FT Alphaville » Markets live transcript 23 Oct 2009

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Markets live transcript 23 Oct 2009

Posted by Neil Hume on Oct 23 11:02.

Markets live chat transcript for the chat ending at 12:09 on 23 Oct 2009. Participants in this chat were: Neil Hume, FT (NH) Miles Johnson, FT (MJ)

NH:

hey

NH:

It’s 11.03am

NH:

which means…

NH:

it’s time for Markets Live

NH:

FT Alphaville’s daily markets chat

NH:

Miles is here

NH:

and reeling from this morning’s GDP number

MJ:

Morning all

MJ:

what a miss

NH:

the recession lives on

NH:

a fitting tribute for ML’s third birthday

MJ:

consensus was for a 0.2% rise

MJ:

and we got a 0.4% fall

MJ:

incredible

MJ:

time to pour more scorn on economists

NH:

indeed

NH:

before we hear what they have to say

NH:

let’s check the market reaction

MJ:

11:05AM

MJ:

sterling hit hard on the expectation of further QE

MJ:

Cable is $1.642

MJ:

A euro buys 91.6p

MJ:

And the 10-year gilt yeild now sits at 3.167

NH:

and the equity market?

MJ:

…

MJ:

is up

MJ:

Up 65 points at 5271

NH:

hmmmm

NH:

I guess the theory here is

NH:

more QE

NH:

means more asset price targeting

NH:

and more stock market gains

11:08AM

MJ:

Anyway – enough doom and gloom for the moment

MJ:

It is the ML 3rd birthday today

NH:

thanks Shrewdette

NH:

had completely forgotten that

NH:

although I do remember the first session

NH:

if you think ML is currently a shambles

NH:

you should have logged on then

NH:

we ran out of content by 30 mins

MJ:

Now you are a fighting fit ML machine Neil

NH:

indeed

NH:

can do more than an hour

NH:

I think about 12 people logged on

NH:

most of them flaks

NH:

to see Murph’s new venture

NH:

flop

NH:

but amazingly it didn’t

NH:

I guess we should have had some celebratory drinks

NH:

but that will have to wait

NH:

until AV Xmas drinks

NH:

at a time and venue to be confirmed

NH:

not sure I can promise a free bar, a la Webby’s II

MJ:

Monkey has kindly dug out the link to the first ever session

MJ:

Blast from the past: http://ftalphaville.ft.com/blog/2006/10/23/365/markets-live-7/

NH:

and look at this

NH:

in that week

NH:

the FTSE 10 was at 6,514

NH:

actually

NH:

that’s rubbish

NH:

that was a year ago

MJ:

Those were the days eh?

NH:

indeed

NH:

right let’s back to the GDP data

NH:

and the reaction

11:12AM

NH:

here’s Merrill

NH:

The UK economy contracted another 0.4% in 09Q3: notably below market
expectations of a small 0.2% gain, and only a slight improvement from the 0.6%
contraction in Q2. The UK economy has now been in recession for 6 quarters,
over which period GDP has fallen nearly 6%: substantially worse than the circa
4.8% decline in the early-80s recession and the 2.5% decline in the early-90s
recession.

NH:

Given the discrepancies between this data and other indicators, the MPC are
likely to treat it with more scepticism than usual. But still, a 0.4% decline is much
weaker than their August Inflation Report expectations of a small gain. As such,
this data raises the risk of a further expansion of QE in November substantially.

NH:

Merrill betting on more GDP

NH:

Just awful really. A massive flop.

MJ:

Certainly makes this sort of thing we were seeing in September look rather foolhardy

MJ:

Economists declared the recession over today as official data showed mothballed factories springing back to life and rising optimism in the City stoked a new merger spree.

The National Institute for Economic and Social Research thinktank (NIESR) calculated that the recession is likely to have ended in May. As consumers are buoyed by stabilising house prices and return to the shops, many analysts agree the economy should now record positive growth in the third quarter of the year – the official definition of the end of recession.

NH:

Economists eh?

MJ:

This morning does have a bit of the feel of a losing side’s election night party

MJ:

the limp puff of deflating “Yay, the UK is out of recession” balloons

MJ:

and hungover economists mournfully blowing on party whistles.

NH:

Right

NH:

what do the economist have to say?

