Latin Report

*Cemex reported a nifty rise in Q1 profits thanks to lower financial costs. CX net came in at $336 mn, nearly 10x prior year level of $35 mn! Sales were up 1% to $3.1 bn but up 6% in constant currency. Cement sales were flat but aggregates, a much larger business and ready-mix both saw sales up 4%, boosted by higher prices in Mexico, Latin America, and Europe.

EBITDA cash flow (earnings before interest, taxes, depreciation, and amortization) fell 2% in pesos to $559 bn but were up 2% in constant currencies. Debt was sharply cut to $12.6 bn from $14.5 bn at the end of 2016 and CX expects to meet its target of cutting debt $3.5-4 bn over last year and this. It achieves this by selling assets and is within $100 mn of its target of such sales of $2.5 bn last year and this. Mexico is having a building boom and cement sales there rose 10% y/y. However US cement volumes were down, mainly because of sale of Chihuahua and other assets.

*Mexican under-the-radar multinational corporation Mexichem reported on Q1 after the market closed yesterday. MXCHF reported good numbers despite a tragic fire at its vinyl chloride monomer plant operated with Pemex. It also should gain from the Trump Administration back-down from tearing up the Nafta treaty, which now only will be renegotiated. However there has been no US trading today. The market maker has boosted the bid to $5.43 and the ask to $5.78 from prior close at $5.37.

Consolidated revenues in pesos rose 11% to the equivalent of $1.4 bn and in constant currencies by 13%. Its cash flow (EBITDA) rose 3% to $207 mn, and in constant currencies by 5%; but for vinyl resins, compounds, and derivatives the rise was in double digits. Fluor revenues declined slightly because of price cuts.

By region, sales are overwhelmingly to the US, by 16% our of total sales to North America (including Mexico itself and Canada) or 38%. South America buys 22%; and Europe, which MXCHF has been investing, 37%.

First quarter net majority income was $52 mn, down 10% y/y producing a 12-mo adjusted return on equity of 7.9% and return on invested capital of 6.3%, numbers which MXCHF considers more useful than those for a single quarter, boosted by higher prices in Latin America finally passing through as inventories were drawn down by its customers. Capex was down by a quarter, as predicted last year, which helped.

This is still a Mexican company and its financial costs rose sequentially by 4% to $45 mn. Higher working capital needs were offset by lower taxes but they nearly doubled from the Dec. quarter. Debt remains a risk, at 4.x adjusted EBITDA (which mostly excludes insurance payout from the Q4 PMV plant disaster, still being negotiated.) Total liabilities rose 2% sequentially to $4.812 bn, 40% above majority shareholder equity.

MXCHF predicted that 2017 will be “a very positive year” with EBITDA up 10-20% from 2016 levels.

*Cosan SA of Brazil produced its consolidated SEC 20-F form today under International Financial Reporting Standards in Brazilian reais. It is 270 pages long in English, and even longer in Portuguese.

CZZ's report on details of how it consolidates various subs remains complicated. Last Sept., CZZ sold to a sub of TIAA-CREF and other shareholders all but 3% of its two Radar Propriedades Agricolas subs which no longer have to be consolidated in CZZ results. A month later it merged its former America Latina Logistica sub into Rumo, which it wholly owns. It also negotiated with Shell to remove fixed-date call options over the two Raizen Energia (which refines sugarcane and ethanol) and Combustiveis (which markets them under the Shell brand). They resulted from Cosan acquisitions which had been exercisable in 2021 and 2026. The subs are no longer proportionally consolidated in CZZ statements.

It moreover identified a tax liability error.

Its other subs include Comgaz which pipes to customers in the São Paulo State; Cosan Logistica, which transports, stores, and loads at ports sugar and grains; Moove which makes and sells Mobil- and Comma-branded lubricants in Latin America, Europe, and Asia. Its combustible and lube businesses compete with Petrobras (PBR), which I expect will be a less fierce contender after the bribery revelations.

With all these adjustments it is hard to see what happened in 2016, but here goes. In Reais, net sales were up ~1% last year to Rs 12.518 bn and costs of sales fell nearly 4% to Rs 8.3175 bn, producing a gross profit up 11% to Rs 4,.201 bn. Total operating expenses hit 2.155 bn, up 65% and net income was nipped by as well by discontinued operations (earlier in the year). It came in at Rs 277.8 mn for those who (like us) own the ADR of the parent, vs prior year's Rs 405.6 mn.

