Morning Mumble: Any Old Iron, Chinese Housing, Petra Diamonds (Really...), Wolf Minerals (Pricing update please) and VED, SXX

Good Morning,

As a decent analyst described the iron ore appreciation, as a "the Australian iron ore dead cat has a tin of cream." You'd be hard pushed to disagree. There's an element of physical restocking pushing the price up currently with the minnows left to have the price dictated by the seller, but the overall theme remains the same, oversupply, lower demand. 

The Chinese data, reduction in RRR (reserve requirement ratio for those that complain of the alleged extensive use of acronyms here, get real) is an attempt to offset the capital flight and what the EMC has commented on many a time, the "rolling over of distressed loans and/or alleged financial products." The recent improvement in the Chinese unemployment rate is a farce, forget any conspiracy, it would appear that China have cleverly added a significant number to the migrant worker lists, a staggering 310M now, previously circa 293-298m.

In discussions with Li, he mentioned a "new" survey based approach to unemployment, for which he's finding out more details. Albeit the EMC thinks new may be stretching a long-time policy. From memory, it’s based on taxation, disclosure and bank deposits but only for those that are registered for unemployment benefits and are a 'permanent' resident. It’s wise to wait for more details. What is telling is the contradiction between the official headline rate, which decreased to 4.05% and the survey figure which is nearer 5.1%. 

Li's view, having family classified as migrant workers is, the figure is a lot larger, with the gap (read as break) between jobs for migrant workers is growing. They are managing to live on their lower income. Enough for now, but its clear there's a pattern emerging that will have a further impact on the main expectations of growth.

More importantly, to give people a wider view of normalisation and pricing expectations (read as performance), from the National Bureau of Statistics of China. Advance payments totalled 626.0 billion yuan, a staggering decreased 8.4 percent. The entire sector needs to level out, with limited reason to take a risk on any new housing or commercial property, whilst the sector declines at a rate of knots. 

The merged graphs make for a compelling comparison, with some strength being shown in commercial/retail property, residential is still in significant decline (click on image to enlarge). One would be wise to look at the advance payments (link), totalling 626.0 billion yuan, a decreased 8.4 percent, and now without some sentiment change set in trend. 

Petra Diamonds (PDL) bond issue for the Cullinan plant isn't good news for shareholders, whose return on their shareholder funds has been dire. Despite what's said in the conference call, contradicting a lot of previous assertions including those one only 8 days ago and in the results regarding CAPEX. 

The lack of discussion or disclosure, with 'everything' being hunky-dory previously leaves a bitter taste. It suggests to the EMC that shareholders returns (EMC PDL 16 April 2015) are likely to be worse than previous reports. It’s wise, when the market is surprised, like many a company before them, despite the terminology allegedly being positives, is often not. 

The basis for the funding is large stones are currently crushed in the plant, despite them finding a ‘world record’. Albeit PDL do state ‘when it isn’t not configured correctly.’ Admittedly there will be savings via efficiencies including OPEX, Security and maintenance.  It’s inferred that it will save “up to 15 ZAR per tonne”, current costs have been up to 90ZAR per tonne. We'll see, but don't get excited about seeing any returns shortly, more so a further dent in the bottom line!

Wolf Minerals (WLFE), it might be prudent to revisit their pricing expectations and remind the market re: TIN and Tungsten prices. With an expected production near 1k/tpa of tin at $20K/T, new guidance will be required. From memory, their projections were based on $20K/t, better than the current price. Perhaps WLFE are thankfully they're currently not producing! 

The All in Sustaining Costs (AISC) per MTU should have improved as result of 24/7 operations rather than the 5.5 working week that was previously modelled. WLFE's guidance/expectations of a recovery in the Tungsten price from January 2015, is somewhat absent, current pricing is around US$257.5/mtu, admittedly in a recovery mode, but below WLFE's current expectations of nearer $300/mtu. 

No time to cover the Vedanta (VED) update or the poor performance of Sirius Minerals (SXX) post approval update.

Atb Fraser

Apologies for the poor layout, grammar and readability, very limited time so rushed out in a matter of minutes.  

