand.

Finally, it would be unfair not to consider Majestic Wine (MJW) whom pulled the proverbial plug out of their economic moat of six bottles or more. Apparently, MJW trialled no minimum bottle requirements at 23 stores for 5 months. Its allegedly had no impact of volumes, really?? 

The question is, did the removal of the 6 bottles or more criteria improve sales? Or just increase the cost per sale? Is this a flag waving event where they firmly placed themselves within the supermarket sector where such benefits of 6 or more bottles may have insulated them to a degree. Surely if one is an off-license location is key!

If someone could be so kind as to point out where Majestic announced to the market that they were trialling the no minimum bottle purchase, it would be appreciated. As in yesterday's announcement of a new pricing strategy stated, "follows the previously announced successful trial in selected Majestic stores since Spring 2015 proving popular with both new and existing customers." Perhaps one is just being tardy, a quick email to Majestic's IR might assist. 

With the results out on the 16th, and one has a suspicion there's been a leak to the supermarkets! Quite why Majestic Wine's didn't merely launch their own online offering of wines via post/text is a very pertinent question

Atb Fraser

Apologies for grammar a quick one!

PM Bolt-On: Lonmin (LMI) & Anglo American (AAL) - Kumba, Exxaro, Minas...+ Copper and Chinese Interest Rate Cuts (+waffle) + WPP & Majestic Wines

Good Evening,

Last week, hopes of Lonmin (LMI) being the casualty that the Platinum/Palladium industry needed faded away, with their latest refinancing. Not only would this have removed a significant proportion of the surplus off the market but perhaps improved the outlook favourable. The deal is yet to be inked and with quite a few outcomes it’s not without its risk. 

There's gossip (or hope) of interested parties post the update on trading, business plan and funding. With a number of outcomes, the poignant question is "what equity is there in Lonmin for non-participating shareholders?" The likely outcomes:

1. LMI may raise the monies and based on their cash costs of ZAR10,339 per PGM could have a chance of recovery. Assuming one ignores the past fundraisers that Lonmin quickly burnt through - previously raising in December 2012, 
2. The $817M kept the lights on since -  LMI fail to raise the monies based on shareholders experiences to date - geo-political risk, miner/worker demands, inflationary costs (Eskom's price rises are unsustainable) and the outlook for platinum/diesel associated catalytic converter risks. 
3. LMI raise a partial amount to satisfy the banks in the interim whilst a buyer for LMI is found. The difficulty is determining the value of equity/assets after dilutive equity raise. The risks cannot be totally ignored. 

Lonmin (LMI) -

The Board intends to announce on 9 November 2015 the full terms of the Proposed Rights Issue to provide the new equity funding required of US$400 million and to publish a prospectus and the audited results for the Group for the year ended 30 September 2015. The Proposed Rights Issue is expected to be underwritten on 9 November 2015, inter-conditional with the Amended Debt Facilities.

With not long to decide, it’s over to those already torched and/or underwriting to strike a price. Could this be a 4:1 dilution?

We had Anglo American (AAL) come out the other day and say just how bad it is. Like Lonmin, Anglo face an uphill battle of immense proportions. There's a number of items to be considered, we shall be coming back to them in due course over the coming weeks, specifically the items the market is ignoring.

Not forgetting that the comparable quarter for platinum production was during a strike, it’s sensible to read right to left on the chart below. Save for the warping of platinum, the results are a disaster for shareholders. There's a real risk of De Beers being sold near the bottom of the market. Admittedly there appears to be some form of resistance from the board to dispose of the main value in Anglo, they may be forced into a corner.

The lack of debt guidance in Q3’s is always an issue, but on results there's an indication that the dividend is going to be toast. Cashflow doesn't look ‘great’ and the outlook isn't much better. We estimate $12.6B in debt currently.

