The Markets
Market opening: The FTSE-100 is expected to start this morning's session fairly flat.
New York: Wall Street ended in the red after three consecutive sessions of gains. Oil prices remained under pressure as the Energy Information Administration reported a rise in US oil inventories. Moreover, weak corporate earnings affected investor sentiment. The S&P 500 declined 0.5%, dragged down by the energy sector.
Asia: Equities are trading lower, as investors remain concerned over the health of the global economy and tumbling oil prices. The Nikkei 225 declined 1.4%, as a stronger yen exerted pressure on export-driven stocks. The Hang Seng was trading 0.4% lower at 7:00 am.
Continental Europe: Markets ended in the green amid a volatile trading session yesterday. Oil price volatility weighed on investors’ minds. However, positive corporate earnings boosted investor confidence. France’s CAC 40 and Germany’s DAX rose 0.9% and 0.2%, respectively.
Crude Oil: Yesterday, WTI price increased 0.4%, while Brent price fell 0.6%. The spread between the two varieties stood at US$3.5 per barrel.
UK small caps: The FTSE AIM All-Share index closed 0.68% higher yesterday at 682.54.
Today's news
OECD cuts global growth forecast for 2016
The Organization for Economic Co-operation and Development (OECD) has downgraded the global forecast for 2016 and 2017 to 3% and 3.3% from the earlier estimates of 3.3% and 3.6%, respectively. Moreover, the OECD has cut growth forecasts for major economies, including the Eurozone, the UK and the US. The organisation has urged world leaders to urgently adopt a collective policy to accelerate growth and reduce financial risks.
Company News
Ortac Resources (LON:OTC, 0.03p) - Speculative Buy
Ortac Resources, the diversified mineral exploration and mine development company, announced on 17 February 2016 an update on its exploration partner Andiamo Exploration, in which it holds a 25% equity interest. Andiamo holds a 253km2 exploration licence (Haykota) in Eritrea and has completed a 2,000m second round drill programme. Drilling focused on the Hoba prospect in the northern part of the Haykota licence and confirmed the presence of a volcanogenic massive sulphide (VMS) deposit. The best intercepts returned average grades between 0.8 and 1.1% Cu over 8.5 to 21.9m intersections. Andiamo also announced a maiden JORC resource (Indicated and Inferred) of 0.9Mt with an weighted average grade of 2.79g/t Au and 5.3Mt grading 0.41% Cu (weighted average) for its Yacob Dewar deposit in the southern part of the Haykota licence.
Our view: We are encouraged with Adiamo latest drill results and its maiden JORC resource within the Haykota licence. Whilst more much more exploration work is required, confirmation of a VMS type system is very encouraging and warrants additional work. Likewise, a maiden JORC resource provides a solid foundation on which to develop and expand further resources. Given its 25% equity stake in Andiamo, Ortac could benefit from continued exploration success on the Haykota licence. As such, we maintain a Speculative Buy rating on the stock.
Beaufort Securities acts as corporate broker to Ortac Resources plc
Savannah Resources (LON:SAV, 2.03p) - 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 yesterday its audited financial results for the year ended 31 December 2015. The Company reported an operating loss of £3.1m (compared with a loss of £1.9m in FY14) mainly attributable to a decrease in the valued of listed investments with an impairment expense of £1.1m and a £0.7m loss on disposal of assets. Net debt for the period totaled £0.1m compared with net cash of £1.5m in FY14. During FY15 the Company raised £1.1m in equity and £1.8m post period and as at 15 February 2016 had a cash balance of £2.0m.
Our view: Despite reporting an operating loss of £3.1m in FY15, mostly attributable to a loss on disposal of assets and impairment charges, we note that the Company has a solid cash position and a strong portfolio of assets. During the period, Savannah has made significant progress in defining high-grade Cu-Au zones within Blocks 4 and 5 in Oman and establishing a strategic partnership with Rio Tinto to develop heavy mineral sands in Mozambique. We look forward to continued development of Blocks 4 and 5 with an updated mineral resource estimate as well as feasibility studies regarding potential production of copper concentrate in 2016. In the meantime, we maintain a Speculative Buy rating on the stock.
