Markets live chat transcript for the chat ending at 12:08 on 15 Oct 2008. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM:
Welcome to Markets Live
PM:
This is FT Alphaville’s daily markets chat
PM:
We are generally burnt out at this end.
PM:
tech is anyway
PM:
But for you, dear AV-ers, we will summon the energy.
NH:
morning
PM:
Neil has got over his hissy fit and skulked back to work.
NH:
bear with us, we have some technical issues
PM:
Of course Neil was actually sick yesterday
PM:
NH:
yeah, at the sight of the FTSE 100 going up
NH:
and the Dow the night before
NH:
but normal surface has been resumed today
NH:
my screen is a sea of red
PM:
Don’t people realise the storm is over ?? We’ve been bailed out!!
PM:
Gordon’s saved us. Come on people. You shouldn’t be selling shares – should you?
NH:
well, they are
NH:
FTSE 100 down 135 points at 4,259.2
PM:
dunno why prices are going dow when the Europeans have also agreed to an across the board cooking of the books
NH:
Iceland just cut interest rates by 3.5% – wow
NH:
mind you they were 15.5%
PM:
That’s not on the wires yet
PM:
jsut Stacy watching Icelandic tv or something
PM:
Central bank has been making a statement in Iceland this morning
NH:
anyway, what’s all this about cooking the books in Europe
PM:
this – just been pinged around the news room by Leyla Boulton on the World News desk here:
PM:
BRUSSELS, Oct 15 (Reuters) – European Union accounting regulators have voted
in favour of easing a fair-value rule blamed by the bloc’s leaders for
exacerbating the credit crunch.
The regulators’ committee decided to accept changes made earlier this week by the International Accounting Standards Board to the standard setter’s fair-value rule.
“The accounting regulatory committee has unanimously voted in favour of the IASB solution,” a European Commission spokesman said.
The European Parliament needs to endorse the vote. That could come as early as Wednesday afternoon to seal the change, which would come into effect in time for third-quarter results, the spokesman said.
in favour of easing a fair-value rule blamed by the bloc’s leaders for
exacerbating the credit crunch.
The regulators’ committee decided to accept changes made earlier this week by the International Accounting Standards Board to the standard setter’s fair-value rule.
“The accounting regulatory committee has unanimously voted in favour of the IASB solution,” a European Commission spokesman said.
The European Parliament needs to endorse the vote. That could come as early as Wednesday afternoon to seal the change, which would come into effect in time for third-quarter results, the spokesman said.
NH:
Euro legislators agree book cooking deal.
NH:
nice – that should help the market
PM:
And more good news
PM:
*BA DROPS FUEL SURCHARGE AS MUCH AS 13 PNDS
*BRITISH AIRWAYS DROPS FUEL SURCHARGE BY 13 PNDS
*BRITISH AIRWAYS DROPS FUEL SURCHARGE
*BRITISH AIRWAYS DROPS FUEL SURCHARGE BY 13 PNDS
*BRITISH AIRWAYS DROPS FUEL SURCHARGE
PM:
A tellya people – the Crisis Is Over.
NH:
look now we have got a warning from State Street that profits will be better than expected
PM:
Q — sorry we had missed that. Well i had
NH:
PM:
Okay — i think the stream issue has just been fixed
NH:
*STATE STREET 3Q OPERATING EPS $1.24; ANALYST EST. $1.20
PM:
if in doubt refresh and close other AV windows
PM:
Quick ad for Stacy and Sam
PM:
Some things to be excited about today – like Sam and Stacy-Marie doing a ive Facebook event at 3pm today.
PM:
Gonna be talking about credit markets in general – and the Korean won in particular on the FT discussion board on facebook.
PM:
If that’s the right FB lingo.
PM:
Think you will find it here:
PM:
but you can go to that later on.
