Friday, May 27, 2016

"Have You Ever Tried to Sell a Diamond?"

Common sense tells us that the only way to increase the value of 
diamonds is to make them scarce, that is to reduce production.

Nothing is forever.
Except, maybe, Neil Diamond.

A topic of endless fascination, a major piece from The Atlantic, February 1982:

An unruly market may undo the work of a giant cartel and of an inspired, decades-long ad campaign
The diamond invention—the creation of the idea that diamonds are rare and valuable, and are essential signs of esteem—is a relatively recent development in the history of the diamond trade. Until the late nineteenth century, diamonds were found only in a few riverbeds in India and in the jungles of Brazil, and the entire world production of gem diamonds amounted to a few pounds a year. In 1870, however, huge diamond mines were discovered near the Orange River, in South Africa, where diamonds were soon being scooped out by the ton. Suddenly, the market was deluged with diamonds. The British financiers who had organized the South African mines quickly realized that their investment was endangered; diamonds had little intrinsic value—and their price depended almost entirely on their scarcity. The financiers feared that when new mines were developed in South Africa, diamonds would become at best only semiprecious gems. 
The major investors in the diamond mines realized that they had no alternative but to merge their interests into a single entity that would be powerful enough to control production and perpetuate the illusion of scarcity of diamonds. The instrument they created, in 1888, was called De Beers Consolidated Mines, Ltd., incorporated in South Africa. As De Beers took control of all aspects of the world diamond trade, it assumed many forms. In London, it operated under the innocuous name of the Diamond Trading Company. In Israel, it was known as "The Syndicate." In Europe, it was called the "C.S.O." -- initials referring to the Central Selling Organization, which was an arm of the Diamond Trading Company. And in black Africa, it disguised its South African origins under subsidiaries with names like Diamond Development Corporation and Mining Services, Inc. At its height -- for most of this century -- it not only either directly owned or controlled all the diamond mines in southern Africa but also owned diamond trading companies in England, Portugal, Israel, Belgium, Holland, and Switzerland. 
De Beers proved to be the most successful cartel arrangement in the annals of modern commerce. While other commodities, such as gold, silver, copper, rubber, and grains, fluctuated wildly in response to economic conditions, diamonds have continued, with few exceptions, to advance upward in price every year since the Depression. Indeed, the cartel seemed so superbly in control of prices -- and unassailable -- that, in the late 1970s, even speculators began buying diamonds as a guard against the vagaries of inflation and recession. 
The diamond invention is far more than a monopoly for fixing diamond prices; it is a mechanism for converting tiny crystals of carbon into universally recognized tokens of wealth, power, and romance. To achieve this goal, De Beers had to control demand as well as supply. Both women and men had to be made to perceive diamonds not as marketable precious stones but as an inseparable part of courtship and married life. To stabilize the market, De Beers had to endow these stones with a sentiment that would inhibit the public from ever reselling them. The illusion had to be created that diamonds were forever -- "forever" in the sense that they should never be resold. 
In September of 1938, Harry Oppenheimer, son of the founder of De Beers and then twenty-nine, traveled from Johannesburg to New York City, to meet with Gerold M. Lauck, the president of N. W. Ayer, a leading advertising agency in the United States. Lauck and N. W. Ayer had been recommended to Oppenheimer by the Morgan Bank, which had helped his father consolidate the De Beers financial empire. His bankers were concerned about the price of diamonds, which had declined worldwide. 
In Europe, where diamond prices had collapsed during the Depression, there seemed little possibility of restoring public confidence in diamonds. In Germany, Austria, Italy, and Spain, the notion of giving a diamond ring to commemorate an engagement had never taken hold. In England and France, diamonds were still presumed to be jewels for aristocrats rather than the masses. Furthermore, Europe was on the verge of war, and there seemed little possibility of expanding diamond sales. This left the United States as the only real market for De Beers's diamonds. In fact, in 1938 some three quarters of all the cartel's diamonds were sold for engagement rings in the United States. Most of these stones, however, were smaller and of poorer quality than those bought in Europe, and had an average price of $80 apiece. Oppenheimer and the bankers believed that an advertising campaign could persuade Americans to buy more expensive diamonds. 
Oppenheimer suggested to Lauck that his agency prepare a plan for creating a new image for diamonds among Americans. He assured Lauck that De Beers had not called on any other American advertising agency with this proposal, and that if the plan met with his father's approval, N. W. Ayer would be the exclusive agents for the placement of newspaper and radio advertisements in the United States. Oppenheimer agreed to underwrite the costs of the research necessary for developing the campaign. Lauck instantly accepted the offer. 
