The Markets
Market opening: UK markets are expected to start the session positively this morning. At 7:25am FTSE-100 Futures were trading 76-points higher.
New York: Wall Street ended higher, taking cues from the Asian and European markets. Moreover, improvement in the US private sector payrolls lifted investor sentiment. The S&P 500 advanced 1.9%, led by the consumer discretionary sector. For the quarter ended September, the markets fell 6.9%.
Asia: Equities are trading higher, tracking the global markets. Furthermore, improvement in China’s manufacturing index led to optimism among investors. The Nikkei 225 added 1.9%, while the Hang Seng remained closed due to a national holiday.
Continental Europe: Markets advanced, led by the auto and retail sector stocks. In addition, the rally in the Asian markets fuelled buying. France’s CAC 40 and Germany’s DAX roe 2.6% and 2.2%, respectively.
Crude Oil: Yesterday, Brent oil prices improved 0.3%, whereas WTI prices decreased 0.3%. The spread between the two varieties stood at US$3.3 per barrel.
UK small caps: The FTSE AIM All-Share index closed 0.67% higher yesterday at 725.26.
Today’s news
UK’s current account deficit contracts in second quarter
As per data from the Office for National Statistics, the UK’s current account deficit narrowed to £16.8bn in Q2 2015 from £24bn in Q1 2015, mainly due to a £4.5bn rise in exports. The deficit in Q2 2015 was 3.6% of GDP vis-à-vis 5.2% in Q1 2015.
China’s manufacturing PMI rises in September
The Chinese government’s official gauge of factory activity improved in September, with the manufacturing PMI rising to 49.8 from 49.7 in August. Furthermore, a private survey by Markit indicated that the manufacturing PMI fell to 47.2 in September, above the estimate of 47.0, from 47.3 in August.
Company News
Alecto Minerals (LON:ALO) – Speculative Buy
Alecto Minerals, the mineral exploration and development company focused on Africa, yesterday released its interim results for the period ended 30 June 2015. During the period, the Group narrowed its pre-tax loss to £0.3m from £0.4m over the previous comparable period. As at 30 June 2015, Alecto had a cash balance of £0.3m (£0.1m as at 30 June 2014), excluding £0.2m of the £0.3m gross proceeds raised through a placing in June 2015. The Group also announced the disposal of its wholly owned subsidiaries Nubian Gold Exploration and Rift Valley Resources, which hold all of Alecto’s interests in the Federal Democratic Republic of Ethiopia, namely the Wayu Boda and Aysid-Metekel exploration licences, to Wame Mineral Development, a private Ethiopian mineral development company. Under terms of the disposal, Wame will pay Alecto an initial nominal amount of £1 in respect of each Nubian and Rift Valley and a potential deferred consideration of US$3 per JORC-compliant resource ounce of gold or gold equivalent discovered up to a maximum of US$1m in respect of each mineral licence. Thus, on aggregate, the maximum deferred consideration could be US$2m. Moreover, in the event that Wame disposes of either licence within a two year period from completion, Alecto will be entitled to receive a proportion of the net proceeds.
Our view: With the disposal of the Wayu Boda and Aysid-Metekel exploration licences, Alecto can continue to focus on developing its advanced gold projects in Mali and Burkina Faso. Whilst we believe that the divested licences, located within the relatively underexplored Arabian-Nubian Shield, remain highly prospective for additional gold resources, management can now concentrate on the more advanced West Africa assets. In light of a recently announced results on a joint scoping study between Alecto’s Kossanto East and Desert Gold’s (DAU CN) Farabantourou gold projects we see significant upside potential through joint development of these two projects. As such, we maintain a Speculative Buy on the stock.
