Stock markets are now looking ahead, and while there are undeniably concerns about the health of the major western economies, there is a growing consensus that by the second half of 2009, we may witness the beginning of a recovery.  That offers private and professional investors, who have spent a good part of 2008 on the sidelines, potentially some very good opportunities to snap up companies on undemanding valuations ahead of an anticipated recovery.   Recent data from Capita Registrars highlighted that private investors are beginning to buy back into the markets, with net inflows from retail investors recorded in October and November of 2008.

If our own experiences are anything to go by, private and professional investors are certainly still around. Our last event of 2008, with Cluff Gold, Minera IRL and Lydian International generated substantial interest from the investment community - all three companies received a boost in their share price and/or traded volume in the following days.

We certainly see no decrease in interest from companies wishing to present at our forums either. Our first three forums of 2009 are already fully booked, and we have only limited availability remaining on any date in the first half of 2009. Demand is so strong that we are planning to commence investor forums in Birmingham and Manchester later this year.

The following companies have already confirmed they will be presenting between January and June 2009:  Regal Petroleum, Cambridge Mineral Resources, EMED Mining, Go Industry, Seeing Machines, Kootenay Gold, Gold Resource Corp, Gulf Keystone Petroleum, Central China Goldfields, Strategic Natural Resources, IPSA, Landore Resources, Green Dragon Gas, Gemfields, Kopane Diamonds, Victoria Oil & Gas and FTSE 250 constituent Dragon Oil.  

Our investor forums are to be hosted on the following dates:  January 15, January 29, February 12, February 26, March 11, March 26, April 7, April 22, May 14, and June 4.  

Our first forum, on January 15 at the Chesterfield Mayfair Hotel (Register Here), will be hosted by Plant Impact, Synchronica and Medicsight.   All three companies chalked up considerable milestones in 2008 and are looking forward to further progress in 2009. 

A short description on each is below, and we look forward to seeing you on the 15th.

Medicsight (LSE: MSHT) is a London-based developer of computer-aided detection (CAD) and image analysis software for the medical imaging market. The company specialises in helping radiologists to identify, measure and analyse disease and early indicators of disease.

Founded in 1999, it has taken Medicsight the best part of a decade to launch its first products.
With the company’s focus being on colorectal and lung cancer, it is Medicsight’s ColonCAD and MedicRead Colon products that are expected to drive revenues over the next few years.

As Medicsight’s colon-related software continues to gain regulatory approval in key territories, sales are forecast to increase to approximately £24 million in 2009 (when the company is expected to become profitable) and £34 million in 2010.

Plant Impact (AIM: PIM), based in Preston, was formed in 2003 and joined AIM in October 2006. It specialises in natural products designed to improve the health of crops, making them more resistant to climate change, adverse soil conditions and pests. This results in better crop yields and a longer shelf life, which of course boosts the profits of food suppliers.

Plant Impact is coming to the end of its research and development phase. It has around 200 ongoing field trials in more than 30 countries, primarily sponsored by third parties many of whom approached Plant Impact in the first instance.

Although some trials have been conducted on arable crops such as soy bean, the majority have been on higher value items such as fruits and flowers. Tests have been conducted on tomatoes, lettuce, table grapes, strawberries, blackberries, apples, pears, cocoa, squash, roses and cucumbers for example.

Many of these trials have produced impressive results with one on cocoa improving yields by 69% and another on lettuces improving yields by 15%, shelf life by 7 days and dramatically reducing fertiliser input.

Plant Impact uses six main technologies, sometimes in combination with each other, to create its various different products. Manufacturing is outsourced to two UK-based firms.

Synchronica (AIM: SYNC) has, over the last three years, streamlined its business model to become a true mobile software company by concentrating on two software products for mobile phones.

Synchronica´s flagship product is a mobile email and synchronization solution, Mobile Gateway. Although it works with most types of mobile phones, its key selling point is that it allows ordinary mass-market feature phones to send and receive emails plus manage calendars and contact lists.

Normally this sort of functionality is confined to Smartphones such as Blackberries and Windows Mobile devices. Mobile Gateway provides Blackberry-like services on a wide range of devices from all leading manufacturers and supports about 1.5 billion devices in the market today. Unlike other solutions, it requires no additional software to be installed on the handset. Instead it uses industry standards to synchronise with built-in applications, enabling it to address a much larger market than competing solutions.

Synchronica has announced a number of contract wins in recent months, and investors have started to take notice, pushing the stock from a 2008 low of 2.5 pence back to 4 pence.

Rambler was founded in 2004 when we acquired 100 percent ownership of the former Ming Mine. We listed in London on the AIM in 2005 at 50 pence. As the Ming Mine was located Newfoundland, Canada we also decided to joint list on the TSX-V which we did in 2007. We currently have some 60 million shares issued and fully diluted and over the last 52 weeks we’ve traded as high as 72.5 pence and a low of 8 pence which is currently where we are trading at today.

Our Chairman is the well renowned Harry Dobson who is also the Chairman of Kirkland Lake Gold, Belvedere Resources and Borders & Southern. Brian Hinchcliffe is also on our Board of Directors and he is the Managing Director with Kirkland Lake Gold and Brian Dalton, the President and CEO of Altius Minerals who are our largest shareholder, is also on the Rambler Board of Directors.

 
What differences are you finding between the upper and lower footwall zones at the Ming Mine project?

Well, with respect to the upper zone we are finding that it contains massive sulphides, which is the higher grade material, grading around 3.5% copper and 2.5 grams per tonne of gold, but much lower tonnage, currently in the known resource about 1.5 million tons of ore at those types of grades. In the lower footwall zone we have a much, much larger resource closer to 12 million tonnes grading only 1.7% copper with only 0.25 grams per ton of gold.

 
Tell us about the 43-101 compliant resource that was published in April 2008, and what can you tell us about the update scheduled for early 2009?

The resource that was issued this year was the first national instrument compliant resource for the property, basically it showed that we have some 1.5 million tons of better than 5 percent copper equivalent which we are currently focused in on mining initially in a five year business plan. There is then about an 11.5 - 12 million tons of lower grade material which is sitting in the lower footwall zone, grading about 1.78% copper and 0.25 grams per ton of gold. All in all though, when you look at the resource in total we have in excess of 500 million pounds of contained copper, we have 150,000 ounces of contained gold and we have 1.1 million ounces of contained silver. I should also say that all the zones remain open in all directions and there is lots of potential on the property for expanding on the resource. As we have been drilling over the last seven or eight months since publishing this resource it is our intention to put a resource update out in the first quarter of 2009. That resource update will move tonnage in the lower footwall zone from the inferred and indicated categories up into the measured categories but more importantly it will add some new high grade massive sulphide zones which we are now finding on the property and we expect those zones to have grades between 5% copper equivalent and as high as 10% copper equivalent which is going to figure significantly in our five year business plan.

 
Talk us through the scoping study that was published in June 2008 and tell us your thoughts about the scoping study and the way forward

The scoping study was conducted by SRK Consulting out of Toronto. It worked with a non 43-101 compliant resource, at that time which was some 16.3 million tons at 1.82% copper and 0.35 grams per ton of gold. Importantly it did show that the lower footwall zone could substantiate the 4,000 metric ton per day mine which would give us about 18,000 tons of copper metal annually with a life of the mine in excess of 10 years. The basic metallurgical testing was excellent; with the lower footwall zones showing copper recoveries as high as 98% and a 28% copper concentrate and no deleterious material which could possibly incur a penalty in an off-take agreement. The total mine cash cost at that time was also $60.15 per ton.

