The Markets
Market opening: Markets are likely to open lower today. FTSE 100 futures were trading 61.0 points down at 7:00 am.
New York: Wall Street ended in the red amid concerns over China’s economic growth and an expected rate hike by the US Fed. The S&P 500 fell 0.6%, dragged down by the energy sector.
Asia: Equities are trading mixed amid a decline in commodity markets and sharp fall in Chinese stocks. The Nikkei 225 dropped 0.1%, whereas the Hang Seng was trading 0.8% up at 7:00 am.
Continental Europe: Equities ended lower, as investors ignored better-than-expected economic data from Germany and focused on volatility in China’s stock market. Germany’s DAX and France’s CAC 40 shed 2.6% each.
Crude Oil: Yesterday, prices of Brent and WTI crude oil declined 2.1% and 1.6% respectively. The spread between the two varieties stood at US$6.1 per barrel.
UK small caps: The FTSE AIM All-Share index closed 0.95% lower yesterday at 747.77. To read our latest research click here.
Today’s news
Factory orders in UK hit two-year low
According to the Confederation of British Industry, factory orders in the UK slipped to -10 in July, the lowest level in two years. This drop was ascribed to a strong sterling and weak global conditions.
IMF expects Eurozone to perform better in 2016
The International Monetary Fund (IMF) expects the Eurozone to grow at 1.7% in 2016, up from 1.5% in the current year, led by declining oil prices, a weaker euro and steps taken by the European Central Bank. However, the IMF warned the region is still prone to shocks and uncertainty in Greece.
Company News
Ariana Resources (LON:AAU) – Speculative Buy
Ariana Resources plc, yesterday confirmed that it has raised £1,000,000 before expenses via a placing of 77,777,778 new ordinary shares (the Placing Shares) plus 33,333,333 new ordinary shares (the Subscription Shares) at a price of 0.9 pence per ordinary share. The proceeds of the Placing will be used for further exploration and resource development of the Kiziltepe Sector of the Red Rabbit Gold Project in western Turkey where first gold production is expected to commence in H2 2016 and for additional working capital. The Placing is conditional on the Admission of the Placing Shares, which rank pari passu in all respects, which is expected to take place on 30th July 2015. A portion of the shares to be issued have been purchased by Proccea Construction Co., Ariana’s JV partner on Red Rabbit, and by Directors of the Company. Proccea purchased 11.1m shares and now hold a total of 2.86% of the issued share capital; Michael de Villiers, Executive Chairman, purchased 6.11m shares (2.48%) and Dr Kerim Sener, Managing Director, purchased 2.22m shares (1.55%).
Our view: Ariana provides exposure to near-term, low-cost, fully funded, fully permitted gold production in Turkey, with significant exploration upside across the country. The new fundraising provides the Company with the funds required to continue its planned exploration and resource development work at the Kiziltepe Sector of the Red Rabbit Gold Project. In the past 18 months, it has systematically established multiple resource target areas and has advanced several of these to the point of drill-testing. With the 69.6%-owned JV funded to initial production by Proccea, the Project has the potential to yield additional resources that can ultimately be fed in to the mining schedule while also increasing the mine life of Kiziltepe, where they anticipate first gold pour in H2’2016, targeting 20,000 oz per annum. Confirmation on 6th July that Ariana secured the surface rights for its (69.6%-owned) Red Rabbit Project, means first production should get underway in Q3’2016. With an imminent construction start, Red Rabbit’s C1 cash costs of just US$600/oz demonstrate very robust fundamentals. Project economics indicate a net present value (discounted at 8%) for this project alone of some US$20m, with an IRR of around 25% based on currently depressed gold prices. On this basis, the payback period would be just over 3 years. And with only 6% (2km) of this total vein system (34km) defined to date, there is considerable potential to expand the current resource. Following soil and rock-chip geochemical programmes, management has recently also confirmed new gold targets at its Kepez and Karakavak prospects, while the Tavsan sector represents immediate resource upside and capacity for an additional 30k oz/yr. Red Rabbit’s Definitive Feasibility Study (‘DFS’) of June 2013, detailed a global JORC Resource of 221koz with pit grade of 3.1g/t AYu and 39.8g/t Ag.
