MACRON HEADED FOR FRENCH PARLIAMENT MAJORITY, POLLSTERS PROJECT
German Chancellor Merkel: we are ready to begin Brexit negotiations in the next few days
- Britain will remain part of Europe
- Expect UK gov to stick to its Brexit negotiation plan even after the surprise election result
Amazon loans just the start for ‘techbanking’
Digital leaders were always going to collide with the finance business
In the pantheon of public sympathy, banks sit some way below bookstores. Bookworms might bemoan the closure of their local literary emporium. But after a decade of financial scandal and billions of dollars of fines, few will care very much if ecommerce giant Amazon ramps up its loans business at the expense of banks.
Retailers have long had sidelines in credit, but it is usually advanced to customers rather than suppliers. More recently, the likes of Walmart, Carrefour and Tesco have set up financial services arms to help to deepen customer relationships. In the commercial world, invoice factorers have for many years lent against invoices coming due.
Amazon Loans extends short-term credit to small and micro business selling on its marketplace. The retailer has lots of data on how its sellers are performing, allowing it to cherry-pick borrowers. Its retail and web services operations generate lots of cash, and if the company wanted more, investors or creditors would happily provide it.
Other technology groups awash with surplus cash could feasibly do likewise. Imagine Apple lending money to app developers, or sending out “artist and repertoire” scouts to find new acts for iTunes. Google financing independent studios for YouTube. Facebook moving into payments. Supporting small businesses neglected by banks is good public relations. And lending increases loyalty; if your bank manager is also your IT provider and your distributor, you are less like to sell via a rival service.
But “techbanking” poses several risks. There are the usual reputational pitfalls of asymmetry: big faceless corporation exploits the little guy. This is exacerbated by patchy regulation of commercial lending, in contrast with fairly well-developed protections for consumers in most countries.
There is the salutary tale of GE Capital, which started out financing the sale of white goods and ended up with a $500bn balance sheet. That transformation took place over many decades and relied increasingly upon risky wholesale funding not surplus cash. But it shows how companies can be seduced by the high returns from unregulated lending — especially if growth in other areas slows.
Then there is credit quality. Amazon’s $3bn of loans are unlikely to cause it trouble. But in a decade’s time? Too much money chasing too few borrowers tends eventually to result in poor lending decisions. Banks are cautious about lending to small businesses for a reason: they are risky.
It will take a while for regulation to catch up with technology, as has been seen in fintech. And as technology companies become ever more powerful and reach into more facets of people’s lives, they will inevitable reach a Standard Oil moment. By that time, people may even be feeling sympathy for traditional banks.
Glencore proposes to buy Coal & Allied Industries from Rio Tinto for USD 2.55bn
09 JUN 2017
Glencore, a Swiss commodity trading and mining company, has proposed to acquire Coal & Allied Industries Limited in Australia from Rio Tinto, an Australian mining giant, for USD 2.55bn cash plus a coal price linked royalty.
A potential deal would expand Glencore's holdings in the area.
On 24 January, Rio Tinto announced a potential sale of C&A to Yancoal Australia Limited. Glencore's proposal is USD 100m greater.
Glencore’s proposal will automatically expire in the event a binding agreement has not been executed by 26 June.
Press release:
Glencore has submitted a proposal (“Glencore Proposal”) to acquire Rio Tinto’s 100% interest in Coal & Allied Industries Limited (“C&A”) for US$2.55bn cash plus a coal price linked royalty, with the cash comprising:
USD 2.050bn cash payable on completion; and
USD 500m in aggregate deferred cash payments, payable as annual instalments of US$100m over five years following completion.
The Glencore Proposal will be funded from existing cash resources and committed facilities and is subject only to regulatory conditions.
A subsidiary of Mitsubishi Corporation (“Mitsubishi”) has a tag-along right to sell its 32.4% interest in the Hunter Valley Operations joint venture (“HVO JV”). Glencore has agreed to purchase Mitsubishi’s 32.4% interest in the HVO JV and 28.898% interest in the Warkworth joint venture for US$920m cash conditional on completion of Glencore’s acquisition of C&A from Rio Tinto, with US$520m being payable on completion and US$100m payable on the first four anniversaries of completion.
There is no certainty that any transaction will be concluded. Glencore will only be bound once a binding share purchase agreement (“SPA”) is concluded with Rio Tinto.
If a transaction is concluded, Glencore intends to mitigate its overall financial commitment via a sale / monetisation of assets (prioritising its coal portfolio) of no less than US$1.5 billion, including exploring the option of selling down up to 50% of its interest in the C&A mines. In any event, as part of our overall Group financial policy, in addition to targeting maximum 2x Net debt/Adjusted EBITDA through the cycle, Glencore’s balance sheet will be managed to prevent net debt increasing above December 2016’s level of US$15.5 billion, thereby ensuring that our leverage target is comfortably met and financial conservatism maintained.
