TheChek News Flow

Lawmakers representing midtown Manhattan have been skeptical, though they haven’t shut the door entirely

Move would allow gold miner to split its Russian and Kazakh businesses

Polymetal is preparing to relocate its domicile from Jersey to Kazakhstan, so that the Anglo-Russian gold miner can carve out its Russian business in the wake of sanctions and war.

Until recently one of the most profitable gold miners in the world and a FTSE 100 company until last year, Polymetal has become emblematic of the difficulties in navigating mounting sanctions against Russia, despite not being targeted itself.

By redomiciling to Kazakhstan, the company could be allowed by Moscow to split its assets, carving out its Kazakh and Russian mines into separate entities.

Russia has banned asset sales by gold miners domiciled in “unfriendly” places such as Polymetal’s current choice of the Channel Islands.

“This would allow for the restoration of shareholder value, because the Kazakh business would re-emerge without being under the shadow of sanctions,” chief executive Vitaly Nesis told the Financial Times.

The redomiciling could be accomplished by the third quarter of this year, allowing for the split to take place potentially in the first quarter of 2024, he added.

By separating the assets, shareholders in the Kazakh mines — which accounted for more than half the company’s profits last year — could enjoy a more favourable valuation, Nesis said. The structure would also allow shareholders in the Russian mines to receive their normal dividends, which are currently blocked.

The group has eight gold and silver mines in Russia, and two in Kazakhstan. Its main holding company is incorporated in Cyprus and is owned by a Jersey-domiciled entity listed on the London Stock Exchange.

Polymetal last year produced 1.7mn ounces of gold equivalent, 2 per cent higher than in 2021, and has forecast similar production levels this year.

Sales of gold — which had temporarily fallen as sanctions forced the company to find new buyers for its Russian-produced metal — recovered by the end of the year, partly because of a surge in buying by Russian retail investors.

The Astana International Exchange (AIX) does not have arrangements in place that allow proxy voting for remote shareholders, but Nesis said Polymetal was working with AIX to make sure the infrastructure for this was put in place.

He said that while he would like to remain listed in London, this would probably be impossible once the redomiciling was complete. Polymetal’s efforts to list depository interests in London had been “denied” by service providers that “refused to deal with us”, he added.

The EU’s ninth sanctions package, adopted in December, prohibit new investment in the Russian mining sector.

The company’s share price dropped 10 per cent at market open on Wednesday before recovering some of its fall to trade 3 per cent down by late morning.

Move would allow gold miner to split its Russian and Kazakh businesses

Polymetal is preparing to relocate its domicile from Jersey to Kazakhstan, so that the Anglo-Russian gold miner can carve out its Russian business in the wake of sanctions and war.

Until recently one of the most profitable gold miners in the world and a FTSE 100 company until last year, Polymetal has become emblematic of the difficulties in navigating mounting sanctions against Russia, despite not being targeted itself.

By redomiciling to Kazakhstan, the company could be allowed by Moscow to split its assets, carving out its Kazakh and Russian mines into separate entities.

Russia has banned asset sales by gold miners domiciled in “unfriendly” places such as Polymetal’s current choice of the Channel Islands.

“This would allow for the restoration of shareholder value, because the Kazakh business would re-emerge without being under the shadow of sanctions,” chief executive Vitaly Nesis told the Financial Times.

The redomiciling could be accomplished by the third quarter of this year, allowing for the split to take place potentially in the first quarter of 2024, he added.

By separating the assets, shareholders in the Kazakh mines — which accounted for more than half the company’s profits last year — could enjoy a more favourable valuation, Nesis said. The structure would also allow shareholders in the Russian mines to receive their normal dividends, which are currently blocked.

The group has eight gold and silver mines in Russia, and two in Kazakhstan. Its main holding company is incorporated in Cyprus and is owned by a Jersey-domiciled entity listed on the London Stock Exchange.

Polymetal last year produced 1.7mn ounces of gold equivalent, 2 per cent higher than in 2021, and has forecast similar production levels this year.

Sales of gold — which had temporarily fallen as sanctions forced the company to find new buyers for its Russian-produced metal — recovered by the end of the year, partly because of a surge in buying by Russian retail investors.

The Astana International Exchange (AIX) does not have arrangements in place that allow proxy voting for remote shareholders, but Nesis said Polymetal was working with AIX to make sure the infrastructure for this was put in place.

He said that while he would like to remain listed in London, this would probably be impossible once the redomiciling was complete. Polymetal’s efforts to list depository interests in London had been “denied” by service providers that “refused to deal with us”, he added.

