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. 

PM Bolt-On: Non Farm Payrolls & Weaklings - Freeport & Valeant wth some hindsight on IMIC (International Mining & Infrastructure Corporation)

Good Afternoon,

The UK wasn’t the only place with fireworks this with week. What with the Non-Farm Payrolls (NFP 271,000) increasing the probability of a rate rise – now the odds are looking at 85/15 in favour.

The NFP fanfare has forced investors to consider the risks of heavily leveraged companies and those made vulnerable by the liquidity contraction across emerging markets and/or commodities space.

In the longer-term there may be some reward by investing in restructuring plays like Freeport-McMoRan, but not for the faint hearted. The recovery in leveraged companies isn’t clear cut either, so expect some reality/stresses in the short-term.

Commodities producers reacted this week (selling) –

1. China’s focus on innovation and a limited response to an infrastructure stimulus. (Hopes of higher PE - long the SHCOMP on hopes and/or China 300 only on momentum).
2. Standard Chartered’s (STAN) prudence sticking the knife into the commodity sector and a realisation of avoiding a light in a tunnel or two (Qingdao). We hope for STAN’s sake it’s not a train coming towards them - Currently no reason to hold the stock.
3. Fears being realised of a credit bubble/liquidity contracting in emerging markets.
4. German Manufacturing Data (negative for copper) – answers on a post card.

& Friday’s…

5.  Boom busting NFP figure that was a wildcard and above expectations.  

Companies will need to bolster their balances sheets if they operate in a deflationary market, especially those with significant debt and limited operational free cash flow. Remind you of anyone? Not just Anglo, but the market will now belatedly start focusing on rightful candidates. We had the analogy in the morning call that “certain traders are like a bunch of hyenas!!” As if!

The open secret of “debt to revenue service costs” is finally acknowledged as a risk. Not that the writing hasn’t been on the wall for some time. Admittedly, It’s difficult to find a reason to hold US equities with the dollar strengthening. Those goliaths are going to take a haircut to earnings.

With fears of larger scale corporate default and financial bubbles, the market is now factoring in restructurings whether it be fundraising, equity issues, convertible notes or debt for equity a k a dilution for the weak.

Shareholders should be prudent to the possibilities of losing control via the back door or worse, there being limited equity left for shareholders. Freeport-McMoRan (FCX) are not immune to these woes either, but with Icahn on board at least there’s some form of hope signal for the shareholders.

Valeant - without repeating the woes of Valeant (VRX) verbatim (See Citron Research) – it is the pharmaceutical equivalent of VW as it has so many unquantifiable liabilities. With three + warnings out now, it’s likely a case of the die-hards hugging the stock. "Value seekers" will no doubt be sifting the wreckage and be tempted to trade. 

From a psychological model, with such a nuclear fallout and one suspects more to come, is there any reason to hold Valeant? What is the value? What are the risks? With the market perversely needing to be told of the value or limit the slow motion car wreck, what is the likely outcome? With such a wide range of variables, what pricing methodology does one use for Valeant? The price range here up until Thursday was $56-$103 and now, we suspect there’s more potential liabilities, so have narrowed this to $38-$44 a share.

The damage within the pharmacy/dispensary industry cannot be ignored. Pharmacists may now follow the cost conscious route across all prescriptions, not just related to Valeant medications.

In coming to a price, we’ve considered Valeant’s responses and what we assume Pershing Square may be ignoring. Of course Pershing may be selling/have sold, but in the absence of a notification, we’ll assume they’re holding.

For consideration:

1.       Was Philidor using pharmacy codes for pharmacies it had not (yet) acquired e.g. R&O?  

a.     Did they have permission to use them?

b.   What are the implications for Valeant if they are considered to a shadow director/owner of Philidor? Do the rights that Valeant acquired in Philidor mean they have also liabilities?

2.      Its been suggested that dermatology products sold through Philidor were of average profitability -  if we assume that at least some revenues comprised of generics costing $5 or less, but when combined by Valeant and branded it enabled a charge of $400 plus++. If this is correct, then it becomes very difficult to buy into the average profitability claims suggested as the ‘worst case downside.’

3.   It’s been inferred that Philidor filled/dispensed prescriptions even when they were not required / requested. If Valeant’s revenues were reliant on the revenues of 3 units when only one was needed - what are the real implications on Philidor closing/departing company? Repeat prescription business will in essence be torched?  

4.       There’s been vague disclosures as to what other 'specialty pharmacy' networks Valeant has. Will this have further implications?

In making a few assumptions from the above, it’s easy to come to conclusion that the impact on Valeant profits is likely to be double digit. As a reminder, Valeant in October 2015 disclosed they had $1,420M cash and debt of $30,883.3M. What will earnings be and the outlook? If one conducted a simple calculation, deducting net debt from the market capitalisation, what equity would left for shareholders?