Beaufort Securities acts as corporate broker to Ariana Resources plc
Advanced Oncotherapy (LON:AVO) – Speculative Buy
Advanced Oncotherapy, the developer of next-generation proton therapy systems for cancer treatment, this morning announced that the second Coupled Cavity Linac (‘CCL’) unit has been manufactured and delivered to the Company’s testing facility in Geneva. The CCL accelerating structures are an essential part of the LIGHT proton therapy system. They consist of a series of cells which accelerate the protons from energies of 37.5MeV to the 230Mev, the high level of excitation required to treat radiosensitive tumours in a clinical setting. The finished LIGHT system will incorporate a total of ten CCL units configured together in series. Following its recent successful initial testing in Italy, the Side Coupled Drift Tube Linac (‘SCDTL’) will also be delivered to the Geneva testing facility in the next few weeks to allow high-power testing on the CCL units with the RF Power in August. This will be in-line with the timetable provided by the Company to shareholders in November 2014. Further to this, the first two Radio Frequency power Units, both the Modulator from Scandinova and the Klystron from Toshiba, have been delivered on schedule to Geneva following initial successful testing and will be used in the next few weeks to start CCL high-power testing, in accordance with the same timetable. In addition, the Company announces that Howard de Walden Estates Limited, which in January 2015 granted a 50 year lease to the Company for the Harley Street site, has confirmed its willingness to expand the agreement beyond the 8,000 sq ft space allocated in the original lease. This would allow the Company to develop a Proton Therapy Centre on the same site but with an extended footprint, offering potential operators a larger overall facility to manage. The additional planning permission and reconfiguration of the original site plans will have an impact on the start date for work on the site, however the Company remains on schedule in its technology development to have its first LIGHT system ready for patient treatment in 2017.
Our view: On schedule to deliver! Today’s news marks another important step forward in delivery of the next generation of proton accelerators; it also underlines management’s confidence in its ability to deliver the first LIGHT system for patient treatment in 2017. Furthermore, AVO has secured opportunity to extend the footprint of its existing site in Harley Street, in order to allow development of a larger Proton Therapy Centre in Central London. The fact is that AVO’s ground-breaking big science is, as promised, progressing at an exceptional pace toward commercialisation. The formation of the necessary teams to deliver LIGHT through to launch and patient application has already been completed. Key supply chain partners have been appointed: ScandiNova (RF Power), Toshiba (Klystron), VDL (CCL module), Pyramid (beam focusing nozzle) and ICT (software). An oversubscribed placing raised the £20 million (net) funding necessary to develop and install first the UK’s first Proton Therapy Centre using the LIGHT System in Harley Street, which will be followed by the first commercial sale to Sinophi Healthcare. The enormity of this opportunity and the market potential it presents has already been significantly detailed in Beaufort initiation research of September 2014 and subsequent updates. In simple terms, if AVO delivers exactly ‘what it says on the tin’, the operational and cost advantages LIGHT offers will effectively render first generation proton therapy devices all but obsolete. Its principal limitation would then become simply its capacity to deliver to a global opportunity that will grow dramatically beyond its current US$2.5bn size, as it will also become the natural replacement for the more antiquated X-ray radiation machines that are installed in huge numbers around the globe. Given such an outcome, of course, major international competitors wishing to remain in the game will almost certainly be willing to pay a handsome price, one way or another, to get their hands on AVO’s proprietary technologies. Advanced Oncotherapy plc remains one of Beaufort’s key investment picks for 2015.
Beaufort Securities acts as corporate broker to Advanced Oncotherapy plc
Horizon Discovery (LON:HZD) – Speculative Buy
Yesterday, Horizon Discovery announced investment up to £10m in its leveraged R&D business for a span of two years, to identify the next generation of molecular cancer therapeutics. The investments would focus on two key areas comprising synthetic lethality and immuno-oncology. Synthetic lethality uses exposures arising from rewiring of cell signalling pathways by cancer driving mutations. This strategy was lately confirmed by the approval of AstraZeneca’s drug Lynparza for the treatment of ovarian cancer. Immuno-oncology has the ability to suppress the mechanisms of hidden cancer cells in the immune systems, thereby providing lifelong cancer remission. Yerkoy, Opdivo and Keytruda are some of the previous successful products in Immuno-oncology. The aforementioned investment would help in defining novel drug targets and initial stage New Chemical Entities (NCEs)/New Biological Entities (NBEs), thus resulting in discovery of novel drug candidates across various oncology indications.
Our view: Horizon’s investment in its R&D business is in line with its strategy to enhance its product portfolio offerings through huge investments. The company has already invested £4m in the business to develop its product line. The current research areas under focus are expected to represent around 20~50% of oncology market over the next 10 years. Further, Horizon is looking out for partnerships for its programmes with therapeutic-focused companies, to minimize its risk while widening its revenue streams. We believe the company’s robust technology and innovative ideology would help them achieve their profitability target by 2017. In addition, Horizon’s delivered solid first half results in terms of both revenues and expansions. The company’s increasing demand of services and strength of line is expected to help them achieve its full year targets. In view of the above argument, we maintain a Speculative Buy rating on the stock.
Great Western Mining (LON:GWMO) – Speculative Buy
Yesterday, Great Western Mining (GWM) declared its unaudited half-yearly results for H1 2015 ended 30th June 2015. During the period, the company swung to pre-tax profit of €88,784 from a pre-tax loss of €258,730 in H1 2014, leading to an EPS of 0.14cents against a loss per share of 0.11cents in H1 2014. On the operational front, GWM successfully completed two field programmes in M2 along with the extension of IOCG (Iron-Oxide-Copper Gold) mineralization to further 2kms along the Bass Mountain. The company completed its renovation work in M2 Phase 2 drill pads, resulting in extension of M2 drill permit for Phase 3 drilling programme. Meanwhile, the application process for target 4 Phase 1 drilling programme was concluded and a permit approval is expected by early September. Further, the company has also concluded geological soil sampling survey over an area in M1.
