The Markets
Market opening: The FTSE-100 is expected to open around 10-points higher this morning.
New York: Wall Street ended in the red ahead of key jobs data release scheduled today, which may provide some indication on the possible timing of rate hike. Furthermore, a decrease in oil prices weighed on investor sentiment. The S&P 500 fell 2.38 points, with the energy sector declining the most.
Asia: Equities are trading mixed, tracking global markets. The Nikkei 225 rose 0.8% after strong performance from financial stocks. The Hang Seng was trading 0.6% down at 7:00 am.
Continental Europe: Markets advanced amid positive corporate earnings releases. However, energy stocks were dragged down by volatile oil prices. Germany’s DAX and France’s CAC 40 gained 0.4% and 0.6%, respectively.
Crude Oil: Yesterday, WTI crude oil prices decreased 2.4%, while Brent oil prices fell 1.2%. The spread between the two varieties stood at US$2.8 per barrel.
UK small caps: The FTSE AIM All-Share index closed 0.10% lower yesterday at 746.31.
Today’s news
BoE keeps interest rate unchanged
The Bank of England (BoE)’s Monetary Policy Committee retained its benchmark interest rate at the record low level of 0.5%, maintaining an 8–1 vote in favour of no rate hike. The interest rate has remained unchanged since March 2009 and matched market expectations.
Company News
Kibo Mining (LON:KIBO) – Speculative Buy
Yesterday, Kibo Mining (Kibo) reported its operational update for Q3 2015 highlighting progress on all of its projects. The company stated that all the conditions related to the Joint Development Agreement signed with SEPCOIII last quarter were met and hence the agreement has now achieved unconditional status. Kibo announced that it has also completed the Mining Pre-feasibility Study on Mbeya Coal to Power Project (MCPP) in July 2015. Results of the study were encouraging and the project is now fast approaching financial close. Moreover, Kibo has initiated exploration work on two of its jointly held projects – Morogoro and Pinewood – with Metal Tiger. The company has made remarkable progress on its Haneti project in central Tanzania as the final report from an independent Airborne Geophysical Data Interpretation indicates that the nickel sulphide prospective rocks are significantly higher than the earlier estimates. Furthermore, Kibo managed to handle its cashflows effectively during the quarter, and will be receiving £526,000 from its previous broker, Hume Capital, within a time frame of two months starting from 2 October 2015.
Our view: The aforementioned breakthroughs on operational front are encouraging considering the prevailing weak market conditions for junior mining companies. Apart from consistently making sound progress on its ongoing projects, Kibo managed to efficiently handle cashflows in current difficult market environment and will soon receive the pending amount of £526,000. Last month, the company completed the financial optimisation study for the coal mine component of the MCPP which indicated relatively low operating costs, high NPV and improved cash return on capital invested. Also, Kibo holds a wide portfolio of mineral projects ranging from the Lake Victoria Goldfields in the Southern Tanzania (which boasts of around 700,000oz JORC compliant gold resource) to the highly prospective Haneti nickel project in the Central Tanzania. A wide asset base and sustained focus on enhancing operational performance bodes well for Kibo’s future growth prospects. We, therefore, continue to recommend a speculative buy on the stock.
Beaufort Securities acts as corporate broker to Kibo Mining.
Amphion Innovations (LON:AMP) – Speculative Buy
Amphion Innovations plc, the developer of medical, life science, and technology businesses with significant shareholdings in seven Partner Companies, yesterday announces that it has signed a Memorandum of Understanding with an undisclosed private company which is a pioneer and leader in advanced pulmonary imaging technology. The private company itself owns an advanced pulmonary imaging technology platform which is used to more accurately diagnose and monitor major lung diseases, including COPD, asthma, and cystic fibrosis. Both businesses have already been engaged in early stage drug testing and continue to generate modest revenues. Conditional upon the fulfilment of certain terms, a merger of this private company and Amphion’s 25.6%-owned m2m will take place. m2m, is a US-based company focused on developing a range of preclinical and clinical imaging system accessories for MRI systems. Post-merger, Amphion expects to own approximately 40% of the combined merged entity.
Our view: This appears to be the next important step forward to both accelerate the commercialisation of m2m’s proprietary technologies and for Amphion to commence monetisation of the opportunity for shareholders. The merged entity’s proprietary technologies can be expected to seek FDA approval over the coming 18 months or so. Its immediate target market in lung disease is huge, comprising over 40 million people in the US alone, where it generates product sales in the region of US$150bn annually. The combined entity will offer a range of products serving the MRI market with its illuminating gas technology, whose market indications could potentially expand significantly beyond pulmonary to encompass other complex organs, such as brain etc. Amphion management can also be expected to begin steering the merged entities toward a stock market quotation (most likely on London’s AIM) within the next six months or so. Conversion of existing loan stock held by Amphion would take its direct equity holding to around 80%. Based on a 50:50 merger of the two entities, would leave it with the 40% detailed in the RNS, although whether the Group participates in any secondary sell-down at the time of IPO remains to be seen. Beaufort considers Amphion Innovations continues to create excellent value. In the past it has been seen primarily as a cheap way into (26.14%-owned) Motif Bio; but clearly significant progress continues to be made amongst the Group’s six other portfolio companies, including particularly m2m and, Kromek, as well as the consolidated IP development company, DataTern. On this basis, Beaufort repeats its ‘Speculative Buy’ recommendation.
