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Friday, 29 March 2013

Cyprus - severely wounded with euro exit the likely ultimate outcome


So, the banks in Cyprus finally reopened today at 10.00 UK time, freshly filled with newly minted ECB euros and transported in armored trucks overnight (to keep the rioting masses at bay!) as the Cypriot authorities were concerned with what could happen when the banks reopen. The British company G4S (they obviously know nothing about the Olympics fisaco…) will in fact provide 200 men to help police ensure the safety of banks and the people of Cyprus.

There are fears that even with the various capital controls imposed by the authorities that money could disappear from the banks in just a few hours due to fear-led huge withdrawals - who can blame them? Cyprus actually has a record amount of money deposited per inhabitant. With just 860,000 people, total deposits amount to €68 billion, which averages €79,000 per person although that is skewed by very large deposits from a number of Russians - a very bad move on their part given the haircut’s they are taking now!

After failed negotiations with the EU and a veto on the initial plan A, which sought to confiscate 6.75% of deposits under €100,000 and 9.90% on deposits over that amount, Cyprus leant on Russia in asking for help - to no avail in the end however. Ultimately, in an 11th hour deal in the late hours of last Sunday, her politicans reached a deal with the EU under which the main Laiki Bank will be dismantled and its assets sold. Depositors  with in excess of 100,000 euros initially take a cut of 40% on deposits over €100,000 whilst deposits below this figure will be honored in full albeit in staged withdrawals per the capital controls. The tight capital controls include a maximum daily cash withdrawal of €300, no cheque’s, a limit of €5,000 credit card spending per month outside Cyprus and no one can leave Cyprus with more than €1,000 in his pockets!

Even though cash will not be withdrawn all at the same time, we’re certain that here people will try to get as much as possible out of the banks and the country - certainly the larger depositers near the 100,000 euro threshold. At the same time, if you were a business, would you accept payments other than with cash? So cash will be more valuable than any other means of payment and the economy will most likely struggle in the short terms. We expect the financial system to almost freeze and the country ultimately be pushed to a situation under which it not only needs but actually wants to leave the Euro - just look at the zombie state of Greece as a consequence of remaining in the euro… Cyprus is a much more palatable exit.

How will Cypriot businesses survive without liquidity? How will new projects get financing. Will the ECB provide it? Temporarily, yes, but we doubt they will continue to finance if they see money wholesale leaving the banks. What could be a small and contained problem may become a huge blow in the Eurozone. Messing with deposits changes rules. It was previously sacrosanct and we think the repurcussions of this will be far reaching.

If deposits aren’t safe anymore and Governments may take your money, especially in peripheral European countries - what fait can citizens of Greece and Portugal for example have in the integrity of their banking systems and the implicit trust in making a deposit? This is what may be the slow burn that accelerates once more the euro crisis for the 3rd summer in a row.

Cash has in fact already started leaving those peripheral countries in the form of reduced demand for sovereign debt as we have seen in Italy yesterday for example. Yields are rising again, having surpassed 5% in Spain on 10-year debt, and hitting 12% in Greece, while the German government can continue raise money at a miserable 1.32% rate. This is the consequence of the new deposit measures. Money flows from periphery to the centre. This new “bail-in” way of solving EU problems is the most dangerous route so far within the region and one that will help the fragile European economy sink again in our opinion.

With unemployment rates around 20% and GDP heading south, how can you sell the idea the Euro is the best place to remain for the peripheral countries? You just can’t, and as a consequence of this, euro-skepticism is rising as never did.

The Euro is losing once more against all the majors today. After hitting 1.37 against the dollar, the Euro is now trading around 1.28 and threatening to go even lower. In fact, it is our opinion the common currency is trading much above what it should be - realistically against the Pound it should be 1.30-1.35. The matter is not only an economic issue but also political one. If mining in some African countries is seen as a risky business due to political instability, depositing money in Europe is also a risk, so why not look elsewhere? With banks charging to keep your money unsafe, it is time to buy a good mattress with a safe vault under it.

