The Markets
New York: Wall Street remained closed due to the New Year holiday.
Asia: Equities are trading lower, as weak manufacturing data released in China renewed concerns of economic slowdown in the country. The Nikkei 225 fell 3.1%, while the Hang Seng was trading 2.8% down at 7:00 am.
Continental Europe: Markets remained closed due to the New Year holiday.
Crude Oil: On Friday, WTI and Brent did not trade due to a holiday. The spread between the two varieties based on the closing on 31st December 2015 stood at US$0.2 per barrel.
UK small caps: The FTSE AIM All-Share index closed 0.47% higher on New Year’s Eve at 738.83.
Today’s news
UK’s private sector gathers pace in December
As per the Confederation of British Industry (CBI), the balance of firms increased to +20% in December from +13% in November, above the long-run average of +5%. The improvement was led by growth in the retail and wholesale sector.
China’s manufacturing PMI falls in December
As per Caixin, China’s manufacturing Purchasing Managers’ Index (PMI) fell to 48.2 in December from 48.6 in November, marking the tenth consecutive month of contraction. The weak manufacturing data renewed concerns of slowdown in China.
Company News
Xtract Resources (LON:XTR) – Speculative Buy
On 29 December 2015, Xtract Resources, the gold and copper mining and development company with projects in South America, South Africa and Mozambique, informed shareholders of two fatal accidents that had occurred on surface within the gold processing plant at the Chepica Gold and Copper Mine in Chile on 24 December 2015. These accidents occurred when an individual undertaking training at the Mine’s restricted area without the necessary safety equipment for unexplained reasons. The shift supervisor then attempted to rescue the individual but was also fatally injured. Following the notification, on 24 December 2015, Inspector of Mines stopped all work on the Mine for an investigation. This has now completed and concluded that neither the Mine nor any of its workers were negligent and that no Mine Health and Safety standards or procedures were transgressed. Underground mining operations subsequently resumed on 29 December 2015, with the ore mined being stockpiled. The processing plant will, however, remain closed until certain recommendations from the Inspector of Mines have been implemented in the area where the fatal accidents occurred and it is expected to be operational on or around 12 January 2016. The Company reaffirmed that despite the temporary shutdown of the processing plant, it expects to ‘come close to achieving its financial targets’ for the quarter.
Our view: Accidents do happen. No enterprise can guard against unforeseen hazardous events, unauthorised access or other ‘Acts-of-God’. Although it will be little or no compensation to the families of those involved, Xtract does appear to have effected the rigorous health & safety code necessary to ensure that, in normal circumstances, their mine site remains free from incident. Indeed, Chepica’s underground mine continues to maintain an impeccable record. With 2010’s Copiapó mining accident still relatively fresh in its mind, however, Chile must of course be seen to be ensure the highest possible standards when it comes to mineral exploration and production. In this respect, the implementation of certain ‘recommendations’ from the Inspector of Mines should be seen as the very least one might expect. Indeed, the temporary shutdown will likely also provide an opportunity to advance routine maintenance and site upgrades that might otherwise have hindered Q1’16 activity, on top of conducting the further surface operations risk assessment that has been cited by management. With this in mind, Beaufort shares the management’s confidence in its ability to meet its target of 11,999t milled during Q4 2015 along with recommencement of stoping operations at Chepica Main Mine in the new year. Meanwhile, we also look forward to the on-going development at the Colin prospect, results from the metallurgical tests on the copper tailings at Carolusburg and O’Kiep, as well as completion of the Definitive Feasibility Study (‘DFS’) on the Manica gold project. Beaufort reiterate a Speculative Buy rating on the stock.
Beaufort Securities acts as corporate broker to Xtract Resources plc
MySQUAR (LON:MYSQ) – Speculative Buy
On 29th December, MySQUAR Limited (AIM: MYSQ), the Myanmar-language social media and entertainment platform, announced its final results for the year ended 30 June 2015. Key highlights in terms of investment and user acquisition for the Group, which was Admitted to AIM on 1st July, had already been well explored and so contained few surprises. Importantly, however, it confirmed it had witnessed the continuing reforms of Myanmar in both its economy and political transparency that are essential for the country’s development; the friendlier business environment has produced great results, strongly boosting Foreign Direct investment (‘FDI’) into the country on a year-on-year basis. In the telecommunications sector, the situation was considered even more positive, with the country targeting 80% geographic coverage of 3G mobile technology by the end of 2016. As per the Group’s business plan, MySQUAR did not generate revenue during the accounting year ending 2015. Accordingly, the financial results for the period represent the operating expenses of the Group which were reported at US$2.09 million including US$0.62 million of share-based payments. As of 30 June 2015, the Group had net liabilities of US$0.32 million. However, with the proceeds being received from the capital raise at Admission in July and the Credit Facility of US$1.0 million provided from Rising Dragon Singapore Pte Ltd, it is expected that the Group will have sufficient working capital to execute its current business plan.
