Beaufort Securities Breakfast Alert: Harvest Minerals, Karelian Diamond Resources, ValiRx, G4S, Interserve, IP Group, Parkmead Group



The FTSE-100 finished yesterday's session 0.22% higher at 6,866.42, whilst the FTSE AIM All-Share index closed 0.02% worse-off at 776.94. In continental Europe, markets ended in the negative territory, pulled down by losses in energy stocks amid decline in oil prices. Additionally, weak corporate earnings releases dampened investor sentiment. Germany's DAX and France's CAC 40 shed 0.4% each.
Wall Street
Wall Street ended in the red as oil prices slumped after the Energy Information Administration's weekly data showed inventories rose more than expected. Investors digested quarterly earnings releases of retail companies. The S&P 500 fell 0.3%, with the energy sector losing the most.
Equities are trading higher, reversing the global trend of losses. Investors await economic data release from China later this week. The Nikkei 225 remained closed for the Mountain Day public holiday. The Hang Seng was trading 0.8% up at 7:00 am.
Yesterday, WTI prices decreased 2.5% to US$41.71 per barrel, while Brent oil prices dropped 2.1% to US$44.05 per barrel.

UK house price balance slips in July
As per the latest survey by the Royal Institution of Chartered Surveyors, UK's house price balance dropped to +5 in July from +15 in June, marking the lowest reading in 39 months. This is mainly due to uncertainty in the market after Brexit and adjustments to the latest measures announced by the Bank of England.

Company news

Harvest Minerals (LON:HMI, 8.12p) - Speculative Buy
Harvest has published highlights of a scoping study for its Arapuá fertilizer project in Minas Gerais (next to Rio de Janeiro state). Headline numbers include an NPV10 of $15m using a $50/t fertilizer sale price and upfront Capex of only $800k. The study is based on the recently published resource and envisages a 100kt operation over 7 years. It will form the basis of a trial mining operation which Harvest will build this year using existing funds (Harvest raised $3.6m in November last year). Management are in the process of appointing mining contractors, a small mine permit application is with the authorities and first production is targeted in 4Q16. Note that the 883kt resource (published July 26) is from only 3% of the known mineralisation on Harvest's licences. So if the project develops into a profitable operation, Harvest would drill-out a much larger resource and produce more tonnes for longer. The ultimate size of the operation will depend on the market demand for Arapuá's product rather than the resource.

Our view: The scoping study numbers demonstrate that Arapuá has potential to be very profitable for Harvest's shareholders. Unfortunately, the product's sale price is as yet unknown and as a result the consultants used a range from $15/t to $120/t versus a production cost of $7.3/t. We would expect the product to sell for at least $30/t simply based on the deposits 4.2% K2O grade, with upside expected from the phosphate (3.5% P2O5), calcium and magnesium content. First, Harvest must get approval to market the product from the Brazilian ministry of agriculture, then it can start work on establishing a market and sale price. Very usefully, the Arapuá project is right in the middle of one of Brazil's largest agricultural regions.

Beaufort Securities acts as corporate broker to Harvest Minerals plc

Karelian Diamond Resources (LON:KDR, 0.72p) – Speculative Buy
Karelian Diamond Resources, the diamond exploration company focused on Finland, announced yesterday that it has received technical material relating to the diamondiferous Lahtojoki kimberlite pipe. Karelian acquired the project and related diamond mining permit from A & G Mining Oy on 19 April 2016. The Lahtojoki diamond project is located in the Kuopio – Kaavi region of Finland and has excellent infrastructure including good road access and power distribution. The Lahtojoki kimberlite pipe is diamondiferous and management believes it has the potential to become a profitable, low strip ratio open-pit diamond mine.

Our view: The diamondiferous Lahtojoki pipe and the associated mining licence are positive catalysts for Karelian as it continues to develop its diamond plays in Finland. Whilst much more work is required for development of the Lahtojoki project we are encouraged with the potential diamond content. Previous owners processed a mini-bulk sample comprising 23.3tons that returned an average diamond content of 30.6carats/100t and a bulk sample of 1,000t returned an average content of 5.7carats/100t. Although there is large discrepancy in diamond content at Lahtojoki, Karelian now has a comprehensive database that will enable it to assess the project and plan a development programme moving forward. We look forward to further updates on the project, in the meantime, we reiterate a Speculative Buy on the stock.