In the small caps it would appear there's a sense of déjà vu. Those that remember the views expressed here EMC: International Mining & Infrastructure Corporation (IMIC). To quote yours truly:

International Mining & Infrastructure Corporation plc (IMIC) loan conversion shows the faith in the company, a mere 30% discount to the SP. One hopes you've sense my irony with the mere...the 1 year chart must surely look like the cellar steps! Next stop 10 pence? 

It would be wise to think how the terms are fair and reasonable as Strand Hanson Limited, the Company's Nominated Adviser (NOMAD), consider that the terms of this transaction are fair and reasonable insofar as the shareholders of IMIC are concerned. Its not something I shall be complaining about having rated this as a sell since they acquired Afferro Mining Inc.

IMIC was suspended after the resignation of their NOMAD Strand Hanson in October.  As a positive those holding the Afferro Mining Inc. bonds of yesteryear get a few more shares (whether they’re tradable is another issue), with the conversion notice yesterday.  Is IMIC now extinct? Or can they pull off the unthinkable in the current mining space? Perhaps even find a NOMAD?

So whether it’s goodbye or see you in another form? Who knows…It’s wise to keep an eye on the assets of the micro craps, perhaps not the companies that trade them left and right, but follow the assets.

In other news, the South African and Australian “anti-EMC fan club appears to have gone silent!” Surely it’s not the Zumba Iron Ore share price? Atlas or perhaps Slater & Gordon?

The final thoughts go to Anglo American (AAL) having a rights issue?? The odds are getting higher! BHP Billiton (BLT) tailings damn could be a significant liability...what are the implications and costs? We have varying ranges and estimates as high as $2B excluding losts dividends and as low as $450M, 

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. 

PM Bolt-On: A Chinese missive, from Dudley, through the GDP, to Venezuela and "can you" because Icahn't.

Good Evening,

A gaunt through the week’s events, having only been back at it a day or three and travelling, its taking some time to get back into it. Does anyone else find it concerning how predictable central banks are becoming in their actions for short-term praise? Rather than longer-term policy benefits? Not exactly exuding confidence in the markets, but for the populist investors it’s a license to print money.

Someone got up one morning and realised the dollar impacts on the global economy, l’économie de base/basic economics. Only two days before, William Dudley, head of the New York branch Fed, told a conference that it was “important not to overreact to short-term market developments”.

The poignant part being Dudley accepted that the argument for tightening monetary policy as early as September seemed “less compelling to me than it was a few weeks ago.” (FT :). Fed’s William Dudley cools talk of September lift-off.

With a sense of relief felt by the markets, we had good news for the US economy, with revisions of the GDP to 3.7% (annual equivalent), up from 2.3%. Those in the know are now are campaigning for a rate rise, having only a few days previously been remonstrating for prudence on interest rates are now (WSJ). Just don’t tell the bond king Jeffrey Gundlach.

We have had Venezuela cryingfoul and inferring the need for an emergency OPEC meeting.  With some suggesting American production was going to fall (and inventories), oil about turned and rocketed. The concern being this didn't catch many (if anyone) off-guard, unless of course you’re a trader snoozing at your desk at 4am (GMT) and making significant profit, surely this never happened. 

Was this bottom (bounce) the obvious call for every-man and his dog? It certainly looks that way with all the various commentators agreeing. Momentum and sentiment set the volume alight with a mighty bounce. With the issues of liquidity in China and the realities of emerging markets, it’s likely the markets won’t deny the realities for forever.

All one needs now is further liquidity crisis to impact on the global bounce. What say you for further Chinese market woes, with the suspended bankrupts coming out of the closet or better still, “a large failure?” This will be evident not only in the capital outflows but productivity.

To continue the theme, China'srichest man says its time for government to abandon high growth rate 'fantasy'. Irony really, what with a company built on leverage and the need for growth? With international deals getting bigger, it’s starting to signify a complete cooling in the Chinese domestic market (ex-growth or limited and suspicions of a recession). With Wanda buying the Ironman Triathlonowner for 585 million pounds (if you include the debt), it’s a deepening sign of what is to come for China.

With memories of Japan in the 80/90’s, we have had FOSUN on the acquisition trial with Club Méditerranée (FT)  and partnership with Thomas Cook (Reuters). Remember this is on the back of acquiring stakes in Cirque du Soleil and Jeff Robinov’s Studio 8, plus Meadowbrook  and more (UK Property's JVs to come). Anyone for the high top?

Latterly, we have Albert Edwards via PM@FT, with a suggestion we have a 99.7 per cent probability that we are now in a bear market.  Worse, the professor of economics, Christopher Balding wanting to hug the Chinese, perhaps in sympathy.  What of the Chinese taxation revenues in decline?