Despite this, CZZ declared a dividend totalling Rs 975.4 mn, up 80% in Brazilian currency, or $299.3 mn, up 111% in US dollars. Per share the payout was $1.1307n up from 51.42 cents the year before.

Cosan also repaid 9% of its outstanding debt which now is at Rs 12.1 bn. This is a tough one to cover because of shifting assets and the cyclicality of sugar production and demand and a similar volatility in ethanol and fuel markets which moreover correlate with sugarcane prices.

Moreover as a regulated or licensed operator in fuels and lubricants in Brazil and several states there, CZZ has to meet regulations lest if face penalties. The market for ethanol is heavily regulated in the USA and elsewhere which can give an edge to CZZ's competitors which include Archer-Daniels-Midland, Cargill, A.E. Stanley, a sub of UK Tate & Lyle, and Bunge. In Brazil however CZZ is the biggest. There are more risks including accidents and environment, labor relations and concentration of clients, but you get the idea. This huge dump of down-directed data may hit the share price further but so far it is down only 1.23% here after losing 2.5% in Brazil.

*As I have warned repeatedly, Vale earnings, up in triple digits, came in below forecasts. Revenue and EBITDA rose but of course this cannot continue if China stops producing steel it doesn't need and is barred from exporting. Moreover iron ore costs are up and volumes down. Sanford Bernstein analysts predict that VALE will rise to $14.20, up 65%. I wonder what they are smoking.

More Americans

*Validus Holdings (VR) missed forecasts with lower earnings at $94.6 mn or $1.17 per share. However excluding non-recurrent items, the earnings fell to only 95 cents/s vs estimates from Capital IQ of $1.19 excluding one-offs. Prior year level for adjusted earnings were double that at 1.98/sh and $166.8 mn overall.

VR faced higher competition over property and casualty reinsurance and only wrote $990.8 mn in premiums, down 1.4% y/y and also below estimates of $1.03 bn. VR also suffers from low return on investing. Return of average equity was 10.2% vs prior year's 18.1% and annualized net operating return on equity fell to 8.3% from prior year's Q1 level of 13.2%, both seriously down. Harry Geisel, our expert says to take some profits but is covering the conference call as I write.

However book value on each share grew 2.9%. There were no particular events which cut the net, just the cost of money. Its combined ratio hit 83.2% which is good (lower is better.) I always listen to Harry. I lightened up.

​Rest of the World​

*Orocobre, Australian producer of lithium in Argentina, reported sequential sales revenues rose 19% to $32.1 mn on higher prices while the cash cost of production was up only 1%. The increase came despite pond management problems disclosed in Feb. and heavy tropical rains in the summer quarter which cut tonnage by 21% to 2.784 mainly because of maintenance issues in Chinese lithium plants which halted production increases there.

This led to OROCF operating margins of 65% (which is unsustainable) and gross cash margins of 21% (ditto). It also gained from refunds of value added taxes imposed by the prior Argentina govt on exports, which we reported as they came in. It also divested several lithium brine sites to Advantage Lithium of Canada while retaining 50% of the interest, to decline to 25% and also a 1% royalty. It also will sell to Lithium Ltd, also of Canada, for sale of exploration interest in Salinas Grande for $4 mn (US) at the closing plus $1 mn for each of the following 3 years. OROCF announced startup of phase 1 drilling at Cauchari, in Jujuy province 20 km from its existing site in combo with Advantage, which will move to phase 2 later this year if all goes well. This is an inferred resource where no drilling has yet been done.

OROCF is now working on creating a battery grade lithium hydroxide plant able to process 10,000 metric tonnes in Japan, something of a pilot. Lithium hydroxide commands a much higher price than lithium carbonate and OROCF has a Japanese partner in Toyota Tsusho, a sub of the car company alongside the province of Jujuy. OROCF is also planning an Olaroz phase II expansion for lithium hydroxide for which Ausenco is the designer in Argentina.

