Today's edition features:
• Harvest Minerals (LON:HMI)
• Hummingbird Resources (LON:HUM)
• Obtala Limited (LON:OBT)
• Thor Mining (LON:THR)
"Having posted mixed performances on the final trading day of H1'2017, equities started H2 in a better mood with asset managers allocating fresh cash inflows to market. European equities made a reasonable start but then trod water until mid-afternoon when the US Institute of Supply Management released its June report. Showing a surprising acceleration in US manufacturing growth, June's PMI climbed to 57.8, well ahead of the consensus expectation of 55.3, as the panel reported orders, production, employment, backlog and exports all expanding. This spurred convincing gains amongst the broadly-based S&P-500 and Dow Jones Industrial indices during their shortened pre-holiday session, dragging their European counterparts sharply up behind them. Enthusiasm was not dampened by a separate report from the Commerce Department which confirmed unchanged Construction Spending for May, slightly below expectations, as public-sector works picked-up the slack left by slowing in private spending. Rising Crude Oil prices pushed the quoted sector higher, taking the Philadelphia Oil Service Index up by 3.3 %, with the US Rig Count reportedly declined by 2 last week. Scope to ride much further on this story, however, is limited given that a total of 756 operational units is still more than twice the count of this time last year and Reuters reporting OPEC's own oil output has risen recently to a 2017 high of 280k bbl/day, despite having agreed production cuts in place. Financials and Trucking also met good buying. After notching up an exception performance over the past six months, however, the tech-heavy Nasdaq closed in the red yesterday evening, giving back an early gain as traders pondered on the sector's heady valuations along with questions as to whether the EU's record €2.4bn fine imposed on Google could indeed spark a new flurry of international litigation on the index's social media giants. The US$ edged up from the nine-month lows plumbed last week, while benchmark 10-year Treasury yields hit 2.348%, its highest closing since mid-May, while shorter 2-year paper rose to an 8-year peak. Australia was Asia's outstanding performer this morning, as the oil and financials-weighted S&P/ASX 200 picked up on similar sector moves in European and the US. Most of the region's other major equity markets, however, closed lower on the day. South Korea's KOSPI index suffered a modest sell-off following its neighbour, North Korea, launching another ballistic missile. The news also pressured the Yen, resulting in early gains for the Nikkei which gave way to selling before the close, while the Hang Seng was the session's biggest loser and the Shanghai Composite also remained in the red throughout trading. European stocks broke a four-day losing streak on Monday. Initially celebrating stronger than expected manufacturing data from China, which provided obvious support for the Miners, but Oils and Banks also met good interest. Enthusiasm picked up sharply, however, in the afternoon with the US surge reflecting across all bourses. The CAC-40, for example, closed a remarkable 1.47% up, with the Xetra Dax was not far behind at 1.22%. Having ended on Friday at a more-than two-month low and finishing the quarter down 0.5%, the STOXX 600 put on 1.06% on good volumes. Despite its heavy weighting in commodities and financials, the FTSE-100 trailed behind its Continental peers to put on just 0.88% after receiving news that its Manufacturing PMI slid to a three-month low of 54.3 in June, well below consensus expectation of 56.0 and down from 56.3 in May. Indeed, reflecting the currently downbeat mood, forecasts released first thing yesterday by the Centre for Economics & Business Research confirmed it now sees the UK economy growing by just 1.3% in 2017, a sharp cut from downward revision from its earlier projection of 1.7%; its forecast for 2018 has also been revised down to 1.2% from 1.6% in the face of "newly created political uncertainty", implying reduced business investment because and weaker consumer spending as Brexit negotiations continue. UK macro data due today includes June PMI Construction, its Inflation Report Hearings and BRC Shop Price Index. The EU provides May's Producer Price Index and the ECB's Peter Praet is due to make a speech; the US is limited to releasing its API Weekly Crude Oil Stock figures. UK corporates due to release earnings or trading updates include Sainsbury (SBRY.L), St. Modwen Properties (SMP.L), Costain Group (COST.L), Johnson Service Group (JSG.L) and Imagination Technologies (IMG.L). Picking up on the mood during Asian trading, as concerns mount regarding the possibility of North Korea receiving a much stronger warning from President Trump ahead of the G-20 summit which starts later this week, London is anticipating a soft opening this morning. The FTSE-100 is seen down 25-30 points in early trading."
