Hocus-Pocussians, Commodity Credit Stress and Economic Gambles

BHP, Rio Tinto and Glencore Face Economic Gambles but Noble Group has a Cancer


Hong Kong Financial place is by any standards, very corrupted and only concerned by its well-being.

The role of financial analysis research is misunderstood by firms and also by young people who dream to get a foot in the financial industry.

An analyst has to be independent and be allowed to express an opinion, even if it’s negative.

To us the Iceberg case has focused the attention on the risks that financial analysts face in candidly reviewing companies accounting.

The Iceberg was right at the top and at the bottom of the line.

Alireza and Noble Group live rich in a total denial of the reality.


Noble Group’s Shocking Debt to EV Exuberance:


Noble Group total debt on EV


Noble Group has a cancer

Their debt pile is a total non-sense and there is no way out for the nouveau riche subprimers of the commodity trading industry.


Noble Group net debt


Noble Group will be downgraded by S&P.


Our macro-template for how the downgrade works like this:

  1. The stricter regulatory environment in which banks and hedge funds are now operating supports credit investors, not what is off-the-book. Under Basel III, FED tier-one test, HY commodity-exposed paper becomes too costly to carry on Bank’s B/S.

  2. The Fed’s move in 2015 will level-up all parts of the financing curve.

  3. Fed is tightening the prompt part of the curve in the 2015, hard to roll billis at sub 2% each 3 mths (accounting hocus-pocus or not)…

  4. S&P will also incorporate high concentration of short-term debt in their outlook.

  5. However since S&P does NOT based their CREDIT outlook on off-balance sheet liabilities used by trader (repos, revolving L/Cs), what must go up ?


BHP Billiton, Rio Tinto and Glencore Face Economic Gambles

While they are definitely some idiosyncratic risks with Noble Group, miners are facing an economic gamble.

Miners are tough knots: they are tough.
We wish there was a way to beat them in the game, we’d be the first in the line, but there isn’t you got to do die broke with the game.

Highly leveraged miners have a cash addiction and the metal crash has cut-off their cash supply.


Rio Tinto Operations, Kitimat BC wharf lingos for Asia



Glencore is the finest transportation and marketing operation anywhere in the world.

Until recently they had hands full of aces; their scale and earning power base were impressive.

However if we got into a bad market it would be catastrophic for a such operation that is so levered in debt.


BHP Billiton , Rio Tinto and Glencore SR 5YR CDS

Rio Tinto, BHP Billion Glencore CDS



With low-flat prices, for a company like Rio Tinto it is no longer about being the lowest marginal cost producer per metric ton in the world.


AP-60 leading-edge Aluminium smelter in Saguenay-Lac-St-Jean, Quebec.

CFs don’t mean anything if you cannot cover debt.
It is very important to cover your debt service.

Having done the break-down of the macro and micro:

1. We can say with confidence that the sector could encounter serious trouble because their economics are flawed.

2. If these companies don’t generate the kind of wind it takes to pay billion dollars of debt service, hundreds of millions in OPEX, millions in payroll and if we got into a bad market we think they will face a catastrophe.


Commodity Credit Stress

If you believe that the framework is off-the-mark read this:

Wall Streeters’ attention is suddenly focusing on commodity credit stress and their reverberating effects on policy-making. (not necessarily commodity analysts)

BofA Merryll Lynch has decided to suddenly focus on a small subset of the commodity sector, one which we have been fascinated with for over a month.

They have termed it commodity credit stress; we have subdivided the equation into three components: debt leverage cancer, kurtosis and accounting-hocus-pocus.


To conclude, the market is now on par with us and standardly late as usual Standard and Poor’s will catch-up.

After a decade of greed and exuberance, only the Hocus-Pocussians cannot acknowledge.


Simon Jacques 2015/08/30


© 2015 Navigating the commodity markets with Freight and Spreads


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