Morning Mumble: Hiatuses, Commodities waffling including China DCE/Mills Iron Ore Fillip, the Nickel stand-off, Oh Rio + Genel.

Good Morning,

It’s that time of year where things wind down for the summer break. With visits and holidays planned and a few things going on behind the scenes, it'll be more of a rest from trading/investing and the market. Allowing for pool and travel time, there should be some time for the odd comment after tomorrow. 

It’s been thought provoking how the contracts have been trading on iron ore on the DCE (Dalian Commodities Exchange), with the liquidity only "appearing" more recently (16th July), almost identically to the contraction in crude prices. 

Is the previous absence and contraction in leverage now being restored? Are the Government "interventions" starting to iron out these issues (poor I know)? At the moment it looks more of a bounce than anything else, with the speculation of the port inventories and the steel mill holidays for the 70th anniversary celebration. 

We had Goldman attempting to work out the amount spent by the Chinese on the stock market rescue (FT). Alas the figure is always dependent on ones positions and perhaps there's some work that is earning them significant fees at the moment. Some figures were already in state media prior to the article, from when the "intervention" commenced. 

When one factors in all the considerations it dwarfs the $188B by Goldman. As on suspects certain factors have not been included such as the financial provisions to SEO's that were reliant on monies from impending IPO's, brokerages (and companies) requiring margin/funding assistance directly and that excludes the near $200B that the Government has spent via the CSR for lending on margin (near Goldman's numbers), brokerage assistance and more importantly "direct market equity assistance." Oh, don't forget the bond issuances and "pension company" purchases. Maybe there will be a holding’s RNS?

It’s in China's interests to play down the amount of money spent, as the significance of such a figure will show the gravity of the problem. They need to show the availability of funds to reassure the punters and wider public (confidence). All sorts of knock on consequences, for which economists will have such grand names for. 

One suspects iron ore is a bounce with the steel mills running at reduce capacity, even allowing for the fillip in steel and iron ore prices. In discussions with Li, he has evidenced steel mills avoiding restocking on any notable scale, showing perhaps a generally limited outlook of capacity/orders. 

Steel mills have a number of woes, evidenced in part by the steel-home china iron ore inventory numbers (lower than 2013), showing a) lack confidence in the steel price recovery and demand b) significant cashflow issues (even in state owned mills, more consideration required on that) c) better stock management d) awaiting a stimulus in infrastructure. It’s hoped there can be China special with various people in due course, more so evidencing the flow of money. (Promises Promises/Pie Crust?). 

The same for Nickel inventories (port), which dipped as low as 6MT in stock piles in January. There's restocking occurring without any movement in price. Inventories have grown to 10.75MT's and increasing (Chinese and LME & importantly Asia ex-LME). In contrast to the assumed deficit is nowhere in sight and prices are under pressure. 

There appears to be a momentary stand-off for a minimum price occurring on Chinese (and globally) prices at the moment circa $5/lb ($10,800/t). One suspects the LME on warrant supplies will have to drop significantly before any major appreciation in the price. In contrast the price has dropped near 28%, whilst a restocking of some 4-5MT's has occurred. There's also the consideration of supply coming online from Indonesia (end 2015). Please note this is excluding other inventories outside LME/Chinese Ports.

Earlier in the year it was sensible to consider the Nickel shortfall against assumed production and demand, on the back of Indonesian ban. The revisions are now taking place with an increase in LME/Warehousing inventories increasing near 50% fold. It would appear the bets are now on the second half for shortfalls and increased consumption. Really? Save for some Goliath type stimulus, post a significant bond raise by the Chinese (estimates ranging between $188B and $544B), maybe? 

Note the Shanghai Futures Exchange (SHFE) nickel contracts since launch appear to have spanked the price, especially Norilsk nickel for futures on SHFE. As a thought, with greater transparency that started with Iron Ore, the prices of commodities have suffered. Was the dinosaur opaque model detrimental to Chinas needs and global purchasing? Was there too much power in the hands of the marketeers? The results are certainly suggesting so.

On the market, Rio Tinto have announced they have delivered first half underlying earnings of $2.9 billion. Beating the whisper, but being priced in yesterday as consensus was anticipating something special. In reality, there's merely a delay in recognition of commodities prices having tanked across their operating divisions. 

There's positives in terms of dividend increases (beating consensus), share buybacks on-going and an emphasis on cost reduction. One does wonder how much more Rio can reduce costs without impacting on the bottom line. Rio have a very efficient model, without a doubt, most strive towards it. Debt's up a smidge to 13.683B from 12.495B (10% ish), although nothing near the likes of small producers that debt to equity would make northern rock shiver (FQM). 

