The Markets
Market opening: The FTSE-100 is expected to start this morning's session around 11.5-points higher.
New York: Wall Street ended in the green despite the continuous slump in oil prices as investors cheered positive developments in China and stabilisation of the yuan. The S&P 500 advanced 1.7%, led by the consumer discretionary sector.
Asia: Equities are trading lower. Oil prices remained volatile after a deal between Saudi Arabia and Russia to freeze oil production failed to ease concerns over the global glut in crude. The Nikkei 225 fell 1.4%, amid lower-than-expected data on core machinery orders in Japan. The Hang Seng was trading 0.5% down at 7:00 am.
Continental Europe: Markets ended in the red, as a decline in commodity prices led to losses for basic resource stocks. Investors digested a mixed set of corporate earnings released. Germany’s DAX and France’s CAC 40 shed 0.8% and 0.1%, respectively.
Crude Oil: Yesterday, Brent and WTI oil prices decreased 3.6% and 1.4%, respectively. The spread between the two varieties stood at US$3.1 per barrel.
UK small caps: The FTSE AIM All-Share index closed 0.03% higher yesterday at 671.87
Today's news
UK inflation reaches one-year high in January 2016
As per the Office for National Statistics, consumer price inflation edged up to 0.3% in January 2016, highest since January 2015. The agency stated the rise was due to smaller falls in food and fuel prices, and a modest rise in the prices of clothes. However, consumer price inflation dropped 0.8% m-o-m due to Christmas discounts and drop in airfares.
Company News
Tertiary Minerals (LON:TYM, 1.15p) - Speculative Buy
Tertiary Minerals, the AIM-listed company focused on the identification, acquisition, exploration and development of mineral projects in the fluorspar sector, announced yesterday the results from its Phase 4 drill programme at its MB fluorspar project in Nevada, USA. Phase 4 drilling comprised four holes totalling 1,553m. Three of the four drill holes intersected fluorspar mineralisation, the best intercept (drill hole 15TMBRC036) returned a total of 89.1m (from eight significant fluorspar intersections) at an average grade of 12.02% CaF2 from a depth of 120m and is located 190m west of the Western Area. Drill hole 15TMBRC038 located to the north of the Western Area returned 22.86m grading 11.47% CaF2 from 74.68m. Drill hole 15TMBRC039 intercepted 137.16m (from 16 significant fluorspar intersections) grading 11.54% CaF2 including 185.93m (from five high grade intersections above 15% CaF2). Step out hole 15TMBRC037, located 425m NW of Western Area, was abandoned after a change in lithology from limestone to barren granite.
Our view: We are encouraged with the Phase 4 drill results from Tertiary’s MB project as we believe MB is proving to be a world class and strategic fluorspar deposit. These latest results prove the continuity of mineralisation both laterally and at depth in the Western Area and remains open. We expect the resource estimate to continue to grow from the existing 86.4Mt grading 10.7% CaF2. We look forward to continued development of the project including metallurgical testwork, economic modelling, scoping study and mine permit planning. In the meantime, we reiterate a Speculative Buy on the stock.
Beaufort Securities acts as corporate broker to Tertiary Minerals plc
Ferrum Crescent (LON:FCR, 0.13p) - Speculative Buy
Ferrum Crescent, the AIM, ASX and JSE listed mining development company announced on 15 February 2016 that it has entered into an option and potential sale agreement with GoldQuest, a private company with two lead-zinc exploration projects in Spain. Under terms of the agreement, Ferrum has the exclusive option, valid until 31 July 2016, in which to conduct due diligence on GoldQuest and its two Iberian lead-zinc projects in exchange for £22,500 (comprised of shares and cash). Should Ferrum exercise its option to acquire 100% of the share capital of GoldQuest, the consideration payable is £320,000 in cash and 100M new ordinary shares of Ferrum having an aggregate value of £145,000 based on the mid-market price of 0.145p as at 12 February 2016. GoldQuest owns 100% of the Toral project covering 2,024ha in the province of Leon and the Lago project located in the province of Galicia, both projects have high prospectivity for lead and zinc mineralisation.
Our view: While the Moonlight iron project in South Africa continues to develop under the previously announced BFS farm-in agreement and JV funding arrangement with BVI, Ferrum’s Board has been actively seeking new project opportunities. We are encouraged with the option and potential sale agreement given the high prospectivity for lead-zinc mineralisation particularity in the more advanced Toral project, which has an existing NI 43-101 resource estimate based on the results of 42,000m of historic drilling. Management believes that the Toral deposit is open to reinterpretation given the style of mineralisation and as such the existing resource estimate has been substantially underestimated. We look forward to the geological and metallurgical reinterpretation of Toral as well as the continued development of the company’s flagship Moonlight project. In the meantime, we reiterate our Speculative Buy on the stock.
Beaufort Securities acts as corporate broker to Ferrum Crescent plc
Stellar Diamonds (LON:STEL, 10.50p) - Speculative Buy
Yesterday Stellar Diamonds announced it had exported 3,341 carats from its 75% owned Baoulé project in Guinea to Antwerp. The goods are expected to be auctioned in March. This diamond production is part of the on-going trial mining of the Baoulé pipe where Stellar is targeting 100Kt of mining and processing (started September 2014). This should generate sufficient data to calculate a maiden resource statement with grades, diamond value, tonnage and contained carats. Management is targeting a 3 million carat resource at Baoulé.