In their subsequent investigation of the American diamond market, the staff of N. W. Ayer found that since the end of World War I, in 1919, the total amount of diamonds sold in America, measured in carats, had declined by 50 percent; at the same time, the quality of the diamonds, measured in dollar value, had declined by nearly 100 percent. An Ayer memo concluded that the depressed state of the market for diamonds was "the result of the economy, changes in social attitudes and the promotion of competitive luxuries." 
Although it could do little about the state of the economy, N. W. Ayer suggested that through a well-orchestrated advertising and public-relations campaign it could have a significant impact on the "social attitudes of the public at large and thereby channel American spending toward larger and more expensive diamonds instead of "competitive luxuries." Specifically, the Ayer study stressed the need to strengthen the association in the public's mind of diamonds with romance. 
Since "young men buy over 90% of all engagement rings" it would be crucial to inculcate in them the idea that diamonds were a gift of love: the larger and finer the diamond, the greater the expression of love. Similarly, young women had to be encouraged to view diamonds as an integral part of any romantic courtship. 
Since the Ayer plan to romanticize diamonds required subtly altering the public's picture of the way a man courts -- and wins -- a woman, the advertising agency strongly suggested exploiting the relatively new medium of motion pictures. Movie idols, the paragons of romance for the mass audience, would be given diamonds to use as their symbols of indestructible love. In addition, the agency suggested offering stories and society photographs to selected magazines and newspapers which would reinforce the link between diamonds and romance. 
Stories would stress the size of diamonds that celebrities presented to their loved ones, and photographs would conspicuously show the glittering stone on the hand of a well-known woman. Fashion designers would talk on radio programs about the "trend towards diamonds" that Ayer planned to start. The Ayer plan also envisioned using the British royal family to help foster the romantic allure of diamonds. An Ayer memo said, "Since Great Britain has such an important interest in the diamond industry, the royal couple could be of tremendous assistance to this British industry by wearing diamonds rather than other jewels." Queen Elizabeth later went on a well-publicized trip to several South African diamond mines, and she accepted a diamond from Oppenheimer. 
In addition to putting these plans into action, N. W. Ayer placed a series of lush four-color advertisements in magazines that were presumed to mold elite opinion, featuring reproductions of famous paintings by such artists as Picasso, Derain, Dali, and Dufy. The advertisements were intended to convey the idea that diamonds, like paintings, were unique works of art. 
By 1941, The advertising agency reported to its client that it had already achieved impressive results in its campaign. The sale of diamonds had increased by 55 percent in the United States since 1938, reversing the previous downward trend in retail sales. N. W. Ayer noted also that its campaign had required "the conception of a new form of advertising which has been widely imitated ever since. There was no direct sale to be made. There was no brand name to be impressed on the public mind. There was simply an idea -- the eternal emotional value surrounding the diamond." It further claimed that "a new type of art was devised ... and a new color, diamond blue, was created and used in these campaigns.... " 
In its 1947 strategy plan, the advertising agency strongly emphasized a psychological approach. "We are dealing with a problem in mass psychology. We seek to ... strengthen the tradition of the diamond engagement ring -- to make it a psychological necessity capable of competing successfully at the retail level with utility goods and services...." It defined as its target audience "some 70 million people 15 years and over whose opinion we hope to influence in support of our objectives." N. W. Ayer outlined a subtle program that included arranging for lecturers to visit high schools across the country. "All of these lectures revolve around the diamond engagement ring, and are reaching thousands of girls in their assemblies, classes and informal meetings in our leading educational institutions," the agency explained in a memorandum to De Beers. The agency had organized, in 1946, a weekly service called "Hollywood Personalities," which provided 125 leading newspapers with descriptions of the diamonds worn by movie stars. And it continued its efforts to encourage news coverage of celebrities displaying diamond rings as symbols of romantic involvement. In 1947, the agency commissioned a series of portraits of "engaged socialites." The idea was to create prestigious "role models" for the poorer middle-class wage-earners. The advertising agency explained, in its 1948 strategy paper, "We spread the word of diamonds worn by stars of screen and stage, by wives and daughters of political leaders, by any woman who can make the grocer's wife and the mechanic's sweetheart say 'I wish I had what she has.'"
De Beers needed a slogan for diamonds that expressed both the theme of romance and legitimacy. An N. W. Ayer copywriter came up with the caption "A Diamond Is Forever," which was scrawled on the bottom of a picture of two young lovers on a honeymoon. Even though diamonds can in fact be shattered, chipped, discolored, or incinerated to ash, the concept of eternity perfectly captured the magical qualities that the advertising agency wanted to attribute to diamonds. Within a year, "A Diamond Is Forever" became the official motto of De Beers. ...

