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Colin Lea
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The author is Australian with a long term interest and personal stake in financial planning and management. He works within the Financial Services Industry, is a member of the FPA Australia, and is a Certified Gold Seeking Alpha Contributor. Prior professional background of 20 years in military... More
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  • Indians Answering The Call To Rebuild Their Economy

    The following article is shared from the Sydney Morning Herald:


    October 13, 2012 by William Pesek

    A surprise Finance Ministry appointment suggests India is serious about reform and investment.

    THE first time I met Raghuram Rajan, the Indian economist couldn't sit still.

    It was over coffee in Bangkok in November 2008, less than two months after Lehman Brothers imploded and almost took the global financial system down with it. Rajan had become a big draw by then, having warned as early as 2005 that a crash was coming. On that day in Thailand, he had a crisis on his hands: The hotel's WiFi was out.

    "I'll be back - I need to make a call and make sure the world economy is still there before I begin my speech," he deadpanned. "You never know."

    That last sentiment could also apply to an extraordinary bit of recruitment on the part of Indian Prime Minister Manmohan Singh. Rajan, 49, is one of his most pointed critics, never one to shy away from slamming India for trying the same failed policies over and again. Rather than castigate Rajan, Singh offered him a job: top adviser to the Finance Ministry.

    Rajan's arrival might shake up India at just the right moment and accelerate moves to open retailing, aviation and insurance to foreign investment. Palaniappan Chidambaram's return as finance minister in July might have seemed enough of a jolt. He wasted no time in announcing policies that amounted to shock therapy for an economy that has lost its way. If those were a sign India is again open to business, hiring Rajan suggests it won't stop there. There are three things about Rajan that are noteworthy:

    One, his focus. He's looking in the right places - modernising the financial sector, making it easier for companies and entrepreneurs to do business and tackling the labyrinthine distribution system in areas such as agriculture;

    Two, Rajan is a University of Chicago guy. To some extent he's about increasing economic efficiency as a means of raising living standards. Supply-side solutions can go too far, as we saw when the US went off the rails due to lax regulations and oversight. Yet if there is anything India needs, it is a burst of deregulation fever.

    Among the most common phrases you hear in India is "licence raj," shorthand for the baffling and elaborate system of issuing permits to do anything. This snarl of red tape throttles business and breeds corruption. It is the single biggest barrier standing between India's 5.5 per cent growth and shantytown dwellers in Mumbai or Kolkata. New strategies are desperately needed to remove it;

    Three, Rajan is an intellectual re-import. It is often said that India's best export is its chief executives - Indra Nooyi, of PepsiCo, Lakshmi Mittal, of ArcelorMittal, Anshu Jain, of Deutsche Bank, to name a few. Its academics, too, remind us that developed nations don't have a monopoly on economic wisdom.

    Rajan is part of a growing pattern of talent returning home. Take Rana Kapoor, who left Wall Street to start Mumbai-based Yes Bank. Or former Citigroup executive Jaithirth Rao who founded software maker MphasiS in the US before moving the group's headquarters to India, where he started an affordable-housing finance company. Rajan's experience as chief economist of the International Monetary Fund from 2003 to 2006 and as a celebrity academic is now to India's benefit.

    There's still plenty of flow in the opposite direction, including Kaushik Basu. He recently left India's Finance Ministry to become chief economist of the World Bank, which along with the International Monetary Fund is holding its annual meeting this week in Tokyo.

    Basu is the rare iconoclast in a position to make a difference. An adherent of his own brand of Freakonomics, his interest lies not with the politically correct or expedient but common-sense solutions to the biggest quandaries of our day. One is what to do about corruption. He argues that it be legalised, thereby adding transparency and having the effect of naming and shaming graft seekers.

    Like Basu, Rajan is an example of an Indian in the right job at the right time in ways that could benefit humanity. Jump-starting India's economy would offer the world another engine at the perfect moment. It would also arrest the policy decay in Asia's third-biggest economy.

    A day after Chidambaram met the US Treasury Secretary, Timothy Geithner, in New Delhi this week, Standard & Poor's reminded India it may become the first BRIC economy - Brazil, Russia, India and China - to lose its investment-grade rating. Junk status would be a terrible blow to a nation S&P predicts will see its budget shortfall widen to about 6 per cent of GDP in the year to March 2013. Borrowing costs would surge, investors would flee and reducing poverty would become harder.

    The good news is that Rajan is on the case to help Singh's team get back in touch with its reformist roots. You can bet he won't be sitting still on the job.

