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Beaufort Securities Breakfast Alert Armadale Capital, AFC Energy, Amphion Innovations, EMED Mining and others

Published: 08:05 11 Sep 2015 BST

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The Markets

Market opening: UK markets are expected to opened little changed this morning. FTSE 100 Futures were trading 6 points higher at 7:28 am.

New York: Wall Street ended in the green after a volatile trading session yesterday. Improvement in oil and metal prices lifted the market sentiment. The S&P 500 moved 0.5% up, led by the information technology sector.

Asia: Equities are trading mixed. The strengthening of the Chinese yuan and improvement in oil prices created optimism in the market. However, investors remained concerned over the possibility of an interest rate hike by the US Fed. The Nikkei 225 fell 0.2%, while the Hang Seng was trading 0.7% higher at 7:00 am.

Continental Europe: Markets ended in the red amid growing concerns over economic slowdown in Japan and China. Weak economic data released in these countries dented investor confidence. France’s CAC 40 and Germany’s DAX shed 1.5% and 0.9%, respectively.

Crude Oil: Yesterday, WTI and Brent oil prices increased 4.0% and 2.8%, respectively. The spread between the two varieties stood at US$3.0 per barrel.

UK small caps: The FTSE AIM All-Share index closed 0.29% lower yesterday at 734.14.

Today’s news

Ireland raises GDP forecast for 2015

The Ireland government expects GDP to expand 6% in 2015, which would render the country the fastest growing economy in the Eurozone. For the April to June quarter, the GDP grew 1.9%.

Company News

Armadale Capital (LON:ACP) – Speculative Buy

Armadale Capital, the investment company focused on natural resource projects in Africa, announced yesterday its interim results for the period ended 30 June 2015. The Group reported a loss before tax of £365k (H1 2014 loss of £442k) which was largely due the cost of developing the Mpokoto gold project in the Democratic Republic of the Congo. As at June 30 2015, the Group had a cash balance of £26k versus £612k over the same period last year. Since then, Armadale has raised gross proceeds of £1.1m to ensure continued development of the 678koz Mpokoto gold project.

Our view: Given the post period events, Armadale now has the cash to complete the DFS as well as its current drill programme aimed at expanding its resources at Mpokoto. We are encouraged with the pace of development at Mpokoto which remains on track for production to commence in H1 2016. With funding potentially secured through the definitive agreements signed with African Mining Contracting Services (A-MCS) group, a highly experience mining contractor, and the Mining Licence already in place, we look forward to the completion of the DFS and confirmation of the low start-up capital, currently estimated at US$20m. As such, we maintain a Speculative Buy on the stock.

Beaufort Securities acts as corporate broker to Armadale Capital PLC

Xtract Resources (LON:XTR) – Speculative Buy

Xtract Resources, the diversified exploration and development company focused on production from its Chepica copper and gold mine in Chile as well as developing the Manica gold project in Mozambique, announced yesterday revised terms for the acquisition of Manica gold project from Auroch Minerals. On 29 June 2015, Xtract announced that the total consideration for the transaction was US$12.5m to be satisfied through a payment of US$4.5m cash with the remainder in consideration of Xtract shares, a further cash payment by Xtract of US$1.5m was to settle project level creditors. Under terms of the original agreement, the number of consideration shares issued was to be based on the lesser of VWAP at which the Company’s shares traded 10 days prior to completion and a 0.35p conversion price. Since the transaction date Xtract’s share price has decreased. At current prices, dilution would be c 16% and in order to limit dilution the company has successfully renegotiated the terms of the transaction. As such, the number of conversion shares will be fixed and the resulting dilution will be c 11%. Under the revised terms, total cash consideration will be US$7m of which US$2m is expected to be settled through project financing and a further US$1m of cash will be retained by Xtract to settle any potential tax liability relating to the disposal of the asset. Xtract will issue Auroch 1,032,258,065 new ordinary shares (valued at US$4m) and a three month lock in period.

Our view: We are encouraged with the revised terms relating to the acquisition of Manica by limiting the amount of dilution to existing Xtract shareholders through the fixing the number of shares issued. Moreover, the new terms could see Xtract preserving its existing cash through funding a portion of the transaction cash consideration (up to US$2m) through potential project financing, which as we understand is currently being negotiate. We look forward to continued developments relating to Manica gold project and formalisation of any potential project financing proposals. We understand that the project remains on track for production to commence in 16 months and at a anticipated production rate of 50kozpa. In the meantime, we maintain our Speculative Buy on the stock.

