Morning Mumble: A valium edition - a recap, from China to the oil price requirements on government expenditure - flying pigs poignantly timed for Macau's disappearing Billions...but it's ok it's only 3-4% of the Macau Junket liquidity ++ KGF being Screwfixed!

Good Morning, 

One would be wise to make sure they have coffee or Valium!? Some missives from the past couple of days. 

Not only is there a rise in Chinese inventories, retail price increases, wholesale/factory gate prices are falling - to stay competitive China have resorted to energy price manipulation. All of which are eating into the earnings of global producers – aluminium a prime example. Following in unfortunate timing with, FT: Asia trades cautiously following Chinese data.

The overhauling of the SEO’s (State Owned Enterprises) is insufficient on its own. China, with any form of sensibility will have to adjust the wastage and excesses. The implications throughout the economy are not positive, if SEO’s suddenly garner economic prudence. The agendas of the Government will be harder to be played out, including, but not limited to, employment numbers, wages but also benefits.

The indicators suggest all is not as well in China, in addition to flying pig prices - notably the pork industry isn't as leveraged. China's food inflation won’t assist the economy out of this glut either, but they can hope. Similar to Russia but not as dramatic, China is suffering from a reducing wage cost, the impact on how people service there mortgage will perhaps be another story.

Finished goods prices (wholesale) have come under pressure from lowering demand but aided mostly by reducing commodity prices that are limiting the chances of growth. If UBS and Goldman Sachs forecasts’ of a worst case $28.50 and $20 a barrel respectively, come to fruition it’s not looking great either. If one was so inclined, this belated about turn by UBS and GS, may be an indicator the market is about to improve, with drilling count and well reductions.

See: AFR's: BHP Billiton price target cut on oil forecast revision and Bloomberg: How Low Can Oil Go? Goldman Says $20 a Barrel Is a Possibility. Essentially the outlook for certain countries isn't great, nor for debt of the oilers or the credit ratings.

Bloomberg’s Brazil's Junk Status is just the start of the risk realisation in international bond markets. Where, in the race for returns, monies have been lent on the basis of being a lower risk than the realities of the situation present. What are the implications for the following debt? More so who will own Petrobras? 

Country	Oil Price to balance fiscal budgets 2015
Algeria	Needed $130/bbl, revised to $98/bbl
Angola	$100/bbl++
Brazil’s just another story entirely, Petrobras’s debt woes won’t disappear overnight!	$115/bbl estimated just to service debt. Junk!
Ecuador	$80/bbl
Iran Allegedly	$130 by consensus but more than probable at $84/bbl based on increased exports.
Iraq	$95/bbl
Kuwait	$55/bbl
Libya	$140/bbl
Nigeria	$120/bbl
Qatar	$55/bbl
Saudi Arabia	$62/bbl (*based on revisions and financing)
Rest of UAE	$70/bbl
Venezuela	$120/bbl

Bloomberg's: Best & Worse Analysis.

For those readers that are keen on Pork Ribblets, Semi-Meaty. The UK suffered a lowering in pork prices and demand during August. Spain and Portugal, despite significant increases (double digit EMC estimates 10-12%) in exports, has seen only modest 2-4% increase in prices, despite a surge in demand. 

The global pork prices, even allowing for US woes of Porcine Epidemic Diarrhoea Virus, or PEDv, have not seen the supply issues being cited in the Chinese press nor so in China. One can only wonder who or what is leading the media to believe there is a supply shortage of pork in China? A flying pig perhaps? 

With the current news flow including companies attempting to rationalise their balance sheets and spending, similarities are yet again being drawn towards Japan. Japan suffered a prolonged period of disinflation occurred after periods of strong growth. Ticking another box in the theory that Chinese companies' having no alternative but to invest globally (EMC: Japan August 2015) and / or pay down debt. Some appear exempt on sensible ratios of debt. With Japan printing, is it a case of sell GEM (Global Emerging Markets) and buy Japan?

Corporate entities have a rather large issue in China. The need to focus on their borrowings, part acknowledged by China's reduction in interest rates. If Chinese corporations continue without some form of prudence and debt reduction, the deflation and slowing of demand will create a real risk the number of defaults rising. It could be just the foundations and consolidation that China needs. China's premier will not be resting on his laurels with regard to a stimulus, but perhaps more prudent to take ones time.