Our view: MySQUAR continues to deliver on all its promises and much more. A target of 2.0m user accounts by end-December, means that this figure has more than doubled during its first six months of quotation on AIM. The key feature of social media sites, of course, is that ‘success-breeds-success'; from here, the pace of MyCHAT’s user acquisition will continue of compound as 3G network reach rapidly expands across Myanmar. Indeed, it is considered to be the world’s fastest roll-out across what is, realistically, the world’s final major telecom frontier. An exceptionally young population of some 60m, is now learning to access communications and the world-wide web through Chinese smart phones that are available on the street for just US$30. With such momentum, 2016 looks to be a very exciting period for MySQUAR and its highly confident management planning appears to underline this. In particular, monetising through advertising should shortly start to bear fruit. Having integrated its advertising features with Smaato’s platform, one of the largest advertising networks in APAC, a business development team has also been established in Myanmar to conduct direct sales to brands. Meanwhile, it is ahead of schedule for the deployment of mobile payment services, following an agreement with MyPAY that was signed last October. In order to execute these plans, the Group expects to almost double headcount by the fiscal year-end, while the marketing budget could be tripled. It will also allocate more resources for partnership development to gain more competitive advantages for its businesses, while intending to maintain investment in key products whose development pipeline is expected to be more intensive. In parallel with this organic growth, the Group may also review potential acquisitions relevant to strategic areas and operations. Cash resources, facilitation payments due in coming months from MyPAY and existing loan facilities are expected to more than cover the cost of such projects and the value created for shareholders in the process will be significant. Realistically, MySQUAR could have accumulated as many as 4.0m user accounts by this time next year. Such a figure, coupled to a nationally recognised brand name, should be sufficient to attract deep-pocketed and highly acquisitive US/Korean/Japanese sector giants keen to integrate large, new international virgin social media territories into their global hubs. They, most certainly, would then be prepared to pay a significant multiple of MySQUAR’s modest market capitalisation for control. Beaufort accordingly confirms a price target of 21.0p/share on MySQUAR and repeats its Speculative Buy recommendation.
Beaufort Securities acts as corporate broker to MySQUAR Limited
KEFI Minerals (LON:KEFI) – Speculative Buy
On 30 December 2015, KEFI Minerals (‘KEFI’), the gold exploration and development company with projects in the Saudi Arabia and the Ethiopia, provided an operational update for Q4’2015. During the period, KEFI completed a gross US$4m (£2.6m) placing of ordinary shares on 11 December 2015. In Ethiopia (where it operates the wholly-owned Tulu Kapi Gold Project), the Company has now finalised the costs estimates and appointed industry-leading contractors. The Government of Ethiopia has also confirmed its intended equity investment in the range of US$15m-US$20m in the project. KEFI is on schedule for project finance syndicate documentation and inter-creditor arrangements to be assembled and approved by syndicate and the National Bank of Ethiopia for full drawdown by mid-2016. The project remains on track for production to start in 2017. In Saudi Arabia (40% owned and operating partner for Gold & Minerals Ltd Joint Venture), its flagship project at Jibal Qutman, has completed preparation of its Mining Licence Application and supporting technical studies. The infill drilling program is now completed along with further metallurgical testing. KEFI intends to issue an updated Mineral Resources upon completion of its review processes in accordance with JORC Code (2012). At Hawiah, community consultation meeting planned for early Q1 2016, as prelude to commencing drilling.
Our view: 2015 has been a busy and productive year for KEFI. It ends with the fully-permitted Tulu Kapi gold project having assembled a first-class syndicate of backers for this robust project, which remains scheduled to start production in 2017. The financials stack up very strongly, with all-in Sustaining Costs in the range of US$730-741/oz, which ranks it in the lowest cost quartile globally for gold producers. The Project NPV is US$92-161 million and increases to US$121-197 million at commencement of production in 2017, based on the net after tax cash flows to equity from the Tulu Kapi open pit only (after adjusting for debt and streaming) at an 8% discount rate. This should then be capable of providing free cash flow of US$25-37 million per annum based on average cash available for equity holders and after servicing commitments including debt and gold stream. Elsewhere, the Jibal Qutman gold project in Saudi Arabia is scheduled to commence development in 2017 with funding for ambitious growth agenda in an under-explored province. Following last month’s completion of a £2.6m equity placing and in anticipation of project finance syndicate documentation and inter-creditor agreements to be assembled and approved for full drawdown by mid-2016, management remains highly confident of reporting further significant progress during the next 12 months. Beaufort retains its Speculative buy recommendation on the shares.