Beaufort Securities acts as corporate broker to Alecto Minerals plc
Savannah Resources (LON:SAV) – Speculative Buy
Savannah Resources, the diversified mining group focused on exploration and development of mineral sands in Mozambique and copper-gold projects in Oman, yesterday released its interim results for the period ended 30 June 2015. During the period, the Group slightly widened its pre-tax loss to £1m from £0.9m over the previous comparable period. As at 30 June 2015, Savannah had a cash balance of £0.4m (H1 2014: £1.8m). Highlights during the period include a signed JV agreement with Rio Tinto combining Rio’s Mutamba and Savannah’s adjacent Jangamo heavy mineral sands projects within Mozambique. In addition, Savannah continues to develop its high-grade copper-gold projects in Oman (Blocks 4, 5 and 6).
Our view: Whilst Savannah’s interim results were fairly academic, we continued to be encouraged with the quality of the company’s heavy mineral sands assets in Mozambique and its high-grade copper-gold projects in Oman. We look forward to a mineral resource estimate for the Group’s Block 4 high-grade copper deposit which is expected during Q4 2015 and has historical drill results including 18.6m grading 4.7% Cu and 33.8m grading 3.35% Cu. We are also encouraged with the potential of the recently signed JV agreement with Rio Tinto. Under terms of the agreement, Savannah will be the operator and can earn up to 51% of the combined Mutamba-Jangamo heavy mineral sands project. The JV is conditional upon approval from the Ministry of Mineral Resources and Energy of the Republic of Mozambique and evaluation work will begin once the licence is approval for the combined areas. In the meantime, we maintain a Speculative Buy rating on the stock.
Beaufort Securities acts as corporate broker to Savannah Resources plc
Ferrum Crescent (LON:FCR) – Speculative Buy
Yesterday, Ferrum Crescent (Ferrum) declared its results for the year ended 30th June 2015. Revenue from continuing operations fell to US$23,753 from US$35,844 in 2014. However, pre-tax loss narrowed to US$1.3m from US$2.6m leading to loss per share of US$0.50c against US$0.75c in 2014. Cash at the end of period stood at US$1.0m (2014: US$738,345). On the operational front, the company completed a drilling programme at Moonlight Iron Ore Project (Moonlight) to study the level of Zone D at the Moonlight Deposit to determine the location for the proposed mine. Ferrum successfully raised £500,000 (before costs) in May 2015. The company signed a Memorandum of Understanding (MOU) with South Africa’s Principal Monarch Investments (PMI), where the latter may acquire up to 39% of Ferrum Iron Ore (Pty) Ltd (FIO), the Group’s Project holding company for US$12m. Further, Strand Hanson Limited was appointed as nominated adviser and Beaufort Securities appointed as AIM broker. Post the first half, the company continued to look for suitable partners to carry further bankable feasibility study (BFS) for the Moonlight as PMI didn’t make payments as per the MOU.
Our view: Ferrum made significant progress in 2015 following successful drilling at the Moonlight and completion of some of the main components of BFS. The Moonlight is a magnetite deposit, located in Limpopo Province, with an estimated Mineral Resource of 307.7 million tonnes (Mt) at 26.9% Fe, with the inferred category estimated to contain 172.1Mt at 25.3% Fe. The company has located the site for its mining activities and has commenced the work on the pit design. Additionally, Ferrum remains financially strong with reduced losses and improved cash position. Going forward, Ferrum plans to use the latest drilling data to enhance the model for the mine along with the direct reduction (DR) pellet centre at Thabazimbi. Further, the company’s marketing team has identified potential South African off takers of products developed from the project. Overall, Ferrum is strongly positioned to benefit from its projects and counter the difficult trading conditions. In light of the above argument, we maintain a Speculative Buy rating on the stock.