- Barry Gibb, Research Analyst
Markets
Europe
The FTSE-100 finished yesterday's session 0.88% higher at 7,377.09 whilst the FTSE AIM All-Share index was down 0.40% at 962.09. In continental Europe, the CAC-40 finished up 1.47% at 5,195.72 whilst the DAX finished 1.22% higher at 12,475.31.
Wall Street
In New York last night, Wall Street was mainly higher ahead of Independence Day today when the stock markets will be closed for the day. The Dow Jones finished 0.61% higher at 21,479.30, the S&P-500 was 0.5% higher at 2,436 but the tech heavy Nasdaq was 0.2% lower at 6,116.
Asia
In Asian markets this morning, the Nikkei 225 was down 0.26% to 20,00.40, while the Hang Seng was 1.47% lower at 25,404.27.
Oil
In early trade today, WTI crude was down 0.47% to $46.85/bbl and Brent was down 0.48% to $49.44/bbl.
Headlines
Senior MPs urge post-Brexit EU drug regulation deal
The UK will continue to co-operate with the European Union on medicine testing after it leaves the bloc, two senior ministers have suggested. Business Secretary Greg Clark and Health Secretary Jeremy Hunt said such a deal would be "in the interests of public health and safety". "The UK would like to find a way to continue to collaborate with the EU," they wrote in a Financial Times letter. There are fears Brexit may cause delays in UK patients getting new drugs. Currently the London-based European Medicines Agency (EMA) authorises drugs for use across the EU, including the UK. However, it is expected to move out of the UK after Brexit, raising uncertainty over whether the UK will need to develop its own separate drug approval system. Industry experts have warned that if this happens pharmaceutical firms could be slower to seek permission for their drugs to be used in just one country, focusing instead on getting their drugs approved for larger, more lucrative markets. The UK pharmaceuticals trade association has also warned that Brexit could undermine future investment, research and jobs in the country.
Source: BBC News
Company news
Harvest Minerals (LON:HMI, 10.62p) - Speculative Buy
Harvest published a positive agronomic study update for the KPfertil product from its Arapua project in Brazil. There are three main categories of testing: chemical properties, kinetics (incubation and leaching) and efficiency (how well the plants use nutrients (i.e. growth trials). The results from various 'incubation' tests show KPfertil performing better than the Control samples for potassium, phosphate, magnesium & calcium, pH and silica. However, KPfertil is a slow release product and incubation measures how quickly the nutrients enter the soil. KPfertil takes longer than traditional KCL (potash) or phosphate fertilisers for its nutrients to enter the soil but on the flip side leaches away slowly. The leach results are due shortly and we expect KPfertil's nutrient content to leach away much more slowly than KCL or phosphate. The 'efficiency' / growth results of KPfertil look impressive. Harvest has published photos showing excellent performance of rice plants when KPfertil was applied compared with the Control sample.
Our View: KPfertil is a unique product and will be integrated into fertiliser regimes in a bespoke way. Important advantages are multi nutrient, slow release, re conditioning (improves pH), low salt (versus KCL potash) and price. We look forward to the leach results (expected shortly) and full results from the crop trials (the photos show the effect but the plants and soil will be analysed). Harvest will submit all the results for Remineralizer certification during 3Q17 and we anticipate it receiving certification in 4Q or 1Q18. Meanwhile Harvest is still targeting first sales in 3Q this year, although we are expecting a gradual increase in demand as farmers trial the material with small orders before committing to large scale use of a new product. This is a unique story for AIM and this trial, certification and marketing process is a little slow and complicated. However Harvest and KPfertil are progressing well and we expect a successful outcome. We maintain our Speculative Buy recommendation.