There’s suspicions that China isn't perhaps telling all, with a focus on consumption. Whether a valid theme, it certainly questions any significant bounce. Especially in those economies more reliant on commodity sales. Or perhaps one should rephrase, were reliant, leaving shortfalls in their budgets. 

Certain countries are now ‘attempting’ to entice those with wealth to come and buy into the bigger picture, of course without trace. Surely not, the DoJ et al, do need a new dog to kick for compensation as banks have rolled over and coughed up the moular. Whatever next? Dubai property crash?

In the US markets we have Icahn acquiring a stake in Freeport-McMoRan (NYSE: FCX). One of the favoured leveraged miners shorts of 2010-15 (to be exact 4 years in total), now coming back with a decent cost cutting exercise to enable the company to keep the lights on (contrary to EMC thoughts).

Whether one should read too much into Icahn’s8.46% stake is open for debate. Icahn’s ability to buy value in commodities is questionable, as evidenced by their ventures into Chesapeake with 10.98%. It’s not a great call in the short-to-mid-term.  Over the longer-term, there’s a reduced risk of failure in FCX thanks to cost cutting, but why buy into a slump until the variables have played out?

Freeport-McMoRan (NYSE: FCX), have completed the unthinkable in avoiding the “majority” of a fundraiser in excess of the announced $1Billion. Not only does it indicate the bottom of the “trough in their cash demands” as Morgan Stanley seem to think, but give some hope for the future.

If commodity prices appreciate from here, FCX have done just enough to avoid significant issues with their announcement -  spending cuts in response to “Market Conditions”  read in conjunction with their previous Oil & Gas  capital budget commitments.  

What pantomime will next few weeks bring? A predictable element of about turns, anticipated volatility with the big boys "torching each other on a daily basis." Protection anyone??? 

In the current climate, it would be wise to consider business models, especially those “bidding” on certain contracts at the moment. Where the needs of winning a bid should not be at the expense of profitability. We shall be hearing about this later in the year…rest assured, even those larger entities with “currently” good balance sheets.  

Finally, it would be rude not to finish off with a validation, even for "foster carers" of the stock-market, JD Capital are exiting capital southbound!

Atb Fraser

Morning Mumble: Prozac Anyone? Maybe a Coffee? Dr Copper & all taking a spanking - whilst likening Glencore's webcast to Star Trek's Captain Kirk & Engineer Scotty...plus the need to actually do a full days work whilst on Holiday. RIO finally surpasses the 2200 target price.

Good Afternoon, 

Back up, albeit briefly... 

It's been a while! Although far from inactive - it has been fun to relax and enjoy the holidays.

The views and positions here have pleasingly been validated by the market. A pleasant bet being honoured on RIO hitting (and surpassing) my target price of 2200 pence today! Now, with a tangent look at Glencore, with some analogies to Star Trek.

We'll ignore what the critics stated about the target prices here and on FTML, with some pleasing emails of acknowledgement. Stopped clock or not (as some called it here) there was no deviation. Not because of stubbornness, but the indicators have only become a) apparent and b) a lot worse than even those reading here thought. So why would one change their view over the longer-term? Perhaps revisit the analysis but certainly not change this view, at the moment.

Initial analysis started to appear more positive after Glencore’s webcast on the 2015 half-year report. If you have a position in any stock, in any country, it's sensible to consider the webcast and in particular the defensive body language displayed and the wide range of earnings guidance. Also, as a validation, a quick visit to Fortescue Metals Group (FMG) annual results that aided the selloff in Australia last night.

In the webcast (45 mins onwards (Q&A) section), it was noted that some analysts were rightfully enquiring about the leveraged nature of the balance sheet, specifically what flexibility there is in the working capital. 

The market is now waking up to the acknowledgement of Glencore’s wider guidance of $2.7-$3.7bn (Page 9 in Presentation). Being near 2 months into H2, one surely should have been able to be more specific or is there lot of hope being priced in? It does suggest there's a lack of confidence in their operating divisions including Russian Wheat export taxes, Canada grain harvests and the copper / oil woes and finally, China.  Is this representative of the current wider global theme?

Least we not forget Glencore's thermal coal adjustments. Despite assertions of profitability and low costs, why did Glencore have “no other option but to scale back 18MT’s of thermal coal per annum.” Is it implying that Glencore are not understanding the full extent of the market deterioration in commodities, or perhaps across the board? Not a good thing if you operate in such fields.

There are a number of issues Glencore's copper division appear to have missed. One being that the "sudden" appearance of significant physical, that is suggesting a destocking of inventories. We are even starting to think that it suggests the Asian market had stored significantly more than what the market had allowed for in warehouses and of those cashing out (by pulling levers).