Morning Mumble: Victoria Oil & Gas (another EMC Amendment to their RNS) & Iron Ore (on my Christmas list), any old iron (Fortescue Metals Group)

Good Morning,

Continuing on from my theme in March, EMC: VOG March 2015, today Victoria Oil & Gas update the market on Logbaba Power Station Online. Excuse the sarcasm, but if the power output has increased then surely ones production has also. VOG are in danger of achieving what they say, this is a rare event, as long-term followers should know well.

The EMC does not change the view that the management are the risk to any VOG holding, the asset and developments are good, the power generation means VOG should have a utility premium applied, subject of course to geo-political and management discounts. Today confirms, average gas production since the 50MW has been online is 14.5mmscf/d with a daily peak of 15.3mmscf/d, all good for the bottom line. With that in mind, a review is required, expect a re-rating. 

The market belated realised that BLT (EMC yesterday) were slowing production growth, so with the closure of shorts globally, the prices motored near 5-6%. However, overnight we've had Vale, doing the exact opposite, with a record quarter! Vale's Q1 figures, N4WS expansion plans are likely to have an impact and make up the shortfall that BLT had aided the market with. 

With limited time, analysts may be wise to consider issue that producers even in China are assessing the viability of expanding production/operations to compete at these prices. Certainly, Rio, BLT and Vale's positions are not assured, viable yes. The issue the market has, or should have, is the closures of mines are not happening quick enough to reduce supply. Perhaps the forecasts will need revisiting on price. 

Staying in sector, Fortescue Metals Group (ASX: FMG) have finalised the 'refinancing', where every man, woman and Wonga loan specialist jumped on the bandwagon. Quite clearly showing FMG's management have panicked, with an interest offering of 9.75% per annum, uplifted from the original (USD) $1.5B offering to $2.3B. When there is such an increase, save for income hunters realising the benefits, questions should be raised about the pricing. 

Over to FMG, “We’ve seen strong demand from the market which will result in repayment of our 2017 and 2018 debt in full, refinancing of US$450m of our 2019 debt and an additional US$350m to further strengthen our balance sheet.” They only achieved such an uplift because of a mispricing on the interest rate, admittedly it removes a few obstacles, but all the same, the % is laughable, admittedly it gives FMG fresh 'hope,' One suspects they board would be wise not to beg for production cuts from the majors again...any time soon.

Sirius Minerals (SXX) should be congratulated for requesting the suspension of their stock. Those naughty traders whom planned to travel up had all their plans thwarted at the last minute. One hopes they obtain refunds on their accommodation!

On the Anglo Pacific (APF) news front, APF have only gone and given some guidance on Kestrel. EMC's view this should be shortly after Rio's rather than two days later. Its positive, APF estimate that Rio Tinto will mine between 60% and 65% of total production within Anglo Pacific's royalty lands during 2016. Being a buyer of APF (not without risks), the amount of investments and financing sunk into royalties, one would have liked to see APF be more proactive about their investments. This is the third time now!

Little time to summarise the Gemfields (GEM), (not Gem Diamonds as one confused analyst got today), the auction results were crap, albeit allegedly at a profit even at $4 a carat. We'll avoid sugar-coating, so it’s wise to read the auction results. One has a suspicion there's plenty of 'lower' quality stones heading to eBay at a large premium. Those cheapskates should set up alerts now! 

What GEM are doing utilising a decent grading system to enable bidders to have confidence (or not) as has been evidenced from the previous auctions. Expect some positives in the short-term, especially after a few analysts were on a jolly to visit operations. 

With a positive Montepuez maiden resource due in H2 (need to check), it’s likely to enable a clarity on the valuation of the company. With limited debt ($20M last time it was checked for Kagem), cash at the bank, there's a lot worse out there. With an improvement in sector financing and a sensible approach to improving production, GEM are benefiting, out-performing the sector near 40%, contrary to the view of EMC. One has to wonder whether the 'share options" granted 7 days ago is taking the proverbial somewhat. 

Atb Fraser

Morning Mumble: What BHP Billiton finally admits, Iofina (The placing is afoot?) and...KEFI +SXX holders incompetence. (Edited from BLT to BHP)

Good Morning,

BHP Billiton (BLT) come out with their 'half decent' 9 months review to 31st March 2015. All the figures are bang in line, even the rig count down from 25 to 17. Interestingly, BLT have elected to slow the growth to 290 MT at a lower cost. Some sensible actions by BLT whom now admit they are tapering back their growth (in the short-term). 