The large challenge we had though with the scoping document was that the level of capital required to bring the mine into production at that 4,000 metric ton per day production rate, was in excess of $200million which was going to be challenging even before we saw a meltdown in the financial market. So at that point in time Rambler already changed tack to bring the mine into production closer to the historical production rate which would be about 650 tons per day of ore which would generate about 6000 tons of contained copper metal annually, but importantly that minimises the capital requirements significantly to some CA$30million and brings the mine into production much sooner.

 
What is Rambler’s current financial position and how much money will Rambler need to raise in the foreseeable future and what are your thoughts about raising it?

Well Rambler’s current working capital at the current burn rate would take it through into the third quarter of 2009. We currently foresee doing the project financing in the second quarter of 2009 after we have produced the detailed engineering and the resource update. We do have confidentiality agreements with several parties including two banks that we have been talking to for the last year in connection with possibly doing some debt financing. We are also talking to several commodities traders and building the potential for off-take agreements and forward sales of copper and gold concentrate. We are also speaking to some other interested parties who currently have cash on the balance sheet and are looking for projects to joint venture with and partner potentially with Rambler. So those are three particular options which we currently have on the table that we will be investigating over the next four to five months as we move closer to the project financing in the second quarter of 2009.

 
What can we expect from Rambler Metals and Mining over the next 12-24 months?

Some of the key milestones that you will see from the company will be a resource update being issued in the first quarter of 2009 at the same point in time we will also be releasing a completion of our detailed engineering and once we have those two documents in place it will then allow us to update our cash flow models with the various sensitivities and on the back of that we then expect to do the project financing in the second quarter of 2009.

There is then a 9-12 month period whereby we will be doing detailed engineering, construction drawing, site construction and commissioning of a new mill with refurbished components which then brings the mine into production in the middle of 2010. Of course while all of that work is ongoing we will be continuing with our exploration program and recently we have completed a Titan geophysics over the entire property which is the first time that has been done and the Titan geophysics is able to penetrate through the ground down to about a kilometre in depth and it has actually shown that there are two or three new zones previously undiscovered that have to be followed up on, on the property over the coming 12-24 months. So there is the potential to add additional resources to the known 43-101 resource.
 

Is the aspiration that you are undertaking currently giving you cause to rethink the Ming Project property?

I would have to say the answer to that question is yes. As you are aware we have just recently completed the Titan geophysics over the entire property which is the first time that has been done. We are certainly seeing that there are some anomalies being indicated which previously were not identified and a couple of those anomalies are close to surface. So they certainly represent an opportunity for Rambler to drill off sometime in 2009 going into 2010 once the project financing is in place we will want to drill those off from the surface. With respect to underground, we have been primarily focused on a five year business plan so we have been drilling off at the moment the nearer ore bodies to the existing infrastructure but we also know that all of the zones at the Ming Project are open at depth. Interestingly, as we drilled the deposits off about a year ago when we were doing the drilling from surface, we have been finding that the deeper holes that we had been putting in - particularly in the lower footwall zones - have been improving with grade. Indeed one of the last holes that we put in there had some 30 metres of better than 5 percent copper in the lower footwall zone and of course that zone is open at depth. So that has represented an opportunity for us once we have completed our detailed engineering to drive out into the hanging wall with an exploration drift and then test that zone for the down plunge extension. Of course it would be our hope that it does continue and the grades improve.

 
Exploration is one thing, developing a project and bringing it into profitable production is another, what skill does Rambler have in Mine development and production?

I think certainly our operations team that we had assembled for this project is second to none. Jason McKenzie who is the general manager we hired in August this year brings with him 30 years of experience in operations, not just in Canada but internationally around the world, and he worked at Tara Mines which is the largest lead-zinc mine in Europe. Don Seymour, our project superintendent, is a native of Newfoundland and Labrador has 35 years operational experience. And then of course myself. I have some 19 years in the mining industry with 16 years actual experience at the operations level; most of that with Anglo American. So I think we have assembled a very, very strong team of individuals with lots of operations experience.

We are also very fortunate in that where the mine is located it is a historic mining camp that was in production between 1962 and the mid 1980’s and there are lots of experienced miners working throughout Canada who originally emanated from that area. We have been quite fortunate as we have brought the mine back into pre-production that we have been able to attract some of those miners back to the project and back to the property and they are actually doing the physical mining for us underground. I think that is some of the strengths that Rambler has when it comes to developing and getting the mine back into production.
 

What are the disadvantages and advantages of working in Newfoundland?

Well, certainly if we look at the advantages; the provincial government so far on the project has been very supportive in assisting us in getting the mines back into production. For example, I just attended the China Mining Expo under a trade delegation that the provincial government actually sent there, and they were actively promoting the mining business within Newfoundland, but specifically Rambler was taken on that trade delegation and we were heavily promoted by the provincial government. We have also been given first right of refusal on some of the old components and equipment within that whole mining area, Because it is a former mining camp and a brownfield site, that is going to assist us with the speed at which we can gain our environmental permits. I should also say that the site has access to power and the provincial grid runs within 100 metres of the mine site. There is a workforce to draw upon and the workforce has a very good work ethic. We are 5 kilometres from the Atlantic Ocean with access to several ports so we have the ability to ship concentrate around the world. I think these are some of the advantages we have doing business in Newfoundland.

If we consider some of the disadvantages I would say probably that we are an island; a lot of the consumables and goods that we require for the project and for when the mine comes into production are not actually made in Newfoundland or Labrador, so they have to be shipped in from mainland Canada. That takes some extra time. I would also say that we are doing business in North America and as we all know in North America, compared to other areas of the world, certainly labour cost is a big component of our operating costs on the project.

 
What are your thoughts on the short, medium and long term prospects for copper?

In the short term we have seen a tremendous destruction in the copper price like many other commodities over the last 3-4 months. I believe currently at the existing copper prices of £1.60 per pound I think that 40-50percent of the current copper producers at those prices are probably operating below their production marginal cost and therefore are losing money which is not sustainable. So there is going to come a point in time where we are going to see more operations being put on care and maintenance which will further reduce the supply and some of the surplus copper that we are seeing sitting in the inventories around the world.

For the medium and longer term, actually I am still very bullish on copper. I believe that a lot of the stimulus packages that many of the governments have introduced over the last several months will start taking effect sometime in late 2009. Because we are going to see further disruptions on the supply side, once we start to see a recovery taking place in the global economy and demand starting to come back for these commodities, with the supply disruption I think we are likely to see commodity prices increasing to levels which we saw not less than a year ago.

 
What are your thoughts on the debt markets, the stock markets in general and the AIM and the TSX-V exchanges in particular?

First of all with respect to the debt markets, I think at the moment there is obviously a lack of confidence out there. I think that once 2008 draws to an end and a lot of the banks and financial institutions have taken the various write-downs. I think we will start to see the debt markets starting to open back up in 2009. I think with the governments in the western world taking some part ownerships in some of these financial institutions I think they are going to be forced to start lending again to stimulate the economies, so I do expect the debt markets to start coming back in 2009.

