The Markets
Market opening: The UK market is likely to open marginally higher this morning. FTSE 100 futures were trading 8 points better-off at 7:23 am.
New York: Wall Street was closed for trading due to a public holiday in the US.
Asia: Equities are trading mixed. Weak foreign trade data from China dented market sentiment. The Nikkei 225 shed 2.4%, with Japan’s GDP contracting 1.2% in Q2 2015. The Hang Seng was trading 0.7% up at 7:00 am.
Continental Europe: Markets ended in the green following positive corporate earnings. Improvement in Germany’s industrial production lifted investor confidence. Germany’s DAX and France’s CAC 40 rose 0.7% and 0.6%, respectively.
Crude Oil: Yesterday, Brent oil prices decreased 4.0%. WTI did not trade due to Labor Day holiday in the US.
UK small caps: The FTSE AIM All-Share index closed 0.06% lower on yesterday at 732.57.
Today’s news
UK retail spending slows in August
As per the British Retail Consortium (BRC), retail spending rose 0.1% y-o-y in August; however, this is slower than the 2.2% growth reported in the previous month. On like-for-like (LFL) basis, sales slipped 1.0% in August, after increasing 1.2% in July. Retail sales are expected to improve in September.
China’s trade surplus expands in August
Chinese imports fell 14.3% y-o-y in August, following an 8.6% drop in July. Exports slipped 6.1% y-o-y, after declining 8.9% in July. The decline in imports led to 40% m-o-m expansion in the trade surplus to US$57.8bn in August.
Company News
Mariana Resources Limited (LON:MARL) – Speculative Buy
Yesterday, Mariana Resources informed that it has notified Condor Resources regarding the termination of the earn-in option agreement for the Soledad Copper-Gold-Silver Project, located in Central Peru. The company has finished 2,084m of drilling in the Project resulting in high grade copper-gold mineralization in tourmaline breccia pipes. These pipes are of limited tonnage potential, thereby the exploration activities would focus on deep porphyry source. The drilling at these targets involves high level of discovery risk and costs to Mariana. Therefore, the company has withdrawn from this option agreement.
Our view: The aforementioned withdrawal from the agreement comes at a crucial time considering the difficult market conditions. Mariana’s termination would help it reduce its exploration cost along with minimizing the associated risks. In addition, an exit from this project would help the company focus on Turkey and its other potential assets. Last week, Mariana found encouraging results from the Hot Maden Project with resource estimate (MRE) of 2.9Moz Au equivalent (eq) grading 10.9g/t Au eq (based on current spot prices and weighted average). As per the results, the deposit also contains significant zinc (Zn) mineralisation that was excluded from the initial mineral estimate. The improvement in zinc grades that Mariana is witnessing in the North and emergence of elevated molybdenum assays would further enhance the prospects of the Hot Maden Project. We look forward to further drilling results and the forthcoming technical report from this potentially world class deposit. We believe the various steps taken by Mariana to combat the challenging situations would help it maintain its growth momentum. Therefore, we retain a Speculative Buy rating on the stock.
Yesterday, PHSC released its trading update for the four months to 31st July 2015. During the period, the unaudited sales fell to £2.13m from £2.29m in the same period last year. The decline in sales was due to the closure of two large contracts. The EBITDA stood at £66,351 (2014: £216,000). The company’s cash balance improved to £855,000 (2014: £706,000).
Our view: PHSC delivered below par results following the closure of its two important orders. Recently, the company declared its final results for the year ended March 2015 and reported a decrease in pre-tax profit and EPS. PHSC gained from the continued push in client base to constantly improve health and safety standards. However, reduced funding from the UK government for enforcement agencies resulting in companies spending less on compliance services hurt the company’s business. Currently, the company is looking out for acquisition opportunities to enhance the range of opportunities in the pipeline. Recently, PHSC’s subsidiary B to B Links Limited, secured new CCTV installations valued at more than £500,000. Further, company’s another subsidiary, QCS International Limited, is expected to generate earnings by advising on major changes to quality standards. We would like to wait and watch company’s progress in terms of acquisitions and performance over the year and therefore downgrade the rating to a Hold for now.
Savannah Resources (LON:SAV) – Speculative Buy
Yesterday, Savannah Resources (Savannah) informed that it has received positive results from the Versatile Time Domain Electromagnetic (VTEM) survey conducted on Block 4 Project, located in Oman. The company has 65% interest in the Omani company, Al Thuraya LLC, the owner of the Block 4 licence project. Savannah has found many targets, located close to the previously producing copper mines at the site with production of more than 190,000 tonnes of copper. A total of seven regions with high concentrations of Priority 1 and two VTEM anomalies were modelled in the survey. In these areas, 29 VTEM targets were modelled including 7 Priority 1, 19 Priority 2 and 3 Priority 3 anomalies. The results have shown a series of strong, near surface conductors up to 350m in strike length and extending at least 200m down, with potential to be the result of VMS mineralisation. The field operation has begun and drilling is expected to start by the end of September 2015.