    Read more:

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Oct 12 3:48 PM | Link | 3 Comments
  • Fortescue Gets $4.3b Lifeline, Shares Soar

    Article from Sydney Morning Herald:

    Shares in Fortescue Metals have soared after the iron ore miner was handed a $4.26 billion lifeline by its creditors, which will delay its earliest debt repayments until November 2015.

    The iron ore miner this morning announced a commitment for a senior secured credit facility of up to $US4.5 billion from backers Credit Suisse and JP Morgan. The deal gives the troubled miner more time to manage its $US9 billion in debts, as the outlook for iron ore grows less certain.

    The miner's shares rose as much as 51 cents, or 17.1 per cent, to $3.50 in early trade.

    "This facility will be used to refinance all existing bank facilities and provide Fortescue with additional liquidity," the company said.


    "The facility extends the earliest repayment date for any of the company's debt to November 2015 and removes financial maintenance covenants which applied under previous facilities," the company said, noting that Credit Suisse and JP Morgan both signed a full underwriting commitment for the facility that provided "funding certainty to Fortescue".

    Perth-based Fortescue also flagged potential partial sales of assets to a range of interested partners in order to strengthen the company's balance sheet.

    "Fortescue is currently evaluating these approaches," the company said. "Transactions of this nature are not required under Fortescue's new debt facilities and will only be pursued if they clearly add shareholder value."

    Fortescue shares were placed into a trading halt on Friday morning after its stock plunged the day before on revelations that the company was in talks with its creditors to renegotiate its debt covenants. The company's stock closed 48 cents lower, or 13.8 per cent, to $2.99 on Thursday.

    Job cuts

    The iron ore miner has cut $300 million from its costs and laid off 1000 staff in recent weeks in response to softer demand from Chinese steelmakers. Fortescue, with debts of $9 billion, requires iron ore to remain at $US110 per tonne or higher in order to cover repayments to its backers.

    The benchmark price for a tonne of iron ore at the Chinese port of Tianjin has sunk as much as 34 per cent since the beginning of July, reaching a low of $US86.70 a tonne on September 5, as growth in the industrial giant switches into lower gear. Since hitting the low, iron ore has regained some strength, rising by $US9 to $US105.1 after the US Federal Reserve unleashed its latest monetary stimulus which lifted global commodities prices.

    Leyland Asset Management senior portfolio manager Rohan Schmidt said the deal would be positive for Fortescue shares this morning but over the longer-term fate of the company was still tied with the direction of iron ore prices.

    "It looks like Fortescue stock may bounce on the open but it's still very much an iron ore price story," he said.

    "If the iron ore price stays under $US100 per tonne in the mid-term or well below this company would still be in trouble."

    Mr Schmidt said the deal announced this morning showed Andrew Forrest "still has a very good relationship with his bankers... once again he has shown his deal-making acumen".

    Mr Schmidt said, however, the debt may not be particularly attractive to the backer.

    "I imagine Credit Suisse and JP Morgan would want to offload this debt in the secondary market pretty quickly because I'm sure they don't want it on their balance sheets."

    Fortescue chief Nev Power said the company had started talks to restructure its bank facilities and scrap earnings-based covenants ahead of Fortescue's next review in December.

    ''This action, together with our previously announced measures, will continue to build on Fortescue's profitability, liquidity and above all, removes uncertainty around our financing arrangements," he said.

    Read more:

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Sep 17 9:41 PM | Link | Comment!
  • BHP Summary Review 2012

    BHP 2012 Results at a Glance

    > An 11 per cent increase in the 2012 financial year dividend takes the compound annual growth rate of our progressive dividend to 26 per cent over the last 10 years.

    > Strong momentum established with annual production records achieved at 10 operations. Our low-risk, largely brownfield projects in execution are expected to create substantial shareholder value.

    > Underlying EBIT (Earnings before interest and taxes) decreased by 15 per cent to US$27.2 billion and Attributable profit excluding exceptional items declined by 21 per cent to US$17.1 billion. Exceptional items totalling US$1.7 billion contributed to a 35 per cent decline in Attributable profit to US$15.4 billion.

    > Underlying EBIT margin remained at a robust 39 per cent, while Underlying return on capital was 23 per cent.

    > Net operating cash flow of US$24.4 billion reflected the strong cash generating capacity of the business throughout the economic cycle. Gearing of 26 per cent remains within the parameters defined by our solid A credit rating.

    > In FY2012, three fatalities occurred at controlled operations. The FY2012 total recordable injury frequency (TRIF) performance of 4.7 per million hours worked improved by six per cent compared with FY2011 (5.0).


    Disclosure: I am long BHP.

    Additional disclosure: The attached information is from BHP Billiton's web site.

    Sep 17 8:31 PM | Link | Comment!
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