PM:
NH:
I just want to look at the market again
NH:
a lot of data coming out today
NH:
US PPI
NH:
and retail sales data
NH:
not forgetting results from JP Morgan and nine other S&P 500 companies
NH:
but what stands out for the moment is the performance of the mining sector
NH:
being smashed this morning
NH:
hammered in fact
NH:
average price fall is around 10%
PM:
(negative alpah — will see what we can do)
NH:
look at some of these moves
PM:
Jeepers
NH:
KAZ:LSE
Kazakhmys (KAZ:LSE): Last: 364.25, down 69 (-15.93%), High: 429.25, Low: 363.00, Volume: 1.31m
NH:
XTA:LSE
Xstrata (XTA:LSE): Last: 1,110, down 206 (-15.65%), High: 1,297, Low: 1,084, Volume: 6.80m
Vedanta Resources (VED:LSE): Last: 785.50, down 115 (-12.77%), High: 895.00, Low: 780.00, Volume: 1.18m
Anglo American (AAL:LSE): Last: 1,449, down 211 (-12.71%), High: 1,620, Low: 1,449, Volume: 5.45m
Antofagasta (ANTO:LSE): Last: 304.75, down 36.75 (-10.76%), High: 335.00, Low: 302.25, Volume: 2.34m
Eurasian Natural Resources Corp (ENRC:LSE): Last: 458.25, down 58.25 (-11.28%), High: 510.00, Low: 450.00, Volume: 544.69k
PM:
wipeout
PM:
global recession fears?
NH:
well, that’s playing a big part
NH:
but there are a couple of other reasons
NH:
now rumours flying around that
NH:
and reader beward this is RAW
RAW is market chatter – information that has not been formally tested through traditional journalistic channels (PRs etc). The story might be complete rubbish, but if we believe there is some substance to it we will say so. Either way, Reader Beware.
NH:
and I should add is being played down
NH:
that Glencore might be looking to sell its stake in Xstrata
PM:
goodness me
NH:
I know
NH:
and I as said this is very RAW
NH:
but the CDS spreads on Glencore have ballooned of late
NH:
and no one seems to have a reason why
NH:
the best any one can come up with is that they are rising because investors don’t like opaque companies at the moment
NH:
and Glencore certainly fits into that catergory
PM:
and Glencore certainly fits into that catergory 
NH:
so Glencore CDS currently trading around 700bps
PM:
700???????
NH:
that’s up 4 from yesterday
NH:
but, but
NH:
they were wider last week
NH:
775bps think they got out to
NH:
anyway, Glencore owns a 35% equity stake in Xstrata
NH:
now, aside from that little rumour
NH:
Rio Tinto has announced a Q3 operations review, that has a pretty cautious tone
PM:
really?
NH:
yup
NH:
and the company is being really explicit about a slowdown in China
NH:
which is odd given that there were trying to fight off a bid from BHP
PM:
perhaps they would not mind being taken over now
NH:
good point
NH:
anyway as a result of this new environment
NH:
Rio is reviewing the timeline” on its announcement of the first US$10 billion of divestments, previously slated for before the end of 2008 and the company is also reviewing near-term capex programmes.
PM:
reviewing cap-ex programs
PM:
looks like the super cycle could be dead
NH:
indeed
NH:
here’s a quick note from Michael Rawlinson at Liberum
NH:
on the Rio update
NH:
Third quarter operations review has cautious tone
Rio Tinto this morning released its operations review for the Q3’08 period.
Production figures are generally up on the previous period in key divisions
such as iron ore and aluminium, although copper was weaker largely due to
expected lower grades at Escondida.
Rio Tinto this morning released its operations review for the Q3’08 period.
Production figures are generally up on the previous period in key divisions
such as iron ore and aluminium, although copper was weaker largely due to
expected lower grades at Escondida.
NH:
In all, the release sends a cautious message with management recognising what is
a very changed macro outlook and the company is explicit about an economic
slowdown in China. Given this environment, Rio Tinto is now “reviewing its timeline” on its announcement of the first US$10 billion of divestments, previously slated for before the end of 2008 and the company is also reviewing near-term capex
programmes.
a very changed macro outlook and the company is explicit about an economic
slowdown in China. Given this environment, Rio Tinto is now “reviewing its timeline” on its announcement of the first US$10 billion of divestments, previously slated for before the end of 2008 and the company is also reviewing near-term capex
programmes.
