Morning Mumble: Hanergy and the SRX anomaly

Good Morning, 

There was a good intention of covering the Hanergy debacle that's unwinding in Hong Kong, that was picked up with Mick Johnson and Gavin Jackson at the FT, Hanergy: The 10-minute trade. Those with youth on their side will remember, EMC Hanergy back in late January. 

Whether the tank is imminent or not, the positions "will" have to unwind. One suspects that there should be a very good look at the share register and also those with derivative positions. Certainly one to watch! If the valuations were LFL, then what would make Apple's recent solar acquisition, VERY cheap, or perhaps Hanergy is totally overvalued, built on a stack of cards?

It’s amusing to read Sierra Rutile (SRX) year end (2014), where its wise to consider what "focus" means in terms of "actual." SRX highlight there is "sustained focus on cost control resulted in a decrease in unit and operating cash costs". So SRX have increased sales volume, up 17% at 129,602 tonnes compared to 111,018 tonnes (2013). Revenue was down on a fall in Rutile prices near 20% but quotes by SRX at 21.6% to US$117.8 million, compared with $123.4m (2013). 

SRX inform holders that direct costs are down on various measures, "Significant reduction in unit operating costs despite the effect of inflation in certain products and services due to Ebola and lower than planned production:

• 7% reduction in direct operating cash costs¹ to US$546/tonne (2013: US$588/tonne).
• 5.4% reduction in operating cash costs³ to US$646/tonne (2013: US$683/tonne).
• 10.5% reduction in all-in cash costs⁴ to US$683/tonne (2013: US$763/tonne)."

BUT, "On an absolute basis, cost of sales were higher at US$111.3 million for the year from US$93.1 million in 2013 due to the greater volume of rutile sold, impacted by:

• increased change in inventories of finished goods of US$ 14.2 million (2013: income of US$5.3  million) due to greater volume of rutile sold; and
• an increase in depreciation charge to US$21.0 million (2013: US$17.6 million) mainly due to additional depreciation on Lanti Dry Mine assets."

[Obviously], the Group remains committed to controlling costs and continue to focus on many cost efficiency programs.

Over to SRX to cover the entire issue, "Despite a difficult market environment, sales volumes remained strong during 2014, with Sierra Rutile selling a record 129,602 tonnes of rutile and reducing inventory held to more normal levels. Demand for natural rutile was strong but also highly price-sensitive as the overall TiO2 feedstock was in surplus from an abundance of lower-grade feedstocks. This resulted in a cap on the premium customers were willing to pay for natural rutile over lower-grade products and dragged the market downwards overall, with average realised prices 21.6% lower for 2014 than 2013. Consequently, despite strong sales volumes, turnover fell 5% for the year.

SRX share price had a brief recovery this time last year on the back of their news, but as covered previously, there was little in the way of a headwind to improve the outlook for SRX or Kenmare (KMR). The news does improve the prospects for the ‘on-going’ discussions between KMR and Iluka Resources.

With SRX cash declining, net debt up, one wonders if they would be wise to place a few shares before 10 pence? Net debt is now $36,436m, from $26.476m, with deferments obtained from the Government of Sierra Leon (GOSL), one hopes NED bank and GOSL won't have their patience tested. Watch for any news on Rutile, Kemnare, Iluka or a general improvement in rutile pricing. The latter improvement in pricing with the market having excessive supplies is unlikely. Jam anyone? 

On the gossip front, its alleged that Central Rand (CRND) have had a cash offer from one of their suitors for their dutch subsidiary (Obviously no more than $150M). Copper's appreciation has not gone unnoticed, nor the narrowing of the WTI / BRENT pricing and wonders would never cease, China's Oil Storage, ru here near two weeks ago (EMC Chinese Oil Storage), with the FT running yesterday with China low on crude oil storage capacity

Atb Fraser

Morning Mumble: Debt overhang (Negative Equity) and...GMD, Copper and ESG, the decline continues.

Good Morning,

China's banks have been reviewing the impact of declining house prices and risk of a debt overhang (negative equity), occurring in 'most cities ' (66/70) in China. Obviously, this will include syndicated loads to property developers and the probability of repayment or perhaps rolling over of loans/obligations. 

