KME - Herding the cats
All,
Please refer to our unchanged analysis here.
Renewed efforts by certain lenders to sell their exposure in the borrowing base facility suggests that any financing solution is still some way off. The copper price continues to hover perilously close to USD10,000 per ton with today’s spot price of USD9,877.
Clients vs Banks:
- We have been arguing for some time that the natural source of cash to fund the copper inventory is the company’s clients - not its banks. The latter are overexposed as is and are not keen on financing copper purchases at $10k/t only to be even more exposed to the company when those prices drop again. - Clients in turn often face similar pressures to KME and their likely larger number makes it difficult to herd the cats. One client agreeing to pre-finance its copper (or shorten payment days considerably) would be financing the competition too, if the other client continued to receive their product without advances.
Positioning:
Last month we halved our position in KME on the back of concerns about the lack of progress in organising additional liquidity. Our core thesis remains that the sea of liquidity in the market still favours the necessary capital being available eventually. In the absence of that cash, KME will have to repeat the volume reduction policy that supported working capital management in the December quarter.
Happy to discuss any ideas or thoughts.
Aengus
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E: amcmahon@sarria.co.uk
T: +44 203 744 7055