The Markets
Market opening: Markets are likely to open lower today. FTSE 100 futures were trading 25.80 points down at 7:00 am.
New York: Wall Street rallied amid optimism over a possible deal between Greece and its creditors, and the recovery in markets in China. The S&P 500 advanced 1.2% on Friday, while closing flat for the week.
Asia: Equities are trading higher buoyed by the hopes of an agreement among European officials over Greek’s new bailout deal. Meanwhile, a 2.8% rise in Chinese exports for June lifted sentiments. The Nikkei 225 rebounded 1.6%, while the Hang Seng was trading 0.3% up at 7:00am.
Continental Europe: Markets ended in the green following the submission of the new reform proposals by Greece for a third bailout package. An upsurge in Chinese stocks further aided the rise. France’s CAC 40 and Germany’s DAX gained 3.1% and 2.9%, respectively.
Crude Oil: On Friday, prices of WTI crude oil decreased 0.1% whereas that of Brent Crude Oil improved 0.2%. The spread between the two varieties stood at US$6.0per barrel.
UK small caps: The FTSE AIM All-Share index closed +0.68% higher on Friday at 749.82. To read our latest research click here.
Today’s news
Debate over Greece’s rescue plans continue
The latest discussion among European finance ministers was focussed on the new terms for a possible bailout plan worth €86bn for Greece. The country would need to implement tough economic reforms on pensions, labour, taxes and privatisations by Wednesday. In the event of no deal, Greece may be required to temporarily leave the Eurozone.
Company News
Hummingbird Resources (LON:HUM) – Speculative Buy
On Friday, Hummingbird Resources informed that it’s wholly owned subsidiary in Liberia signed a 25-year Mineral Development Agreement (MDA) with the Government of Liberia (GoL), and expects an approval by the President shortly. Subsequently, the MDA would be sent to the National Legislature of the Republic of Liberia for confirmation following which MDA is expected to become a law. The MDA would provide an essential long-term framework along with stable taxes and duties as it is a 25-year agreement with an extendible option. The aforementioned deal covers 2,000 sq. km of Dugbe Shear Zone, having a deposit of 4.2Moz (million ounces) of gold resources. The royalty rate for gold production is fixed at 3%, and the (GoL) would be granted a free carried interest rate of 10% in the project. The income tax rate is fixed at 25% with credit given for historic exploration expenditures. In addition, the fuel duty is likely to be 75% for the first five years of production provided the gold price remains below US$1,500.
Our view: Hummingbird’s agreement with the GoL is an important step ahead as the MDA is expected to become a law and would provide the required stimulus for further progress of the project. Mining is a thriving industry in Liberia and the company is well positioned to leverage on the huge opportunity and enhance its prospects. In addition, the company’s 5,000 sq. km ground in Mali and Liberia are being continuously assessed for new prospects. With the 1.8Moz Yanfolila project continuing towards near term production and the 4.2Moz Dugbe project providing additional upside, we maintain a Speculative Buy rating on the stock.
Beaufort Securities acts as corporate broker to Hummingbird Resources plc
Ilika (LON:IKA) – Speculative Buy
On Friday, Ilika announced its full year audited results for the year ended 30th April 2015. During the period, the company’s revenues surged 4% to £1.09m, primarily due to payments from the company’s Europe-based partners. Ilika’s loss decreased to £2.7m from £2.7m, owing to a decline in the depreciation and amortisation charges. Consequently loss per share reduced to 4.10p from 5.37p in 2014. On the operational front, the company obtained two patents related to production of solid-state batteries. Ilika also finished its pilot line acceptance test of solid batteries and started production in March 2015. The pilot line technique is set to increase the deposition area of key battery materials by 20 times. It is accompanied by a five-fold increase in the rate of deposition of materials, a key factor that determines the price point of the resulting batteries. The company also made substantial improvement in the development of aerospace alloys. Ilika also won a Proof of Concept contract with its European partner for the development of batteries for wireless sensor network (WSN) and wearable applications. In a separate release, Ilika announced the appointment of Mr Mike Inglis as a Non-Executive Director.
Our view: Ilika witnessed significant growth this year through the extension of its proprietary solid-state battery technology, improved operations and addition of new patents to the portfolio. The operational advancement has gone in sync with the original equipment manufacturer’s and supply chain associates, who are expected to assimilate the technology into Internet of Things devices. The company expects further improvement in the deposition rate as further tests to optimize the yield and performance of the batteries are being conducted. The market for micro-battery prototypes is growing rapidly as consumer electronics and several mainstream applications require faster fabrication rates for lithium-ion batteries. Given the importance of this innovative technology, we expect the company to receive higher commercial interactions for prototype orders. We reiterate a Speculative Buy rating on the stock.
