Wednesday, June 27, 2012

China and the miners: place your bets

“A crisis is an opportunity riding the dangerous wind” goes a Chinese proverb.

For investors who want to make money out of one of the century's biggest and most profitable themes - the commodities boom led by China - now is a time of great opportunity and risk.

There is an apparent opportunity because the mining shares that have done so well are relatively cheap after several months drifting lower.  And risk because the cause of the share price weakness, the slowdown in China, could yet end in a crash.

The China-boom-or-bubble debate has been a hardy internet staple on business/investment chat sites for several years.  Perhaps only the inflation-deflation argument has generated more heated argument.

On the one side you have the China bulls who believe the country's thirty year 10% annual growth record is good for another decade or more yet.  They call the current slowdown a blip and claim normal service will be resumed later in the year as government stimulus measures kick in. These include the first interest rate cut for three years and a car subsidy program.

The China bears fret that the incredible China boom is literally that - too good to be true - and that Chinese growth is unsustainable  Just like Ireland, Spain and Japan, a boom underpinned by cheap money and property speculation will give way to bust.

"Dubai times a thousand" was how a renowned bear (Jim Chanos) put it but he said that 2 years ago and, although property prices have come down in some top tier cities, the general crash he predicted has yet to materialise.

I lean towards the side of the bears but it is an oft-observed fact that the economic phenomena that seem unsustainable can persist for much longer than you think.  People have been calling the demise of the US (and Japanese and UK) sovereign debt markets for years.  They may be proved right eventually but you can lose a lot of money shorting something prematurely.

As for the bull case, I have a lot of time for Dr Stephen Loeb and he is in the "blip" corner.  His article "Silver, Copper, Gold and China" states the case for continuing China growth and a recovery in commodities (and miners) very well.

If you are persuaded by his argument and think the commodities boom has a lot further to run, then now would be a good time to back your judgement and buy ETFs which hold physical commodities like gold and copper which have suffered recently.  Loeb is very keen on silver which has a key industrial role in for example solar panel production.

Another option is the shares of mining companies.  Obvious choices are highly diversified giants quoted in London such as BHP and Anglo-American.  In the past I have had profitable dealings in mining royalty holder, Anglo Pacific (AFP), which has recently been marked down due to some specific problems at a coal mine which it will recover from (see here).

Finally I am intrigued by Glencore which always seems to be in the headlines, most recently because of its on-off merger with Xstrata.  It's shares have slid by almost a third in just a couple of months.  The markets have been a bit dubious of this company I think partly because it's profits derive from trading commodities as much as producing them and the trading bit is somewhat opaque.  However there is no doubt that the people who have built up Glencore, including multi-billionaire Ivan Glasenberg, are extremely smart and ambitious.

Buying Glencore would be a triple play on a China recovery, a successful conclusion to Xstrata merger and on the company's management.  Too rich for my blood but the share price, at under £3, makes it tempting.

From our website:  Massive tax rises in Spain for 2012

Sunday, June 17, 2012

Super bid premiums are a vote of confidence in UK shares

With UBS equity strategists talking about a 20% chance of a "black cloud" scenario (mainly involving Eurozone calamity) leading the FTSE down to 3,500, it might seem an odd time to be touting UK shares.

But a bit of news from the oil sector last week gives British shareholders cause for optimism.  Cairn Energy agreed to buy a small North Sea oil company called Nautical Petroleum last week but had to pay a 50% premium to the pre-bid share price to get the deal.

That's been greeted favourably by analysts covering both Cairn and the company being acquired, so it sounds like a fair price and Cairn are not believed to have overstretched in valuation terms looking at the price per barrel of oil it is potentially getting for its £414m.

So does that mean that some UK companies are well under-priced?  If hard-headed oil companies are prepared to pay 50% more for assets than the current market value then there is certainly a case to be made in this sector even though there is some weakness in the oil price right now.

This video clip with an industry observer ends with an interesting exchange about Premier Oil, a much bigger North Sea specialist which has recently had a somewhat depressed share price:

Premier Oil has been an acquirer itself this year but the analyst reckons it is not too big to be on the receiving end of a bid and I would expect a large premium to its current share price if that were to happen. It has big output growth in the pipeline and was boosted by recent UK budget changes to encourage North Sea investment. As a bonus it has just announced a big find in the North Sea which should boost its value still further: Cove announces Carnaby oil discovery.

And the bid premiums have not just been restricted to oil company acquisitions.  When IT Group Logica was taken over in May, its share price soared 62%.

Buying companies in the anticipation that you will benefit from a bid is a dubious strategy and can lead to years of frustration, a good example being Smith & Nephew which has been a permanent "possible target" story for many years.  Even Sainsburys has been the subject of more bid rumours than it has sold hot dinners.

But the prices that companies are prepared to pay for other companies does offer encouragement that quality stocks are not intrinsically overvalued right now whatever the short term outlook.

From our website:  Starting a business in Spain

Saturday, June 9, 2012

Malaga Airport's response to the crisis? Jack up prices

I find Malaga Airport a somewhat irritating and depressing place.  Very big, new and modern it may be but it's hard to escape the feeling of being a captive market for the shops and restaurants that, almost without exception, charge eye-wateringly high prices.

Obviously I am not naive enough to expect airport prices anywhere to be low or comparable with those in the real world.  But Malaga Airport takes the art of fleecing innocent travellers to a new level.

When you land at the airport and come out of the arrivals hall there is a duty free shop which has a refrigerated beer display unit selling San Miguel.  As I often arrive late and enjoy a beer after a long journey, I   could be considered part of the target market for the beer selling tactic but I have always been put off by the price - €9 for 6 small cans, about 350% more than the same beer would cost at the supermarket.

It's the same all over the airport with sandwiches, drinks and snacks at the top end of the range and too rich for my blood.  The prices in the London Airports are at or just above normal high street prices but the Malaga Airport prices are so high it smacks of an attempt to fleece foreigners.

Even cigarettes in the Duty Free shop, an area which is supposed to offer travellers a chance for a bargain, are about 15% more than the normal "estanco" prices.  There is actually an estanco just opposite the terminal entrance which sells cartons of cigarettes at normal, not airport rip off, prices.

As for the shops selling souvenirs, fashion items and electrical goods, they are a joke.  They are so expensive that you rarely see them doing any business.  Even the fast food outlets like Pizza Express and Burger King are expensive - I quite often see holiday-makers pulling faces when they see the prices on the boards.

In these times of grave economic and financial crisis for Spain (see Spain's Fred Goodwin has sunk his country's credibility) you might have thought that there would be plenty of deals available, cut-throat competition and desperate bids by retailers to get the punters buying.  But in the airport and beyond I don't see much different - the restaurants in tourist areas are actually quite expensive and the retailers seem pretty much the same complacent bunch as ever.

As for the beer in the arrivals hall - I noticed on my latest trip that they had at last done something about the prices . . . put them up.  Now €9,60 for six small beers.  Cheers!

From our website:  Will you get caught not declaring Spanish tax?
OctoFinder Blog and ping Spanish Insight - Blogged