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Northland Capital Partners View on the City: Rockwell Diamonds, Ideagen plc, Fusionex, NCC and others

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MINING: Rockwell Diamonds (TSE:RDI)

Q314 RESULTS: UPGRADE TO FORECASTS AND PRICE TARGET EXPECTED

 

  • Revenue from Rockwell operated mines for the nine months to date remained level at USD$19.8m compared to the previous year (excluding net royalty revenue).
  • Revenue from beneficiation for the nine months to date remained level at CAD$3.1m compared to the previous year.
  • Total revenue for the nine months to date (including contractor revenue) increased to CAD$31.3m from CAD$23.8m the previous year.
  • For the nine months to date LBT was CAD$2.4m compare to CAD$9.3m the previous year.
  • Rockwell sold two exploration projects during the quarter and we expect Rockwell to receive around CAD$2.5m from the sale next financial year. These projects were non-core to Rockwell and the sale is a major bonus for the Company. These projects were outside our valuation.
  • As announced on 09/12/13 Rockwell is also anticipating additional funds from its new BEE partner and we expect the first tranche to boost the company’s coffers before the end of the financial year.
  • All these developments are likely to have a net positive effect on our forecasts and price target, which is currently under review.

 

NORTHLAND UK VIEW: Q314 demonstrated that Rockwell Diamonds’ turn around has made significant progress, but operational costs continue the biggest hurdle for the Company. LBT for the first nine months of this financial year was dramatically reduced compared to the prior year, giving comfort to investors that things are moving in the right direction. At the Saxendrift Mine, Rockwell focused on mining the higher grade Saxendrift Extension area during the quarter, pushing up the average grade but the increased haulage distances resulted in increased fuel costs and reduced volumes. The aging fleet also pushed up maintenance costs and Rockwell is addressing the fleet issue with a detailed optimisation study. Overall the net effect at Saxendrift was positive and is likely to increase our FY14 forecasts. At Saxendrift Hill, operational costs came down dramatically as the mine completed its ramp up, grades were above our expectations and the combined effect is likely to lead to an upgrade in our FY14 assumptions. At Niewejaarskraal, costs were well above our expectations and volumes & grades well below our forecasts caused by delays in the ramp up, we expect this will lead to a downgrade in our FY14 assumptions. Overall Q314 bodes well for FY14, added to this Rockwell has built up a substantial diamond inventory that we would expect to be sold in Q414 leading to a strong end of year performance. The additional funds from the sale of the exploration projects and funds from the new BEE partner area also expected to have a positive impact on our forecasts and valuation.

Week Ahead (13/01/14)

View from the trading desk

The New Year has started with a degree of optimism at the macro level with the US, UK and Eurozone all expected to persist with ultra-low interest rates. Surveys of business sentiment also point to the highest level of optimism for several years and companies look set to expand into new markets and introduce new products/services. The appetite for increased investment is supported by the availability of funding - both debt and equity. Given current rating multiples across numerous sectors upgrades need to come through during this year or markets will start to give back gains. 

At the company level, the first week back has been dominated by the retailers, as is traditional. Amongst the supermarkets, J Sainsbury (LON:SBRY) seems to have had the least bad Xmas in the face of competition from Waitrose at the top end and Aldi and Lidl at the bottom end. Morrison (LON:MRW) had the worst of it handicapped by its lack of an online presence during the crucial trading period and limited convenience store footprint. Tesco (LON:TSCO) sales shrank 1.6% with falls at home and abroad whilst the outcome at Marks & Spencer (LON:MKS) was not as bad as feared with growth in food partially offsetting the general merchandise contraction. Other casualties included Mothercare (LON:MTC) and Debenhams (LON:DEB). Next (LON:NXT), once again, had a strong Xmas with its good balance between online and offline.

Sales & Research thoughts

TMT: The volume of scheduled announcements is set to pick up next week with interim results due from Ideagen (LON:IDEA), the supplier of compliance based information management software, scheduled for Tuesday. The company flagged significant growth and a maiden dividend in its pre-close (06/11) and since then has acquired Pentana for up to £3.1m in net cash. We like the software subsector though there is a price for growth (19.6x FY14). Fusionex (LON:FXI) has FY results on Wednesday. The company has capitalised on the interest in Big Data, Business Intelligence and Analytics and the shares are trading on a consensus FY13 PER of 47.7x even though its Big Data product, GIANT, was only launched in December. 

Among the larger companies NCC (LON:NCC) has interims on Thursday. The company appears to have sorted out the problems in its US business but recruitment and retention in the Assurance division remains an issue and over the first four months dropped to 90% from 98%. The historic level was very high for the sector but the market will want an update on the measures taken. Meanwhile expect an update on the .secure generic top level domain (gTLD). Finally, Thursday sees a pre-close FY update from Computacenter (LON:CCC). Q4 is always the most important but management reported good momentum at its last IMS in October with good growth in the UK, an improving situation in Germany but France remains problematic. 

Mining: With the unrefined mineral export ban deadline looming on Sunday, the question remains as to what the Indonesian Government will actually do. According to press reports, the Mining Ministry is proposing to give copper, lead, zinc, and iron ore miners that commit to building new smelters flexibility to export concentrate that have grades over certain limits (e.g. 15% for Cu) until 2017. This would mean that production from major miners, such as Freeport-McMoRan and Newmont that account for 97% of the County’s copper production but only refine a third of this domestically, would be largely unaffected by the ban in the short term.

Interestingly it appears that the Ministry is planning to maintain the ban on the export of nickel concentrate and bauxite citing that there is already sufficient domestic smelting capacity, a view that is contested by some miners. Indonesia accounts for 18-20% of global nickel supply and 9-10% of the bauxite supply, the combined value of the two industries is c. $2 billion, so the ban could have a material effect on nickel and bauxite prices. 

Any increase in the bauxite price could open the door for Australian producers - well positioned both geographically and geologically to make up the shortfall in bauxite supply to China. An unprocessed nickel export ban is expected to have a bigger effect on the price as there is no obvious replacement for the high grade nickel laterite deposits of Indonesia for Chinese nickel pig iron smelters. The proposal has yet to be approved by the president and no matter what happens on Sunday, Indonesia reputation as a place to do business continues to be trodden into the lateritic mud.

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