Wednesday, 27 March 2013

Is it time to load up the truck once more on the Mining Sector?

It seems like it was only a few weeks ago, and indeed it was, that we relayed the best performers in the FTSE 350 were our picks of Lonmin, Bumi & ENRC. Well, in the space of just over 3 weeks, certain of the mining stocks have fallen by almost 50%. Yes, that’s right 50%, whilst the FTSE has rallied towards new highs. This is actually one of the fastest dislocations in the market of sectors since late 1999/early 2000 when the “old economy” stocks were sold down to crazy levels whilst tech stocks moved to stratospheric ones. Are we in a similar situation again with the likes of Kazakhmys down some 43% from where they were at the end of Feb?

Out of 38 FTSE 350 sectors, there are in fact only two in the red this year as global monetary easing has continued to pump confidence higher and cause investors broadly to return to the equity asset class. Lagging behind almost every sector is mining which is currently showing a loss of 8.6% for the year, only better than that of industrial metals which has lost more than 17%. Is there a reason for this massive underperformance experienced in mining and in particularly in the gold miners? There are some good reasons why the mining sector isn’t rising with pockets of oversupply, renewed corporate governance fears, recent large scale asset write downs etc but in relative terms, we think this is an excellent multi year opportunity to add certain stocks to one’s portfolio.

While it is becoming tougher and tougher to justify buying shares at the top of the performance ranking tables, there are some good reasons to pick up gold miners. The sector is out of sync with gold prices and many companies are trading at a near generational discount in terms of book value. We should expect some M&A activity in the near term as the stronger capitalised companies take the opportunity to consolidate. We suggest you read the latest edition of our magazine in which we pick 5 gold miners for the medium term. We included four UK companies and one from the USA: Avocet Mining, Aureus Mining, African Barrick Gold, Amara Mining, and Iamgold.

We havein fact been bearish on gold since the autumn of 2012, due to the mix of an improvement seen in the US economy, a decrease in the Eurozone’s “perceived” problems (Cyprus notwithstanding!), a wholesale move into riskier assets, and more recently the relatively mild solution to the fiscal cliff and debt ceiling issues in the US. All these factors highlight the fact that gold is even more costly to hold as investors are losing opportunities with the rising equity market and so diminishing further the attraction of gold. Even though all these factors are against gold prices and somewhat against gold miners too, we are still confident in the sector as we believe there is a massive disjoint between gold prices and gold miners that must be filled.

If we look at the following chart, we can see that while the gold price has been moving sideways since July 2011, gold miners have been losing value at a rapid rate. The link between the two has been broken and mean reversion will likely occur. We expect the gold mining sector to rally materially throughout the balance of the year on the back of M&A and an asset allocation rotation into the sector by institutional investors.

While gold has risen 7.2% since July 2011, the FTSE 350 mining sector has lost 31.4% and gold miners, or if measured by the Market Vectors Gold miners ETF, 30.1%.

Gold mining is an operationally geared business. Explorers usually have high fixed costs with their revenues highly dependent on the price of gold. When gold rises, share prices of gold miners are expected to rise by a greater degree than the rise in gold prices and vice versa. That hasn’t been happening for nearly 2 years now and as a result Many are trading at a heavy discount to book value and on EV:EBITDA ratios of sometimes just around 2 -  a level which is usually a steal.

The wider mining sector is also heavily oversold at this point with Rio down 25% this past month, Lonmin a similar amount, ENRC almost a third from its peak and worst of all Kazakhmys nearly 50% - in the latter’s case it is trading at a discount to tangible book of almost 40% and this includes writing ENRC down to current value.

Kazkhmys relative to FTSE YTD

We contend that we are within days of a sharp rebound for the wider sector and called the turn almost to the day last November (see here - http://www.spreadbetmagazine.com/blog/second-train-leaving-mining-sector-opportunity.html). We have positioned ourselves accordingly.