The EU’s ninth sanctions package, adopted in December, prohibit new investment in the Russian mining sector.

The company’s share price dropped 10 per cent at market open on Wednesday before recovering some of its fall to trade 3 per cent down by late morning.

Time sometimes doesn’t equal money

Watches are great. As a way to tell the time, the wristwatch is certainly among the top five options to consider.

Watches can be less useful as stores of value:

The above is from WatchCharts, a website that tracks the resale value of high-end wristweights. Over the past 12 months to mid January, among the 49 brands it follows, Rolex was the worst performer, with the average listing price down 15 per cent. Tudor, Rolex’s junior brand, is the second biggest loser with a fall of 11.5 per cent.

It could be worse. A 28 per cent peak-to-now drop in resale value means expensive watches have outperformed bitcoin over the same period (-51.9 per cent), as well as the Ark Innovation ETF (-44.5 per cent). But performance looks less resilient when compared against the S&P 500 (-12 per cent), spot gold (-1 per cent) and US treasuries (-4.9 per cent).

There are lots of reasons for why watch prices are falling faster than luxury spending in general. It’s partly China, where high-end pawn shops did brisk business last year as Covid lockdowns forced HNWIs to raise cash. It’s also the disappearance of crypto froth, which benefited the most obvious brands as coinbros offered multiples of RRP to turn their tokens into something tenable. There’s also a bit of distortion stemming from Rolex’s launch in December of an official resale channel. (Rolex official certification is worth a 39 per cent premium, WatchCharts finds.)

Double-digit deflation might nevertheless surprise casual readers of the watch media. Recent stories on our own pages have been about demand for wristwear continuing to outstrip supply, resulting in all sorts of weird stuff in the primary, secondary and even tertiary markets.

Making sense of it all means understanding Rolex. The brand is estimated to account for 42 per cent of the global luxe used watch sales by value, according to Morgan Stanley research. Patek Philippe and Audemars Piguet are in a distant second and third place respectively, with a combined 28 per cent of the used market by value.

All three companies are privately owned and secretive by default, but a reasonable estimate is that between them the latter two turn out about 100,000 watches a year. Rolex is in a different league. It’s estimated to add at least a million to supply annually and is reportedly breaking ground on a new factory. There’s no sign of the reported supply shortages on specialist resale retailer Chrono24, where nearly one in five listings is for a Rolex.

China is therefore worth watching because among big watch markets it’s where the Rolex distortion is at its weakest. Omega and Longines, both owned by The Swatch Group, are China’s top selling luxe brands and, until recently, the most coveted name was Patek Philippe.

Another reason to care is because Chinese watch sales have been spectacularly bad.

Full-year results this week from Swatch missed expectations in spite of its MoonSwatch selling more than a million units. The MoonSwatch is a dual-branded replica of an Omega Speedmaster that’s sold exclusively through Swatch shops for about a 100th of the price of the real thing. It has proved wildly popular.

Yet China still managed to eclipse the MoonSwatch. Greater China sales dropped 50 per cent year-on-year in December. Group 2022 constant FX sales growth would have been 25 per cent without China, instead of the 4.6 per cent reported. Cash flows deteriorated sharply and inventories hit a record as stockpiled parts and materials were left unused.

Swatch CEO Nick Hayek said on the earnings call that Chinese demand is rebounding but that there were too many Longines and Omegas in the supply chain. These kind of overstocks are difficult for high-end watchmakers to manage.

Rolex last year denied choking supply but among its peers, scarcity has to be manufactured. Deloitte’s 2022 Swiss Watch Industry Study found that nearly 30 per cent of brands were discontinuing products to keep them exclusive. Patek Philippe last year withdrew its runaway best seller, causing secondary prices to spike, then reintroduced it at twice the price.

Swatch’s strategy has been protect its all-important Omega brand by pushing precious metal variations while bypassing the counterfeiters with its own official knock-offs. Offsetting of avarice against novelty has been a winning strategy but probably can’t be repeated too often, and it hasn’t stopped Omega resale values falling 7 per cent in a year.

Another grim reading on China came this week from The Swiss Watch Fed, Fédération de L’Industrie Horlogère Suisse. Its report for December showed month-on-month export growth decelerating nearly everywhere, but Greater China and Hong Kong were notably awful: down 22.6 per cent and 19.8 per cent year-on-year respectively.

