PM Bolt-On: Good news for Zambia + ZESCO & First Quantum Minerals

Good Evening, 

ZESCO have managed to source additional power to replace the hydro shortfall. First Quantum (FQM) are prudently quick to update the market on their power improvements. Over to FQM, full power supply was restored to its Kansanshi operation and Sentinel project by ZESCO, Zambia's state-run power company.

TORONTO, ONTARIO--(Marketwired - Aug. 6, 2015) - First Quantum Minerals Ltd. ("First Quantum" or the "Company") (TSX:FM)(LSE:FQM) today reported that, on August 6, 2015, full power supply was restored to its Kansanshi operation and Sentinel project by ZESCO, Zambia's state-run power company. This follows the receipt of notice of the declaration of Force Majeure for the supply of electricity from ZESCO to Kansanshi and the subsequent reduction in electricity supply to both Kansanshi and Sentinel as reported on July 27, 2015.

While the Company believes some restrictions may be re-imposed during the remainder of 2015, ZESCO has stated that it has contracted independent power producers such as Maamba Collieries Limited and Itezhi Tezhi Power Corporation through the signing of Power Purchase Agreements to procure more electricity by the end of 2015.

On Behalf of the Board of Directors of First Quantum Minerals Ltd.

G. Clive Newall, President

Although not necessarily permanent, at least ZESCO are being active. Admittedly with parliamentary discussions in Zambia showing knowledge of likely electrical generation problems, could it could have been completed sooner? A very healthy bounce post the news, can it be sustained? ZESCO have not confirmed whether the new supply is online now or whether they have increased production at Kariba et al. (Source:Hydropower.com/Zambia)

We shall await news from Glencore, Vedanta and Barrick. 

Atb Fraser

Morning Mumble: They have Phorm, NEXT guidance improvements. Can it get any worse for First Quantum (FQM), load-shedding! + AQP & GKN + DRX

Good Morning,

I would like to apologise to readers for kicking this proverbial dog, but Phorm have Phorm. Today, the can is kicked back with a convertible loan note extension. In essence this is a pre-placing, keep the air conditioning running type corporate action. With little to add to Phorm, EMC: criteria for a huge short March 2014. 

The long-only contingent are celebrating with a stonking trading statement from Next (NXT). EMC: NXT March 2015. Over to Next (NXT), with an increased sales and profit guidance for the full year that supports a timely buy note by Citi on Monday. With no buy back, but the floor raised to £69.62 and a special dividend of 60 pence (2 November 2015). One will sit and wait for the trading opportunities. It’s noted a lack of margin commentary or analysis.

First Quantum Mining (FQM), has received notification of a Force Majeure for the supply of electricity to its Kansanshi operation from ZESCO. With load shedding/supply being reduced 23+% at Kansanshi Operations and Sentinel being reduced the same from 55 to 42. How this affects the guidance and ramp up is another question. A likely 2400 tonnes per day feed through, the costs will move out to the previous $1.77/lb (not C1). Are Vedanta (VED) affected as ZESCO have suggested it’s just in the North West region? Also, was the load-shedding announcement made on the 13th July? 

For the geographically minded, this has been on the cards for some time. ZESCO is reliant on Kariba Dam. Water levels there have been at lows and the outlook isn't great either. There's a material shortfall of 550 MW this year. The problem is likely to get worse, as so far the power reductions are plumb on the middle of guidance, whereas the the grid is showing a 30% deficit in power generation. Perhaps Aggreko can assist? They should be on the phone already, if they haven't already been. That's a significant 'potential' contract...

There's has been an absence of reporting from Vedanta. VED's Zambian operations are not insignificant, nor are Glencore's, who also have an interest in Mopani Copper Mines plc along with FQM. The load shedding issues will not be resolved until the end of the year at the earliest.

The issues have been discussed in the Zambia parliament over recent months by the perhaps outspoken Mr Patrick Mucheleka (MP). Not only taking a significant interest in copper, power generation but more importantly, the acquittal of former President Rupiah Banda. Perhaps to the disappointment of President Edgar Lungu?

A psychic announcement for Lonmin (LMI) thanks to Aquarius Platinum (AQP), whom Q4 production results. The pertinent issue in the commentary from Jean Nel, CEO Aquarius Platinum said (see bold): The fourth quarter was characterised by a particularly good performance from both Aquarius operating mines. Both Kroondal and Mimosa again improved safety, delivered all time fourth quarter production records and reduced costs, in what remains a challenging operating environment. The performance is testimony to a disciplined approach to operations and the operating teams at Kroondal and Mimosa deserve much credit for this. From a macro perspective, the lower metal prices which prevailed during the period and especially post quarter end will not only require an increased focus on safety, cost and production discipline, an approach which Aquarius will remain committed to, but also a focussed assessment of the viability of each shaft at each operating mine to ensure the sustainability of the business in a low metal price environment.

