I wrote a piece titled...

"Randgold - undoubtedly the best large cap gold company in the world"

...which was uploaded just now to the ShareProphets website.  A link to the piece (free sign-up) is here.

"Large cap mining speaks #2: Glencore shows the way"

I wrote a piece titled "Large cap mining speaks #2: Glencore shows the way" which was uploaded just now to the ShareProphets website.  You can find a link to the piece (free sign-up) here.

"BHP Billiton: investing after a disaster"

I wrote a piece titled "BHP Billiton: investing after a disaster" which was uploaded just now to the ShareProphets website.  You can find a link to the piece (free sign-up) here.

"Randgold Resources: flashing below the 4000p share price level again"

I wrote a piece titled "Randgold Resources: flashing below the 4000p share price level again" which was uploaded just now to the ShareProphets website.  You can find a link to the piece (free sign-up) here.

Randgold - thoughts on the latest quarter from the world's best listed gold miner

Randgold Resources has been a favourite gold equity holding of mine for a while now.  Recently I have noted (link here) the value below the £40/share level and accordingly bought more stock during the summer (it is for full disclosure the number #1 holding in my pension fund):

The share pulled back today (c. -4% as I write) and over the past few weeks.  Of course it is convenient (and quite reasonable) to blame the fall back in the gold price as the US dollar has pushed up with the re-emergence of expectations of an imminent rate rise by the Federal Reserve...

...but more of this later. 

Onto the numbers.  I actually thought they were basically fine with record production, an enhanced net cash position and cash costs remain well under control (below US$700/ounce). So much better than certain other large cap gold companies I could mention (link here)....

So what struck me about the numbers?  For the second quarter in a row I thought the prospective exploration potential remains excellent both in Mali...

...as well as across the whole Continent at the company's operations (note the first mention in a quarterly report of the Ghana opportunity which made news during the last couple of months - post deal close hopefully before the end of the current quarter I believe there should be further interesting newsflow here). Kibali in the DRC remains a real standout.  

Otherwise what really stood out were the company's comments about the broader industry.  We all know that the commodity supercycle of a few years ago is well and truly over...

...but this chart on the gold industry generally is fascinating.  This is the deep value in the Randgold story: sustainable, growing, high grade production at a low cash cost and properly rationalised at US$1,000/ounce gold:

Of course no surprises that the stock has performed (and over longer time periods massively outperformed) and my view remains very clear.  I will buy more stock below a £40 share price.  

And macro-wise, what about the fears of an interest rate rise on gold/commodity stocks that are denominated in US dollars?  Well...it just might be a great opportunity given that the biggest fear in markets is always fear itself...

Europe earnings comments today: Weir Group, Imperial Tobacco & Standard Chartered

Another busy earnings day in Europe. I will come back with some thoughts on UBS and BMW later (after I listen to the latter's conference call) and I might even add a comment or three on Glaxo's R&D day (if I understand it) but first some UK names which updated thoughts earlier today.

First Weir Group.  I don't think I have ever reviewed the service supplier to the minerals and energy sector but no surprises that the shares have been whacked over the last year:

Inevitably the law-of-round-numbers adherent to me notes the bouncing of near/around the 1000p share price level... In present the notes I made from the conference call below:

’70 announcements of mining capex cuts YTD…accelerated in September in October’

Mining -

Original equipment – ‘lumpy’, no clear up trend yet

Aftermarket – feel stated weak numbers ‘one-off’ reflecting tough comps/market factors and pleased with cost containment.

Oil/gas –

Noted further declines since last updated the market in July due to oil prices -25% etc.

‘the longer the downturn the quicker the bounceback will be’ – noted Exxon upping Permian Shale bets

Provide FY16 guidance in Feb

Noted slowdown across all divisions but also market leading positions

‘Strong cash generation’, inventory down £30m helping

Q&A –

Pricing pressure – ‘been pricing pressure for the last four years…been able to mitigate that through efficiency drives’

Aftermarket – ‘disappointing Q3 performance’ but noted different geographic splits (Middle East, selected emerging markets better).  ‘Lots of moving parts’.  ‘Pricing (pressure) in the Middle East is nothing like we are seeing in North America’

‘customers are pushing the boundaries about how long before equipment breaks…rise in emergency orders when something goes wrong’

The bottom? – fudged the question: ‘crystal ball gazing’.  Feb when the update is.  Noted many levers on the balance sheet ‘very comfortable with headroom we have got versus our covenants’.  Noted ‘limited visibility’.  

My view here?  You wait.  I still prefer on margin the actual producers be it a BHP Billiton or a Royal Dutch Shell or BP.  Nevertheless I will be all over the numbers in February including the new guidance. 

