The Markets
Market opening: The FTSE-100 is expected to start the session 44 points lower this morning.
New York: Wall Street closed in the red, as investors remained disappointed over European Central Bank’s (ECB) measures not meeting expectations. Investors await non-farm payroll reports to be released today. The S&P 500 fell 1.4%, dragged down by the healthcare sector.
Asia: Equities are trading lower, taking negative cues from losses in the global markets. In addition, Fed raising the possibility of an interest rate hike dented investor sentiment. The Nikkei 225 fell 2.2%, while the Hang Seng was trading 1.1% down at 7:00 am.
Continental Europe: Markets ended in the negative territory, as ECB’s monetary policy measures did not match investor expectations. Moreover, a stronger euro impacted export-driven stocks. Germany’s DAX and France’s CAC 40 shed 3.6% each.
Crude Oil: Yesterday, Brent and WTI oil prices increased 3.2% and 2.9%, respectively. The spread between the two varieties stood at US$2.8 per barrel.
UK small caps: The FTSE AIM All-Share index closed 0.01% lower yesterday at 741.62.
Today’s news
UK services sector improves in November
As per Markit, UK’s services purchasing managers index (PMI) improved to 55.9 in November, the highest in four months, from 54.9 in October. Moreover, job creation in the sector remained high despite the introduction of National Living Wage. The agency further stated that the economy is expected to grow 0.6% in Q4 2015 from a 0.5% growth in Q3 2015.
ECB extends its stimulus program
The ECB extended its monthly €60bn stimulus programme by six months to March 2017. The bank maintained the benchmark refinancing rate and lending rate at 0.05% and 0.3%, respectively. However, the ECB cut the deposit rate to -0.3% from -0.2% earlier.
Company News
Tertiary Minerals (LON:TYM) – Speculative Buy
Tertiary Minerals, the AIM-listed company focused on the identification, acquisition, exploration and development of mineral projects in the fluorspar sector, announced today a start date for the next phase of drilling at its MB fluorspar project in Nevada, USA. Following the Phase 3 drilling programme and resource upgrade (86.4Mt grading 10.7% CaF(2)), Tertiary Minerals has completed a 166 line-km ground magnetic survey in order to better understand the geological and any potential structural controls related to fluorspar mineralisation. Using the magnetic survey results coupled with the previous drilling campaign, the Company has planned its Phase 4 drilling programme to test the lateral and at depth continuity of high-grade mineralisation in the newly discovered Western Area. Drilling is expected to commence on 07 December 2015 and will comprise five reverse circulation (RC) holes totalling more than 1,800m. The Company also announced an update of its Exploitation Permit (mining) application at the Storuman fluorspar project in Sweden. Following extensive consultation with key stakeholders, six of the seven key stakeholder groups have given their support to the Storuman Exploitation (mining) permit area. Only the Sami reindeer husbandry community has objected to the mining application. The final decision now lies with the Swedish Mining Inspectorate, which Tertiary expects shortly.
Our view: We are encouraged with the continued progress being made at Tertiary’s MB fluorspar project in Nevada as we believe that project is a world class and strategic fluorspar deposit. We look forward to the results from the next phase of drilling which will allow Tertiary to upgrade the current JORC resource as well as progressing the project towards a prefeasibility study. We also look forward to a positive decision on the mining permit application for the Storuman project. In the meantime, we reiterate a Speculative Buy on the stock.
Beaufort Securities acts as corporate broker to Tertiary Minerals
Acacia Mining (LON:ACA) – Speculative Buy
Yesterday, Acacia Mining (Acacia) informed that it would continue on its restructuring programme within the organization. The company has already cut 60% of its higher-cost expatriates. Acacia expects around 1,050 staff, representing around 27% of the workforce to leave the company over the next few months. In addition, Acacia is working to enhance capital expenditure, renew discussions with contractors and suppliers to improve rates.
Our view: This news is in line with Acacia’s plan to restructure its business. In the past two years, the company has undertaken various measures to enhance productivity and cash flow. Acacia has taken steps to enhance its mines, including the automation of the Bulyanhulu mine and shifting to underground mining at the Gokona pit at North Mara. These changes have resulted in 30% reduction in costs for Acacia. Post the restructuring, the company expects to generate annual savings of around US$25m and sustainable cash flow starting from 2016. Furthermore, Acacia plans to refine capital expenditure, streamline corporate organization and lower spending. We believe these restructuring initiatives will help Acacia to limit impact on ongoing volatility in commodity prices on its earnings performance going forward. In light of the above argument, we maintain a Speculative Buy rating on the stock.
Caledonia Mining (LON:CMCL) – Speculative Buy
Yesterday, Caledonia Mining (Caledonia) informed that its 49% owned subsidiary, the Blanket Mine in Zimbabwe has reported an increase in the resource base. Based on drilling below the AR South section in the past six months, the company has added 222,000 tonnes of new inventory to the indicated resource category and 283,000 tonnes to the inferred resource category. Meanwhile, the company continued infill drilling at Blanket Section to upgrade inferred resources to indicated resources and a total of 254,750 tonnes have been upgraded. The new and upgraded resources during the period stand total to 476,750 tonnes. Additionally, the mine has 3.47 million tonnes of reserves and indicated resources as mentioned in the May update.