W Resources (LON:WRES) – Speculative Buy
On Friday, W Resources announced the completion of the final stage of its infill diamond drilling programme at its La Parrilla Fast Track Mine in Spain. Preliminary grades from the first four of 12 holes matched the expectations with the WO3 (tungsten) ranging from 0.093% to 0.170% in 17.80 metres and 11.26 metres, respectively. Initial mining in the adjacent area to the existing open pit is expected to commence in 2016 and the grade control drilling using a reverse circulation or air core rig will commence in Q3 2015. Following the completion of the drilling, the diamond core rig has been moved to the La Parrilla West, to define a second and potentially materially higher grade open pittable resource. La Parilla Mine’s current JORC compliant inferred resource stands at 46.92 Mt (million tonnes) at 0.09% Tungsten Trioxide (WO3).
Our view: The completion of the initial phase of drilling at the La Parrilla Fast Track Mine is likely to lead a revision of resource and reserve estimates. Meanwhile, the higher than expected tin intersections bode well for the future tin concentrate production. With the diamond core rig moving to the highly prospective La Parrilla West, we expect the company to define a higher grade open pittable resource. The most prominent recent development from the company’s camp was the connection of the La Parrilla tailings to the Spanish national power grid. In addition the exploration at the CAA/ Portalegre gold project has also shown good progress and the company is in the process of seeking partners for the farming opportunities. Régua project development in Northern Portugal was substantiated at total resource of 4.46 million tonnes at a grade of 0.308% WO3. Thus in view of the above, we upgrade the stock to a Speculative Buy for now.
Sirius Minerals (LON:SXX) – Speculative Buy
On Friday, Sirius Minerals provided an update on the progress of the development of the York Potash Project located in the UK. After receiving the planning approval for the project, the company is moving towards the financing and construction phase. All the remaining issues are expected to be resolved and the final decision notices would be issued by the end of September 2015. Meanwhile, the preparation of the Definitive Feasibility Study moved forward and is expected to be completed by Q4 2015. The company plans to access debt markets for the majority of the project construction and split the financing into two stages. The first stage would comprise the initial construction period and is expected to be completed by the end of Q1 2016. The second phase involves the financing requirement of the development. In addition, Sirius continues to make good progress on the polyhalite sales to support financings.
Our view: Sirius Minerals is the potash development company focused on the development of the York Potash Project in the UK. The Project has a JORC compliant Probable Mineral Reserve of 250 million tonnes of 87.8% polyhalite and the company is looking at alternatives to improve the capacity from 6.5 million tonnes a year to 10 million tonnes a year, along with an ability to potentially increase the capacity to 20 million tonnes a year. Recently, the company received a major push forward when it received the go-ahead to mine in a national park as the benefits to the economy were expected to outweigh the damage to the countryside. With the remaining approvals expected to be in place by September, we expect the company to become a major multi-nutrient fertilizer producer in the near term. Thus in view of the above we recommend a Buy rating on the stock.
Intercontinental Hotels (LON:IHG) – Buy
On Friday, Intercontinental Hotels Group announced a deal to sell its ownership stake in InterContinental Hong Kong to Supreme Key Limited for a total consideration of US$938m. The buyer is a consortium of investors managed by Gaw Capital partners, a private equity fund management company. Supreme made upfront cash payment of US$98m and the remaining transaction is expected to be completed by the end of 2015. In addition, the buyer has committed towards the renovation of the hotel, which is expected to start in 2017. The company will retain a management contract for next 37 years, with three 10 year extension rights. The company’s management expects to receive a fee payment of nearly US$8m per annum which may increase after renovation. For the year ending 2014, the hotel reported an EBIT of US$42m, and a net book value of US$298m. The transaction is expected to increase the exceptional pre-tax profit on disposal of US$700m and non-cash tax charge of US$40m. The company plans to announce the return to shareholders from the earnings on the above deal and the Inter Continental Paris contract along with the preliminary results in February 2016.
Our view: IHG continues to focus on a franchise based model and manage the hotels instead of owning them. The company has divested several properties in the past decade and continued to make capital returns to the shareholders. The completion of the above deal marks the conclusion of the sale of company’s major owned assets. Intercontinental Hong Kong is one of the finest hotels in the company’s portfolio and the company would continue to run it for at least 37 years, in return for a management from the buyer. IHG has distributed over US$10bn to its shareholders since its inception and plans to continue doing so in future. The company remains fundamentally sound with better growth prospects as a leaner organisation. Thus we upgrade the stock to a Buy for now.
Economic News
US wholesale inventories
US wholesale inventories grew 0.8% m-o-m in May after rising 0.4% in April, data from the Commerce Department revealed on Friday. Markets had expected inventories to rise 0.3% during the month. Durable goods inventories advanced 0.6%, while non-durable goods inventories rose 1.2%. Furthermore, the department reported that wholesale sales increased 0.3% in May compared with the previous month.