Supply chain stuff has an outsized effect on monthly data so trends are clearer on a three-year view. The chart below from JPMorgan shows that while Europe and the US imports have been steady against pre-pandemic levels, China has flipped negative for a second time in a year:

The other way to split the data is by price. The Swiss export federation’s top band starts at Sfr3,000, which in retail terms is a Cartier or a Breitling. The range below cuts off at Sfr500, equivalent to a Tag Heuer or a Rado. Then there’s the lower band between Sfr200 to Sfr500, which is Tissot territory. For some time their respective performances have been good, bad, and ugly.

By value, Swiss top-price exports grew 13.3 per cent last month after 15.7 per cent gain in November. In the mid-band, exports plunged 14.3 per cent having been flat in November. But it’s the lower band where the battery has leaked, with sales by value down 25.7 per cent after a 30.3 per cent drop in November. Chart below from Morgan Stanley:

All of which continues a trend visible since 2017: watch exports by value have kept going up even as volumes went down. RBC Capital Markets provides the average selling price chart:

2017 lives large in horologists’ collective memory because it was when Paul Newman’s Rolex Daytona sold at auction for $17.8mn. It was a Beeple moment, helping solidify the belief that expensive watches are appreciating assets with bonus tax breaks and easy cross-border transportability. The Apple Watch had arrived a couple of years earlier to knock the already struggling mass market, so the industry pivoted as one into big-ticket collectibles for the newly wealthy.

Does China hint at a strategy at its limits? Though reopening chaos and historic volatility make conclusions difficult, the depth of downturn still looks ominous. China’s primary watch markets reopened in December but the status seekers and resale flippers just didn’t turn up.

The world looks different outside China largely because of Rolex, whose second-hand certified models still tend to sell at a premium to retail. But the Rolex bubble has deflated as fast as it grew and peers have shown few tricks beyond chasing ever higher price points.

If last year’s secondary market correction morphs into a China-led, industry-wide cyclical downturn it could yet have implications for the value of whatever’s on your wrist. Unless it’s just for telling the time, in which case no worries.

E-cigarette maker explores potential sale, investment or distribution deal with Philip Morris, Japan Tobacco or Altria

Juul Labs Inc. is looking for a new partner.

The e-cigarette maker, which came close to filing for bankruptcy protection last fall, is now in early-stage talks with three tobacco giants, according to people familiar with the matter. Juul is seeking a potential sale, strategic investment, licensing or distribution deal, the people said.

Juul executives in recent weeks have had separate discussions with Philip Morris International Inc., PM +1.93% Japan Tobacco 2914 0.32% Group and Altria MO -0.13% Group Inc., the people said. A deal isn’t imminent, the people said, and the discussions may not result in a sale or partnership. Altria, which owns a 35% stake in Juul, valued the vaping company at $1 billion in October.

Juul, which represents 27% of e-cigarettes sold in U.S. stores tracked by Nielsen, reached the brink of bankruptcy last year amid a dispute with federal regulators over whether its products could remain on the U.S. market. The still-unresolved dispute made it difficult for Juul to raise money to cover its legal liabilities.

Juul in December agreed to pay $1.7 billion in a broad legal settlement covering more than 5,000 lawsuits. Many of the lawsuits accused the e-cigarette maker of marketing its products to children and teens. Juul has said it never targeted young people and has been working to regain the trust of regulators and the public.

To pay for the settlement, Juul secured an equity investment from a group including two Juul directors, The Wall Street Journal has reported. The settlement and financing put Juul on firmer ground and allowed the company to begin talks with potential strategic partners.

Juul reached late-stage talks with Altria last fall on a potential deal to sell Juul’s international business or license its U.S. intellectual property but those talks fell apart in September as Juul prepared for a potential bankruptcy filing, people familiar with the discussions said. Those talks haven’t previously been reported.

Altria on Sept. 30 announced it was ending its noncompete agreement with Juul. The decision gave the Marlboro maker the flexibility to acquire another e-cigarette brand or develop its own new vaping products. And it gave Juul the freedom to sell itself—or a significant stake—to one of Altria’s competitors.

Juul Chief Executive K.C. Crosthwaite and other Juul executives traveled earlier this month to Switzerland, where both Japan Tobacco and Philip Morris are based, to discuss Juul’s newly expanded options, some of the people familiar with the matter said.

Juul has also resumed discussions with Altria, these people said. Altria can’t buy Juul outright because of antitrust concerns: In a case that is pending, the Federal Trade Commission is seeking to unwind Altria’s 2018 investment in Juul. Altria and Japan Tobacco in October formed a partnership to develop and sell heated tobacco devices in the U.S. and other new tobacco products abroad.

