White House denies ‘egregious’ budget accounting error


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Today’s edition features:

  • Ferrum Crescent (FCR.L)
  • Mineral & Financial Investments Limited (MAFL.L)
  • Prairie Mining (PDZ.L)
  • Premier African Minerals (PREM.L)
  • Savannah Resources (SAV.L)
  • ValiRx (VAL.L)
  • Pennon Group (PNN.L)

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FOMC Minutes point to June rate hike

"According to the FOMC minutes released overnight, the Federal Reserve is having to weigh up why inflation data isn’t higher when the jobs market, with the unemployment level in April at 4.4%, is running fairly hot. Despite some hesitation ahead of the minutes’ release, Wall Street indices closed slightly higher. Mixed corporate results left the FTSE 100 Index almost 30 points higher (0.4%) at 7514.90.A key commitment from the European Central Bank’s President, Mario Draghi, in his speech to the Bank of Spain yesterday was that the policy of asset purchases will end before interest rates begin to be raised. He obviously feels that this will be less disruptive to his stimulus programme. Recent indications of a broadly steady improvement in the health of Eurozone economies adds conviction to his views although there are still concerns about the ability of some of the regions’ banks to become profitable. Members of the ECB are to meet in the Estonian capital Tallinn in early-June to publish their latest eurozone forecasts.

Alongside yesterday’s psychological blow to China’s attempts to be accepted on the World’s financial stage in the form of the Moody’s credit downgrade, some slight encouragement may be coming towards the end of June. MSCI (the index compiler formed from the merger of Morgan Stanley and Capital International) has suggested that it may finally agree a 0.5% weighting of Mainland Chinese stocks in its Emerging Markets Index after previous rejections.

While President Trump continues on his Foreign trip, it is said that an air of almost-forgotten calm has settled on Washington. However, the Budget proposals’ combination of increased Defence spending and reduced Welfare outlay smacks of straitened times. Inevitably, much as in the case of the UK Conservative Party’s original social welfare reform strategy, strong resistance looks likely ahead of the US midterm elections in 2018 when a large proportion of Congressional seats are to be contested.

Ahead of the OPEC meeting to be held in Vienna today, the Joint Ministerial Monitoring Committee comprising six OPEC and non-OPEC nations agreed yesterday to support an extension of the current oil supply deal up into March 2018.It was agreed last year that output would be cut by up to 1.8 million barrels per day for six months. However, stock levels around the world have not fallen as quickly as hoped, partly due to rising shale gas and oil production in the US."
– Mike Franklin, Chief Investment Strategist


The FTSE-100 finished yesterday’s session 0.40% higher at 7,514.90 whilst the FTSE AIM All-Share index was up 0.19% at 987.44. In continental Europe, the CAC-40 finished down 0.13% at 5,341.34 whilst the DAX was 0.13% lower at 12,642.87.

Wall Street
In New York last night, the Dow Jones rose 0.36% to 21,012.42, the S&P-500 firmed 0.25% to 2,404.39 and the Nasdaq gained 0.4% to 6,163.02.

In Asian markets this morning, the Nikkei 225 had improved 0.37% to 19,815.33, while the Hang Seng had firmed 0.58% to 25,576.6.

In early trade today, WTI crude was up 0.76% to $51.75/bbl and Brent was up 0.8% to $54.39/bbl.


White House denies ‘egregious’ budget accounting error
The White House has denied the president’s budget proposal contains an “egregious” maths error. Former US Treasury Secretary Larry Summers pointed out the spending plan double-counts $2tr (£1.5tr). But White House budget director Mick Mulvaney told reporters: “We stand by the numbers.” Unveiled on Tuesday, the budget proposes deep cuts to welfare programmes. Mr Summers, also formerly chief economist of the World Bank, was one of the first to spot the apparent mistake.

