Sunday, November 22, 2015

"Peabody Energy Enters Into Agreement To Sell New Mexico And Colorado Assets" $BTU

Press release

Peabody Energy (BTU) announced today that it has entered into a definitive agreement to sell its New Mexico and Colorado coal assets to Bowie Resource Partners, LLC for $358 million in cash, subject to customary working capital adjustments. Bowie will also assume approximately $105 million in related liabilities. The transaction was entered into following a competitive bidding process and includes the El Segundo and Lee Ranch mines in New Mexico and the Twentymile Mine in Colorado, which have combined coal reserves of approximately 330 million tons. [...]

Peabody's New Mexico and Colorado mines are projected to produce 11 million tons in 2016. Based on Peabody's current operating plans, pre-tax cash flows after capital expenditures for these mines are projected to be approximately $70 million in 2016.[...]

In addition, the sale reduces the amount of Peabody's self-bonding in place for reclamation obligations by more than $300 million.
Observations: less than a dollar per ton of coal reserves. A 15% yield to 2016 projected pre-tax cash flow after operating expenditures (6.6x multiple).

Most recent quarter (10-Q) for all of Peabody Adjusted EBITDA was $129 million and capital expenditure projection for 2015 was $36 million per quarter, which would give a net "free cash flow" number of $93 million quarterly, or $372 million annualized.

If you were to capitalize that at 6.6x, you would reach a value of $2.46 billion. That's a problem because Peabody has a $1.17 billion term loan (first lien), and $978 million of secured (second lien) notes - and $6.3 billion in total debt!

No wonder the current yield on the sub debt is now close to 100%!

Great Critical Post On Einhorn

From Value and Opportunity:

"Either Einhorn assumes implicitly that cost of capital goes down dramatically or he has some 'secret' that I don’t know. If I look at Einhorn’s last pitches, especially AerCap, SunEdison and Consol, there seems to be a common theme: He is always pitching capital-intensive companies with significant debt where he assumes pretty low cost of capital in order to show upside."
A correspondent writes,
"I think there's a mix of macro and micro forces at work here: on the macro side, by pressuring investors to reach for yield, the Fed has made it possible for crappy companies like SUNE to pursue the financing strategies they have. On the micro side, value guys like Einhorn have great historical returns, which has led to inflows, and now they're managing more money than they can realistically invest, which has forced them to put money into increasingly marginal stocks."
SUNE has been completely obliterated. Seems like a decent chance that the bear market has finally arrived.

To Jesus Christ, Our Sovereign King (St Mary Choir and Orchestra)

Wednesday, November 11, 2015

High Plateau Drifter: "Simplicity"

Optimists like to point to the monthly chart of the S&P 500 as showing a completed three wave correction from the high of 2000 to the low of 2002, then to the rally high of 2007, and then to the bottom in early 2009, concluding that the rally over the past 6 years from that 2009 bottom is the beginning of a brand new upleg that should last at least another 10 years.

However, when you look at a monthly chart of the NASDAQ 100, below, you will see a very different and worrying picture.

The top in 2000 produced a nice 5 wave impulse into the bottom of 2002, and from that point forward you see a very clear 3 wave corrective rally of 13 years duration though today as the NDX attempts a retest the high of year 2000 at 4816. The NDX monthly high of 2239.23 in 2007 failed to retrace even 38.2 % of the prior decline.

I would suggest that the NDX (Nasdaq 100) is the best measure of market sentiment, containing as it does the large cap tech and cocktail stock favorites.

Zero percent short term interest rates have driven the cell phone boom from 2009 through 2013, while from 2013 through the present low rates have provoked a boom in social media stocks. Ultimately the social media stocks are driven by advertising revenue. And now we hear that Facebook users are posting less content, and that one billion of its 1.5 billion users never click on an ad.