HT: Alpha Ideas

Making OPEC and DeBeers look like glee clubs, the tinsel trade maintains a brutal price discipline that would be the envy of the Sinaloa or the Worldwide Parsley Producers cartels....
9331 100C Purple Front

Dollar climbs, traders await Yellen speech for Fed clues

Commodities as a whole are fractionally weaker.
From Reuters:
The dollar index rose on Friday, on track for its strongest monthly performance since last November amid expectations the Federal Reserve may raise rates in coming months and investors awaiting fresh guidance from the head of the U.S. central bank.

The index .DXY was up 0.1 percent at 95.259, having pulled back from Wednesday's two-month peak of 95.661, with month-end rebalancing flows by asset managers likely to limit the gains, traders said. Holidays in Britain and the U.S. are likely to curtail volumes on Monday.

The dollar is still up 2.3 percent this month, among the top performing currencies, after a string of Fed officials raised expectations for a hike in interest rates as early as June.

"We will see some consolidation in the dollar after the recent gains with expectations of a June hike still in play," Nomura currency strategist, Yujiro Goto, said.

"Next week is a big one with U.S. non-farm payrolls and ISM (Institute for Supply Management) data, so investors are awaiting for more data," Goto said.

Fed Chair Janet Yellen is due to speak at an event hosted by the Harvard University at 1715 GMT. Her speech comes after a slew of Fed policymakers from John Williams to Bill Dudley and James Bullard all sounded relatively hawkish.

"I'm not sure how concerted this whole thing has been. If it's all kind of planned or if it's just individual members speaking," Nordea Bank head of trading, Jesper Bargmann, said, referring to the Fed officials' comments....MORE 

Volkswagen To Invest Up To 10 Billion Euros In New Battery Factory

From The Telegraph:

VW 'to invest £8bn in battery factory' in a bid to reinvent itself as electric carmaker 
Volkswagen is reportedly to invest up to €10bn (£7.6bn) in a major new battery factory as it attempts to reposition itself as a leader in the electric car market.

The move is part of a bid by VW to reinvent itself in the wake of the damaging emissions-rigging scandal.
The company had already announced ambitious plans to sell one million electric and hybrid vehicles a year by 2025 and to invest more in batteries.

It is now understood that Matthias Müller, the chief executive of VW Group, is to put plans for a massive new battery factory before the company’s supervisory board next month.

“We want a big hit, which will put us at the forefront of the industry,” a company source told Germany's Handelsblatt newspaper.
A spokesman for VW described the report as “speculation”.

But there is no doubting VW’s drive to corner a major share of the electric market as it tries to restore its image after the diesel emissions sandal, which will cost the company billions in recalls, fines and litigation fees.

Earlier this year, Mr Müller vowed to “make electric cars one of VW’s new hallmarks”.
If it goes ahead with plans for a battery factory, VW will be following the lead of the US electric carmaker Tesla, which is currently building its own “Gigafactory” in Nevada.

Together with Panasonic, Tesla is investing up to $5bn (£3.4bn) in the facility. Once operational, Elon Musk, the Tesla chief executive, says it will produce more batteries a year than were made worldwide in 2013.

The rationale behind car makers building their own battery factories is to give them independence from the Asian manufacturers which currently dominate the market....MORE
However, as we saw yesterday the battery makers are very dependent on Asian supply chains:
Why the CIA Reads The Financial Times (and you should too) Tesla and Cobalt

Thursday, May 26, 2016

Wannabe Asteroid Miner Planetary Resources Raises $21.1 Million In Series Alpha Round

From Next Big Future:
Planetary Resources, Inc., the asteroid mining company, announced today that it has secured US$21.1 million in Series A funding. The capital will be used to deploy and operate Ceres, an advanced Earth observation business that features the first commercial infrared and hyperspectral sensor platform to better understand and manage humanity’s natural resources. The funding was led by Bryan Johnson and the OS FUND; and joined by Idea Bulb Ventures; Tencent; Vast Ventures; Grishin Robotics; Conversion Capital; The Seraph Group; Space Angels Network, a syndication of investors from; and Larry Page. Earth observation will be another aspect of Planetary Resources’ operations in addition to prospecting and mining asteroids.

Conceived from the company’s vision for the exploration and utilization of asteroid resources, Ceres will leverage Planetary Resources’ Arkyd spacecraft to deliver affordable, on-demand Earth intelligence of our natural resources on any spot on the planet. While typical satellite imagery provides only a picture, Ceres will provide actionable data with higher spectral resolutions – going beyond what the human eye can see – by measuring thermographic properties and detecting the composition of materials on Earth’s surface. The midwave-infrared sensor is the first ever commercial capability from space to offer thermographic mapping and night-imaging, and the hyperspectral sensor includes an unprecedented 40 color bands in the visible to near-infrared spectrum....MUCH MORE
Somehow related:
"Luxembourg’s Asteroid Mining Plan"
"It is Now Legal to Own an Asteroid in the U.S."
The U.S. House Of Representatives Just Passed An Asteroid Mining Bill
Here Comes Another Asteroid Mining, 3D Printing, Robotic, Start-up
Asteroid Mining: "A Start-Up Sees a Gold Rush Among the Stars"
"Are Ross Perot Jr. and Google's Founders Launching a New Asteroid Mining Operation?"
 X Prize Founder Wants to Mine Asteroids
 Rocket Men: A unique gathering of 13 companies showcases a coming year of launches
"We Are About to Start Mining Hydrothermal Vents on the Ocean Floor" (now with added alchemist's fallacy"
"Asteroid a MILE wide to hurtle past Earth in 48 HOURS - as experts warn of MASS EXTINCTION"
"The companies vying to turn asteroids into filling stations"

