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Broker Round-up part 2, including Atlantic Coal, EMED Mining, Gemfields, Caledonia Mining

Published: 16:38 16 Jan 2013 GMT

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Junior miners were very much the flavour of the day among City analysts, who digested a number of stocks today.

It was yet another good quarter from anthracite coal miner Atlantic Coal (LON:ATC), according to small cap specialist Fox-Davies.

The broker, which has a ‘buy’ rating and 1p target price on the stock currently trading around 0.3p, cheered the company’s record production from its Stockton mine in Pennsylvania, USA.

Managing director Steve Best said the company is now beginning to see the benefits of its investment programme to improve the operation of the mine.

Analyst Mark Heyhoe notes that while the stripping ratio – the ratio of overburden removed for a tonne of clean coal produced – dropped to 23.1 from 32.5 in 2011, it did not fall as far as the 17.7 forecast.

“This drop in the stripping ratio was due to the moving of the Norfolk and Southern Railway line,” said Heyhoe.

“This facilitated access to over one million tonnes of coal and will allow for more efficient working of the remaining reserves of the mine.”

Sticking with junior miners, EMED Mining (LON:EMED) says it has now secured insurance for the Rio Tinto mine after it reached agreements with the Andalucía authorities, and it continues to wait for the green light from the government for the start-up.

Respected mining house RFC Ambrian is still upbeat that the company will gain government approval sooner rather than later.

“While we feel there has been a slight delay to the process, largely due to the recent acquisition of sections of the tailings dam, we are confident that the political climate in Andalusia favours the re-start of the mine,” said the broker.

Mining may not sound very luxurious but coloured gemstone specialist Gemfields (LON:GEM) is trying to make it so.

Gemfields’ management has a track record of delivering growth, and will be looking to rejuvenate Fabergé when the iconic brand joins the fold.

Broker Canaccord Genuity argues, however, that the current valuation of the shares takes no account of the prospects for Fabergé or, for that matter, the firm’s ruby assets in Mozambique.

“At the current valuation, we believe both Fabergé and the exciting ruby development project in Mozambique are included for free,” argues Canaccord’s Jeremy Dibb.

Dibb acknowledges that loss-making Fabergé will initially dilute earnings per share (EPS), and the shares issued to pay for the acquisition will also depress EPS.

However, “Fabergé will provide Gemfields with direct control over a high-end luxury goods platform and a global brand with a heritage dating back over 170 years. More specifically, a jewellery retailer with a history of producing coloured gemstone pieces,” Dibb notes.

“It is difficult to think of a retail jewellery acquisition, at any price, that would have been a better fit,” Dibb adds.

The broker is sticking with its ‘buy’ recommendation and has trimmed its share price target to 39p from 40p, and warns investors that Gemfields may need some time to get a handle on the recently relaunched Fabergé before embarking on ambitious growth plans.

The same broker sees Caledonia Mining (LON:CMCL, TSE:CAL) as an attractive investment on a number of fronts.

It could have almost as much spare cash as its current value in two years’ time, the broker added.

“With the net cash balance building, Caledonia offers a premium dividend, production and earnings growth versus peers,” says the broker.

 The company trades on a 65% discount to peers on three key metrics, while average annual free cash flow will be US$33mln over the next five years.

This will allow the company to fund its five-year investment programme of US$37mln internally, while leaving ample room for dividend growth, argues Canaccord.

A wave of downgrades from City number crunchers dampened the Footsie’s spirits today following an upbeat start to the year’s trading.

Deutsche Bank led the way when it cut mobile phone giant Vodafone (LON:VOD) to ‘hold’ from ‘buy’.

The German broker does not believe a deal to sell its US joint venture Verizon Wireless will materialise any time soon due to tax and valuation complexities, adding that it would expose the fragile state of the stock.

Analyst David Wright’s best guesses point to a deterioration in growth in 2013, while his crystal ball-gazing shows him that free cash flow (FCF) will decline the year after.

He reckons Vodafone could be forced into some M&A action to compete in what he sees as “an increasingly converged sector”.

The downgrade saw the shares lose 2% today.

Société Générale jumped on the broker bandwagon by cutting alcoholic drinks maker Diageo (LON:DGE) to ‘hold’ from ‘buy’.

Nicolas Ceron, an analyst at the French broker, predicts growth in the US spirits market is about to be watered down, while the price/mix in scotch, which accounts for a third of Diageo’s business and 50% of its organic growth, is likely to moderate.

“We are less bullish than the market on North America (1/3 of Diageo’s sales, 40% of profits): after almost three years of organic sales growth acceleration in this region, we believe Diageo is now at a turning point,” said Ceron.

He also questions the company’s ownership of its beer business given “the limited synergies with spirits in Africa”.

Fellow FTSE 100 stock Lloyds Banking (LON:LLOY) was also on the receiving end of a downgrade after Australian broker Macquarie Capital cut it to ‘underperform’.

A sharp slowdown in sales at fashion retailer French Connection (LON:FCCN) sparked Oriel Securities’ downgrade to ‘hold’.

The company said it expects to make a loss of between £7.5-8mln when it reports its full-year earnings to the market at the end of January after a poor sales run up to Christmas.

“There remains a lot of work to be done at French Connection in terms of strategy, growing full price sales and exiting unprofitable space, and until we see clearer signs of progression on these fronts, see few catalysts for the shares in the short term,” said analyst Alistair Davies.

Bank of America Merrill Lynch provided some cheer after a bullish note on the housebuilding sector.

Tipster Andy Murphy reckons there are a number of supply and demand factors in place that are likely to lead an improved mortgage market in 2013.

“This is crucial as finance availability is generally viewed by market participants as the key constraint,” said Murphy.

“This could be a long-term driver of better demand and growth rates.”

Barratt Developments (LON:BDEV) and Bovis Homes (LON:BVS) are joined on the broker’s top picks list by Berkeley Homes (LON:BKG).

Murphy, who also raises his target price for all three, upgraded the latter to ‘buy’ from ‘neutral’, praising its cash return programme.

It was not all good news for the sector however. He did cut Taylor Wimpey (LON:TW) to ‘neutral’ from ‘buy’ with its share price close to its potential peak.

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