With respect to the stock markets and particularly commodities companies, obviously most of these companies have seen 90percent of their share value erased in the last 6 months so I would have to say that there are tremendous opportunities out there to buy at this moment in time if the investor actually understands the risk and is able to accept the risk. I do however think that in the longer term once confidence comes back into the retail side with the investors I think we are going to see a rebound in the stock markets, probably some time in late 2009/2010. Obviously on the AIM and particularly the TSX-V which is heavily weighted to energy and commodities I think we are going to see a strong rebound once these mining companies start coming back into favour in 2010.

I would also say that a lot of these companies may not survive over the next year to 18 month so we are actually going to see a clean slate with respect to a lot of the junior exploration and mining companies that don’t have strong projects, over the next 18 months are probably going to fall by the way side I think in the longer run that’s going to be better for the investor because they will have less choice but they will also know that the companies that have survived are the companies that actually have tangible assets that have economic value and that will make it easier for the investor.

Regal floated on AIM back in 2002 when it was led by Frank Timis. Massive hype regarding a potential billion-barrel find in Greece saw its shares soar to over 500p. The well turned out to be non-commercial and the shares slumped. Then the company was involved in an ownership dispute regarding its Ukrainian licences. The shares fell again but the dispute was eventually resolved in Regal’s favour at the end of 2006.

Timis resigned from the company in the middle of 2005. He’s still the company’s largest shareholder however, owning a 12.5% stake. Since Timis departed there have been a number of management teams at Regal. The previous incumbents were keen to attract an experienced partner as an operator for Ukraine. Two memoranda of understandings were signed, the second one with Shell in November 2007.

Shell was due to pay $50m for a 51% stake in Regal’s Mekhediviska-Golotvschinska ('MEX-GOL') and Svyrydivske ('SV') gas and condensate fields plus the first $360m of capital expenditure. But some shareholders felt this was undervaluing their potential and wanted Regal to operate the fields itself. So a new management team was installed, led by David Greer, who had himself spent 28 years at Shell working all around the world in challenging assignments as well as being Shell’s Global Director of E&P Projects.

Within days, Shell had withdrawn and Greer set about transforming the Company and raising the funds required to make a start on its own development plans. Regal raised £80m in January of this year and a further £20m in July to secure two brand new rigs for 5 years. These will be able to drill deeper and more quickly than the rigs traditionally used in the Ukraine.

External interest in Regal’s assets has continued. In April the company said it was early-stage discussions with potential partners but nothing was finalised. Meanwhile the share price soared to 300p. Then in October the company denied rumours that Shell had approached the company regarding a takeover. Press stories mentioned 300p as the take-out price but investors appeared doubtful. The shares only touched 125p before the rumour was quashed.

So what’s in the Ukraine that has caused some much corporate commotion? The MEX-GOL and SV licences lie about 200km east of Kiev and gas was initially discovered there in the 1960s. The fields were partially appraised over the next couple of decades before Regal took an interest in 1999 and then a 100% 20-year production licence in July 2004.

Since the fields were first discovered over 20 wells have been drilled. A handful of these have been in production for a while and in 2007 their output averaged around 1,000 barrels a day of oil equivalent. This year production has declined steadily to around 500, according to a recent Regal presentation. Following an extensive 3D seismic programme, one new well (MEX 103) and two work overs (MEX 102 and GOL 2) have recently been completed.

MEX 102 exceeded expectations and is producing nearly 1,200 barrels of oil equivalent a day. This should mean Regal will hit its year-end production target of 2,000 barrels per day. Two more new wells (MEX 106 and SV 58) will spud soon and an additional work over (GOL 1) should also be completed in the near future.

The initial development plan includes 15 new wells, split equally between the two new rigs and a third that is close to being secured. In total, around 70 wells could be drilled and peak production is estimated at 50,000 barrels plus in 2015-18.

The wells will take several months to drill, even with the new rigs, and could cost in the region of $20m each according to some analysts. A new gas processing plant with ten times the current capacity is being planned and could cost a further $100m, taking the total development cost to around $1.5bn. The current plant’s capacity is 25 million cubic feet and 1,250 barrels of condensate per day. The gas is taken via a 13km pipeline to the main Kursk/Kiev Majestral pipeline.

A reserve report was produced by Ryder Scott in 2005 and estimated proven and probable reserves for MEX-GOL and SV at 169 million barrels of oil equivalent. An updated report is expected around the middle of next year. The gas lies between 4,800m and 6,000m below the surface and the 2005 report only examined the shallower ‘B’ sands. Including the deeper ‘T’ sands could increase the reserve figures considerably, with some analysts reckoning both reserves and estimated peak production could double.

Following Regal’s July placing the company had net cash of $174m. At the time of writing this is greater than its market capitalisation but it looks like all this cash and more could be spent bringing the Ukrainian portfolio into full production. A farm out to share some of the development costs looks like the most likely way forward.

Although the focus is very much on the Ukraine, Regal also has interests in Romania and Egypt and these should also be included in the updated reserve report scheduled for next year.  

In Romania Regal has a 100% interest in the Barlad licence and 50% in Suceava. At Barlad, a shallow well was successfully flow tested at 3.7 million cubic feet of gas per day in December 2007 over a 5m interval. A second larger interval of 13m did not flow and a follow up appraisal well was plugged and abandoned last month. Regal had been planning two further wells if the follow up proved successful but is now likely to be reassessing its plans.

At Suceava, where Regal is partnering with Aurelian Oil and Gas, a gas discovery of 0.9 million cubic feet per day was made last year which was to be tied into production during 2008. However, no further plans for this licence have been announced since.

In Egypt Regal has a 25% interest in the East Ras Budran concession. The ERB-A-1X well was tied into production in June of this year and was initially producing around 1,100 barrels of oil a day. Two subsequent wells found no hydrocarbons however and were plugged and abandoned.

While not for the faint of heart, Regal’s prospects look far more favourable than the share price is currently suggesting. The new management team has delivered to date and if a suitably deep-pocketed partner can be secured and initial production targets are hit, the market may soon reconsider its valuation of the company.

A good example is Rangold resources, a gold miner, which has prospered while others in the sector have had operational issues. 

Healthcare Locums is an interesting stock that has prospered despite being in the recruitment field – an area which is suffering massively at the moment.  The firm claims to have a strong niche in the health sector which is fairly defensive but even if this is the case surely barriers to entry in the recruitment field are low.  It is not clear to me what the drivers are behind the share prices of Capita and Barr (AG).

Bonds – Us Treasury 1-3, 7-10, Euro Government Bonds, UK All stocks Gilt

Investment Funds: Ruffer Investment Company – Could an investment firm actually have managed to protect its shareholders money in these times of woe?  Ruffer has actually made money during the bear market which is something of an achievement.  However, it did under-perform in the preceding bull market so whether this is the consequence of a perma-bear type strategy is unclear.  For example, just owning government bonds would of produced out-performance and capital appreciation in the recent climate.

FX – NZ per Euro, Swedish KR per Euro, Norwegian Kr Per Euro, £ per Euro

Lows

FX – ($ and £) Yen per $, HK $ per $
Swiss Fr per £, Euros per £, Indian Rupee per £, Singaporean $ per £

Fall of the Anglo-Saxon Currencies appears to say something symbolic about capitalism.