NH:
Operating highlights
Iron ore (44% of 2008E EBITDA) Sequential QoQ production up 1% (+17% on
Q3’07; Hamersley +14%, Robe River -3% and +4% at IOC). Record quarterly
production was achieved on the ramp up of Yandicoogina and the Hope Downs
development and de-bottlenecking programs. Improvement on Q2 was despite a
major shutdown of a car dumper at Cape Lambert port for 3 weeks caused by
major fire at Apache in the Pilbara;
NH:
Copper (21% of 2008E EBITDA) mined production decreased on previous
quarter by -24% and down -7% compared with Q3 ’07. As expected, mined
copper grades recovered in the second quarter at KUC and Grasberg following
the disappointing first quarter. However copper mined at Escondida declined -
28% on Q3’07 due to expected decline in ore grades;
quarter by -24% and down -7% compared with Q3 ’07. As expected, mined
copper grades recovered in the second quarter at KUC and Grasberg following
the disappointing first quarter. However copper mined at Escondida declined -
28% on Q3’07 due to expected decline in ore grades;
NH:
Aluminium (19% of 2008E EBITDA) record YoY quarter reflecting the full
integration of Alcan, with aluminium production flat on 2Q08 but up an impressive
371% on 3Q 07. Bauxite was up 93% on Q307 and alumina was up 222%. Most
tellingly, whilst most of Rio’s operations are in the low end of the cost curve, it
states that in light of current aluminium market weakness it is reviewing
production rates and is considering curtailments at higher cost smelters;
integration of Alcan, with aluminium production flat on 2Q08 but up an impressive
371% on 3Q 07. Bauxite was up 93% on Q307 and alumina was up 222%. Most
tellingly, whilst most of Rio’s operations are in the low end of the cost curve, it
states that in light of current aluminium market weakness it is reviewing
production rates and is considering curtailments at higher cost smelters;
NH:
Energy (11% of 2008E EBITDA) a record quarter reflecting full recovery from
the impaired production of 2Q08 due to the severe weather conditions in
Queensland. Queensland hard coking coal was up 40% on 3Q07 when
constrained port conditions were experienced and 7% on 2Q08. Hunter Valley
semi-soft production increased 8% on 2Q07, however production was down -3%
on 2Q08 since longer NSW vessel queues reduced the ability to match
allocations. US coal production was up 13% on 3Q07 and up 14% on 2Q08
reflecting production expansion at operations and strong customer demand. A
modest capacity expansion is expected at Newcastle and Dalrymple Bay in 4Q08
and 2009 followed by a major expansion of coal shipping capacity in 2010;
the impaired production of 2Q08 due to the severe weather conditions in
Queensland. Queensland hard coking coal was up 40% on 3Q07 when
constrained port conditions were experienced and 7% on 2Q08. Hunter Valley
semi-soft production increased 8% on 2Q07, however production was down -3%
on 2Q08 since longer NSW vessel queues reduced the ability to match
allocations. US coal production was up 13% on 3Q07 and up 14% on 2Q08
reflecting production expansion at operations and strong customer demand. A
modest capacity expansion is expected at Newcastle and Dalrymple Bay in 4Q08
and 2009 followed by a major expansion of coal shipping capacity in 2010;
NH:
Other divisions (5% of 2008E EBITDA) diamond production at Argyle was -4%
on 3Q07 but was up 56% on 2Q08 due to re-accessing higher grade areas of the
pit. Variability in production rates are expected to continue as the open pit mine
makes its transition to an underground. Diamond production at Diavik was -26%
on 3Q07 but was up 56% on 2Q08 due to re-accessing higher grade areas of the
pit. Variability in production rates are expected to continue as the open pit mine
makes its transition to an underground. Diamond production at Diavik was -26%
NH:
and here’s some more comment from MF Global
NH:
Although the production numbers produced today are positive, question marks surrounding the divestment programme, China and debt should continue hold the stock back, unless we see a some action on the proposed BHP Billiton offer or the US$ starts to weaken again.
NH:
At an exchange ratio of 2.6x, the market is basically saying that this deal won’t happen. That said, we feel that BHP Billiton is still very much interested, while the combination now also makes more sense for the Rio Tinto shareholders and possibly even the management.
It is for this reason that the 30% upside to the exchange ratio should not be completely disregarded. Our BUY has to be seen as a relative call against BHP Billiton (Neutral).
NH:
With one of the highest debt exposures Rio Tinto also updated on its acquisition facilities, which in terms of maturities generally seem reasonable but still need action on the first part of the facility due within a year of US$15bn. Debt ratios so far look pretty solid, but can obviously change quickly depending on the changes in metal prices.