OROCF expects H2 production to reach 5,500-6,000 metric tonnes on which the price per tonne will hit $10,000 (US). It aims to rectify the pond brine volumes by increasing the area where solar evaporation occurs and pump more between pumps. The first of six new pump stations has come on, and the total cost will be $1.5 mn. It earlier rectified the thickener resident time using hydrocyclones installed to remove solids blocking the pumps.

*Nokia rose over 7% today in European trading confirmed by Wall St. It reported revenues which beat forecasts by 1.5% at euros 5.39 bn but which fell y/y by nearly 4%. Its earnings of 3 eurocents per share were in line with the Capital IQ forecast. While networks sales dropped 6% y/y, mostly because of lower volumes for IP, Optical, and fixed, the tech area (patent trolling) saw a 25% rise in revenues, boosted also by the acquisition of Withings. It forecast that it would save as much as euros 1.3 bn by the end of next year and sell lots of new IoT and NOK branded former Withings smart-phone linked consumer goods, including high-priced personal digital health devices (scales, blood pressure monitors, no-hole thermometers, etc.)

It also launched last year a Nokia-branded virtual reality camera for filmmakers, which will come out in a cheaper version for non-pros. It will continue making cellular exchange equipment and infrastructure after acquiring Alcatel-Lucent last year. It also outsourced its production of branded NOK-designed mobile phones to Asia makers using a newly founded linked (but independent) Finnish firm called HMD Global Oij. But for the 5.4% yield I would be selling NOK today but I am lightening up. The new line, which amounted to only 4% of sales last year, has over-excited the market.

Drugs

*GlaxoSmithKline was downrated to hold with a target price of $21.73 by Deutsche Bank. However Beaufort Securities put a buy on GSK this morning at its London opening price of GBX 1570 (UK pence) and set a target price of 1750 based on its trio of businesses all delivering good revenue growh and before tax income. Beaufort also like the focus on near-term performance expressed by new CEO Emma Walmsley. It argues that the generic threat to Advair is now well-prepared and GSK may launch its own generic once a competitor arises. They also feel that while Indian sales may have weakened, longer term the emerging markets arena is a key plus for GSK.

Moreover trading at 9x enterprise value to EBITDA, the stock is cheap and yields over 5%. They also expect Walmsley who is a marketeer to play some of the M&A opportunities in consumer healthcare. GSK fell nearly 2% overnight in London over concern about its failure to develop enough new drugs, expressed by Lex in the Financial Times.

*Today Roche Holdings (RHHBF) promised higher dividends after it reported sales up 4% overall and 3% in pharmaceuticals, both in Swissies and dollars in Q1 to SwFr 12.94 bn. The big winner outside drugs was diagnostics. Roche plans a new generation of diagnostic products based on the cobras HPF DNA and Liat tests in Europe for bacterial infection with 4 nasties, including clostridium difficile. Its CINtec Histology test for cervical pre-cancer in the US where it is taking the lead in fighting cervical cancer.

It also forecast low-mid single digit pharma eps growth for the rest of the year matching the rise in sales. My soon-to-be-former broker failed to produce the quarterly report because RHHBY is quoted on the pink sheets. From secondary sources I learn that the FDA approved its Ocrevus to treat two variants of multiple sclerosis while the EU okayed Alecense for lung cancer. It also reported that it successfully completed phase III trials of its new Perjeta post-surgery drug to treat early breast cancer which backs up Herceptin in women with HER2-neu versions of the disease.

The US was its largest drug market accounting for 39% of sales while price controls in Japan slashed sales. In other Asia growth was good.

Roche does not report interim profits but it confirmed its sales and dividend projections from the close of 2016. Its combo of diagnostics and pharma was reported here on yesterday based on its control of Foundation Medicine, FMI, a US money-losing small cap.
 

Finance and Funds

*Allianz SE plans to launch a new real estate debt fund to buy US and European commercial mortgages, competing with our Kennedy Wilson European IT which is being bought by KW of the US. AZSEY is German

*Standard Life was rated outperform by analysts at Macquarie. SLFPY is merging with Aberdeen which manages funds. Both are British.

*Barclays rated Virgin Money an overweight. VRGDF is also British.

*Fibra Uno (FBASF) which reported yesterday, obtained from the US Green building council a gold level LEED certificate for its Torre Reforma Latino building on the top business street in Mexico.