Commodities – Aluminium, Natural Gas, Copper, Oil.

Funds – Psource structured debt, HG Capital Trust, Gartmove Growth Opps, BH Macro, Ukraine Opportunity Trust, Thames River Multi Hedge, Goldman Sachs dynamic Opportunities, Bramdean Alternatives, Blackrock alternative strategies.  There are many more which could be added to this list and perhaps the joke should be that absolute return funds (those claiming to produce uncorrelated returns) do produce absolute returns: returns which are absolutely awful.

Stocks (hitting new lows for the first time or producing continuation patterns)– Kerry, Smith and Nephew, HSBC, Logica, Green Dragon Gas, Prodesse Investments, Maple Energy, London security, Iomart Group, Sepura, Ceva, Mattioli Woods, Chaucer Holdings, RM plc, Business post, All leisure Group, Tenon, Liberty, Cohort, Latchways, Neuropharm, Eleco, Carr’s Milling industries, Lincat, Management Consulting group, Marwyn Materials, Pinewood Shepperton, Cohort, DCC, Teleset Networks, Norkom group, Hyder consulting, Teleset, Wynnstay, Multigroyd group.


Keep it simple stupid

What kind of framework might have been able to predict and adjust an investment/trading approach to current conditions?  One which doesn’t explicitly try to predict future conditions of course which is a neat little contradiction.  The new/highs lows ratio which is followed here is one such indicator as is the 200-day moving average.  Both of these don’t try to anticipate the future but do indicate a change in market direction.  Statistically it appears that these indicators could have led to superior returns with less risk being taken.  

Is this premised on a basic trend-following methodology?  Yes.  It fails, though, to work if markets are volatile without any particular direction as each trend it tries to latch onto collapses.  In other words in volatile markets using a trend-following strategy leads to continual losses as the investor gets whipsawed.  What does all this mean and why is it potentially interesting?  Well since the start of this century a basic trend-following strategy would have delivered the goods which means it is something worth noting.  A potential weakness of such a system, even when trends do occur, is that markets can rapidly collapse as happened in 1998 and 1987.  Thus a possible further addition to an automated trend following system may be a judgement based method to sell-out when markets appear dangerously exuberant.  Essentially this is the methodology proposed by Mark Shipman (Books: The Next Big Investment Boom and Big Money Little Effort) but also by other authors.

It is relevant as such a simple methodology can be copied and needs little work.  Indeed Mr Shipman claims to spend only one hour a week looking at his charts.  Crucially, though, even if there is some statistical evidence it is important to understand intuitively why such a system may have merit.  A large part of the answer can be put down to the fact that markets are emotional beasts and also due to the asset gathering incentives of fund managers.  Typically money management firms focus on marketing and claim that it is impossible to time the market.  At the same time they proclaim that “now” (it is always now) is a great time to invest and promote themselves most at the middle or top of the market.  Thus markets move in cycles and those who invest according to mutual fund firms typically do so at the wrong time.  Stocks also reflect economic cycles and these occur with some regularity given the boom bust cycle also prevalent in the real economy.  

In essence then trend-following strategies might be considered a way of obtaining money from the underperformance of the mutual fund industry and of financial advisors.  It is also an approach which acknowledges that the future is largely unpredictable as its only premise is that we “follow” the trend.  Is this the way to go?  Maybe and maybe not but what is clear is that when indicators start to turn we should take notice of them.  The 200-day moving average turned down late in 2007 for the first time in four-and-a-half years and look what happened after that.  That may have been a more telling signal then following in-depth market reports over nearly five years.  

Perhaps the reason that such an approach hasn’t caught on is that everyone in the financial industry wants us to believe that complexity is needed to succeed so that they can justify their fees.  A prominent critic of the momentum approach was the famed value investor Benjamin Graham who contended that there was simply no evidence to support it.  Set against this is the presence of strong trends – we may not predict them but we might react to them – and the drivers of such trends which include human psychology and economic cycles.  Finally, the statistical evidence from trend-following funds appears to be somewhat compelling.

Follow the Debt

An interesting footnote to the present crisis concerns how events such as these might be predicted.  After the 1998 Asian crisis one journal claimed the best way is to “follow the debt” (I believe this was The Economist but I have no citation).  In other words companies, countries or systems which have built up to much debt will be at risk from a crisis based on an inability to meet payments.  A build up of debt, preceding the crisis, shows excessive optimism or an inability to live within one’s means.  Following this an inability to pay is triggered by a slowdown or simply as the sheer size of debt becomes too large such that it cannot be sustained even under normal economic conditions.

Of course debt is really a proxy for excess and there are other indicators of this.  However, it is an important variable as it helps exaggerates booms and deepens any downturn that follows them.  It is also one for which we have historical indicators that show when debt levels become unsustainable.  Also historically debt levels have become pronounced before major downturns such as the Great Depression or the Asian Crisis.  Before the Great Depression there was a huge expansion of credit with much of it borrowed to support speculation while prior to the Asian crisis many firms there borrowed in Western currencies to support boom-related expansion.  

The major issue with debt is that it is as an obligation that doesn’t simply go away when the good times end and therefore serves as a shackle around the prospect of any recovery.  This is something that firms know to their cost as those that have made bad purchases using debt have often not survived.  There is also the added dynamic that when credit stops being repaid creditors suddenly do not wish to lend and this may instigate and exacerbate any downturn.  It can be argued that taking on debt is largely a bet on strong economic conditions continuing as the results if this isn’t the case may be a complete wipe-out.  Why to people take on debt if the consequences of a change in conditions are so severe?  A large part of the issue is the agency problem in that the principals end up with a geared play on the boom if things go well and the banks end up with the problem when the boom fails.

How is this relevant to our present crisis?  Well the simple “Follow the debt” rule would have worked well as a predictor of our current malaise.  Hedge funds operated on credit as did investment banks and private equity.  Indeed the whole private equity business model appears to be simply a “we do well as long as the good times keep rolling” bet.  Does no one remember Michael Milken and Junk Bonds?  Even the name private equity is misleading as it suggests exclusivity and to be part of a club.  Well it is a club in which investors could get wiped out in a day but managers take money out as long as this day doesn’t arrive.  In any event the simple rule of following the debt would have foretold a major crisis in the making and the need to sell-out at the appropriate time.  It is an approach which therefore may be more effective than following the grandstanding by Economists.  The key issue though is that those taking on more debt now are governments and therefore we can only hope that this time excess debt will get us out of a crisis and not lead us into another one.

This forms part of the actions the company is taking after a strategic review of its exploration activities, which all taken together will reduce exploration spend to US$5 million per annum from approximately US$25 million.

Petra Diamonds has also reviewed exploration in Botswana and will substantially reduce both the level of activity and spend, but will not relinquish any of the licence areas of interest.

It is discussing options regarding the Kono project in Sierra Leone with its joint venture partner Stellar Diamonds Ltd, the focus being on substantially reducing Petra Diamond's monthly cash spend on this advanced exploration project.

There is potential to reduce exploration spend by a further US$4 million depending on the results of the Luangue and Kono reviews, Petra Diamonds said.

The operational reviews at all of its mines were taken in response to the global weakening of rough diamond prices. Petra is confident that - other than Star and Helam, which may need to be placed onto care and maintenance -, the mines will be cash flow positive at current prices.