Glencore will make further announcements in due course regarding the Glencore Proposal and the Mitsubishi transaction.
Strategic rationale
The C&A assets comprise majority joint venture interests in large-scale long-life low-cost coal mines in the Hunter Valley region of NSW. HVO (owned 67.6% by C&A, 32.4% Mitsubishi), Mt Thorley (80% C&A) and Warkworth (55.6% C&A, 28.898% Mitsubishi) together produced 25.9mt in 2016 (100% basis) of premium quality export thermal coal and semi-soft coking coal. C&A also has substantial regional landholdings and owns a 36.5% interest in Port Waratah Coal Services, a coal export terminal located at the Port of Newcastle, the world’s largest coal export facility.
The C&A mines, as seen below, lie adjacent to numerous existing Glencore mines in the heart of the Hunter Valley, including our core Ravensworth North and Bulga mines.
The addition of the C&A assets to our existing portfolio in the Hunter Valley would unlock large scale mining and operating synergies. Glencore’s combined portfolio of mines in the Hunter Valley would have production capacity of 81 million tonnes per annum of high energy coal that feeds increasing Asian demand for high efficiency, low emission coal.
Background to the Glencore Proposal
On 24 January 2017, Rio Tinto announced the terms of the potential sale of C&A to Yancoal Australia Limited (“Yancoal”) (“Yancoal Deal”). The terms of the Yancoal Deal provide that Rio Tinto may engage in negotiations or discussions with a third party if the Rio Tinto board, acting in good faith, determines that a competing proposal is (or is reasonably likely to become) a superior proposal and that compliance with the ‘no talk’ restriction would constitute a breach of their fiduciary or statutory duties. To constitute a superior proposal, a competing proposal must propose the acquisition of 100% of C&A for cash consideration (including any deferred consideration and price adjustments) and royalty payments together having a net present value exceeding the total value of the consideration payable under the Yancoal Deal by at least $100m and be reasonably capable of being completed on a timely basis and be more favourable to Rio Tinto shareholders.
Glencore believes that the Glencore Proposal satisfies the criteria for a “superior proposal” for, amongst others, the following reasons:
The Glencore Proposal is US$100m greater, but otherwise matches the key terms of the Yancoal Deal.
The Glencore Proposal is fully funded and is not subject to any funding condition or termination right. By contrast, Yancoal has the right to terminate the Yancoal Deal if it is unable to raise the funding, and its funding remains outstanding. In our view, the fully funded Glencore Proposal provides substantially more deal certainty and is more favourable to Rio Tinto shareholders.
The Glencore Proposal is only subject to regulatory conditions, and in this regard, Glencore has already received an approval from the Japanese anti-trust authorities.
Rio Tinto must provide Yancoal with the opportunity to present a counter offer. If any such counter offer is determined by the Rio Tinto board to be equally or no less favourable than the competing proposal, then Rio Tinto must accept the Yancoal counter offer.
Glencore’s Proposal will automatically expire in the event a binding SPA has not been executed by 26 June 2017.
Akzo Nobel activist Elliott increases stake to become largest investor - report
10 JUN 2017
Akzo Nobel [AMS:AKZA] investor Elliott Advisors has increased its holding in the Netherlands-based paint and coatings group, making it the biggest single shareholder, The Daily Telegraph reported. The activist investor increased its previously held stake by more than 5%, the unattributed report said.
Elliott, an activist hedge-fund management firm, unsuccessfully attempted to oust Akzo Chairman Antony Burgmans last month after the company cold shouldered takeover offers from PPG Industries [NYSE:PPG], the report noted.
Cost of ‘Black Swan’ bet on falling markets hits pre-crisis low
Hege funds could make 25 times their money if S&P 500 falls 7 per cent in a month
The cost for hedge funds of taking out “Black Swan” insurance against a sharp fall for US equities has fallen to the lowest level since before the financial crisis as stock markets continue to touch all-time highs.
Months of low market volatility has forced down the price of options allowing hedge funds to place bets that would make them 25 times on their money if the S&P 500 index fell by 7 per cent over the next month.
“The price of constructing hedges against a fall in equity markets are at their lowest levels ever, while equity markets are trading at all-time highs,” said Deepak Gulati, chief investment officer of Argentiere Capital and former head of equity proprietary trading at JPMorgan Chase.
“Historically low levels of volatility in options markets are providing the opportunity to construct long volatility positions with completely asymmetric pay-offs.”
