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Beaufort Securities Breakfast Today including Tertiary Minerals, Magnolia Petroleum, Polo Resources and Ophir Energy

Beaufort Securities Breakfast Today including Tertiary Minerals, Magnolia Petroleum, Polo Resources and Ophir Energy

The Markets

Market opening: Markets are likely to open significantly higher today. FTSE 100 futures were trading 56.5 points up at 7:00 am.

New York: Wall Street rallied despite the beginning of tapering by the US Fed, as the central bank decided to keep the benchmark rate at record low levels and expressed optimism about further recovery in the labour market. Robust housing start numbers added to the gains. The S&P 500 climbed 1.7%.

Asia: The Nikkei climbed 1.7% as the announcement of tapering sent the yen to a five-year low of 104.37. The Hang Seng was volatile amid the news from the US and worries over the impact of higher funding costs in China on the country’s growth prospects; it was trading 0.3% down at 7:00 am.

Continental Europe: Investors cheered reports of upbeat employment data from the UK and improved business outlook in Germany while awaiting the outcome of the Federal Open Market Committee (FOMC)’s meeting. Germany’s DAX and France’s CAC 40 advanced 1.1% and 1%, respectively.

UK small caps: Yesterday the FTSE AIM All-Share index closed 0.20 points (-0.02%) lower at 818.16.

Today’s news

EU ministers strike deal on handling failed banks

Finance ministers of the European Union (EU) finalised the agreement over the treatment of failing banks in the region. The ministers have decided to set up an industry-financed resolution fund of €55bn over the next 10 years. This fund would be backed by an agency that would take decisions regarding how to handle failing banks.

Federal Reserve upbeat on employment outlook for 2014

At the end of the two-day FOMC meeting of the US Federal Reserve, the central bank released its employment projections for the coming period. It expects unemployment to drop to as low as 6.3% by the end of 2014, as against the September forecast of 6.4-6.8%. The rate is expected to slip to 5.8-6.1% in 2015 and 5.3-5.8% in 2016.

Company News

Magnolia Petroleum (LON:MAGP)

Yesterday, Magnolia Petroleum provided an operational update across its portfolio of interests in proven US onshore formations including the Bakken, North Dakota and Mississippi Lime, Oklahoma. At the Robison 4-1MWH well in Woorford, Oklahoma, production was started under the operatorship of Calyx, wherein Magnolia’s 0.293% net revenue interest (NRI) earned the net initial production rate (IPR) of 2.28 barrels of oil equivalent per day (boepd). In the same area, the Parmley 1-1 WH (NRI – 12.187%) and Bolay #1-19 HW (NRI – 1.55%) wells are drilled and completed, and are waiting on frac. In Hunton play in Oklahoma, the Chalfant 1-7H well (NRI – 0.236%) is undergoing completion with the drilling work done, while the SPS Lucy 1-14H well (NRI – 2.42%) is still under drilling stage. For the Yani 1-31H well located in the same prospect, NRI was increased to 2.734% from 1.66%. The Hufnagel 1H-34x well was renamed to Bohlman, the company informed.

Our view: The start of production at the Robison 4-1MWH well in Oklahoma has highlighted the rapid progress of Magnolia towards establishing a strong production base through drilling. Through the recent acquisition of larger participating interests, including the Parmley1-1 WH well, Magnolia’s average interest in 180 wells in proven US onshore formations has risen to more than 3% from 0.6% two years back. With a strong base of 46 wells under development stage, association of well known partners like Devon Energy and lucrative productivity potential of its assets, Magnolia is likely to witness a major upside in the coming months. We retain a Speculative Buy on the stock.