Beaufort Securities acts as corporate broker to Xtract Resources plc

EMED Mining (LON:EMED) – Speculative Buy

Yesterday, EMED Mining (EMED) declared its unaudited interim results for the half year ended 30th June 2015. During the period, pre-tax loss widened to €15.84m from €4.53m in H1 2014. The losses were ascribed to huge increase in finance costs, unfavourable exchange rates, and a rise in care and maintenance expenses. The company’s cash and cash equivalents at the end of period stood at €58.93m (31st December 2014: €21.1m) as the company successfully raised £64.9m through open offer and subscription at 4.75p per ordinary share. On the operational front, EMED signed a resolution comprising grant of mining permit for the Rio Tinto Copper Project (Proyecto Rio Tinto). The company appointed Jesus Fernandez Lopex to the Board of Directors. Post the first half, EMED received the Activity Licence from the Minas de Riotinto Municipality in July 2015. The company continue its progress in the onsite development with first production generated on 31st July 2015.

Our view: EMED delivered subpar financial results in the first half of 2015 mainly due to the challenging commodity markets. However, the company made substantial progress in its operations as it received permission to start mining in the Proyecto Rio Tinto. EMED has been doing a lot of groundwork for years in order to commence production from the project. The Proyecto Rio Tinto provides the company an exciting opportunity to generate large scale copper production at low cost. Fortunately, EMED has a good infrastructure and processing facility in place to commence the production. The company expects to achieve 7.5 million tonnes of Cu by H1 2016 and 9.5 million tonnes of Cu by the end of 2016. Further, EMED has raised sufficient capital that would facilitate the costs incurred during the production. In view of the above developments, we reiterate a Speculative Buy rating on the stock.

Amphion Innovations (LON:AMP) – Speculative Buy

Amphion Innovations plc, the developer of medical, life science and technology businesses, yesterday announced that DataTern Inc., a wholly-owned subsidiary of the Group, has received a favourable ruling by the U.S. District Court in Massachusetts, which denied two motions for summary judgment filed by MicroStrategy Inc. seeking dismissal of DataTern’s claims on the grounds of validity and infringement. The Court found that the ‘502 patent solved a specific problem in computing using an inventive concept and concluded that the invention was eligible for patent protection under the U.S. Supreme Court’s most recent precedent. On the second motion, concerning the issue of infringement, the Court denied MicroStrategy’s motion seeking a determination that it did not infringe because its Business Platform did not use an ‘object model’, leaving the door open to revisit related issues in the future. The Group’s legal team and patent experts, continue to believe in the strength of its intellectual property; both of DataTern’s key patents have completed a comprehensive re-examination by the United States Patent and Trademark Office (‘USPTO’) and successfully emerged both fully validated and with additional claims added. It remains the firm and considered opinion of the DataTern team that the two patents are both valid and being infringed by a wide range of companies involved in this activity. Its Board believes that a Claim Construction ruling, which is fully reflective of its interpretation of the claims of the patents, would establish significant infringement by a large number of companies and it believes that DataTern should be able to generate a significant amount of revenue from this asset over the next few years.

Our view: This outcome appears to confirm the view that there has been a significant patent infringement. The ‘502 patent and the ‘402 patent are directed to how object oriented software applications access data stored in relational databases. Such applications are widely used and most databases in use today are relational databases. Should companies use, or find themselves adopting, this patented technology, yesterday’s ruling is clearly another step toward forcing them to entering equitable licensing agreements with DataTern and FireStar. Management will make every legal effort for determine such an outcome with a view to generating a fair and reasonable return on the very substantial investment made in past years of the development. If successful, Amphion considers that the value of the net income to DataTern should be substantially in excess of its carrying value, whether it arrives in the form of negotiated once-off licence payments or some form of continuing usage royalty. Being a wholly-owned subsidiary of the Group, such a bonanza inflow could then be directed either to reduce outstanding borrowings, for re-investment or even partial distribution to shareholders. Whatever, yesterday’s news is a useful reminder that in addition to the exceptional net worth generated through its Motif Bio participation, long-term value is also being created within Amphion’s other technology and IP ventures. Amphion appears to trade at a significant discount to the true value contained within its overall portfolio. Beaufort continues to recommend the shares as a Speculative Buy.

