Anglo – no glow


“Whilst you can throw your hands up in the air and feel bad about it, what has happened here is part of a natural cycle of supply and demand, and the relative prices of where the commodities were and where they are now. At the moment in too many commodities there is an oversupply.”

To market to market to buy a fat pig. A loud Brett Proctor “oh my word” was the order of the day yesterday, and it wasn’t I am afraid of “something special”, rather the exact opposite. Commodity stocks were kicked into touch like an old rusty bucket, once again the prices of the producers were plumbing new multi year lows, in some cases a whole lot worse than you may have anticipated. There were several value investors calling the rout of commodity stocks to the beginning of this year as an opportunity, it was hard to not believe them, some of the stocks had fallen by more than fifty percent. In recent months however, from the Chinese growth slowdown to rising US interest rates, the leg down has in some cases been more severe.

Prices of global commodities have been bashed badly. The Bloomberg Commodity Index year-to-date return is minus 24 percent. Over the last 12 months it is nearly 30 percent. It has been worse for the stocks, yesterday was the worst point in the cycle, I have been watching some of these companies for over a decade and a half, in some cases I have never seen these prices. Anglo American was in some respects, with their investor day presentation, the company to sum up the mood. They are now the fifth biggest diversified commodity producer.

The headline tells it like it is: Anglo American sets out radical portfolio restructuring and further material cost savings and capex reductions. Consolidating into three businesses, the diamonds (De Beers), Industrial Metals and then Bulk Commodities. Dividend suspended with immediate effect all through to the end of the 2016 financial year. There is a nice chart in the associated presentation that tells you all you need to know. I mean, 1000 words.

Commodity prices have been trashed. This may not include the recent days rout either, which includes iron ore and oil prices. The caption at the bottom of the slide is clear, … and this is not a time to talk about business as usual. I wonder what the response will be from government, from labour on the restructuring of the business, including reducing the workforce significantly. Of course not everyone will just lose their jobs, the group is planning asset sales, to the likes of Sibanye of course in the platinum space. The future Anglo American (slide number 9) is expected to go from 135 thousand in the workforce today, to 50 thousand in the future.

Whilst you can throw your hands up in the air and feel bad about it, what has happened here is part of a natural cycle of supply and demand, and the relative prices of where the commodities were and where they are now. At the moment in too many commodities there is an oversupply. In some commodities, the markets are tightening, as we have seen with OPEC however, nobody wants to blink first and be the first to turn off the taps. It is starting to happen now, the market prices are dictating to the producers to take supply out. The painful transformation of Anglo from the once swan to the ugly duckling has unfolded to the disbelief of shareholders.

The market hated the news, and coupled with a day that commodity producers felt the pain from the falling core prices, the stock sank 10.72 percent to 72.76 Rand. In London that was 327.3 pence, 90 percent lower than where the company was utilising shareholders resources to buyback shares. Sigh, those funds could have been conserved for a rainy day, don’t you think? Hindsight, things you wish you knew now. Over five years in Rand terms, in the local market, Anglo is down 77.78 percent (as of this morning), over a year the stock is down 67.35 percent. Year-to-date it is about the same. The last three months have been particularly brutal, the stock is down 51 percent.

What next? The debt maturity profile hardly reveals that the worst is over, the company may be strong armed in refinancing at worse rates if commodity prices don’t stabilise and recover somewhat from here. They may well be forced to raise money by listing De Beers separately again, that would be a bad outcome, all things considered. The only solace that Anglo shareholders could take yesterday is that they were not alone, South32 was down 7.9 percent, Glencore nearly the same, BHP Billiton was down 6.3 percent, the Jozi all share as a collective was down 1.56 percent by the time the closing bell rang, mercy for the commodity stocks.

Over the seas and far away, in New York, New York, stocks closed the day lower, most especially blue chips, the Dow Industrial Index sank by 0.92 percent. Weighed down by basic materials and energy I am afraid, the nerds of NASDAQ closed out the day nearly flat, healthcare was one of the few noticeable winners on the day. The broader market S&P 500 closed the day down two-thirds of a percent.

The biggest news however on the day was undoubtably after the market, the announcement (and here from the New York Times) of Dow Chemical and DuPont Said to Be in Merger Talks. As you can see, two companies of equal sizes to be split into combined entities that no longer compete. Promote synergies and all that.

I can hear the competitions hawk in you squawking already, cost savings equally represent more efficiencies, which equals lower prices. The plan may be to split the combined entity into three separate businesses. As you can see from the FT article DuPont and Dow in $120bn deal talks, this has even been announced, these are currently reports. Today, I have no doubt, all will be revealed. Whether or not it passes through antitrust hoops remains to be seen. First things first, let the companies announce and confirm “person familiar with the negotiations”.

Linkfest, lap it up

This was one of the most clicked on links on the Bloomberg web page – Odd Lots Podcast: 6,000 Years of Interest Rates. If you have 22 minutes to spare, you can give the podcast a listen.

The great thing about shale oil is the speed at which you can turn the tap on. It now takes less than 30 days to turn the tap on of a new well. The downside is that shale wells also dry up sooner than other wells – CIBC: The Crude Glut Might Be Cured Faster Than You Think

The FED is set to raise rates soon, most probably next week. If guessing when the FED will raise rates is not enough the next guess is by how much? The speculation on the street seems to point to a 25 basis point hike, I suspect it might even be lower than that – How Much Can the Fed Raise Rates?. The basic point of the article is that current long term interest rates are a little over 1%. What that means is that until the market moves longer term interest rates higher, the FED essentially has a ceiling on how high rates can go.

This is bizarre. Our neighbours Zimbabwe had hyperinflation, now as a result of an economy blighted by a multitude of factors, the country is experiencing deeper deflation than any country in the world. True story: Zimbabwe’s shops have gone from being hyper-expensive to being too cheap. Both are dangerous!

Home again, home again, jiggety-jog. Stocks across Asia are lower, the same should happen here I guess, we should start lower. Some key commodity prices have bounced off depressed levels, most noticeably the oil price, which tested multi year lows again yesterday. Sad, but true. Venezuelan opposition looks likely to clash with the socialist nut job Maduro, the FT had an amazing headline that said Hasta la (cha)vista. World class, well done. Excuse me for not being smug of far lefties and their losses, those ideas belong elsewhere, having done more harm than good. Remember more than a century ago the debate around the next economic superpower was between Argentina and the USA, we know how that went. There are elections in Argentina this weekend, that was the only noticeable exchange to rally hard yesterday, ahead of what may also be an ousting of the lefties there too, and their policies.


Sent to you by Sasha and Michael on behalf of team Vestact.

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