Beaufort Securities acts as a corporate broker to Karelian Diamond Resources Plc

ValiRx (LON:VAL, 7.75p) – Speculative Buy
This morning, ValiRx Plc, the life science company, which focuses on clinical stage cancer therapeutic development, taking proprietary & novel technology for precision medicines towards commercialisation and partnering, provided an update on the clinical development of ValiSeek, the joint venture between ValiRx and Tangent Reprofiling Limited. ValiSeek has received notification of acceptance by all required Regulatory Authorities in Georgia of the protocol and associated documentation for the Phase IIb Clinical Trial of VAL401 at the chosen site in Tbilisi. This acceptance allows the Group to complete initiation of the clinical site at the Medulla Immunotherapy and Chemotherapy Clinic and allows Principle Investigator Dr Tsira Kortua to begin identifying patients to be recruited into screening. This screening process tests the patient suitability for induction into the trial protocol. The approved protocol lists 'Tumour progression-free survival' as the primary endpoint. This will record the length of time between patient screening and progression of the disease, providing a first indication of whether the treatment will be efficacious. Secondary endpoints include pharmacokinetic measurements; safety and tolerability of the drug; quality of life of the patients and overall survival, providing supporting data on efficacy and drug dosing parameters, which are key to aligning the programme with industry expectations. The protocol details the dosing and testing schedules to be carried out on each patient for six months' treatment, with a maximum of twenty patients to be fully enrolled, with recruitment staggered over a number of months to ensure patient safety.

Our view: This is an important step forward! VAL401 treatment will now proceed to late stage clinical trial for an identified, significantly unmet medical need. It follows ValiSeek's receipt of a positive opinion recommending approval of the trial protocol from the Ethics committee covering its clinical site in Tbilisi, as announced on 14 July 2016. It confirms regulatory opinion that the trial has been correctly constructed and that the process of selecting patients for dosing can begin. First results are expected to be received in the coming months. Beaufort retains its Speculative Buy recommendation of the shares.

Beaufort Securities acts as corporate broker to ValiRx plc

G4S (LON:GFS, 227.20p) - Hold
G4S declared results for the half year ended 30th June 2016 (H1 2016). At constant rates, revenue increased 5.1% y-o-y to £3.1bn in H1 2016, while at actual rates revenues rose 3.2% to £3.5bn. Profit before interest, tax and amortisation (PBITA) increased 8.2% to £199m at constant rates and 9.7% to £203m at actual rates. Pre-tax profit increased to £115m from £80m in H1 2015, resulting in an EPS of 4.5p, compared with 3.1p in H1 2015. Operating cash flow increased to £273m from £160m in H1 2015. Net debt as at 30th June 2016 stood at £1,782m (December 2015: £1,782m). Net debt/EBITDA dropped to 3.2x (December 2015: 3.3x). The company won new contracts with an annual value of £0.7bn (2015: £0.7bn) and total contract value of £1.4bn (2015: £1.4bn). G4S declared an interim dividend of 3.59p in line with H1 2015, to be paid on 14th October 2016.

Our view: G4S delivered good performance in H1 2016. The company recorded an increase in revenue and profits, as it continued to boost productivity in the business. G4S witnessed strong growth in the emerging markets, recording 8.0% increase in PBITA to £94m. The company's focus on enhancing working capital management led to strong cash flow generation, which helped in lowering debt/EBIITDA. G4S continued portfolio management as it sold seven businesses in H1 2016 and realised proceeds of £32m. However, the company's huge debt remains a big problem, which was broadly unchanged from the previous year. Moreover, following Brexit, devaluation of Sterling has inflated G4S' debt, as most of it is denominated in other currencies. In light of the company's good progress in H1 2016, management's willingness to maintain dividend and already severely punished share prices (down -35.7% year-to-date), we upgrade the rating to Hold from Sell.

Interserve (LON:IRV, 372.50p) - Buy
Interserve declared results for the half year ended 30th June 2016 (H1 2016). During the period, revenue rose 2.4% y-o-y to £1,632.9m, while headline operating profit increased 2.1% to £62.9m. The company incurred loss before tax of £33.8m, compared with pre-tax profit of £33.7m in H1 2015, due to Interserve's decision to exit the Energy from Waste sector, which resulted in £70m exceptional charges. Headline EPS increased to 31.3p from 31.0p in H1 2015. Gross operating cash flow increased to £128.3m from £19.9m in H1 2015. Net debt fell to £275.6m (FY 2015: £308.8m) and improved year-end net debt guidance to £300–320m. The company won business worth £1.9bn during the period. Interserve declared an interim dividend of 8.1p per share, 2.5% higher than H1 2015, totalling £11.8m.

Our view: Interserve's performance in H1 2016 across most divisions and regions was in line with the expectations. Underlying profits benefited from strong contribution from the Middle Eastern construction operations, while the UK support services arm performed in line with the expectations. Equipment Services continued its growth momentum, particularly in the UK and Far East, with revenue rising 5%. The company's decision to exit from the loss-making Energy from Waste business, in light of the challenges within the business and difficult outlook, was one of the key events. Meanwhile, Interserve witnessed a sharp rise in operating cash flow and reduced its debt substantially. The company won many contracts, from both new and existing customers including the Defence Infrastructure Organisation, Home Office, JLL, Renfe, East Midlands Trains, Emaar (UAE), Majid Al Futtaim Group (UAE) and Hitachi (Qatar). Interserve's outlook for the year remains unchanged despite the ongoing political and economic uncertainty following Brexit. Therefore, we maintain a Buy rating on the stock.

