Bearishness reaches a short term crescendo

S&P to drop 14%… China misses earnings… VIX at a 4 month high… Greek deadline Sunday eve…Spanish bailout woes… the list of bear stories today is seemingly endless. Packaged with negative sentiment, as detail in the blog here -http://www.spreadbetmagazine.com/blog/safe-to-go-back-in-the-water.html and heavy oversold readings on the major markets (ex Japan which is our top pick and continues to hold its own in recent weeks) today, our contrarian noses continue to twitch.

With Apple missing earnings quite extensively and yet the stock now up on yesterday’s close in pre market trade, and the markets turning around sharpy, it is apparent to me that we are finding a floor around the 5750/60 level and we still target 6000 in the weeks between now and Xmas.

Click here to read the rest of this article. Alternatively visit the spread bet magazine blog

Lonmin and "anal"-yst price targets....

We note with interest (and derision) the price target put out by SocGen in recent days on Lonmin of 145p. Yup, that’s right, 145p. Either the guy knows something we don’t, he is looking for a controversial headline or he has missed a number in front or, as one commentator opined, he’s “smoking something”.

Given that Lonmin has prime platinum assets and is one of the biggest producers in the world, delivering an operating margin in the region of 20% over the ypical cycle and so, with the debt convenant issues all but certain to be waived by the banks and/or their major shareholder Xstrata likely to support a capital raising, the company is slated to produce and an EPS of over 100p for 2013. Not suprisingly we are scratching our heads furiously this morning at such a call from SG as that would put the stock on 1.5 times earnings should they deliver them!

Now, far be it from us to cast aspersions (;-)) as to the “independence” of City banks - perish the tought!, but with almost 20% of the company’s shares out on loan - likely to some large hedge funds, I wonder if there is a vested interest in this Sell call?

We actually take the opposing tack at this price and believe that there is a fantastic short squeeze set up. I would expect that should platinum not turn tail and fall back below $1500 that fellow industry participants will begin to look at renewed corporate activity in the sector. The SA labour unrest issues is actually supportive of the platinum price as it is taking our excess capacity too. 

With Glenstrata now a done deal, Glasenberg has to do something with his inherited 24% stake in Lonmin - either mount a full bid again (for a fraction of the cost that Mick Davis was contemplating) or put the stake up for sale - if the latter, this will likely act as a powerful catalyst for the share price as an industry buyer would set a new price for the stock. 24% is a good lump and a perfect bid platform and a price of 750-800p is eminently conceivable by the likes of AngloPlats

Finally, the chart below shows just what a drubbing the stock has had over the last few years with the shares probing lows last seen in 1997… Oversold is an understatement.

Spreadbet Magazine V Soc Gen - may the best man win!

IMF Global growth downgrade & Chinese weakness weighs on markets

The IMF reduced their forecasts again yesterday for the second time since April, citing, not unsurprisingly, the U.S. fiscal cliff and Europe’s debt crisis as being the top issues for the global economy. The IMF pegged back the world growth outlook to around 3.3% - back to 2009 levels with a contraction in the euro economy being the principal drag on growth.

No real surprises here though. So China, India, and Brazil are to slow - this is not a surprise to investors, or shouldn’t be, with plenty of cooling noises emanating out of China in particular in recent months. 

 

We agree with the argument that Europe will take years to recover in terms of economic growth reverting to normalized levels. However, the European stock markets have already discounted this with CAPE (Cyclically Adjusted PE) ratio’s in Spain, Italy, Portugal and Europe’s basket case - Greece - all near generational lows. What’s intriguing to us is the fact that the S&P500 and Dow  are reaching near record highs. Of course, the primary answer is Me Bernanke and his magical money creation machine. For investors with a 1 year + horizon, we doubt that the US will be still leading the pack with China, Southern Europe and Japan likely to be heading the returns tables.

Another interesting snippet from the IMF growth revisions is that they still anticipate “emerging markets to grow four times as fast as advanced economies” and while reducing expectations for China in 2012 and 2013, the IMF warned against being overly pessimistic about the prospects of these economies, which were major engines of growth in the global financial crisis. IMF Chief Economist Olivier Blanchard said at a briefing “Let me be clear. We do not see these developments as signs of a hard landing in any of these countries”

These statements support our postulations that China and also Japan offer exceptional value at these levels and, when weighing up the downside v upside potential the odds are now skewed heavily in the bulls favour. In China’s case the equity market has have severely underperformed international equity benchmarks for the past four years.