AFC Energy (LON:AFC) – Speculative Buy

Yesterday, AFC Energy (AFC) released an update on the progress in its KORE fuel cell system located in Stade, Germany. The company has successfully commissioned the KORE system in Stade on 31st July 2015. AFC remains in line to achieve Milestones 10 and 11 of the 11 Milestone programme set on 8th December 2014. Further, the company expects to hit full nameplate capacity for the KORE system as per its previous guidance. AFC has made significant progress in the development of fuel catalyst and has witnessed improvements in the power output generated from the cells. Additionally, the company has started talks with potential commercial customers and would update on these discussions in coming months.

Our view: AFC continues to make substantial progress in its first fuel cell system and remains on track to commence production by the end 2015. The company has made the developments using minimal resources ahead of its stipulated time reflecting its operational efficiency and technological advancement. Once the fuel system is fully operational, it would be world’s largest alkaline fuel cell system, functioning at an industrial facility selling power to national electricity grid. Further, AFC’s signing of a Power Purchase Agreement (PPA) with Stadtwerke Stade would aid the company’s plans as it would help commercialize the energy generated from the system. The electricity sales from the systems would be the first commercial revenue earned by AFC. Going forward, the company expects to complete the Milestones 10 and 11 of its POWER-UP strategy. In view of the overall developments surrounding the Project, we maintain a Speculative Buy rating on the stock.

Fox Marble Holdings (LON:FOX) – Hold

Fox Marble Holdings (‘FOX’) yesterday announced its interim results for the six months ended-June 2015. As had already been forewarned by management, revenues for the half year came out significantly lower than originally expected. Key highlights from the period and post period also included the September order book standing at €2.8 million, of which only half can now be expected to be realised in the current financial year. Argento Grigio marble was installed within a new development of St George plc, the luxury homes division of Berkeley Homes plc, and subsequently a further purchase order in relation to follow-on building phases has been received. Further also to the sales agency agreement signed with Zhong Shengdestone, the first sample order of blocks has been shipped to China to be processed in its factories. On the production front, after reaching agreement with property owners neighbouring FOX’s own Sivec quarry, the Group has now shipped its first batch of high grade processed slabs. Meanwhile, significant progress had been made in the commissioning of its processing plant, with the building construction completed and installation of key machinery presently underway. Following unexpected delays in procurement of two key pieces of capital equipment (which resulted in something of a setback during the first half), the problem now appears to have been overcome with the facility coming on stream during the second half.

Our view: Yesterday’s release told us little we did not already know. It did remind us, however, that FOX appears to have had more than its fair share of teething problems over the past couple of years. Right now, investors are impatient to hear a recital of positives from one of the management operational updates, possibly in terms of the new factory’s throughput, projected processing capacity or even something more exciting on the order book front. In the absence of these, last month Beaufort took its long-term Speculative Buy recommendation down to Hold. But the fact remains that the Group’s business opportunity, with what must rate as one of the world’s most exciting portfolios of high grade on-surface dimensional stone, to supply a giant and highly fragmented international customer base is enormous. Its management is capable and the business remains cash rich, while most capital costs have already been committed. Beaufort anticipates little further significant expenditure going forward. Labour and transportation costs are low, yet global demand continues to increase while pricing remains firm and rising. Perhaps comprehensive distribution networks for the key international markets (like North America, Middle East, China etc.) remains the last piece missing from the overall jigsaw? Assuming management is now putting such agreements in place, there should be little to stand in the way of the Group securing a highly visible and long-term order book over the next couple of years that, in turn, should be capable of rapidly dropping down to the bottom line. When this appears on the horizon, Beaufort will be quick to upgrade the shares once again

Economic News

UK Bank of England rate

The Monetary Policy Committee of the Bank of England (BoE) retained its benchmark interest rate at 0.5%, matching the market expectations.

US initial jobless claims

Number of Americans filing their initial claims for unemployment benefits fell by 6,000 to a seasonally adjusted 275,000 in the week ended 5th September, from last week’s downwardly revised figure of 281,000, the Labor Department said yesterday. The number came in line with the market expectations.

US wholesale inventories

US wholesale inventories slipped 0.1% m-o-m in July after a downwardly revised rise of 0.7% in June, data from the Commerce Department revealed yesterday. Markets had expected inventories to rise 0.3% during the month.

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