Over to Rio to put it in context

As expected at the start of the year, the macro environment and commodity outlook facing the mining industry has been challenging. Commodity prices are under pressure, in some cases falling to levels not seen since 2009 in the aftermath of the Global Financial Crisis. Moderating Chinese demand, continued supply growth and downward shifts in industry cost curves are all contributing to weaker markets. Global macroeconomic risks have also added to short-term volatility, and China's equity market correction and Greece's debt negotiations have resulted in concerns of financial markets impacting commodity trading.

As with all cycles, we expect the current cyclical weakness will pass as global economic growth picks up and commodity markets rebalance. However, the recovery will be characterised by slower commodity demand growth compared to the past decade and a likely continued focus on productivity and costs over capital project development. This is the industry's "New Normal", in which producers at the lower end of the cost curve will maintain their competitive advantage, but higher cost producers will be exposed.

The importance being that Rio are expecting slower commodity demand growth compared to the last decade. Perhaps they can inform the Chinese premier? 

Genel (GENL) give a reminder to the market of how harsh the cashflow conditions are at the moment. The half yearly evidences the obvious, cash down, negative cashflow, net debt up. All this whilst appraising, developing and producing assets in the hope one day KRG coughs up some cash. There's hope though, over to Genel,

"Genel's operating performance in the first half of 2015 was strong, with net working interest production up 41% to 88,800 bopd. In recent days the KRG has made a public commitment to pay international oil companies on a sustainable basis from September 2015. These regular and predictable payments will allow Genel to fully capitalise on our strategic opportunities.

We remain committed to the Kurdistan Region of Iraq and will continue to invest in our existing oil fields while moving our major gas fields forward to development, creating significant value for both Genel and the KRG."

The final thought goes to something that was expected earlier, bad debts in China, with non-performing loans rising to 1.8 trillion yuan ($289.92 billion) as of the end of June, up 35.7 percent from a year prior, (Reuters). What is the impact for the grey lending and underground margin contingent that will also be suffering, perhaps it’s safe to assume disproportionally. RRR (reserve requirement ratio) may need a modest adjustment. 

Atb Fraser

Morning Mumble: CIC Gold, Rurelec (RUR) the debacle and questionable business, Juridica (JIL), Mundane Iron Ore (again), TYO, MIO, DCE and Anglo Pacific.

Good Morning

CIC Gold Group Limited whom allegedly has prominent Chinese gold miners and international mine developers as backers intends to list. It will be certainly an interesting story to follow with various entities struggling on AIM or giving dire returns there's hope for CIC, or is there?

The story doesn't start with CIC Gold but with CIC Capital. CIC Capital notoriously went from sub 1 pence to 10 pence on the back of very little and then subsequently suspended/delisted in 2014. Of course, the current holders are 'looking' for growth. 

If one is contacted by VSA or similar regarding the IPO, it would be wise to ask what DD has been completed on this company including whom the “prominent Chinese gold miners and international mine developers are involved." If one has the time, the prospectus is here. It would be wise to look at the number of shares (the issuance of) and why they have been issued to CIC Capital. 

Rurelec's debacle is not over yet. Today there is a wave of announcements, some that shareholders should perhaps consider more positive, one that is not is the "gifting" of IPC to Peter Earl by Rurelec as he departs. I think RUR have rephrased "spinning-out." 

RUR purchased IPC for £16,560,483.87 including the two Siemens Westinghouse 701 DU turbines that were subsequently sold for £1.2M leaving some £15.3M valuation for IPC. How IPC, can "spin out" (changed as I was typing) to "remove in excess of £500,000 worth of overheads out of the Rurelec Group" is questionable. If all the assets and liabilities have been transferred into Rurelec. One assumes they're factoring in Mr Earl's £230K remuneration commitments? 

What is laughable is, IPC was meant to "accelerate Rurelec's organic growth and increase Rurelec's global footprint." IPC & Rurelec share the same offices, on the 17th Floor, Millbank Tower London. Were their separate staff being transferred out, name Peter Earl and associates? In essence the savings are not savings to RUR in the true sense of the word, without clarity on what "savings are being made). We'll ignore the director loans to a subsidiary but these under Related Party Transactions in final results out today. 

Should the "independent directors" not check with the NOMAD whether this transaction (Spin-Out) is fair to shareholders? In fact, having acquired IPC to increase their footprint, the "nominal sum" payment is laughable, based on potential goodwill and positioning in the market. 