NH:
Using our below consensus numbers, the EBITDA net debt multiple at 1.4x 09E remains quite comfortable for now, albeit capex might come under scrutiny given the impact of lower commodity prices. On the back of that one could
expect that capex is going to be reduced in the near-term, which should help to reduce
debt and future production, which in turn should help support prices;
expect that capex is going to be reduced in the near-term, which should help to reduce
debt and future production, which in turn should help support prices;
NH:
Using our below consensus numbers, the EBITDA net debt multiple at 1.4x 09E remains quite comfortable for now, albeit capex might come under scrutiny given the impact of lower commodity prices. On the back of that one could
expect that capex is going to be reduced in the near-term, which should help to reduce
debt and future production, which in turn should help support prices;
expect that capex is going to be reduced in the near-term, which should help to reduce
debt and future production, which in turn should help support prices;
NH:
Having spoken to some of our
Chinese clients yesterday at the LME Dinner, it seems that they too remain bearish on the outlook in the short-term, but are looking for the positive effects of the government’s push/reforms to develop the countryside. In that sense they feel that a rebound into next year should be
possible; and
Chinese clients yesterday at the LME Dinner, it seems that they too remain bearish on the outlook in the short-term, but are looking for the positive effects of the government’s push/reforms to develop the countryside. In that sense they feel that a rebound into next year should be
possible; and
NH:
• A stronger US$, weakening global growth should put further pressure on commodity
prices, but eventually once China starts to recover into the 2H09, then we would not be surprised to see another spur in metal prices given the current state of supply coming on stream.
prices, but eventually once China starts to recover into the 2H09, then we would not be surprised to see another spur in metal prices given the current state of supply coming on stream.
In terms of the BHP Billiton offer, Rio Tinto obviously is now in a weaker position and it will be interesting to see how the management is going to play it from hereon out. The exchange ratio of 2.62 now offers upside of almost 30% for those investors who believe that this deal will happen.
NH:
bickie
Reminder to readers – if you arrived late and want to stop the dialogue ‘jumping’ as you catch up, hit the ‘pause auto-scrolling’ tab at the bottom right hand corner
NH:
PM:
Are people losing their jobs below?
PM:
certainly hope not.
NH:
plenty of my contacts are MIA now
PM:
I fyou are, get in touch — we must buy some lunch
NH:
lost quite a few in the past couple of weeks
NH:
and the punters are all laying low
PM:
Hmm
NH:
and there is one other thing on the miners
NH:
another sign of stress in the sector
NH:
Looks like Vedanta are set to pull a deal because of the financial crisis
NH:
was going to acquire the Arizona mining company for $2.6bn from bankruptcy
NH:
but that has been pulled
NH:
here’s quick summary from Merrill’s
NH:
According to Dow Jones news wires, Vedanta Resources Plc has told Asarco
LLC that it can’t close on its deal to buy the Arizona mining company for $2.6
billion and take it out of bankruptcy.
LLC that it can’t close on its deal to buy the Arizona mining company for $2.6
billion and take it out of bankruptcy.
According to the news service, at a court hearing Tuesday, lawyers for Asarco
and the Vedanta unit that agreed to buy Asarco said Vedanta couldn’t complete
the purchase under the current agreement due to the ongoing financial crisis and
the “collapse” of copper prices.
NH:
Vedanta have neither confirmed nor denied the news story. If it is true and if
Vedanta / Sterlite are able to effect a withdrawal without major financial penalty,
we would view this VERY positively for Vedanta.
Vedanta / Sterlite are able to effect a withdrawal without major financial penalty,
we would view this VERY positively for Vedanta.
As we have previously written, we felt that the purchase of Asarco’s high cost, US
copper assets was 1) A major departure from Vedanta’s strategy and core
competencies 2) NPV destructive for shareholders. The recent change in
economic outlook suggests even more that more high cost copper assets are not
an appropriate addition to Vedanta’s otherwise fairly high quality portfolio of
assets. Beyond that, with the recent collapse in both copper price and mining
valuations, the negotiated price is well above what such assets might reasonably
be expected to fetch in the current market environment, in our opinion.