At a time when equity markets continue to grind higher and most investors are betting that volatility will remain low, the potential for big payouts worth many multiples of their cost is tempting a small number of hedge funds to take the other side of that trade.
Options using the so-called one month 97-93 per cent put spread on the S&P 500, which requires the index to fall by between 3 and 7 per cent in a month to be profitable, currently allows a maximum profit of $4 for contracts that cost $0.16, or a 25 times return, according to Bloomberg data.
Expectations of market volatility, which make up an important input into how much options bets cost, have been plumbing new lows this year. Earlier this month, the Vix index, which tracks the implied volatility of the S&P 500 over the next 30 days, closed at the lowest level since 1993.
Last month the Financial Times reported that Ruffer, a $20bn London investment company, had been buying up large amounts of contracts linked to the Vix index priced at half a dollar as part of a hedging strategy for its portfolio, earning it the moniker “50 Cent” among bemused traders.
At the same time, low expected volatility also allows traders to make cheap bets using options on the US stock market also rising in value.
The so-called 3 month 105-110 per cent call spread on the S&P 500, which needs the index to rise by 5 to 10 per cent over three months to be profitable, would generate a profit of up to 38.5 times. This compares to an average pay-off ratio for an identical call spread of 5.6 times over the past decade.
Palladium Rally Could Hit a Wall
Prices hit new highs last week, but weaker car sales could puncture the speculative buying binge.
Palladium prices surged to multiyear highs last week, but more pessimism in the auto industry and a pile-in by speculators suggest that the rally is getting exhausted.
The gains have outpaced those of all other precious metals this year, with the most active palladium futures contract rising 25% year to date compared with gold’s 10% gain. The ETFS Physical Palladium Shares exchange-traded fund (ticker: PALL) is up 29% this year.
Partly driving the outsize returns has been increased consumption in the past few years by auto manufacturers, which use palladium in the catalytic converters that filter car emissions. According to the researchers at GFMS Thomson Reuters, palladium demand in auto-catalyst applications hit an all-time high for the fifth consecutive year in 2016, rising by 5% annually.
That combined with mine closures has caused palladium supply to fall short of demand for the past couple of years, a trend that analysts expect to continue in 2017.
Weaker auto sales this year could put a damper on the demand for the metal. According to Autodata, total U.S. light-vehicle sales fell 0.5% in May year over year, and are down 2% year to date, compared with 2016. On Thursday, Morgan Stanley cut its U.S. auto sales forecasts through 2020 based on an “unprecedented buyer’s strike.”
Car sales in China have also slowed this year after growing at the fastest pace in three years in 2016. A government tax incentive for auto buyers led sales to a record monthly high in November. However, cutting the tax break has weighed on sales growth this year.
WHILE PALLADIUM IS A PRECIOUS METAL, the majority of demand comes from its use in vehicles. Therefore, the lukewarm outlook for auto sales should soon take a toll on prices, analysts said. Rising prices in the face of weak data this year also suggest that the market could be vulnerable to a short-term correction. Prices closed at $856.20 an ounce on Friday, the highest level since September 9, 2014. They’ve closed higher in 10 out of the last 11 sessions.
“Usually, the palladium market reacts quite sensitively to this news,” says Carsten Menke, commodity analyst at Julius Baer. “We think that eventually this slowdown in global car sales should translate into lower palladium prices.”
The concerns are compounded by signs that the recent price gains have been driven by speculative investors, which could turn the market quickly if they decide to unwind long positions on palladium futures. The palladium market is also dwarfed in size by other metals, like gold and copper, so it takes fewer participants to trigger a major move.
Menke says that when palladium for industrial use is more expensive than bars bought by investors, it indicates higher demand from auto manufacturers. But the current lack of a premium suggests that the need for palladium in catalytic converters is not as strong as some might think.
“It really seems like there’s a lot of speculation going on in the market,” Menke says. “Historically, across most commodities we observe, [that has] been a warning sign,” he notes.
Data from the Commodity Futures Trading Commission show that net long positions by speculative investors reached the highest level since 2014 in early May. As of June 6, bullish bets outnumbered bearish bets by more than 23,559 contracts, hovering near the high of 23,570 contracts reached last month.
According to Société Générale, palladium has attracted more than double the investment flows in futures and exchange-traded products than its precious metals’ peer platinum this year. Most of the overall flow Société Générale is tracking is coming from futures. Holdings in palladium ETFs have been declining, falling below 1.5 million ounces for the first time since 2010, according to Commerzbank. “We therefore find it hard to understand why the palladium price in particular is so strong,” analysts wrote last week.