NH:

here’s what Darling thinks

NH:

RTRS-UK’S DARLING-ALWAYS BEEN CLEAR THAT GROWTH WILL RETURN AT TURN OF YEAR AS FORECAST IN BUDGET
10:03 23Oct09 RTRS-UK’S DARLING-WE REMAIN CAUTIOUS AS RESULT OF HIGH DEGREE OF ECONOMIC UNCERTAINTY
10:04 23Oct09 RTRS-UK’S DARLING-ALL THE MORE REASON TO CONTINUE ACTION GOVT IS TAKING, TO STOP NOW WOULD BE MADNESS
10:11 23Oct09 RTRS-UK’s Darling says cautious, sticks to growth forecast

MJ:

This is of political significance of course

NH:

go on

MJ:

The whole Brown gameplan appears predicated on the UK economy coming out of recession before the election

NH:

Darling is still a believer though

MJ:

Will really mess things up if it doesnt

NH:

I think they are doomed whatever happens

NH:

although in the wake of these figures

NH:

not sure Obsourne would be wise to reign in QE so quickly

11:17AM

NH:

Have you got any snap comment on the GDP numbers?

MJ:

Here is a bit from Howard Archer at IHS Global Insight

MJ:

The third-quarter GDP data are a real shocker and desperately disappointing, showing that the UK economy remained in recession for a sixth successive quarter. It is impossible even to take comfort from the fact that the rate of contraction moderated to 0.4% quarter-on-quarter, especially as the Eurozone and the US seem highly likely to have grown in the third quarter. While the sharp drop in industrial production in August and only flat retail sales in September had raised the downside risks to the GDP data, contraction of 0.4% quarter-on-quarter had been off the radar.

MJ:

Worryingly, the contraction in the economy continued to be widespread on the output side in the third quarter. The dominant services sector contracted by 0.2% quarter-on-quarter, while there were still relatively large drops in industrial production (down 0.7%) and construction (1.1%).

On the expenditure side, it is highly likely that there was further sharp contraction in business investment in the third quarter, while stocks could have been run down at an increased rate. Consumer spending may well have contracted modestly as reduced spending on services outweighed a 0.9% quarter-on-quarter increase in retail sales and higher car sales resulting from the scrappage scheme. However, net trade was probably positive in the third quarter as exports rose more than imports while government spending and investment also very likely supported economic activity.

MJ:

Not nice. But he does end on a slightly more upbeat note

MJ:

We suspect that economy will return to growth in the fourth quarter, helped by the car scrappage scheme and some spending being brought forward ahead of the Value-Added Tax hike in January. Stock developments should also be more positive, while there are signs that exports are now starting to benefit more from the competitive pound and some improvement in conditions in key overseas markets.

NH:

Hmmmm

NH:

And to rub it in, the Eurozone PMIs were actually rather good this morning weren’t they?

MJ:

Yup. Smacked the consensus forecast out of the park

MJ:

October eurozone PMI came in at 52.2, against a 51.4 forecast.

NH:

Over 50 of course separates expansion from contraction

MJ:

Eurozone Services PMI was at the highest level in 20 months, while manufacturing hit an 18-month high

NH:

So why was it so good?

NH:

I thought the euro

NH:

would be hitting their manufacturing businesses hard

MJ:

Well, maybe that will take another quarter to show up

MJ:

the French put in a very strong showing

MJ:

But not many economists I have read are seeing this as sustainable

MJ:

Here is Unicredit

MJ:

Summing up, these are the main messages from today’s release. Positive news: 1) For the time being, higher manufacturing output doesn’t seem to be leading to a significant re-stocking. 2) Prices charged remain very tame, showing no signs of underlying inflation pressures. On a less positive note: 1) The bulk of the eurozone improvement is in France, with other countries lagging well behind. We think this is not sustainable and don’t see the adjustment occurring through other countries picking up to the French level. 2) Employment is not yet responding to economic activity – the indicators are consistent with ongoing marked job shedding across sectors. Therefore, the upswing continues to remain fragile.
Bottom line: we acknowledge that recent data point to a continuation of the recovery trend, but remain cautious on the growth outlook, and so will the ECB.

MJ:

And here is JP Morgan’s take

MJ:

With the third-quarter GDP report (due to be published November 13) likely to show a very solid 3% annualized increase in areawide GDP, it is worth considering how the story is tracking. Our sense is: So far, so good. But, one single quarter of strength is unlikely to convince everyone that growth will be sustained at a solid pace. Many commentators, including the ECB, expect the growth profile to be bumpy, with periods of strength followed by periods of weakness. There is nothing in the data today that tells us for sure where growth will be in six to 12 months. On the one hand, the developments needed for our story to play out—a recovery in global trade, improved financial conditions and confidence, and some healing in the functioning of credit markets—seem to be occurring. But, on the other hand, plenty of changes still need to happen to confirm our story. While overall growth is unlikely to accelerate further, some indicators do need to move up significantly. For example, the composite PMI needs to increase from the October reading of 53.0 to the mid-50s to be consistent with steady growth in a 2.5% to 3.0% range.