Friday, 15 February 2013

Avocet Mining - shocking financial journalism by Shares Magazine

Below is an excerpt from a piece by Shares Magazine’s contributor Dan Coatsworth that is a stark illustration as to why it is not just “anal”ysts who should be struck out of the industry given the collective value destruction they create (see post below on the Vampire Squid - Goldman Stinks).

Here’s what he actually printed on Avocet - 

“A quarter of the miner’s production is loss-making, representing the 33,000 ounces it must sell at $950 per ounce under the hedge agreement each year. This is nearly half the price it would get selling into the spot market where the latest price is $1,648 per ounce.

It has 173,250 ounces left to deliver under the hedge agreement. At the $950 selling price, this equates to a $164.6 million liability. This is considerably larger than Avocet’s $93 million (£60 million) market cap.”

Anyone reading that and acting on it through fear, has reason to be aggrieved with Mr Coatsworth as the actual liability is not simply calculated through timesing 173,350 by $950 as it appears he as done, this is in fact madness to make such an elementary mistake, but in fact it should be calculated one of 2 ways - 

1. Either through the difference between the hedged selling price ($950/oz) and the cash cost of production (around $1100/oz) - in effect this is the loss to the company whilst the hedge is run down over the life of the hedge and equates to a manageable $26m or

2. As appears to the case in Avocet’s case through buying back the hedge at market prices which around $1650/oz results in a loss of circa $700/oz and so a loss of $121m. However, the true loss over the life of the mine is not in fact of this magnitude as of course Avocet will be selling production at the new spot rate and therefore the loss reverts back (assuming spot remains around $1650) to the $26m.

We believe the market has monumentally over reacted to Avocet and at the current price of 26p it represents the best buy in the global gold mining (producing v exploration) sector. There’s a difference between short term difficulties and long term problems and we think Elliot Advisers - the hedge fund carrying almost 30% of these, will now push for a rival to take them out.

Adjusted book value accounting for the true hedge book loss and reduced Inata reserves at the current price is around 0.35 times - this is a total steal in our opinion and we are buying very heavily. Unlike most other publications, we put our money where our mouth is and certainly ensure we do our homework as our calls in Bumi, Lonmin, ENRC, London Capital Group etc in recent months pay testimony to!

We will flesh out our investment case in the next edition of our magazine due out in just under 12 days and if you’d like a copy then ensure to register on the right.


For more great articles just like this why not subscribe to Spread Bet magazine using the form on the right.

Monday, 11 February 2013

Additional cautionary signs for the market. Getting ready for the big short...

Regular readers of our blog will know that we have become a little more cautious in recent weeks as the market has had a storming start to the year. Almost all our picks - ENRC, Bumi, LMI, Japan, GBPAUD, Apple etc have been major outperformers and good profits have been reaped.

Well below is a chart of the S&P 500 together with the difference between the percentage of bulls and bears, according to the weekly sentiment survey by Investors Intelligence (II). When the number of bulls is far higher than the number of bears, it’s an indication of a lot of optimism in the market. We can see below that the high levels of optimism have, historically, had bearish implications for the market going forward. Certainly this was the case looking at 2011 and 2012.

Six weeks into 2011, the bulls-minus-bears was very near 40% (circled on the chart) - an extreme measure. The market went sideways after that, before eventually collapsing later in the year and giving back all its gains. Then, in 2012, the market was once again off to a great start, but this time the bulls-minus-bears was much less, right around 20%. The market continued higher and finished the year up about 13%. Currently, the optimism, according to this poll, is the near the 2011 level (marked by the red line). Any further strength going into this weeks expiry of options in the US will be our cue to get aggressively more short (thus far we have been playing it via Put Spreads centred around March and April expiries).

The expiry this week has a lot of open call options around the 1520 level - sellers of these calls will be keen to keep a lid on prices below this level so that they can collect the premium. If however there is a move through here then what is called “delta hedging” will come into play and they could force the market up quite sharply - perhaps towatds 1540. If this occurs going into the close of play Thurs/Fri morning then we will be selling short heavily.