A compilation image of mining equipment in space
Artist's depiction, not actual asteroid mining

For Sale: 1 Gawker Media With Attached Lawsuit Judgement

From the Wall Street Journal:

Gawker Media Looking at Possible Sale of Company
Digital media company in the middle of costly legal battle with professional wrestler Hulk Hogan
Gawker Media has hired an investment banker to explore strategic options including a potential sale, according to a person familiar with the matter, as the digital media company fights a costly legal battle with professional wrestler Hulk Hogan.

The digital publisher has hired banker Mark Patricof of Houlihan Lokey as it reviews its options, Gawker confirmed Thursday.

Terry Bollea, known in the wrestling world as Hulk Hogan, sued Gawker for violating his privacy by posting a clip of Mr. Bollea having sex with the ex-wife of a former friend.

In March, a jury awarded the wrestler $140 million in damages. Gawker is appealing the ruling.

Late Wednesday, Silicon Valley billionaire and investor Peter Thiel acknowledged that he has been providing financing for Mr. Bollea’s legal fight and other such battles involving people who Mr. Thiel feels have been targeted unfairly by the media company....MORE
Gawker 24/7: Judge Denies Gawker Motion, Upholds $140 Million Trial Awards
Adventures In Lawsuit Funding: Mission Destroy Gawker

"Walgreens Reportedly Struck Theranos Deal Without Verifying the Tech" (WBA)

Very troubling. 
Except to the plaintiffs attorneys.
From Fortune:
 Walgreens  WBA -1.13%  reportedly failed to adequately verify that embattled blood lab startup Theranos’ proprietary Edison finger prick testing technology worked as advertised, saddling the pharmacy giant with a business partner staring down mounting troubles. 
The drugstore chain struck its Theranos deal in 2013 under the leadership of former CEO Greg Wasson, who was reportedly eager to invest in a potentially revolutionary new technology to grow sales prior to the completion of Walgreen’s merger with Switzerland’s Alliance Boots. The partnership was a big win for Theranos, which was seeking a respected pharmacy ally to boost its brand and technology. 
Less than three years later, Walgreens has halted its expansion plans for using Theranos’ blood testing services beyond the 41 “Wellness Centers” in Arizona and California where they currently operate and is reportedly looking to dump its partner altogether in the wake of reports that its technology doesn’t work as advertised and growing scrutiny from both federal regulators and federal prosecutors. Walgreens operates about 8,000 pharmacies across the country. 
According to the Wall Street Journal, researchers at Johns Hopkins University who were paid to test the Edison device on Walgreens’ behalf back in 2011 were unable to do so because Theranos never delivered it to them. ...MORE

Ex-Goldman Sachs Structured Products Head Gets A Quarter-Billion Investment From Blackstone

From Artemis:

Hudson Structured secures $250m anchor investment from Blackstone
Hudson Structured Capital Management, the insurance, reinsurance and transportation linked investment firm set up by ex-Goldman Sachs structured products leader Michael Millette, has closed on and secured its $250m anchor investment from Blackstone, Artemis has learned. 
Hudson Structured Capital Management launched in the second-half of 2015 as an investment management firm operating one fund offering insurance and reinsurance linked investments, and another fund offering transportation finance investments, with Millette a founding managing partner. 
Since then Hudson Structured has been in the market with a private offering, seeking to raise launch funds for both of its fund. On the insurance linked investing side, the firm has now hired a team of experienced insurance-linked securities (ILS) and reinsurance executives to underwrite for and manage the re/insurance linked fund offering. 
Part of the capital raise involved an anchor investment arrangement with one of the world’s leading investment groups, Blackstone, an asset manager with $336 billion under management at the end of 2015. 
The anchor investment has now been secured, Artemis can reveal, as a source explained to us that Hudson Structured closed on the investment late last week. 
We understand that this injection of capital from Blackstone is for around the expected $250m mark and will be allocated relatively equally across the Hudson Structured re/insurance and transportation investment funds. 
The work now begins to deploy capital, we understand, and Hudson Structured is expected to target being fully invested as soon as it can. The timing works well for the firm’s insurance and reinsurance linked fund, with the key renewal period of June/July just around the corner....MORE

Climateer Line of the Day: 'Au Contraire Young Man' Edition

A (apparently) young reader commenting at FT Alphaville took Izabella Kaminska to task for the phrase "unviable for private interests." and used an unfortunate example to hammer home his point:

...There's never been any big concern that the U.S. airline market is "unviable for private interests."
Unfortunate because an insurance guy from Omaha Nebraska has already plowed this ground:
...Move on to failures of airlines. Here’s a list of 129 airlines that in the past 20 years filed for bankruptcy. Continental was smart enough to make that list twice. As of 1992, in fact--though the picture would have improved since then--the money that had been made since the dawn of aviation by all of this country’s airline companies was zero.