Moving on, Imperial Tobacco has been a regular feature on these pages (see for example here).  Back in June I noted a top-slice opportunity (I actually switched monies to Philip Morris International where I see better upside at the moment - link here) and an opportunity to rebuild sub a £30 share price (which occurred in September).  Here however we appear to be technically running out of a bit of steam:

Today's announcement was very solid.  As I noted on Twitter:

#ImperialTobacco nos solid today. Fav slide this one showing post 4% div pre acq FCF & 16e div +10% too (15A +10%)

Which is underneath all this is strong pricing (more than offsetting any Iraq/Syria volume issues) which is - of course - a trait across all tobacco stocks:

Looking ahead the key is going to be the development of the US business which was significantly augmented by a very sensible acquisition earlier this year (and which has helped induce much of the YTD share price performance).  If there is one metric to follow over the next year with Imperial Tobacco it is the US market share one in my view: 

Overall thoughts? Prospectively c. x14 forward EV/ebit and a 5% free cash flow yield (4% paid out with a 10% dividend progression).  This is fine for longer term capital but I would not be putting new money in.  That is for a sub £32 share price currently. 

And finally Standard Chartered.  Two announcements here: first the Q3 results...

...and second a much anticipated money raising to rebuild core tier 1 (above that fabled 13% level).

 As I noted on Twitter:

On the #StandardChartered CC. Even though latter column not annualised point clear. 2nd chart: lots low RoE assets

The charts above show what a mess the bank has become a point memorably noted by the still newish CEO:

'pockets of excellence buried under piles of..."fertiliser" ' - Standard Chartered CEO on what he has found in his first 5 months on the job

So what to think about the money raising?  Well the first aspect to note was that the rhetoric (as noted by the comment above) is suitably aware of the problems the bank is in:

‘thorough root-and-branch review…no sacred cows’

‘developed a very comprehensive set of actions’

‘package aggressive and realistic’

‘our starting point is far from where we would like to be'

Good therefore to see hopes that costs will be materially cut...

...and that RoE recovers over the rest of the decade.  8-10% RoE is not particularly exciting compared to other banks I have looked at over this results season I note.  

Interesting too to note why the RoE has declined so much: blame regulation and cyclical issues!

So should you support this deal?  I think you do.  At a current c. x0.6 price to book value (link here) there is value in simplification albeit you need faith in management to impose the plan and hope that extra regulation costs are not too onerous (plus some outstanding money laundering court cases - see here).  The shares have been dire over the last year including a fall below 650p today...

...and as I was foolish enough to still hold some shares (not a top 20 position) I will be looking to augment and lower my average purchase price. 

"Panic city at Glencore = mining sector opportunities"

I wrote a piece titled "Panic city at Glencore = mining sector opportunities" which was uploaded just now to the ShareProphets website.  You can find a link to the piece (free sign-up) here.

"Glencore’s non-surprising surprising money raising"

I wrote a piece titled "Glencore’s non-surprising surprising money raising" which was uploaded just now to the ShareProphets website.  You can find a link to the piece (free sign-up) here.

End of US earnings season head scratchers: Joy Global and Campbell Soup

So as we move into September there are a few US earnings season odds and ends to sort out.  For the S&P 500 it actually has been a reasonably workable earnings season.  Yes versus - say - the 1 April earnings estimates there has been a slight deterioration almost exclusively in the more overseas facing areas (industrials, materials etc.) where US dollar strength has impacted.

It is one of these areas (materials) that I turn to first with the sheer dumping in the share price of the mining sector supplier Joy Global.  No joy in these shares today which are kicking around close to big multi-year lows: 

(h/t @JackDamn)

Let's face it the numbers were pretty poor reflecting the huge constraints on spending we noted from large mining companies like BHP Billiton and Rio Tinto (link here).  All key segments whether from a sales or bookings perspective were down with unsurprisingly the original equipment part most impacted: 

As they noted in the more details comments projects got delayed and hence they had to run their own cost optimisation initiatives too.  

However they are still making money even if earnings hopes for FY15 were pulled back substantially...

'Company now expects 2015 guidance of $1.80 in EPS on revenue of $3.1B vs. earnings of $2.50-$3.00 per share on sales of $3.3B-$3.6B'

...which still suggests US$250m+ of operating profit.  x10(ish) EV/ebit anyone?  I must admit at prevailing I prefer the lunacy as represented by the big, high yielding mining companies (see for example here) who are nearer the top of the food chain but on any reasonable timeframe Joy Global feels overly hated.  One for the watch list - and the big multi-year lows are saying something.  

And then there is Campbell Soup who I have grumpily written about before (see for example here).  Interesting since I wrote these short biased thoughts the shares have broadly moved sideways.  

So what about today's numbers?  One observation I made on Twitter shortly after the results were published kind of summarises the numbers well: 

At least $CPB is suggesting growth for fiscal '16. Ebit yoy +3 to +5%, revenues up 0-1%, some FX impact. Yawn.

At least the core US 'simple meals' (soup et al) business did ok...

At the above link at a low-to-mid teens EV/ebit multiple and a c. 4% free cash flow yield I said the shares had to be in the US$30s to be interesting.  I would stick with that view. 