Altria sells Marlboro cigarettes in the U.S., while its erstwhile partner Philip Morris sells Marlboros outside the U.S. The companies split in 2008. Philip Morris now plans to re-enter the U.S. market through its acquisition of Swedish Match.

The Food and Drug Administration in June ordered Juul to take its products off the U.S. market, then stayed the order pending Juul’s appeal. If the FDA ultimately rejects Juul’s e-cigarettes, Juul could seek U.S. authorization for a newer version of its vaporizer that so far has been released in Canada and the U.K. Juul also has other products under development.

Billionaire has held talks with investors about selling new Twitter shares

Elon Musk’s team has been exploring using as much as $3 billion in potential new fundraising to help repay some of the $13 billion in debt tacked onto Twitter Inc. for his buyout of the company, people familiar with the matter said.

In December, Mr. Musk’s representatives discussed selling up to $3 billion in new Twitter shares, people familiar with the matter said.

Mr. Musk’s team has said to people familiar with the finances of the company that an equity raise, if successful, could be used to pay down an unsecured portion of the debt that carries the highest interest rate within the $13 billion Twitter loan package, people familiar with the matter said.

Paying off the debt would provide welcome financial relief to Twitter, which has struggled to keep advertisers on the platform. In November, Mr. Musk said Twitter had suffered “a massive drop in revenue” and was losing over $4 million a day. He also said that month that bankruptcy was a possibility for the company, although Mr. Musk later shared more upbeat prospects for the company, saying he expects Twitter to be roughly cash-flow break-even in 2023 as he has slashed some 6000 jobs.

The state of the fundraising talks couldn’t be learned. In mid-December, Mr. Musk’s team reached out to new and existing backers about raising new equity capital at the original Twitter takeover price.

Mr. Musk’s advisers had hoped to reach a deal to raise cash at the initial takeover price by the end of 2022, according to an email sent to prospective investors at the time. However, some prospective backers said they balked at the terms, given concerns about Twitter’s financial performance. The Musk team didn’t specify a funding amount or purpose for the fundraise in the email.

Fidelity, one of the co-investors that backed Mr. Musk’s takeover of Twitter, has written down its stake in Twitter by 56%, public filings show, suggesting Mr. Musk would face an uphill battle raising funds at the original valuation from outside investors. The banks holding the $13 billion in debt that backed his takeover of the company haven’t yet received any formal notice of any repayments, people familiar with the matter said.

Representatives for Mr. Musk didn’t respond to requests for comment.

Twitter’s unsecured bridge loans, which total $3 billion, are the most expensive portion of the $13 billion debt package Mr. Musk incurred as part of his $44 billion acquisition of the social-media company. They carry an interest rate of 10% plus the secured overnight financing rate, a benchmark interest rate that has shot up in recent months and currently sits at 4.3%.

With every quarter that passes without Twitter refinancing the debt, the interest rate goes up by an additional 0.50 percentage point, according to regulatory filings. Twitter’s first quarterly interest payment is due at the end of the month, the filings show.

Twitter’s annual interest burden has increased by over $100 million since he announced the takeover deal last April, as the overnight rate has increased. At the time of the announcement, the overnight rate was 0.3%.

Twitter’s total interest expense has been estimated to be roughly $1.25 billion per year, according to a December analysis by Jeffrey Davies, a former credit analyst and founder of data provider Enersection LLC. By that estimate, Twitter is incurring roughly $3.4 million every day in interest-payment obligations.

On Dec. 13, Mr. Musk tweeted “beware of debt in turbulent macroeconomic conditions, especially when Fed keeps raising rates.”

Repaying the unsecured bridge loans would leave Twitter with a debt burden that has much more manageable interest rates. Twitter’s $6.5 billion in term loans and $3 billion in secured bridge loans carry an annual interest burden of 4.75% and 6.75%, respectively, plus the overnight rate, according to public filings.

A potential deal would also provide a degree of relief for the banks that backed Mr. Musk’s takeover of the social-media company, and that intended to sell the debt to third-party investors but changed course after deteriorating market conditions sank Wall Street’s appetite for exposure to risky bonds and loans.

The $13 billion of Twitter debt on bank balance sheets, one of the biggest “hung deals” of all time, has helped contribute to a drag in the number of mergers and acquisitions as banks’ firepower to back deals is tied up.

Morgan Stanley, the lead bank on Twitter’s debt deal, has approximately $807 million in unsecured bridge debt on its balance sheet, while Bank of America Corp. , Barclays PLC and MUFG Bank Ltd. each have approximately $623 million of exposure, according to public documents and calculations by The Wall Street Journal.