The wholesale deflation has made it very difficult for the corporations to service debt, maintain earnings and justify the higher levels of employment. Banks, are sensibly risk assessing new applications despite the actions of the PBOC (People’s Bank of China), shrinking liquidity further. 

China is being forced to become efficient (or attempt to), this will have implications for employment levels and taxation receipts. The PBOC has realised this, with planned infrastructure and PPP/PFI spending, there are little alternatives.

It’s prudent to have a quick recap of the Chinese growth story and their economy this year. To prop the economy up, the PBOC has reduced interest rates five times (soon to be six). Injected capital directly into the banking system to attempt increase lending and part replace the capital outflows. 

China have reduced the Reserve Rate Ratios (RRR) 5 times to a now 18% and attempted to prop up the stockmarket financially, followed by policy. Better yet, China devalued their currency and tightened up on e-payments and capital outflows including commodity financing deals. Glencore would be wise to consider the latter.

Most of the actions by the Chinese government have had limited impact, China has no alternative but to acceleration spending on infrastructure projects. China has already been discreetly bringing forward infrastructure projects, examples being the development of waste management systems for Beijing.

Tax incentives are being given for investments and capital expenditure, both for individuals and corporations, on top of development grants for those wishing to become entrepreneurs. We have not forgotten the dire state of local government and their dwindling revenues and central government seizing $150B, where the confetti of debt has been issued and underwritten by central government. 

It appears Macau have caught another cold, thanks to a group with a light-fingered approach to gambling. Not only is Macau in the glut of a property depression, in part aided by Li's anti-corruption policies and clampdown on excesses, but more so, the wider economy both with property and business revenue declines. 

Not to worry, gross revenues in Macau may have dropped by 38% in June (worst for five years), but their property has so far only dropped 15%. Junket’s losing near $250M appear not to be of significance to some analysts, it’s only 3 percent to 4 percent of junket volumes.  Ironically, due to the declines it’s actually nearer 8% but what’s a few % of an entire market in decline?

One has to wonder how well the listed Macau Property (MPO) is and what of their Net Asset Valuations in light of the property situation in Macau. With some dramatic discounts being touted on high end property of 25%, but the average is 15% decline as a minimum. We'll know more in due course with a visit planned very soon by the travelling duo!

Of course, with a share buyback in full swing at MPO you'd have thought the SP would be appreciating/holding. With a NAV near 50% above the current SP, one cannot think what the buyers are waiting for!

Staying with a theme, Cloudbuy's (CBUY) NOMAD Westhouse has quit with immediate effect. Disappointedly (for the management) it won't have helped them with their half yearly report also out at the same time. 

Why did Westhouse quit, more so, if anyone was long on this stock post the EFH (Here EFH 1 and Here EFH 2 about turn) debacle covered very well elsewhere, then they need to have words with themselves. Time would not be wasted in looking at how EFH traded this stock, perhaps those whom earn monies exposing such things will be inclined? 

Kingfisher’s interim results are out, beating expectations (EMC) and also a beat on the implications of the BDO. However, the drop in profit is not to be ignored. One has to consider the sensibility of the ScrewFix expansion - 200 stores. The press/city would be wise to wake up to the discounting and margin erosions, more so ScrewFix is not just a “tradesman’s entrance.” Margins yet again under pressure.

KGF are not confident of a French performance (remaining cautious on trading in Castorama and Brico Dépôt France). In essence what the UK gave, France took away. It would be wise to monitor the industrial output of France, renamed “the indicator for Catorama and Brico Dépôt.” KGF, in hindsight for them, may be thankful in being unable to complete on Mr Bricolage.  How prudent of KGF to sell their controlling stake in China.  

To save time, we’ll say goodbye to Haik Chemical now, this company has been the eternal dog of performance. We could blame the likes of Hi-Tech Spring, whom consistent with higher inventories and lower demand have been forced to be more competitive.   

Apologies for the search function not working properly in the top left hand corner, there is nothing that can be done about this. Utilising Google's site search, may be wise. 

Atb Fraser

(Travelling today so limited). 

PM Bolt-On: Nae bad, as the Scotsman would have you believe at BHP Billiton (BLT)...and some. Come on the cheap money, lance it...!