The company has been transformed by the acquisition of the Cullinan and Koffiefontein mines, and with the Kimberley Underground and Williamson mines adding further production in the next six months it is comfortable in deciding to relinquish the capital intensive exploration projects that have historically been Petra Diamonds' focus.

 “The global financial environment requires a change in commercial approach. Our focus now is to continue to build cash-positive production, whilst maintaining rigorous cost control,” it said in a pre-close trading update ahead of interim results.

Gross revenue from rough diamond sales for the first half to end-December 2008 rose to US$48.1 million, a 52 percent increase from the same period a year earlier.

Petra Diamonds announced the recent recovery of a second exceptional blue stone at the Cullinan mine. Early indications are that the 26.58 carat stone is an extremely rare discovery, of even better colour and clarity than the 39.19 carat blue stone sold in October 2008.  It will announce how and where the stone is to be sold in 2009.

And certainly the chance to ‘top up’ exposure in regions where it already operates will likely be seized. The company has already agreed to take full control of Vodcom, South Africa’s biggest mobile operator for instance.

With the big deals done for the time being the focus is now back on existing assets and the changing economic landscape in the West.

Indeed we retain our view on Vodafone as a high quality defensive exposure generally. An as such regard a 2009 price to earnings ratio of around 10 times and dividend yield of 6 percent (with a progressive policy in place) as highly undemanding.

Direct shipping of Acoje’s laterites has never been the main game, but was a very handy starter operation while it lasted.  Depressed nickel prices mean it will be a while before this resumes in earnest, but a Japanese buyer has recently taken delivery of a trial shipment of 7,500 tonnes of nickel laterite ore, shipped by Rusina’s Philippine partner, DMCI.  The change is that the ore was 2.15% nickel, almost double the average grade and significantly higher than past shipments.  A certain amount of high-grading won’t do significant damage to a laterite tonnage of 50MT (two-thirds indicated, the rest inferred) and further shipments are possible.  Margins are low but it all helps.

Main Course.

The ‘main course’ for Rusina is the 40:40:20 joint venture between Rusina, European Nickel and DCMI to process the bulk of the Acoje laterites, using European Nickel’s heap leach technology.  Crudely, this involves mining the near-surface laterites (strip ratio 0.46), and subjecting it to European Nickel’s proprietary heap leach technology.  Most people know that nickel laterites can be difficult to process, but European Nickel’s technology is known to work well at Caldag in Turkey.

Rusina and European Nickel have just published the pre-feasibility study, and it is good news.  In addition to opex costs of $3.10/lb – notably economic below today’s $4.40/lb nickel price – the study features an Internal Rate of Return of 28.3%, 3-year payback and forecast annual sales of US$260m, inclusive of by-product credits (mainly cobalt).  This translates to US$108 million of free cash flow annually.  The study assigns a post-tax NPV of US$375 million using a 10% discount rate and notes there is quite a bit of potential to improve on these figures by extending the mine life.  

There are two routes to increase the resource.  The first is by infill drilling and firming up all the Inferred resource (40%) to Indicated status (currently 60% of the resource).  The second route is by adding tonnage from the Zambales Chromite deposit, and the combination is expected to extend the mine life beyond 20 years by the time the Definitive Feasibility Study is published.

All this is predicated upon a long-term nickel price of $6/lb and cobalt at $10/lb, which should be realistic, bearing in mind that operating nickel mines are falling by the wayside in today’s price environment.  Supply-side factor will kick in once Chinese stockpiles clear next year.  

For the technically minded, the leaching agent is dilute sulphuric acid.  Sulphur prices have retreated by a factor of 8 from their peak, which means Rusina are more likely to source prills from abroad and burn them on-site than use pyrites from the recently acquired Barlo tenement.  Electricity is a nice by-product from the sulphur-burning process and can be sold back to the grid.  Incidentally, Barlo holds interesting metal potential in its own right, and if not needed for sulphuric acid, Barlo’s pyrites will be gladly taken by the fertilizer industry.

The nickel will be recovered in a precipitation plant in a two stage concentration process producing two saleable products.  The first stage primary nickel product ("PNP") will contain 39% nickel and 1% cobalt and the second stage nickel product (SNP) will contain 25% nickel and 1% cobalt.

The next stage is a trial operation which will contribute to the bankable feasibility study.  Rusina is currently constructing the trial pads that will start being irrigated early 2009, and plans to employ a Chinese EPC (Engineering Procurement Construction) contractor.  Since the plant is basically a copy of European Nickel’s operation at Caldag, Turkey, it makes sense for speed, economy and accuracy to employ the Caldag contractors, and the added links to China won’t hurt either.  

Regulars will know that EN are earning their 40% by paying US$10m for the development to full Definitive Feasibility stage, so there is no drain on Rusina’s cashflow.  The DFS should be complete by the end of 2009, at which point $498m in funding will need to be found, pro rata to the JV ratios.  This includes 10% contingency.  How will this be found?  There are options, but let’s see how the market lies in H2 next year.

Exploration.

Dessert comes in the form of some surprise drilling results.  Back in the September operational update, Rusina reported assorted results at Acoje.  Part of this was to explore the chromite potential of the property – regular readers will remember that Acoje was originally a metallurgical-grade chromite mine which produced for over fifty years.  Drilling targeted three near-surface virgin loads for extensions beneath their outcrops, with one additional deep (320m) hole exploring beneath the old workings.  PGMs were also assayed.

The deep hole confirmed high grade chromite intercepts, including 6.05m of 44.4% chromite and another intercept of 3.60m at 42.9% chromite.  This would be exploited from tunnel extensions to the old underground mine and wouldn’t come cheap, although the near-surface pods close by are an easy bonus.  A joint venture partner would be needed, and Rob Gregory reckons an end user smelting group would make an ideal match, not least because it would eliminate marketing costs.  Speaking of costs, chromite prices are down from $450/t to $200/t, and opex costs would likely be under $100/t.  However, there’s a long journey to travel before feasibility studies begin.

What made some of us sit up were the anomalous PGM results that were returned within the massive chromite, including 0.4m at 1758 ppb platinum and palladium (1.76 g/t Pt + Pd), with palladium as the dominant component.  Previously, the PGMs were thought to be restricted to black dunite nickel sulphide pods, which are quite separate from the chromite mineralisation, but if Rusina eventually exploits the chromite, these PGMs are virtually a free bonus.  More intriguingly, it opens up new geological interpretations.  Watch this space.

However, this time around it appears that health-related businesses are not entirely immune to a downturn. For instance, with the economic climate having an impact on doctor visits and drugs sales, growth in the US pharmaceutical sector is forecast to slow from 2-3% in 2008 to 1-2% in 2009 (source: IMS Health).

So investors targeting health as a safe(ish) haven need to focus on companies that are operating in specialist areas of the health sector, such as Asterand.

Asterand is an Anglo-US healthcare services business that supplies human tissue and tissue-based research services to drug discovery organisations.

The company operates in a growing sector since drug discovery scientists are increasingly using well-characterised human tissue to develop new drug candidates. Often, these scientists need to see if their drugs cause a desired response in targeted tissue, but they also need to test to see if their drugs cause a response in non-targeted tissue that may lead to an undesired side effect. Meanwhile, tissue samples can be helpful in determining which genes or proteins are the cause of certain diseases.