Having had a target price for Glencore of 165 since from Xstrata (XTA) merger completion on the 2 May 2013. The risks are still there in China, Russia, Canada, in fact every area that Glencore has an operating divisions, but more importantly net debt and its ratings, inventory valuations (and consequences of hedging), whilst being in a global deflationary environment.

Glencore are in a position of being forced to sell off assets, allegedly non-prime/central to Glencore's needs. We note Glencore announced the sale of Tampakan, Falcondo and Sipilou on the 14th August. The buyer, a subsidiary of the Alcantara Group (via their subsidiary Indophil Resources NL) appear to have benefited from Glencore's woes. Not forgetting that the sale also proves the case that yet more volume is hitting the market. Or are Glencore and the market believing that Indophil purchased these assets to do absolutely nothing with them? “Give o’er…” as Polonius said in Hamlet!

There's going to be a temptation by funds to start averaging down given the current price compared to the IPO. We'll ignore the warped belief of the investment case for Glencore, but some 'averaging' down will give risk to shorts in the interim. Without further woes in the price of oil, copper and agri-commodities it's “about the price” (for now), with more volume likely around the 150 pence.

Simply, Glencore is no-longer a conviction short, until further testing and understanding. Namely, “how bad is it really in China?” China’s next about turn in policies, devaluation and protectionism is likely to answer that. To the detriment, of course, of their trading partners – both Asian and global.

It’s ironic that Glencore go as far as to blame 'aggressive' short-selling on copper woes. Hang on a minute, don't Glencore have a copper trading desk? It would be a fair statement if they were but a "mere" producer blaming the woes of the market, rather than a fully integrated Goliath.

It’s rather taking the biscuit to point the finger when you have a capital intensive trading / marketing division? Were GLEN the counter-parties of such positions? What is the impact of the Russian export taxation on profits, with most trading houses with active positions from June taking a large hit?

If we liken Ivan Glasenberg to Captain Kirk and Steven Kalmin to Scotty the "engineer" from Star Trek, it is bemusing to review the discussions in the webcast regarding debt, working capital and trading/financing deals (Circa 50 mins onwards). 

When pushed on the debt position, debt rating and the hypothetical situation of $2/lb copper, Capt. Kirk/Ivan explained the benefits of being a trading house etc...Where there is flexibility in business model. Steve aka Scotty was able to step up the power or reduce it accordingly by these magic levers to reduce working capital, change the interest rate on internal lending to trading / marketing or look to derisk financing positions with third parties. Warp speed anyone? Perhaps Scotty in reality is “giving all he can Captain?!”

Admittedly there's evidence in the webcast of both Capt. Kirk and Scotty not understanding the business. Glencore need to reduce their debt by about $8B and essentially by as much as the carrying value of the inventories. Why was there no comment on the reduction in volumes across their divisions? After all it’s essential to trading to have volume.

Glencore’s biggest concern is its inability to call the market. One would have thought the overall theme of a market would have enabled better guidance rather than statements about “China being weaker than anyone envisaged.”

Likewise, Scotty suggested, that one can simply reduce inventories and/or working capital in addition to intra-company loan rates. This may actually be harder than what Glencore have previously done in the past. Especially in light of volumes of commodities available in the short-term. Their selling, could actually warp (speed) the market further (at least in the very short-term).

Glencore have failed to consider the currency benefits of a strong dollar on the marginal producers, that are given (yet more) lifelines. Especially as America “hops along” to an interest rate increase (but no doubt delayed by 9 months+).

The currency beneficiation has not only helped the likes of Kaz Minerals and FQM stay in business, but most other leveraged players. The ability of producers to ramp up to reduce the costs further, whilst  putting a glut on the market, is under-appreciated (at present).

Admittedly there's some hope, Glencore think the worst is over in agriculture - with the new wheat export tax now having visibility. Glencore appear to think there's near balance of supply and demand in copper and the market price is false. Ironically those statements were made just before the PMI data for China (1). The market is waking up to just how leveraged and unstable/weak China was, but one suspects not how weak it is. Could Glencore have been overly optimistic, so far it would appear they are, and perhaps will still be. 

An example being copper piping, where over the weekend Li informs us there's a couple of cargoes going for a proverbial song. Has someone perhaps been caught on the hop contractually? More on this later, if we manage to find out a price.

Yet in contrast to these cargoes (as a snap shot), analysts are banking on China spending on the electricity supply grid and infrastructure. This may actually be a pointless exercise as energy use has reduced near 3%, one cannot see China being able to afford the previous levels of wastage to support the economy.

Whilst avoiding being gleeful of near 4 years work in commodities, one suspects the market is now at risk of capitulating to a bear market, with the wider ramifications needing further analysis.

