Commodities
Diamonds and precious stones
Apart from Petra’s update (which I have covered in the company segment below), the industry chatter is all about the upcoming sight and the move by De Beers to permit 100% of November ITO's until December. The sight looks as though it will be a very small one indeed, especially as we have Diwali approaching (6-16th of November). It is worth remembering that even in the good times, Indian manufacturing facilities still close and rough demand fades. An interesting point to ponder is what happens to the deferrals that come due in December and/or the first three sights of '16. Personally I feel further concessions will be forthcoming.
It seems that Talk Talk can't have all the hacking headlines to itself as the Gemmological Institute of America (GIA) and Rapaport suspended 10 members for allegedly participating in a scheme that hacked into the GIA’s computer system and upgraded 1,042 GIA grading reports. The GIA and Rapaport have subsequently issued laboratory alerts invalidating the grading reports and named the suspended members.
Precious metals
It has been a bit of a tough week for the yellow metal as the bears landed two rather hefty blows on bullion. What with the Fed talking up a reason for their existence by removing the reference to a "global slowdown restraining the US". Err not quite sure that will be the case, but you carry on...
And the Venezuelans are now actively selling anything they can get their hands on as $3.5bn of bond repayments come due in the next few days, with another $1.5bn by the end of the year for good measure.
Admittedly, this story has occupied my time more than it should because after President Nicolas Maduro swapped $1bn in cash for about 1.3Moz at the end of April (worth c$800/oz. to the country post "fees"), it is estimated that the country still has around 12-13Moz in reserve. But after the late president Hugo Chavez decided to repatriate the country's gold in 2011, it would probably be fair to imagine a few mercenaries hoping for a call to transfer the bars to a new home, as an empty Government vault in Caracas is probably not an ideal long term home. This has so much potential for a Hollywood action film...
"Oi Dave, did you shut the container door?"
Oh and in the PGM space, the CEO of Aquarius Platinum this week said "Given we see no fundamental reason to be optimistic about PGM prices in the short-term, management will continue to implement all possible cost saving measures to preserve cash levels". Not quite a call to arms is it?
This week: Gold: (1.5%), Silver: (1.4%), Platinum: (0.5%), Palladium: (2.5%), Rhodium: (2%)
Base metals:
Did someone poke Moody's with a stick?
After famously making a mess of not forecasting the risks of packaging up low quality bonds as "AAA" and then flogging them on to highly leveraged buyers ahead of the GFC, the ever prescient chaps came out with their annual base metal forecast that concludes "Slowing growth in China and Brazil, muted conditions in Europe and a weak recovery in the US will continue to pressure global base metal prices"
Anyone want to buy some triple "A" CDO's?
This week: Aluminium: (1.4%), Copper: (0.4%), Lead: (2.4%), Nickel: (2.5%), Tin: (3.6%), Zinc: (3%).
Bulk commodities:
I did see a rather controversial report from the Bloomberg economic team claiming Chinese growth to be closer to 2.8% and not the government's 6.9%, which would indicate a flaw in official data...
Otherwise Iron ore looks to be worrying a few again, prices are down over 11% to below $50/t again. Lots of talk of cheap Chinese steel exports, mills closing and scrap at 10-year lows.
Not good, unless of course it becomes obligatory to make steel cots after the relaxing of the one-child policy...
This picture made me smile as I read that Vale are heading for production costs of below $10/t.
Courtesy of Vik Muniz from Vale Museum
Company announcements/news/meetings:
It's been a tough ol' slog for equities this month with the wider index now underperforming the All-Share by an astonishing 34% year to date.
Petra Diamonds (LON:PDL), Buy (PT: 135p)
Firstly, judging by the market reaction on the day, I got this very much wrong and as such, I apologise.
The operational aspects of the update were certainly in line with what we expected. Regarding prices, the results at the October tender were, if anything, above what was forecasted (you will recall I thought down 10%-15%). However, concerns over the balance sheet were thrust into focus and the disclosure of discussions with lenders were, in my opinion, punished to great effect.
My personal view is that this is not another Lonmin. Yes the debt figure is a little too high for a market in a risk-off mode, but the diamond industry is not destined for a spot next to the Dodo at the Natural History Museum. I believe that Petra retains significant flexibility in its expenditure programme and yes, if expansion was to be delayed, it would be a near-term negative but the calls for a rights issue seem aggressive. (although it would remove the B/S fears) My fear is that it could become self-fulfilling in the absence of a swift resolution. However, in a situation that sees a resolution on the covenants issue (banks agree to relax) these will surge forward.
Other names in the sector have also been hit on pricing fears. In my view Gem Diamonds has been particularly harshly dealt with, as the company retains a net-cash balance sheet and exposure to a better performing segment of the market.
Major movers this week:
Rambler (27%)
Lonmin (20%)
Petra (13%)
Anglo American (10%)
Gemfields (10%)
Next week:
Updates from AngloGold, Glencore, Vedanta and Randgold