Source: BBC News

Company news

Ferrum Crescent (FCR.L, 0.11p) – Speculative Buy
FCR, the European lead-zinc explorer, announced today that drilling has commenced on its Toral lead-zinc project in Spain. The planned 2,100m drill programme will test for shallow lead-zinc mineralisation within 150m from surface. Eleven drill holes are planned along a two-kilometre geochemical anomaly and is expected to take less than ten weeks to complete. Currently, Toral has a combined (Indicated & Inferred) resource of 8.7Mt with a weighted average grade of 10.7% (Pb + Zn).

Our view: The above drill programme will test FCR’s hypothesis that known mineralisation at depth is linked to shallow mineralised features. If proven correct, these shallow mineralised features could potentially add to the current resource base. We look forward to the drill results in the coming months. In the meantime, we maintain our Speculative Buy on the stock.

Beaufort Securities acts as a corporate broker to Ferrum Crescent plc


Mineral & Financial Investments Limited (MAFL.L, 13.38p) – Speculative Buy
Mineral & Financial Investment (MAFL), the metals and mining focused investment company, yesterday announced drill results from its Lagoa Salgada project in Portugal. The project is owned and operated by TH Crestgate, a private investment company in which MAFL holds a 49% interest. Crestgate released assay results from the third of its four-hole drill programme recently completed on the zinc-copper project located in southern Portugal, 100km from Lisbon. Hole LS ST-04 was drilled perpendicular to known mineralisation and returned mineralised intervals of 20m to 40m of between 2.6% and 4.0% Zn Eq., including 8m grading 9.08% Zn Eq. Mineralisation remains open at depth and along strike.

Our view: We are encouraged with the continuity of mineralisation both within the LS ST-04 drill hole and near the existing mineralisation which forms the basis for the historical mineral resource estimate. LS ST-04 confirms historical mineralisation both in width and at depth. Furthermore, the thick intercepts suggest the potential for large tonnage with higher-grade zones. We look forward to the assay results from the remaining drill hole which, on aggregate, could increase the current historical resource estimate of 4.5Mt. In the meantime, we maintain a Speculative Buy on the stock.

Beaufort Securities acts as a corporate broker to Mineral & Financial Investments Limited


Prairie Mining (PDZ.L, 33.00p) – Buy
Prairie Mining announced this morning that its Deposit Development Plan (DDP) for its Jan Karski coking coal mine has received approval. This is a very significant step forward towards getting the mining licence and starting construction. In Poland a mining licence requires submission of the DDP, an Environmental and Social Impact Assessment, and a spatial development plan (rezoning of land for mining use). Prairie expects both environmental consent and its spatial plan to be approved in 2H17 which presumably will coincide or be shortly followed by a 50 year Mining Concession. Other news is that 45MW of power for the mine has been agreed with the Polish power utility and engineering works have started – Prairie has engaged SAG Group to design and permit the 10km power line required.

Our view: We are pleasantly surprised by the DDP development and the progress made on all fronts at Jan Karski. But perhaps most important is the comments of regional governor of Lublin Province, Mr Krzysztof Grabczuk. He said “Not only will the new mine create thousands of new jobs, but also largely contribute to the economic development of the region. It is uncommon for a mining project to be as strongly supported by the local communities as this one is, hence it proves our understanding of the mining industry and recognition of its economic benefits. We are looking forward to seeing another profitable mine in our region, Jan Karski, build and run according to the best international standards.” Local support for a mine is critical, especially so in Europe and other developed countries. Jan Karski now appears to be moving quickly towards the mine construction stage and we recommend buying the shares.

Beaufort Securities acts as Retail Investment Advisor to Prairie Mining plc


Premier African Minerals (PREM.L, 0.60p) – Speculative Buy
Premier African Minerals, the South and Western Africa focused mineral explorer and developer, announced today an update on its RHA tungsten mine in Zimbabwe. The Company reports that the first shipment of tungsten concentrate from RHA can now commence following receipt of all necessary permits from the Zimbabwean authorities. Management can now ship wolframite (tungsten ore) concentrate from the RHA mine to Durban.