With new builds down circa 22% and new land purchases by registered developers, approaching a 40% decline year on year. The impact to the 'average' earning Chinese worker is significant, and is being felt across all of China. Whether Migrant workers, steel-makers, factory workers including those in equipment and machine manufacturers, none are exempt from the downside is slower growth. This contagion has already started to happen with a decline in factory output, and laying off of personnel. Today's flash PMI HSBC data confirms this (compiled my Markit).

Without further intervention, albeit, what else can the Chinese Government do, as they have reduced interest rates, relaxed borrowing requirements and eased property ownership rules. Save for further bailouts like those of Evergrande Real Estate Group (HKG: 3333), the developers are up the creek without a paddle. Same for Local Governments, whom were previously reliant on land sales and sales taxation revenue, all now significantly lower with the possibility of council tax/property taxation being considered to make up the short-falls in budgets. 

The Chinese Government have put a band-aid on a shark bite with the Chinese loan facilities extended to Evergrande (Circa$16B). With debts approaching $31.8B (EMC figures inc. perpetual bonds $7B approx.*) and revenues in decline, Evergrande's woes have only been delayed the inevitable, save for 'further stimulus'. 

Evergrande can make space for a Ghost Cities segment in their reporting? Or delayed developments? At what stage is the button pressed on a rights issue (to the Chinese Government or asset sales similar steel mills?) to scrub the debt off Chinese Property developers books. This will of course continue the perverse bull run on their stock prices, despite the sector running above 90+% net debt (average) across the industry and by a recent reports over the 120-130% debt to equity (EMC) estimates. 

Citron Research, had a view, "that Evergrande was insolvent and had consistently presented fraudulent information to the investing public." The Securities and Fraud Commission in Hong Kong has an on-going misconduct case against Citron. This started last Wednesday (18 March 2015), due to be finalised sometime beginning of March 2016 (yes 4 years later) on or around 6 March 2015. It would be wise to update ones diary on the tribunal. Although Citron's commentary hasn't always been blinding, but it is certainly worth considering the views of the short seller. Sometimes catching the mighty Deloitte on the back foot!

Today's mumble was delayed due to the requirements of Game Digital (GMD), with Benedict Smith (CFO) stepping down after lengthy 26 months in the position after dire  interim results.. With a decline in first half profits, (the company already sign posted in January), it’s no surprise the stocks on the tank (again), and any recovery in the SP from January was totally unjustified. The market is competitive, with delivery available next day for those wanting to trim their purchase price further. 

The entire gaming industry is suffering the woes of a lack of 'new' blockbuster games enticing the loyal followers to part with their cash. Margins squeezed on near the same revenue, although digital/online sales should provide some support. At anything above 200 pence, one finds the price very hard to justify. EMC remains negative on HOME and GMD as per the January commentary.. Although it’s wise to bank profits in the latter on the news today. From a technical perspective, can GMD hold 240 pence...

Copper had a brief recover, going to $6000/t ($2.72+/lb.) and now at $2.795/lb ($6160/t) despite the weak Chinese data, one assumes the market has spotted the Chinese trades as well and the rush to cover short positions on the dollar strength. The bets are on copper for Chinese stimulus and national grid developments...for now.

Reviewing the AGM announcements for ESG (Eserveglobal) it was a timely reminder for EMC's commentary on CFO Stephen Blundell flipping his options. The EMC was subject to criticism from certain parties. With threats of reports to the FCA for market manipulation 'based' on the EMC view of Stephen Blundell's director share sale and that of Investec's, being an indicator of what is to come. 

ESG shareholders and the board consider it prudent to appoint Stephen Blundell as the Chief Operating Officer. If the gossip is correct, Stephen Blundell has put himself forward for the permanent CEO position, where he is currently "interim" CEO as a result of Mr Paolo Montessori's resignation. The AGM statement, for those who have missed it. One would find it hard to criticise a share sale where the stock performance has been positive. 