IP Group (LON:IPO, 173p) - Buy
IP Group, the developer of intellectual property-based businesses, has announced its half-yearly results for the six months ended 30 June 2016. Net assets excluding intangibles was £683.5m (HY15: £700.6m; FY15: £714.3m) and the adjusted loss before tax stood at £31.1m (HY15: profit of £70.1m; FY15: profit of £82.4m), excluding amortisation of intangible assets. Portfolio realisations came out at £14.5m (HY15: £0.4m; FY15: £0.6m) and net cash and deposits at 30 June 2016 were £174.7m (HY15: £219.6m; FY15: £178.8m). Fair value of portfolio recorded £525.7m (HY15: £478.2m; FY15: £552.2m) and capital provided to portfolio companies and projects amount to £12.8m (HY15: £15.1m; FY15: £75.9m). The Group's portfolio companies raised approximately £38m of new capital during the half year. Oxford Nanopore Technologies Limited, the Group's 19.6% held portfolio company, announced significant technical and commercial progress, including the launch of a number of new products and services, and delivers its first PromethION instrument.

Our view: It is pleasing to read that a number of the portfolio companies have made excellent commercial progress during the period across all four of their sectors - Healthcare, Technology, Cleantech and Biotech - although broader economic conditions have had an impact on the value of some of the AIM-quoted holdings. The Group's US business continues to develop, with the Group having signed agreements with the University of Washington and The Johns Hopkins University to explore opportunities to commercialise the universities' intellectual property. It is clear that the UK is facing a period of uncertainty following the EU referendum and ahead of the conclusion of subsequent negotiations. While in the shorter term there may be some impact on specific portfolio company financing rounds, the Board believes that the fundamentals of the business are strong and that the case for the commercialisation of science remains compelling. IP Group has partnerships with 14 of the UK's and 5 of the US's leading research universities, a portfolio worth £525.7m, a strong cash balance of £174.7m, an experienced management team and a healthy pipeline of new opportunities. This leaves the Group well positioned to respond effectively to, and capitalise on, opportunities in the second half of the year. We believe there is considerable upside in both the private holdings-valued only at the previous fund raising valuation-and the AIM listed holdings. Indeed, the largest monetary value is in Oxford Nanopore where they have portable DNA sequencing products. Their products have been the first to sequence DNA in Space, and under the sea and topically, have undertaken rapid sequencing of both the Ebola and Zika viruses. We believe the current share price presents an excellent opportunity to invest in IP Group. Buy

Parkmead Group (LON:PMG, 49.50p) - Speculative Buy
Parkmead, the UK and Netherlands focused independent oil and gas group, announced that it has doubled its stake in the Polecat and Marten oil fields in the UK Central North Sea. The Polecat and Marten fields are located in Blocks 20/3c & 20/4a within Licence P.2218. Parkmead has acquired a further 50% of Licence P.2218, and now operates the licence with 100% equity. Parkmead initially secured its first 50% interest in these blocks as part of the UK 28th Licensing Round awards, where the Group won a total of nine new oil and gas licences covering 12 offshore blocks. The Polecat and Marten fields lie approximately 20km east of the significant Buzzard field, and are located close to Parkmead's large Perth-Dolphin-Lowlander (PDL) hub project in the prolific Moray Firth area of the Central North Sea. Polecat and Marten are two sizeable existing Buzzard sandstone oil accumulations, which are jointly estimated to hold over 90 million barrels of oil in place and over 33 million barrels of contingent resources. Through this acquisition, Parkmead has increased the Group's total contingent resources by 39%, from 42.5 to 59.1 million barrels of oil equivalent. The Diever West gas field, located onshore in the Netherlands, continues to perform above expectations and gross production in July 2016 averaged 34 million cubic feet per day (approximately 5,850 barrels of oil equivalent per day). Parkmead worked closely with its joint venture partners on the fast-track development of Diever West, and the partnership successfully brought the field on-stream within just 14 months of discovery.

Our view: This is a positive update, to have doubled Parkmead's stake in the Polecat and Marten oil fields which significantly increases Parkmead's contingent oil and gas resources by some 39%. Polecat and Marten could be highly valuable to Parkmead's PDL project by contributing an additional 90 million barrels of oil in place to the already large oil and gas reserves base at PDL. It is also pleasing to note the continued outperformance of the Diever West gas field which has been producing at stable rates of around 30 million cubic feet per day since coming on-stream, significantly ahead of expectations. The profitable gas production from Diever West, and Parkmead's wider portfolio of gas fields in the Netherlands, provides important cash flow to the Group. The Group's low-cost onshore portfolio in the Netherlands produces gas from four separate fields with a very low average operating cost of just US$14 per barrel of oil equivalent. We continue to believe there is much upside in Parkmead's valuation and support management with their large shareholding in the Group. Speculative Buy

Economic news
US MBA mortgage applications

US home mortgage applications, including both refinancing and home purchase, rose 7.1% in the week ended 5th August, after a 3.5% fall in the preceding week, the Mortgage Bankers Association said yesterday

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