For copper, there are contradictory indicators coming out of the sector. We have Platt's* on the one hand forecasting growth in 2015 of near 5% whereas ICSG (International Copper Study Group) at negative 3%* (Source: ICSG PDF File). That's some range considering what the implications are at an economic level, although more recently there have been a few production issues in the market that may provide support (based on a reducing supply). 

Like in China, are we now going to see the forced selling of stock pledged/secured against loans or mortgages globally? What of the collateralised loans? Or perhaps with a hope of security “in cash” now being forced to sell. An example being the sale by Martin Rowley of First Quantum Minerals. Whatever the reason behind Martin’s sale, one suspects there’s going to be more globally, whether current or former management of most companies. It’s certainly the case in China, Asian and Pacific economies.

Freeport-McMoRan (FCX) are a prime example of expanding into the rout of commodities. They are yet to press the button for equity (perhaps due to lack of interest). Are they waiting for glimmers of hope in the commodity prices? One suspects they cannot wait much longer without a restructuring/raising.

China have significant problems that without a multi-pronged approach to their economy, without some form of foundation building rather than bubble focus, their economy will continue to raise concerns. The next trend (reiteration) is likely to be PFI (Private finance initiatives) or PPP's (Public Private Partnerships).

The Chinese have very cunningly been creating their own supply chains, whether Aluminium, Steel, Copper, Nickel, Coal to petroleum. This is evidenced in Taiwan, where they have felt the might of China in the semiconductor market.

Taiwan’s semiconductor exports were significantly larger than China, their market was near 3 times the size of Chinese in 2009 but is now is en par with the Chinese market. Like solar panels in Germany, this expansion into a commercial space and supply has hurt them. Many Emerging Markets will have to consider the implications of the determination of a weakness in their currency, with a reducing demand and reducing level of investment in their countries. Examples being Taiwan, Thailand, Korea and Japan.

If one considers read across of the semiconductor market in Taiwan to the copper draw/demand on copper in China. Then China’s demand/needs may not change that much, but what may is the demand from predominantly emerging Asian markets that have relied upon China. These markets have only just woken up to the fact their industries have been replaced/replicated.  

One cannot ignore the compliment from a devout critic of the views here, where "the macro environment commentary on China/Asia and India is very accurate and almost psychic here", (to quote one reader. Maybe it's only one reader!

May be a little biased of course, but one would be hard to disagree in light of the carnage on the markets and ensuing ‘recorrection’, reading back and comparing here with the realities of the PMI data and those of the bulls of the commodities. 

Why did this blog post became so popular over the weekend, EMC: Fanya Metal Exchange. What of others? Perhaps it was after this article about angry investors capturing the head of Fanya metals exchange (FT). Quite how much commodity do physical ETFS have, what are the implications for the Jo'burg PGM ETF's etc..With humour, should one be factoring in security costs for under-performing companies?  

Atb Fraser

*Platt's from memory does not distinguish between refined and unrefined copper whereas ICSG is focussed on refined copper. 

1) Add Diary of Release Dates for PMI information to your diary. 

Morning Mumble (Shhh don't tell anyone): Voilà Freeport-McMoran (FCX), Mr Debt with implications for Vedanta, FQM, and the turnaround of HSP? + "The largest "Sale of Things" in 6 years

Good Afternoon,

Whilst no one is looking I've managed to sneak a couple of things in, including the Wolf Minerals (WLFE) call that wasn't that informative if I'm honest. They did highlight the reduction in global output as higher cost producers either close, mothball or are placed on care and maintenance. It didn't help dialling in late as I forgot the time difference. 

Having had my fair share of alcohol on a sunny cliff side restaurant, it dawned on me whilst looking down, what about that rather large entity known as Freeport-McMoRan (NYSE: FCX) Mr Debt! We know and understand leverage, it's not a good idea to be "over-leveraged" in a space of falling commodities nor so where one of the main consumers is "unwilling to pay much of a premium to operating costs."

Often there's a perception that leverage is prudent, it’s got tax benefits etc...Simply, that's a positive in small doses, but to bet the ranch on loans/bonds that in percentage to equity are just plain silly. More so, a common mistake of those trading CFD's/Spreadbets that perhaps have more aspiration than the reality of their consequence. The commodities sector is a prime example of what was wrong with Northern Rock. Plains Exploration simply was a wrong purchase for FCX, not now, but at the time it was wrong, no hindsight is needed. 

The behemoth of companies that have bet on such expansion with debt. They've been covered for a long time, finally the realities are bearing down on these leveraged plays. The Yuan / RMB depreciation is unsurprising, for those following the debacle of the Chinese companies with high inventories as a result of over production and cheap borrowings,. We know too well the outcome, voilà solar panels, housing, copper, iron ore, coal, stock-market, infrastructure projects, government revenue streams declining including corporate taxation and land sales (albeit improving) etc...

