Biting the dust?
One of the categories for Montaka’s short selling framework is structural decline. Another is asymmetric risk.
One company that we believe fits at least both of these categories is Freeport-McMoRan, a U.S.-based natural resource producer of gold, silver and copper with operations in Asia and Spain.
The company has a highly geared balance sheet. Importantly, the company’s lenders have imposed covenants that require it to maintain leverage below 4.75x through 2016 and 4.25x in 2017.
Already producing negative free cash flow, there is a very high risk that the company’s covenants will be breached and its credit downgraded to junk status. The chart reveals a spike in Credit Default Swap prices for FCX.
US-based miners including Walter Coal and Alpha Natural Resources have already filed for bankruptcy protection and others including Arch Coal are knocking on the door.
The strong US dollar is hitting a wide swathe of corporate America—from consumer products giants like Procter & Gamble Co. to technology companies such as Microsoft Corp. and pharma companies such as Pfizer Inc. Revenues from overseas expansion are shrinking in value as the dollar rises or failing to keep up with rising dollar-based costs.
Moreover, all oil and gas production in the US is suffering from falling commodity prices and rising US dollar-based costs and the same can be said for about half of copper production in the US. Competitively they are also suffering from emerging market producers who are benefitting from weaker currencies.
One of the desirable benefits for Montgomery in running global funds is that the work of the global team can inform the analysts on the domestic team. The developments above must inform any Australian investor who is considering trying to pick the bottom of the resource and energy sector busts.
Roger Montgomery is the founder and Chief Investment Officer of Montgomery Investment Management. To invest with Montgomery domestically and globally, find out more.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Chris
:
“high” US dollar ?! Sorry Roger, but I have to disagree, based on current US interest rates and all the QE that has gone on…if they think it is tough now, wait until rates really DO start going up.
My USD denominated assets that I bought back in 2011 have enjoyed a handsome run, but most of that is due to the S&P500 and not because of currency. I think that it is not the “strong” US dollar but more that their rising costs are hurting…the ‘strength’ is a furphy.
Russell
:
Roger I believe Trump has commented along these lines. What chance of him becoming President and doing something about the price of the dollar?
Roger Montgomery
:
It’s impossible to predict the currency and even harder to predict Trump!
Random Ash
:
Montaka has benefited from the full 36% decline this calendar year alone?
Benedict Hess
:
Just to clarify then. Roger, are you suggesting then that value investors such as yourself, should consider investing in quality businesses, facing the cyclical impact of a high USD, such as those in the consumer, industrial or technology sector? There may even be excellent opportunities in the materials sector because of this cyclical factor.
Roger Montgomery
:
Cycles often present opportunity but the merit in the investment is dependent on the cycle that has generated the opportunity. The business cycle gets a tick, the commodity cycle not so much.