Overview (from Q3)

	Q3 2015	Q3 2014	% vs. Q3 2014	YTD 2015	YTD 2014	% vs. YTD 2014
Iron ore - Kumba (Mt)	11.4	13.0	(12)%	33.9	35.8	(5)%
Iron ore - Minas-Rio (Mt)(1)	2.9	-	nm	5.9	-	nm
Export metallurgical coal (Mt)	5.5	5.1	8%	15.7	16.0	(2)%
Export thermal coal (Mt)	8.8	9.0	(2)%	26.1	25.0	5%
Copper (t)(3) (4)	171,100	176,900	(3)%	527,400	573,300	(8)%
Nickel (t)(5)	6,800	10,700	(36)%	19,800	30,500	(35)%
Platinum (produced ounces) (koz)(6)	614	541	14%	1,739	1,267	37%
Diamonds (Mct)(7)	6.0	8.2	(27)%	21.6	24.2	(11)%

 *See notes 1-7 end of commentary

We’ve previously discussed the issues at Kumba Iron (Sishen Iron Ore Company Proprietary Limited (SIOC), more so the difficulties with cost controls. This should have been implemented earlier.

Kumba’s operating costs target is a fairy tale at circa $40/t. Whether this can be sustained longer-term is another question. In the short-term there's a possibility, but sustaining capital investment can only be modestly be reduced. 

The majority of South African operators are suffering and Kumba’s Sishen FE mine is not exempt from the ensuing operational issues and potential unrest. Kumba had a reduction in iron ore production from the forecast 33Mt to 31 Mt (6%)) and an increase in waste tonnage from 200 Mt to 230 Mt (15%). 

Not only do Kumba/Anglo have lower iron ore prices, lower production and higher costs all unwelcome at the cashflow/profits level. The risks associated with the Exxaro black economic empowerment (BEE) vehicle should not be ignored. (EMC: July Morning Mumble: Anglo's further woes thanks to Kumba/Exxaro). Similar to Anglo's dividends, shareholders should not discount the possibility of any credible dividends from Kumba and consider them toast for the foreseeable future. 

Luckily for Exxaro they have the International Development Corporation (IDC) (Article: Creamer Media Mining Weekly) to bail/refinance them. The IDC do not have the greatest track record of investments, en par with the International Finance Corporation (IFC) whom notably invested in Nyota Minerals (2010). With their entire holding now being worth a paltry £48K (Approx.). Admittedly, Nyota was one of those that many (including here) got wrong at the time, but luckily wised up to.

The Kumba Iron Ore fan club need to consider how distressed the operations are. Moving more earth, for less production etc... The FX beneficiation of the South African Rand is of limited positive and remember, with FX devaluation, asset values in dollar terms will depreciate. As eluded to previously, the ArcelorMittal contract premium was in essence a subsidy / saviour for Kumba. They have now stopped gift-aiding.

Anglo's Minas Rio production was a smidge off the pace, allegedly owing to the drought. However, what Anglo have forgotten to mention the “collective holidays” that the company are utilising. Save for benefit to OPEX costs in the short-term aided in part by the Brazilian Real (BRL), ramp-up expectations should be revised downwards. Minas Rio needs 92+% operational capacity to attain a limited/exclusive status of having a profitable mine (with humour).  

We know that contractors have been delayed and/or appointments to positions not made as has been reported in the press. One expects further downgrades at Minas Rio unless their employment returns to viable capacity to improve ramp-up.

Remembering that Minas Rio is another obligation for capital expenditure on the Anglo balance sheet. Anglo are unable to cut this expenditure without significant write-downs/losses that would also impact on assumed cashflow.

Least we remind ourselves of Roy Hill’s first shipment that was pencilled in for this month that is now likely for November/December. See: GinaRinehart's Roy Hill mine to miss deadline for first shipment

Copper production was better than expect but still down, in part owing to the sale of some assets. Its noted diamond prices continue to fall and De Beers are forced to scale back production to offer some support in the market. 

The Chinese created a trading event on Friday, with the majority of commodity share prices benefiting for 10 or so minutes. That was until the realities sunk in, that as the Chinese had cut its 1 year lending rate to 4.35% (25bps reduction) it raised questions about the very state of the economy. The 6^th rate cut in 11 months.