In case anyone is trying to fathom out what calendar AQP work to, today's is Q4. A lot of work has been carried out at AQP. Sadly the share price is unlikely to benefit much from it. It’s a testimony to the capabilities of the staff. The overall outlook won't help AQP, expect more cuts to production from unprofitable shafts. Although near a more realistic valuation than LMI...whom must be haemorrhaging cash! 

GKN results, acquisition and cash placing for another day...but watch that space. The book runners will not doubt suggest the job was difficult in the prevailing market etc.! Of course it was 'Gov.' Rather insightful after yesterday's EMC: JMAT read across for GKN! Drax's half yearly today aren't so bad. Having been a knife catcher on the climate levy changes, and a strategic review under way to consider the long term options for the Group. 

Atb Fraser

Morning Mumble: Camp AV, Evraz (EVR), HSS Hire Group (HSS), Speedy Hire PLC (SDY), Sirius Minerals (SXX), Phorm!! Has Zambia lost the plot? Hargreaves Services (HSP) and NIPT, sensible placing!

Good Morning,

A hot day yesterday at Camp AV! For those that were there a plunge pool and ice baths would have been brilliant addition, perhaps next year? The ice-cream seller was in high demand and certainly a welcome relief.

It was good to catch up with a few people yesterday, some previously unknown and others old timers. The question of the day was, who was the lady with the body guards? We know the inquisitive were just interested in the person rather than the lady's looks! We won't mention those totally fascinated by the lady in question. 

It was a pleasure to listen to some of those highlighting the issues in markets, the Enron chap (CFO) Andrew Fastow. Disappointing that I missed a significant part of but was very good for the little  I did manage to grab. 

The rabble team quiz were jinxed from the off, with the system rushing through questions and not submitting our last set of answers to the total. Not that it would have made any difference to the winners, spending more time revising! To next year...

The holiday season upon us, it’s time to close positions, to avoid any issues and the need for management. One in particular EMC: Evraz, Steel and Sugar (April 2015). The credit here goes to Hugo for our entry point being 205, and today's is no credit here for this trade, it’s down to Hugo's technical analysis. The entry point would have been 187, post breaking 206. An acknowledgement that technical analysis pays 202 it was. Looking at the percentage rate, on the issue of 4-year 15 billion rouble bond (approx. $275 million), it tells the true story of the issues facing EVR. 

EVR have further woes with the South African unit Evraz Highveld Steel & Vanadium (JSE: EHS) that's turnaround hasn't exactly gone to plan. With the share price dropping 95%+ in 3 years, it’s not clear when EVR will write-down the full value of JSE: EHS. 

With the hard work done, it was the day (yesterday) to sell the remainder of Sirius Minerals (SXX). The company planning an update in due course after the approval. With a significant amount of cash needed after an update on the fine print, it suggests limited upside from here at the moment. For those in the longer-term, it’s likely the company will take the asset to full production. If SXX haven't already been on the phone to start the funding, they will be. 

It was a coup yesterday, with HSS reporting on Monday (EMC) the read across wasn't positive for Speedy Hire (SDY). SDY announced a profit warning and a change in the board. SDY have they been unsuccessful in 'divesting' the remainder of the oil and gas division in the middle-east.  Having shut down the equipment hire operation business in the region, one suspects any sale is going for a song now or closure. The board have also identified some contributing factors to 'poor' trading:

• A lack of available equipment during the network optimisation programme.

• A focus on strategic accounts at the expense of SME customers. (*Addition Small & Medium Enterprises)

• Poor customer service caused by disruption during the implementation of a new IT and MI system.

The statements suggest the company's eye has been taken off the ball. With such items contradicting the very survival and purpose. If one does not have the equipment, limited focus on the bread and butter (SME) and "poor" customer service, you're not going to win many friends. 

SDY are quite likely struggling with margins on key accounts as the sector as becomes more competitive. HSS's woes in cooling are not the only thing felt by SDY. Date for Dairy, HSS due to announce on Wednesday 26 August 2015. 

Having previously had woes SDY's with accounting irregularities (gaping hole in the accounts for Gulf oil & gas) and now being forced to be ultra-conservative with forecasts and the overall management of the company. 

Those with a risk appetite may consider SDY's soon to be ultra-conservative approach as a buying opportunity. SDY will have to increase equipment spending to fill the voids it’s identified. Greater customer service costs will impact on margins. 

