Diamonds haven't lost their sparkle
Sector news points to improving rough prices and a compelling longer term outlook

The spotlight has been on Petra Diamonds as excitement grows over the auction of its 507-carat white diamond called The Cullinan Heritage. More interest has been generated than was expected for the sale of one of the biggest diamonds ever discovered. Not that long ago there were quite a few diamond stocks trading on AIM but there has been a bit of a cull as the economic downturn hit the prices paid for rough stones. Some such stocks have gone bust and others have become shells for other resource businesses. There is little surprise that the share prices of diamond companies tumbled, along with those of luxury goods manufacturers, as at the first whiff of a recession such stocks were dumped, as institutional investors moved into the more defensive sectors. In February, leading diamond producer De Beers gave a good insight into the market and forecast a difficult year amid concerns about the state of the world's economic recovery and the lack of consumer confidence. However, De Beers did report that consumer demand for diamonds is beginning to recover on the back of strength in the developing markets, such as China and India. Such sentiments were echoed at the time that Petra Diamonds' interim results were announced, when its Chairman Adonis Pouroulis, was able to highlight steadily improving rough diamond prices. Although he was cautiously optimistic for the short to medium term, Mr Pouroulis pointed out that in the longer term, the fundamentals were very positive, as commentators seemed to agree that demand is likely to outstrip supply. Certainly, De Beers sees no let up in the desire for diamonds and forecasts a tightening of the supply/demand situation with further growth for diamond jewellery from the emerging economies. It seems to be another facet of the same story, that as the populations in these countries become wealthier, they hanker for the same necessities and luxuries that people in the developed countries already enjoy.

A change of fortunes

Weak production figures and a series of exploration disappointments towards the end of last year has meant that shares in Dana Petroleum are continuing to trade below its core net asset value. Such a situation seems to have rekindled rumours of a takeover from one of its peers; as well as thoughts that the Company's gas reserves may be of interest to a utilities business in the wake of Centrica's successful £1.3bn hostile takeover of North Sea oil and gas business Venture Production in August 2009. Dana is seeking to grow through exploration and development of production in the North Sea and Egypt; and currently produces from some thirty five oil and gas fields spread across four countries. Following a series of successful discoveries by oil explorers in Africa, the oil and gas potential of this continent seems to have really attracted the attention of investors. In Africa, Dana not only has production, development and exploration interests in Egypt, but also oil and gas discoveries in offshore Mauritania and Morocco, plus additional exploration opportunities in offshore Senegal; which could give the shares a boost this year. There seems to have been a change of fortunes for 2010, as last month Dana was able to announce its second gas discovery in the West El Burullus concession in offshore Nile Delta, Egypt. In this prolific region, the Company has found two new gas fields with its first two wells and now is focusing on drilling the deeper and much bigger Bamboo structure.

Ditches engineering businesses

Southern Bear is to focus its attention on support service and the fire protection/prevention markets; as the board has made the decision to dispose of its engineering business for £1.8m, which will be used to cut debts and provide working capital. Following the successful diversification into the support services market, the engineering division increasingly looked destined for the chop, as these businesses were producing poor trading results. Nigel Wray, the Chairman, commented "The markets in which the support services businesses operate have been relatively insulated from the challenges in the wider economy. The disposal of the engineering operations will enable the Group to continue its positive progress and to ensure it remains well placed to fully capitalise on the opportunities that may arise in our core markets." After the clear out, Southern Bear is now made up of three businesses, which are BGC Limited (heating installation and gas boiler maintenance), Fenhams Limited (domestic gas central heating installation, service and maintenance) and Intumescent Protective Coatings Limited (application of fire protective coatings to steel structures). With the reorganisation completed, the board is concentrating on growing Southern Bear both organically and by acquisition. In addition, the directors plan to pay off all its bank borrowings and intend to raise further funds in the equity market to achieve this goal.