Absolutely zero.

I like to think that if I’d been at Kitty Hawk in 1903 when Orville Wright took off, I would have been farsighted enough, and public-spirited enough--I owed this to future capitalists--to shoot him down. I mean, Karl Marx couldn’t have done as much damage to capitalists as Orville did.
-Warren E. Buffett, Fortune Magazine, November 22, 1999 
and repeated on the 2003 centenary of that first flight

Momo Mamas Bored With Dollar, Chasing New Scam Dogs

I'm dating myself.
The headline is a take off on the title of the year 2000 book by Wall Street Journalist John Emshwiller.

From Marc to Market:

The US dollar is trading with a softer bias today after the momentum stalled yesterday.  The pullback is shallow but could be extended a bit more in the North American session.  The US reports weekly jobless claims, durable goods orders and pending home sales.   However, the market already appeared to take on board that the US economy is rebounding strongly in Q2 and that the prospects of a Fed hike have increased, but a June/July hike is still not a done deal.    The next important step regarding market psychology is not today's data but tomorrow's speech by Yellen.  
Recall in that in March several regional Fed presidents talked up the prospects of a rate hike as early as April.  Yellen effectively closed the door on this line at her March speech in NY.  Dudley's comments last week, after the FOMC minutes, likely reflected the views of the Fed's leadership, and should be reiterated by the Chair.  
The interest rate adjustment has stalled alongside the greenback.  The August Fed funds futures contract, which offers the clearest view of a June or July hike has stalled at an implied yield of 55 bp or about a 72% chance.  As recently as May 16 the implied odds were closer to 20%.  The US two-year premium over Germany widened from 125 bp after the US employment figures on May 6 to 143 bp yesterday.   
In addition to the dollar's consolidation, the other feature continued recovery in oil prices.  Brent rose above $50 a barrel today, six-month high.    The driver is supply.  The larger than expected draw down of US inventories, coupled with disruptions in Nigeria, Venezuela and Libya are taking a toll.   OPEC meets next week, but reports suggest attempts to freeze output have been largely abandoned.   Although Iranian output is increasing, it will likely take several more months at least before pre-embargo levels are reached.  Reports suggest the partial sanctions that have continued, the ease of alternative business, and a purposeful campaign by Saudi Arabia slow the Iran's recovery.  
The higher oil prices are helping energy sector equities and sensitive currencies, like the Norwegian krone (0.9%), Canadian dollar (0.3%), Malaysian ringgit (0.5%), Mexican peso (0.3%).  The MSCI Asia-Pacific Index extended its recovery from two-month lows.  The regional index has risen in four of the past five sessions, despite the Fed tightening and the weakening of the Chinese yuan.  Europe's Dow Jones Stoxx 600 is about 0.2% lower though the materials and energy sector are up (1.0% and 0.7% respectively near midday in London).   
The details of the UK's Q1 GDP were reported Growth was unchanged at 0.4%, but the year-over-year pace slipped to 2.0% from 2.1%.  The composition of the growth was a bit different than expected.  Consumption was stronger, but capital investment and services were weaker, and trade was a bigger drag.   Sterling extended its recent gains to $1.4740.  Sterling has only been higher briefly on May 3 (when its staged a key reversal lows) since the very start of the year.  
Many attribute the sterling's gains to some polls that suggest the "remain" camp is moving ahead of Brexit.  While there may be something there, we note that one-month implied volatility is surging today.  It was around 11.7% yesterday, and now indicative prices suggest it is closer to 16.4%.  It is the biggest jump in nearly two decades....MORE   

Feeding Behemoth--"Statoil: The Solution or the Problem?"

Astute reader will note the name of the partially acquired company. It is the cousin of one of the players in the post immediately below.
From Energy Intelligence, May 2016:
Øystein Noreng

While Norway is widely regarded internationally as the gold standard for effective state management of the oil industry, closer examination actually reveals that it is struggling with problems not unlike those that face other countries. Since the beginning of Norway's petroleum times -- the late 1960s -- a fundamental tenet has been that the oil industry should be subject to political governance and control. But reality falls far short of that objective in the interaction between the Norwegian government, which is the landowner, the industry regulator and the dominant shareholder (70%), and Statoil, Norway's leading and dominant oil company. For decades, Statoil has essentially acted according to its own interests, disregarding those of the state, its majority shareholder. A current case, Statoil's partial acquisition of Lundin Petroleum, shows the extent to which the national oil company has interests contrary to national policy and contrary to those of its primary owner, but it nevertheless has prevailed. Apparently, in this case, the national oil company has more power than the government.