SDY's relatively low net debt to EBITDA ratio (when compared to HSS) will instil some confidence. Even allowing for a £25M increase in debt to £130M with plenty of headroom in the (recently renewed) £180 million 5-year asset-based revolving facility. Both companies are en par with 35% losses for holders. One hopes their customers don't stick the knife in 'after the news'. 

When should HSS & SDY have informed the market? With contradictory statements by HSS Q1 in line with expectations May 2015. Just 5-6 weeks later, the trading update specifically states that April and May...

The Group's trading performance through Q2 was marginally below expectations, primarily impacted by weakness in Key Accounts customer activity across a number of sectors particularly in April and May, as well as reduced demand for cooling equipment during the period. In June, we have seen customer activity begin to return to more normalised levels, with order books building into the second half of the year.

Standard life should perhaps be asking how on the one hand trading is in line and then some weeks later it’s suddenly below for the same period? Same for SDY whom initiated a board level review of the business. What led them to this decision and what evidence did they have to conduct a 10 week investigation and not inform the market?

After Phorm's (PHRM) woes EMC March 2014 nothing has changed for the company. To quote in full, to save time.

Leggie, Phorm.....I wanted to do a lengthy piece until I realised Tom W had, for which covers a lot of the items. What I will say is, and as an assurance to Phorm, the fundraiser meets the criteria for a huge short...I look forward to the news with glee.

(Edited: added in Bold).

Having shifted their strategy to China, the annual report reads of a chilling indictment of the views 16 months ago. Over to Phorm to inform you of the operational highlights. 

Operational

• Successful launch of the Company's machine-learning technology offering a solution which can function without the requirement for an Internet Service Provider ("ISP")

• Launched operations in the United States with initial test campaigns being converted into revenue generating commercial campaigns within a matter of weeks.

• Shifted strategy in China to partnership model, reducing cost base by approximately $0.5 million per month.

• Focused the Company's resources on its core markets; China, Russia and the US.

• Global peak daily opted-in users achieved in 2014 of 148 million, including a peak figure of 109 million in China.

• High calibre board appointments in Lex Fenwick, the former CEO of Dow Jones & Co. and Bloomberg L.P. and Johannes Minho Roth, a highly experienced and respected fund manager.

Disappointingly there's limited downside potential for those wanting to acknowledge the facts and ability of this company. Over to Phorm again,

In April 2015, the Company raised £6.00 million gross, via a placing and subscription, to fund the Group's general working capital requirements. As at 30 June 2015, the Company had a net cash position of £0.9 million, which, at the current over-head run rate, taking account of additional funds due and our ability to manage our working capital, is expected to last until early August 2015. The Company is urgently exploring funding options with a view to securing additional working capital in the short term.

Placing at sub 1 pence? Would you!?!?!?!?!?!?!?!

A few companies will be reconsidering their positions in Zambia this week, Barrick Gold (TSX:ABX), Glencore (GLEN) and First Quantum Mineral (FQM). With Zambia yo-yoing between budget deficits and milking the miners, its not going to be easy for Zambian Miners. Zambia from memory scrapped corporation taxes last year (sept/oct) to change to a 20% taxation of revenue (open pit) and 6-8% for underground mining. Yesterday (1^st July) started the reversion back to the 30% corporation tax that is en par with the 20% taxation.

Not only is the corporation taxation an issue, Zambia are now proposing a mineral export ban that have not been beneficiated in the country? How Zambia will manage this will a reliance on hydro power and a shortfall in capacity is another matter.

Had Christopher Yaluma, the Minister of mines, energy & water development thought through his statements, he would have been wise to outline how this "theory" of native beneficiation (processing) will be worked through.

Not only are Zambia in danger of deterring any possible FDI (Foreign Direct Investment), but companies would be wise to consider any further investment on projects. The Government appear to have a complete inability to implement sensible taxation and policy without considering it fully first (aka consultation). 

Little time for Hargreaves Services (HSP), period end trading update with more information to (EMC) review the company. The drop today was perhaps a little harsh, but with the words 'coal', the market is likely to misprice the woes. Staying with coal, the placees in Coal of Africa Ltd (CZA) will be far from chuffed with the failure of Mooiplaats. Of course they're continuing discussions..........................

Premaitha (NIPT) pressing the button at a sensible time with a sensible discount to the sp.

Atb Fraser

Morning Mumble: REM's Desperation & Writedowns lost in the GLEN. Copper Gossip & Spain 2.0.

Good Morning, 

Markets tend to be more confident in the UK as it shrugs of its seasonal affective disorder to start the spring afresh, but not for long! It was yesterday the supreme chartists (exc. Hugo) are now calling for a FTSE 100 retrace to near 4000. To quote Hugo, as it's unusual for him to be consider the FTSE, if there was a retrace it would be circa 5100, nowhere near the 4000 being bandied around. 