GATE ventures watch, circa 12% down, 'ramp-fabulous!' With some significant rumour flying round about Oxus (OXS), its wise to avoid further commentary until the result of the arbitration and the Jerooy Mine update. A reminder for those getting carried away, the Prime minister Joomart Otorbayev of Kyrgyzstan warned back in January that "Each prospective investor [for Jerooy] should be warned of additional legal costs."

Atb Fraser

Morning Mumble: Vedanta, CHAR, MKS, Indonesian Copper blockade and WRES (Tiddler Watch)

Good Morning, 

Avoiding much in the way of commentary before Vedanta's (VED) Capital Markets “live webcast", the question on most analysts minds should be, "cash cash cash." Simply put a) where's it coming from and b) with the complex structure of VED, without simplification, limits how the cash going to be directed towards each subsidiary? VED's structure isn't complex as such, it's just simply wrong.

As Roddy pointed out on FTML before most journos (hat tip), you will note Tesco today are rearranging their affairs, with a stores transaction with British Land, (21 in total). The key point to note is the deal is not subject to RPI-indexed increases, admittedly TSCO do receive £96M into the deal. On that basis, what are the risk elements to all the deals with RPI attached? Today is the day all positions are closed in Tesco's. Thanks to Duncan who's settling in well and getting used to the systems at Bloomberg, it was a very shrewd call. 

Its a brave call to be positive on any oil stocks (Malcy does a better job), however this amateur (+ a few) has been in the market for Chariot Oil & Gas (CHAR), not only anticipation of the results being a reminder to the market, but of the deals ahead and the cash balance. A discount to cash doesn't always represent value, as seen by certain Chinese listed entities, but CHAR may just be turning the corner. 

Ian's limited view on CHAR is Neanderthal, "they have the acreage, farming it down for free carry / part-carry is a no-brainer and have $." Time will tell, yes on a Friday being long into a weekend, wonders will never cease, what next, holding equity in Marks & Spencer (MKS) long-term?? Not for much longer! 

Some antics over in Indonesia with a mine blockade at Grasberg (Freeport-McMoRan Inc) that will provide some support to Copper. There's discontent growing in Indonesia as miners are laid off due to the ban on unprocessed ore, it would be wise to watch the situation.

In tiddler watch, WRES Resources (WRES) have woken up and  dealt with the Bergen facility. They may just be calling the bottom of the Tungsten price, as China's prices are gaining a slight premium to Europe. Expects Europe to follow exactly 27 days later. 

Atb Fraser

Morning Mumble: NXT, Cautiously trading & the outlook.

Good Morning, 

Well those without a rocket science degree were proven right about Next (NXT) numbers (albeit revised). The wisdom of de-risking into the news proving worthwhile for most of the traders right up to the bell yesterday, with the bi-polar shorts jumping on the bang wagon upon weakness today. 

The re-occurring theme *(yet again) at NEXT of the margin pressures and the retails sales growth as cautioned by management. Sales Growth up circa 4.8% on last year but implying saturation or limited growth, with new stores contributing the most to growth with 3.4%.

Next have almost made an outright admission that their own brand is under pressure from other [third-party brands] labels. Perversely Next see a benefit in calling another offering provided by them "Label." The only benefit being the service offering including the delivery (Next Day). Margins in the third party branded business are near 14%, from 19% in 2014, and 11% in 2013, lower than own-brand and more importantly expected to grow at circa 50% per annum. 

NXT credit account customers have declined a further 2.4% (74K) with cash on the increase, implying there is a loss of loyalty (remember that). Next, without a doubt have delivered, admittedly with revised margins, but one cannot find many reasons to hold long from now. Management leaving, margins under pressure and an implied stagnation with some "collections not as strong as last year.

Next's Sales Outlook, although the consumer economy looks benign, we remain very cautious in our sales budgets. Whilst we are happy with most of our current product ranges, we recognise that some collections are not as strong as they were at this point last year. In addition, during the Spring and Summer seasons, we face very tough comparative numbers from last year, when sales were assisted by unusually warm weather. There is a potential upside in the second half as the comparative performance last year weakens, particularly in the third quarter.