Good Evening,

Due to the asx, one forgot to press publish.

As of last night, the themes were remarkably predictable thanks in part to the S32 interims (Short 32). BLT's expectations and the marked denial were evidenced in the webcast and the consensus. More on this in due course, as a teaser, could there be a capex issue for short32?

BHP Billiton's (BLT) webcast and presentation gave nothing more away that wasn't contained in the year end results. Despite being pressed on BLT’s expectations of commodity prices a number of times, Andrew Mackenzie elected to avoid answering. This has wider implications for those that believe it's down to the analysts to cover those assumptions (dig). Talk about horse and cart scenario, we expect to "do this" but we aren't going to tell the market the prices or assumptions we base these on. Although, notably, their assumptions by EMC estimates are "about the price" now. 

BLT are in a more privileged position than the likes of (Anto-f-ghastly) but not without risks. Not only are they on the lookout for a $6-$10B acquisition (my estimates), but their current gearing/leverage is better than most, albeit could be better (post further writedowns). BLT asserts they are determined to make projects workable/profitable at current prices, rather than the tone of "care and maintenance” other entities have suggested.

There appears to be some irregularities in the CAPEX and guidance given, a near $1.5B  difference in 6 months, which Andrew was pressed on not once but twice. Andrew wanted to take "this offline" to clarify the items. One wonders, whether these "offline discussions" will make it into the public domain, as it has some significance. From $12.5B to the quoted $11B today (for 2015) is concerning. As one analyst questioned, did they simply stop spending for 6 weeks. 

Whatever way the cat is skinned, BLT cannot maintain the dividend commitment without an improvement in cashflow via a) an increase in commodity prices, b) improvement in costs (that are entirely absent of an "all in associated costs basis,” but hey lets ignore this) c) reducing capex, including sustaining capex and finally, d) assuming the sustaining capital costs can be managed at circa $5/t they need to achieve an OPEX of $15/t. We'll be back to this in due course, because one suspects it's overly optimistic.

The elephant in the room went unanswered, namely taxation. Yes, this was ignored by pretty much everyone, taxation liability. BLT announced the woes of taxation only a week ago. If one was to break down the cost per employee, one has to wonder what the level of profitability is for Singapore worker compared to those in Australia. We are of course not suggesting the Australian Government are not considering this (‘onest gov).

Over to BLT, "almost 100 per cent of the profit from the sale of Australian commodities, from mine to customer, is subject to Australian tax – totalling $8.7 billion in taxes and royalties in Australia in the 2014 financial year." Really?...

BLT's figures were better than envisaged (EMC), but below consensus. BLT will have the same currency beneficiation that marginal producers will have to enable an improvement in OPEX costs, albeit with asset writedowns.

Regular readers will note the views here of the FX AUD trades, as the favoured currency play. Although it’s sensible to consider the implications of Saudi Riyal and the U$D peg. Those complacent marginal traders surely don't want another CHF debacle? Do they? 

There couldn't be more noise made about the "simplification premium" if they had tried. However, when pushed on it, one couldn't help but wonder if Andrew/BLT really meant was the ‘board’ has an inability to multitask (& perhaps some analysts). When pushed on it, to expand on the meaning of simplification, it didn't have the same dramatic effect that the term hoped to embrace. In essence, the board got rid of a short (Short32/South32: EMC call), to enable a focus on "three pillars." (EMC term now).

Without wanting to do a pseudo-analysis of the results, it comes down to earnings. These are guaranteed to fall for the next financial year, save for some act of god (Chinese mega-stimulus). BLT’s sensitivity to sustain operating profitability (P+ve cashflow); namely iron ore, oil and copper, doesn't bode well. 

There are challenges to the guidance given today, in light of the current outlook for “the three pillars” (as one cannot mention the other). Quite how the market expects BLT to perform, isn't so much a mystery, but more so reliance on a recovery of the three of the pillars. We’ll ignore the bauxite/Aluminium issues presented by Dupre Analytics, but the significance should at least acknowledged. Hat-tip on some significant work there and one suspect there’s “more to come on other Chinese entities.”

Oil's decline is likely to impact around $1.65B on BLT revenues. The recent decline in steel, metallurgical coal prices and iron ore, will undoubtedly impact. Whether BLT's guidance to their iron ore costs can be achieved is another story.