Anglo Pacific Group (LON:APF) – Speculative Buy
Yesterday, Anglo Pacific Group (Anglo) released an update on its interests in Berkeley Energy Limited. The update follows company’s pre-feasibility study (PFS) on Berkeley’s Salamanca Project earlier this week. Berkeley expects to start with site work on the project in mid-2016. Berkeley has also added Zona 7 deposit to the project, apart from the previously included Retortillo and Alameda deposits. The project has a net present value (NPV) of US$871.3m and an IRR of 93.3% with a mine life of 18 years.
Our view: The aforementioned update is encouraging for Anglo as it receives positive news on the project. The company has both royalty and equity interests associated with Berkeley. The development work at the site is progressing well as Berkeley reported higher NPV and IRR and also expects to start site work in 2016. Additionally, the company continues to progress well on the Narrabri royalty. Whitehaven, the mine’s operator reported higher sales than production in the last quarter. Whitehaven expects the production for the fiscal year 2016 to be between 6.6Mt to 6.8Mt. Furthermore, as per the recently declared results for the first half of 2015, Anglo delivered solid performance despite the difficult trading conditions, with increased royalty income and reduced losses. We believe the company could witness improved earnings owing to significant developments across its projects. Therefore, we maintain a Speculative Buy rating on the stock.
Victoria Oil & Gas (LON:VOG) – Buy
Yesterday, Victoria Oil & Gas (VOG) released a production update for the third quarter ended 30th September 2015. The average gas production increased to 8.2 million standard cubic feet per day (mmscf/d) in Q3 2015 from 4.0mmscf/d in Q3 2014. The company sold 2,242mmscf of gas in the first nine months of 2015 as compared to 893mmscf in the same period last year. While, the condensate sold rose to 10,878bbls in Q3 2015 against 5,667bbls in Q3 2014. VOG received US$8.1m (Q2 2015: US$9.8m) in cash for the sale of gas and condensate. The cash balance at the end of period stood at US$12.8m (Q2 2015: US$14.2m). Additionally, the company reported a US$2.4m decrease in debt during the period. VOG has started well engineering for two wells planned for H2 2016. The company has initiated a new seismic programme concentrating on acquisition and reprocessing of historic data points.
Our view: VOG delivered solid performance in the third quarter with improved production and higher sales. The company’s production numbers were benefitted by ENEO surpassing its take-or-pay level for the period by 32%. VOG continued development at the Logbaba gas production plant, which it brought in Q2 2015. The company has commenced the expansion plan at Logbaba gas to double the capacity to around 40mmscf/d. Additionally, VOG’s operating subsidiary GDC, analysed the plan for potential pipeline extension into the Bonaberi area and customer connections. Going forward, the company plans to increase its plant capacity, drill two wells and placing new pipelines. We expect VOG to improve its gas supply to new and existing markets and subsequently increase reserves and production capacity. In light of the above argument, we maintain a Buy rating on the stock.
BlueRock Diamonds (LON:BRD) – Speculative Buy
Yesterday, BlueRock Diamonds (BlueRock) informed that it has entered into an agreement with Diacar Mining and Plant Hire Limited (Diacar) to act as a subcontractor. As per the terms of the agreement, Diacar has built a second processing plant at the Kareevlei site at its own cost. The plant is developed to process kimberlite of oversize material (> 70mm in size). BlueRock doesn’t have the required machinery to process this material. The contract is for a period of five years, with an option of renewal based on Diacar’s performance in the preceding one year. Diacar would be liable for all costs apart from the mining of the oversize material and diesel. Diacar would also be responsible for producing concentrate, which would be sorted by BlueRock. The company has full ownership and would carry out the marketing of all diamonds recovered from the concentrate. BlueRock would receive 60% of revenues arising from the Diacar operations net of licence fee, taxes and selling costs. Separately, the company informed that it has finished the next drilling and blasting programme involving 190 drill-holes (a total of 1,705 metres) and generated around 80,000 tonnes of weathered kimberlite for the plant.
Our view: The aforementioned update is encouraging for BlueRock as it enters into a contract with Diacar. The company continues to progress well despite the lack of some essential machinery to carry the work. The agreement would enhance BlueRock’s production levels without any inherent costs. The company expects the plant output to double once it is fully operational. Additionally, BlueRock has completed the drilling programme as per the plan and generated sufficient amount of weathered kimberlite for the plant. Therefore, riding on the continuous development at Kareevlei and the substantial operational improvements, we believe the company has bright future prospects. Therefore, we maintain a Speculative Buy rating on the stock.