Beaufort Securities acts as corporate broker to Ferrum Crescent plc
Northcote Energy (LON:NCT) – Speculative Buy
Yesterday, Northcote Energy (Northcote) declared its unaudited interim results for the six months ended 30th June 2015. Revenues reduced to US$349,000 in H1 2015 from US$783,000 in H1 2014. Pre-tax loss widened to US$2.1m from US$1.8m in 2014 mainly due to lower commodity prices during the period. Loss per share narrowed to US$0.11c against US$0.14c in H1 2014. Cash at the end of period stood at US$2.3m (H1 2014: US$3.2m). On the operational front, the company entered into a joint venture with Gaia Ecologica to carry business within the oil field services sector in Mexico. The company signed an agreement with NAPP to acquire the entire issued share capital of NAPP’s wholly owned US subsidiary, NAP USA Inc. The company successfully raised £4.2m via equity placing. Post the first half, Northcote was granted permission to access the data administered by the National Hydrocarbons Commission (CNH) to evaluate the potential opportunities. The company also received positive results at the Shoats Creek Field in Louisiana at its Lutcher More 20 well (93% interest).
Our view: The first half of 2015 has been difficult for Northcote with volatile oil price movements hurting the company’s financials. However, Northcote took the low pricing environment as an opportunity and expanded into the fast growing Mexican energy sector. The company along with its partners Gaia Ecologica have set up a remediation facility in Tabasco, located in Mexico. Northcote has designed the facility in such a manner that the site would start generating cash flows just after its commission. In addition, the site is located close to the port, which would reduce distance travelled by the oil and gas operators to transport waste for remediation. Further, the permission to access data from CNH provides the company access to crucial data that could help it focus on potential areas for future growth. Additionally, the Lutcher More 20 well in Louisiana substantially exceeded the company’s pre-drill expectations in multiple areas including thickness of pay-zone, oil cut and daily rates achieved during testing. Going forward, the Northcote expects to increase its activities in the Mexican region and also expand operations to Indonesia to extend the company’s international presence. In view of the continuous developments surrounding Northcote, we maintain a Speculative buy rating on the stock.
Beaufort Securities acts as corporate broker to Northcote Energy plc
Ariana Resources (LON:AAU) – Speculative Buy
Yesterday, Ariana Resources, the gold exploration and development Company focused on epithermal gold-silver and porphyry copper-gold deposits in Turkey, announced its unaudited interim results for the six months ended 30 June 2015 (‘the period’). During the period, loss before tax was £621,000 (H1 2014: £225,000). On the operational front, the Company is developing a portfolio of prospective licences selected on the basis of its in-house geological and remote-sensing database, on its own in western Turkey and in Joint Venture with Eldorado Gold Corporation in north-eastern Turkey. Eldorado owns 51% of the Salinbas/Ardala joint venture and are fully funding all exploration work on the JV properties, while Ariana owns 49%. The total resource inventory within this JV is 1.09 million ounces of gold. Adjacent to this project is the discovery of the 3 million ounce gold equivalent Hot Maden deposit, and this reinforces Arian’s view that this area has the potential to host multi-million ounce gold deposits. The Company also saw advancement of construction at the Kiziltepe mine, a 50:50 partnership with Proccea Construction Co., with development finance of US$33 million provided by Turkiye Finans Katilim Bankasi A.S. Current progress on mine development includes the acquisition of all required freehold land, installation of perimeter security fencing and the laying of foundations for mine buildings. Long-lead orders and selection of mining contractor have also been negotiated. The Company remains on target for first gold pour in in the H2 2016. Post the period, the Company completed a placing for £1 million which strengthened the balance sheet and will enable meaningful exploration and development work to be conducted across its portfolio.
Our view: It is apparent from recent work that the project contains significant potential for further resource discoveries in the vicinity and the Company is advancing to drill-testing several targets in the coming months. The area is host to a prolific gold-bearing vein system, which at Kiziltepe contains significant quantities of silver (approaching 40 grammes per tonne of silver in Reserve) and at Kepez (up to c.380 grammes per tonne of silver in rock-chips). On the exploration front, Ariana is in progress to focus on the identification of new resource areas in order to enhance late-stage mine life and profitability. With a first gold pour planned in H2 2016 and annual production c.20,000 ounce equivalent per annum over the current planned eight years ‘at an expected cash cost in the vicinity of US$600 per ounce’ we are very excited at the Company’s prospects. The Company deserves support and we continue to recommend the Company as a Speculative Buy.