Rio Tinto's (RIO) is the preferred model, with RIO leading the charge in cash cost terms. Simply, one would be sensible to factor in a cash unit cost of $16.5/t for BLT, rather than the hoped for $15/t. 

The same for the read across on copper, where Rio advised that the second half is expected to be impacted by a decline in grades and water availability (Ref: to Escondida). Although absent from the BLT today and lacking further discussion. Should we stop looking for themes in accounts and just accept what we are told? 

Longer-term, today presents an opportunity assuming there's a telescope looking past the 3.5/7 year cycles and considering the super cycle per se. It was/is an opportunity for sentiment, aided in part by the Chinese Central Bank / PBOC meddling with the liquidity.

The move was an admittance of how bad things have got, with more to come. All expected, whilst avoiding shock and ore, an RRR decline of a further 100-150bp (EMC Estimates) is required. We note the auto-leasing implications, saving the likes of Daimler/VW.

Contrary to some expectations, the EMC has a target price/range of 1350 for BLT based on today's news. If they there are currency movements in the AUD (Aussie Dollar/expected) and the Chilean Peso (CLP/also expected) and USD interest rates, then BLT are set to benefit on an operating cost level basis. For the short-termism, it was rude not to have some "on the news."

If one wants a dividend at the expense of growth (CAPEX) this is the stock. Assuming BLT avoid biting the bullet and acquire an asset in the oil and gas sector, there's limited upside (circa 35%). 

More on ANTO in due course now their cash has gone. Thoughts for the evening - what are the implications for Caterpillar in the current climate. What are the implications for the Chinese “losing their life savings?” This has more weight that most analysts give credit for….analogies to a stalling plane going virtual were made on the morning call. 

Finally, thanks in part to Li, China (the people) want an explanation for their losses. With prices high, wages low, and China aiming for 7%, we have to acknowledge GDP (we’ll call it faux-growth) is now lower. This is evidenced in part by “cheap money” being thrown at the boil, rather than lance it. Come on the cheap money...whoops, not good for Wall Street…

Atb Fraser

PM Bolt-On: China's new Company for bad stocks.

Good Evening,

As announced yesterday more so informally. We are now understanding the actions with a little bit more information. Today/Yesterday the Chinese have launched a vehicle/bank/company (please delete as you feel appropriate), that will buy stocks to stabilise the market. 

Similar to what the Chinese Government did with bad loans strangling Chinese banks almost 12 years ago, they're now repeating the same tactics with the supermarket. Apparently the bad debts / new bad bank was hailed a success because it only lost half the money it "invested", 

From what we have understood so far, the remit is so loose its creating significant uncertainty on the market. The policy has not been explained fully, perhaps the Chinese Government does not know yet but what most grasped yesterday is only half of it, "unlimited liquidity" (無限的流動性). Whether this "Unlimited Finance Entity" buys companies that are suspended and wraps them up or just the stock of the seller is unknown as of yet. The policy and remit will be announced formerly next week. 

The ramifications, "liquidity" and overall confidence in China by their own people will be felt for a very long time to come. With the knee-jerking to cash under the mattress for quite a few, the property sector may suffer further pain. As a result, loan approvals have plummeted over recent days, and the PBOC are looking at injecting another round of cash into the banks to cover short-to-medium-term financing requirements, with a rather loose set of criteria for approval attached. 

Interesting all the same! 

Atb Fraser

Morning Mumble: China (of course) + Liquidity with some likely sad news for a few Chinese traders, PLUS500 (what are its user costs). The pain of Graphene and GKP!

Good Morning,

Overnight the Chinese authorities have banned listed entities selling stock (if over 5%) in other listed entities for 6 months. So those collateralized loans should be safe for now, with a Band-Aid on the value of them. 

China curbs stock sales in effort to halt market rout and they've dealt with those insurers owed money from brokerages, by banning them from calling their positions (Reuters). The articles doesn't mention the liquidity issues the insurers are suffering as a result nor the Peoples' Bank of China assisting them with emergency funding "for as long as is needed."

The woes of China are causing a "drag effect" across all markets as a race to cash occurs. As seen on the DOW yesterday and other markets with Asian exposure. The FTSE/LSE's will have a similar occurrence. 