Our view: The confirmation of potential targets at the Block 4 Project is an encouraging signal for Savannah. The company is on the right track to enhance its interests in Oman and establish itself as a major copper producing firm. The anomalies are found in suitable geological conditions close to the company’s old copper mines. Drilling is expected to commence shortly that may enhance the mine’s resource potential. Recently, the company confirmed gold mineralisation and associated copper mineralisation at the Salahi 1 prospect at Block 4 in Oman. The sampling results identified a gold prospect at the Salahi 1 area having samples producing results of up to 72.2 grams per tonne of gold, with finds including 12 metres at 11.87 grams per tonne of gold. In addition, the company’s Jangamo project in Mozambique encountered several high grade HMS mineralization zones. Thus, in view of Savannah’s recent successes and on-going efforts to improve its prospects, we maintain a Speculative Buy rating on the stock.
Glencore (LON:GLEN) – Hold
Yesterday, Glencore informed that Katanga Mining Limited and Mopani Copper Mines have commenced a review of their businesses, including operations and expenses, owing to the challenging environment for commodities. In addition, production at both the mines would be suspended for the next 18 months until the expansionary and upgrade projects to reduce the overall operating costs are completed. Once completed, these programs are expected to reduce C1 costs at Katanga and Mopani to c.US$1.65lb (per pound) and c.US$1.70lb respectively from over c.US$2.50lb at present. Glencore would continue funding the expansion and up-gradation. Meanwhile, Mutanda Mining continues to perform well, producing above name plate capacity at a C1 cost of $1.33lb. In a separate announcement, the company revealed plans to issue equity up to US$2.5bn in order to reduce the company’s net debts and strengthen its balance sheet.
Our view: The commodity price outlook continues to remain challenging and is forcing quite a few companies to review their operations and expenses. Glencore is no exception and is taking concrete steps to acknowledge its debt problem through the issuance of equity and other measures. The company’s stock has been battered by the slump in the commodity prices, falling nearly 54% in this year so far as Glencore’s key commodities, copper and coal, touched multi-year lows in 2015. Though the company’s proposition to cut its debt by about US$10bn is a step in the right direction, we feel that the commodity market is still quite unstable. Therefore, we maintain our Hold rating on the stock.
Associated British Foods (LON:ABF) – Buy
Yesterday, Associated British Foods (ABF) issued a pre-close trading update for the year ended 12th September 2015. Underlying trading remains in line with the expectations, while declines are expected in the adjusted operating profit due to stronger Sterling. Consequently, the adjusted EPS for the year is expected to be slightly lower than last year. The company’s sales at Primark are expected to be 13% higher than last year at constant currency led by an increase in selling space of 9% and better sales densities in stores opened this year. ABF expects its Grocery, Agriculture and Ingredients business line to perform better than the last year. However, the company’s Sugar business adjusted operating profit is expected to be significantly lower than the last year due to the decrease in the European sugar prices. UK sugar production for the year stood at 1.45 million tonnes driven by very high beet yields and good factory performances. The net interest charges for the company would be lower due to reduction in average borrowings as compared to the previous year. On the operational front, the company has opened around 1 million sq ft of selling space to take the total to 293 stores and 11.2 million sq ft. ABF also opened new stores in the Netherlands, Belgium and Germany. The company made investments to increase the warehouse capacity in its existing warehouses. The final results are to be declared on 3rd November 2015.
Our view: Despite showing robust production and an improved quality, ABF’s Sugar unit continued with its weak trading performance due to lower prices that impacted the revenues and the margins. However, the strong performance from the other business units is likely to offset the negative impact of the unit. Primark, the company’s fast fashion chain, with more than 50% contribution to earnings, is expected to do well and plans are underway to launch the brand in the US on 10th September 2015. Primark’s trading suggests that the business possesses the potential to provide a credible and growing revenue stream to the company in the coming years. Meanwhile, the low-cost fashion retailer is looking for further expansion in the US, Spain, France and Italy to fuel future growth. In addition, the higher disposable income of the consumers in the UK and improving global scenario would aid company’s expansion program. ABF has been progressing well to expand its warehouse infrastructure and expects to increase the total capacity by two thirds by the end of next year. In view of the overall developments surrounding the company, we maintain a Buy rating on the stock.
Economic News
Germany industrial production
Industrial production in Germany increased 0.7% m-o-m on a seasonally adjusted basis in July, after a revised decline of 0.9% in June, the Federal Ministry of Economics and Technology said yesterday. Economists, on the contrary, had predicted the production to grow 1.1% for the month. On a y-o-y basis, industrial production improved 0.5% in July, ahead of the market expectations of a 0.3% increase. Excluding energy and construction, industrial output grew 0.3% m-o-m.