 II Bulls-Minus-Bears vs. SPX


Going back to 1990 and looking at those years when the S&P 500 was up at least 2% through the first six weeks of the year and tracking the returns going forward depending on whether the bulls-minus-bears was above 20% or below 20% is displayed in the table below. We can see that the returns are remarkably better when there is less optimism in the market. This is one indicator showing some cause for concern as the market is closing in on all-time highs.

 SPX Returns When II Bulls-Minus-Bears is Above or Below 20 Percent
Below is a cracking guide that we put together that looks at a possible end date for the current bull run, and also postulates upon the ideal level for one to get long on any imminent correction to capture the last of the returns from this bull market.

Thursday, 3 January 2013

Ora Capital reaches 29% of Ceres Power, only another 0.9% to go...

See below from the latest RNS. I must admit that Richard Griffith (who is a clever chap) CEO of ORA is playing a very smart game here. If he isn’t to bid for the balance equity then they have created a very “squeezable” stock dynamic with a small free-float now and most people still underwater - even those that participated at 1p - as the original purchases were likely much higher (only 11% of the company turned over sub 10p in the last 8 months). They are unlikely to dampen a run in the stock until 10p+.

Perhaps ORA & IP2PO are looking to maintain the new market cap ready for a new equity raising in 9-12 months time and with a few positive RNS’s behind them? Either way for CWR shareholders, it’s only good news (apart from for “Sueyou!”! - where’s the writ Sue?!) - there could be a serious squeeze around the corner.

2012 - Against the odds, a bullish Year For Equities

Just when everyone was thinking that the worst of the crisis was already behind us, a new wave of concern laid the markets low and caught many off guard. In the end, ECB head “Super” Mario Draghi started a high stakes game bluff that, luckily for him, he emerged the winner in late Summer when he was successful in reflating equities.

The second quarter of 2012 in particular was a really tough one, with many European markets dropping around 7% and the Nikkei more than 10%.  It seemed that everything was pointing to yet another ugly August like the one in 2011 but Draghi’s strong words that he would “do whatever it takes to save the Euro and keep it alive” turned the ship around. With such unexpectedly strong wording, investors bet heavily that the ECB would step in and engage in some kind of monetary easing as the FED is doing in the U.S. with the FED.

Read the rest at spread bet magazine.com

Thursday, 6 December 2012

All quiet on the Bumi front... Is Glasenberg about to enter stage left?

It’s been a couple of weeks now since any real news on Bumi and all remains eerily quiet… All the while, the stock remains resolutely pinned to the 260-270p level.

We continue to believe that Bumi presents the best potential Xmas or New Year present in the mining sphere given the £4+ that is presently on the table and the desire of all parties (ol Natty, Bakrie and Tan) to retain the prized assets in Indonesia. One has to accept that they all know the assets better than anyone and the fact that they each want them speaks volumes. Natty thinks the assets worth north of £10 per share, ditto with Tan and the Bakries just need to find some cash…. Which led me to do a bit of digging surrounding the history of Bumi and which does not seem to have been picked up by the financial media…

The Glasenberg connection

It seems the Bakries are friends with global mining billionaire Ivan Glasenberg of yes, you guessed it - Glencore. It was speculated last year in various quarters that Glencore may come to the aid of the Bakries by way of a loan backed by Bumi shares. Hmmm… The Sunday Telegraph reported without citing sources, that Glencore was looking at providing some sort of “quasi-debt facility” to support the family.

At the time of the speculation surrounding the Bakries loan financing and in which they were ultimately bailed out by Samin Tan to the tune of $1bn, various analysts stated openly that Glencore would be an obvious buyer of any Bakrie shares, given that it signed a share swap agreement with the Bakries last year over 4.8 percent of the company and it marketed Bumi’s coal.

Read the rest of this story at www.spreadbetmagazine.com

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