Christos Angelides (left 6 months ago and announced here) after 28 years and only a week ago David Keens (Finance Director) departs after an almost impossible 28 years departs in April (as announced here.). A cursory reminder just six months after Christos's departure, “some collections are not as strong as last year."

Christos has moved on to Abercrombie & Fitch whom are looking for increased exposure in Europe and an improvement in brand perception and performance. A timely exit by both goliaths? The long-standing stable with matched performance rewarding those for shareholders over the period rewarded with their patience is just about to come under pressure. 

With the market, including EMC expecting so much more from NEXT the realities are certainly coming to bear. 

Many thanks to those knee-jerk traders! More later...

Atb Fraser

Morning Mumble: HochsChild (HOC)...SOLG & SNTY

Good Morning, (It would have been in I had published it!) Good Afternoon,

The preliminary results for HOC are in and this company results are worse than the EMC expect, apparently the market disagree, validating the closure of shorts for the news. HOC is the cursory reminder of the risks of leveraged plays evolving in slow motion. HOC need silver above $17.55/oz. to break-even even allowing for hedges. 

HOC advise the market that there's some Jam tomorrow with, "all-in sustaining costs [are] expected to be $15-16 per silver equivalent ounce." Validating the shorts, AISC's (all-in sustaining costs) for the reporting period at $17.4/oz., which lets face facts is dire, and apparently exceeding guidance. 

Very belatedly, HOC's mine plans are being revised to deliver profitable ounces in lower precious metal price environment. Surely when ramping up production and mining, efficiency is key, an entity should be aiming to deliver the "most" profitable ounces irrespective of metals prices over a mine life. 

Considering the currencies that HOC operates in, namely Peruvian Nuevo Sol (PEN) and Argentine Peso (ARS), but reporting in dollars, one would have expected a significant improvement in costs.  Yet HOC only beat their cost guidance by 1% despite a weakness in local currencies. 

Inmaculada, looks further delayed and is only 90% complete, but as they've sunk significant capital into Inmaculada, its rude not to drop another $70M in their for good keeping. Hochschild's bonds are starting to mirror the share price, at what point does it become viable to own the bonds rather than the equity, aka Afren and Gulf Keystone? Or avoid totally and short the lot...'under-review'.  

SolGold (SOLG) announce an open offer to review/progress the Cascabel project in Ecuador. Why they didn't do it all in one go in December?!?! Yes it would have required shareholder approval, but better in the long-term. Over to someone savvy to pick up Cornerstone Capital Resources whom need a little more cash later on, they must have just under $1m available. 

Oil….the Chinese will enforce crude take-home for storage at these rates! The no news of the day goes to SNTY (Synety Group), many thanks (added: see comments FTML!)

Atb Fraser

Morning Mumble: BHP's South32 (Short32) allegedly less debt & BLT favours, yeah right! Rio's SP10 *(No Sun-protection) and ANTO.

Good Morning, 

There appears to be a lot of misinformation surrounding South32 in the press, where the journos need to take their socks off. There's no way in the world BLT could have loaded Short32 with any more debt, without significant risk to its debt rating and/or higher borrowing costs. Worse, the press have ignored the level at which BLT would have created a defaulting structure that would breach the legal requirements of corporate governance. 

The press ignore the fact that BLT have to ensure that South32/Short32 must be able to operate as a going concern. The commentators prefer to 'believe' that BLT are doing Short32 a favour by reducing the debt. When the sums of the liabilities are put to a total, they are in fact higher, merely labelled differently. 

For those not wishing to split-hairs, the liabilities are higher than 'consensus' with rehabilitation and closure ($1.5B and that may be circa 15-17% on the low side) plus debt of $674M, taking the liabilities and debt to $2.174B, with a $1.5b revolving credit facility being made available. When one considers the on-going liabilities, excluding those clearly labelled debt, its going to make leveraging (without dilution/equity raise) for any acquisitions very difficult, irrespective of the alleged financial prudence attached. Let’s see how the dividend policy goes. 