Beaufort Securities Limited acts as corporate broker to Harvest Minerals plc
Hummingbird Resources (LON:HUM, 26.38p) – Speculative Buy
Hummingbird Resources, the gold exploration and development company with assets in Mali and Liberia, announced today that the US$60m senior loan facility with Coris Bank International Group has now been fully drawn down. The debt facility has a four-year term, carries a 9% interest, a 12-month capital repayment deferral and has no royalty or hedging. This facility is being used to fund the ongoing construction of the Yanfolila gold mine in Mali, which remains on schedule and on budget with the first gold pour targeted by end of 2017. Hummingbird's cash position now stands US$70m.
Our View: The above announcement provides Hummingbird with greater flexibility and sufficient working capital as it continues with the construction phase at Yanfolila. The first instalment of c US$25m was completed in April while the remaining c US$35m was expected to be drawn down over a five-month period. The accelerated draw-down of the remaining debt facility reflects the confidence Coris has with the project and Hummingbird's management. We continue to be encouraged with the progress being made at Yanfolila and look forward to further development updates as the project moves towards first production by year end. In the meantime, we maintain a Speculative Buy rating on the stock.
Beaufort Securities acts as a corporate broker to Hummingbird Resources plc
Obtala Limited (LON:OBT, 17.75p) – Speculative Buy
Obtala yesterday confirmed that its 75%-owned forestry subsidiary, Argento, had acquired 100% of the share capital of WoodBois as of June 30, 2017 for a total consideration of US$14.6 million (approximately £11.2 million). Paul Dolan (CEO) and Warren Deats (COO) have also been appointed to the WoodBois board; WoodBois' founder directors, Zahid Abbas and Jacob Hansen, each of whom are former DLH Group executives with over 20 years' experience in African timber sales and procurement, will remain with Obtala for a minimum of 5 years, while Hadi Ghossein, a Gabonese citizen who manages operations in Gabon, has committed for a minimum of 3 years. Obtala has acquired the entire issued share capital of WoodBois, for a consideration satisfied by a mixture of cash and new Obtala ordinary shares payable in three tranches:
Tranche 1: Initial cash consideration of US$3 million (approximately £2.30 million) and the issue of 15,641,499 new Obtala ordinary shares within five business days of completion of the due diligence period on June 30 2017; the consideration shares to be issued as part of this Tranche 1 consideration, with a value at 17.63p per share of £2.76 million (approximately US$3.59m million), are subject to a 24 month lock up period, with any disposal subject to Obtala's consent and orderly market provisions. They represent approximately 5.63% Obtala's current issued ordinary share capital;
Tranche 2: Further cash consideration of US$3 million (approximately £2.30 million) on the earlier of 30 September 2017 and 120 days after Completion; and
Tranche 3: Deferred cash consideration of US$ 5 million (approximately £3.84 million) payable over five years in equal quarterly payments commencing 30 September 2017.
Founded in 2004, WoodBois is engaged in the global trading of sawn timber sourced from 100s of exclusive timber producers throughout Africa. Since Obtala announced the acquisition on 24 May 2017, WoodBois has received approval for a forest management plan for a 20-year concession covering a net area of 96,851 hectares near Mouila, Gabon, 82,703 hectares of which is dense forest. Each year WoodBois may apply to harvest an area of 5,000 hectares, and each 5,000-hectare area may remain open for harvesting for up to three years with no more than three areas in any concession opened for harvesting at any one time for the production of sawn timber planks and veneer. For this, Obtala commissioned a third-party inventory assessment to determine the potential annual cut of first and second grade quality, concluding an annual potential first and second grade cut of 8,201,091m³ of Okoume, 527,691m³ of Okan, 153,662m³ of Azobe, 926,940m³ and 186,925m³ of Ovengkol was found. Prudently this assumed just some 3,000 hectares of each 5,000-hectare area is readily accessible productive land.