As the landowner, the Norwegian government has an interest in pluralism and competition in the oil industry in order to reduce costs, promote innovation and improve flexibility. Since the mid-1980s, smaller, flexible companies have accounted for much of the innovation in the oil industry worldwide, especially in the US Gulf of Mexico, the North Sea and North American shale. With these objectives in mind, Norwegian petroleum taxation was modified in 2005 in order to attract newcomers, essentially smaller oil companies willing to take risk, with a simple, low-cost management and the ability to make decisions quickly. Lundin is perhaps the most successful company among the newcomers, with an impressively successful exploration record.

In two stages, Statoil this spring has bought 20% of Lundin stock. The deal includes a transaction for parts of fields. In addition to cash, Lundin acquired the Statoil share in the Edvard Grieg field, where it is the operator. As a counterpart, Statoil through its share of Lundin strengthens its position in the giant Johan Sverdrup field. So far, seen in isolation, this appears as a rational operation for both companies. Lundin gets cash it needs for investment and consolidates its position as an operator of a smaller field. Statoil gets a larger share of the oil and the cash flow of a giant field. However, for the government the outcome is negative, as Lundin will be less inclined to challenge Statoil.

The key issue is what will happen next. For Lundin, the need is to secure capital for immediate investment projects. For Statoil, the motivation seems to be consolidating the position in Norway's oil industry and a higher future cash flow by buying into competing oil companies. Further acquisitions should not be excluded, especially if oil prices stay low and Lundin should need more capital. In the end, Statoil might buy all of Lundin.

Statoil's interest is to consolidate an already dominant position in the Norwegian oil industry, where the company is the operator of 80% of production. It has less interest in pluralism and competition. The Lundin acquisition seems to be strategically motivated. To Statoil, Lundin is a small competitor that in key matters such as exploration and cost control has proved more competent. Lundin is possibly the most successful company in recent Norwegian petroleum history. By comparison, Statoil appears less brilliant. Even if it has many highly competent individuals among the staff, it is a large, bureaucratic and rigid organization with a costly administration.

By contrast, Lundin is small, agile and flexible, with a simple, low-cost administration. By doing things differently, Lundin represents a challenge to Statoil. Statoil's response is to buy into Lundin, perhaps in order to take it over completely and eliminate the challenge. Such an outcome would be advantageous for Statoil, but harmful to the Norwegian government, the landowner and the dominant shareholder. Remarkably, Statoil's board, in which the Norwegian government appoints a majority of members, generally supports the senior management rather than the primary investor, the Norwegian government.

Loss of Control
This case shows that the Norwegian government does not exercise much control over its multiple business investments, whether in Statoil or other large companies. Numerous corruption scandals involving partly government owned Norwegian companies operating in developing and emerging economies indicate poor governance, showing that the Norwegian government does not follow up its investment with control. The justification for government investment in businesses is usually that the market and private investors do not secure salient national interests. In the case of Statoil, in the early 1970s, the justification for Statoil, at first a wholly government-owned entity, was to secure funding in order to avoid foreign investor dominance. Statoil's statute was to secure the development of the Norwegian Continental Shelf, nothing more.

The politicians omitted, however, to set limits. Without consulting the government, then the sole owner, Statoil expanded into new business areas, at first refining and distribution in neighboring Denmark and Sweden, subsequently in upstream activities in many parts of the world. Upstream investment abroad has been no unmitigated economic success, but it has provided some oil and some interesting management jobs.

Partial privatization and the subsequent fusion with the oil and gas division of Norsk Hydro has created a giant in the Norwegian economy that neither the dominant shareholder nor the market can tame. The government has little or no influence because the board tends to line up with senior management. No other actors in the Norwegian petroleum sector can match or defy Statoil. The purchase of Lundin further aggravates this issue....MORE
Øystein Noreng is professor emeritus, BI Norwegian Business School, and an Oslo-based independent consultant and adviser.

Why the CIA Reads The Financial Times (and you should too) Tesla and Cobalt

A couple weeks ago we posted a seemingly innocuous piece with a boring headline: "'Freeport Sinks On Sale of Africa Copper Mine To Chinese' (FCX; LUN.TO)".

I figured there were at best two thousand people in the whole world who knew or cared about the back story and real import of what was going on so I'd just drop it as an Easter egg for the cognoscenti and other assorted electric vehicle/conflict mineral/African warlord/Elon Musk/extractive industry/Génocidaire hunter/U.S. political corruption watchers to find.

Well now that cat's out of the bag.

Big kudos to the FT's Henry Sanderson for recognizing one hell of a story and a small request for the Financial Times: Can you tell us what the old ENRC is up to these days?

From The Financial Times, May 25:

China plays long game on cobalt and electric batteries
Chinese company’s acquisition of Congo cobalt mine has repercussions for car industry
As China Molybdenum announced it was buying one of Africa’s largest copper mines earlier this month one thing was soon clear: the acquisition was about far more than the red metal.
The $2.65bn deal, the biggest private investment in the Democratic Republic of Congo’s history, is instead designed to secure China’s supplies of cobalt, a once niche raw material that is crucial to developing batteries for electric cars.