In move contradicts the 6.9% GDP figures that came and the Press Conference of the Ministry of Commerce on October 20, 2015. Having discussed previously the need for cuts, expect a reserve requirement ratio cut of 100bps to 17.5% sooner rather than later (although this may now be averaging out, with the real time rate being lower. The interest rate cut has created more fear than confidence.

There's a likelihood of credit becoming cheaper for longer in China, the threat of further monetary easing in Europe and America’s limitations of a rate rise may give some false dawns. With the trade surplus in decline, China’s switch to consumerism/consumption will/ has to be the more rapid. 

China has to adapt to the full blown capitalist model sooner rather than later to sustain growth and sustain some form wage inflation. This will promote employment opportunities and offset the reduction in manufacturing that is occurring - evidenced in part by the reduction in trade surplus.

China’s “competitive edge" as a manufacturing super power is being eroded. The capital outflows from China are triggering a longer-term devaluation of the yuan. Over the coming quarters China will be compelled to reduce the capital/deposit requirements for property, for leases (including autos) and embrace the leveraged ratios considered the norm in the west. Examples being 90-95% mortgages (perhaps even the equivalent of help to buy in mid-lower tier cities. In addition to near nil deposit autos and cheap consumer credit.

With consumerism/consumption being promoted, China has to bet on service, retail, leisure and tourism sectors. In the absence of any consumption type stimulus China will be in a downtrend until at least demand catches up again.

Expect further cuts in the lending rates and RRR, otherwise China’s corporations are heading for default, including SEO and private/public listed companies. We know Chinese Co's are struggling to maintain debt payments.

The MarkitFlash U.S. Manufacturing PMI ™ showed a five-month high for October that is ultimately making any rate increase harder for the Fed. Admittedly the Q3 results for industrials are contradicting the FED’s confidence in the robustness of the US economy.Could the Chinese capital outflows be aiding the US Manufacturing, a Chinese version of QE with a flight to safer climbs?

More to come on WPP, a model based on acquisition? Majestic Wines - the new off-license? Eroding margins where there's a hope people will order between one and five bottles from Majestic Wine's rather than at their normal supermarket? What are the real costs of customer enticements at Naked Wines? With incentives from the likes of Moneysupermarket/Uswitch? 

Atb Fraser

• (1) Saleable production

• (2) Production includes medium carbon ferro-manganese

• (3) Within export coking and export PCI coals there are different grades of coal with                        different weighted average prices compared to benchmark

• (4) Includes both hard coking coal and PCI sales volumes

• (5)Excludes Anglo American Platinum's copper production

• (6) ASCu = acid soluble copper

• (7) TCu = total copper

PM Bolt-On: SABMiller, Commodities: Iron Ore & Base Metals - China & Glencore's coal neighbour + a little bling! + DOM, CWD & Majestic Wine's realities!

Good Evening,

There's significant demands on time at the moment, so apologies. 

Agreement has finally been reached between AB InBev and SABMiller. A rewarding trade for those going for the overnight 'thrill'. The discount to the £44 deal should not go unnoticed and evidencing how savage the arb market is ncurrently (BG included).

The benefits to Molson Coors (NYSE: TAP) should not be ignored but prudence dictates that profit taking would now be wise. 

Those longer term readers will remember Duncan Fox - who is no doubt relieved that the MegaBrew deal has been inked (*subject to regulatory approval). Duncan was  seen discussing SabMiller the other day (BBerg). Duncan can now look forward to the daily implications and sale of a stake in China Resources Snow Breweries.

In commodities there’s a growing trend that Europe are partially buying the story, the US consolidating it, but Asia are selling it (perhaps Asia is not in denial about the outlook). Iron ore has levelled around $54.5/t, but will not be assisted by the World Steel Short Range Outlook for 2015-2016. Worth a read, rather than taking the media reports.

The World Steel short range outlook factors in a number of assumptions that have yet to occur. Especially as a significant number of major projects are more than 50% complete and delays happening with new projects. All creating a hesitancy in opinion, it’s understandably difficult to measure the longer-term outlook without further flag waving stimulus from the Chinese Government.