NH:

(indeed Taxloss. Eyeing a trip to that with my sabbatical next year )

NH:

thanks for all that Miles

NH:

Europeans laughing at the UK

NH:

BNP on TV

NH:

god

11:21AM

NH:

Okay

NH:

some breaking sporting news

NH:

looks like the British GP

NH:

could be heading back to Silverstone

NH:

Donington Ventures Leisure Limited has confirmed that a bond for £135 million to cover the cost of the F1 redevelopment at Donington Park has been unsuccessful. Despite higher than expected levels of interest and very positive early indications, the bond – which was launched with Citi Group last week – has failed to secure enough subscription ahead of today’s deadline. The news dealt an unexpected blow to staff and management at the circuit, who still have a deadline of 12pm on Monday 26 October to remedy a breach of contract with Formula 1 Rights Holder Bernie Ecclestone, in order to keep any plans for retaining the existing 17-year Formula 1 contract alive.
“Information regarding the circuit’s future plans is not yet available, however the major focus is on providing security for the Leicestershire venue and all related parties, including staff and suppliers

NH:

I think the coupon on the bond was upwards of 12%

NH:

and still no takers

NH:

I wonder what Bernie will do next

MJ:

I do wonder

11:23AM

MJ:

Right Neil

MJ:

Should we move onto some stock specific stuff?

NH:

Good idea

NH:

Lloyds

NH:

looking very squeezy

NH:

heading into the weekend

Lloyds Banking Group (LLOY:LSE): Last: 97.64, up 2.84 (+3.00%), High: 100.00, Low: 94.65, Volume: 69.36m

NH:

what’s the latest Miles

NH:

the latest 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:

that is

MJ:

Well, there is this theory going round this morning

MJ:

that UKFI will take the rights issue as an opportunity to reduce its stake

NH:

hmmm

NH:

so how does that work?

NH:

Lloyds lines up buyers?

NH:

the Qataris

NH:

other SWF’s

MJ:

It isn’t clear

MJ:

But if you were short right now, and alot of people are, then you might be feeling a bit vulnerable

NH:

actually

NH:

on the Qatar stuff

NH:

fair to say

NH:

a few people are sceptical

NH:

have a look at this

NH:

In the 80′s, there was the KIO. In the 90′s, there was ADIA. At the Millenium, out came Dubai, and now we have the Qataris. What do they have in common, a couple of spectacular deals & then 2 subsequent years of the City speculating what they’ll do next…. – And the answer is, absolutely nothing. The reason, Sharia Law and the nature of Mid East investing. 1) Sovereign Wealth does not want to own outright except for large influential stakes in distressed Co’s eg BARC, & Al Waleed in CITI, 2) Critically, Sharia allows bank stakes, but not non-Sharia bank ownership, & conversely outright property ownership, but not outright property developers. Hence, the spec, in SBRY, BLND, PSN, is utterly rubbish & the LLOY rumour will only be accurate if th Govt fails to take its Rights. – In short, having made 6x on BARC, the last thing they’re going to do is what the City expects, ie, to spend it….

MJ:

Well that is a view

NH:

indeed

NH:

but I suspect

NH:

we will be seeing quite a bit of speculation in the Sunday press

NH:

on this cash call

11:27AM

MJ:

So, where next?

NH:

well

NH:

BSKyB

NH:

have had numbers out

NH:

they were a good market early on

NH:

as the UK hunkers

NH:

stays at home

NH:

and watches TV as the recession continues

NH:

where are they trading now Miles?

MJ:

Shares are up 3.5p to 563p

MJ:

So not a massive jump then. Well off the top – they were doing very nicely right after the numbers came out

NH:

yep

NH:

just been looking over the numbers

NH:

they look to be good but bang in line

NH:

and there is one minor negative

NH:

looks like the churn rate

NH:

has jumped a bit more than expected

NH:

Miles

NH:

do we have any comment on BSkyB?

MJ:

Coming right up

NH:

(Chopper Bear. We didn’t think you were a student. We had you down as a market pro!)