Our view: The aforementioned news is encouraging for Caledonia as it reported an increase in resources at the Blanket mine. The upgrade showcases the company’s continued focus on resource development and represents a 14% rise in terms of tonnes and 19% in terms of contained gold as compared to the previous upgrade. Recently, Caledonia reported solid performance in the third quarter of 2015. The company witnessed an improvement in gold production and higher net profit attributable to shareholders. Caledonia’s benefitted from the Revised Investment Plan at Blanket Mine, which the company presented last year. This plan focuses on increasing the gold production, reducing the average cost of production and extending the life of mine. The company enjoys a healthy balance sheet with enhanced cash position and solid assets. In light of the overall optimism surrounding Caledonia, we upgrade the rating to Speculative Buy.
Yesterday, BG Group informed that it has received a pre-conditional clearance from the Australian Treasurer through the Foreign Investment Review Board for the company’s takeover by Royal Dutch Shell. This is the fourth approval that BG has received, out of a total of five regulatory clearances for integration.
Our view: This development takes BG a step closer to complete the integration with Shell. Moreover, BG reported resilient performance in the first nine months of 2015 supported by improved production level. The company also enhanced its focus on improving operational performance and efficiency of its assets. BG’s growth was led by its businesses in Australia, Brazil and Norway. E&P production in Australia witnessed an improvement in capacity utilization, recording highest production level of 118,000 boepd and averaging 98,000 in Q3 2015. Additionally, production in Brazil doubled to 158,000 in Q3 2015, led by the Santos Basin. The LNG Shipping & Marketing reported a huge jump in volumes, which was offset by the lower sales prices. Going forward, the company plans to undertake various measures to generate operating and cost savings, to alleviate the effect of weak commodity prices in its final results. We believe BG would meet its production and EBITDA guidance for the year owing to its continuous efforts to improve operations and reduce costs. Therefore, we maintain a Buy rating on the stock.
Starcom (LON:STAR) – Hold
Yesterday, Starcom informed that it has entered into a supply and support agreement with Pinnacle Systems, a Kenyan based company. As per the agreement, Pinnacle would purchase many thousands of Helios units over a three year period. Additionally, it would use Starcom’s software service, for which it would be charged on a monthly basis. The value of the contract including service fees over the period is US$5.5m.
Our view: The aforementioned contract won by Starcom is the largest one till date. As a part of the agreement, the company would receive recurring monthly fees and net proceeds from the sale of Helios units. Recently, Starcom formed a Joint Venture (JV) with the US-based Sato Global Solutions, providing it an easy entry to the North American market. However, the company’s results for the first half of 2015 have been lacklustre. Starcom’s reported flat revenues for the period owing to low sales of its new products and tough price competition on existing products. Though Starcom has succeeded in winning contracts, and upgraded its sales and marketing for WatchLock and Helios TT, we believe there is little likelihood of any strong recovery in the near term. We would like to wait and access Starcom’s performance in the near future. For the time being, we retain a Hold rating on the stock.
Falcon Oil & Gas (LON:FOG) – Speculative Buy
Yesterday, Falcon Oil & Gas (Falcon) informed that it has signed a termination agreement with Naftna Industrija Srbije (NIS) to terminate the oilfield services contract. NIS would pay US$3.7m to Falcon as a part of contractual obligations.
Our view: The aforementioned termination of contract with NIS is a positive development for Falcon, as the latter was not able to complete the drilling and testing of the three-well programme in time. Just last week, the company reported resilient performance in the first nine months of 2015 despite difficult trading conditions. The company’s focus on cost management and efficient operations turned fruitful and it reported a 41% decrease in general and administrative expenses. This in turn lowered net losses y-o-y. Earlier this month, Falcon completed drilling operations at the Amungee NW-1H horizontal well. Results have been encouraging with excellent gas shows indicating the potential prospects in the Beetaloo region. Additionally, preliminary results from the drilling on the first three Australian wells showed favourable shale properties with excellent gas shows raising the possibility of high levels of gas saturations. Moreover, the company remains financially strong with solid cash position and no debt. Going forward, the JV partners plan to conduct Diagnostic Fracture Injection Tests (DFIT) on all of the vertical wells drilled in 2015 and 2016. In light of the above argument, we maintain a Speculative Buy rating on the stock.
Economic News
US initial jobless claims
Number of Americans filing their initial claims for unemployment benefits increased by 9,000 to a seasonally adjusted 269,000 in the week ended 28th November, from last week’s claims of 260,000, the Labor Department said yesterday. This was in line with the market expectations.
US factory orders
US factory orders improved 1.5% m-o-m in October after a revised drop of 0.8% in September, the US Department of Commerce said yesterday. The markets expected a 1.4% increase in orders. Excluding orders for transportation equipment, factory orders increased 0.2% in October, after a 0.6% decline in November.
US durable goods orders
US durable goods orders rose 2.9% m-o-m in October following an 3.0% increase in September, the Commerce Department said yesterday. Excluding orders for transportation equipment, durable goods orders improved 0.5% in October, following a similar reading in the previous month.
Number of Americans filing their initial claims for unemployment benefits increased by 9,000 to a seasonally adjusted 269,000 in the week ended 28th November, from last week’s claims of 260,000, the Labor Department said yesterday. This was in line with the market expectations.
US factory orders
US factory orders improved 1.5% m-o-m in October after a revised drop of 0.8% in September, the US Department of Commerce said yesterday. The markets expected a 1.4% increase in orders. Excluding orders for transportation equipment, factory orders increased 0.2% in October, after a 0.6% decline in November.
US durable goods orders
US durable goods orders rose 2.9% m-o-m in October following an 3.0% increase in September, the Commerce Department said yesterday. Excluding orders for transportation equipment, durable goods orders improved 0.5% in October, following a similar reading in the previous month.