INDUSTRIAL DEMAND FOR PALLADIUM also faces risks such as substitution and a growing scrap-metal market. An annual survey from GFMS Thomson reported that auto-catalyst scrap supply rose to the second-highest level on record in 2016, which helped mitigate the loss of material from mine disruptions. As palladium prices have risen, platinum has been selling off, raising the possibility that platinum will become a substitute if it becomes the cheaper of the two. That would also cap palladium demand. Still, analysts cautioned that any switch would take a long time to implement.
“In our view, it is more a case of when, not if, the palladium price will exceed platinum for the first time since 2001,” says Ross Strachan, precious-metals demand manager at Thomson Reuters, in a May report. “However, we think that the recent move has been too far and too fast.”
These factors have led analysts to suggest that investors re-evaluate their short-term positions, but fundamental supply and demand looks steady over the next year.
“We are getting close to where we think a reasonable high for the market might be,” says James Steel, chief precious-metals analyst at HSBC Securities in New York, who added that palladium prices still may reach as high as $870 an ounce this year. “It might be getting a bit toppy…but that’s not to say we’re not bullish longer term.”
Would-be miner of rare earths bets on electric cars
Sale of largest US deposit of elements used in zero-emission vehicles due Wednesday
When Tom Clarke first heard about rare earths a year ago he had to look up what they were on Wikipedia.
Now the coal miner is leading a bid by a consortium to reopen a California mine that is the only major US deposit of rare earths — elements that are poised to benefit from increasing demand due to their use in magnets that go into electric car motors.
“The more I got involved in rare earths, the more I realised these elements are going to be in increasing demand [in electric vehicles],” says Mr Clarke. “So our hope here is to help facilitate the re-opening of the mine. We think there is a reliable market for it.”
The Mountain Pass rare earths mine, located about 50 miles south of Las Vegas, was owned by Molycorp, a US natural resources group that filed for bankruptcy in 2015.
The mine is now due to be sold at auction on Wednesday, and Mr Clarke’s ERP Strategic Minerals has teamed up with Swiss private equity firm Pala Investments and Australian rare earths exploration group Peak Resources to offer $1.2m.
A rival bid is expected from a consortium involving hedge funds that are among Molycorp’s creditors — including JHL Capital Group and QVT Financial of the US — and Chinese rare earths mining company Shenghe Resources. JHL declined to comment on behalf of the consortium.
The auction is due to be closely watched by the US authorities, because rare earths are used in the defence industry — for example in missile guidance systems. The Committee on Foreign Investment in the US, which reviews certain proposed purchases of domestic assets by overseas buyers, could potentially have a role scrutinising the acquirer of the Mountain Pass mine.
Contrary to their name, rare earths such as neodymium and dysprosium are not unusual. But they are widely used in consumer electronics products, as well as industrial goods such as wind turbines.
Molycorp, which once had a market capitalisation of $6bn, symbolised the boom and bust in the rare earths market.
Rare earth prices soared in 2011 as China, the country with the largest rare earth deposits, tightened export restrictions and buyers scrambled to find alternative sources. They then collapsed as manufacturers reliant on these elements used less of them, or turned to substitutes.
Molycorp invested $1.5bn in the Mountain Pass mine, but a person involved in one of the bidding consortiums says the former owner produced a “failed chemistry set” by focusing on cerium, a rare earth that is in plentiful supply.
Some industry observers say the Mountain Pass mine has good prospects. “The deposit itself is world class in terms of size and grade,” says Ryan Castilloux, founding director of Adamas Intelligence, a rare earths consultancy.
If the mine comes close to reaching the operating cost target Molycorp tried to achieve, it would be the most profitable asset in the sector, adds Mr Castilloux.
Furthermore, prices of several rare earths have started to pick up this year amid increasing demand for industrial magnets and reduced Chinese production due to a crackdown on polluting mines.
In a report last month that looked at General Motors’ Chevrolet Bolt electric car, UBS analysts said rising demand for electric cars could cause a “demand shock” for rare earths that would push up prices.
They estimated the global fleet of electric cars will grow from about 2m today to 14.2m by 2025.
Meanwhile, Mr Clarke suggests a novel approach to try to inject some price stability into the rare earths market: collaboration with China.
If the ERP-led consortium wins the auction for the Mountain Pass mine, it could talk to Chinese rare earth producers about creating a “micro-Opec for rare earths”, he says, in a reference to the global oil cartel.
That could help support prices. “It would have to be a transparent process,” adds Mr Clarke.
He says if rare earth prices go back to the mid-point of where they were over the past five years, the Mountain Pass mine will be “very profitable”.