NH:

fire away Miles

MJ:

Here is Caz

MJ:

BSkyB – [BSY.L BSY LN] 560p Stock In-line Sector Neutral
Q1 results Solid financial performance despite excellent volume growth
Sky has just announced its Q1 results. A conference call follow at 8.30 a.m UK time, (Dial-in +44 (0) 203 003 2666) and a separate conference call for US analysts and investors at 10.00 a.m. (EST). The calls will be webcast live at http://www.sky.com/corporate. Sky’s AGM is also held today.
Summary
Solid results, top-end of consensus in terms of revenues and slightly above for operating profits despite very strong volume growth once again. Adjusting for HD volumes might suggest around a 5% underlying beat at the operating profit level.
Revenues and operating profits 1% and 2% above consensus at £1,380m (+10%) and £198m (+9%). EPS of 7.0p (+15%), 8% above consensus. Cash flow weak, although mainly phasing of working capital.

MJ:

Operating metrics: Net subscriber growth of 94k (+8% year on year) above expectations of 86k. Gross adds also up 9% following an increase in churn to 11.3%. Growth in Sky+ and Sky HD very strong with 287k HD adds against our estimate of 200k and consensus 237k. ARPU also strong at £469 (+9%). Macro impact perhaps showing within the higher churn figure but other metrics very strong.
Outlook: No new commentary, more of the same from Sky. Estimate changes will depend on volume assumptions but long term value of the business continues to grow.

MJ:

Sky trades on 16x PER for calendar 2010E with a dividend yield of 3.4%. Whilst full, this rating reflects CAGRs of 7% for revenue, 17% for operating profits and 21% for EPS to June 2012E. Growth reflects the scope to increase penetration of HD, broadband and telephony across Sky’s customer base. In addition, investments in HD and broadband have reduced margins (15% in 2009) with scope therefore for improvement as the underlying products achieve critical mass.
We continue to believe in the long-term strength of Sky and have much confidence in management’s execution capability and vision. However, the ongoing dispute with Ofcom regarding wholesaling of premium content and the emerging threat of broadband content being increasingly available on the television reduce the scope for a re-rating, in our view. Ofcom is expected to publish a final regulatory statement in early 2010 with an appeal process then likely. It remains uncertain whether Ofcom’s proposals would be implemented during any such process

MJ:

And here is Numis

MJ:

BSkyB has reported a strong operational and financial performance in Q1, ahead of our forecasts on almost all metrics. Net DTH additions were 94k (NSe 83k), with continued robust growth in HD. In our preview note, we highlighted that our 220k forecast was likely to be conservative, and so it proved with additions of 287k. Churn emerged at 11.3%, fractionally higher than NSe 11.0%, reflecting the price rise, viewing card swap out and tighter payment terms. Revenues rose +10%, while EBITA was £198m (NSe £180m, consensus £189m). This EBITA outturn is impressive given the stronger than NSe HD additions, which led to c.£16m more SAC than our forecast. PBT of £180m was ahead of NSe £150m, though benefited from a £9m fair value gain. We are not changing our FY estimates at this early stage, but view them as firmly underpinned and see scope for upgrades as we progress through fiscal 2010. BSkyB remains one of our key picks, driven by our conviction that the group is now fully invested and its strong operational momentum will increasingly be reflected in its medium-term financial performance.

NH:

thanks for that

11:32AM

NH:

(Chopper, youre profile!)

NH:

anyway

NH:

we are 30mins in to our 3rd birthday edition

NH:

and we haven’t mentioned a certain oil company

MJ:

No Neil! Please, I can’t take anymore of that company for this week

NH:

OK, that’s fair enough

NH:

but there is another small cap oil company

NH:

we must look at

NH:

because it serves as a good reminder of what can go wrong

NH:

particularly when they are priced for big discoveries

11:34AM

MJ:

So, whats this company then?

NH:

Hardy Oil & Gas

NH:

and there are some serious burnt fingers in this today

MJ:

NH:

punters had really high hopes for this company

NH:

and the well D9

NH:

the reason

NH:

is that it was next door

NH:

to a big gas find Reliance had made in India

NH:

everyone assumed

NH:

the find would stretch on to the Hardy licence

MJ:

And?

NH:

it didn’t

NH:

D9 plugged and abandoned

MJ:

Do you have the statement to hand Neil?

NH:

Yes

NH:

The exploratory well KGD-A1 drilled to a total depth of 4,875 m TVDRT (4,861 m subsea) to explore the Middle and Lower Miocene targets, will be plugged and abandoned.

While encountering some background gas while drilling, the well encountered poor reservoir sands in both the Middle and Lower Miocene target levels. The data obtained from this first exploration parametric well is very significant and will be integrated with the existing geological model to improve the prospectivity of the block before drilling subsequent wells. The first phase of the D9 exploration licence provides for the drilling of a further three exploration wells in the block.