Beaufort Securities acts as corporate broker to Savannah Resources plc
Tertiary Minerals (LON:TYM, 1.38p) - Speculative Buy
Yesterday afternoon Tertiary Minerals announced it has received the Mining Permit (Exploitation Permit) for its Storuman project in Sweden. The announcement also notes that an appeal against the permit may be lodged, up until 24 March 2016, although it is not clear whether an appeal is likely.
Our view: Storuman is Tertiary’s most advanced project with an excellent location next to a main road and 25km from a bulk rail terminal. Sweden is a good mining jurisdiction although permitting can sometimes be a challenge, so yesterday’s news is an important step forward. The next step will be environmental approval which will require local support. In a recent announcement (December 2015) Tertiary said that it has majority support from key stakeholder groups, which presumably includes groups representing at least some of the local communities. In view of the good progress, Beaufort reiterates its Speculative Buy recommendation on Tertiary Minerals.
Beaufort Securities acts as corporate broker to Tertiary Minerals plc
BAE Systems (LON:BA, 505.0p) - Buy
Yesterday, BAE Systems declared its results for the year ended 31st December 2015. During the period, sales increased 7.6% y-o-y to £17.9bn, supported by a stronger dollar. Pre-tax profit rose 23.6% to £1.1bn, resulting in an EPS of 29.0p compared with 23.4p in 2014. Net debt at the end of period stood at £1.4bn, a net increase of £390m over 2014. Cash and cash equivalents totalled £2.5bn, while the order backlog stood at £36.8bn. On the operational front, the company was selected by Boeing to develop and manufacture the next-generation digital electronic warfare system for the US Air Force's Eagle Passive Active Warning Survivability System programme. BAE was granted contracts by the Royal Navy, including an £859m Type 26 frigate demonstration contract and the full £1.3bn contract for the fifth Astute Class submarine. BAE was awarded a five-year contract by the US Army for the Enhanced Night Vision Goggle III and Family of Weapon Sights. In Saudi Arabia, BAE was granted a contract for 22 Hawk aircraft, associated ground equipment and training aids. The company initiated a £68m capital investment programme at its San Diego shipyard. The company acquired 20% interest in Reaction Engines Limited, which is working on a radical new aerospace engine concept, SABRE. BAE proposed a final dividend of 12.5p, taking the total dividend to 20.9p for 2015, 2% higher than 2014.
Our view: BAE performed strongly in 2015, with higher revenues and improved margins. The company's segments performed well, led by the Platforms & Services segment in the UK. This division benefitted from good programme execution and continuity in UK customer requirements. The UK government's initiative in July 2015 to protect defence and security expenditure also boosted business activities. The company's cyber security systems segment is gaining momentum and is set to witness increased sales. BAE was awarded several contracts in 2015 by some of the leading players in the market, including Boeing and Royal Navy. The company boasts of a significant order backlog that supports future business prospects. BAE remains committed to shareholders, as it announced an increase in dividends payable to shareholders. Meanwhile, the company is set to benefit from the Bipartisan Budget Act of 2015 signed in the US, which has raised the defence budget caps for fiscal years 2016 and 2017 by £22bn and £16bn, respectively. We believe BAE is well placed with substantial resources and funds to deliver long-term growth. Therefore, we maintain a Buy rating on the stock.