Asterand is a result of a merger in January 2006 of two human tissue-focused businesses: Pharmagene, a human tissue-based drug discovery firm already quoted on AIM and located in Royston in the UK; and a US organisation (also known as Asterand) that ran a human tissue biorepository. The company today maintains offices and laboratories in the both the UK and the US, and its sales network covers the important healthcare markets of the US, Europe and Japan.

The merger was agreed because both management teams recognised that the combination of an international network for human tissue supply developed by the US firm and the UK business’s expertise in human tissue-based research services would enable the enlarged company to provide a comprehensive supply and service offering to pharmaceutical and biotechnology organisations. Specifically, Asterand would be able to deliver a broad commercial offering that included: a supply of tissue samples in a variety of formats; a supply of tissue derivatives; consultancy advice on the development of in-house tissue banks; and applied experimental research services, using human tissue, tailored to the needs of individual clients.

The decision to combine the two companies appears to be working, and fits in with Asterand’s strategy of first achieving profitability and then using first-mover advantage to capture a large share of the growing human tissue market.

Since Asterand’s competition largely consists of direct sourcing activities (where pharmaceutical research labs collaborate with academic organisations and research hospitals in order to obtain tissue), as well as smaller rivals offering a similar tissue sourcing service to the pharmaceutical industry, the company is able to leverage both the organisation of its business and its economies of scale to good effect. For example, Asterand has unparalleled access to human tissue through a worldwide network of 36 active collaborative donor institutions, while its XpressBANK biobank contains several hundred thousand specimens from a broad range of therapeutic areas and a diverse ethnic representation.

Meanwhile, the company’s PhaseZERO process for testing the effect of drugs on human tissue is used by many large pharmaceutical businesses around the world.

Since the merger, Asterand has won contracts with a number of large businesses and prestigious organisations in the healthcare arena. For example, in May 2007 the company extended an existing agreement with Bristol-Myers Squibb for a further three years, the deal giving access to Asterand’s PhaseZERO drug discovery service and its XpressBANK of human tissue and clinical samples. Today, Asterand’s customers include each one of the top 30 pharmaceuticals companies around the world.

In October 2007, it signed a deal with the US government to assess the condition and value of the Department of Defense Armed Forces Institute of Pathology’s tissue repository – the largest tissue bank in the world.

In 2007 the company managed to increase its revenues by only 9% to £7.6 million due to constraints on the supply of human tissue.  The supply constraints were a result of restrictions placed between June and August 2007 on the export of human biological materials by the Russian Federal Customs Service. 

Asterand did manage to reduce its loss for the year to £1.9 million, which was an improvement over the loss of £2.5 million made by the company in 2006, and since then has had some traction in expanding its tissue supply network beyond Russia.  

In the period since the middle of 2007, Asterand has undergone many changes, with a new CEO, new CFO, a revamped Board, a re-orientated sales and marketing team, and improvements in operational efficiency at Detroit and Royston.  New management announced its strategy going forward in June 2007, and since then appears to be delivering on its promises.  Revenue growth saw a sharp increase in the first half of 2008, with H1 revenues coming in 43% greater at £5.1 million, with essentially breakeven performance (as compared with a loss in H1 2007 of approximately £1 million).

The next step for Asterand is to reach profitability, which the company believes it is well on its way to achieving. In November, the company reported that since the half-year stage it had continued to exhibit substantial revenue growth.

Meanwhile, with the world facing difficult economic conditions and recession, Asterand’s chief executive officer Martyn Coombs believes that Asterand is “recession resistant, and in fact the market drivers for our products and services are increasing”.

For 2008 as a whole, house broker Daniel Stewart expects revenues to almost double to around £14 million and for Asterand to produce a first pre-tax profit of £3.3 million. This translates to earnings per share of 2.7p, which is not bad considering that Asterand’s shares currently trade for 11p each.

Asterand also has a strong balance sheet, with cash resources of £6 million (equivalent to 5p per share) reported in November 2008, no long-term debt and an untapped £2 million working capital facility with the Silicon Valley Bank.   Coombs says that the Company intend to use some of the cash to fund near term growth opportunities.

With profits finally arriving, Asterand looks set for a bright future despite the economic problems currently afflicting the world

These are very unique times. We all knew that a crash was coming when you’ve had the kind of bull markets we’ve had, but no-one suspected there would be this severe down turn of the credit markets. So it’s more than a stock market crash in that it’s a credit crisis affecting everybody. So because of that we’ve just assumed that we don’t know when this craziness will end, and therefore we don’t know when we’re going to raise money, so let’s assume we are going to raise no money and we have to have a business plan that can keep us surviving for the next 12-18 months.


What are your thoughts about the price of uranium and the prospects for uranium?

I like uranium. I’ve liked it for a long time, but I don’t believe it is tied to other commodities. Unlike the base metals which can quickly change overnight, because they’re so tied to the consumers’ spending, uranium is very different. It is tied to a cycle of building a nuclear reactor and you know that takes more than one or two years, it takes 10-20 years by the time the [permits] come in, develop it, raise the money etcetera. So if we were to have four or five years of recession, maybe they’ll re-think some of the of the nuclear plants, but generally the uranium that we produce for the next four, five or eight years is going to go towards existing reactors and not new ones.

So I am optimistic about the price of uranium as I don’t think it’s tied to other commodities, it’s on a long term cycle, and also, it’s not a big part of building a nuclear reactor, it’s a very small percentage of it, so it’s not like tomorrow morning people will say: “gees, you know we need to cut costs on nuclear reactors, let’s go cut back on the fuel.” No-one’s going to do that.

The price of uranium when we talk about it, generally it’s about the spot price. People seem to not talk about the long-term price. The long term price has not had the huge swings that you’ve seen in the short term spot price. But a lot of the big swings were happening because hedge funds were buying it physically. So they drove the price past the $135/pound level and now that they’re in trouble, they drove it down into the $40/pound level, but in the last two weeks alone it has jumped up about 10%, $4/pound. There is a good report out by Dave Wargo - he expects it to go back up to $50-$70/pound range. So I think the prospects are excellent because it’s green energy and it’s very cheap.


What is Fission Energy’s financial situation?

We have roughly $4 million in the till and $2 million of that flow through. So we’re in good shape. Because of the situation we’re in right now in stock markets we will have to prioritize our spending. Thankfully we have got some good joint venture partners, especially the Korea Electric Power Corporation, so they’ll be spending most of the money. It will mean that we have to curtail some projects, for example we were going to do some more work in Peru, but we’ve held that back because it’s hard dollars - we’ll go into more of a maintenance mode there. Some of the other projects we will have to drop, but if we do drop them we’ll keep a percentage. So I think you’ll see us dropping noncore properties but our core property, near the Hathor discovery and Dieter Lake, we’re going to keep those.
So our priority is to focus on our key properties and drop the non-core ones.


What are Fission Energy’s prospects for raising money, and if you can’t raise any money how are you going to manage your business plan going forward?

