Morning Mumble: Hiatuses and...Ken's Mare (KMR) Equity for shareholders? Anglo + De Beers, Glencore and some news about a former Jam Tomorrow Employee Rurelec & Questions for their NOMAD.

Good Morning,

Very busy - although amusingly, there were suggestions we had visited the dark side and started working for a long-only fund! Chance for a recap later this week on the pertinent issues from the 22 November to present, although nothing much has changed, save for news driven events.

Iluka Resources sensibly announced the long-awaited termination of discussions with Kenmare Resources (KMR) - it’s wise for parties to read the RNS. Those followers will be unsurprised by this "news.” 

KMR equity holders have the opportunity to participate in the dreams of the future. So to sugar-coat the dire state of the KMR’s financial position they have announced plans for an investment by State General Reserve Fund (SGRF), a further capital raising, and balance sheet restructuring

Over to KMR (bold, italics and underlining are additions):-

SGRF, a sovereign wealth fund of the Sultanate of Oman, has approved in principle an investment of US$100 million in the firm placing via one of its subsidiaries, subject to and conditional upon, inter alia, agreement of a subscription agreement, agreement of arrangements with the Group's project lenders on the Group's capital structure, procurement of commitments from other shareholders in respect of an additional minimum US$75 million capital, necessary Kenmare shareholder approvals, and finalisation of a prospectus.

Wait….continue reading:

Moma is a world-class asset that encompasses a large, long life ore body. Total invested capital exceeds US$1.2 billion, with the mine producing more than 7% of global TiO2 feedstock supply - being the largest merchant producer of ilmenite globally.

Having invested capital that exceeds $1.2B, and producing 7% of global TiO2 feedstock, it would appear the management are going to hang around to run the next stage of the "KMR turnaround story/saga." This is despite being in charge whilst a transformation of a once multi-million pound company into a small cap with a £12M valuation took place. One has to wonder what the board’s remuneration and bonuses have been over the years in comparison to the returns for shareholders. 

The question that those supporting shareholders should ask is, “are the management right for the future?” If the past is an indicator of the future, prudence would be to have a fresh start with a clean sweep. Those whom played the KMR pub quiz last year on FTML, will no doubt be aware of the dire performance for shareholders.

What’s another $175M in the grand scheme of things? Will the prudential be putting up any ‘wonga’ into the fundraiser? More to the point, is $175M enough?

There remain a number of material matters that need to be agreed to enable Kenmare to deliver the planned capital raising and there can be no certainty at this time that they will be achieved. Kenmare welcomes the indicated support from SGRF and appreciates the support of key shareholders.

We’ll watch from a distance, although if one was short, prudence would suggest closing on the news today. KMR Net Debt must be around $315-332M by EMC estimates.

Continuing with a theme of shareholder value and with some amusement for those following the debacle at LGO Energy. Judging by the latest announcement they’re off to find and/or recognise shareholder value with  a strategic review. 

LGO also update the market on the Trinity Exploration no-deal on the Tabaquite Block by issuing 41,487,776 to Trinity Exploration. Trinity’s statement on Tabaquite Block, Trinidad ends with: 

The decision to cancel the SPA has been considered as part of management's overall assessment of means to better realise the value and future potential of the Tabaquite Block. 

  

We have Glencore (GLEN) updating the market this Thursday. NH and David Sheppard at the FT ran with something a bit more positive, “Glencoreexpects to cut debt ahead of schedule.” - Sensible and common-sense discussion about GLEN's earnings forecasts in the current environment. Pay attention to the terminology used on Thursday, one suspects there may be a few statements coming from the back foot.

Sadly for GLEN's workers Collinsville coal mine in north Queensland, 180 workers are to lose their jobs. Is this an admission of the dire state of the coal industry? It certainly explains why Mick Davis is taking his time with X2 Resources, perhaps to Rio's annoyance. 

In the weekend press we had Anglo American allegedly slashing their dividend (again and again), talk about echoes – news must be thin on the ground! Anglo’s investors’ day tomorrow (08th Dec). We can no doubt look forward to all the positives of a diversified miner and what this offers investors, whilst struggling with depressed pricing.