Centrica (LON:CNA, 207.40p) - Buy
Centrica, the energy and services company, yesterday announced final results for the year ended 31 December 2015. During the period, the Group has generated £2.3bn adjusted operating cash flow, up +2.4% compared to FY2014, in line with expectations. Revenue has declined by -5% to £28bn (FY2014: £29.4bn), adjusted operating profit fell by -12% to £1.5bn and adjusted profit before tax fell below consensus to £1.1bn from £1.3 in FY2014 impacted by falling wholesale oil and gas prices. The Group has written down value of its exploration and production ('E&P') and power generation assets by £2.4bn against a backdrop of weaker commodity prices. On the other hand, adjusted basic EPS were marginally ahead of the consensus decreased by -4.4% to 17.2p (FY2014: 18P) helped by lower than expected tax rate at 26% due to reduced proportion of profit from the heavily-taxed E&P business. The Group has reduced its net debt by -9% to £4.7bn in the year 2015. The Group has declared final dividend of 8.43p per share, resulting full year dividend of 12p per share (FY2014: 13.5p) in line with dividend rebase announced in Feb 2015. CEO, Ian Conn said the Group expect operating cash flow to be over £2bn in 2016 and commented "We remain confident that our plans and underlying performance momentum will allow us to more than balance cash flows and deliver at least 3-5% per annum underlying operating cash flow growth to 2020, even in the current environment, so underpinning a progressive dividend policy".
Our view: Centrica delivered a slightly better than expected FY2015 performance, despite challenging market condition triggered by falling commodity prices. The Group has made significant progress on operational as well as strategic, in terms of capital expenditure and costs. E&P capital expenditure for 2016 has been reduced to c. £500m and the Group is in position to flexibly reduce it further in next two years depending on market condition. Furthermore, the Group is on track to deliver £200m in cost saving during 2016, as a part of 5-year £750m cost efficiency programme. The Group started 2016 with confidence, balancing sources and uses of cash flow out to 2018 at current low commodity price environment of $35/bbl Brent crude, 35p/therm UK NBP gas and £35/MWh UK power prices, while projecting delivery of at least 3-5% per annum underlying operating cash flow growth to 2020. We believe Centrica is moving in the right direction with its steps taken should help it mitigate continuing difficult conditions going forward. The Competition and Markets Authority's Energy Supply review is progressing, having published preliminary findings, and the next milestone decision is due this March, followed by statutory dealing in June. Publication is expected to provide Centrica investors with further comfort regarding its long-term market position. Beaufort maintains its Buy rating on the stock.
European Metals (LON:EMH, 6.13p) - Speculative Buy
European Metals, the AIM and ASX listed exploration and development company focused on its wholly owned Cinovec lithium-tin-tungsten deposit located in the Czech Republic, announced yesterday the remaining results from its 2015 drill programme. Drill hole PSn01 intercepted 156m grading 0.46% Li2O, including 64m averaging 0.63% Li2O. These intercepts also contained enriched tin and tungsten zones including 36m grading 0.22% Sn and 20m grading 0.18% WO3. Likewise, drill hole PSn07 returned 194m grading, on aggregate, 0.32% Li2O, including 47M averaging 0.47% Li2O and also intercepted enriched Sn and WO3 zones. The two drill holes were drilled 500m apart revealing the consistency and extent of the lithium mineralisation as well as zones of enriched tin and tungsten. Management plans to initiate a second round of drilling in Q2 2016 focusing on the shallow high grade lithium zone in the northwest past of the Cinovec deposit.
Our view: We are encouraged with European Metals latest drill results which confirm the extent and consistency of mineralisation. Whilst more much more exploration work is required, we note that Cinovec is already the largest lithium resource in Europe containing 514.8Mt grading 0.43% Li2O (inferred). We note that Cinovec also has a combined tin resource estimate of 79.7Mt grading 0.23% Sn (Indicated and Inferred). Given the significant presence of by-products including tin, tungsten and potash, management estimates its costs of production to be approximately US$800/t Lithium carbonate. While this estimate is based on a scoping study completed in March 2015, we look forward to additional drill results and firming up of the cost of production estimated through feasibility studies. In the meantime, we recommend a Speculative Buy rating on the stock.
