David Fuller and Eoin Treacy's Free (Abbreviated)
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July 29 2014

Commentary by David Fuller

EU Aims at Russian Banks, Technology in Widest Sanctions

Here are some brief samples of this report from Bloomberg:

The European Union curbed Russia’s access to bank financing and advanced technology in its widest-ranging sanctions yet over President Vladimir Putin’s backing of the rebellion in eastern Ukraine.

EU governments agreed today in Brussels to bar state-owned banks from selling shares or bonds in Europe and restricted the export of equipment to modernize the oil industry, a key prop for Russia’s economy, two EU officials told reporters. New contracts to sell arms to Russia and the export of machinery, electronics and other civilian products with military uses will also be banned.

“The political implications of the escalation in tensions are likely to cast a further chill over relations between Russia and the West,” Citigroup Inc. analysts includingEric Lee and Tina Fordham said in a note to clients before the EU decision. “Economic costs are starting to bite, but it could be a while before the economic consequences bear domestic political costs for Russia.”

The U.S. is also preparing to announce tougher sanctions on Russia after months of separatist unrest in Ukraine’s easternmost Donetsk and Luhansk regions and the disaster involving a Malaysian Air jet¸ which U.S. officials have said was probably downed by a missile fired by the pro-Russian rebels. At least 10 soldiers and 28 civilians died in violence over the past 24 hours.

The new package of EU sanctions will “track pretty closely” with those already imposed by the U.S. and the Obama administration plans to unveil additional penalties as soon as today, PresidentBarack Obama’s spokesman said.

And:

For the first time, the EU sought to hobble broad swathes of Russian industry, with the goal of accelerating the flight of capital from the country. Russian economic growth will slow to 0.2 percent in 2014 from 1.3 percent last year, the International Monetary Fund said last week.

“Russia needs the opposite, Russia needs internationalization, globalization to make Russia a better place to do business,” Tim Ash, an emerging-market economist at Standard Bank Plc in London, told Bloomberg Television earlier today. “In the short term, the impact of sanctions could be to push Russia into recession.”

Taking aim at the Russian financial system, the EU prohibited state-owned banks from selling securities with more than 90 days maturity to European investors. The result will be “sharply increased costs of issuance,” the European Commission predicted in a background paper last week.

David Fuller's view

My impression is that these European Union sanctions are tougher than what would have been remotely possible before the MH17 massacre, or perhaps even last week.  Moreover, they will last for 12 months, albeit first reviewed at the end of October, but requiring unanimity from all 28 members to drop the sanctions prematurely.  That would appear unlikely.  The US has also responded in kind by increasing its sanctions to cover Russian banks. 

The interesting question is how will Putin react to these new sanctions?

This item continues in the Subscriber’s Area and includes links to three additional articles.

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July 29 2014

Commentary by David Fuller

Email of the day 1

On Santander bank:

“Dear David, Regarding the current search for yield climate and dividend paying reliability I noticed the remarkable dividend quoted by Santander bank of 8% which probably explains its strong performance this year. What are the future prospects for maintaining this? Do you use any method for evaluating dividend reliability in the general market?”

David Fuller's view

Thanks for an interesting email which is likely to be of relevance for some other subscribers.

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July 29 2014

Commentary by David Fuller

July 29 2014

Commentary by David Fuller

Email of the day 3

On the Big Mac Index:

“This week The Economist published the "big mac index". I am wondering what David, Eoin and the collective is thinkng about this index. Do you consider it a "useful" way to judge the value of a currency. Thank you in advance, and best regards.”

David Fuller's view

The Big Mac Index was invented by the Economist in 1986 and it has been a great source of publicity and fun, so thanks for reminding us that it is still being mentioned. 

This item continues in the Subscriber’s Area, where a relevant table is also shown.  

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July 29 2014

Commentary by Eoin Treacy

Banco Espirito Santo Bonds Drop After Report on Estimated Losses

This article by John Glover and Joao Lima for Bloomberg may be of interest to subscribers. Here is 

“If they report that kind of a loss, then they have to report some kind of a solution at the same time,” Raymond said in a telephone interview. “Unless they can find a fully private-sector solution, then the subordinated debt is in trouble.”

The lender’s stock has slumped 40 percent this month, after three companies in the Espirito Santo group requested protection from creditors following missed short-term note payments at two of the units. Portuguese Central Bank Governor Carlos Costa has sought to reassure depositors and investors that Banco Espirito Santo can withstand losses stemming from the group’s difficulties, saying yesterday that new investors will be found.
Capital Raising

Paulo Tome, a Lisbon-based spokesman for Banco Espirito Santo, declined to comment on the Expresso report. The bank is scheduled to report first-half earnings tomorrow after the close of trading in Lisbon.

Several entities have expressed an interest in taking a stake in the bank, which indicates it can raise capital, the Bank of Portugal said in an e-mailed statement yesterday. If that isn’t possible, then the government has funds left over for bank recapitalization left over from its international bailout in 2011, it said in the statement.

Even after losing about 60 percent of its value since the beginning of June, Banco Espirito Santo is the nation’s second- largest lender by market value after Banco Comercial Portugues SA.

 

Eoin Treacy's view

Banco Espirito Santo’s capacity to shock investors has declined over the last couple of weeks as more detail about the company’s balance sheet difficulties have emerged. The share has unwound its short-term bounce and has returned to test the mid-July lows near 35¢. It will need to hold the current area if potential for an additional bounce is to be given the benefit of the doubt. The company’s ability to do this will likely be linked to its success in finding an outside investor capable of bridging the funding gap. 

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July 29 2014

Commentary by Eoin Treacy

Part II - The Tide Is Rolling In

Thanks to a subscriber for this report from Cowen and Co which may be of interest. Here is a section: 

As shown in Figure 1 the higher-levered seniors ABX and NEM have been focused on selling non-core assets (and were reportedly in talks to merge and rationalize assets; see our report Barrick/Newmont - Sorting Through The Noise). Meanwhile, AEM and AUY have taken advantage of healthier balance sheets and historically-depressed equity valuations to buy production and expand project pipelines. Looking to 2015, we expect GG to be in the best financial position to engage in M&A. That being said, we see NEM and AUY as having the capacity to make additional purchases, and ABX and KGC being the most challenged.

From a growth perspective, with their existing pipelines, both Agnico and Yamana are now both in a solid growth position after their joint purchase of Osisko – receiving not only operating assets, but both a near-term and longer-term development projects. Both Barrick and Kinross have little to no net growth ahead of them, and what production replacement they have will come at a heavy, up-front capital burden. With Barrick’s high financial leverage, we believe they will need to either delay major projects (Donlin, Goldrush, Turquoise Ridge O/P, Pascua-Lama completion), prioritize, or significantly reduce the initial scope – most likely all three. Like Barrick, Kinross has several large projects (Tasiast expansion, Lobo-Marte) that they need to execute on in order to counter declining existing production, but would face financial challenges.

Despite recent M&A activity, we see the senior gold producers as much better positioned both financially and operationally, to withstand a $1200/oz-$1300/oz gold price environment vs. last year. It is our view that they can now afford to make acquisitions to be built at a later date, and take advantage of low junior miner market valuations.

 

Eoin Treacy's view

A link to the full report is posted in the Subscriber's Area.

The gold mining sector continues to go through a painful period of rationalisation but companies that did not engage in overly profligate spending before gold’s decline are now being rewarded with relative strength in their shares. 

 

 

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July 29 2014

Commentary by Eoin Treacy