Polo Resources (LON:POL)

Yesterday, Polo Resources announced its audited results for the 12 months ended 30th June 2013. Operating loss stood at US$13.7m as against a profit of US$9.6m last year. Accordingly, the loss before taxation was US$16.2m versus a profit of US$7.3m. As a result, basic loss per share stood at 6.49 cents compared to earnings per share (EPS) of 0.31 cents last year. The net asset value per share as on 17th December 2013 was about 32.3p per share. During the year, Polo increased its investments in oil & gas and gold projects, while maintaining support for its ongoing interests in the coal and iron ore investment sectors. For Signet, Polo’s key oil and gas investment, equity interest was raised to 44.9% from 21.7% through the issue of shares at a cost of US$15.7m. For Signet, the process for assessing strategic alternatives for the African oil and gas asset portfolio attracted high level of participation from a broad range of potential bidders, while the evaluation of its majority owned and operated exploration acreage – block 2914B continues. Polo’s gold investment – Nimini Holdings Limited, covering an area of 100 sq km, was awarded a large-scale mining licence in November 2012, for an initial 25 year period. Based on a minimum true width of 1m and a 2.4 g/t gold cut-off grade, the Komahun project of Nimini showed indicated mineral resources estimate (MRE) of 0.55 million ounces (oz), i.e. 3.6 million tons (mt) at 4.69 grams per tonne (g/t) gold; and inferred mineral resources of 0.34 million oz, with 2.6 mt at 4.08 g/t gold. This MRE provides a good platform for a Preliminary Economic Assessment (PEA). Ironstone Resources Limited (in which Polo holds a 15.16% interest) continued to work towards defining the process flowsheet for its Clear Hills Iron Ore/Vanadium project in Alberta. GCM Resources (Polo’s 27.8% interest) recorded further progress in the development of the major Phulbari coal project in Northwest Bangladesh.

Our view: Polo’s strategy of focusing on core assets to unlock portfolio value, along with regular acquisition of undervalued and high potential assets, offers dual benefits to its shareholders. The MRE have shown a massive 60% jump in inferred mineral resources and 21% rise in the indicated mineral resources from previous MRE carried out in June 2012. Polo also continues to push forward its strategic investment activities. With an upbeat balance sheet & improving cash position, majority (75%) interest in the highly prospective block 2914B, Namibia and strong probability of near term returns, we are optimistic about the company’s future prospects and retain a Speculative Buy on the stock.

Ophir Energy (LON:OPHR)

Ophir Energy announced the farm-out agreement with OMV covering its deepwater offshore blocks in Gabon. OMV agreed to acquire 30% non-operated interests in the Manga and Gnondo blocks and 10% non-operated interests in the Mbeli and Ntsina blocks, leaving 70% operated interests in the Manga and Gnondo blocks and 40% operated interests in the Mbeli and Ntsina blocks for Ophir. As consideration for the deal, OMV would pay the past costs and a promoted share of well costs on the Padouck Deep, Affanga Deep and Okala wells and the cost of two additional wells, along with the cost of 3D seismic surveys planned across the blocks. Further conditional promotes are payable in the event of success with the Padouck Deep or Okala wells. The stock closed up 4.8% in yesterday’s trade.

Our view: The inclusion of an experienced and well funded partner like OMV for Ophir’s acreage in Gabon is welcome news for shareholders. The deal is aligned with Ophir’s strategy of mitigating exploration risk ahead of the drilling programme, while continuing to avail significant benefits from an upside at its lucrative assets like the pre-salt play on the Mbeli and Ntsina blocks. With securing a drillship, Ophir looks all set to kick-start its multi-well campaign off Gabon in the coming year. Meanwhile, successful completion of drilling operations on the Mlinzi Mbali-1 well in Block 7, Tanzania, could lead to significant de-risking of the overall Mlinzi Channel complex, currently estimated at more than 20 trillion cubic feet (tcf). The Mzia-3 well had also shown encouraging appraisal results last month. Considering Ophir’s strong position in deep water acreage in the African region, potential benefits of the current farm-out deal and the series of drilling successes in recent months, we are confident about the future prospects of the company. We assign a Speculative Buy to the stock.