Beaufort Securities acts as corporate broker to Ariana Resources plc
PCG Entertainment (LON:PCGE) – Speculative Buy
PCG Entertainment Plc (LON:PCGE), the AIM listed Asia-Pacific gaming and media company yesterday announced its interim results for the six months ending 30th June 2015. The results included revenue generated from the recent acquisition of Center Point Development Corporation (‘CPDC’). This business was acquired with an effective acquisition date of 16th June 2015, and the results since that date have been consolidated in accordance with IFRS 3. The transaction was the subject of an announcement on 11th August 2015 and was approved by resolution by the shareholders at a general meeting. On 28th August 2015, the enlarged share capital was admitted to AIM. Revenue of US$745,220 was earned between 16th June 2015 and 30th June 2015, which generated a gross profit of US$256,714. PCGE anticipate ongoing revenues from CPDC, which management now looks “forward to being reflected in our year-end results”. Having been quoted on AIM for just one quarter in December 2014, PCGE was temporally suspended under Rule 14 of AIM Rules in February 2015 and then readmission in August 2015 following the reverse takeover of CPDC. Highlights for the half year period included (i) The loss for the Group is US$2,482,669 (2014: US$114,802) after charging readmission costs of US$1,176,000, (ii) Group cash balances at 30th June 2015 of US$719,617 (2014: US$538,420), (iii) The CPDC acquisition although completed in August 2015 has been accounted for under IFRS 3 from 16th June 2015, the date of acquisition agreed in the Sale and Purchase Agreement and, (iv) Revenue of US$745,220 was earned and gross profits have been earned by the CPDC acquisition from 16th June 2015 to 30th June 2015 of US$256,714 which after expenses nets to US$221,086.
Our view: The media and gaming sectors are among the fastest growing in China. McKinsey calculated that China’s online gaming market, valued at US$18bn in 2014, will grow substantially to over US$22bn over the coming year. PCGE aims to offers safe and transparent exposure to this sector for western investors. In line with stated strategy, the Group is focused on the development of its business across not just China, but the larger Asia-Pacific region. Management aims to continue growth through further acquisition and exploitation of Group licenses in China, for which the acquisition of CPDC represents a transformational first step. Importantly, while these licenses may be subject to future change and/or modification, they presently enable management to initiate business centered on online gaming and agency distribution of the Sports and Welfare lotteries in the PRC. Within this it will also be able to add operational value to companies in which it proposes to initially share distribution revenues, and take a minority shareholding. With a regulatory framework now in place, a gradual relaxing of rules governing Chinese gaming is anticipated while evolving, in tandem, with a more transparent, long-term online policy. The growth this could capture in Chinese gaming is positively breath taking. Any group that can position itself to secure online revenues from the PRC’s twin obsessions, namely Lottery and Poker, while monetizing an increasingly liberated market, will add considerable value. Beaufort considers the shares offer value up to 15p each on PCGE’s opportunity to rapidly leverage its situation.
Beaufort Securities acts as corporate broker to PCG Entertainment plc
Strat Aero (LON:AERO) – Hold
Strat Aero plc, the international aerospace company focused on the rapidly emerging Unmanned Aerial Vehicle (‘UAV’) sector, yesterday announced it has entered into a Share Purchase Agreement for the acquisition of Geocurve Holdings Limited, a privately owned company, which specialises in the provision of UAV operated topographical surveys and inspection services to a blue chip customer base, including the UK’s Environment Agency (‘EA’), EDF Energy, Carillion, and the RSPB. The Acquisition is in line with the more expansive strategy adopted by the new management team to rapidly build a vertically integrated UAV offering, covering all aspects of the value chain including software, hardware and services. Geocurve brings Strat Aero a unique 3-D Modelling UAV based mapping solution and highly experienced team of specialist surveyors and UAV operators. The combination of the two businesses also is expected to provide multiple new cross-selling and expansion opportunities. Indeed, the intention is to roll out Geocurve’s capabilities internationally and two initial countries currently being explored. Strat Aero intends to leverage Geocurve’s data analytical capability by developing a number of key data analysis centres built around the Group’s existing Digital Data Management (‘DDM’) system in Houston to facilitate the ‘control’ of client interface and output, and the rapid roll-out of its inspection services globally. The cost of acquisition has been set at one times Geocurve’s sales for the year ended 31st March 2016 up to a maximum of £1.5m – subject to defined profitability levels being achieved – split into an initial payment (half equity, half cash) followed by instalments out to March 2016.
Our view: Geocurve is the first of a series of acquisitions Strat Aero’s new management team has been evaluating, all of which offer the prospective to fast track the Group transformation into a fully integrated global solutions provider focused on the rapidly growing UAV market. It comprises two subsidiary companies, UKAerovision Limited and GN Site Engineers Limited, which have a combined 5 years of commercial UAV/UAS operations and over 80 years of engineering/surveying experience, which distinguishes them from the more general UAV inspections market. It brings a team of specialist surveyors and UAV/UAS operators, encompassing the skills of engineering, site engineering, surveying, GIS database, 3D modelling, UAV/UAS operations, airborne surveillance and hydrographic modelling. GN Site Engineers Limited reported profits of £38,443 for the 12 month period ended 31 March 2015, while UK Aerovision Limited reported profits of £63,300 for the 15 Month period ended 31 March 2015. Building out a ‘full solution’ offer into separate divisions addressing Training, Military, Commercial and Inspection, investors can anticipate a number of further announcements detailing ‘bolt-on’ acquisitions and joint ventures. In so doing, Strat will capture a wide range of skills, experience, contacts and visions from early movers in this rapidly developing industry. And there can be absolutely no doubt that the global market opportunity identified will become absolutely giant. The US administration, for example, is presently taking steps toward an opening of US airspace for Unmanned Aerial Vehicles, from which the Federal Aviation Administration suggests a new market worth as much as US$100bn could eventually be created in its territory alone. But actually converting current interest and enquiries into firm, near-term profitable contracts is, as Strat’s previous management found out to their pain, the trickiest part – especially when dealing with military and utilities. The newly adopted, more deliverable approach (focussing first on commercial applications) should provide greater visibility for forward earnings. That said, it must now be realistic to anticipate the Group delivering losses, not just for the current year but also 2016E. Beaufort retains its ‘Hold’ recommendation in anticipation of Strat’s operational portfolio being built-out in the coming months and operational strategy becoming clear.
Beaufort Securities acts as corporate broker to Strat Aero plc
Kibo Mining (LON:KIBO) – Speculative Buy
Yesterday, Kibo Mining declared its unaudited half year results for the period ended 30th June 2015. Pre-tax loss narrowed to £913,891 in H1 2015 from £1.1m in H1 2014. Cash and cash equivalents at the end of period stood at £835,227 (H1 2014: £68,783). On the operational front, the company signed a Joint Development Agreement with SEPCOIII to take its Mbeya Coal to Power Project (MCPP) to the next stage of development. Kibo has completed the Mining Pre-feasibility Study (MPFS) on MCPP. The company signed joint venture agreements on the Morogoro (gold) and Pinewood (uranium) projects with Metal Tiger plc. Further, the results from the Haneti project showed that the nickel sulphide prospective rocks are much more extensive than previously estimated.
Our view: Kibo delivered solid performance in the first half despite difficult trading environment for mining companies. Kibo made significant progress to the MCPP project with completion of the MPFS, reporting a NPV between US$211m and US$244m and IRR between 33.6% and 53.9%, respectively. The range is based on four different mining options over a mine life of 28 years. The company remains on track to finalize the Definitive Feasibility Study (DFS) with the help of its partners. Kibo has a diversified portfolio of mineral projects including the Lake Victoria Goldfields in southern Tanzania, with around 700,000oz JORC compliant gold resource and the highly prospective Haneti nickel project in central Tanzania. Furthermore, the company’s uranium JV with Metal Tiger covering the Pinewood uranium project has commenced. The beginning of work on the Pinewood uranium project under terms of the JV signifies that both partners see the potential for a resurgence of interest in the uranium sector. We believe the company has long-term growth potential well supported by its solid assets and huge resources. Therefore, we maintain a Speculative Buy rating on the stock.