IPC, as a company has a brand value (including goodwill) over and above the assets. However, having been a shareholder in RUR previously and sold out after the dire issue of the International Arbitration and subsequent misunderstanding of Third Party Litigation Funding. It would be wise to reconsider any position if the company cannot protect what assets it had left (or has). 

Should you consider Peter Earl a net seller in the stock now? Having been in consideration of the Jam Tomorrow Award, this may prove very unfair. Perhaps RUR are now being upgraded for consideration of the "destroyer of any value for shareholders award." In gifting / spinning out IPC at a nominal sum! The company would be hard pushed to justify the sale (now spin), when in IPC's own website words, http://www.indpow.co.uk/,

"Independent Power Corporation PLC is one of the United Kingdom's leading power developers and power plant operators. Founded in 1995, IPC has developed, owned or operated 7,000 MW of thermal and hydro power generation facilities in North America, Latin America, South Africa, Asia and Europe." [Within Source of website ]. This was subsequently changed to,

IPC has owned, operated or developed over 4,000MW of thermal and hydropower generation facilities in Latin American, North America, South Africa and Europe. (Current)

IPC's brand/business/company even as a shell should be marketed for sale. 

Having taken profits and dividends in both Juridica (JIL) and Burford (BUR) today's portfolio update was negative on the bottom line. Measured in NAV, JIL is valued after today around $150M (ish) without checking. Consequently, the stock correctly repriced the stock 88 pence. 

With some volatility in JIL at the moment, it’s hard to justify any share appreciation based on the NAV. As a result, a disappointing 17% return over near 3 years on this investment, allowing for today's sale with no further holding. Better than most bank returns but disappointing. Time will tell whether its wisdom to hold Burford (BUR), performing better over the 3 years with a better blend of small dividend and share appreciation (50%) ish. 

The iron ore price gave the proverbial kicking to the producers. Sensibly the drop away from the ceiling set by the Chinese (EMC: Mundane Iron Ore Spot Price) is now a reality. With some hedgies banking significant profits. This was a common-sense trade, especially in light of the reduced imports that fell 8% in May to just under 18MT’s for 62% fines but the price has temporarily. 

There’s a lack of speculation in the physical spot prices / supply / immediate delivery including that on the DCE (Dalian Commodity Exchange). Closing positions on Copper and Iron Ore on the basis they are currently linked. Copper, with the dollar's weakness and potential restock has a greater degree of risk in the short, than Iron Ore. Iron's critical level of support circa $60/t (62% fines) and 65% fines now sub $70 and looking for support. Seven days previously at $74/t (6% decline in a week). 

With steel prices softening in China due to lower demand, iron ore is logically following suit. The belated restocking, was a convenient necessity for all concerned push prices up off the lows. The lack of sustained demand will have the speculators looking to any further declines in the ports inventories just keeping its head above 80m/t's. As a result, in line with the dropping iron ore price, the SP in Rio, BLT, Vale and FMG have all followed. 

A question for the majority of Energy Resources of Australia (ASX: ERA), in light of all the news on Ranger 3 Deeps project – further update and Rio's inclination to avoid funding much further. What reason is there to hold the stock further? Denial? 

Save for some Knight in Shining Armour, of Chinese lineage perhaps? Rio and ERA have appraised the feasibility of expansion and simply, in the current outlook, it’s non-viable. This does not bode well for the other producers if an established entity cannot find economic reasoning to extend LOM (Life of Mine) and justify investment. One hopes if they are also Atlas Iron holders (ASX: AGO) they can keep merge this disapproval in a joint email to save time! 

The market is mystifying at times, on the one hand its prices in any risk (proactive) and likewise, it reactively points out the obvious. Today selling the remainder of Anglo Pacific (APF) and closing spread bet positions. It would be easy to think I've lost my marbles after a decent recovery and better outlook. Well simply, if the Coal Settlement Contracts are as announced it doesn't bode well for Kestrel. Rightly as Roger Bade points out, "it's not good news for APF". 

APF are diversified, but one cannot help to wonder if there's a swelling in supply. How this bodes for US exporters/producers is another question or Mitsubishi Corp, whose share price has seen a decent recovery of late, near 25% gains in a year. Admittedly significantly more diversified than APF from Banking, Food, Machinery, Chemicals & the all-important energy. For those trading the related stocks TYO (Tokyo Stock Exchange) one would be wise to consider the implications. 

Finally, Minco (MIO) announce further drilling results. It adds nothing really exceptional at this stage to the value of Bachans, due to depth and narrowness of veins. As tight as 85cms in depth) and as narrow as 50cms in width. Back to that old chestnut of strategic speculation by the Chinese and potential JV/total sale. Buchan's may need a revaluation in due course, after more drilling. 