Sterlite shares have traded down today in India.
NH:
We think this is more likely down
to an ongoing sector sell off (the Australian majors are down 5%). If it is in part
attributable to investors fearing that Sterlite doesn’t have the money to complete
this transaction, we think these fears are misplaced. Vedanta had net cash of
over US$2 billion in March 2008.
Maintain BUY on Vedanta, confirmation of the withdrawal from the Asarco
purchase could be a positive catalyst for shares in our opinion
to an ongoing sector sell off (the Australian majors are down 5%). If it is in part
attributable to investors fearing that Sterlite doesn’t have the money to complete
this transaction, we think these fears are misplaced. Vedanta had net cash of
over US$2 billion in March 2008.
Maintain BUY on Vedanta, confirmation of the withdrawal from the Asarco
purchase could be a positive catalyst for shares in our opinion
NH:
NH:
Woody we are only too happy to help out on the jobs front
NH:
in fact we helped one of fav banks analyst get a new job after he was made redundant
PM:
Yes, — drop us a line and we will pass on your details to people who might be hiring
PM:
No commission deal
NH:
no finders fee
NH:
in fact we will even buy lunch/drinks for the hurt
PM:
Quick gag
PM:
Tracy came up with this.
PM:
Open that in a separate window – give it a moment, takes a little while load.
PM:
But then you can have that open on one of your monitors as you read ML on the other.
PM:
Click on it with your mouse and you will see you can drop sand into a pile at the bottom.
PM:
Isn’t that relaxing??
PM:
And it’s utterlying addictive.
PM:
In fact, if you double click it wil continue pouring sand automatically – and you can even move your cursor to a new window – and it will still pour sand for a while.
PM:
It’s lovely
NH:
that is
NH:
really addicitve
PM:
How old are we?
PM:
NH:
PM:
NH:
Right we have avoided for long enough
NH:
the banks
PM:
Had to smile this morning – reading a UBS note on the US banks.
PM:
Some stuff about reverse buyback programmes.
NH:
Reverse buyback – what’s that , a rights issue?
PM:
Yeah!
PM:
Reverse buybacks.
NH:
Suppose they call buybacks and special dividends, reverse cash calls.
PM:
Yeah, but this is a specific process – reverse buybacks.
PM:
Here’s a par from UBS
PM:
With bank stocks (and financials overall) rallying in recent days, there may be
an opportunity to issue common equity. In mid-September Zions was successful
in raising $250m of common stock (at or near market prices vs. traditional
capital raises earlier this year that were at meaningful discounts), in a program
that is akin to a reverse buyback. In the program, the broker/dealer sells new
shares of the company’s stock as buy orders come through their trading desk.
an opportunity to issue common equity. In mid-September Zions was successful
in raising $250m of common stock (at or near market prices vs. traditional
capital raises earlier this year that were at meaningful discounts), in a program
that is akin to a reverse buyback. In the program, the broker/dealer sells new
shares of the company’s stock as buy orders come through their trading desk.
NH:
So rather than buying shares off other shareholders, those who want to invest simply buy newly minted stock.
PM:
Yep.
NH:
But doesn’t that just put a cap on the share price – like forever??
PM:
Well I guess you just do it for a set time while raising your target amount.
NH:
Sounds a bit new-fangled to me. Needlessly so. If you need to do a cash call, do a cash call. Then people will know where they stand.
NH:
And you’d create a two tiered market.
PM:
What do you mean?
NH:
Well, say you decide to buy some shares in Goldman Sachs. And Warren Buffett is trying to sell some of his.
PM:
Yes, and?
NH:
Well you say, no no Warren – I’m not buying your stock at that price, cos I can get crisp brand new share certificates if I go to the broker who is selling them on behalf of GS.
PM:
PM:
So Buffett’s tarnished stock, which has been thru a hedge backwards, will trade at a discount.
PM:
So we’d end up with a system where on the bulletin board you’d have:
PM:
10,000 GS vgc, some curling at the edges – $112.90 apiece
PM:
SAVING $10 A SHARE!
NH:
Anyway – is there anything useful in that note?
PM:
Er, here’s the summary
PM:
A Bailout of the Bailout; Now What For
Banks, Brokers, and Trust Banks?
Banks, Brokers, and Trust Banks?