Our view: Baoulé’s evaluation is 70% complete and likely to end mid-2016. Data collected thus far suggests a rock value of circa US$17/t which has the potential to underpin a profitable operation, albeit with slim margins at current diamond prices. As a comparison Firestone’s Liqhobong feasibility studies estimate an operating cost (including sustaining capex) of $14.5/t. It is also worth noting that Baoulé is known to produce large stones (a 55ct stone was recovered last month) and these could increase its rock value significantly. Of Stellar’s various assets, Beaufort most favours the Tongo project in Sierra Leone. Beaufort now has Stellar on its radar and at this point considers the shares a Speculative Buy.
FinnAust Mining (FAM.L, 2.08p) - Speculative Buy
Yesterday, FinnAust Mining informed that it has appointed Mr Peter Waugh and TZ Minerals International Pty Ltd (TZMI) to help in the development of Pituffik titanium project in Greenland. The work completed on the project till date has shown top quality assets in terms of heavy mineral grade, the report informed.
Our view: The appointment of Mr Waugh and hiring of TZMI are important steps undertaken by FinnAust as it will enable it to quickly assess the project’s near-term production potential. TZMI would initially work on leveraging important mineralisation elements such as grade, volume and composition. This would help in creating cost-effective development scenarios that would be measured by FinnAust. In addition, the company would benefit from Mr. Waugh’s extensive experience in the global titanium dioxide pigment industry. He would assist in end-user and off-take arrangements, along with metallurgical management and advice. FinnAust recently reported positive results from an offshore survey conducted at Pituffik. The results indicated significant titanium volumes extending over a large area, which further enhanced the potential resource base. We look forward to the developments related to the Pituffik project. In light of the above argument, we maintain a Speculative Buy rating on the stock.
Anglo American (LON:AAL, 397.95p) - Hold
Anglo American’s 2015 preliminary results were reported yesterday. Unsurprisingly financial results were hit hard by lower commodity prices with revenue down 26% to $23bn, EBITDA down 38% to $4.85bn and a net loss for the period of $5.6bn (FY14A net loss $2.5bn). Underlying earnings (not including negative $7.0bn of exceptionals) were positive $0.8bn, although free cashflow was negative $0.98bn with Minas-Rio responsible for the bulk of the capex spend. Net debt was broadly flat YoY at $12.9bn. There was no final dividend although this was announced in December. Yesterday Anglo also published a “Strategic focus and positive free cash flow” announcement which is essentially an update of the message given at the December 2015 investor day but with a stronger focus on its future as a diamond, platinum and copper producer with 16 core assets. The updated strategy also includes a more aggressive disposal programme.
Our view: Anglo’s new strategy seems reasonable. Divest the iron assets which are inferior to its competitors while reducing exposure to South Africa. Selling the niobium and nickel businesses is also a simple call, they are relatively small and were always non-core. The coal assets are profitable (21% EBITDA margin in FY15) and may remain part of the portfolio for some time. In terms of the focus going forward (platinum, copper, diamonds), presumably management believes that platinum prices will recover. It would also be a massive change to exit a commodity that is synonymous with Anglo and its history. Copper is a decent business (EBITDA margins of 39% in FY14 and 27% in FY15), DeBeers is also decent (26% EBITDA margins in FY14) and also important to Anglo’s history. We retain our Hold recommendation for Anglo.
Vodafone (LON:VOD, 211.0p) - Buy
Yesterday, Vodafone and Liberty Global agreed to form a 50:50 joint venture (JV) to merge their businesses in the Netherlands. With operations in 14 countries, Liberty Global is the world's largest international cable company. According to the agreement, Liberty Global's cable (Ziggo) and Internet businesses would be merged with Vodafone's mobile operations. Vodafone would pay €1bn in cash to Liberty Global to have equal ownership in the JV. The merged entity is expected to generate synergy, with an estimated net present value of about €3.5bn after integration costs. The entity would target a leverage ratio of 4.5–5.0x covenant EBITDA. The deal is expected to be completed by the end of 2016 and is subject to regulatory approvals and consultations with works councils.
Our view: The agreement opens up a lot of exciting opportunities for Vodafone. The JV would offer cable TV, broadband and mobile services to a combined 15 million customers. This customer base includes over 5 million mobile subscribers, 4 million video clients and 3 million broadband customers. In addition, the JV is expected to generate annual run-rate cost and capex synergies of €280m by the end of the fifth year. The existing infrastructure and IT systems of both companies would help in delivering services at low costs. Moreover, the parties have agreed to provide a suite of services to the JV. The suite includes technology-related, procurement, brand management and other support services. The JV would provide Vodafone Netherlands a significant opportunity to cater to Ziggo's existing residential and business customers. This agreement would enhance the company’s market share and presence in the Netherlands. Of late, Vodafone has been focusing on expanding its network across geographies. It has expanded its data coverage in Africa, the Middle East and Asia-Pacific through Project Spring. The project is in full swing, with the modernisation of several mobile, 3G and 4G sites. The company has already committed £19bn to the project. We are encouraged by Vodafone’s progress in different geographies and expect it to deliver long-term growth. Therefore, we maintain a Buy rating on the stock.
Economic News
UK PPI
The UK producer price index (PPI) output fell 0.1% m-o-m in January 2016, after 0.3% decline in December, the Office for National Statistics said yesterday. The markets expected a 0.2% decrease in output. On y-o-y basis, output prices decreased 1.0% in January, after a decline of 1.4% in December.
Germany ZEW survey
The Centre for European Economic Research/ZEW reported that the German economic sentiment dropped to 1.0 in February from 10.2 in January. Meanwhile, the gauge of current situation fell 7.4 points to 52.3 in February.
US empire manufacturing
The US Empire State manufacturing index for general business conditions improved to -16.64 in February 2016 from a reading of -19.37 in January, the manufacturing survey by the Federal Reserve Bank of New York revealed yesterday. Economists had expected a reading of -10.0.