Tertiary Minerals (LON:TYM)

Tertiary Minerals released the analytical results from the first 13 of 22 holes drilled in Phase 2 of its first drill programme at the MB fluorspar project in Nevada, US. In southern area, drilling results from first 10 holes confirmed potential for definition of open-pit mineable fluorspar resource. Thick zones of mineralisation intersected between surface and the maximum depth of drilling (125m), with all the holes ending in mineralisation. So far, mineralisation is open in all directions over the area (300m x 400m). In the central area, the company is awaiting results from five wide spaced holes. The drill permit has been modified to allow further drilling between southern and central areas, which may connect in undrilled areas. The stock rose 3.6% yesterday.

Our view: Tertiary Minerals is steadily progressing towards defining a JORC compliant mineral resource at the MB fluorspar project. The upcoming sample logging results in central area could present a substantial upside for the company. The recent closure of equity swap agreement with YA Global Master SPV highlights the high level of demand for Tertiary Mineral’s shares. Given these positives and a rapid progress towards development of its key projects, we are optimistic of a meaningful addition to Tertiary’s stock price going forward and thus, retain a Speculative Buy.

Beaufort Securities Limited acts as joint corporate broker to Tertiary Minerals plc.

Economic News

UK jobless claims change

UK jobless claims in November fell 36,700 to 1.27 million, following a revised decline of 42,800 in October, the Office for National Statistics said yesterday. Markets had expected claims to fall by lesser margin of 35,000.

UK ILO unemployment rate

UK unemployment rate for the three-months ended October dropped to 7.4%, the lowest since 2009, from 7.6% in the previous quarter, the International Labour Organisation (ILO) stated yesterday. Economists, on the contrary, had expected the reading to remain unchanged in October. The number of unemployed people fell by 99,000 to 2.39 million. The number of employed people rose by 250,000 to 30.1 million, reaching a record high till date.

Germany IFO

The German business sentiment index slightly improved to 109.5 in December from 109.3 in November, in-line with the market forecasts, survey results from the IFO Institute revealed yesterday. The Current Assessment Index declined to 111.6 from 112.2 in the previous month, versus market expectations of 112.5. The Business Expectations Index, a gauge of attitude towards business prospects over the next six months, stood at 107.4, up from a revised 106.4 in November, and exceeded economists’ expectations of 106.5.

US MBA mortgage applications

US mortgage applications declined 5.5% in the week ended 13th December after edging up 1% in the prior week, the Mortgage Bankers’ Association said yesterday. Refinance index dropped 4.3%, while the gauge of loan requests for home purchases lowered 6.1%. The refinance share of mortgage activity stood at 65.8% vis-à-vis 65% last week.

US housing starts

US housing starts climbed 22.7% to a seasonally adjusted annual rate of 1.09 million units in November, the Commerce department said yesterday. Housing starts were reported at 889,000 units in October and 873,000 units in September. The November reading outperformed market expectation of 955,000. Housing starts for single-families surged 20.8% to a 727,000 annual rate and for multi-families, it jumped 26.8% to a 364,000 annual rate.

US FOMC rate decision

The US Federal Reserve Open Market Committee (FOMC) decided to reduce the pace of its monthly bond purchasing programme to US$75bn from US$85bn, but held the benchmark interest rate at record low of 0-0.25%. The Fed would cut down US$5bn each from the purchases of treasuries and mortgage bonds starting from January, taking the monthly purchase rate to US$40bn and US$35bn, respectively. The central bank, however, assured that it would maintain an accommodative monetary policy by keeping the benchmark interest rates at record low levels at least until the unemployment rate came below 6.5%, especially if the inflation outlook stayed lower than the threshold of 2.5%.

Important Risk Warnings and Disclaimers 

This report is published by Beaufort Securities Ltd ("Beaufort Securities"). Beaufort Securities Ltd is Authorised and Regulated by the Financial Conduct Authority and is a Member of the London Stock Exchange. 


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