Hardy, through its wholly owned subsidiary Hardy Exploration & Production (India) Inc., holds a 10 per cent participating interest in the D9 block which is located in the Krishna Godavari basin on the East Coast of India covering an area of approximately 11,605 km2. Reliance Industries Limited is the operator and holds a 90 per cent participating interest in the block.

NH:

Now

NH:

there is no this can be spun as good news

NH:

and I am not surprised the stock is off 35%

NH:

it is a disaster

NH:

and also a reminder of what can go wrong

NH:

when oil stocks are priced for drilling success

MJ:

Yup getting tonked

MJ:

Down 191p at 355p

MJ:

You make an intersting point – this should be taken as a warning

MJ:

NH:

Hardy was valued at £325m last night

NH:

so it was no minnow

MJ:

A dangerous game punting around in these types of companies

NH:

Right I have a bit of comment on Hardy

NH:

from their house broker

NH:

Arden

NH:

Conclusion: Hard to see this as anything but a disappointment for Hardy, following the wait to spud the first D9 well – and is being reflected in the share price this morning. However, for us the seismic and read-across potential for D9 remains – and remember that this was just the first of a planned four well programme on the block.

NH:

What has happened? Hardy has announced that the first well on the D9 block has now been plugged and abandoned, effectively as a dry well, having reached the 4,875m target level.
 Discussion with the company suggests that the expected gas-bearing sands were just not present at the key Miocene and Lower Miocene levels (which were the main targets for the well), despite gas shows whilst drilling.

NH:

We would expect Reliance to be able to use data from this first well in the planning of the next one (which could now be in late 2009, allowing for a suitable period of analysis). In our opinion, the seismic evidence remains positive with respect to the hydrocarbon potential of D9, as does the read-across from D6.
 In a wider sense – and, as we have commented on before – we would watch for D3 drilling news in the next few months, given the well requirements of that block, with the potential to provide positive newsflow towards the end of the year.
 Our base NAV remains at 860p, to leave the stock at a 57% discount, following this morning’s 33% decline from yesterday’s closing levels

MJ:

NAV at 860? Say what?

NH:

yeah

NH:

that’s a long way off now

NH:

a long way

11:41AM

NH:

Moving on

NH:

and we still haven’t mentioned that company

NH:

Miles

NH:

is there anything else you would like to look at?

MJ:

Well I was having a look at Galleon’s returns this morning

MJ:

Pragmatic capitalist blog got hold of them

MJ:

http://pragcap.com/how-long-was-galleon-trading-on-insider-information

NH:

amazing stats

NH:

so consistent

NH:

and such strong returns

MJ:

Well – some of the years really do jump out

MJ:

Like in ’99 when Raj and the gang’s Diversified Fund returned 93.2 per cent

NH:

pretty good

NH:

but that was at the height of the dot.comedy bubble

NH:

when the Nasdaq did what?

MJ:

Exactly – Nasdaq made over 80 per cent that year

MJ:

So people shouldn’t jump instantly to conclusions

MJ:

I have done a post on this here: http://ftalphaville.ft.com/blog/2009/10/23/79381/a-closer-look-at-galleons-returns/

NH:

but your point is

NH:

that the fund was so big

NH:

that it could not be all down to insider trading

NH:

because if it was

NH:

the authorities would have been alerted years ago

MJ:

Indeed – when you have a portfolio made up of billlions, it is pretty difficult to manage it based only on that sort of trading

MJ:

You are simply too big

11:47AM

NH:

Okay

NH:

Tracy has just sent an interesting email over

NH:

JPM

NH:

predicting an extra £50bn of QE in Nov

NH:

following today’s disasterous GDP figures

NH:

Our forecast has anticipated a further £25bn of QE, and a change to reserve remuneration, in November even as 3Q GDP returned to marginal growth. Given this morning’s news, we are revising that to anticipate a £50bn extension alongside reserve remuneration changes. The MPC was already concerned that the prospective recovery in output would be insufficient to begin to absorb slack and prevent an inflation undershoot: those concerns will be heightened by this morning’s data, even given the potential for upward revision (as best as we can tell, the MPC had anticipated an 0.3% q/q sa gain in 3Q GDP).