Polymetal - reiterating the stock as my second favourite gold miner

I last wrote about the Polymetal back in March.  Back then I wrote positively about the Russian focused but (at least for the shares I hold) the London-listed precious metals producer. Unsurprisingly given the fall in precious metals prices the shares have fallen since then and my previous observation that below 500p indicated value has been tested...although not by that much:

The fundamentals for the company remain akin to those I have observed previously in terms of good cash cost control and free cash flow generation...  

....as the company noted in supplementary charts in the presentation document. First on cash costs (where ruble costs and US dollar revenues were clearly a helpful combination)...

...and then on the cash flow / dividend payment side (on the latter aspect the company's board will decide at the end of the financial year whether another special dividend will be granted to help boost the total shareholder yield to 4-5%).  

I even note as per the above that Polymetal at least on the free cash flow yield during the first half of 2015 even bettered the superlative (and my #1 gold sector holding Randgold - who I last wrote up here noting their scope for a 5%+ free cash flow yield generation).  You always have to be slightly careful with a very short-term period (Kinross for example is not a gold company I am very excited about) but nevertheless consistent with the aforementioned dividend policy and ok-to-good balance sheet (even adjusting for future exploration/development spend) Polymetal is a good cash flow generator. 

They also gave solid guidance which historically they have slightly low-balled on.  

 Overall I still remain comfortable with Polymetal as my second favourite gold play.  On any reasonable recovery of the gold price the shares will trade nicely above that aforementioned 500p level.

"BHP Billiton – 10 quid odd a share is just plain rude"

I wrote a piece titled "BHP Billiton – 10 quid odd a share is just plain rude" which was uploaded just now to the ShareProphets website.  You can find a link to the piece (free sign-up) here.

"Glencore – an update from the large cap mining sector coalface"

I wrote a piece titled "Glencore – an update from the large cap mining sector coalface" which was uploaded just now to the ShareProphets website.  You can find a link to the piece (free sign-up) here.

Signals from Rio Tinto

Even running the Rio Tinto share price in weak Australian dollar terms to try to pick up some benefit of selling in stronger US dollar terms the commodity equity malaise is very clear to see with only the dog days of 2008-9 have a lower share price over the last decade.

Unsurprisingly today's results could not dodge the impact of falling prices and these weighed heavily on the reported numbers as shown below.  Note however the good underlying work on cost reductions.   

Of course these continue as the constrained forward capex spending profile shows.  

But all of this is fairly well known.  What was perhaps more surprising for the casual observer was just how well margins held up in the much maligned iron ore space.  Of course it helps to have a tier 1 asset...

The above shows a very important point: with top class assets and cost discipline even in a lousy market it is possible to limit the retrenchment...although it does not help to have exchange losses on derivative contracts to push through the earnings line too. 

Nevertheless the bigger point is that Rio Tinto are a survivor...and one which currently pays a 5%+ dividend yield including an interim yield that was increased and a buy back policy that was continued: 

So is all of this sustainable?  Clearly you have to partially believe (akin to Vale's comments a week or two ago - link here) that capacity will come out of the market over time as it is inherently unprofitable plus underlying underlying conditions will rise.  Of course timing this is tough so what you also need is a good balance sheet.  With gearing levels at the bottom of their preferred range they have a little time.  

Overall the Rio Tinto numbers reminded me much of my comments on Royal Dutch Shell the other week (link here): 

'There is value from a reasonable time basis perspective...' 

Rolling the dice with Vale?

I took a look at the Brazilian (and US listed) iron ore and other metals producer Vale late last year when the shares crashed through US$10 (link here). I had a think about the stock but fortunately decided not to invest: the shares are down over 40% since and as shown below are not too far off the 10 year lows*:

So what did Vale say today in their Q2 numbers?  Well no surprises that earnings were well below last year but sequentially quarter-on-quarter ferrous minerals performed better...

...and this was broadly based from price/volume/FX/cost control etc.

Of course this is better and reflects (as noted on the conference call) underlying core Brazilian production costs in the US$12-15/t range and a 'landing cost' to China (unsurprisingly one of their large markets) at around US$40/t.  So despite lots of influences on the price realization noted below the company does have some clear capability to make underlying profits - although clearly it helps if the iron ore price is stronger.  

Unsurprisingly their capex is coming down and they see some good benefits from the further development of some of their new mines below (higher margins etc.)  

 

Nevertheless the bigger issue still remains debt...which despite some of the initiatives above is still rising...and this makes Vale a still risky bet. 

Of course the iron ore market can change.  On the conference call the company noted that globally '90m/t coming out of the mkt balanced by (lower cost) new supply.  For '16 'people will be surprised about depletion'

We will have to see about that.  Clearly it is a very difficult backdrop out there currently which means I think you stick with a major with a good balance sheet - and that's a name like BHP Billiton in my view.  There will be more than enough leverage to this undoubtedly out-of-favour part of the market via such a route. 

*Of course for balance I did buy BHP Billiton (link here) which has performed better...but that is not saying too much: