The markets
Europe
The FTSE-100 finished yesterday's session at 6,136.89. The FTSE AIM All-Share index closed 0.22% higher yesterday at 717.02. Continental markets ended in the negative territory amid declines in auto and banking stocks. Investors digested the minutes of meeting of the European Central Bank and remained concerned over volatility in oil prices. Germany's DAX and France's CAC 40 dropped 1.0% and 0.9%, respectively.
Wall Street
Wall Street ended in the red due to losses in financial stocks. Weak oil prices and continued strengthening of the yen against the dollar weighed on investor sentiment. The S&P 500 fell 1.2% in yesterday's trading session.
Asia
Equities are trading mixed, as investors remained concerned over slowdown in the global economy. However, rebound in commodity prices, upbeat regional economic news and a relatively weaker yen lifted investor confidence. The Nikkei 225 added 0.5%, whereas the Hang Seng was trading 0.6% down at 7:00 am.
Oil
Yesterday, WTI and Brent oil prices decreased 1.3% and 1.0%, respectively. The spread between the two varieties stood at US$2.2 per barrel.
Headlines
WTO cuts global trade growth forecast for 2016
The World Trade Organization (WTO) downgraded its global trade growth forecast for 2016 to 2.8% from 3.9%, in line with the growth estimates for 2015 and 2014. The decline in estimates is ascribed to uncertainties surrounding the global economy. However, the agency expects global trade to rise 3.6% in 2017, led by increased demand for imported goods in Asia.
Company news
Keras Resources (LON:KRS, 1.50p) – Speculative Buy
Keras Resources, the Australian gold mining company, announced today that it has completed its first ore parcel haulage to the Paddington Mill from the Anomaly 22 deposit, located within the Grants Patch Gold Tribute lease area in Western Australia. A total of 7,548t grading 1.53g/t and containing some 372oz of gold will be processed under the toiling milling agreement with Paddington Gold, a subsidiary of Norton Goldfields. Under terms of the agreement, Paddington Gold has 42 days to pay for the agreed contained gold, as determined by truck weights and gold grades based on rigorous sample procedures at the plant, once minimum parcels of 3,000t of ore are delivered.
Our view: Keras has, in less than six months, executed the first delivery of ore under terms of the Grants Patch toil milling agreement. This represents a significant milestone for the company as it now becomes a gold producer, albeit at a small scale initially. We look forward to increasing gold production of between 20,000 and 30,000oz over the next 12 months. In the meantime, we maintain our speculative buy on the stock.
Beaufort Securities acts as corporate broker to Keras Resources plc
Sunrise Resources (LON:SRES, 0.13p) – Speculative Buy
Yesterday Sunrise published an update which summarises its strategy and planned work in 2016. The highlight is undoubtedly Sunrise's bolder move into the Nevada gold space where management notes that a "five year decline in the junior resource sector has opened up some great opportunities." Sunrise will establish a new local company and, as it has successfully done historically, generate new projects for very low cost - essentially by pegging overlooked or dropped exploration ground before advancing it at minimal cost.
Our view: Sunrise's project generator/incubator model is a tried and tested approach which has delivered. Very recently, Sunrise sold its diatomite project for $450,000 (payable in 18 months), a revenue based royalty (undisclosed %), plus annual lease payments. Sunrise had previously 'generated' the diatomite project for the minimal cost of pegging the licence area. Should the leasee develop a diatomite mine there, Sunrise will receive regular income with no further expenditure required. Looking forward, its strategic move into the Nevada gold space has potential to deliver similar or greater upside without diverging from the low cost model. Sunrise also has other interesting projects including diamonds in Australia and Pozz Ash (potential cement ingredient) in the U.S. We recommend a Speculative Buy.
Beaufort Securities acts as corporate broker to Sunrise Resources plc
Amphion Innovations (LON:AMP, 3.25p) - Speculative Buy
Amphion Innovations plc, the developer of medical, life science, and technology businesses, yesterday announced that it has reached a settlement agreement with Berkeley Research Group LLC. As had previously been reported, in December 2012 BRG (an expert consultant engaged by the Company's wholly owned subsidiary DataTern), filed for arbitration claiming US$1,142,478 million was owed to them. DataTern opposed the arbitration and vigorously contested the amount owed. In January 2015, however, the arbitrator found in favour of BRG and awarded them a total amount of US$2,090,865 million for the balance due and legal costs. The Company recorded the US$2,090,865 as a liability in its 2014 Consolidated Financial Statements and has now announced a settlement agreement with BRG for US$1,575,000 million. The payment terms are US$100,000, which was paid upon signing the settlement agreement, and further payments of US$400,000 on 30 April 2016, US$500,000 on 30 June 2016 and US$575,000 on 31 December 2016. As a consequence of this settlement, the liability has been transferred from DataTern to Amphion. Amphion intends to satisfy the BRG payment obligations through additional loan facilities.