Our view: The above announcement is an important milestone for the company as it begins shipments of tungsten concentrate after its mine optimisation, refinement and development. We look forward to continuous sustained operation at RHA as well as updates on production levels and profitability. In the meantime, we maintain a Speculative Buy rating on the stock.

Beaufort Securities acts as corporate broker to Premier African Minerals plc
Beaufort Securities acts as corporate broker to ValiRx plc


Savannah Resources (SAV.L, 5.88p) – Speculative Buy
Savannah Resources, a diversified mineral exploration and development group, announced today that it has entered into an agreement to acquire a series of highly prospective lithium projects with near-term production potential in Portugal. The Company is acquiring a 75% interest in four project areas covering 1,018km2 for consideration of A$1m (£0.58m) plus 20M ordinary shares of Savannah. Additional milestone based consideration could lead to aggregate amount of A$10.1m (£5.8m) in combination of cash and shares. One of the projects, Mina do Barroso, has an approved mining plan, a 30-year mining licence and an approved Environmental Impact Assessment (EIA) which means that it could be fast-tracked into production. Historical drill results returned mineralisation near or at surface including 32m grading 1.16% Li2O (from 20m), 12m grading 1.60% Li2O (from 1m) and 16m grading 1.35% Li2O (from surface). Preliminary metallurgical test work has indicated that a high-grade (>6% Li20) and low-iron lithium concentrate can be produced.

Our view: The above announcement provides the Company with a rare opportunity to acquire an advanced lithium project in Europe. Savannah will initially focus on defining a JORC-compliant resource at Mina do Barroso to support a potential mine development. Given that the global lithium demand is expected to double by 2025 on the back of the burgeoning battery market, Savannah is looking to capitalise on the lithium market and diversify its portfolio. We look forward to further updates as the Company works to define a JORC-compliant resource at Mina do Barroso. In the meantime, we maintain a Speculative Buy rating on the stock.

Beaufort Securities acts as a corporate broker to Savannah Resources plc


ValiRx (VAL.L, 2.30p) – Speculative Buy
ValiRx, the life science company with a focus on cancer therapeutics and diagnostics for personalised medicine, yesterday announced that ValiSeek Limited (‘ValiSeek’), the joint venture between ValiRx and Tangent Reprofiling Limited (‘Tangent’), has been granted an Australian patent covering VAL401 and its use in the treatment of cancer.

Our view: This is a positive news for ValiRx. The latest patent grant means ValiSeek now has patent protection for VAL401 in New Zealand, Australia and the United States, while there are further patents pending across the rest of the world. VAL401, currently in Phase II trials, is a re-formulation of the generic anti-psychotic drug, Risperidone, in an orally-administered format, which has demonstrated anti-cancer properties in pre-clinical trials. Phase II trials are expected to complete by the end of 2017, and subsequent analysis of the data will define the clinical activity of VAL401, its effect on patient quality of life, as well as pharmacokinetic in non-small cell lung cancer (NSCLC) patients. According to GBI Research, NSCLC market is expected to grow at CAGR of +6.6% during 2013 to 2020, with a value of US$7.9bn in 2020 across the leading 8 developed nations. The Group operates a low-risk, high return model where comparisons with peer groups with similar clinical portfolios, or early stage partnership deals with big pharma seeking entrance into such therapeutic areas, suggests a significant valuation gap. ValiRx shares presently recognise none of the value created over the past 18 months, nor the depth of its therapeutic pipeline. While it is understandable that the market remains concerned regarding the Group’s prospective funding needs, it should also recognise that a potentially near-term Big Pharma development collaboration for either VAL201 or VAL401 would likely be at a multiple of the Group’s current capitalisation. Beaufort reiterates its Speculative Buy rating on the Shares with a price target of 6.5p.