NH:

go FTSE

NH:

MJ:

11:48AM

NH:

Right

NH:

a quick reader request

NH:

if anyone subscribes to T1PS.com

NH:

and they see Evil Knievil’s attack on Earthport

NH:

could they mail it or post on the right pls

NH:

stock is weak this morning

NH:

and I would like to know what Evil makes of the BS

Earthport (EPO:LSE): Last: 29.00, down 1.5 (-4.92%), High: 29.75, Low: 28.50, Volume: 323.07k

MJ:

That would be interesting to see

NH:

also interesting

NH:

is that note on property out of MOST today

MJ:

Entitled

MJ:

Property: Why Gearing Has to Come Down Long-Term

MJ:

Property: Why Gearing Has to Come Down Long-Term
Morgan Stanley & Co. International plc
Bart.Gysens@morganstanley.com, Christopher.Fremantle, Bianca.Riemer
It’s been all about balance sheet gearing. During the recent upswing and subsequent
correction, investors and analysts have focused a lot on balance gearing.
But don’t forget P&L gearing. Despite the low interest rate environment, average interest
cover for large quoted properties is at the low end of the historical range (around 2x), with
companies having historically high Net Debt/EBITDA multiples (close to 10x on average).
Pressure to gear down when interest rates rise. We think interest cover concerns will force
property companies to gear down when interest rates rise, everything else being equal.
Not an immediate issue. Admittedly, it could take time before interest rates rise in a meaningful
way.

MJ:

In addition, it will most definitely take even more time before such a rise feeds through to
companies’ cost of debt, particularly in the UK where debt duration tends to be long.
Capital structure is a strategic decision. Recent events have showed that it can be
challenging to gear down quickly. Therefore, we think property company managements are
currently thinking about their optimal capital structure for the medium to long term.
More equity offering to come, particularly in continental Europe. As a result, we anticipate
more equity raisings, particularly in continental Europe where many property companies remain

NH:

(Joe

)

NH:

thanks for that Miles

11:51AM

NH:

Getting a few emails coming on Next

NH:

what are the doing Miles?

MJ:

Up 63p at 1900p

NH:

hmmmm

NH:

that must be its highest level since when?

MJ:

September ’07 from what I can see

NH:

strange. looks like a few bears might have been burnt in this

NH:

a few people were shorting them after Philip Green’s gloomy comments on the UK high street yesterday

NH:

obviously not working

NH:

and Chopper Bear

NH:

one problem Earthport has

NH:

it’s burning around £500,000 a month

NH:

and they have £832,000 in the bank

NH:

and a £1m loan from a party they won’t identify

NH:

in fact they point blank refuse to comment on

NH:

they also won’t say what it is secured against

NH:

personally I think shareholders have a right to know about that

MJ:

Silence always generates suspicion

11:55AM

NH:

Okay

NH:

a couple of things to round up on

NH:

Lorcan was looking for something on the mining company we can’t spell or pronounce

NH:

apparently it could be FTSE 100 bound

MJ:

says who?

NH:

Liberum

NH:

Petropavlosk

NH:

POG a remote outsider for the FTSE 100 by Christmas?

NH:

Yesterday POG made a preliminary application for a blocklisting of 10.9 million new shares, the application was made in respect of a potential imminent conversion of POG’s US$140m convertible bond. The bond matures in August 2010 and converts above £7.24/shr into 11.1 million shares ie: 6.3% dilutive. However the convertible automatically converts if POG’s volume weighted share prices trades above £10.86/shr for 20 consecutive days; it has now traded above £10.86/shr for 11 consecutive days. The earliest the US$140m bond could convert is Wednesday 4 November, whereby POG would become a debt free company with US$71m in cash.

NH:

We note this technical situation with great interest. The top 60% holders of the convertible are hedge funds, which in our view is bullish for POG’s share price. As is typical ahead of a bond conversion, we expect these hedge funds will by back the POG stock which they delta hedged at the time of issue (ie: the funds will unwind the long convertible, short the equity trade). With the convert adding c.6.5% to the market cap of POG, we think POG’s market cap has c.7% further to go before it becomes a contender for the FTSE 100 in the mid December re-weightings; Bunzl plc is currently ranked 91st with a market cap of £2.18bn vs POG’s £1.91bn (£2.03bn pro forma for convertible). We expect the conversion will drive POG’s share price higher plus we would expect a investors to revisit the company as it becomes debt free. POG may not make it to the FTSE 100 by Christmas, but looking down the list of shareholders of London’s gold producers which are predominantly non-UK, with Randgold and Fresnillo already there and POG on the brink, we believe UK long only institutions that have ignored the precious metals sector till now had better start sharpening their pencils.