Our view: Settling the BRG obligation and transferring the liability to Amphion will allow DataTern to obtain non-recourse litigation financing so that it may continue its patent litigation programme. This is important! DataTern Inc., a wholly-owned subsidiary of the Group, has received a favourable ruling from the U.S. District Court in Massachusetts, which denied two motions for summary judgment filed by Micro Strategy Inc. seeking dismissal of DataTern's claims on the grounds of validity and infringement. If it is now successful, Amphion considers that the value of the net income to DataTern should be substantially in excess of its carrying value, irrespective of whether it arrives in the form of negotiated once-off licence payments or some form of continuing usage royalty. Being a wholly-owned subsidiary of the Group, such a bonanza inflow (which realistically might have a negotiated value in range of US$20m plus) could then be directed either to reduce outstanding borrowings, for re-investment or even partial distribution to shareholders. Whatever, yesterday's news is a useful reminder that in addition to the exceptional net worth generated through its Motif Bio participation, long-term value is also being created within Amphion's other technology and IP ventures. Amphion appears to trade at a significant discount to the true value contained within its overall portfolio. Beaufort continues to recommend the shares as a Speculative Buy.
Caledonia Mining (LON:CMCL, 59.00p) – Speculative Buy
Yesterday Caledonia published its Q1 2016 production numbers, reporting 10,822 ounces of gold versus 9,960 ounces in the same period last year. Quarter on quarter production was down a little (4Q 2015 – 11,518 ounces) but this was according to the mine plan. Annual guidance of 50,000 ounces remains on track.
Our view: By the end of 2017, Caledonia expects to be producing gold at annual rate of approximately 70,000 ounces compared with 42,800 in 2015. This transformation is due to a development programme that includes a large new central shaft and smaller sub shaft. This sub shaft (no.6 Winze) has recently come into operation and the remaining quarters of 2016 should see the first meaningful increase in gold production. The profile is for 50,000 ounces this year, approximately 65,000 ounces in 2017 and close to 70,000 ounces in 2018. If all goes well, by 2021 production is expected to exceed 80,000 ounces. Also, over the same period All-in sustaining costs are due to decrease to circa $700/oz. The whole programme is not without execution risk but when complete Caledonia should be a highly cash generative company with a long life asset and excellent infrastructure (both underground and on surface). We recommend a Speculative Buy.
Central Asia Metals (LON:CAML, 171.0p) - Buy
Yesterday, Central Asia Metals (CAML) released its production update for Q1 2016 for the Kounrad dump leach, solvent extraction and electro-winning (SX-EW) copper recovery plant in Kazakhstan (Kounrad). Copper production at the plant increased to 3,207 tonnes from 2,350 tonnes in Q1 2015, while copper sales surged to 2,550 tonnes from 2,233 tonnes. Central Asia remains on track to meet its production guidance of 13,000–14,000 tonnes in 2016. The company has started groundwork for the Stage 2 expansion, which would enable it to leach copper from larger resources within the Western Dumps.
Our view: CAML showed a strong performance in Q1 2016, aided by increased production and sales. The increase in production is due to on schedule and below budget completion of Phase 1 of the plant at Kounrad in 2015. The company has started work on Phase 2 expansion and expects to achieve first production from the Western Dumps in H1 2017. CAML's performance has been in line with expectations. It is well placed to achieve the targeted production level for 2016. The company has reiterated its commitment to cash management and expects to generate positive cash flows from operations at Kounrad, despite unfavourable market conditions. In light of the above argument, we maintain a Buy rating on the stock.
Imperial Innovations (LON:IVO, 365.0p) - Buy
Yesterday, Imperial Innovations declared its results for the half year ended 31st January 2016. The company's net portfolio rose £27.9m to £355.1m due to an increase in investment and broad-based net gains in its unquoted portfolio. Pre-tax loss narrowed to £5.9m vis-à-vis a loss of £7.0m in H1 2015, primarily due to a £9.8m decrease in the net fair value of the quoted portfolio. Net assets at the end of the period stood at £415.9m. As of 31st January 2016, the company had cash and short-term investments of £91.6m (31st July 2015: £128.1m). Imperial invested £27.5m across 17 companies, compared with £22.4m in H1 2015. The company led three major private funding rounds for Kesios Therapeutics Limited, Inivata Limited and MISSION Therapeutics Limited. It added six new companies to the unquoted investment portfolio, with a total investment of £10.0m. Post the period, the company invested £11.4m increasing the total investment in the financial year to £38.9m. Innovations signed an agreement with UCL Technology Fund, providing formal access to IP created by UCL researchers. In addition, Imperial committed £3.3m to the new £40m Apollo Therapeutics Fund in January 2016. In February 2016, the company raised £100.0m before expenses by placing 23.5 million shares at 425p.