Each of the four banks have more than $2 billion in other Twitter debt commitments on their balance sheets separate from the unsecured bridge facility, including term loans and other secured debt, the documents show.

Representatives of those banks declined to comment.

Pact to conclude in 2025 as the industry faces reduced demand and lower freight rates

The world’s two biggest shipping lines said they would end their vessel-sharing partnership in 2025, a move that will shuffle a lineup of global alliances as demand for trade is weakening.

A.P. Moeller-Maersk and Mediterranean Shipping Co. created the so-called 2M alliance in 2015 to help them reduce costs by sharing cargo on major ocean routes. Rivals formed similar partnerships, creating the Ocean Alliance and THE Alliance. The three groups account for about 75% of global container-shipping capacity, according to data company Statista.

The decision to wind down the 2M alliance comes as shipowners are dealing with a drop in cargo and excess vessel capacity that has pushed down freight rates to prepandemic levels. That has shifted the balance of power back to customers of these alliances.

The alliances were formed to cut costs and squeeze smaller competitors, but now that volumes are falling there is less reason to share capacity, industry executives said. Some customers had complained to regulators the alliances were anticompetitive.

Global trade volumes fell 9.5% year-over year in November 2022, according to London-based Container Trade Statistics, and global shipping rates have been sliding at a steep pace since early last year.

Big cargo owners such as Amazon.com Inc. and Target Corp. are securing ocean freight rates that are about one-third less than last year’s contracts, according to container shippers and retail executives.

Retailers that import large volumes of goods typically sign fixed-term contracts with ocean shippers to avoid uncertainty in deliveries. When the Covid-19 pandemic upended supply chains and normal delivery patterns, shipowners were able to charge importers top dollar to secure spots on vessels moving containers from ports in China to the U.S. West Coast.

Some importers are now opting to pay market rates instead of securing fixed-term contracts. The spot rate to send a container from Shanghai to Los Angeles was $1,323 this week, down from about $15,200 a year earlier, according to the Freightos Baltic Index. The average along the route was $1,525 in 2019.

In a joint statement, the chief executives of Maersk and MSC said that much has changed since the 10-year deal was signed, and terminating the agreement will allow both companies to continue to pursue their individual strategies.

Maersk and MSC’s strategies have changed over the past five years, with Maersk pushing to become an end-to-end logistics operator with the focus on inland supply services while MSC has overtaken Maersk in the number of ships it operates, sharply building up its fleet.

MSC CEO Soren Toft said that while 2M was instrumental in stabilizing the fragmented container market, MSC now had the scale to service all its customers on its own.

“Even if 2M formally runs until January 2025 it should be expected that Maersk’s and MSC’s networks on the alliance trades will begin to deviate even more in 2023,” said Lars Jensen, CEO of Denmark-based Vespucci Maritime.

He said the winding down of 2M raised questions over the future of the other two alliances, Ocean Alliance and THE Alliance. “This is only the beginning of a reshaping of vessel-sharing agreements on especially the major east-west trades,” Mr. Jensen said.

Container volumes across the Pacific are down about 30% so far in January compared with last year, according to operators and charterers. Shipowners have withdrawn sailings they added at the height of the Covid-19 pandemic. Retailers have scaled back imports as they adjust to weak holiday sales and bloated inventories.

“Our ocean freight has basically normalized to what it was prepandemic after paying up to 10 times more last year,” said Wade Miquelon, CEO of fabrics and craft retailer Joann Inc., at an analyst event this month. “The ports have normalized. So the in-transit issues and all the penalties have pretty much faded away.”

Target said in an email that it renegotiates its shipping rates regularly. The retailer’s chief operating officer, John Mulligan, said in November that container rates had come down by one-third and that they would come down further. He said the windfall would become evident this year when Target renegotiates freight rates.

A spokeswoman for Amazon declined to comment.

“It’s very unpredictable, both for us and our customers,” Maersk CEO Vincent Clerc said in a December interview. “We made significant capacity adjustments, but the inventory corrections can take a few months to sort out.”

The uncertainty has cut down the duration of fixed-rate contracts that shipowners are offering from one year to as short as three months. That is because daily spot rates are on a downward spiral, giving cargo owners the option to pick spot deals for some shipments rather than committing to longer contracts.

Pricing will be under pressure for shipowners this year—and while cargo owners are getting discounted rates, they could face disruptions if ships end up idled or sailings are canceled, said Peter Sand, chief analyst at shipping trade body BIMCO.

The mysterious iron ball at the center of the Earth may have stopped spinning and reversed direction