Beaufort Securities acts as corporate broker to ValiRx plc


Pennon Group (PNN.L, 919.50p) – Buy
Pennon Group, one of the largest environmental infrastructure groups in the UK for water and waste water services, yesterday announced its results for the 12 months ended 31 March 2017 (‘FY2017’). During the period, on an underlying basis, revenue advanced by +0.1% to £1,353.1m, EBITDA rose +8.4% to £486.0m (adjusted EBITDA +7.4% to £546.2m), operating profit grew +16.3% to £304.6m and pre-tax profit climb +18.3% to £250.0m, against the comparative period (FY2016). Underlying earnings per share consequently jumped by +19.0% to 47.0p. Including the non-underlying items of £39.5m (FY2016: £5.0) comprised of shared services restructuring and derivatives, statutory pre-tax profit rose +2.05 to £210.5m, leading to statutory earnings per share pf 39.8p, up +7.6%. Operational cash inflows improved to £456m (FY2016: £418m) and net debt at the period end rose by £181m to £2,665m. The Group’s period end cash and committed facilities are £1,383m (FY2016: £1,707m), includes cash and deposits of £598m and undrawn facilities of £785m. Looking down the key performance indicator (KPI), the Group’s Water business achieved Return on Regulatory Equity (‘RORE’) of 12.6% during the year, comprised of; 6.0% Base Return, 3.2% (£73m) total expenditure (‘Totex’) outperformance, 0.3% Outcome Delivery Incentives (‘ODI’) outperformance (£3.6m net reward) and 3.1% financing outperformance. Viridor business had 8 operational Energy Recovery Facilities (‘ERFs’) with 4 currently under construction with addition of Avonmouth during the period. Pennon Group’s CEO, Chris Loughlin, commented “We believe Pennon is well positioned now and for the future and our performance underpins our long established sector-leading 10 year dividend policy of 4% growth per annum above RPI inflation out to 2020”. The Group declared a final dividend of 24.87p per share, bringing full year dividend to 35.96p, up +7.1%, to be paid on 1 September 2017.

Our view: Pennon delivered strong performance in the FY2017. Both businesses traded well with underlying pre-tax profit growth of +18.3% derived from increased tariff (price), strong customer demand and cost savings from South West Water business (c.41.4% of revenue), together with growth at Viridor business (c.58.6% of revenue) driven by the ERFs delivering EBITDA of £107m against guidance of £100m. Operationally, the Group delivered excellent 12.6% RORE during the year (FY2016: 11.7%). The Group added another £73m of Totex savings during FY2017, taking total cumulative savings since K6 capital programme (2015-2020) to date to £129m. Customer ODI reward of £3.6m (£5.5m cumulatively) was delivered as significant improvement was achieved in quality of bathing water, water restrictions with interruptions to supply and leakage. Financing cost remain lowest in the sector at 3.1%. ODI is a regulatory condition under which companies are incentivised to outperform the permitted regulatory return. Any outperformance in ODIs along with Totex and financing will translate into RORE, a key indicator of the underlying performance of the regulated business. The Group is well-positioned to maintain sector-leading RORE to sustain strong position for its South West Water business, while Viridor business continue to be a growth driver driven by strong ERFs portfolio with Glasgow on track for final commissioning in late 2017. The Group has also completed a Shared Services Review recently, which should result in an increase in total Group cost savings of c.£17m per annum from 2019, of which, £9m are already secured. Given Pennon maintains sector-leading dividend policy of at least +4% growth per annum above RPI inflation to 2020, its Shares are valued at FY2018E P/E multiples of 20.2x with dividend yields of 4.3%. In light of the Group’s progress, Beaufort retains its Buy rating on the Shares. Pennon remains top pick in the sector.


To read Beaufort’s full research archive click here

Compiled by:
Barry Gibb, Kazunaga Senga, Sheldon Modeland, Charles Long & Ben Maitland
(t) +44 (0) 207 382 8384
(e) [email protected]

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During the three months to end-April 2017, the number of stocks on which Beaufort Securities published recommendations was 216, and the recommendations were as follows: Buy – 73; Speculative Buy – 118; Hold – 22; Sell – 3.

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