With Anglo’s subsidiaries either under water in terms of operational costs (Kumba Iron Ore/De Beers), lacking flexibility in CAPEX (Minas Rio) or needing to deleverage the balance sheet. The future doesn't look rosy. Anglo is now realising the hard choices it has to make and the limited flexibility. Quite why they have not pressed the equity raise/capital injection button is anyone’s guess. Surely they'll want to get in there before all the others?

We note that De Beers have sold Kimberley Mines in South Africa to Petra Diamonds and Ekapa Mining for a rather low sum. If one looks at the capital De Beers spent on Kimberly and the plant etc…it gives a rather good indication of the amount pressure to monetise what assets they have/can sell.  An article from May 2015, makes for an interesting read… Engineering News - De Beers inviting bids for life-extending takeover of Kimberley Mines. Was the USD to South African Rand/ZAR near $1:ZAR5 in 2002/3?

For those that have followed a company Rurelec that we consider jam tomorrow, its not often one gets validated in their views so quickly. Over the weekend attention was drawn to the following announcement on Independent Power Corporation PLC.  See the previous commentary here (EMC) when the IPC was "spun out" or Rurelec to allegedly save costs.

Questions:

a)      When did the Independent Power Corporation PLC, Peter Earl and Anglo Kazakh TransAsian Pipeline Corporation Limited commence discussions? We may be able to update on this shortly...

b)      Was this before or after the spin off?

c)       Was the NOMAD consulted on the “spin-off?”

See the original announcement and terminology 19^th June 2015 - Director Change (Peter Earl) leaving & IPC. Then see the replacement, Spinout of Subsidiary. Albeit it’s somewhat immaterial as the horse has already bolted.

Atb Fraser.

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: Normality resumes with oil and the swallows have left with China needing Growth support, cutting reserve ratios. Vale, APF, X2, Largo Resources...

Good Evening,

In my absence the market been in denial. The assumptions on capex is that there will be a reduction in supply. So the market intelligence focused on the drilling rig count than the supply. Inventories were up and more than the consensus thought. Perhaps the consensus needs some educating with their inability to read the obvious. No wonder the myopic speculation became negative/nervous with Brent and WTI today and ran for the hills. A few fingers were burnt in there today and wrongful assumptions about strikes...you have been warned!

Struggling economies are under the cosh with reduced oil revenues and a weaker currency the infighting is already occurring. It may pay those bottom feeders to consider Turkey for the annual hols. With the interest rate being the main enticement to the Turkish Lira (₺), and the Central Bank under significant pressure the currency(ies) are going to be volatile. 

Record iron ore capacity was announced coming out of Western Australia, it's a wonder who the casualties are. The minnows we know but there will be some rights issues on Indian producers with prices set lower than the international market. Add into the mix the pressure from Russian operators with the currency advantage it’s not looking positive. Its been known on the shop-floor in China, but ignored by the analysts, that Steel Mills are more willing to adopted the "just in time" approach for purchases. The price is going to be stressed unless further stimulus is announced as the Chinese become savvy at stock management; evidenced by the port inventory declines. 

Mick Davies's X2 Resources (X2) may come to Vale's assistance by purchasing some of their Nickel assets including Sudbury Ontario (population significantly reliant on Vale's nickel). Vale would like a partner for their Nickel ops, but what price is realistic at these prices? X2 are now rumoured to be finding some debt to fund a 'certain' acquisition. Who what when isn't the question...we know what's available it's a question of timing.

The other day EMC got "almost" positive on Anglo Pacific (APF), and today, there's a proposed acquisition and placing. How this placing got away as they also announced reduction in dividend by 40% and they forget to mention that Largo Resources (TSX: LGO) (Vanadium pure play) with Iron ore credits (or lack of) helping to miss all targets, costs and we'll assume the debt can be refinanced. 

Largo's cost issues alone live little room for error. APF are interested in a 2% Royalty on, with targets missed. Thanks to Roger Bade for pointing but, once confirmed, one might need some smelling salts if you continue to hold. As discussed on EMC Largo Resources and here (Afren Favourable result & Largo Resources (Maracás).

Atb Fraser