Providence Resources (PVR.L, 15.0p) - Speculative Buy
Yesterday, Providence Resources provided an update on its assets in the Celtic Sea basins, offshore southern Ireland. The company continued farm-out discussions with third parties at the Barryroe oil field, which it operates with 80% holding. Providence is currently considering a proposal from a group of contractors to drill the Barryroe well for £16m. The company confirmed substantial productivity and resource potential across the eastern portion of SEL 1/11 & southern portion of OPL 1 on assessment of the upper gas bearing C-Sand reservoir at Barryroe. The modelling work at the reservoir has indicated initial production rates of up to 30 million cubic feet per day and around 400 billion cubic feet of gas. The company has been granted a two-year lease undertaking by the Irish government for evaluating low-cost development options at the Helvick and Dunmore oil discoveries. Providence has assigned Lansdowne a 9% stake for these discoveries, where a marginal field development plan is being considered. The company also received positive results of the geochemical study from the Liassic and Carboniferous sections at the Silverback prospect. Providence would launch a farm-out process at this prospect in March 2016.
Our view: Providence has made good progress across its portfolio of assets in the Celtic Sea basins, despite the challenging operating conditions. The company continued development at the Barryroe field, with establishment of significant resource potential in the C-Sand reservoir. Substantial amount of gas was generated and good production rates were achieved at the well. In light of the existing nearby gas infrastructure and available capacity, Providence has started talks with owners of the existing infrastructure to accelerate development. Meanwhile, the work done at Helvick and Dunmore until date has shown positive results. Taking advantage of the low capital expenditure environment, the company plans to develop them into commercially large reservoirs. Providence also received two-year lease undertakings for the discoveries, which would allow it to work with Marginal Field Development Company Limited to assess possibilities for a low-cost development. Furthermore, Providence’s work at the Silverback prospect in the past 12 months turned fruitful, as it is all set to commence the farm-out process. We are buoyed by the company’s progress and await future developments from the prospects. Therefore, we maintain a Speculative Buy rating on the stock.
Victoria Oil & Gas (LON:VOG, 40.88p) - Speculative Buy
Yesterday, Victoria Oil & Gas (VOG) entered into an agreement with Glencore Exploration Cameroon Ltd and Afex Global Ltd (AFEX) on the Matanda Block, a large hydrocarbon licence in Cameroon. As per the agreement, Glencore would give its 75% participating interest in the Matanda Production Sharing Contract (PSC) to VOG, and VOG would become Matanda's operator through its 100% owned subsidiary Gaz Du Cameroun Matanda S.A. (GDC Matanda). The remaining 25% participating interest would be with APEX. VOG and its subsidiaries would take responsibility of the work programme subject to government approvals.
Our view: VOG’s acquiring interest in the Matanda Block bodes well with its expansion plans. Matanda covers an area of around 1,235 sq km and holds an estimated P50 gas-in-place volume of 1.8 trillion cubic feet and condensate-in-place of 136 million barrels. The block’s area is 60 times more than existing Logbaba concession. The deal provides VOG an opportunity to meet growing energy demand in Cameroon. GDC Matanda and AFEX would initially focus on prospects in the onshore licence area close to Logbaba area. Thereafter, the parties plan to submit a new work programme to the government of Cameroon for approval and expect to start the seismic development work in Q4 2016. VOG would also benefit from the existing Logbaba gas network infrastructure to enhance the development process of discoveries made on Matanda. Going forward, the company plans to expand business to other parts of Africa and develop as a significant energy provider. In light of the above developments, we maintain a Speculative Buy rating on the stock.
Economic News
US initial jobless claims
Initial jobless claims in the US decreased 7,000 to a seasonally adjusted 262,000 in the week ended 13th February, the Labor Department reported yesterday. Economists expected the claims to increase to 275,000. The four-week moving average fell 8,000 to 273,250 last week.
US leading index
The Leading Economic Index for the US fell 0.2% m-o-m in January 2016, following a drop of 0.3% in December, the Conference Board said yesterday. This was in line with the market expectations.