I think the prospects are very low like any other junior company. Investors are able to buy bank stocks and make speculative moves on them. So until that settles down I don’t see a lot of money flowing into the junior markets. So I don’t think the prospects are very good at all, so therefore we have to realize we’re not going to raise a lot of money and our business plan will have to reflect it. We’re not going to spend money we don’t have; number one is survival, so we’re cutting back overheads, people are going to be doing more jobs and our hope is to move the company forward by using our joint venture partners’ money and cover our overheads, and hopefully as these markets settle down then one day we can raise money. But the prospects are very low so we have recognized that and we’re making adjustments as we speak to make sure we survive until we can raise money.


What are you priorities for 2009 in terms of exploration and development?

Our core project is our Midwest property. It’s within 100-200 meters of the Rough-rider zone where big discoveries are being made, so that’s an obvious no-brainer place to focus. We are going to be spending about $4 million of Korea Electric Power Corporation's money. So they are going to be spending 100 percent of the money on that property, so that will definitely be our focus for January, February and March. Wintertime is the best time to drill as it is cheap - you can drive right across the lake so you don’t have to worry about having to helicopter things in across the water.
So our priority will be, assuming no money is raised, to focus the majority of our efforts on Davy Lake.


What’s your reasoning for the JVs that you’ve been doing?

Well, it didn’t cost a lot of money to stake land, it doesn’t cost a lot of money to do some basic work and so our key reason has always been an old adage that I learnt in a bear market: it’s your brains, your property but somebody else’s money to develop and move the project forward.
That’s why you saw so many joint ventures at Strathmore Minerals, which we spun Fission Energy out of. It was always that: ‘let’s use other people’s money for the risk’ - and that’s why you saw Sumitomo there. I was a founder of Strathmore, we brought Sumitomo in and other joint venture partners. Use other people’s money to move the business plan forward. It’s less dilution for your investors and less risk. That strategy probably wasn’t the best for the bull market, but it’s a great one in a bear market. So we try to stick to using other people’s money, and Korea Electric Power Corporation is actually a group of investors behind other utilities, and they’re really in control of that money, and so as a result we are very fortunate to be able to move our business plan forward in this new market without raising any more money.

What can we expect from Fission Energy over the next 18 months?

I think you’ll see us continue to develop our key properties depending on market conditions. If we don’t raise any money you’ll probably see us focused on Waterbury Lake, maybe some work on Davy Lake and Dieter. Those are our three priorities. We won’t be doing much work in Peru.

So, it’ll be a challenge to do much more than what KEPCO provides for us, and KEPCO is going to spend $9 million over the next two years as the JV moves forward. That’s a lot of money and a lot of spending. Hathor has had such sensational results, amazing results. The grades have been so high that you’ve got to be nuts not to focus all our money on that area. Some people are worried about their depth; there may not enough there, but if we can find one of those veins in our property then our stock can move pretty rapidly here from that 13-15 cent level into the 50-60 cent level just on that discovery alone. So that’s our goal.

Like I said, we grew up in a bear market and in a bear market money is limited. Hopefully we’ll get some results and hopefully some reward for our shareholders because they’ve sure been beat up like so many others.

Secondly, there is a potential share overhang.  Following the takeover of Mineral Securities Limited, CopperCo holds 19.5 million shares representing approximately 17.52% of the currently issued capital of Platmin.  Unfortunately this acquisition went horribly wrong and CopperCo is now in administration.  How – and on what timescale – this pans out is guesswork.  The neatest solution is for Pallinghurst to step in, but this risks raising objections in Toronto to the current Platmin rescue deal.  Incidentally, Pallinghurst are themselves lisiting on the JSE this week.

Lifiting our noses from the detail, it is clear that Platmin is now the vehicle for Brian Gilbertson’s PGM aspirations.  Pallinghurst is backed by over $500m of unspent seed capital, with potential to raise more if warranted.  Pallinghurst’s interests are wider than PGMs alone, but Platmin’s journey over the next decade could be a very interesting one indeed.

It's always interesting to see how the share price of a company that is firing out batch after batch of highly encouraging drill results reacts against a backdrop of doom and gloom in the wider natural resources sector and, for that matter, global markets in their entirety.  Since completing a secondary listing on the TSX in 2007, Extract has swung between 80 cents and C$1.50.  They are currently hovering around the $1.10 mark - a pretty stellar performance compared to many other uranium companies - underlining that fact that Extract does have support.

Valuing an emerging uranium company is never an easy task, and companies of this size almost always receive a "speculative buy" from analysts as there are so many risks that cannot be discounted until the project is far more advanced.

However, with Extract Resources, the "valuation" potential became abundantly clear when George Forrest International launched a bid for Forsys Metals, another TSX listed uranium company with another uranium discovery in Namibia.  George Forrest is paying C$573 million for Forsys Metals, which controls the Valencia Uranium Project.  The Valencia project hosts an inferred, indicated and measured resource of approximately 62 million pounds of uranium, half of that number sites in the higher category of probable reserves.  This implies that George Forrest is paying approximately C$9 per pound of uranium for Forsys Metals.  An updated 43-101 resource statement is overdue from Forsys Metals, but it is not clear now whether this will be released before the company is delisted. 

Regardless, the takeover price gives a rough valuation of what Extract Resource could command from a potential suitor. Extract has already defined approximately 25 million pounds of uranium at Ida Dome, but the focus has switched to Rossing South. At Zone 1, Extract is anticipating a maiden resource of 57.3 - 92.5 M lb U3O8.  However, recent drilling at the southern extension of Zone 1 has highlighted the potential that Zone 1 and Zone 2 to the south could indeed be one system.   Regardless, assuming a maiden resource of 75 million pounds for Zone 1, and adding in 25 million pounds at Ida Dome, but applying a $4 per pound valuation, would value Extract at $400 million - double the current capitalisation.  

Increase the resource to 150 million pounds for Zone 1 and Zone 2, add in 25 million pounds at Ida Dome and apply the takeover price tag per pound for Forsys Metals, and Extract's valuation leaps to C$1.5 billion...members of the mining community looking at the project, believe Rossing South could host up to 200 million pounds.

Potential suitors certainly appears to be lurking.  RAB Capital, the natural resources specialist hedge fund, recently sold its equity stakes in Extract Resources and Kalahari Minerals to Rio Tinto (LSE:RIO).  Rio Tinto in turn has a 68.6% stake in the Rossing Mine, the largest open pit uranium mine in the world, which just happens to lie directly north of Extract's Rossing South discovery.

So high is the threat of Rio Tinto acquiring the company, that a recent proposed merger between Kalahari Minerals (AIM: KAH) and Extract Resources was called off, as Rio would have had a substantial interest in the combined group, and there were fears that it may attempt to push the newco into a joint-venture or other deal to gain access to Rossing South rather than pay a premium to acquire the whole company.  Kalahari Minerals was the driving force behind the merger, and also opted to call off the deal after its own shareholders expressed concerns about Rio's intent.

Kalahari Minerals finds itself in an interesting position. It holds approximately 39% of Extract Resources, and is very keen to maintain or increase on that position. On current Canadian-Sterling exchange rates, Kalahari's equity stake in Extract is valued at £42 million versus Kalahari's market capitalisation of approximately £40 million.  It has two seats on the board of Extract Resources, and as the largest shareholder has considerable say over how Extract manages itself.  Yet at the same time, there appears to be some friction between the companies, highlighted by a request for the chairman of Extract Resources to resign, and a further request that Extract drop its secondary listing in Toronto to cut overheads.   

