This is the transcript of the Markets Live session ending at 12:01 on 13 Dec 2012. Participants in this session were: Bryce Elder Joseph Cotterill
There are three competing theories:
1) Fiscal cliff concerns raised during Q&A – this one can be dismissed pretty much since fiscal cliff should have led to a big decline in bond yields, the opposite of what occurred
2) Fears of higher inflation – 5y5y forward inflation breakevens went down a bit during the press conference although 20y and 30y inflation breakevens went up a bit. The moves were not big and it is unclear why the equity market would react so dramatically (or even why it would react negatively).
3) Bernanke’s hidden tightening message – some analysts have extrapolated the recent ace of unemployment decline into 2013, and argue that if we are hitting 6.5% unemployment by then, Fed stimulus withdrawal would occur prematurely.
3) is the most consistent with market reaction. It is just hard to read the transcript of the press conference and the FOMC statement and come away with the conclusion that Bernanke and the Fed intend to tighten soon. If anything, he seemed to go out of his way to argue that they would use judgment to assess whether 6.5% was a correct reflection of labor market conditions. I would expect that subsequent clarification will show that the dovishness of the statement is the more significant message than the mechanical extrapolation of unemployment trends into an early tightening.
US: Fed delivers everything expected…
…which is not to say they should have done.
We got from the Fed everything the market had been hoping for at this 12 December
FOMC meeting, which was complete replacement for the 10Y Treasury purchases that
had been coming from the Twist, and which has now expired, plus some additional
forward guidance. That means an additional US$45bn per month (less any rolled assets
and coupon reinvestments) of outright Treasury purchases, adding onto the on-going
US$40bn rate for MBS purchases.
This is a substantial pick-up in Fed stimulus, since replacing the Twist purchases with
outright purchases is not like for like, and in effect, doubles the QE being undertaken. It is
quite misleading to think of this as “maintaining the US$85bn per month rate” (though
Bernanke denied this at the subsequent press conference).
We also got the economic additions to the forward guidance, which now says that federal
funds will stay where they are until we see the unemployment rate reach 6.5%, and
inflation projections push above 2.5%. The press conference nuanced these thresholds,
noting that they were not automatic, and represented a move towards part of an “optimal
policy” setting framework. In our opinion, a policy is only “optimal” if its inputs are correct,
and we suspect the Fed is working with a “full employment” rate substantially below
reality delivering the incredibly easy policy they now suggest might stay in place until
2016 (recent speech by Vice Chair, Yellen).
That said, the Fed believes that these new economic targets are consistent with its earlier
date- based guidance, which was for policy to remain on hold until at least mid-2015. The
current unemployment rate is 7.7%. It fell 0.2ppt last month alone. And even with high
levels of structural unemployment, with the housing market likely to provide a helping
hand to labour mobility in the year ahead, we can see a scenario where the
unemployment rate is converging on this 6.5% rate a lot earlier than mid-2015. CPI is
currently 2.2% and 10Y TIPS break-even rates are 2.4%, also close to the new limits.
It is not clear yet whether the rest of the market agrees that these economic targets seem
rather closer than the Fed intends them to be, and we will likely only see the current view
substantially change once fiscal cliff is resolved.
Given that only a month ago (before fiscal cliff worries started what will hopefully be a
temporary collapse in confidence and activity), the US economy was looking fine, this
monetary expansion seems extremely aggressive to us, and odd given relatively upbeat
and increased forecasts by the Fed members for GDP in 2013 (2.3-3.0%). Jeffrey Lacker
seems to agree with us, and dissented – though there is nothing new there.
Consequently, this latest announcement ought to weigh on the USD. Though in providing
a boost to risk sentiment, any decline in yields on US Treasuries may prove short-lived.
Our take – The suspension of fuel supply and the ongoing inability to export gold from Egypt are both material and negative new developments for Centamin and are in addition to the ongoing legal dispute surrounding the exploitation lease for Sukari. The placing of the mine on care and maintenance makes achieving the company’s guidance of 250 koz for 2012 almost certainly unachievable and, even if this matter is resolved relatively quickly, is likely to impact 2013 production and the timetable of the expansion programme at the mine.