With Chinese inventories expanding at factories, gate prices under pressure and limited sales, they've got to entice customers somehow. So why not devalue their entire offering and have a "sale of things." 

The devaluation is the primary example of what "has been banged on about here" for how long, to quote one avid critic. More so, one suspects its as a result of the FED's guidance and strengthening of the dollar, perhaps an FX play that could wobble the potential for America. Least we note forget, the Yuan RMB is "almost" a dollar, commodities, goods, services often represented in USD terms. 

With misguided expectations, the ramifications will have wider implications than are being felt in the aluminium sector, steel, plastic goods space etc...etc...The Chinese are now entering the market with oversupply of semi-processed and finished goods. Shipping rates anyone? 

With Freeport-McMoRan guiding on the requirements of $1B of cash required, it would be rude not to consider the fact they need more than that paltry $1B suggested. The balance sheet by EMC estimates is near $21.2B Debt and limited cash (estimates: $340M).

FCX debt is simply unsustainable in the current commodities cycle, especially as Plains Exploration was more prudently called "Pains Exploration." FCX needs around $2.5B and the market should be aware $1B is only a temporary measure, whereas something more prudent would be to raise near $2.5-4B to enable the finalisation of capital commitments on projects and give sensible space and time to a restructuring. 

FCX could even utilise FQM's excuse for a capital raising that was on the basis of "a stronger copper market following a period of weakness"? (EMC: FQM 30 July 2015). Maybe even throw in a bone or two about consensus on WTI being circa $59/bbl in 2016 to tempt those believers and copper at $3.50/lb by year end...

If one was leveraged a la Vedanta (VED) or Freeport-McMoRan (FCX) the outlook isn't great. Vedanta are trying to raid the Cairn India's cash pile. This is insufficient, allowing for all their operations (capex needs) and now zinc suffering with a 10% drop since their announcement that they were rather "upbeat on." EMC: VED (31st July 2015) and FQM's Bitter Sweet Pill (EMC: FQM). 

Will FCX have to offer a large discount or motivate the stock, the latter is more unlikely than the former. Although FCX shareholders appeared to have celebrated FCX needing $1b when it's rather like putting a band aid on a share bite. 

We had a day of comedy yesterday. There was a celebratory notice by Vedanta commencing iron ore operations at Codli in Sanguem Taluka in Goa with 3.1m/t's hitting the market. Are we missing something? Perhaps the get out of jail free card is the terminology "The Company is likely to recommence operations from August 10, 2015." Surely an announcement on the same day and being 5 hours ahead of the UK reduces the chances of operations not commencing? Perhaps that's being too picky, after all, a quick trawl here and grammar and perfection don't exactly go hand in hand.

So with a global surplus, what more did the commodities sector want than more than another 3.1mt's of iron ore with a potential 2M further to come?  Hip Hip Hooray, what next African Minerals (AMI) making a return? Although with humour, one wonders if that was the only commodity to suffer due to a few accounting issues at AMI. This dropped in the inbox yesterday, Theophilus Gbenda Blog (2012), surely not but the infrastructure deal does give food for thought. 

Results out for Hargreaves Services (HSP) that will need more time. See: Closing HSP short Positions. If there were some decent results in the coal space, these were them. 

Fraser

Morning Mumble: Dialight (DIA) almost cheery, Freeport-McMoran & Rio's Copper Confusion. The summer snow edition to finish on (with humour): RRL, AFPO's deal of the century & RRR? Phorm on Phorm

Good Morning,

In an admittance of just how bad things are, Dialight (DIA/DIRE) initiate a cost reductions. Having only sped through the RNS on the basis of having had the money and am unable to manage a position whilst on holiday, it’s surprising they haven't mentioned anything about their inventory. 

As a quick reminder, turnover up, cash down, profit down and in the absence of an effective cost management process, net debt is now around £10M. The market capitalisation is a smidge under £180M (550 pence/32.5M shares in issue). From previously having a modest dividend, this one has been torched. 

So today, they reduce the workforce near 12% (130 personnel) and incur a few costs as a result. Question being, what's taken so long to get to the consultation process? Are management so reactive to the company's position? We'll exclude save for Mr Sutsko from that having been in the position a short period of time. 

Why pay interest on debt when carrying inventory at levels near £36.5M, which raises the question of a goods/inventories impairment. We shall perhaps revisit Dialight post hols for a deeper look at these (date for diary October)...as there could just be some potential! 

Over to Dialight (bold is the addition,

Michael Sutsko, Group Chief Executive, said:

"I believe that we have a huge opportunity ahead and Dialight is well positioned to capture significant value in our rapidly growing markets. However, as sales continue to grow, the business has taken on excess costs which have resulted in our poor first half performance.