Beaufort Securities acts as corporate broker to KEFI Minerals plc
Ortac Resources (LON:OTC) – Speculative Buy
On 30 December 2015, Ortac Resources (‘Ortac’), the diversified mineral exploration and mine development company, announced unaudited interim results for the six months ended 30 September 2015. During the period, Ortac reported 56% reduction in operational losses to -£346k (H1 2014: -£786), achieved by cost rationalisation programs in both Slovakia and London. Consequently, losses per share has narrowed to £0.0011 from £0.0031). In October and in July, Ortac has raised £400,000 and £600,000 at 0.05 pence and 0.085 pence per ordinary share respectively in order to finance the US$600,000 investment in Zambia Zamsort Ltd (‘Zamsort’), as well as to maintain liquidity and further develop their existing portfolio. In the last six months, Zamsort has secured US$2.6m of funding (US$2m of equity with the rest being secured convertible loan notes) and renewed its Small Mining Licence for a further 10 years. Zamsort has started construction of a commercial scale demonstration plant to produce copper cement and cobalt hydroxide filter cake and is expected to be commissioned in Q2 2016. Ortac’s total investment to Zamsort sums US$1.2m via convertible loan notes which, if converted, would provide the Company with a 19.35% stake. Meanwhile, drilling results from Andiamo Exploration Limited (‘Andiamo’) Haykota License in Eritrea, especially at the Hoba target was “encouraging” said by Ortac who holds 25.37% stake. Ortac maintains its interests in Slovakia, and is currently in discussion with potential local partners and supporters in relation to invest in the project.
Our view: The half year saw Ortac make good progress in controlling costs (resulting in significantly lower operating losses compared to the corresponding prior period), two successful placings while continuing diversification of its portfolio with a view to managing commodity-price and country-specific risk. Even with the currently depressed commodity market conditions, development of the Group’s key investments, Zamsort and Andiamo, moved forward by securing funding and developing their respective licenses. Management expects to provide further updates on their ongoing work programs in the coming months. Zamsort’s demonstration plant, for example, is expected to demonstrate capacity to generate revenues sufficient to fund exploration at its Large Prospecting License; Andiamo also continues to make good progress with drilling restarted after the rainy season and likely to be completed before the year end, while also anticipating a clearer outlook on Slovak government’s position concerning natural resource development after the results of March 2016’s Parliamentary elections. Importantly, mining remains a key employer in Central Slovakia, with major brown coal mines, a number of Bentonite mines and an underground gold and polymetallic mine, all operating in the region close to Šturec. In anticipation of tangible progress and newsflow during 2016, Beaufort maintain a Speculative Buy on the shares.
Beaufort Securities acts as corporate broker to Ortac Resources plc
NU-Oil and Gas (NUOG.L, 0.33p) – Speculative Buy
On 31 December 2015, NU-Oil (‘NUOG’), the independent Oil and Gas group, announced its results for the year ended 30 June 2015. Management highlighted the Group’s continuing focus on development of the stranded and marginal fields through the recent investment in, and relationship with, ABT Oil and Gas Ltd. (‘ABTOG’) in which the Company holds a 50% interest. ABTOG has developed the MFD Consortium which is a group of major industry service companies and equipment suppliers, including Arup, Kongsberg, Frames and AGR as key members, which have the recognised expertise to deliver key aspects of the engineering solution. Corporate strategy is to focus on utilising engineering solutions that reduce both Capex and Opex, while being redeployed in an effort to build a portfolio of low risk highly appraised marginal assets. The Group’s historical portfolio that was acquired before the oil price fall of 2014 now appears to be uneconomic at the current oil price and so a decision has been taken relinquish these assets, for which it has already provided for all liabilities. Accounting figures for the period detail a loss before tax of £5,274,000 (2014: £4,859,000). This included £140,000 of finance costs associated with re-negotiating financing arrangements with Shard Capital Management (‘Shard’) for the extension of its loan and its increase by £200,000. There was also an exceptional charge of £4,115,000 (including the effect of foreign exchange) for an impairment against the carrying value of the Group’s Canadian assets. The effect of the exceptional charge was to push the Group into a net liability position of £2,899,000. The net liabilities mainly relate to the loan owed to Shard and to related party creditors. At this time neither Shard nor related parties have sought to recover these debts and it is expected that they will continue to support the Group.
Our view: Amid a significantly challenging low oil price environment, NUOG has developed a clearly focused strategy. It will commercialise stranded and marginal fields based on solutions and core expertise delivered by ABTOG and the MFD Consortium; these are expected to significantly improve the economics of developments. The aim is to build a portfolio of projects and opportunities that do not expose the Group to exploration and appraisal risk. Support from other senior and experienced players in the oil and gas industry indicates both optimism in and the high potential of the Group’s untested technology initiative. Post year end, NUOG raised £435,000 (before expenses of £58,000) through the placement of new shares, but management is clear that further fundraising will be required in the short term to implement the business strategy, but stresses the value this could generate might significantly exceed the effect of any potential shareholder dilution. Moreover, the status of commercial discussions on a number of projects provide it with the confidence that the business model has global potential and that the Group can satisfy its liabilities and operate as a going concern. On this basis, Beaufort reiterate its Speculative Buy rating on the stock.
