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

Good Evening,

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Atb Fraser

Apologies re: Grammar.

PM Bolt-On: Glencore, FED with fears of Déjà vu, owning American stocks? Lithium (who's taking it?) FMC/SQM/Tanqi, + Gold (not quite a bug) on Randgold.

Good Evening,

Initially it was going to be Glencore’s results on the share placing, but every-man and his dog has covered it and there appears to be a consensus that the debt matters resolved. With the employment and cost issues cropping up on GLEN's care and maintenance proposals, the costs savings might just need a little Tipp-Ex. 

Tomorrow’s news on the Fed could or could not be the impetus and momentum needed commodities. Any deferral in rate rise, will only lead to speculation of when it will raise rates, including the associated risks (Déjà vu). Here the view is, the FED should bite the bullet, but those whom know about all such things suggest its unlikely. 

The question is likely to be, why own American stocks? Justification that cheap money has been used for buy-backs and/or capital returns isn't a sound investment case in its own right. Return on capital employed/invested and return on shareholder funds, isn't hindsight but prudence. 

News is rife with Lithium. The market appears very slow to give some credit to a changing market. Perhaps with the likes of FMC Lithium (NYSE: FMC) on a PE of near 35 it’s enough for now. 

FMC have wisely sold their Consagro operations (Brazilian generic crop protection distribution and sales subsidiary), to ‘Atanor do Brasil,’ the Brazilian subsidiary of Albaugh. A sensible choice as FMC have/had neither scale nor a leading position to leverage off.

FMC poignantly update the market that as a direct result of “continued market growth is outpacing current industry supply capabilities for most of our product lines.” This has improved market conditions to justify a hefty 15% price increase in lithium (Inc. lithium carbonate, lithium chloride, lithium hydroxide and all other products) except speciality products that are rising $3.50 per kilogram.

Tesla are shrewdly conducting deals, signing up off-take/supply agreements at a discount to market and capping the price. Examples being Pure Energy Minerals (TSX: PE) (Sept 16 release), whom today did a deal with Tesla.

Same for Bacanora Minerals (BCN) whom near two weeks ago struck a similar deal supply agreement with Tesla. Although small fry, it’s giving an indication Tesla is working very hard to stabilise the price, admittedly not very well if one compares Chinese prices.  

The price rises are unlikely to help Chinese buyers whom have an import duty of 6.5% on top of the price. It’s difficult to find the appeal of Tesla with their failure to convert sales in China, but Marmite has customers, so why not Tesla.

The price increases are marginal for car producers including the likes of Tesla. Without checking, more recent estimates suggested that Tesla required between 11-16 Kilos of lithium per car. Will Tesla become a gimmick in China, especially as average auto sales prices are dropping, margins down, incentives up but demand contracting? Don't Tesla at some point need volume rather than R&D costs eating into the majority of the unit sales price?

Like energy pricing by the ‘non-cartels in the UK,’ with FMC leading the way, you can be assured that Albemarle (NYSE: ALB) whom bought out Rockwood Holdings (U$D5.7 billion), Global X Lithium ETF (admittedly not exclusively a direct exposure to Lithium producers; noted RD), Sociedad Quimica y Minera (SQM (NYSE: SQM) and Talison Lithium. (Formerly TSX: TLH), will be "compelled" to act...

Talison Lithium, a once upon a time target for Rockwood Holdings, is near impossible to gain exposure to having been bought Chengdu Tianqi Industry Group (Tanqi). Note the indicator was there post any fundraiser of a take out for CDN$850M (from memory.) The Chinese press had reported well before the offer that the Chinese Investment Corps (CIC’s) had approved loans to funds the purchase of Talison by Tianqi well before the event. After all, they'd completed the financing for the mine.

Being prudently reminded of the SABMiller (EMC) commentary. To quote yours truly, “The best hope for SAB is a take-out, over to Anheuser-Busch InBev whom today had a good justification to limit any premium if it were "going to make a move at the end of the month." Today’s news on Anheuser-Busch InBev (ABInBev) SABMiller PLC - Responding to press speculation crystallising ‘most’ of the value.

Whilst not being the biggest fan of gold, Randgold (RRS) today presented with an opportunity to place money (with requirements of safety), with gold steady around $1100/oz, RRS is the preferred Fed Arb, with costs and cash built in even for a longer-term trade. RRS's ability to weather the market and price movements is not to be under-estimated. Even with some citing $775/oz. as a possibility, Randgold may find it tough, but others would quicker fall, causing a shortage of supply. Shockingly, this is likely to be a longer-term investment here.