I we and the IMF are right on the soft landing scenario, then we may well have seen the low points for many of the larger resource stocks, with all the iron ore producers now well above their low point of a month ago. The sector showed signs of capitulation when iron ore prices got down to around $85 a tonne. 

Time will tell, but if we are right in our view that China is in for a better than expected landing, then commodity prices during the current corrective phase may well have also seen their lows. Commodities such as copper and energy are already looking much better in terms of their respective price action. These two commodities may well prove to be the lead sled dogs for the wider commodity complex.Commodities are real assets that will always appreciate during timesof currency abasement. And those times are upon the global financial system at present. We stick with our picks in BUMI, ENRC, Lonmin and Vedanta.

As flagged yesterday, Bumi looks ready to pop

Here’s the link to yesterday’s blog post on beleagured coal miner Bumi in which we suggest a break of 172/3p looks likely to herald a move back over 200p - CHART SNIPPET - BUMI LOOKS TO BREAK RESISTANCE @ 172/3P

The stock is in demand this morning ahead of the shareholder meeting in Singapore tomorrow with a clear break of the resistance of 175p. One to keep an eye on…

 

Ceres Power - the unanswered questions...

It’s fair to say that this mag has been a big advocate of Ceres Power, based around the potential of its technology and high expectations of the new management headed by David Pummell. Here’s a link to our postulations underpinning the investment case (page 16) - http://issuu.com/spreadbetmagazine/docs/spreadbet-magazine-v6_generic 

Regular readers will also know that we are not afraid to stand up and make our voice heard when we think a “wrong” is occuring against shareholders as we did with Plus Markets in particular, and the blogs we have posted on all that is wrong with corporate management in the UK.

It is with a heavy heart that we find ourselves having to be galvanised once again, this time in relation to the Ceres issue. I for one am simply not buying the story that they cannot raise the finance to continue with the commercialisation programme and am now, unfortunatley, actually questioning the integrity of the Board of Ceres, and wondering just why David Pumell will not return our calls…

Leading up to last Wednesdays shock and surprisingly curt announcement were a number of RNS that confirmed the exceptional progress that had been made in bringing the product to a point where it was commercial with stand out progress on the degradation rates. Only on the 26th of July, an RNS was released headed “Commercialisation remains on track”. Field trials were also lined up for 2014 with British Gas and in the Benelux region with Itho-Daalderop. The comment in particular from their anchor shareholder British Gas, Managing Director Phil Bentley seems at odds with their “unwillingness” to participate in a new fund raising - 

“Ceres has continued to make good technical progress under the new leadership of David Pummell. We are looking forward to participating in the next phase of trials and laying the groundwork to market the product in preparation for Ceres’ planned manufacturing scale-up.”

I note that in last weeks announcement there is no comment either regarding the 2.4m euro’s of European Commission Framework 7 funding too - just what has happened to this monies?

Look closely at the statements made to shareholders in the announcement of 26 July 2012 - 

1. Flagship UK and Benelux commercial product launch programme remains on track to deliver the mass volume low cost micro-CHP for 2H 2016

2. Independent review by Booz & Company and AEA Technology confirms low-cost capability of the Ceres micro-CHP product design

3. Independent review of Ceres core fuel cell technology by a globally recognised SOFC expert commissioned

Fast forward just 2 1/2 months and there was some heavy turnover in the shares in recent weeks too that took them up to 15p - not the type of turnover by private shareholders but sustained purchasing. Who was this purchaser(s) and what did they think they knew at the time?

We also ask key questions like why did Mr Pummell (a) not look to cut costs to mitigate the cash burn in recent months, (b) go to shareholders with a rights issue before throwing in the towel,  (c) attempt to partner with another company, (d) look to license the technology etc…? In fact, any one of a number of potential scenarios that would have not simply thrown shareholders under a bus. It smells distinctly rotten to us and I wouldn’t be surprised if BG, Itho- Dalladerop or GE are lined up to buy the company’s technology and reap the substantial rewards themselves. The non exec’s should put their heads above the parapet at this stage and probe the fund-raising exercise.

The “shiny, happy” (unlike his shareholders!) David Pummel, CEO of Ceres Power

David Pummell’s comments of the 18th Sep coming on the back of an independent expert report by Dr Nguyen Minh a former Chief Scientist at GE Global Research that the product was “likely to exceed the requirements for residential CHP” raise even more questions for shareholders. Here is his remarks - 

“We continue to make positive progress in improving the durability performance of our core technology.  The assessment report prepared by Dr Minh gives the Board significant confidence that Ceres core technology is on track to achieve the degradation requirement of residential CHP by 2016.  It also concludes that Ceres has the potential for cost leadership in mass manufacturing of cells and stacks, a key strategic advantage.”