Our view: GWM’s excellent results are attributed to the efforts taken by the company to identify new resources and utilize them to their best ability with the help of its strong infrastructure and robust technology. Moreover, the latest findings in Northern Section of M2 across the Bass Mountain have shown favourable geologic environment for IOCG mineralization with gold (Au) present in sub-ppm with copper (Cu) at a ratio of 1Au/50,000 Cu, suggesting that the M2 open pit copper resource contains 16,000oz (ounces) of Au. Further, the company awaits approval of target Phase 1 drilling programme apart from the results of its latest geological sample survey in an area in M1. We expect GWM to witness improvement in its prospects following approval of target 4 and increasing drilling programmes on existing and new resource sites. Thus, in view of the above developments, we maintain a Speculative Buy on the stock.
AFC Energy (LON:AFC) – Speculative Buy
Yesterday, AFC Energy announced its first commercial power purchase agreement (PPA) with Stadtwerke Stade GmbH for the sale of electricity produced at AFC’s fuel cell generation facility at Stade, Germany. The PPA is agreed upon till 31st July 2017 with an option to extend for another 12 months. As per the terms of the PPA, the electricity will broadly reflect the spot prices, implying that AFC stands to gain from the sale of power at peak prices.
Our view: The signing of the PPA marks a major step towards commercialization for AFC Energy. The company’s fuel operation at Stade is about to complete and the electricity sales from the systems would be the first commercial revenue earned by AFC. Further, the rich operational experience of its local partner in the distribution of electricity into the German power grid would strengthen AFC’s process flow. Going ahead, AFC expects its main project POWER-UP to demonstrate world’s largest alkaline fuel system at Air Products industrial gas plant by December 2015. Thus in light of the above developments, we reiterate our Speculative Buy rating on the stock.
Merlin Entertainment (LON:MERL) – Buy
Yesterday, Merlin Entertainment released its trading update for the half year ended 27th June 2015, ahead of its results on 30th July 2015. The company expects the revenues to rise 6.6% (constant currency) to £544m whereas the like-for-like (LFL) revenue is likely to grow 2.8%. The growth would be led by an increase in LFL revenues in the LEGOLAND Parks Operating Group and Midway Attractions Operating Group by 6.0% and 2.9%, respectively. However, the trading in theme parks group has been impacted by the accident of Alton Towers Resort, with temporary closing of the park along with suspension of marketing activities across UK theme park business. The LFL revenues for theme park segment is projected to decline by 2% and the EBITDA for 2015 from the segment is projected to be in the range of £40m to £50m (2014: £87m). Overall, Merlin’s pre-tax profit would increase to £49m from £48m (H1:2014) resulting in an EPS of 3.5p against 2.8p last year. The net financing costs are likely to reduce 28.4% to between £40~45m owing to the refinancing and £110m reduction in debt declared earlier. In addition, the company opened ‘DreamWorks Tours – Shrek’s Adventure!’ brand with the first attraction in London on 1st July.
Our view: Merlin Entertainment anticipates positive half yearly results owing to strong performances from LEGOLAND Parks Operating Group and Midway Attractions Operating Group. Though the company is likely to be adversely impacted by the recent accident in Alton Towers Resort, yet its favourable financing costs are expected to offset these losses. In addition, the company has committed support to the injured and plans to implement extra safety norms to improve its services. Overall, Merlin has long term growth potential in view of its new attractive theme based parks complemented by increasing disposable income, likely to increase the visitor count. Further, Merlin continued to grow in its other segments by successfully launching two parks in the US and expects to expand further in new markets. We believe that the impact of the incident at Alton Towers Resort would be short-lived and the company would bounce back to high earnings once again as it remains the largest European entertainment company. Therefore, we reiterate a Buy rating on the stock.
Economic News
Germany IFO
The German business sentiment index rose to 108.0 in July from a revised 107.5 in June, survey results from IFO Institute revealed yesterday. The index was forecast to read 107.2. The Current Assessment Index rose to 113.9 from 113.1 in the previous month, versus market expectations of 112.9. The Business Expectations Index, a gauge of attitude towards business prospects over the next six months, increased to 102.4 from a revised 102.1 in June and missed economists’ expectations of 101.8.
US durable goods
As per the Commerce Department, US durable goods orders increased 3.4% m-o-m in June, after decreasing a revised 2.1% in May, mainly due to the recovery in the volatile aircraft category. The reading beat the economists’ forecast of an improvement of 3.2% for the month. Excluding the transportation equipment, orders improved 0.8% in June after a downwardly revised 0.1% in the previous month.
Eurozone M3 money supply
Eurozone’s M3 money supply increased to 5.0% y-o-y in June after growing at a similar pace in the previous month, missing the market forecast of an improvement to 5.1%, the European Central Bank said yesterday. Loans to the households and private sector increased 1.2% and 0.9%, respectively. The three-month average growth in the money supply from April to June stood at 5.1% y-o-y.