The direct internet sellers, including the most prominent survivor of the dot com craze, Amazon, and others such as Ebay, and more specialized internet sellers such as Best Buy, Midway (for guns and hunting) and others do plenty of advertising. But it is direct advertising of goods they are selling, Those goods are found by search engines to which these sellers pay for position in the search results. Advertising in the form web site maintenance and search engine position payments is a substitute for the expense of bricks and mortar locations including salary expense. It is durable ad revenue as the customer finds what he or she wants with a maximum of convenience and a minimum of wasted time.

Social media, including especially Facebook, is trying to do something very different.

They are hoping to stimulate demand by having a member click on an add and then tell their friends about their experience, thereby generating demand where it did not previously exist. It is an attempt to gin up demand through social pressure. Thus, social media advertising is highly leveraged in several ways, some of them unexpected and yet to be experienced. In the rare case that a social media advertised good or service is truly useful and desirable, likes from friends can create and spread demand like wildfire. But if the new good or service is only mediocre or competes head to head with well known and liked goods sold through search engines, then being advertised on social media is not terribly useful and the ad spend can be a total flop.

But more significant is the fact that social media advertising and its hoped for multiplier effects are entirely at the mercy of social mood. Should the social mood darken and should a big “stop spending” move become the hip and cool thing, social media ad revenue would crater. Back in the winter of 1979-80 during the Carter administration, G. William Miller, then Secretary of the Treasury, went on the nightly news and, in an effort to curb raging inflation, urged everyone to lock up their credit cards and stop spending. Retail sales collapsed 9% within two months and a publicity campaign was orchestrated to get those credit cards back out of lockup. Social media would be the perfect medium for some of the armchair revolutionaries on ZH to make “buying shit you don't need” un-cool and paying off credit card debt way cool. It would only take 25% of Americans locking up their credit cards to crash the system and destroy most of the oligarchs, all the while improving their circumstances and avoiding the unpleasantness of failed armed revolution.

Of course any such social mood and attendant campaign would vaporize social media ad revenue and ultimately, the social media stocks themselves. Of course the more immediate threat to the social media stocks is the fact that so much of their ad revenue comes from VC funded social media startups desperate to gain traction.

We may be a ways away from a profound swing in social mood, but then the anger of the vanishing middle class suddenly visible in this Presidential primary season is an early warning of what is to come. The monthly chart of the NDX from 1997 gives clear warning that a retest of the 2002 bottom is a reasonable possibility.

Market Getting Realistic Again?

Tuesday, November 10, 2015

Looking Back on RadioShack

September 2014

I would've been honest with investors that the business was in runoff mode. Liquidating stores would have generated cash. It's possible that the honest, pessimistic approach would have caused the stock to be cheap. If so I would have repurchased shares. If shares were expensive, I would have issued more and bought shares of banks trading at huge discounts to book value. Could've been a Berkshire.

Anyway, management basically did the opposite of my plan. So now there are only two possible scenarios, one of which is going to occur in short order: either they file for bankruptcy protection or they get a generous "rescue financing" that lends them more cash and would probably be tantamount to a bankruptcy in terms of the dilution (like the Molycorp financing, but worse). Even all the sell side people admit these are the only two scenarios.
October 2014
I've been looking for an electronics retailer that has done what I say Radio Shack should have done; go into runoff for the benefit of shareholders. A correspondent suggested TWMC... Here's a key difference between TWMC and RSH: there's a former CEO of TWMC, Robert Higgins, who owns 45% of the company. That makes it less likely that money will be wasted on store renovations and "super bowl" advertisements.

"Arch Coal Lenders Aligned With Oaktree Said Seeking Control" $ACI

The company, the second largest coal miner in the U.S. by volume, said in a filing Monday that it’s in talks with creditors on a “significant restructuring” of its balance sheet. Arch may file for Chapter 11 protection regardless of whether it strikes a deal with creditors, it said.

The miner owes about $90 million in coupon payments on Dec. 15. Advisers for its lenders are in talks for a deal that would put the company into bankruptcy by Jan. 15, when a 30-day grace period for the payments would run out, said the people, who asked not to be named because the negotiations are private.