In essence, the Chinese are liquidating the positions that are left to cover the woes of being locked in in on native markets. After just a few days, where the Chinese market would have perhaps found a natural level and the issues resolving itself, it’s likely the woes will be engrained for the longer-term. 

Insurers have liabilities, brokers have liabilities and the population as a whole have commitments (rents, mortgages, car payments etc...) This rout or liquidity contraction is being felt across all market classes. The Chinese appear to have been oblivious to the ensuing train wreck and will recoil in terms of risk appetite and exposure to said risks. Same for their purchases, such as cars, food stuffs and luxury items. 

There's a lot of commitment tied up in the market (near $2 trillion). Chinese directors with stock pledged as collateral for loans against the now suspended stock. The Chinese Government, are reported to have pledged "unlimited liquidity." Around the same time as the state media reported this, all commodities rallied, as though a new source of financing had been found or the keys to the safe. The most notable bounce being Copper treading water around $2.50/lb and Nickel jumping above the key $5/lb to $5.15, but felt by all except precious metals. 

One cannot help but wonder if the Chinese Government are trying to patch leaks in the canoe as they appear, rather than taking stock of the situation. The insurers are now expected to shoulder some of the margin issues, along with the China Securities Regulatory Commission (CSR) and  Brokers, Margin houses and banks (PBOC holding the shoe/house). Local Governments have also seen a keen opportunity to tap the Central Government for some cash. 

The woes may be felt further with the "payday" events that have typically occurred in China, but will put further pressure on the system. Historically late payment of wages has been a normal practice, but in the absence of liquidity, this may be outside the normal practices. Especially if some companies were say "margin trading" when they were not expected to be and are now locked in. 

The SHCOMP (Shanghai Stock Exchange Composite Index) traded in a very large range of 3,373.54 - 3,748.48, with the predictable tank on opening with consistent buying throughout the day. Same for SZCOMP (Shenzhen Composite Index), trading in the range, 3,373.54 - 3,748.48.

The saddening part is the news will soon be awash in China of police arrests for "illegal short-selling practices." The scapegoats are going to have little ability to defend themselves with funds frozen already or to be frozen. The need by Chinese officials to find a scapegoat or 8 to lock up for perpetuity. 

Despite the crime being the stupid levels of long margin that was allowed to go unchecked or regulated properly. All that was needed was an 11% contraction to have a confirmed bear market rather than the normal 20%. Whereas to short in China is very difficult, not only restricted but limited to 5% of total stock, with tight controls previously in place. Even on the grey market, shorting was restricted which rather contradicts the Chinese officials’ assertions that it has been the product of a targeted and sustained shorting attack. Sounds good though doesn't it! 

PLUS500 have given a trading update. What the market would be wise to consider is who has deposited the funds a) the customer b) the company or c) an introducer? The number of active customers may have a significant distortion depending on the answer. PLUS500 traders (as per Facebook) are suggesting if you put pressure on PLUS they'll "give you between €100-200" pending on the value of that customer. More so, PLUS500 are believed to be including these "Freemans" as active customers (really?). 

Customers are in essence drawing their monies out, but first obtaining a freebie to fritter away on highly speculative bets, as between 100 and 200 trades/points are required to be able to draw out the €100-200. What is important in today's announce is the lack of Average user acquisition costs (AUAC) that will have to be revised in light of the "retention" attempts by PLUS. Or are PLUS going to introduce another cost item, say "customer retention costs." This has a material impact on bottom line of anywhere between, €9.3M and €18.6M pending on how generous PLUS have to be or have been. With some "whales" allegedly getting near €2.1K. 

The massive increase in the AUAC costs has not gone unnoticed. More importantly, with gossip from certain quarters suggesting there's some settlement by those "armed up with a lawyer" to recover all their losses during the suspension. Will this become a more common-theme? What is the impact or liability for PLUS. This is excluding the unknown quantum of any potential fine that appears to be a material breach of AML procedures. Over to Playtech to ask those questions during their due diligence. Do PLUS 5000 have to update the market on these liabilities both legal and potential fines? 

Centamin Egypt (CEY) gave a better than expected Q2 Production, ahead of guidance but overall guidance wisely remaining the same. With little in the way of costs per ounce guidance, one has to range between $729 and $655 per ounce. AISC (all-in-sustaining costs) should be around $945/oz but with some positive revision potential towards $915/oz. Grades into Q3 are key, as a lack of improvement will shave %'s off the overall FY of 430,000 and 440,000 ounces."