Less reliant on cash equities

The weakness of sterling has given overseas companies the chance of acquiring FTSE 100 stocks at advantageous prices and following Kraft's bid for Cadbury, commentators having been picking over the poor performers in search of the next potential target. One of the names in the frame seems the London Stock Exchange Group which operates two primary markets which are the Main Market and AIM which has now been in existence for almost fifteen years. Recently the LSE completed the acquisition of Turquoise, which will continue trading under the same name and form a partnership with major banking clients, to create a pan-European dark pool trading platform. Dark pools allow for the anonymous matching of bargains, with prices only published after the deal has been executed, but this has attracted the attention of the regulators, who are concerned about their transparency. The move to acquire Turquoise has gone down well in the City, where it is seen to be a good long term buy, but there are worries that this new trading platform might flatten earnings over the next couple of years. The consensus forecast amongst brokers is that in the year to 31 March 2010, the Company will see a 20% fall in earnings per share, to 59.71p. Growth is expected to resume in 2010/11, with a 10% improvement in the EPS to reach the 65.86p forecast. There are also concerns that the LSE is too reliant on cash equities execution and data sales, where competition is fierce. New multilateral trading facilities, such as Chi-X Europe and BATS Europe are fighting tooth and nail to gain market share. However, a series of new strategic initiatives look like they will allow the LSE to become less reliant on cash equities trading whilst reducing costs, improving efficiencies and leveraging the assets.

First deal expected shortly

Technology play Technis International develops innovative new intellectual properties by combining existing proven technologies to create something new. The team plans to make money by licensing or selling the intellectual property rights of the various products in development. The most advanced technology in the portfolio is Transcribe, which allows the user to send text messages and emails, on either a mobile phone keypad or keyboard, by voice in eleven languages and without needing to download any software. Transcribe is now substantially completed and the board are hoping to announce the first commercial deal for this product shortly. Final results showed a loss for the year of £0.85m, which was in-line with expectations, given that the period included the costs of listing. The directors made it clear that Technis is on the acquisition trial seeking private companies in the mobile, telecoms and software sector that will be happy to accept a mostly paper deal. The team are targeting businesses with either a trading history or ones that could become profitable within twelve months once provided with a limited amount of working capital. Technis came to the market with an acquisition strategy in place and certainly Chairman Bernard Hulme has plenty of experience in this field, as while CEO of Tadpole Technology, he was responsible for acquiring new technologies.

Rapid progress at gold project

Junior exploration stocks really come of age when they move into production; and Ariana Resources could begin the construction of a gold mine on its Red Rabbit Project in western Turkey as early as the first quarter of 2011. In the past nine months the speed of progress has shifted up a gear, which has been helped by putting its project into a proposed joint venture with Proccea, a local company with plenty of experience in the development of gold processing plants. Already a positive project scoping study and an environmental scoping assessment have been completed for the Kiziltepe sector of the project. The scoping study was based on a 150,000 tonne per year project with a mine life of over 5 years and projected a cash cost of between $350-400 per ounce. The current plan is to have one central pit on Arzu South, with satellite pits at Banu, Derya, Arzu North and Kepez. A revised geological model for the mineralisation at Kiziltepe has been completed, which will be used as part of the revised formal estimate, once additional drilling at two satellite veins (Banu and Deya) has been undertaken to upgrade these resources to the Indicated category. Partner Proccea has completed the preliminary designs for the processing plant; and under the terms of the deal will be funding both the feasibility study and the Environmental Impact Study.  The board is now in a position to commence both these important studies with the expectation of concluding this work in the final quarter of 2010 ahead of beginning mine and plant construction in the first quarter of 2011.

Focusing on Homeland Security

In the past there were plenty of quoted companies looking to take stakes in unquoted companies ahead of flotation; but that doesn't work in today's market where IPOs are a bit thin on the ground. Blue Star Capital was one of them, but eighteen months ago the Company smartly switched its investment strategy towards the growing homeland security industry (HSI). Changes in the boardroom included the appointment of Dr Richard Leaver, who managed The PegasusBridge Defence & Security Fund Limited, as CEO. The real leap forward came in August 2009, when the Company actually acquired this fund for £1.49m, paid in shares at 3.3p each. Final results highlighted that all the quoted non-HSI investments have now been sold. Blue Star has four HSI companies in its portfolio, which are: OmniPerception Limited (a developer of biometric software with a number of security applications), Zimiti Limited (wireless access control technology for monitoring and control of security systems.), Pedagog Limited (SIM-enabled camera technology using mobile phone networks) and Zenergy Power plc (specialist manufacturer of commercial applications for superconductive materials). Already this year, the board has been able to announce a strategic relationship with Washington-based The Chertoff Group, formed by Michael Chertoff, who used to be the Secretary of the US Department of Homeland Security, where the two partners will be looking at a variety of investment and consulting based opportunities in risk management in Europe. At the time the finals were announced, the board reported that they are seeing an increasing quality of HSI related deal-flow in the fields of detection/identification.