Beaufort Securities acts as corporate broker to NU-Oil and Gas plc
URU Metals (LON:URU) – Speculative Buy
On 31 December 2015, URU Metals (‘URU’), the multi-commodity exploration company, announced an interim results for the six months ended 30 September 2015. During the period, net loss were –US$1,146m (H1 2014: -US$477,000) due to the high impairment of intangible assets. The Company wrote off US$890,000 intangible assets related to the licences in its subsidiary in Sweden, Svenska Skifferoljeaktiebolaget as management believe they are no longer recoverable at this continued challenging environment for oil and uranium prices. Cash and cash equivalents at the period ends stood at US$382,000 (H1 2014: US$351,000) with no bank borrowings. Post the period, on 30 October 2015, URU raised £400,000 from institutional and other investors through a placing of 100 million new shares at 0,004 pence per share. The funds will be used to further develop the Zebediela Project exploration program. Drilling and additional metallurgical work are expected to start towards the end of January 2016.
Our view: Despite the difficult conditions across all oil and commodity sectors caused by slowdown in China, the World’s second largest economy, URU has successfully raised £400,000 from institutional and other investors. URU maintains its core strategy to develop uranium and nickel assets, as the management witnessing there is a growing supply gap in the uranium market that cannot be fulfilled by current and future planned production. Especially for the uranium, further widening of the supply gap is clear from the view that there is a growing number of nuclear reactors (The European Nuclear Society report, March 2014) whereas national regulations in most countries, and technical capacities of many operations, prohibit rapid changes in annual uranium output. Nuclear utility companies purchase uranium on long-term supply contracts to ensure stable supply of uranium to feed the nuclear fuel pellet production process. For nickel, future demand from newly and rapidly industrialising countries, notably in Asia for nickel-containing materials to modernise infrastructure, for industry and to meet the material aspirations of their population is assuring. The Board anticipates growing demand and price appreciation for uranium and nickel in the short to medium term and remain confident that the long-term fundamentals of the base minerals industries is strong. Beaufort retains its Speculative Buy rating on the stock.
Beaufort Securities acts as corporate broker to URU Metals plc
Sirius Minerals (LON:SXX) – Speculative Buy
On 24 December 2015, Sirius Minerals (‘Sirius’), the fertiliser development company, announced that it has signed a major take or pay offtake agreement with Huaken International (‘Huaken’) in China for the purchase of polyhalite from the York Potash Project (‘the project’). Sirius is on the development of the York Potash Project in the United Kingdom, which has the world’s largest and highest grade deposit of polyhalite, a multi-nutrient form of potash, containing; potassium, sulphur, magnesium and calcium. Huaken is one of a restricted list of companies in China authorised to operate an import and export businesses including potassium fertilisers, rubbers, steels and other products. The agreement enables Huaken to purchase polyhalite to be used as a soil conditioner in China. The agreement lasts for seven years from first production with a volume of 500,000 tonnes in year seven (ramping up following construction of the Project) and its pricing currently in line with previous market guidance consistent with a number of the Company’s other offtake agreements based on a formula linked to inputs.
Our view: The scale of Sirius’ reserve is quite breathtaking! York Potash, a subsidiary of Sirius has a JORC-compliant probable mineral reserve of 250 million tonnes of 87.8% polyhalite, making it a world’s largest and highest grade deposit of polyhalite. The contract with Huaken announced last month, follows a 1.5m tonnes/year agreement with a major US fertiliser group and creates the opportunity for Sirius to become a global leader in Potash production. Given that studies demonstrate polyhalite benefits soils, making them more resistant to soil erosion while also having suppressive effects on soil borne pathogens, it creates significant value. This is particular so in China where, by adding it to condition the region’s highly acidic soils, it can restore agricultural productivity and maintain food security for future generations. Having finally received planning permission last October for the mine and its underground transport system, a feasibility study is now expected to be completed later this month. A previous but similar study, for example, concluded a development cost of around £1.5bn to construct plant capable of producing around 13m tonnes of polyhalite/year. Importantly, Sirius has already confirmed that a number of cornerstone investors have been undertaking diligence exercises since the Q4 2015 and are now at an advanced stage. On 21 December 2015, Sirius also announced its interim unaudited consolidated results for H1 2015 in which, it narrowed losses and enhanced its asset base. Cash balance at the end of September was £25m compared to £27m a year earlier. The Group’s net assets were £153m at the end of the period. Beaufort maintains a Speculative Buy rating on the stock.