REM (Rare Earth Minerals) appear desperate to get above 20% before any such EGM at Bacanora Minerals (BCN). LGO don't have the necessary cash to remove the issue of a vote for the appointment of a Director to the board. The question should be, how much cash do REM have left? No much is the answer…

Having spoken to a few savvy investors in BCN it's unlikely that David Lenigas will achieve the intentions via REM without 20%+ direct holding. All holders should be thanking REM for creating a large illiquid squeeze (do not blame shorters as they were near nil or should have been!) in the stock with the price near doubling. This does not mean they should vote REM or any associates on to the board, far from it in fact.

Glencore's (GLEN) preliminary results 2014 in EMC's view should have taken a huge hit on thermal coal.  The carrying values have warp the overall figures to give a false sense of security for an improvement in the dividend, up 9% today. Viterra saved GLEN from dismal results, debt reductions of circa $5.2b will aided those with myopia and the savings from the incorporation of crap from XTA (Xstrata) are just mystifying. Although when one unwinds the debt, it’s worth noting the sole reduction was down to Las Bambas sale. Had the 'synergies' and CAPEX reductions be substantial enough, the level of debt paid down would have been circa $6.4B and potentially nearer $7b. (Time for a picture, it's dire!) 

The preliminary snapshot sums GLEN up, but doesn't give the whole picture. The market should have been selling into these results. They are dire if you add in coal and the return on shareholder funds, laughable. Roger Bade goes with 4.2% return on shareholder funds. 

Its ironic BLT (BHP Billiton) achieved better than GLEN despite having Short32 to get people's mouths watering. Although, with GLEN's trading division and the level of capital intensity required you'd be a fool to expect the same metrics as Rio/BLT and dare I say it Vale, whom have their own issues.

Roger asks some very good questions about the reasoning or underlying issues within GLEN regarding fees, commissions and pay. Perhaps GLEN was more suited as an unlisted anomaly. Well not for the sellers! It’s very hard to justify a valuation above 265 pence for GLEN, and that's pushing it. So over to the analysts to maintain the status quo with targets of 330-360 pence, obviously not for their own money though!

Analysts are left guessing where GLEN will cut its CAPEX. We'll leave the summary to GLEN, "Responding to the volatile market backdrop, we comprehensively reviewed the appropriate level of capex for 2015. Originally guided to $7.9 billion, we now expect 2015 total industrial capex to be in the $6.5-$6.8 billion range, with reduced spend across the broad portfolio." Coal? Oil? Alternatively OPEX? Marketing? Perhaps more transparency on the marketing fees and 'associated' costs? 

Of course we should end the GLEN commentary on a high note with the largest LMI (Lonmin) short...the in-specie distribution. How has the stock performed since GLEN's in-specie announcement 11 Feb 2015? Those two analysts in RSA (Republic of South Africa) that thought it would be good for liquidity, with a TP or near 240! 

With Mugabe's 91st Celebrations being in the headlines, Mwana Africa (MWA) managed to raise $20M via a bond issue for the smelter restart from ZIM institutionals. One hopes MWA have checked the lead times for the equipment they need in for the smelter reopening in 9 months’ time. 

There's a guaranteed uncertainty coming to the politics of Zimbabwe. It would be sensible to consider this with any investment, irrespective of the benefits of the commodity (namely Nickel). ZANU PF (The Zimbabwe African National Union – Patriotic Front) are in turmoil about who takes over...Even the MDC-T (Movement for Democratic Change) are becoming soft in their old age and wanting to maintain the status quo of ZANU PF, lip-service objections?

Copper gossip via Li in China, Zambia are alleged to be reviewing the overall tax-rate for open-pit mining that has impacted copper production and sentiment on any investments there. After initial discussions with the operators, Zambia are alleged to be reviewing the 20% royalty rate to 12-14%, although ahead of the previous 6% welcomed by the miners. 

Zambia have risked their entire industry in the short-term with the revisions to the Zambian corporate tax and mining royalty regime. With First Quantum's Sentinel mine coming on stream, they have had to revert to their lenders to tweak their covenants. The 12% for Vedanta is still far from positive, and creates risks, despite a recovery in the copper price (currently 2.66/lb)

With Zambia appearing to want to play a hard line on taxation (at least at the moment) Vedanta (VED) is at real risk of being the casualty. Its capital and corporate structure drastically need simplifying/clarifying in order to survive, VED appear have got ahead of itself in the price recovery. 

A few super-yachts cancelled today?

Atb Fraser