Wednesday 16 September 2015

PM Bolt-On: Glencore, FED with fears of Déjà vu, owning American stocks? Lithium (who's taking it?) FMC/SQM/Tanqi, + Gold (not quite a bug) on Randgold.

Good Evening,

Initially it was going to be Glencore’s results on the share placing, but every-man and his dog has covered it and there appears to be a consensus that the debt matters resolved. With the employment and cost issues cropping up on GLEN's care and maintenance proposals, the costs savings might just need a little Tipp-Ex. 

Tomorrow’s news on the Fed could or could not be the impetus and momentum needed commodities. Any deferral in rate rise, will only lead to speculation of when it will raise rates, including the associated risks (Déjà vu). Here the view is, the FED should bite the bullet, but those whom know about all such things suggest its unlikely. 

The question is likely to be, why own American stocks? Justification that cheap money has been used for buy-backs and/or capital returns isn't a sound investment case in its own right. Return on capital employed/invested and return on shareholder funds, isn't hindsight but prudence. 

News is rife with Lithium. The market appears very slow to give some credit to a changing market. Perhaps with the likes of FMC Lithium (NYSE: FMC) on a PE of near 35 it’s enough for now. 

FMC have wisely sold their Consagro operations (Brazilian generic crop protection distribution and sales subsidiary), to ‘Atanor do Brasil,’ the Brazilian subsidiary of Albaugh. A sensible choice as FMC have/had neither scale nor a leading position to leverage off.

FMC poignantly update the market that as a direct result of “continued market growth is outpacing current industry supply capabilities for most of our product lines.” This has improved market conditions to justify a hefty 15% price increase in lithium (Inc. lithium carbonate, lithium chloride, lithium hydroxide and all other products) except speciality products that are rising $3.50 per kilogram.

Tesla are shrewdly conducting deals, signing up off-take/supply agreements at a discount to market and capping the price. Examples being Pure Energy Minerals (TSX: PE) (Sept 16 release), whom today did a deal with Tesla.

Same for Bacanora Minerals (BCN) whom near two weeks ago struck a similar deal supply agreement with Tesla. Although small fry, it’s giving an indication Tesla is working very hard to stabilise the price, admittedly not very well if one compares Chinese prices.  

The price rises are unlikely to help Chinese buyers whom have an import duty of 6.5% on top of the price. It’s difficult to find the appeal of Tesla with their failure to convert sales in China, but Marmite has customers, so why not Tesla.

The price increases are marginal for car producers including the likes of Tesla. Without checking, more recent estimates suggested that Tesla required between 11-16 Kilos of lithium per car. Will Tesla become a gimmick in China, especially as average auto sales prices are dropping, margins down, incentives up but demand contracting? Don't Tesla at some point need volume rather than R&D costs eating into the majority of the unit sales price?

Like energy pricing by the ‘non-cartels in the UK,’ with FMC leading the way, you can be assured that Albemarle (NYSE: ALB) whom bought out Rockwood Holdings (U$D5.7 billion), Global X Lithium ETF (admittedly not exclusively a direct exposure to Lithium producers; noted RD), Sociedad Quimica y Minera (SQM (NYSE: SQM) and Talison Lithium. (Formerly TSX: TLH), will be "compelled" to act...

Talison Lithium, a once upon a time target for Rockwood Holdings, is near impossible to gain exposure to having been bought Chengdu Tianqi Industry Group (Tanqi). Note the indicator was there post any fundraiser of a take out for CDN$850M (from memory.) The Chinese press had reported well before the offer that the Chinese Investment Corps (CIC’s) had approved loans to funds the purchase of Talison by Tianqi well before the event. After all, they'd completed the financing for the mine.

Being prudently reminded of the SABMiller (EMC) commentary. To quote yours truly, “The best hope for SAB is a take-out, over to Anheuser-Busch InBev whom today had a good justification to limit any premium if it were "going to make a move at the end of the month." Today’s news on Anheuser-Busch InBev (ABInBev) SABMiller PLC - Responding to press speculation crystallising ‘most’ of the value.

Whilst not being the biggest fan of gold, Randgold (RRS) today presented with an opportunity to place money (with requirements of safety), with gold steady around $1100/oz, RRS is the preferred Fed Arb, with costs and cash built in even for a longer-term trade. RRS's ability to weather the market and price movements is not to be under-estimated. Even with some citing $775/oz. as a possibility, Randgold may find it tough, but others would quicker fall, causing a shortage of supply. Shockingly, this is likely to be a longer-term investment here.

Admittedly, some see gold as a hedge rather than a supply issue and a store of value. Albeit, the dynamics of the market have always mirrored those of supply and demand. It’s the basics of global risks and perception of risk. With deflation in mining equipment, CAPEX expenditure and energy prices all reducing, it will all assist the unit costs on an all in basis. Obviously save for those producing the equipment reliant on a booming markets. 

Sensibly closing positions in advance of the fed movement today, due to the close nature of any such call, we'll revisit Caterpillar (NYSE: CAT) in due course. The strength in the North America market is facing a wave of deflation in mining and shale costs, caterpillar are not immune, although hedged to some degree by their financing arm.

CAT's Parts may benefit as machines that are run for greater hours per day/week and annum, but insufficient without some form of recovery within commodities generally (read as and/or stimulus). Not forgetting inventory of parts carried by the major miners is also being reduced or managed more efficiently (BHP Billiton a prime example). The destocking on top of pricing pressures won't be positive. We shall reserve comment on Caterpillar's finished goods until 22nd October (Date for Diary). Caterpillar's sponsorship of the Energy and Mines summit is noted.

The recommended reading list is growing and appreciated so please be patience. 

Atb Fraser

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