MELTDOWN: Chapter IV

Continuing the fictional metals trading tale by Geoffrey Sambrook. Chapters V-VII will follow in daily instalments this week.

IV

“That wasn’t very smart, Matthias,” said Steiner. “I mean, I know I said there would be no recriminations, but really, agreeing to give him that extra time to pay doesn’t help.”

“No, but I had no idea we had this problem. We’ve done it before, and everything’s been fine. If I’d known things were different, obviously I would have behaved differently.”

Eisenstadt spoke. “Look, we’re not going to get anywhere arguing about that. It’s done, and we are where we are.That avenue is not open to us. We need the cash now, so even if he’s wrong and we had a legal case, it would be too late by the time the lawyers achieved anything. It’s a little bit the same with the financing deals. If I break them, and get the cash back, it’s still not going to solve the immediate problem. We need something more immediate. Have we really not got a bank line left that we’re not fully utilising?”

“No, we’re pretty much up to the limit everywhere.”

“How about BBV? They’re normally very accommodating to us. Any chance of something there?”

BBV was the Baseler Bank Verein, not the biggest bank in Switzerland, but the one that had traditionally been most active in the international trading business. It had had a long relationship with Metal-Exx.

“Mmm. We’re at our limits there, but you’re right, it’s worth a try. I’ll go up to Basel and talk to Gerber.” Steiner sat back in his chair. “OK, I think that’s it for the moment. Please think about this, though. We have to find a solution, and quickly.”

After the other two had left, Steiner called Urs Gerber, the CEO of BBV. They were old friends as well as long-term business associates and Gerber agreed to see Steiner the following morning at his head office in Basel.

In London, Steyn’s mood that morning was black. Fortunately, he had no external meetings, but all those of his employees who had any dealings with him caught the rough edge of his tongue. He was never an easy man to work with, although when it came to schmoozing putative investors for one of his ventures he could be the most silver-tongued orator. His time at the moment was largely occupied in convincing those same investors that despite the rapid and severe drop in the copper price, Congo Copper was still a valuable property. The threat from Metal-Exx – whom he regarded as a thoroughly on-side co-operator – was potentially a fatal spanner thrown into the works.

But through the black mood, he had the glimmering of an idea that he thought was going to interest one of his investors – a New York based hedge fund called Leopard-Star Associates, run by a veteran fund manager by the name of Jason Serck. The two had become acquainted years ago, and Serck had consistently been prepared to put money into Steyn’s various projects; until Congo Copper, it had all been pretty small beer for the fund, but then it had taken a fair-sized slice of the copper business. This had performed well, but the drop in the copper price together with the turmoil in financial markets generally had eroded much of the gains generated by the holding.

This time, Serck had been wrong-footed by the resource markets in which he specialised and he was nursing some substantial losses both on outright commodity futures positions as well as equities of resource companies. He too got an early morning phone call that day as he was in his car driving in to New York City from his Far Hills estate.

“Jason, hi, good morning, it’s DeWet.”

“DeWet, good morning, I see the markets are taking another hammering today.”

“Yeah, it’s not pretty. There seems to be no good news coming out from anywhere.”

“Especially not China. Nor the Eurozone. One crisis we can cope with, two become difficult.” He chuckled. “Anyway, what have you got for me this morning?”

“Nothing directly, but I have a proposition that I think may be of interest. Maybe a way of making some money out of the copper market for a change.”

“Hey, I’m good for that. But listen, I’ve just got a couple of market calls to make before I get in, so can we speak a little later, after I’ve hit the office and got through the morning meeting?”

“Sure. Whenever suits.”

“OK, I’ll call you later. In the office, in London. Right?’

“Yeah. Let’s speak later.”

The news Serck got when he arrived and sat down to discuss the day’s tactics with his closest colleagues was not good. Leopard-Star’s major funds had all taken another kicking from the markets. They had ridden the resource and China horse for a long time, and profited mightily, but the market was telling them now it was beyond the time to get out. The firm had had another round of withdrawal requests as investors took the decision to move their money away from the sector, back into more defensive positions to help weather the storm that seemed to be engulfing the financial world. They couldn’t have their money straight away, of course; the lock-in provisions of the fund prevented that. Nevertheless, Serck was faced for just about the first time in his career with a major setback. Certainly, he’d run losing trades before, but always they’d been balanced with positive ones; this time, the whole strategy he had in place was leaking money like a sieve. This time, there was no saving grace.