Our view: Imperial delivered excellent performance in H1 2016 on the financial and operational fronts. The company reported growth in its net portfolio and cut losses during the period. Imperial's portfolio companies reported technical, clinical and commercial progress. The company, in line with its strategy, increased its focus on technology companies by adding six firms from the sector. Imperial secured strategic alliances with UCL Technology Fund and Apollo Therapeutics Fund. The partnership with UCL would provide Imperial greater access to deal flow from one of the world's leading universities and provide new opportunities to apply its skills and investment capital. On the other hand, Apollo is a pioneering collaboration between AstraZeneca, GlaxoSmithKline, Johnson & Johnson and the technology transfer offices of three of the world's top universities. Moreover, Imperial has £238.6m available for investment and operations, providing it with sufficient capital to ramp up investment in its maturing portfolio and maximize opportunities from new alliances. Overall, the company is well positioned to sustain its growth momentum in the near term. Therefore, we maintain a Buy rating on the stock.
Victoria Oil & Gas (LON:VOG, 39.75p) - Speculative Buy
Yesterday, Victoria Oil & Gas (VOG) confirmed receiving approval from the Government of Cameroon for its proposed acquisition of a 75% stake in the Matanda Production Sharing Contract in the Matanda block (Cameroon) from Glencore. The remaining 25% participating interest is held by Afex Global Limited. VOG would operate Matanda through its wholly-owned subsidiary Gaz Du Cameroun Matanda. The company said the details of the work programme would be announced after a meeting of GDC Matanda, AFEX and Société Nationale des Hydrocarbures du Camerou.
Our view: Government approval for the Matanda PSC is a positive development for VOG. The Matanda block is a highly prospective area for natural gas and condensate resources; spanning 1,235 sq km. GDC Matanda would focus on Matanda's onshore areas near the existing Logbaba field to boost sales of gas reserve to existing and new markets in Cameroon. VOG expects to start work at Matanda in Q4 2016, which would initially involve an analysis of 2D and 3D seismic information. VOG recently reported strong performance in H1 2016, supported by higher revenues and improved margins due to an increase in condensate and gas sales. The company plans to expand its market beyond Cameroon and become a key energy provider in other parts of Africa. We appreciate VOG's progress and look forward to further developments. Therefore, we reiterate our Speculative Buy rating on the stock.
Watkin Jones (LON:WJG, 107.0p) - Speculative Buy
Watkin Jones plc, the leading UK developer and constructor of multi occupancy property assets with a focus on the student accommodation sector, yesterday released a pre-close trading statement for the half year ended 31 March 2016. It confirmed that during March 2016, four student accommodation developments in Glasgow, Birmingham, Bath and Sheffield, representing 1,175 beds in total were forward sold with a gross development value of £82 million. A total of 16 developments, comprising 6,395 beds, have now been forward sold, including all of the developments planned to be completed by September 2016 plus 7 of the 9 planned to be completed by September 2017. Watkin Jones has a further three developments totaling over 900 beds, under offer and in legal negotiations and a number of other planning applications have been submitted in respect of the ongoing pipeline. During March 2016, the Group's asset management subsidiary, Fresh Student Living, secured a further 536 bed scheme in Glasgow, which brings the total number of beds expected to be under management for the start of the 2016 academic year to 12,663. Management went on to confirm its progress in delivering the current development pipeline its confidence in the outlook for the full year. It also confirmed Group net cash as at 31 March 2016 in excess of £12.5 million.
Our view: Excellent progress indeed! But coming hard on the heels of Watkin's IPO, none of yesterday's news should really have been a particular surprise. What it does remind us, however, is that it is operating the right business model at the right time. This alternative asset class offers both excellent cash flow visibility and highly stable property-sector yields from operations that are well insulated from underlying economic activity. As such, it is able to pre-sell and forward-fund its projects to a long list of hungry institutional buyers – creating an ideal high return, high visibility, capital light model that is almost unique in the world of residential development. With just 6% of the UK's total full-time student population currently occupying PBSA, at a time when government legislation is limiting HMO supply and introducing higher stamp duty on buy-to-let property, the sector is expected to enjoy quite significant growth for years to come while capital growth continues to sharpen returns. Significant demand headroom in all regions, suggests little or no impact even in the unlikely event of BREXIT dissuading EU students from seeking UK education. The shares have performed reasonably well since IPO, but there is still more to go for. The Group is set to deliver double digit earnings growth (implying a 2016E P/E of 8.8x, followed by 7.7x) for the next several years, combined with a generous progressive dividend. With significant net cash in hand at IPO, management was confident enough to project a current year yield to September 2016 of over 4% (based on second-half payment only), followed by 6.2% for full year 2016/17; beyond this, surplus generation could also find its way into shareholder's pockets through specials as well. Beaufort sees good value in Watkin Jones and now formally places a price target of 125p on the shares, which it recommends to both income and growth investors.