Centamin has announced that the company has placed the Sukari mine on care and maintenance following a decision by the Egyptian General Petroleum
Corporation, EGPC, to refuse to authorise the supply of fuel to the mine. The decision relates to a dispute with the company over a retrospective claim by EGPC for the payment of US$65 million for fuel supplied to Sukari between December 2009 and January 2012. Centamin has vigorously denied that any such amount is due and, with the support of the Egyptian Mineral Resource Authority, EMRA, is attempting to restart the supply of fuel to the mine. The company has also confirmed that it has not yet managed to export gold from Sukari as whilst EMRA has authorized the export of gold customs officials have prevented the export from taking place until it has been signed off by the Ministry of Finance. This approval is not usually required and has not yet been forthcoming. The inability to export gold has lead to a shortfall in working capital within Centamin’s Egyptian subsidiary, which was a key part of the decision to stop production at the mine.
The company submitted an appeal against the administrative court judgment in relation to the exploitation lease for Sukari on the 3rd December, although there does not yet appear to be a firm timetable for the Supreme Administrative Court to hear this appeal. In our view all three issues that are currently impacting the company and its share price are symptomatic not of wrongdoing on Centamin’s behalf but of the ongoing deterioration of the political situation in Egypt. The situation in the country is unlikely to improve until the referendum of the constitution is completed over the weekend and this process could indeed provide a further catalyst for instability across the country.
To recap on the gold shipments issue. On 30 October details emerged that a ruling from the Administrative court had deemed that the exploitation lease at Sukari was invalid as it did not have the relevant ministerial approval. The company however is in possession of the executed original lease documentation which clearly shows that approval had been obtained. Due to the sensitive nature of the dispute, on the 26 November the company announced that it had suspended gold exports pending the lodgement of the appeal against the judgment from the Administrative court. The appeal was successfully placed and the process to resume gold exports (which is roughly a two-week cycle) commenced. The EGPC is a state entity and has full responsibility for all sectors of the Egyptian petroleum industry and holds the sole right to import and export crude oil and other petroleum products.
We value the shares at a 45% discount to core NPV for a price target of 70p/sh. Following the announcement the shares have fell from 52.7p to 20p just after the market open.
This coupled with the ongoing legal claim and political shenanigans on a national level, make Centamin a hot potato. Cash and assets on the balance sheet was $180m at the last quarter (10p/sh). In our view, one to avoid for now. We place our recommendation and TP Under Review pending clarity on the issues.
Last night, Iluka issued a market update on sales volumes and product pricing.
Sales volumes are at the bottom end of the previously guided range as Iluka has
been cutting production in order to support product pricing (Iluka is number 1
globally in zircon and number 2 in TiO2 feedstocks). Our estimates are already at
the bottom end of guidance ranges. On pricing, average zircon and rutile prices
are inline with expectations while synthetic rutile prices came in slightly below.
Zircon inline at ~$2,330/t, Rutile 6% better than our number at $2,350/t and
Synrutile slightly below our number at $1,670.
Interestingly, Iluka has sold 425kt of ilmenite, +75kt vs. previous guidance.
Demand has been supported as pigment producers have decided to buy lower
value per ton products in order to preserve margin. This is consistent with
comments from Kenmare. Ilmenite is Kenmare’s key product representing 70% of
revenue. Kenmare recently cut FY12 ilmenite production guidance by 60kt
offsetting increased ilmenite sales volumes from Iluka. While weak TiO2 pricing
(particularly rutile) is negative, we think that much of the pricing trends are already
known by the market. We think pricing is near the bottom but do think it could take
a quarter to work through high inventories in the pigment value chain.
Iluka has decided to idle some production over the Christmas period as demand
remains weak. Iluka reports that market conditions remain challenging. Inventory
de-stocking, mainly of finished ceramics and pigment inventories continues. The
demand weakness appears to be more pronounced in zircon than TiO2
feedstocks with Iluka flagging low zircon usage in tile manufacturing in China,
mainly influence by modern manufacturing techniques. Market reports suggest
that Rio Tinto (number 2 global producer in zircon) has been selling zircon below
Iluka’s prices. Zircon is a by-product for Rio, as is the case for Kenmare, and
hence Rio is likely less price sensitive.
Kenmare trades on 0.5x NPV and we see valuation support at these levels for the
stock. We see a quicker recovery in pricing for TiO2 feedstocks over zircon. In
terms of Kenmare’s earnings sensitivity, -10% cut in FY13 zircon prices implies
-4% to EPS and -1% cut to NPV. Maintain BUY, PO GBp65.
*SPAIN HAS SOLD 113% OF PLANNED 2012 MID-, LONG-TERM DEBT
LONDON (MarketWatch) — U.K. retailer HMV Group (UK:hmv) on Monday said it will not be entering into discussions with Permira over the private equity firm’s revised 210 pence-a-share offer for the group. HMV, whose shares closed Friday at 195.25 pence, said the offer undervalues the group. HMV said it will review its capital structure with the intention of increasing its financial leverage. The group added it is making good progress towards recruiting a successor for CEO Alan Giles, who is due to retire in December.