NH:

interesting angle that

Petropavlovsk (POG:LSE): Last: 1,129, up 14 (+1.26%), High: 1,144, Low: 1,124, Volume: 300.24k

NH:

and there was also a request for some comment on the Q3 figures from Brit

NH:

the new sponsor of the England cricket team

NH:

and the Oval

NH:

and here is some

NH:

from KBC Peel Hunt

NH:

Brit’s Q3 IMS has largely met our expectations, the exception
being investment returns which were boosted by strong mark-tomarket
gains. Nevertheless, the investment return achieved will be
unsustainable into 2010 with spread compression having largely
run its course in the corporate bond portfolio. Concerns over the
extent of growth in the UK commercial lines business and the
capacity for this to come back and bite Brit in future periods
remain and we would continue to recommend a switch to Beazley

NH:

220p Price Target. Reflecting an increased Return on Net Tangible Assets
(RoNTA) of 10.2% in 2009E, our cross-cycle RoNTA increases to 11.7%
(previously 11.0%), suggesting a valuation multiple of 0.85x. Combined with a
revised NTA of 259p, our new price target is 220p, implying 3% upside. With the
stock trading in line with our fair value target we would recommend a switch to
Beazley where we view the intermediate prospects to be much brighter. Beazley
also offers similar yield attractions (6.8% vs. 7.2% for Brit).

NH:

and here’s RBS

NH:

Brit released a broadly positive 3Q IMS (to 30/9) and, as we expected, flagged the boost to
FY09 from strong investment returns and no major catastrophe losses (to date). It also refers
to ongoing rate increases in the UK which it needs to drive the shares forward.

NH:

The UK market remains competitive no real turn before 2011?
Having spent time an effort building its UK SME division, Brit needs rates to harden to show whether
the wait was worth it. However, the UK remains competitive and Brit is only seeing slight rate
increases to date, albeit it expects this to continue into 2010. We think it could easily be another 12
months away and see this IMS as underpinning the shares, rather than driving a rerating.

NH:

hope all that helps

MJ:

Right – we should call things to close

NH:

yes we should

NH:

lots to do this afternoon

NH:

and we are seriously understaffed

NH:

Izy off

NH:

Stacy off

NH:

Miles overslept today

NH:

Murph is ill

NH:

I have a column to do

NH:

so it will Tracy.Alloway.com this afternoon

MJ:

Actually – Tracy has to leave early to go to the bank

MJ:

So we will be relying on user generated content

NH:

and of course

NH:

we are moving

MJ:

Ah yes

NH:

not papers

NH:

to the other side of the building

NH:

being integrated into markets

MJ:

We lose our lovely view of Southwark Bridge

NH:

we currently sit between FT.com

NH:

and their production desk

MJ:

Might be a bit of a squish – but nearer the main news desk

NH:

that’s true

NH:

right we must go

NH:

no winning bid for Tracy’s squid yet

NH:

not sure what to do

NH:

whether to open a sweatshop

NH:

and crank loads out for Xmas

MJ:

She would have to get cracing on them now – such would be the demand

MJ:

Orders flooding in

NH:

they are

12:04PM

NH:

Okay

NH:

before I sign off

NH:

someone asking for some comment on Sylavania Resources

NH:

who saw its merger unexpectedly end this morning

NH:

here’s Investec

NH:

Sylvania has announced that the merger with Ruukki has been terminated.
The reason given is “difficulties experienced with the implementation of the
merger”, but no further details are disclosed. Today’s news is likely to have a
negative affect on Sylvania’s share price. However, our 84p target price and
Buy rating are based on Sylvania’s pre-merger tailings reprocessing business
model, so therefore our numbers remain unchanged, despite today’s news.

NH:

The only reason given for the merger falling apart is “difficulties with the
implementation of the merger”. It is perhaps possible that the companies were
having trouble gaining support from major shareholders. We had received
feedback from investors that the business model of the merged company was
complicated and hard to value. However, we stress that we have no particular
insight into why the merger has been terminated.

NH:

Our forecasts and target price for Sylvania remain unchanged, because we had
not priced in the Ruukki merger. However, the negative perception of today’s
news may drive near-term share price weakness.
Our 84p target price is determined using our risk-adjusted NPV estimate and
18.75x one-year forward earnings. The earnings multiple is a 25% discount to
the multiple we use for Lonmin.

