Beaufort Securities Breakfast Alert: Xtract Resources, Oxford Pharmascience, Severn Trent



The FTSE-100 finished yesterday's session 0.47% higher at 6,728.99, whilst the FTSE AIM All-Share index closed 0.85% better-off at 736.67. In continental Europe, markets ended higher, driven by gains in technology and auto stocks. Investors cheered positive corporate earnings released yesterday. Germany's DAX and France's CAC 40 increased 1.6% and 1.2%, respectively.
Wall Street
Wall Street ended in the green as better-than-expected corporate earnings boosted investor sentiment. In addition, positive US economic data fuelled buying. The S&P 500 advanced 0.4%, led by the information technology sector.
Equities are trading higher, tracking global markets. The Nikkei 225 gained 0.8% as expectations of fresh stimulus measures by the Japanese government lifted investor confidence. The Hang Seng was trading 0.8% up at 7:00 am.
Yesterday, Brent oil prices increased 1.1% to US$47.17 per barrel, while WTI prices rose 0.6% to US$44.94 per barrel.

Retail footfall in UK drops sharply in June
As per the British Retail Consortium, retail footfall in the UK fell 2.8% y-o-y in June after rising 0.3% in May, marking the sharpest decline since February 2014. The significant decline in footfall is largely due to political and economic uncertainty during the month. Moreover, heavy rains and extreme weather conditions throughout the month aided the decline.

Company news

Xtract Resources (LON:XTR, 0.0625p) – Recommendation under review
Xtract announced yesterday that it will essentially break even with the sale of its Manica gold project in Mozambique after failing to deliver the DFS (Definitive Feasibility Study) on time. While the DFS has been finalised a third party independent review of the results is currently underway with completion expected in early August. On 26 May 2016, Mineral Technologies Limited (MTI) and Nexus Capital agreed to purchase Manica for US$17.5m with a condition of a completed DFS by 30 June 2016. Given the delay of the DFS and in order to receive an initial US$2m payment from MTI and Nexus by 12 August 2016, Xtract has agreed to reduce the Total cash consideration to US$15m. The initial payment as well as yesterday's announcement regarding a draw down facility of £0.67m with Ya Global Master (YAGM) will enable Xtract to pay the remaining US$2.5m owed to Auroch relating to its acquisition of Manica in June 2015. The revised consideration could be further reduced by US$1m should Xtract fail to deliver the DFS by 31 July 2016. As Xtract expects to deliver the DFS in early August, it is continuing negotiations with MTI and Nexus for an extension to 31 August 2016. Xtract also announced that it has raised £1m thorough the placement of 1,538M new ordinary shares at a price of 0.065p. The proceeds will be used for general working capital and to refurbish the Chepica mine in Chile; installing a new crushing circuit as well as a new floatation plant to resolve metal recoveries and produce a saleable concentrate. Total capital required for the Chepica plant upgrade is US$0.5m and is expected to be completed in 60 days. During this time underground development at Chepica will continue in order to stockpile c 20,000t of ore during the refurbishment

Our view: While management has been able to restructure the transaction in order to fulfil its obligations to Auroch pursuant to the acquisition of Manica, it will result in significant shareholder dilution. That being said, management can now focus its attention on refurbishment of the Chepica mine. Although small, Chepica has the potential to produce c 12,000oz of gold equivalent per annum and offers mine flexibility given the numerous mineralised zones in the area. Given yesterday's announcement, we place our recommendation and target price under review.
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Beaufort Securities acts as a corporate broker to Xtract Resources PLC

Oxford Pharmascience (LON:OXP, 3.25p) – Hold
Oxford Pharmascience yesterday provided update saying its commercialisation efforts for its OXPzero Ibuprofen and Naproxen compounds to several global OTC (over-the-counter) pharmaceutical companies was not successful. Oxford Pharmascience redevelops medicines to make them better, safer and easier to take and its OXPzero technology platform aims to mask the bitter taste and irritation of non-steroidal anti-inflammatory drugs ('NSAIDs') and to provide reduced risk of gastrointestinal ('GI') side effects. While the discussion has confirmed that OXPzero technology, particularly its GI safety profile would be valuable, OTC companies demanded Oxford Pharmascience to further develop its assets to have more clarity on the regulatory pathways for OTC product approval, before committing to a partnership agreement on either asset or on the platform. Discussions, however, on the taste-masking applications of the technology is ongoing. The Company sees opportunities in taste masking paracetamol based formulations such as pain & fever and cough & cold remedies. The Company is now considering, with input from external advisers, its next steps in terms of development and regulatory work and will make further announcements on these processes as appropriate.

Our view: The announcement was rather shocking. The result reminded us that big pharma, especially those providing OTC medicines, are extremely difficult to please. The feedback from the targeted OTC companies requesting Oxford Pharmascience to further develop its assets for more clarity on regulatory product approval pathways, suggests the platform licence deal is now extended to its longer-term vision. Resignation from its NED, Anand Sharma, ex- Reckitt Benckiser, who only been appointed back at end-February 2016, further undermines confidence. Commercialisation for OXPzero taste masking technology will now clearly take longer. Beaufort regarded reduced GI side effects as most significant benefit of the OXPzero technology and in the absence of any near-term excitement, we downgrade the shares from Speculative Buy to Hold. More positively, the Company remain cash rich as at 30 June 2016 with c.£22.1m (before Research and Development tax credit of £0.74m) in the bank, which enable management to seek further development potential. Considering its target market for Ibuprofen and Naproxen with annual sales of over US$5bn (ref. Evaluate Pharma, at Manufacturers' selling prices), Beaufort will continue to monitor Oxford Pharmascience's progress.
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Severn Trent (LON:SVT, 2,459.0p) - Buy
Severn Trent released a trading update for the period from 1st April 2016 to 19th July 2016. In the Water Plus joint venture (JV) with United Utilities, the company progressed well. The deal was completed on 1st June 2016 following approval from Competition and Markets Authority on 3rd May 2016. Severn Trent indicated that for the full-year 2016/17, the results would include two months of discontinued operations for non-household retail operations and 10 months of the company's 50% share of the JV. In addition to the news related to the JV, there has been no major change in Severn Trent's performance or outlook for the year. The company would announce its results for the half year ending 30th September 2016 on 24th November 2016.

Our view: Severn Trent's performance for the period from 1st April 2016 to 19th July 2016 has been in line with its expectations and previous guidance. The company continued to focus on improving customer service and operational and financial performance. The company is progressing well to deliver targeted efficiency savings in the second year of the AMP6 regulatory period. The completion of the formation of JV (Water Plus) with United Utilities is a positive development. The JV would combine the complementary skills of both companies across sales, customer service, business strategy and credit management to deliver an attractive proposition for large and small business customers across England and Scotland. The company plans to invest for enhancing the customer experience. We are buoyed by Severn Trent's progress and expect it to continue its growth momentum in the current year. Therefore, we maintain a Buy rating on the stock.
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Economic news
UK claimant count rate

The claimant-count rate in the UK remained at 2.2% in June, in line with the market expectations.
US MBA mortgage applications
US home mortgage applications, including both refinancing and home purchase, dropped 1.3% in the week ended 15th July, after a 7.2% rise in the preceding week, the Mortgage Bankers Association said yesterday.
Eurozone consumer confidence
The gauge of Eurozone consumer confidence dropped to -7.9 in July from -7.2 in June, the European Commission stated yesterday.

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