Admittedly, some see gold as a hedge rather than a supply issue and a store of value. Albeit, the dynamics of the market have always mirrored those of supply and demand. It’s the basics of global risks and perception of risk. With deflation in mining equipment, CAPEX expenditure and energy prices all reducing, it will all assist the unit costs on an all in basis. Obviously save for those producing the equipment reliant on a booming markets. 

Sensibly closing positions in advance of the fed movement today, due to the close nature of any such call, we'll revisit Caterpillar (NYSE: CAT) in due course. The strength in the North America market is facing a wave of deflation in mining and shale costs, caterpillar are not immune, although hedged to some degree by their financing arm.

CAT's Parts may benefit as machines that are run for greater hours per day/week and annum, but insufficient without some form of recovery within commodities generally (read as and/or stimulus). Not forgetting inventory of parts carried by the major miners is also being reduced or managed more efficiently (BHP Billiton a prime example). The destocking on top of pricing pressures won't be positive. We shall reserve comment on Caterpillar's finished goods until 22nd October (Date for Diary). Caterpillar's sponsorship of the Energy and Mines summit is noted.

The recommended reading list is growing and appreciated so please be patience. 

Atb Fraser

Morning Mumble: Centamin (CEY), Caledonia Mining (CMCL) and...Asian High Yield Bonds (Chinese Property)

Good Morning,

Some tangents this morning and very limited time. With Centamin Egypt (CEY) unaudited results for the Q1 2015 are identical to Q1 2015 Preliminary Production Results. With a dire ROE (Return on Equity) of a smidge under 10% (annualised around 38%) which is dire! With the warped nature of CEY not paying tax, simply put there's a requirement for a write-down.

Today's results certainly do not justify the uptick in the price, without more news 'on other developments' and expansion, CEY is about the money. We'll ignore the number of shares in issue being wrong and distorting performance slightly, but even so a performance improvement. CEY at the current gold price and likely outlook, is likely to be range bound. 

Staying in gold, Caledonia Mining (CMCL) Q1 are about the mark, costs a fraction up, profits down but dividend maintained. A positive for CMCL is the management have concluded that its best way forward is to focus on 'what's working at the moment.' To quote CMCL, Caledonia has increased its strategic and operational focus on the Blanket Mine and intends to close and dispose of non-core operations in Zambia and South Africa and to reduce operating and administrative expenses. Shareholders should be thankful the management realise this, often there is a tendency to spin too many plates. 

With a focus on costs, CMCL 'appear' to know what they need to do, one hopes there's not a raft of options or salary/bonus awards as a result of their likely successes in saving monies! Pending the success of the expansion plans for the Blanket Mine, expect some rewards going forward in 6-9 months. Other than a gold price improvement do not expect the stock to appreciate too much (in trend/range). With the absence of an indicated resource statement as defined in the PEA December 2014, confidence should be limited until the resources are measured with confidence, rather than "inferred currently. 

Sabmiller (SAB) will find it hard to justify any form of independence with results that are below the management forecasts. As a result of flat sales (poor I known) and the strength in the dollar SAB's bottom line has been impacted. Any strength, save for speculation of M&A is yet another justification to sell the stock. Its ironic soft drinks are performing better, perhaps as the trend suggests, SAB will have to work harder to maintain beer sales. The best hope for SAB is a take-out, over to Anheuser-Busch InBev whom today had a good justification to limit any premium if it were "going to make a move at the end of the month." 

There's a growing trend on the price of the "Asian High Yield Bonds", certainly for Chinese Property developers isn't looking good. With the Asian equities on a bull run, those higher leveraged companies would be wise to take advantage and raise cash to reduce debt. It’s always of concern when the Chinese Government (via State owned media) promotes speculation on the markets. The Shanghai Stock Exchange Composite Index (SHCOMP), has ironically mirrored the growth in speculation (margined trading). 

With second-home down-payment percentages becoming "flexible" it’s envisaged that there will be an uptick in down-payments and completions figures for the next set of data. As a result of the imbalance of supply, it’s likely those speculating will be knife catching to a degree. Over to Kaisa to look to sort its debt woes out, its certainly at the price for their bonds, save for Sunac interventions. Zhang Zhiron's majority shareholder in Glorious Property is at risk of being reduced. Zhang should thank his lucky starts a privatisation motion he made previously was rejected! 

Limited time,

Atb Fraser