We firmly believe that our team can deliver continued growth with future resources being added in line with our strategy. This action is a key part of our plans to transform our business in the short term whilst realigning to deliver profitable growth going forward. As previously indicated, we will report back with the findings of our strategic review in October."

It’s confusing, the company didn't know its cost of sales went up disproportionately to revenue prior to Mr Sutsko's appointment? Finger on the pulse folks! This company may be in turnaround mode, but one has a suspicion there may be a requirement for some cash. The company reminded us they have significant headroom on banking covenants, maintaining financial flexibility, this maybe so, but there's also prudence. Leverage whilst struggling to maintain profits isn't always best, especially when carrying so much inventory as it's a road to ruin. 

We acknowledge the appointment of Michael Sutsko, who has only been in the hot seat 8 weeks, it’s certainly more than the board has done previously. Who'd have thought turning modestly positive, perhaps misguidedly on the hopes of a turnaround but time will tell. Mr Sutsko appears to have initiated more in 8 weeks than anything previously. This smacks of complacency on the part of the previous/current incumbents. 

One is finding it hard to balance the views within the copper industry, we have had FCX wanting to reduce higher cost production (Cost Reduction Plans for FCX), with further budget reductions in oil and gas already identified, albeit limited. Expect more in due course regarding their copper operations.

The problem is there appears to be a confusion/contradiction between what FCX are stating production cuts, to that of what Rio Tinto have inferred in terms of copper consensus and output (PDF Presentation and MP3 File of Presentation (both downloads and a must listen). Worth a note is the time of development including permitting to production around 40 mins circa in.

More is needed on this to go through the presentation including Rio's thoughts on Bauxite in Malaysia and Indonesia. Including the anomalies in Rio's costs, very similar to BHP Billiton's (BLT). Cost per tonne are circa $35-40/t, rely on the lower quoted in the results/presentation at your peril.

With enough depression in the commodities sector, Australia now get to debate the importance (or not) of Rio's assertions to expand Silvergrass. This has previously been delayed, so whether Rio are just teasing Twiggy (Andrew Forrest) or planning to ramp up a further 10mtpa. 

Interestingly, Rio mention in passing that Silvergrass is to maintain the quality of blended iron ore. Is the quality at Yandicoogina declining quicker than envisaged? Having expanded its current brownfield sites, Silvergrass's development might be needed sooner rather than later. 

As promised the summer ski edition, yesterday Range Resources (RRL) came up in conversation. Do people really "invest" in this company now? Today, they give a Trinidad update, having not had chance to follow this crap for some time, it was handy to be reminded of this EMC: Range Resources (December 2013). The chart makes for skiing and is a cautionary tale to all. Although they do assert they’re cashflow positive, at what level? At what stage does the market wake up and consider cashflow?

RRL may, it may not, who really cares? Save for some random event, its unlikely to get any more air time. Although as a positive, apparently the writing style and commentary here has allegedly improved...be your own judge!

Staying with the skiing theme, trending was African potash's COMESA deal (AFPO) with some humour that this will be the Glencore 2.0, it has certainly grabbed attention. Even Chemicals Technology picked up the story, so on to hopes of being an AIM Goliath. The perfect opportunity for those in the last placing to exit swiftly. Whether this deal amounts to significant cashflow is another matter, await terms etc...High risk punts aren't always bad, and there may just be life in the old dog yet. With a proverbial piste of a share chart since IPO. 

Maybe COMESA's customers lost the number of their current suppliers or had not considered conducting a cooperative tender process? COMESA has sought deals since 2012 at various levels. They've certainly improved agriculture, including the launch of the Regional Payment and Settlement System (REPSS). The cooperative approach and expansion of COMESA could just be the big-brother AFPO need. Sometimes it’s fun to be on a rollercoaster?

Whilst typing, one cannot help but notice Red Rock Resources (RRR), motoring away. With the final thought in this special summer snow edition is, the Phorm fundraiser. Phorm have Phorm fundraiser. You have to give companies like this some phorm of credit for just keeping going. If there's ever an AIM TV, we may see adverts for "you can give just £500 a month" to feed this board or that board. 

Limited time to discuss the UK Mail (UKM) trading statement whose indications back in May that it was going to be bad and have become rather self-fulfilling (and worse). It’s wise to read UK Mail and acknowledge the issues. Profits expected to be 40% less compared to last year...despite "opportunities." Have UKM been conservative with the guidance? 

Happy Hols, Fraser

Morning Mumble: Anto-fghastly (ANTO) & the markets alleged White Knight (NYSE: FCX) and the magical ingredients, LGO: Why I was wrong to...JKX & SLP, self-harm!