BLT define South32, as having high quality metals that will be a cash generator, that allegedly the "larger investors" welcome. We'll ignore the volatility of the entire asset class, with a cursory prompt for readers to check the price movements of aluminium recently, manganese is under pressure and coal is not without its significant woes; not so enticing when put in context. Of course Short32's dividend policy will entice the low risk miss-believers into acquiring the stock. 

 

With Manganese, Silver, Lead, Zinc and Alumina making up near 38.6% of Short32’s EBITDA, Short32 may benefit from the Bauxite supply issues thanks to Indonesia's unprocessed ore ban, and declining stocks of Aluminium/Bauxite and Alumina, but how have silver, lead and zinc performed? With any further slowdown in China, don't expect too much in the way of price appreciation, more so a levelling out of both Nickel and Aluminium.  

Staying with mining, and an indicator of the state of the market, Rio yesterday put a tender out for a cargo of high alumina SP10 iron ore cargo. Suffice to say this cargo has had limited interest. The Chinese simply are not prepared to take it without a huge discount, in fact, many aren't/weren't prepared to accept it. 

Higher alumina (circa 3.5%+) content in iron ore causes the slag to become 'rather' fluid during the steel-making process. Processors can be blend the higher grades with lower grade. Simply put, pollution/environmental regulations restrict these deals and limit the price. 5 years ago, some savvy traders would have combined the deal with some low alumina ore from Vale, blended it and made a profit. In today’s commodity cycle, it’s simply not worth the effort or time for most, without a decent discount circa 10%+

Antofagasta (ANTO) have surprised the market with worse than expected preliminary results (2014). We'll save the readers from obtaining an accountancy degree and wade through the waffle in machine gun like fashion. Copper prices down near 14%+ on the corresponding period, taxation in Chile up (it’s only been in force since 1st October 2014/PWC did a very good peace around this time). With margins under pressure and desalination likely to increase costs per pound, what were the markets hoping for today? Simply put, if the investors haven't already priced in lower expectation, they should be from now one in, but all is not lost! 

ANTO's Los Pelambres issues will have an impact on the next set of accounts. With a trending reduction in oil/energy costs, ANTO only managed a cash costs before by-product credits at $1.83/lb, a modest were 2.2% higher than the previous year despite a decline peso. These costs will grow as the wage deals / salary increases kick in over the next 4 years and the declines post reporting period in the copper price.

On a positive, any weakness in the Peso will benefit the reporting cash costs and CAPEX/OPEX expenditure with net cash costs, including by-product credits being a healthy $1.43/lb. The potential upside from Antucoya, Encuentro Oxides and Centinela should not be ignored.  One might just start to turn positive on ANTO with its cash costs being an envy, save for any more radicalisation and issues at Los Pelambres (and the El Mauro tailings dam). The reoccurring theme of grades should not be ignored though but better than management guidance, nor for every 1% movement in the PESO (CLP), it equates to $0.0075 cents P+ve/N-ve to production costs at the current USD Vs.CLP (Chilean Peso).

Unnecessary cheer at Lonmin (LMI) with the appointment of COO Ben Moolman and Bowleven (BLVN) finally have the cash in the bank. The market "may" just re-rate the company, albeit past performance and sector/industry woes will hinder any blue skies beliefs. Juridica Investments (JIL) disappointing the market for no particular reason with their final results. A long-term hold with some very good dividends so far, illiquid so one for the traders as well!

Atb Fraser

Morning Mumble: If Boohoo (BOO) and ASOS (ASC) can do it...B(H)S and oil+shipping (as promised).

Good Morning, 

It wasn't so long ago in a meeting about 'where to invest' in a low oil price environment, I found myself recommending short oil/associated products including washing powders and the like, whilst longing holiday companies and retail leisure.

Next's validation will come shortly on Thursday (Preliminary full year results) with the "beat" being reported as a head of consensus. Perhaps not all blue sky as the market is becoming more active, expect margins after this quarter to go under-pressure again. Simply put, if BOO and ASC can do it, then NEXT should be staggering. 