As one savvy analyst has noticed and is likely to give some greater PR to the graphene industry is the Collaboration between Haydale Graphene Industries (LSE: HAYD) and Talga Resources (PDF version) (ASX: TLG). 

With some unfortunate victims of the 'new tech' era, such as Graphene Nanochem (GRPH). whom operate in materials and chemicals such as  Fuel additives , oilfield chemicals and homecare products. Unfortunately for GRPH their margins will be squeeze across the board, whether there's potential out there for further contracts, there's been a sustained level of selling. 

With debt levels increasing, margins being squeezed and a number of plates spinning it would be wise to price in an equity raise. Whether the company are considering this or not, it's going to be no mean feat. Limited cash, debt of circa £30M, expect news of rescheduling of debt and some element of equity raise. The Company has been punished rightly/wrongly for perhaps being listed too soon. Or arguably from a company perspective of being able to access the capital markets. 

There is/was a lot of hype around the Graphene launches, including Applied Graphene (AGM). With no debt, AGM has not been punished to the same degree, however GRPH are at a different evolutionary stage. GRPH's IR needs a significant work-over irrespective of the sustained selling. When comparing, it would be wise to consider GRPH the leveraged play, whilst AGM/HAYD and ASX: TLG appear to be more reliant on the markets for capital than creditors. 

Limited time for Gulf Keystone (GKP) who's output guidance / forecast has been cut. As a positive GKP have received some cash and will hopefully be shipping oil out via the Turkish pipeline soon. The market didn't need reminding that as a result of the 5 weeks suspension production would be down, near as damn it the 10% GKP are guiding on today. With directors departing and the like, this low ball offer is looking more and more likely! Over to GKP TV for those incapable of reading! (Mentioning no names). With certain folks taking the jolly to Paris for the AGM, sobriety will be top of their lists. 

Atb Fraser

Morning Mumble: Is Greece's agenda paying off? SHCOMP etc...Copper (FQM), Iron ore, Sierra Rutile (SRX), CMCL &...Margin Margin Margin!

Good Morning,

So the vote about "terms" that were allegedly withdrawn has taken place and the outcome is now being consolidated by those denying the gravity of the situation Greece 'feels' it’s in.

Since Tsipras's election and formation of a coalition of sorts, Greece has been on a train with one track and no other routes or exits for its destiny. Not only will this have implications for Greece for the longer-term (35+ years), but will raise doubt over Europe's ability to keep its members in line (the status quo).

China is not assisting matters, with the press realising (belatedly) that the Chinese Government [was] is providing liquidity to the CFD/Spread bet companies offering margin. EMC:Margin and Securisation (03rd July 2015).

Over the weekend, the FT ran with Chinainjects liquidity in attempt to reassure markets. The CSRC (China Securities Regulatory Commission) has come out and stated what the market was aware of. The PBOC is now providing finance to the China Securities Finance Corp (CSFP) to maintain the stability of the market. Is it a case of one cannot be seen to lose on the markets, where 300+ funds have been created since February, with the majority betting long.

These actions and a blind belief of stock performance have created a squeeze of immense proportions The CSRC is tasked with attempting to stabilise something they were warning about in December 2014. 

Those fund managers "speaking positively" [99.9%] are being given the financial muscle to create stability. The PBOC, via 3 financial houses, has been in the market for huge chunks of equity, in specific entities across all sectors (34 stocks in total). One assumes giving greater liquidity in the market or slowing the fall.

The Chinese Government think "stability" is now the main staple of the day. With such a large percentage margin trading, near double the reported figure in the FT (17%). The margins/leverage on Shanghai Stock Exchange Composite Index (SHCOMP) and Shenzhen Stock Exchange Composite Index (SZCOMP) and SouthChina Morning Post (SCMP), is actually near 30% of the entire market if one includes the grey market. With the grey being the biggest risk to any stability, due to the leverage multiples that have been offered compared to the CSRC regulated houses.

In December 2014 the CSRC carried out "out on-site inspection" of the majority of securities firms including margin trading and short selling, pledge-based repo and securities trading with repurchase agreement. Not only did they have concerns about the rolling of positions but the amount of leverage that was being offered.