With Short32 (South32) coming to market, they confirm the pricing of the five year A$1.0 billion note issue under its Australian Medium Term Note Program. Interest payable by South32 is a 'not so bad' 3%, maturer in March 2020. Overall, BLT is nothing to get excited about with the current commodity cycle and their respective prices. If one was looking very long-term, BLT could just be the sensible play over time. 

Expect a push or placing from Iofina by finnCap whom were appointed today, suspicions of the latter would be warranted the latter. With various muppets keeping an eye on SQM and the corruption issues, one would be wise to ignore the noise and look at the price of Iodine including the reduction in shale activity. More recently IOF's  production update confirmed what was known. 

With a reduction in water flow the obvious doesn't need pointing out. Obviously there's some hope pinned on the water permit (No. 40S 30066181), so expect some volatility up to the 6th June 2015, plus the usual over-expectation. Having had ones money both and then down, one will stop short of calling Iofina the 'Grand Old Duke of York.' With the change in NOMAD/Broker, IOF have a risk of a placing, when were those repayments due? 2017? 

Kefi (KEFI) announced the independently updated Ore Reserve. Without going in to too fine a detail, one would be wise to check KEFI's price assumptions. Kefi's price assumption of $1250 isn't that great when you look at the returns. Its viable, but why not model at a discount to the current rate to show viability? Well, we know the answer, at near $1k/oz the returns are near zero, admittedly the $1K/oz. base case is unlikely but 'even' so there's simply better projects out there. 

Kefi suggest an all in cash cost of near $913/oz (although I haven't double checked this), there's little room for error and an IRR of a paltry 22.7%. based on a gold price of a not so unachievable $1250/oz (4% above today). Once board costs etc...are factored in, plus financing and interest payments...there's value to be had but just don't get too excited as production is 2017 H2! 

KEFI could perhaps achieve more by selling the asset, although admittedly they can't keep spin those plates without cashflow. Perhaps Centamin Egypt (CEY) are willing participants? Unlikely now...Do EMED still hold KEFI stock? 

If readers remember Phorm, today's placing news is expected, with a lights on placing. Mirabaud has done well to get this away and surely must be their last access to funding for the company? Oh well, good money after bad. 

There was some sell-off on Sirius Minerals (SXX) this morning, by a few incompetents that read the latest update. For some strange reason, thought York Potash's production would be sooner than the Ministry of Transport (MoT) approvals.The Harbour facilities update is another positive in the SXX movement. Perhaps a quick email to Pearson (PSON) in light of their American online education wores asking for an e-ducation. The subject could be basic reading for those totally unrealistic about first production dates.  

Atb Fraser

PM Bolt On: Parkmead and Chariot Oil & Gas + GKP.

Good Evening, 

With limited time, a little gossip from 'mill' that's been doing the rounds after Woodside (ASX: WPL) passed on operatorship and 25% increase on Chariot Oil & Gas's (CHAR) Rabat Deep. This may just not be the disappointment that at first glance you would be justified in thinking. CHAR's now looking like an exceptional candidate for a take-out and not a la Just Eat. 

Some similar gossip for Parkmead (PMG), but then if there wasn't gossip the market wouldn't justify its position. Over to Woodside to reconsider on CHAR. Separately, with the likelihood of some news on Gulf Keystone (GKP), expect some volatility. The Capital Group Companies, are sitting on their hands at present, shrewd or foolish?

Atb Fraser. 

Caveats of common-sense apply. 

Morning Mumble: (Brief) 'Gossip', Sirius Minerals & Highland, Rio makes me want to turn bullish on Anglo Pacific

Good Morning,

This has to be very brief, apologies.

There's some speculation doing the rounds validated (for once) in part by what other analysts (decent ones) have noticed regarding Allana Potash (TSX: AAA) who's currently had a bid from ICL Chemicals (owners of Cleveland Potash down the road from SXX's). 