The debacle of BHS, has no doubt been amusing for the sector pundits, but if the journo's don't have a clue, then we hope those fronting the company do. So whilst at the races, there was speculation from those in the industry that BHS has been acquired by a subsidiary of Iconix China Group and the daughter of Silas Chou, Veronica.

Whether Iconix or the Chou's are the reality behind BHS or not, its speculation based on Silas Chou/Veronica Chou alleged desire for a UK acquisition. For myself, if they're behind big brands, why own department stores? Those of you like I thinking,...who, what, where is Silas Chou, being swiftly told off on Friday, apparently they’re behind the IPO (2011) of Michael Kors and the purchase of Tommy Hilfiger in the late 80's, Karl Lagerfeld and Pepe Jeans. Clear as mud to I, but if I'm honest, not something I will be keeping an eye out for. 

Staying in retail, it looks like Richard Chase is exuding confidence in AO World (AO) stock slotting 5,583,475 shares  at £1.80.  John Roberts (Chief Executive Officer) assures the market John Roberts, Chief Executive Officer, said: "The share sale by Richard Rose follows the expiry of the post-IPO lock-up and will help to further increase liquidity and the number of shares in public hands. Richard remains committed to the Company, both as a shareholder and as its Chairman." 

If one thinks selling 85% (circa) of your stock (a sizeable holding) is commitment and confidence, then this week I shall spend a few hours applying for Chairman type positions of stocks that are stonking shorts. Richard Chase has unknowingly made the Christmas card list of every shorter in AO. 

Kefi, the amazing performing Gold stock, you'll note the sarcasm, gives an update on Tulu Kapi. KEFI are apparently only having to find $20m to obtain $100M in debt financing. They have a number of possible sources currently being assembled, including financing from contractors and equity at the project or parent company level. Over to the International Finance Corporation (IFC) to stump up sum (poor!)! if the equity is at the parent company level, one hopes the current shareholders (including yours truly) do not need a snorkel for the impending dilution! 

Ian was discussing his long in HOC (Hochschild Mining) over the weekend. Having spent so much time away from technology, its apparent he's incapable of differentiating between a long and a short. Today, with silver finding significant support its wise to close any shorts on HOC, not for fear of a change in trend but to lock in significant profits since the Christmas Silver bounce. They're also announcing their annual results on the Wednesday, and they might not be as bad as the market expects. One hopes there all in sustaining costs of circa $17/oz. is much better! The common-sense coverage of HOC via EMC from November 2014.

It would be rude not to consider oil and shipping rates, WTI at $44.26/bbl, and Brent at $54.20/bbl. these prices are likely to impact on shipping rates as speculators exit their floating storage rates. These rates have continued under pressure with Suezmax Tanker Spot Rates into Q1 2015, dropping near 20% from the start of the quarter having peaked at $80K+/day down to $47K/day, Aframax Tanker rates fairing much better at circa $38K/day. LR2 Tankers rates at $26k/day. All classes all (excluding Suezmax) are near 50% above the rates of 2013/2014 and Suezmax up near 100% on 2013/14). 

The industry men describe the current rates as very strong. Based on the oil price being low, with continued strong demand (Asia from Arabia) and stockpiling (surely there can't be much more), and the rates benefiting from the storage speculation (albeit reducing). The market has missed the reduction in Russian export duties (circa 40% lower), where oil producers/exporters delayed shipments to save a few $$. So more oil out of the Black Sea, Mediterranean and Baltic! The weather is impacting on the Turkish straits, delays near 6-8 days. 

With the maintenance schedules coming up at refineries around the globe, this will push higher inventories and impact further on the prices. Will the trend in rates encourage speculation in fleet growth depressing the industry? Oh yes, tanker/shipping rates are likely to come under significant pressure end 2016 into 2017. 

There's been contracts placed on around 49 long-term Very Large Crude Carrier (VLCC) and Ultra Large Crude Carrier (ULCC) in the past two weeks, giving a floor to the rates and removing excess capacity from the market. All boding well for the tanker market rates but limiting the spot market delivery capabilities. 

Afren (AFR) down another 20% today, perhaps holders have smelt the roses? Don't be silly...over to GKP! 

Atb Fraser