The basis of the investigation was to head off any financial boom and bust type squeezes. It did just that with commodities speculation being reduced massively, with most across the board losing any form of support. Time will tell, but it’s wise not to bet against Goliath's determined to avoid any inference of failure.

Quite where the train of IPO's and delisting of Chinese entities from Global Exchanges goes now is a question that will need answering. The Chinese market is reliant of the Emperor's new clothes to bet long. Without the onslaught of IPO's to maintain silly valuations, people will quickly start to close their positions or avoid betting on the crap.

The crap will have other companies reversed into it, to enable a perceived quick route to a Chinese listing where the regulator doesn't like sellers! See Focus Media's attempts...Reuters (June 2015). This is not the only one either! SOE (State Owned Enterprises) are going to have a rough time of it shifting of the PRC (Peoples' Republic of China's) balance sheet and into the market.

All China’s main brokerages have agreed not to sell shares, perversely so the market can recover to 4500, currently 3,775.912. There's a long if ever there was one! Additionally they have had a whip round and put near $20b into a fund to assist the “Government” with stabilisation. Please note, the Chinese Government / PBOC is likely to be spending near $100B on a similar basis and has also been active in the market! 

Moving on to ASX, FTSE and AIM, with Australia waking up on a Monday to a shock of a horror. Lo and behold commodities dropped and so did the stock. Iron Ore producers were pleasingly punished, (they ignored the Chinese warnings from EMC:warnings from Xinchuang Li  and now the price-setters are making hay whilst the sun shines. It’s not the best market with demand down and the price setters’ appetite for any premium being unplayable. One wonders if there's two steel mills margined up to the hilt speculating not only on Copper but SHCOMP & SZCOMP. 

With one major shareholder in the “China’s Shanghai Chaos fund” needing a little collateral, the fund closed its entire position on Friday/Monday.  Not necessarily the best time after the article by the FT on copper, China’slow rates sound death knell for copper carry trade by Henry Sanderson. A very good piece, which covers the woes of the industry. The read across to other commodities is also likely. 

How does this impact on First Quantum Minerals (FQM), where their production is not only in breach of the ignored covenants but also raises serious questions of the viability of the project being a "bet on the appreciation of copper." (EMC:FQM Gloat & EMC:FQM Moving the goal posts). This is just after Canaccord Genuity places a buy note out with 20% ish upside.

How all these commodity crashes and the like have propped up China's economy is another question. With factory gate prices, inflation and growth all having an impact, is it still wise to pin the tail to circa 4.5% realistic growth when stripping out wastage? 

Caledonia Mining (CMCL) give a Q22015 production update  that is in line. With the company actively managing production grades and looking to maintain the longevity of Blank Mine it’s a positive update. With the revised investment plan looking to benefit production from 2016, the company is spending its cash wisely.

Production up, although comparatively speaking production costs are creeping up again! From $959/oz. on an all in sustaining cost (AISC) bases to $969/oz. AISC eroding 1% of the 4.7% increase in production from the previous quarter. Production is still down 7.4% on the LFL comparative quarter in 2014.

What is not commented on is the grades impacting on the AISC that have spiked near 7% on the comparative quarter from $903/oz. to today's $969/oz. Overall a positive but those costs will have to be kept in check. One assumes with the sinking of no 6 Winze this has had an impact on operational costs as well?

With limited time, Sierra Rutile's (SRX) share price recovery is justified on the back of today's Q22015 production update. Having previously found little hope for rutile prices, the company appear to be managing the company pro-actively.

SRX's cash costs have been managed very well. Costs reducing from $799/t in H1 2013, $609/t in H1 2014 to today’s $527/t., mostly on the back of an increase in Rutile production and they reiterate they’re on track to meet their rutile production guidance of 120,000 - 130,000 tonnes.

All this whilst planned shut-down of the Lanti Dredge Mine for maintenance and commencement of construction of the Gangama Dry Mine being on schedule and budget! With some cherry topping, completion of the Sembehun Dry Mine scoping study. It highlights long-term dry mining project with strong economics. One will have to wait and see. Perhaps some green shoots at long last, at about the money and a recent broker appointment, its wise not to rush in.

Atb Fraser

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

Good Morning, 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Atb Fraser