Atb Fraser

Morning Mumble: Mundane Iron Ore, Spot Supply (A Hedgies heyday!), Oxus (no news) & Woodstock & could Atlas be a buy!

Good Morning, 

The analysts and reporters are of the opinion stockpiles at ports are 'yet again' too low and there's a sudden need for restocking. One would be wise to consider how China have managed their supplies, rather than the inaccuracies that are cited. With spot supply in limited demand, China are a lot better at managing their orders than what the markets are giving credit for. 

The steelhome china iron ore total ports inventory reports a circa 84Mts at ports. This should perhaps be considered within the normal range, with slowing demand. Remembering it’s a float for the steel economy and should run between 5 and 7 weeks of total demand. Admittedly yesterday's figures suggest it’s dropped below 5 weeks demand. There's a simple explanation for the spike, one that was pointed out awhile back, that being the hedgies have realised that a lot of commodities have limited physical spot supply. 

China has the additional woes for short supply, not only a reduced number of smaller privately owned iron ore operators coming back online post their winter break in the north. The supplies that would have naturally be replenished by internal production are now being sourced on the market via spot supply (the spike). Amazingly some state owned mines with costs at $70/t+ have been refused permission to close and source on the international market. The Chinese government may feel security of supply is required, in addition to contracts with steel mills and avoiding a massive spike in unemployment. 

The Chinese of course may do something about their northern mines (perhaps 'development' Grants) to avoid a growing discontent within the entire mining sector. With proposals being considered for subsidies in hardest hit coal and iron ore operators to at least maintain a 'sort of production.' (Direct quote from a Chinese iron ore trader there! 

Thankfully it’s made it very easy to make some decent gains in weeks rather than months, with spot prices moving 8.5% in 6 trading days at circa $62.5-63.10/t. There's a risk of limited upside so expect those able to supply the demand to take some healthy profits! 

With Xinchuang Li, (president of China Metallurgical Industry Planning and Research Institute, & Deputy Secretary General, China Iron and Steel Association), believes the range will be $55-65/t, implying that the peak seen on Weds/Thurs of $63/t+0.9% is towards the top of the Chinese industry consensus (read as wanting acceptable price). One would be wise to have a confirmed change in direction before speculating. 

The hope factors are reliant on the Chinese government increasing spending in "infrastructure" projects to motivate the economy. This may be a little optimistic with a shift from manufacturing, property (commercial and residential) and infrastructure towards service-based industries. Remembering of course the long-term averages (4-5 years) for iron ore stocks at ports is a smidge under 90mts it’s not the panic some would have you think it is. One could argue its almost like the Chinese are fracturing the market!

The positive is Atlas Iron is back in production, even coming out with resources upgrades, a modest "non-cash impairment charge on assets, a royalty relief period and a deal on costs including capital raising. It’s almost as though Atlas is an entirely different company! With mining restarting and Mt Webber likely to help reduce operating costs further. Post reorganisation, it could almost be worth a punt! 

With gossip about Fortescue Metals Group (FMG) in Australia, could they have a very sizeable Chinese partner at operating level or a take-out; surely Baosteel have been approved for 43B RMB overseas investment (imply 25% upside if there was a take-out on FMG). With limited competition in the market for such assets don't get too over-expectant about the price of a deal, or any deal for that matter, so being without intelligence it was rude not to speculate on the stock! 

Oxus Plc (OXS) final results in summary they cannot tell us (shareholders) anything, they remain confident "of fair compensation" for their claim, and they've put in a facility just in case it continues for a longer period of time. Quite what the panel have been doing since May 2014 is anyone's guess. With clarity on the actions of the Uzbekistan Government, it’s not difficult to assess the quantum surely! Even as a range, perhaps one would be wise to consider there's some 'behind' the scenes discussions or cattle trading is going on that 'may' have delayed the outcome! 

Having not "bothered" much with Minco (MIO) for some time (EMC: July 2014) the Q1 Results aren't really anything to get too excited about. The currency gains should have been expected and the cash on hand and value of investments is a plus for those calculator investors and giving appreciation to the SP today. 

What the market should consider is the possibly development of Woodstock being considered by a Chinese entity, with some "potential" upside. Supported in part by cash MIO has potential prospects at long last. After near a year with little price movement, the 'tide just could have turned for MIO" if they can complete on a deal. It would be an astute move by Hongxin Group in terms of a currency hedged producer outside of the Hubei province. With a deal last year in the Ukraine, it’s not beyond reason that a Canadian project could have strategic importance. 

Atb Fraser