The purchase of the Tenke mine, which contains one of the world’s largest known deposits of copper and cobalt, shows how Chinese companies are now moving to take a dominant position in battery materials as the country prepares to shift its economy from heavily polluting industries.
Companies that make batteries for carmakers, from Tesla Motors to General Motors, will be increasingly reliant on Chinese-controlled supply chains as they scale up production of the electric cars western policymakers hope will help cut emissions and reliance on imported oil.

“The majority of the cobalt is heading straight to China,” said Edward Spencer, an analyst at metals consultancy CRU. “Their global hold is huge.”

If the Tenke mine deal goes through, Chinese companies will be responsible for around 62 per cent of global refined cobalt production next year, according to CRU estimates. Demand for the material is expected to soar by more than two-thirds over the next decade.

In many ways, China is following a familiar playbook. At the turn of the millennium, the country moved to secure supplies of traditional commodities like oil and industrial metals, sometimes through acquisitions, other times through investments and loans-for-oil deals with countries such as Angola and Venezuela that held big deposits of the raw materials.

But China’s control of other commodities last decade raised strategic concerns in Washington and Tokyo, after so-called rare earth metals — which were then primarily mined in China — were subject to export restrictions.

Beijing is now pushing the development of its electric vehicle market as a strategic goal, aiming to make its carmakers more competitive abroad while reducing air pollution at home.
China Moly’s largest shareholders are Luoyang Mining Group, a state-owned company, and Cathay Fortune Corp, a Shanghai-based private equity company.

The DRC, one of the world’s poorest countries, accounts for over half of the world’s supply of cobalt, which is also used in smartphone batteries. The Tenke mine, which lies in the south-east of the DRC, some 175km north-west of the provincial capital of Lubumbashi, last year produced 16,000 tonnes of cobalt and it has reserves that could last 25 years, according to the company.

“Chinese strategists have long seen the DRC as one of the prime places for Chinese access to raw material, including cobalt,” says Alex Vines, head of the Africa programme at Chatham House. “I’ve always suspected the natural resources-for infrastructure model that happened in Angola was actually a testing of a model they wanted to deploy in the DRC.” 
Around 93 per cent of China’s cobalt units originate in the DRC, according to analysts at Macquarie, the highest proportion of commodity supply from a single country. That is unlike other battery commodities such as lithium, where China can supply 17 per cent of its own supply.

“There’s no other commodity where China is so reliant on a single country,” says Colin Hamilton, an analyst at Macquarie. “When you have that concentration risk they want some degree of security.”...MORE

Wednesday, May 25, 2016

"Angry customer files class action suit against Theranos"

From The Verge:

The suit alleges customer fraud
The blood-testing startup Theranos has been hit with a consumer fraud class action lawsuit, a week after the company voided two years’ worth of Edison blood test results.

The suit, which was filed today in the district of Northern California, alleges that Theranos’ proprietary blood testing device, Edison, "did not work" and that Theranos’ tests weren’t accurate. So patients who used Theranos’ services were subject to "unnecessary or potentially harmful treatments" or may not have been notified about a treatable condition, according to a complaint.

"The lawsuit filed today against Theranos is without merit," Theranos spokesperson Brooke Buchanan told The Verge. "The company will vigorously defend itself against these claims."

This is the first class action suit against Theranos — but it’s not yet clear if it will stand up to a judge’s scrutiny. For the suit to move ahead, the judge has to certify the class saying there is evidence that there are a number of similarly situated people who suffered the same damage. Even the suit moves ahead, it’s not clear how plaintiffs will show that they’ve suffered damages because of Theranos’ tests. A single Theranos customer is bringing this lawsuit on behalf of himself and two other potential classes of consumers — people who bought Theranos tests in Arizona as well as nationwide. The suit attacks Theranos’ practices on multiple fronts. For instance, although Theranos advertised proprietary technology, the company didn’t use its own blood-testing device, Edison, for most laboratory testing, the suit says. It also says that the company shared incorrect information with the public to attract customers. Finally, Theranos didn’t conduct its testing according to federal guidelines, according to the complaint....MORE

Gawker 24/7: Judge Denies Gawker Motion, Upholds $140 Million Trial Awards

Following on this morning's "Adventures In Lawsuit Funding: Mission Destroy Gawker".
From the Hollywood Reporter:

The judge hears from the wrestler's attorney, who emphasized the importance of privacy.
After a review of the stunning verdict in March in Hulk Hogan's lawsuit against Gawker over the publishing of an excerpt of a sex tape, Florida Circuit Judge Pamela Campbell on Wednesday decided not to order a new trial nor touch the $140 million verdict.