The 'word' is that ICL Chemical are likely to see a higher bid for Allana Potash from China Communications Construction Company (CCCC), or CCCC is on the hunt for other 'assets.'  CCCC have the cash to develop, admittedly their alleged MOU terms with AAA was ssuspect, but CCCC are now scoping out other prospects, as well as considering a higher 'outright' offer for AAA. 

The break-fee payable to ICL if AAA changes their mind is paltry (around £3m BGP) means will more than likely become competitive. ICL have the option to pull out, and go after Highland Resources (ASX: HFR) if CCCC come in with a higher bid. The curve ball being if CCCC are 'really' in the mood there's a possibility of them taking SXX private before approvals. Something shareholders, pending the size of any offer, would perhaps welcome? The later is a little stretched but not impossible. 

Rio's Q1 results are better than expected, allowing for derailment that impacted the iron ore numbers, copper, bauxite and believe it or not, coking coal came in half decent. Higher first quarter coal production was primarily driven by improved production rates at Kestrel South following the longwall ramp-up, increased semi-soft production at Mount Thorley and Warkworth and higher thermal production at Hail Creek. With Rio/Kestrel moving into APF's royalty area, and today's update guidance at Narrabri, APF is certainly looking more favourable. 

Kenmare (KMR)/ Sierra Rutile (SRX) a should take note of Rio's update on their Titanium dioxide (TiO2) production that was 17 per cent lower than in the first quarter of 2014 as production continued to be optimised to align with market demand. SRX do give an update on their Gangama Dry Mine Project. Simply put, the pricicing assumptions being somewhat north of the current price, and the remodelling leave a questionable funding gap. Time will tell, but do not be surprised if there's an equity raising, despite assurance of financing in place and support from Pala Investments. By my maths circa $9-13M.

Atb Fraser

Morning Mumble: Ken's Mare, Petrofac and any old tin!

It would appear in the rush to the train today this wasn't "published".

Good Morning,

The unfortunate position of Kenmare has be exacerbated by issues in South Africa with an update this morning. Petrochemical firm Sasol have also pulled all their South African employees out of Mozambique. Sasol's Inhambane natural gas connections might have to be put on hold for some time if the feuding continues. 

It appears to be an issue stemming from the South African Zulu King, Goodwill Zwelithini. His words, whether taken out of context or not, caused an outbreak of violence and looting. Goodwill, (whether lacking or not, poor I know) has alleged to have said that foreigners cause the crime and they must “take their bags and go." The question being, can KMR continue operations in the absence of these 62 workers, and what impact this has on their Iluka and refinancing discussions. Iluka should really just bypass the KMR and offer the banks par for the debt, surely a better deal?

Petrofac's SP is destined for some short-term weakness with yet another 'warning', It brings in to question, in the current climate, the fixed cost contract base. Petrofac are slowly falling to the whoes of being a contractor, although not without some positives it's a stock simply put, with a few warnings under it's belt its not for the faint hearted. Having risen to strongly in the last 3+ months, its wise to cut and run! Simply put, if the management have no handle on the costs, there's a likelihood of more and more warnings. Time will tell.

Last Friday was amusing to say the least, having only a few days earlier been discussing why tin isn't worth much over $15,000/t on a good day, lo and behold, it motors south by near 10%. The biggest move in some time, 5-6 years. Simply put, its wise when your position is not that strong to keep quiet scale back production and allow the market to rebalance. 

Indonesia's ability to manage the commodity cycle is borderline laughable, decided instead to publicly state, they aren't selling below $17,000 a tonne. The Indonesian tin producers shot themselves in the foot causing a brilliant sell off. Tin has dropped 20+% in the last year and almost halved since March 2011. 

With oversupply in the market and limited hope for a surge in Chinese manufacturing, the market is awash with it, the Indonesian demands are unlikely to be met. More so, if you're a producer, and you're withholding the sale of a commodity, the market is going to react entirely how it should. 

You should be wary of believing PT Timah's or their tin association assertions of stockpiling until $17k/t is achieved. They have no choice but to keep on selling up to their quotas if they're producing; some even ignore this and sell illegally (another story). About half of Indonesia's tin producers should be on care and maintenance and the rest are likely to be running at 50% capacity, if they're complying with their quotas.