NH:

and here’s Ambrian

NH:

on the same topic

NH:

Comment
In the long term this could give Sylvania access to a DC arc furnace in a quicker and less complicated fashion than the originally proposed merger. The merger with Ruukki would have seen Sylvania shareholders become part of a metals and wood processing firm listed in a different country, with an opaque timeline to a potential London re-listing. We feel that this outcome will maintain Sylvania shareholders’ exposure to a pure-play platinum equity (rather than diluting with wood and ferrochrome).
However, in the short term the news is likely to put negative pressure on Sylvania’s share price, which could be exacerbated by arbitrage players exiting (Sylvania-Ruukki arbitrage was 37% on the basis of the now terminated merger terms).
Give our long-term view, there could be an opportunity to buy Sylvania shares in price dips, although there are clearly unknowns about the timing and structure of any potential deal with Ruukki.
With multiple development projects potentially providing a solid production profile, and US$26m cash at June 2009, Sylvania represents good equity exposure to the platinum market, with low cost, cash-generative operations despite a strong rand/US dollar rate.
We expect operations to improve next year as Samancor Chrome, which provides much of Sylvania’s feedstock, progressively increases production from its chrome mines in 2010.

NH:

Following this announcement, we change our valuation from that of one that follows the implied bid value of the Ruukki merger to our previous operations-based DCF valuation. The NAV that this target is based on was generated by a 0.8x NPV for dump processing operations in development and a 1x NPV for all dump processing projects currently in operation, plus cash at face value and nominal values for SA Metals and Great Australian Resources based on their acquisition prices.
We have also adjusted our LT platinum price from US$1,200/oz to US$1,450/oz in 2012 onwards, which we now feel is a figure that should fairly reflect the marginal cost of production on an industry-wide basis. We thus change our target price for the company from 80p (implied bid value on 31 July 2009) to 70p (new operations-based DCF valuation) and retain our BUY recommendation.

12:05PM

NH:

Right

NH:

one final thing AV Xmas drinks

NH:

open to suggestions for a venue and date

NH:

the team here

NH:

will be certainly having drinks one evening

NH:

and it would be good to see a few faces

MJ:

It would

MJ:

Have a good weekend everyone

NH:

Xmas 2009 MOnkey

MJ:

and thanks for the comments

MJ:

Bye

NH:

cya

NH:

have a good weekend

12:07PM

NH:

and one more thing

NH:

Richard Rose at Oriel

NH:

has just published on Hardy Oil & Gas

NH:

worth posting

NH:

First D9 well unsuccessful: Hardy announced this morning that the first exploration well on the D9 block in India has been plugged and abandoned. The well encountered some background gas and poor quality sands in the primary Middle and Lower Miocene targets. The result was a surprise as the well appeared to be highly prospective with positive AVO and CSEM responses, and good correlations across to the successes in the D6 block. Reliance (and Hardy) is now integrating the well results into the geologic model to re-evaluate the remaining prospectivity on the block.
Potential impact on D9 prospectivity: The A1 well location was on the Central Anticline and the failure to find either significant amounts of gas or high reservoir quality sands is likely to significantly increase the risks associated with the other prospects on the Central Anticline and also the other Middle and Lower Miocene prospects in the block (which were thought to be the most prospective intervals, potentially holding 42tcf of the 55tcf of the unrisked prospective resources identified).

NH:

The absence of good quality reservoir may be partially explained by the distance from the sand source which is assumed to be the same as seen in the channels in the D6 block to the North West (suggesting that the B1 Northern Anticline location may be a logical drilling target especially as it appears to be prospective in the Upper Miocene).
However the lack of material gas shows raises questions over all the Anticline prospects as the structures may have formed after the gas had migrated through the area. The block includes a number channel prospects which we assume are likely to targeted if/when drilling recommences.
Valuation and view on shares: Our risked NAV stands at 61p/sh (from 67p/sh due to well costs), but we have reduced our risked EMV for the near term exploration programme to 115p/sh (from 297p/sh). The main changes to our risked EMV are the removal of the A1 and B2 Middle and Lower Miocene prospects and the inclusion of the B1 anticline (with a higher risk factor). We have also included wells on the B3 and A2 channels and an oil prospect which gives risked value for the full well commitments on the block, which may be generous.
This drilling result highlights the exploration risks in the D9 block and may significantly delay further drilling as Reliance incorporates the well results into the geological model. We downgrade to a SELL recommendation noting the shares are trading close to the levels seen just before the D9 well spudded.

NH:

right

NH:

that really is it

NH:

see you next week

This entry was posted by Neil Hume on Friday, October 23rd, 2009 at 11:02 and is filed under Uncategorised. Edit this entry.

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Markets live transcript 23 Oct 2009

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