Shares in HMV Group fell 40 per cent on Thursday after warning that it was likely to breach banking covenants, putting the future of the entertainment retailer under threat.
The CD and DVD chain said it was facing a “probable covenant breach at the end of January 2013”, and blamed poor sales in the run-up to the crucial Christmas trading period.
Trevor Moore, HMV chief executive, said: “In light of current trading performance, and market conditions, it is probable that the banking covenants will not be complied with at that time.”
“HMV has had a difficult first half,” he added, but said that the retailer was in “constructive discussions with the group’s banks including keeping them fully informed in relation to current trading”.
A tough summer has been followed by a difficult Q3 and it is now probable that HMV will breach its covenants in January. It is difficult to ascribe an equity value, given the material uncertainties. The group has a lot of support from its various stakeholders, but its markets are extremely unhelpful.
W hat has been announced: Group sales in the seasonally-weak first half for HMV fell by 13.5% with like-for-like sales declining by 10.2%. Operating losses were reduced by £9m to £24m. Pre-tax losses reduced to £36m (-£50m last year). Net debt increased by £12m to £176m. A disappointing results schedule over the summer impacted sales, but the like-for-like sales trend has improved, although Q3 is below expectations. Therefore, HMV is pointing to a probable covenant breach in January. Discussions with its banks are said to be ‘constructive’. Also, HMV plans to continue to develop further initiatives with its suppliers.
W hat it means: A new management team is in place at HMV, with a new CEO and CFO appointed in September. However, the poor performance in Q3 (46% of sales) means that previous expectations for profit will not now be achieved. Material uncertainties may leave the company unable to clear down the £50m working capital facility for a period of 31 consecutive days and to repay the amortisation payment of £30m in January 2013.
V aluation: It is difficult to ascribe an equity value, given the material uncertainties. The group has a lot of support from its various stakeholders, but its markets are extremely tough.
The Eurogroup welcomed the result of the debt buy back operation, which will lead to a substantial reduction of the Greek debt-to-GDP ratio.
The Eurogroup reaffirmed that this, together with the initiatives agreed by the Eurogroup on 27 November and full implementation of the adjustment programme, should bring Greece’s public debt back on a sustainable path, to 124% of GDP in 2020.
So far as Cuadrilla’s current exploration programme in Lancashire is concerned, the remedial action level for the traffic light system (that is, the “red light”) will be set at magnitude 0.5 (far below a perceptible surface event, but larger than the expected level generated by the fracturing of the rock). I consider that this is an appropriately precautionary approach. We received representations in our consultation that this is too cautious.
In a case brought by the Financial Services Authority (FSA), Thomas Ammann, an investment banker and former FSA Approved Person, has today been sentenced at Southwark Crown Court to 2 years and 8 months imprisonment for two counts of insider dealing and two counts of encouraging insider dealing. But for an early guilty plea the sentence would have been one of 4 years.
Thomas Ammann was an investment banker working at Mizuho International plc (MIP). In late 2008 and 2009 MIP was advising Canon, the multi-national technology company, on its acquisition of Océ, a medium sized Dutch company making photocopiers, scanners, related software and accessories. By virtue of his employment at MIP, Ammann had access to inside price sensitive information relating to the takeover.
Rather than dealing in his own name, Ammann encouraged two women, Christina Weckwerth and Jessica Mang, to buy shares of Océ prior to the acquisition being announced. Following the announcement of the acquisition the women sold their shares for a profit, which they then shared with Ammann. In November of this year, a jury found that both women were not jointly involved with Mr Ammann and his insider trading.
“Your actions had significant impact on public confidence in the integrity of the market at a time that the city is held in increasingly low esteem …. Your activities not only cast a cloud over the particular business that employed you but potentially affects the perception of mergers and acquisitions business within the city as a whole. An honest shareholder who tries to read the market is offended by someone like you who can put aside skill and research by relying on information you are barred from using.”
“At the time of his arrest Ammann was an FSA approved person with privileged access to inside information. He sought to exploit that position to make easy money. This sort of behaviour by city professionals not only brings the individual into disrepute but also damages the reputation and standing of the financial services industry as a whole. We are determined to stamp this out. Today’s sentence should serve as a clear warning of the consequences to anyone who might be tempted to follow Ammann’s example.”