The Board of Ceres Power now have an obligation to their shareholders to explain just why they have been unable to raise the finance, confirm who was approached, why they have not cut costs recently and, as is the general case these days with small cap management, just how Mr Pumell can justify his £250k salary this last year when it seems he has simply poured more shareholders cash down the drain…?

Editor

Bumi - is it safe to go back in the water?

From today’s FT -

The board of Bumi Plc is weighing up severing ties with one of its Indonesian businesses as part of a restructuring aimed at reviving investor confidence in the controversy-hit London-listed coal miner.

Bumi said on Monday that it had asked for an independent investigation, to be carried out by law firm Macfarlanes, into alleged financial irregularities at PT Bumi, in which it has a 29 per cent stake.

The inquiry is the latest blow for Bumi, the vehicle part-owned by financier Nat Rothschild that has come to epitomise the risks investors face when putting money into emerging market entities and has tainted the model of reversing far-flung resources companies into London-listed shells.

The board hopes to have a preliminary report from the law firm “within weeks”, people familiar with the matter said, which is expected to focus on whether money supposedly spent on development projects at PT Bumi was invested on the ground.

Bumi’s board has previously discussed ways to take control of PT Bumi Resources, including through a merger of that company with Berau Coal, its 85 per cent owned Indonesian coal subsidiary.

However, the board is also considering ways to make a lasting split from the troubled Indonesian company and to focus on preserving the value of its Berau holding.

“The bottom line is that we have high quality, valuable Indonesian coal assets and we have been clear about delivering on high standards of corporate governance,” said Nick von Schirnding, head of Corporate Affairs at Bumi Plc. “We have clearly had our challenges and structure remains one of the key issues we are looking at – something we need to resolve over the next few months and then deliver on a simplified strategy going forward.”

A deal to separate Bumi Plc from PT Bumi would be complicated, given the challenges facing the heavily indebted Indonesian group and the cross-shareholdings between the various companies.

Options include spinning out the stake and selling it to other investors or a third party, or distributing it to shareholders in Bumi Plc. Another strategy could involve swaps of stakes in the London group and its Indonesian namesake held by the Bakries and Samin Tan, Bumi PLC’s chairman who bought half the Bakrie’s stake in Bumi in October 2011 as the family struggled to repay a loan.

While cutting ties with PT Bumi is one route being debated, no way forward has been agreed, people familiar with the matter cautioned. Some directors might prefer to focus on ways to take control of PT Bumi, especially when the collapse in thermal coal price has put the company under pressure.

Editor take - it could be that per the old saying re “buy when there is blood on the streets (in this case blood coloured blue!) is appropriate here. With a current market cap of just under £300m and a reputation at stake in Nat Rothschild’s stake, any divestment of the 29.9% stake in Bumi could yield as much as the current market cap, and so leaving the, as yet, unscathed PT Berau for free.

Natural buyers are of course the Bakries and Samin Tan. Alternately, if the Bakries are pressured by their lending banks over the collateral they pledged in Bumi stock to settle the loan then what chance Tan/Natty look to take this? 

Courtesy of Spread Betting Magazine

What next for Bumi?

We included Bumi Plc in our Dream Miners Stock Portfolio (link here - http://issuu.com/spreadbetmagazine/docs/spreadbet-magazine-v9_generic) which was released yesterday and it looks like the “market” is handing us an interesting opportunity. Here’s the explanation for the fall from todays Telegraph - ”the sell-off in Bumi continued as the company fell 54.2 – or 21.7pc – to 195.9p. It is rumoured that a loan to the coal group’s major shareholder, the Bakrie family, which is secured on Bumi shares, could be called in at the end of September. A spokesman for Bumi declined to comment.”

If the above is true then this presents investors with a potential gift as of course any pressure on the stock will and has pushed the price lower but, the valuation is becoming excessively disjointed from the fundamentals with the stock now trading at a shade over 2 times EV:EBITDA and around 3 times historic earnings. Given the recent history of friction between Natty and the Bakries I wonder whether Nat will take the stock the banks may sell from underneath the Bakries. One things for sure, Nattys no fool and I wouldn’t discount such a scenario as it would resolve a lot of issues for him. Of course Samin Tan may take the stock which would, if crossing the 30% threshold (he already holds just under 24%), trigger a full blown bid.

Here’s the chart over the last 10 days - one of the most oversold I’ve ever seen.

If the stock opens lower Monday we’re in with our hands full.