Wednesday, September 26, 2012

Glencore, Xtrata: "Short 'em All, They Aren't Worth the Paper They're Printed On" * (XTA.L; GLEN.L; BHP)

Back on Sept 17 we cautiously cautioned "Be cautious" regarding this Reuters headline: "Hedge funds see further profit from Glencore-Xstrata (XTA.L; GLEN.L)":
Although it's up 25% from the post-IPO low Glencore's stock isn't priced high enough that a smart management would want to use it as currency. I'm not sure there will be any higher offer so, at today's Glencore quote it looks like an 1131p price for XTA or 7.4% higher than the current 1053.
That's a big spread for a deal that is being talked about as a lock. We'll know the answer by Sept. 24....
Today Xtrata is down 9.2% from nine days ago at 956.30, the 3.05 conversion is indicating 1032.27, down from that 1131, the deal has been delayed from the Sept. 24 drop-dead date and the mining business looks worse than ever, warnings from CAT etc.

Here's Bloomberg's Management blog:
The $35.1 billion Glencore-Xstrata merger saga continues to rumble on, with the Xstrata board delaying its response to the proposed takeover by another week to resolve management and board issues at the new company. All the political and personal intrigue in this deal is masking the much bigger issue, namely the imminent sell-off of the mining sector. Some investors seem to be worried about whether their holding should be in Glencore (GLEN) or Xstrata (XTA) stock. My view is: Short them both.

It’s no secret that the mining industry is heading for a fall. China’s economy has driven the decade-long super-cycle in metal prices. But China’s growth is slowing to perhaps 6 percent to 7 percent a year, and infrastructure spending is slowing more quickly than that. The iron ore spot price has dropped 35 percent from its peak in 2011.

How are the mining companies responding? There is some belt-tightening going on, for sure. BHP Billiton (BHP) just shelved a $30 billion investment in a copper and uranium mine. Fortescue Metals Group (FMG) laid off hundreds of workers, and cut back expenses on everything from airport parking to the company-funded barbecues. But it won’t be enough. During the 15-year boom in the mining industry, expenses rose at least fivefold. Every expense from worker pay to infrastructure, shipping, and equipment has mirrored the increases in commodity prices. Prices can drop overnight, but costs take years to correct themselves. Xstrata and Glencore are heading for tough times.

The real issue here is the supreme inability of companies to respond quickly to changes in their operating environments. Markets are designed to allocate resources quickly according to changes in supply and demand. But companies have team-based decision processes that make it hard for them to agree on the need to change, and even harder to respond effectively. Layoffs, closures, reallocation of resources, cost-cutting exercises: All of these are politically charged debates between people with vested interests and personal loyalties....MORE
*I've mentioned* that one of my mentors was the best trader I've ever met. Creative, intelligent, disciplined (and bankrolled).
From time to time though, he would lose his mind and run around the floor screaming
"Sell 'em all, they aren't worth the paper they're printed on".
or the variant  "Short 'em all...":

* Jan. 9, 2008-Can you trust the First Bank of Nigeria?
...One of my mentors, and one of the sharpest traders I ever met, had the most common flaw of students of markets, hubris. In his case it was non-fatal, more of a cost of doing business:

1) He had somehow ended up with some of the Boston Chicken-Einstein/Noah bagel bonds. We know how that worked out:
...Short-sellers got teary-eyed this week following word that old faithful Boston Chicken (Nasdaq: BOST) finally bit the Chapter 11 bankruptcy dust. Though hardly unexpected, Monday's announcement dropped the stock to $0.50 a share, down an astonishing 97% from its 52-week high near $16.
Source (scroll to "A Chicken Autopsy")
He knew it was a finance scam "but the debentures paid 11%"

2) He got into a rigged blackjack game in Yugoslavia. Lost half-a-mil. Said he started to think it was was fixed when he was down a couple hundred.
Wife: "Then why the hell did you keep playing?"
Him: "I thought I could beat it".