However, David Abraham, author of The Elements of Power, a book about rare earths, says the mine is unlikely to be as cheap to operate as those in China. Buyers and users of rare earths will not be willing to pay a premium for US supply over Chinese alternatives unless there is a sudden shortage or some form of industry crisis, he adds.
“It’s unclear to me how this project would work,” says Mr Abraham. “You had a billion [dollars] go into it — with some of the best technology and [Molycorp] couldn’t do it — what is a coal miner going to be able to do here?”
“I don’t see Mountain Pass as economically competitive,” adds David Merriman, analyst at Roskill, a consultancy. “If prices really shoot up then it will be economic but it wouldn’t be one of the top picks.”
Any new owner of the Mountain Pass mine would have to invest in infrastructure, given that it has been mothballed for two years, as well as pick up the cost of cleaning up the site once its rare earth deposit has been exhausted.
But Mr Clarke hopes he can replicate his success with US coal, where he has bought unwanted deposits since 2014, and seen prices rise more than 30 per cent over the past year partly due to reduced Chinese production.
“I still pinch myself, we actually bought at the bottom of the market,” he says.
Barrons weekend summary: positive on LRCX, DBD, select energy sector names, select banks
* Cover story: Mid-year picks from panelists on the Barron's 2017 Roundtable: William Priest (COHR, CYBR, DIS, JCI); Jeffrey Gundlach (PPT, EEM); Meryl Witmer (DLTR, Howden Joinery Group); Scott Black (TSEM, ICHR); Oscar Schafer (COMM, Cellnex Telecom); Abby Joseph Cohen (Schneider Electric, Clariant, Omron, ARMK); Mario Gabelli (VVV, COT, MICC, CNHI, Liberty Braves Group, RHP, MWA).
* Features: 1) Positive on CNQ, CVX, EOG, NBL: The struggling energy sector could be near a bottom after a drop in U.S. crude-oil inventories sent prices to a new low for the year, and the stocks should see nice gains; 2) Positive on CMA, SIVB, ZION: The three banks, which have large variable-rate commercial loan portfolios and non-interest-bearing checking accounts, should continue to benefit from short-term rate hikes; 3) Positive on LRCX: Company is benefiting from the spread of NAND hard drives and the growth in popularity of smart devices such as refrigerators and watches; shares could gain 20% during the coming year; 4) Positive on DBD: Though Wall Street believes online and mobile payment systems will render cash obsolete, Diebold continues to make cutting-edge ATMs and is a contrarian opportunity for investors.
* Tech Trader: Cautious on AAPL: Tech giant’s recently unveiled HomePod “shows up Apple’s shortcomings in cloud computing and the related fields of machine learning and artificial intelligence,” and isn’t likely to supplant AMZN’s Alexa or GOOGL’s Assistant.
* Trader: “If Fed chief Janet Yellen can pull off a hike and convince markets that the U.S. economy is still growing steadily, Friday’s tech wreck could be just a hiccup on the way to higher stock markets”; The tools in the activist investor playbook are getting old, with most activists simply focusing on getting companies to buy back shares and pay dividends; If KR is forced to cut guidance again, it could lead to another industry price war in which margins are sacrificed for sales growth.
* Profile: Peter Kwiatkowski of the Touchstone Flexible Income fund looks for stable income in a global portfolio with a low correlation to traditional stocks and bonds (top 10 preferred holdings: GE, RBS, LYG, Australia and New Zealand Banking Group, JPM, Societe Generale, ING, USB, VIA, Catlin Insurance).
* Follow-Up: Positive on REGN: Shares may look expensive relative to near-term earnings forecasts, but the company has more long-term potential for hits than its peers; Cautious on EXAS: Tests of the company’s colorectal cancer medication seem positive, but profits are years away and much of the optimism is already priced into the stock.
* European Trader: For investors, the outcome of the recent British elections was the worst possible, “potentially plunging the U.K. into a period of political uncertainty that could weaken the economy.”
* Asian Trader: Positive on Inventec, Primax Electronics, Sunny Optical Technology, Largan Precision: AAPL’s home-speaker device is likely to boost several companies in the Asian tech sector.
* Emerging Markets: Positive on BAP: Shares of the Peruvian bank are up, and should continue to benefit from economic growth under Peru’s market-friendly president, Pedro Pablo Kuczynski.
* Commodities: “Palladium prices surged to multiyear highs last week, but more pessimism in the auto industry and a pile-in by speculators suggest the rally is getting exhausted.”
* Streetwise: Fundstrat’s Thomas Lee sees opportunity in unloved sectors, and he likes MKTX, SCHW, WAL, TMUS, FANG, LNG.