Howden Joinery Group (LON:HWDN) – Hold
Howden yesterday reported a good sales performance to date in the second half of 2015, including during the important October trading period. In light of this, the Board stated it remains well positioned to achieve market expectations for the full year. It noted, however, that the two remaining trading months still have to be completed and together typically account for over 10% of annual revenues. Howden Joinery UK depots’ total revenue in the second half of the year to 31 October increased by 12.8% and this was achieved in the face of toughening comparators that have been seen since June. As a result, in the first 44 weeks of 2015 total revenue was up 12.0%, rising 9.3% on a same depot basis. Gross margin performance also remains in line with expectations. The Board went on to remind investors that, as part of the £70m share buyback programme announced on 25 February 2015, the Group has acquired 6.4m shares. This takes the total acquired this year to 7.2m, for which the consideration was £35m.
Our view: Howden is lumped within the wider basket of UK building and residential services/distribution groups, such as Travis Perkins, Wolseley, SIG, Grafton etc. Activity levels at Tool and Equipment Hire businesses, like HSS Hire, also provide a good lead indicator for the sector. Indeed, it was HSS that provided the first warning of a surprisingly sharp and unexpected sector slowdown back in July; this was latterly followed by a rash of ‘shock-horror’ tales from a number of Howden’s peers. The net result has been a widespread sector correction which, more recently, has even spread to the mainstream UK house builders. Yet, surely times can have rarely been better for UK building materials suppliers and equipment hire groups? The public, as ever, love nothing more that adding value to their properties while prices spiral ever upwards. Surely RMI activity should be booming against a background of more relaxed planning legislation and low interest rates/energy costs, while demand-side subsidies also power new UK housebuilding as the Government aspires to lift starts as far as 250,000/year in an effort to quell growing public disquiet over the lack of affordable housing? So what could have gone wrong? One obvious tremor was felt ahead of May’s general election, when polls confidently predicted a Labour party majority; another resulted from legal change that contrived to concentrate contractor vacations during the traditionally busy August-early September period. So It is quite possible that these together resulted in the unexpected activity hiccup; it is also true that a warm and relatively dry Q4’15 could subsequently result in momentum picking up quite sharply once again. Assuming Boards across the sector seek to update shareholders of such an outcome in pre-close statements just ahead of Christmas, it would be reasonable to anticipate share prices rebounding. In the meantime, of course, they may simply tread water for the next six or seven weeks. So what about Howden itself? The shares have sharply outperformed the FTSE250 over the past year and yesterday’s relief bounce repaired much of the recent damage. Trading on 20x earning for this year and 18.2x for next while coming with only a modest yield, suggests almost everything is now in the share price. Beaufort accordingly takes its recommendation down from Buy to Hold while awaiting reassurance about activity levels during the important Nov-Dec period.
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, announced that all resolutions put to shareholders were duly passed at its General Meeting held yesterday. Accordingly, the 8,839,928 ordinary shares pursuant to the previously announced placement (19 October 2015) will now be admitted to trading on AIM on 6 November 2015. In addition, the 5,882,353 (Tranche 2) ordinary shares pursuant to the cash placing previously announced on 8 October 2015 were admitted to trading on 4 November 2015. Savannah has also issued a total of 5,413,158 new ordinary shares at 2p per share to strategic service providers in lieu of professional fees. These professional shares will rank pari passu with existing ordinary shares and are expected to be admitted to trading on AIM on 11 November 2015. Following admission, the Company’s total issued share capital will be 285,865,770 ordinary shares.
Our view: Since 7 October 2015 Savannah has raised £564,060 in gross proceeds. The Company plans to use these funds to target early copper production in Oman and progress its mineral sands initiative in Mozambique. We look forward to a drill results from the current drilling programme on selected new VTEM targets and historical copper results around the Aarja prospect in Block 4 permit area. A mineral resource estimate for the Group’s Block 4 high-grade copper deposit is expected by year end. We are also encouraged with the potential of the recently signed JV agreement with Rio Tinto. 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 a corporate broker to Savannah Resources plc
Economic News
Germany factory orders
German factory orders fell 1.7% m-o-m in September, following a 1.8% drop in August, said the Federal Ministry of Economy and Technology. Economists had forecasted orders to improve by 1.0%. On y-o-y basis, workday-adjusted factory orders slipped 1.0%, after an increase of 1.7% in August. The economists had forecasted a rise of 1.9% y-o-y.
US initial jobless claims
Number of Americans filing their initial claims for unemployment benefits rose by 16,000 to a seasonally adjusted 276,000 in the week ended 31st October, from last week’s claims of 260,000, the Labor Department said yesterday. Economists had expected claims to increase to 262,000.