The Indonesians are their own worse enemy, not only did they flood the market very predictably before the April quota's. They are now attempting to hold the market to ransom with pricing expectations 20% above the currently levels. When a market is awash with a commodity, statements about shutting supply, are pointless.

If the 'word' on the street is correct (more to the beach) in Sungai Liat, Bangka Belitung. Indonesian tin producers actually need the price nearer $20k/t for tin to remain viable. So in the short-term there's more pain likely. With the Chinese woes and reducing demand for solder in electrical manufacturing, Burma (Myanmar) are slowly destroying the price (for now). 

Back tomorrow, 

Atb Fraser

Morning Mumble: Sirius Minerals (SXX), Hargreaves Services (HSP) and Petra Diamonds (PDL)

Good Morning,

Apologies for not responding to emails, work and mornings are the essential hours. The luxuries of putting people in a coma have been limited, plus travel not helping. 

Sirius Minerals (SXX) recent share price moves have been validated as Redcar and Cleveland Borough Council (RCBC) the planning office has recommended approval for 23 April 2015. Current reports of approval are premature as the meeting is next week. Roger Bade yet again being the only one to notice the difference between recommendation for approval and approval. SXX could just be a success story for AIM investors, caveats apply and yes my position is bias, but not without acknowledging the risks. As such, 50% of SXX was taken off the table, with the remainder being left there for the longer term. 

It’s the day to close Dec-Jan short positions in Hargreaves Services (HSP), and hopefully have time to review later in the month. EMC sentiment remains the same, albeit one is wise to acknowledge debt is being paid down and there is the potential for returns post any disposals. The conviction of why anyone would hold such a stock (EMC Sept 2014) is validated, coal, bulk transportation, it's not a case of being out of favour, it's simply a case of low margins and a dire market.  

Octopus Investments Nominees Limited have seen the light in HSP and judging by the volumes, others have cut their losses, now cleared, there may be some light. With that in mind, its best to bank further profits, as it appears Schroders are back in the market, there's a risk of upside. 

Petra Diamonds (PDL) give a trading update. Readers will be aware it’s not a favoured diamond producer. PDL ignored the issues with Antwerp Bank financing hole back in January (EMC: Antwerp Diamond Bank ADB) and today those issues became a telling reality or perhaps acknowledged openly. Simply put in a strained market, if you've not got quality, you're prices (read as revenues) will and have been impacted. 

PDL have reduced production guidance modestly, the matured mining areas will have an impact but this should not be forever. Although PDL now note the woes of ADB absence. The issues will not go away in the short term with a strong dollar and potential liquidity squeezes. It will be offset by growth in the Chinese diamond market and Dubai and Russian banks entering the sector boding well for positive speculation. Today's weakness could just be a buyers opportunity, the conference call was almost a verbatim repeat of the trading update, save for the Q&A.

Diamond inventories are higher because of March tender timing and as a result lower debtors. Liquidity and net debt has been positively reduced, cash up, debt down and available headroom. Concerns about lower grades towards 2019 are valid, apparently the new ore is "extremely well understood" and PDL are confident of limited dilution in the fresh ore. Declines are unlikely to be seen to the same levels in the current grade of ore. The drop in prices seen up Christmas of a 9% decline has not continued (positively), and apparently has stabilised with green shoots of financing being seen.

CAPEX spend is in line with guidance, any hopes the benefits of oil price are unlikely.  With fuel costs lower one would assume this should have improved bottom line albeit as production is so heavily weighted towards labour, power is a small proportion of the operating costs. Timing of tender on inventories and strong finish to the year are crucial and PDL are well aware of this!

Odds are there's likely to be a strong finish to the year, but not without risks of Alrosa and De Beers mismanaging their supplies to market (oops and Rio). Not one for those ignoring the risks, as protests become more widespread PDL by location may be insulated (to a degree). The weakness will present a buying opportunity for those incapable of calculation a return on shareholder funds. 

The more recent bets on Madagascar Oil (MOIL) over the last 4 months or so have finally paid off, albeit it might be wise to derisk on the news! Hat tip Leggie, their Tsimiroro Development Plan has finally been approved, at long last!

Oil was rather self-fulfilling with contracts needing a certain level...and guess where it closed. 

Atb Fraser