Previously with any stimulation, there was a bias towards infrastructure, now with an emphasis on consumption, save for the Housing sector (the maintain stay), there could be a number of wild cards. Expect some focus on recycling, waste management and development of services.

What shouldn't be ignored are the indicators of increased inventories - sales not keeping a pace with production, exports down, imports down and pricing pressures evidencing the low factory gate prices. The only issue is...that's both in the US and China. It’s no wonder that FED rates are looking like they will be lower for longer. 

In Coal, there’s an inkling that a deal isn’t far off between Rio & X2 Resources. Rio's yearning to divest the Allied & Coal assets may, with X2 Resources willingness, have implications for Glencore’s margins. MickDavis (The Sydney Morning Herald), if the time is now, it may just put pressure on Glencore to merge the Australian asset with X2 being the operator.

The synergies are notable and Glencore must be kicking themselves that, save for a white knight, now lack the financial muscle to complete on the Rio deal. It’s ironic X2’s timing of a $2-3B deal, not only could imply the bottom of the market in coal/thermal coal, but more so strong arm Glencore into accepting a joint venture. Rio’s Bengalla sale to New Hope Coal (ASX: NHC) implies X2 would need to pay near $3B, but $2-3B is a sensible range.

Irrespective of such a coal deal, and Glencore's hopes a bull market in commodity prices, the reactions have been muted so far. Glencore’s newsflow continues unabated, and not always welcome, with Jim Chanos coming out and admitting he's "a potential purchaser."

It’s not the headlines that Glencore needed, as it shows Chanos’s is short the stock and highlights their woes. A brave call after such moves, but not without some sensibility in the statements.

The whole idea was if there was a downturn in the commodities markets the trading acumen would help offset the hard assets. It didn’t work that way. If that was the reason to put this thing together one has to question that strategy,” Chanos said.

Not forgetting that Glencore’s actions meant they’ve yet again gone into a corner where others are loathed to go. Remember Glencore attempted to shut in thermal coal production for a longer period and failed miserably. What happened to thermal prices when Glencore turned production back on? Down!

We are increasingly hearing of a drought in diamond financing at the moment, with Qatar being slow to finance new deals the prices are suffering (Idex Online). There is a possibility Qatar's financing options are limited at the moment. In part with the purchase of an agricultural business off Glencore (rumours) and taking a bath in a few stocks.

Retail demand appears subdued, but with contradictory news suggesting its more Global Emerging Markets than Western economies. Validated in part by the Alrosa and De Beers issues ref: Prices including allowing sight-holders to walk away from the tables. 

More to come on this in due course - worth considering why the need for the Dubai Diamond Exchange (DDE) to host a financing event. Is there going to be a recovery or more of a softer lander for prices? Alrosa's and De Beers' prices cuts will not have helped matters and the Russian currency gain is making any form of support difficult, with the Ruble/USD FX benefits.

With updates due soon from De Beers (Anglo American (AAL)), Alrosa MCX: ALRS, Rio Tinto (RIO), Dominion Diamond Corp (TSX/NYSE: DDC), Lucara Diamond Corp (TSX: LUC), Petra Diamonds (PDL) and Gem Diamonds (GEMD) – the market will obviously gain a better understanding of the situation.

Will Dominoes pizza (DOM) follow in the footsteps of Gregg's reporting and appreciate tomorrow? There's a lot of hope and expectation built in - with an early exit in the Rugby by England and the X factor / Strictly benefits losing appeal, will the pricing perception finally sink it? 

What justifies Countrywide's (CWD) premium rating? Not a lot...and looking more like a sell. With the capital markets day going down by certain preferred analysts like a damp squid, its getting hard to justify any premium to the valuation. 

And Finally, the market has awoken to the realities of Majestic Wines (MJW) yet again, with such headlines as Naked Wines Launches "Text for Wine" service, would you be long? No doubt some more consolidation due in the sector in due course. 

Atb Fraser

Apologies re: Grammar.