Beaufort Securities acts as corporate broker to Kibo Mining plc
Saga (LON:SAGA) – Buy
Yesterday, Saga declared its interim results for the six months ended 31st July 2015. Revenues advanced 8.7% y-o-y to £478.3m in H1 2015. The company’s trading EBITDA improved to £130.6m (H1 2014: £129.6m). Pre-tax profit jumped to £101.3m, 140% higher than H1 2014 resulting in an EPS of 7.3p against 3.3p last year. On the operational front, the company successfully launched the motor panel and remains on track to launch Saga Investment Services. The company acquired Bennetts, the UK’s premier motorbike insurance specialist. Saga secured Meyer Werft shipyard to build a new ship for delivery in 2019, with an option for second to be delivered in 2021. The company announced its first interim dividend of 2.2p to be paid on 19th November 2015.
Our view: Saga specialises in providing customized products and services for the customers above the age of 50. The company has started the year on a positive note with excellent performances across all the operating divisions. The company’s travel business led the gains as it recorded an 18.8% jump in revenues. Saga took a lot of initiatives to improve this segment including introduction of new distribution channels, improving digital presence and development of new products. Further, the acquisition of Bennetts would bring in additional expertise to the motor insurance segment. The company’s substantial cash generation over the period has reduced the debt ratio to 2.35x (H1 2014: 2.56x) and paved the way for Saga to give its maiden interim dividend to the shareholders. Additionally, the launch of motor panel and Saga Investment Services is likely to improve the company’s future prospects .We believe the company is well placed to continue its growth momentum for the entire year and achieve its profitability target. Therefore, we maintain a Buy rating on the stock.
Economic News
UK House Prices
As per Nationwide’s latest report, house prices in the UK increased 0.5% m-o-m in September, after an upwardly revised increase of 0.4% in August. This was better than the market expected 0.4% rise. On a y-o-y basis, the prices accelerated 3.8% in September from 3.2% in August.
Germany unemployment change
The number of people without a job in Germany rose by 2,000 on a seasonally adjusted basis to 2.795 million in September, the Federal Labour Agency said yesterday. Economists had forecasted a decrease of 5,000. The seasonally adjusted unemployment claims rate was unchanged at 6.4% in September.
UK GDP
According to the Office for National statistics, UK’s GDP grew 2.4% y-o-y in Q2 2015, after a 2.6% increase in the previous quarter. The markets expected a 2.6% expansion in GDP. On a q-o-q basis, GDP grew at 0.7% in Q2 2015, following a similar rise in Q1 2015.
Eurozone CPI
Consumer price inflation (CPI) in the Eurozone fell 0.1% y-o-y in September, after a 0.1% rise in August, as per the estimates published yesterday by Eurostat, the EU’s statistical office. The markets expected a flat reading in September. Core prices, excluding those of energy, food, and tobacco, grew 0.9% y-o-y in September, following a similar rise in August.
US MBA mortgage applications
US home mortgage applications, including both refinancing and home purchase, fell 6.7% in the week ended 25th September, after a 13.9% rise in the preceding week, the Mortgage Bankers Association said yesterday. The refinance index slipped 8.0% from last week while the gauge of loan requests for home purchases, a leading indicator of home sales, dropped 6.0%.
US ADP employment change
Jobs in the US private sector expanded 200,000 in September, after a downwardly revised 186,000 in August, ADP reported yesterday. The markets expected the jobs to increase by 190,000.
US Chicago purchasing manager
The Chicago purchasing managers’ index (PMI) slipped to 48.7 in September from 54.4 in August, as per the data released by ISM Chicago yesterday. This was behind the market expected reading of 53.0.