Good Morning,

Today's Q2 Production Report from Antofagasta (ANTO) gives some idea of the woes for the industry. It doesn't look great even allowing for reduction in supplies to market including the recent near 200K/t's drop in guidance from other producers, the Zambian load-shedding (EMC: Yesterday) and ANTO's own guidance revisions downwards to 665,000/t's of copper, as a result of some commissioning issues on the crusher circuit. 

Conveniently ANTO don't give their previous guidance, so here it is. For 2015, it was 710,000 tonnes of copper, 250,000 ounces of gold and 8,000 tonnes of molybdenum. Not only do they have the woes of gold prices being at lows, molybdenum price being at a level it's questionable whether it's a viable to process it, and cooper down 45,000/ts. (EMC: Rio molybdenum (Mo) woes). As a result ANTO's cash costs are on the increase due to the MO price and lower than expected production. One would have thought with the USD: Chilean Peso (CLP) strength, there would have been of greater benefit, but this will perhaps be reflected in Q3. 

Luckily for ANTO, there may be some hope for the copper price thanks to the markets white knight known as Freeport-McMoRan (NYSE: FCX). The market may think FCX's planned production and cost cut backs (FCX Site PDF) will assist the cooper market. But with the absence of a magical ingredients, prices are likely to stay lower and for longer, this time. FCX are unlikely, like Rio or BLT, to give up market share for the sake of the higher cost producers. 

Over to FCX, today announced it has undertaken a comprehensive review of its operating plans in its mining and oil and gas businesses to target significant additional reductions in capital spending and operating and administrative costs in response to weak market conditions for its major products. These plans will also incorporate potential adjustments to mine plans and future copper and molybdenum production volumes to reduce costs and preserve valuable resources for anticipated improved market conditions in the future. The company expects to complete this review promptly and will report its revised plans during the third quarter of 2015. 

James R. Moffett, FCX’s Chairman, Richard C. Adkerson, Vice Chairman and Chief Executive Officer and James C. Flores, Vice Chairman and FM O&G Chief Executive Officer, said, “We are responding aggressively to current market conditions affecting our primary products and to the uncertain global economic outlook. These initiatives are focused on maximizing cash flow in a weak commodity environment and on strengthening the company’s financial position. We appreciate the efforts and dedication of our global organization who are supporting our plans to implement revised operating plans. We have a positive long-term view for our markets, the inherent values in our large asset base and are positioning our company for long-term success.”

The copper and wider commodities market are lacking the magical ingredients Chinese speculation and margin. These have been absent for some time (including shadow financing) and are unlikely to return without some significant stimulus from the Chinese Government. All compounded further by a basic approach to commodity back financing that has been in contraction and limited to a basics approach. 

This brings us to the question of those with copper in inventories and/or in transit priced significantly higher either, that had a muted response to the FCX news (VED/GLEN?). Especially those needing to deleverage some $18B of commodity inventories (across the board) to maintain their credit rating and profile! Perhaps GLEN have signed up for an Experian Credit account to "manage" their credit file?

Continuing the theme from yesterday on load-shedding, it would appear Barrick Gold (NYSE:ABX) have forgotten to update the market on the load shedding issues in Zambia for their Lumwana Operations Reuters. Perhaps Vedanta, Impala and Glencore are also immune or do not feel the need. Then again, perhaps Barrick need to work out the cost impact at a C1 level as they will now be marginal. Expect cost revisions near $2.20/lb (C1) and all in near $2.80/lb (EMC estimates, no plagiarism folks). 

Question of the day, seeing as China Securities Regulatory Commission (CNBC) is investigating companies and individuals selling stocks, what can they sell to cover those margins? Cars? Houses?...Also, which Beijing bank (non-state) has the greatest exposure? The hunt is on!

Sylvania Platinum (SLP) have released 4th Quarter results. Operating in the PGM space they aren't great. They've had some cash back from Ironveld, spent some on share for "employees" of shareholders, and its unlikely any dividend will be made. The potential benefit is the selling of a few assets (or divestment) and maybe a low ball offer. As a holder, one hopes you sense my unfulfilled mind-set to this stock. As a punishment to myself, and a form of self-harm these will not be sold (self-harm). 

Finally, JKX Oil release their half yearly results. Dire, although perhaps some hope from the Interim Award International Arbitration Proceedings, it’s still not a stock for any widows. More a bet on a geopolitical and financial improvement in the sector. 

In other news today, LGO Energy drill another well. Having sold this holding and gone short, there's no rush to buy back any time soon. One would be wise to wait until the result to assess the viability of the company. Perhaps we were guilty of being too keen (EMC:) closing LGO Short too early. LGO have given no update on its financing and one has a suspicion revenues will soon be committed to interest and debt repayment. Profitable for the lender perhaps but shareholders? 

Atb Fraser