They were long of all the wrong things, and a turnaround seemed no more real than a mirage across the desert. Serck was annoyed, mainly with himself for failing to act on the signs. Chinese growth had failed to live up to forecasts for some years now, but he’d allowed himself to be swept along by the optimism that China could still drive the whole world’s economy. Instead, the continuing reduction in GDP growth was having a catastrophic effect on basic raw materials – oil, iron ore, copper and so on – which were precisely the areas in which he was invested. He’d ridden out the 2007/08 Lehmann Brothers slump; indeed, having liquidated long positions in early 2007, he’d actually come out substantially ahead. The money attracted by that success was now the same money looking for a way out of his funds. After thirty-plus years running Leopard-Star, he was a very rich man; the blow to his reputation by now was frankly more painful to him than the financial loss.

The morning meeting dragged on, and it was not until around ten that he got to call Steyn back. A few pleasantries, then “So, you said you had a proposition for me. Right now, I’ll listen to anything, so tell me what it is.”

“OK. I had a call from Metal-Exx this morning. Now, you know we sell pretty much all our production to them, and we have a very close relationship with them. They’ve always treated us well, and the deal has been good for both of us. So, we’ve been pricing with them on long QPs, really at their request. But they’ve been helpful, and they’ve paid us a ninety percent provisional on shipment. I think with their other suppliers, that’s been eighty percent, so they’ve been good to us. The way copper has dropped has meant that for some while now, we’ve actually been required to pay them back against that provisional payment – in other words, the ninety percent is more than the current ruling price. OK, we all suffer when the price goes down, but I have had a verbal agreement with Horner – he runs the copper book – giving me extra time to make that return payment.” He paused for a moment. “You know, of course, that we can’t make money at the current price.”

Serck snorted. “DeWet, for sure I know that. With the amount of your stock we own, that’s one of our problems, as well.”

“Yeah, OK. So this morning, I got a call from Horner and Jakob Steiner telling me that despite my agreement with Horner, they were calling me to bring my payments up to date, immediately. I no longer have the extension. If I do that, I won’t be able to keep the mines open. They would be forcing me to close. When I pointed that out, they said that in fact that might be a good thing for the market. It was a clear threat – pay, or we’ll close you down. I don’t like being threatened.”

“So can you find the money?”

“No. Not right now. But I have a different idea, as I said earlier.”

“If your idea involves a rights issue that you expect me to take up, or a bond issue that you expect me to buy, forget it. I like Congo Copper, I think it’s a great long-term play, still, but I’m not putting any more in right now. If anything, I’ll be reducing resources positions until the picture improves. We’ll stick with you as we are, though, for now.”

“No, I know that wouldn’t fly at the moment. No, I’m looking at Metal-Exx. During the conversation we had, Horner said – in these words – ‘We need that money for our contractual commitments’. That started my mind thinking. The whole market knows they’ve got huge outstanding borrowings, not least against that mass of financed material they are holding. Maybe they have overstretched themselves – perhaps they actually do need the money. Their equity is taking a kicking, they’re heavily leveraged – have they pushed it too far? Let’s face it, the amounts I owe them shouldn’t be critical for a company like them. It’s peanuts in the normal run of their business.”

“OK, so what are you proposing? I haven’t bought it yet, I’m just curious to know your thinking.”

“I’m thinking we push them over the edge. We short their equity, we short their bonds. We push them everywhere we can. If we can push them over the edge, then we step in and take the business away from them.”

“Mmm. But what happens if they are not as badly placed as you think? And bear in mind it’s only a guess, based on one conversation.”

“Come on, Jason, there’s already a head of steam against them. In the worst case, we can just buy back the shorts.”

“OK. I have to say that at the moment I’m not inclined to join you, but I will see if I can get any more information. If your best case is right, and they are on the edge, then it could be an interesting play. But right now I’m sceptical. It’s a big company, with a very strong record of profitability and a very strong reputation for prudent financial management. I’m not about to walk into a trap. I’ll think about it, see if anything else supports your case. Let’s talk again, in a day or so.”

Steyn was disappointed, but at least he had planted the seed. He was convinced that what Horner had let slip was significant, but he was also a canny trader. He knew Serck wouldn’t act without more confirmation; he also knew that Serck had a better chance of digging out more information than he did himself.

Chapters V-VII will follow on Wednesday to Friday this week.

Geoffrey Sambrook
editorial@metalbulletin.com