In's and Out's from the Bridge Hall CFD Desk

This week the market gave us a firmer footing to work from, the undertones from the debt laden nations of Greece and Spain are still overhanging the market but these have been put to one side for now. A wandering eye is being kept on any news emanating from the peripheral European nations but the market has been driven by conventional market forces for the week gone by.
As we mentioned last week the UK Banking reporting season has started and a lot of the market is looking to see better than expected figures. Royal Bank of Scotland (RBS.L) failed to disappoint announcing a net loss of £3.61 Billion versus a loss of £24.3 Billion a year earlier, Stephen Hester backed these figures up by saying the "worst in bad debt may be over" and that he believed RBS could have increased its profits by up to £1 Billion had they not lost thousands of their best performing employee’s due to the bonus restrictions placed over RBS. We await Lloyds Banking Groups results (LLOY.L) with baited breath, accordingly we have several trades on the back of this as well. HSBC (HSBC.L) will be following up Lloyds (LLOY.L) results next Monday 1st March.
Last week was finalised with us closing our BAE Systems (BA..L) position’s and we ran into the new week looking at British Airways (BAY.L) and Rolls Royce (RR..L) as a Pairs trade to start the week. British Airways obviously has its concerns with the Unite Union threatening to strike but Unite’s position seems to be deteriating and maybe the negotiating table is getting that bit nearer. The miners created options for us this week with various Long and Short positions taken for specific day trading opportunities, the market gave us good directional trading signals at points to allow us to take our view.
As mentioned above we also built some positions into Lloyds throughout the week in anticipation for their results, this strategy was also carried out for other companies announcing figures, Capita (CPI.L), Centrica (CNA.L) and RSA Insurance (RSA.L). Next week we have Finals from the Property and Building sector Persimmon (PSN.L), Taylor Wimpey (TW..L), Balfour Beatty (BBY.L), also finals from Standard Chartered (STAN.L), Cobham (COB.L) followed by Trading Statements from British Airways (BAY.L), Whitbread (WTB.L) and Easyjet (EZJ.L).
Economically next week we have UK Manufacturing PMI, UK Services PMI, US ADP Non Employment Change followed by US Unemployment Claims and US Non Farm Employment Change respectively on Thursday and Friday. These are major market drivers, positions can be taken accordingly around these and they could give specific stocks the boost they need.
There has been a significant sideways market throughout this week as traders and investors alike have been waiting to take a lead from the UK banking figures and the more punchy economic data that is due in the latter half of the week. There is plenty of volatility in the market at the moment so controlling your risk is paramount, but the trading benefits are there to take alongside the fundamental and economic news due throughout the forthcoming week.  
Happy trading for the coming week and we’ll be in touch next week with another update.  

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Featured stocks

Ariana Resources (AAU)
AIM
Share price:  3.38p
12 months high-low: 5.38p – 1.62p
Market value: £5.78m
www.arianaresources.com 

Blue Star Capital (BLU)
AIM
Share price:  3.88p
12 months high-low: 5p – 2.75p
Market value: £5.83m
www.bluestarcapital.co.uk 

Dana Petroleum (DNX)
FTSE 250
Share price:  1,122p
12 months high-low: 1,549p – 900p
Market value: £1.0bn
www.dana-petroleum.com  

London Stock Exchange  Group (LSE)
FTSE 100
Share price:  657.5p
12 months high-low:  949p – 356p
Market value: £1.8bn
www.londonstockexchange.com

Southern Bear (STBR)
AIM
Share price:  1.38p
12 months high-low: 3.13p – 1.25p
Market value: £11.37m
www.southernbeargroup.com

Technis International (TECP)
PLUS
Share price:  6.5p
12 months high-low: 8.5p – 6.5p
Market value: £3.70m
www.technis.co.uk

Directors dealings

Directors dealings can provide a useful insight
       
Director buys
Central China Goldfields  (GGG) 3 directors @ 3.077p – 3.15p
Cubus Lux (CBX) 10,800 @ 16p
Fuller Smith and Turner (FSTA) 18,112 @ 515p
Halfords Group (HFD) 10,000 @ 431p
Iomart Group (IOM) 25,000 @ 45.32p
Quadnetics Group (QDG) 40,000 @ 150p
XP Power (XPP) 20,000 @ 435p

Director sells
Albermarle & Bond Holdings (ABM) 11,000 @ 272p
BATM Advanced (BVC) 111,370 @ 41.25p
GlaxoSmithKline (GSK) 1,034 @ 1,203p
Investec (INVP) 18,750 @ 455p
Rockhopper Exploration (RKH) 3,855,296 @ 66.38p

The above list of transactions represents a selection of the directors' buys and sells reported last week

Written by Dr Michael Green - Independent analyst – DOC Investments Limited – doc@docinvest.co.uk




 

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