Kalahari also announced that it had raised nearly £4 million at almost no discount to the prevailing share price this week.  Under Australian rules, Kalahari can purchase up to 3% of Extract Resources every six months. Last March, it snapped up 3% to take its stake to 39%.  It seems very plausible that it is planning to acquire shares again, pushing its stake to 42%.  

With Extract valued a $200 million, but consistently delivering solid results from Ida Dome and Rossing South,  Kalahari is keen to at the very least maintain its interest - that would seem like the best strategy for its shareholders considering the potential upside in Extract's uranium assets.

In a statement, the company said every well drilled at Sugarloaf to date has encountered hydrocarbons and is either in production or expected to be put into production.

On top of the success at the Sugarloaf Prospect, three wells in the Margarita project remain in production, providing useful cashflow for Empyrean. It has also retained its 38.5 percent interest in the Eagle Oil Pool Development Project located in California, which has very attractive potential oil and gas reserves, it said.

Empyrean's initial project, the Glantal project in Germany, remains an exciting opportunity with multi-TCF (trillion cubic feet) gas potential. As an exploration opportunity it currently has a lower priority than the development of production from our more advanced Texan projects.

Regarding results for the first half to the end of September 2008, Empyrean made a pretax loss of £427,000 compared with a £197,000 loss a year earlier, while revenue rose to £575,000 from £198,000 previously.

“Overall Empyrean has moved from a purely exploration business into the production phase. We continue to focus on the proven potential of our projects in Texas and on keeping overhead costs to a minimum to generate maximum value for shareholders,” it said.

With production from Margarita and now Sugarloaf, the TCEI JV Block A-3 and A-4 wells in the process of being connected to sales, and the prospect of being able to either add wells to production or improve rates with fracture stimulation, Empyrean is entering what it called “an exciting new phase".

The company is focussed on replacing the relatively short expected production life and modest reserves of Margarita with the much longer life production expected from wells coming on stream from Sugarloaf and incrementally larger potential reserves.

With the current economic climate proving challenging for small companies, it is mindful of the need to watch costs closely and have potential fall back positions should economic conditions take longer to recover than progress on its projects demands, Empyrean added.

As can be seen from the above chart of the FTSE 100 the index has continued to push higher, with a gain of almost 20% over recent weeks.

Recent economic data has showed an accelerating pace of decline in the US and the global economy, with the US announcing monthly jobless numbers rising by 533,000, the worst figure since 1974.

However, the bears appear to have been exhausted. Optimism about Obama’s turnaround proposal and a bail out of the US car industry has provided support to global equities.

Technical analysis shows the index has posted a fresh short term high and is currently trading marginally above its 50 day moving average. A conclusive break above this could indicate a test of further resistance at 4600. The relative strength index (RSI) has also been in a steady uptrend since early October, which suggests the momentum behind the buying has been building.

Across the pond the Dow failed to break key resistance offered from the long term retracement level at 9000. This is a pivotal level and without this break we could continue to see the Dow and therefore the FTSE continue trading within the recent trading range of 4000 – 4600 and not pushing higher.

Over the holiday period trading volumes tend to drop and it is hard to imagine seeing enough momentum to push through key resistance levels ahead of Christmas.

In conclusion, I believe that over the longer term an upside break is becoming increasingly likely and helps to explain the strong bargain hunting seen every time the FTSE trades below 4000. However, profit taking has prevented the index from breaking significantly higher and with declining volumes I do not see this pattern changing ahead of the New Year, thus leaving a short term sell for the active and a longer term buy on weakness for the more passive investor.

This week marked the annual constituent review for the FTSE 100, with several companies leaving and joining the main index.

Among the new entrants is Randgold Resources (epic: RRS), which is a gold miner focused in West Africa and this is the subject of my article this week. This will be the first time in 19 years that there has been a gold company in the index and reflects the recent relative strength of gold to that of other commodities.

The highest the gold price has been in the rally of the past few years was close to $1030 achieved in March 2008. Gold has since declined around 20% to $828 compared to other commodities, such as copper, nickel and lead, which have fallen nearer to 70% over the same period.

However, demand for physical gold (eg: jewellery being the largest use for gold) has been declining to near the lowest level in the past decade and given current economic condition this does not look set to change for some time.

The weak US dollar and high oil prices are two factors which contributed to the rise in gold earlier this year. However, the change in sentiment of the dollar and huge fall in oil have weighed heavily on gold and with several analysts predicting further dollar strength, the gold price could weaken further.

Furthermore, the number of open contracts traded in gold continues to fall towards the lowest level in over 2 years, which indicates that investors and speculators are less interested in buying gold.

Randgold Resources’ share price has historically been highly correlated to the physical gold price, with a coefficient of 0.93, although the two have diverged considerably over recent weeks.

I believe this divergence is due to the company’s inclusion in the FTSE 100. Randgold will be one of only six miners left in the index, with the others being more diversified producers.

The eviction of the other precious metal companies, Fresnillo and Lonmin potentially means that FTSE tracker funds will need to hold close to a full weighting in Randgold to enable them to closely track the index.

 There is no debating that Randgold is a thriving business. It is cash rich and has a solid track record of finding new deposits and bringing them into production. However, the stock is not cheap and trades on forward multiple of 26x earnings.

As can be seen from the above chart of Randgold Resources the shares have doubled since late October and are trading near all time highs.

The oscillators are overbought, with the RSI and stochastic suggesting the rally is overdone.

I believe the inclusion into the FTSE 100 has over inflated Randgold and given the current divergence away from the physical gold price, I am inclined to suggest the shares may go lower once the hysteria surrounding the promotion dwindles.

At the time of writing the share price is 2791 and my short term prediction is for it to go lower. Near term targets are seen at 2642p, 2560p and 2350p, with a stop loss marginally above the all time highs at 2960p.

This report was written by Mark Allen – Head of derivatives at Simple Investments Stockbrokers. The writer does not hold a position in Randgold Resources. The material in this report has come from Fidessa, Share Scope and Randgold Resources’ corporate website.  

The Company was formed in mid 2004 with Teck Cominco a founder shareholder together with David Hall (Chairman), and myself. We listed in 2006 on the basis of requiring funds to undertake drilling on the Inlice (pronounced In-lee-jer) project. That proved to be an early success. Since then we have actually achieved a number of new discoveries in the area, the Konya volcanic belt around Inlice and similar volcanic belts elsewhere in Turkey. On that basis we went to a further financing in June last year and raised £7 million.

As well as defining gold resources and our own discoveries we’ve recently completed an earn-in to the Altıntepe property, offered to us by Teck Cominco and we now have a million ounces or so of gold resource across three different projects and new discoveries ongoing, including the recently announced drill results from Öksüt. In our opinion we’ve got a pretty well balanced portfolio now of development projects and a pipeline of quality new prospects – and this really underpinned, our twin business strategies of exploration and development. But development really would be via joint ventures with well financed and technically competent partners. This minimizes our risk exposure going through feasibility to production and we think it makes a great deal of sense.

Key factors really underpinning our exploration success I would say are putting science to good use. Some of the gold deposits we are looking for are generated under quite a complex set of physical and chemical parameters and it’s really important to understand these. Secondly, nose to the ground – get out of the vehicle and walk the ground, hammer in hand; talk to the rocks, let them talk to you and understand what they are saying which brings the s