The decision comes as the case has gained renewed attention thanks to a report that PayPal co-founder and early Facebook investor Peter Thiel provided financial backing to Hogan as the former professional wrestler pursued claims of having his privacy violated and his publicity rights infringed through an October 2012 post viewed by an estimated 7 million people. Campbell's decision will now allow this dispute to proceed to a Florida appeals court....MUCH MORE

"Apple explores charging stations for electric vehicles" (AAPL)

Reuters exclusive:
Apple Inc (AAPL.O) is investigating how to charge electric cars, talking to charging station companies and hiring engineers with expertise in the area, according to people familiar with the matter and a review of LinkedIn profiles.

For more than a year, Silicon Valley has been buzzing about Apple's plan to build an electric car. Now the company appears to be laying the groundwork for the infrastructure and related software crucial to powering such a product.

The moves show Apple responding to a key shortcoming of electric vehicles: "filling up" the batteries. A shortage of public charging stations, and the hours wasted in charging a car, could be an opportunity for Apple, whose simple designs have transformed consumer electronics.

Apple, which has never publicly acknowledged a car project, declined to comment for this story. Neither the LinkedIn profiles nor sources said specifically that Apple was building charging stations for electric cars.

But automotive sources last year told Reuters that Apple was studying a self-driving electric vehicle (EV), as the Silicon Valley icon looks for new sources of revenue amid a maturing market for its iPhone.

Apple is now asking charging station companies about their underlying technology, one person with knowledge of the matter said. The talks, which have not been reported, do not concern charging for electric cars of Apple employees, a service the company already provides. They indicate that Apple is focused on a car, the person added....MORE

Adventures In Lawsuit Funding: Mission Destroy Gawker

From Forbes:
This Silicon Valley Billionaire Has Been Secretly Funding Hulk Hogan's Lawsuits Against Gawker
One of Silicon Valley’s best-known investors has been footing a former wrestler’s legal bills in lawsuits against a shared enemy. 
Peter Thiel, a PayPal cofounder and one of the earliest backers of Facebook, has been secretly covering the expenses for Hulk Hogan’s lawsuits against online news organization Gawker Media. According to people familiar with the situation who agreed to speak on condition of anonymity, Thiel, a cofounder and partner at Founders Fund, has played a lead role in bankrolling the cases Terry Bollea, a.k.a. Hogan, brought against New York-based Gawker. Hogan is being represented by Charles Harder, a prominent Los Angeles-based lawyer. 
A spokesperson for Thiel declined to comment. 
The involvement of Thiel, an eccentric figure in Silicon Valley who has advocated for teenagers to skip college and openly supported Republican presidential candidate Donald Trump, adds another wrinkle to a case that has garnered widespread attention for its implications over celebrity privacy and a publication’s First Amendment rights. During court proceedings, which ended in late March with a $140 million victory for Hogan, there had been rumors that a wealthy individual had funded Hogan’s case though there was never any hard evidence that surfaced to prove that was true. 
On Tuesday, in an interview with The New York Times, Gawker founder Nick Denton said he had a “personal hunch” that the financial aid could be linked to someone in Silicon Valley. “If you’re a billionaire and you don’t like the coverage of you, and you don’t particularly want to embroil yourself any further in a public scandal, it’s a pretty smart, rational thing to fund other legal cases,” he told the Times. 
It is not illegal for an outside entity to help fund another party’s lawsuit, and the practice, known as “third-party litigation funding” has become increasingly common in the U.S. Typically, the outside party negotiates for a defined share of any proceeds from the suit....MORE
In December 2007 Gawker's Valleywag posted Peter Thiel is totally gay, people.
Gawker also outed Condé Nast's CFO
Gawker's Denton is gay, not sure what he's up to.
Gawker shut down Valleywag December 31, 2015.
We stopped linking to Gawker about a year ago, today is an exception.^

Via the Florida Man feed:

"Gold Sees Follow-Through Selling, Hits 7-Week Low"

From Kitco:
Gold prices are modestly lower and scored a seven-week low in early U.S. trading Wednesday. Follow-through technical selling pressure is featured as the near-term technical postures for both gold and silver markets have significantly deteriorated this week. The precious metals bulls are wondering if their markets can once again show the resilience that had been seen in recent weeks, to stop the bleeding. The recent rally in the U.S. dollar index remains a bearish outside market force for the precious metals markets. June Comex gold futures were last down $4.20 an ounce at $1,224.90. July Comex silver was last up $0.10 at $16.35 an ounce.

Gold prices have shed about $75.00 an ounce this month, amid worries the U.S. Federal Reserve will raise interest rates in June. The June Fed rate-hike notions have been a bullish element for the U.S. dollar....MORE
Kitco spot price, $1221.70 off $5.70; June futures 1221.50 down $6.70:
May 24
"Gold Hits 4-Week Low; Firming U.S. Dollar Index Bearish"
May 23 
"This could send gold tumbling below $1,000 again, Citi says"
May 19 
Gold And Real Interest Rates: "Fed’s Dudley: June is Definitely a Live Meeting"
May 18 
"Gold Tanks After Fed Minutes"