Our View: WoodBois represents a transformative acquisition for Obtala. As well as introducing a huge new African premium timber resource into the enlarged Obtala, it addresses the single problem that most observers consider to be the ambitious management's greatest barrier to success – access to a global distribution network. WoodBois' trading business, historically the main contributor to annual revenues (of around US$15m, or around 1x its lowly deferred acquisition price) is headquartered in Copenhagen, where it conducts the sale of wood primarily sourced in Africa to a diverse network of global buyers. The fact that it is expected to be immediately cash accretive and locks in existing management is of course a big positive, but the real benefit for the Group is that the acquisition dispenses of the years it would otherwise have needed to spend gaining a strong reputation amongst international distributors that it can and will consistently supply wood of the right quality, grade and volume FOB on a timely basis. Addressing the problem in such a manner is possibly the clearest demonstration of the management's comprehensive understanding of the challenges the Group faces, along with the fact that it is also capable of accessing the necessary financial resource to make it happen. Obtala intends to immediately upscale this business, which has seen its available capital reduced as WoodBois invested in production assets in Gabon; as a first step it has already increased WoodBois credit facility, enabling procurement of greater volumes of wood from African suppliers (and at higher margin via 'pre-financing' production) in 2H 2017. The second step will be to invest some US$400,000 to compete the construction of WoodBois' veneer factory in Mouila. This includes the purchase of additional equipment required to address identified bottlenecks and achieve an annual production target of 18,000m³ of veneer which is expected to be completed by the end of 2017. Importantly, Obtala's due diligence team verified substantially all the assumptions upon which the valuation was based, finding on numerous occasions that the WoodBois team had been prudent. A great deal of trust has consequentially developed between the Obtala and WoodBois management teams, which adds to the Board's confidence in its ability to execute a business plan for which timing looks first class! Global timber demand is escalating and prices look set to spike. World Bank forecasts, for example, suggest global demand for timber will quadruple by 2050, which happens to coincide with a number of powerful government bodies armed with national and international policy covering Forest Law Enforcement, Governance and Trade regulation gaining teeth across six Continents; these now seek to coordinate their activities with a view to tightening enforcement and clamping down on illegal logging, which various reports suggest may have accounted for up to half of global supply over the past decade. Nobody doubts, of course, that effective international enforcement will take many years to implement. Nevertheless, the proposed gradual squeeze-out of illegal operations by such agencies offers potential to generate a 'super-cycle' or price bubble, particularly in premium hardwoods, in what has otherwise become a finely balanced market. Sure there are risks with all agricultural investments in Third World locations, but modelling prospective cash flows of what is essentially an elementary business plan, suggests fair value is a multiple of the current share price, even after having applied punitive discount rates. Beaufort reiterates its Speculative Buy rating on the Shares.
Beaufort Securities Limited acts as corporate broker to Obtala Limited
Thor Mining (LON:THR, 0.95p) – Speculative Buy
Thor Mining, the exploration and development company with assets in Australia and USA, announced today that it has been granted an additional Exploration Licence along strike from the Molyhil tungsten deposit in Australia. The application was lodged on 30 January 2017 following the 2016 dill campaign that identified several magnetite skarns close to Molyhil. The new exploration licence is continuous with the Gap Track prospect and comprises 68km2 of highly prospective ground for additional skarn-type tungsten mineralisation.
Our View: The above announcement is positive news for Thor and development of the Molyhil project. We note that there is considerable exploration upside on the extension of the Gap Track prospect which could potentially have a positive impact on the economics of the proposed Molyhil mine. We look forward to further updates on Molyhil as well as the Pilot Mountain project in Nevada. In the meantime, we maintain a Speculative Buy rating on the stock.
Beaufort Securities acts as a corporate broker to Thor Mining PLC