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HB Markets Breakfast Today including Stratex International and Senior

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The Markets

Market opening: Markets could open lower today. FTSE 100 futures were 12.5 points down at 7:00 am.

New York: Wall Street closed nearly flat, erasing early gains after Fed Chairman Ben Bernanke warned that monetary policy would not be sufficient to counteract the damage from the fiscal cliff. The Fed also replaced the current Operation Twist program with a fresh round of treasury purchases in line with expectations. The S&P 500 closed flat.

Asia: Markets traded mixed after the US Fed announced new stimulus action to spur the economy, but raised concerns over the fiscal cliff. Mounting expectations that the Bank of Japan could follow suit and implement aggressive monetary easing next week boosted sentiment. The Nikkei closed 1.7% higher, while the Hang Seng was trading 0.2% down at 7:00 am.

Continental Europe: Markets traded higher in anticipation that the US Fed would announce a new treasury purchase program. EU finance ministers moved closer to agree on financial reforms and the formation of a pan-European banking union. France’s CAC 40 closed flat, while Germany’s DAX rose 0.3%.

UK small caps: The FTSE AIM All-Share index advanced 0.1% yesterday

Today’s news

EU agrees on deal to provide ECB more powers 

Following months of negotiations, the EU member countries finally agreed on a banking union to empower the ECB with a greater supervisory role. This move would allow the bank to directly police the Eurozone’s largest banks and intervene in troubled smaller banks. The new union is expected to be operational by the end of next year.

US Fed lowers GDP and unemployment estimates

The Federal Open Market Committee (FOMC) estimates US GDP to grow 1.7-1.8% in 2012 and 2.3-3% in 2013, down from its September forecast of 1.7-2% and 2.5-3%, respectively. The unemployment rate is expected to average 7.8-7.9% in 2012 versus 8-8.2% predicted in September.

Company News

Black Mountain Resources (LON:BMZ)

Yesterday, Black Mountain Resources announced that it has staked 20 additional mining claims covering 413 acres at its Conjecture Silver Project in Idaho, after intersecting high grade silver in its 2012 exploration program. With this, the company now holds a total of 59 mining claims at the project extending over 700 acres in a prolific silver region. This new area, along with additional potential resources identified from 2012 drilling, would be evaluated for the 2013 exploration program. In terms of development at Conjecture Silver Project, the company has installed the culvert at the portal entry for the Graham Adit and has started work on the construction of a decline to cross cut and access historic working levels. Also, the company has recently secured an option over the operating Lakeview Mill, where ore from the Conjecture Silver Mine is planned to be treated once the mine recommences production in Q2 2013. The stock closed 3.1% higher yesterday.

Our view: This latest news of Black Mountain having staked 20 additional claims at the Conjecture Silver Project is an important step for the company as it looks to take the mine towards production in Q2 2013. The commencement of driving of the decline to access historic workings is also a key landmark towards this target. The company had recently confirmed high grade silver zones as well as uncovered new mineralisation structure at its Conjecture Silver Project in Idaho. Grades of up to 715 grams per tonne (g/t) silver and silver equivalent were seen from the maiden drilling activity. The block is now estimated to contain 50,000 – 60,000 tonnes at an estimated grade of 350-370 (g/t) of silver. Black Mountain is also optimistic about the potential at the Lakeview Mining District. This region has the same geological characteristics seen in the prolific Coeur d’Alene Mining District, and the high grade shallow silver intercepts of up to 1,106 grams per ton (g/t) seen in the recent drilling campaign underpins the potential of the site. We are optimistic that Black Mountain will offer compelling value to investors given its near-term production profile as well as exploration upside. We maintain a Speculative Buy rating to the stock.

Senior (LON:SNR)

Yesterday, Senior issued a trading update ahead of its financial year ending 31st December 2012. The company said that the positive trading seen in October had continued, with adjusted profit before tax matching expectations for both October and November. In its aerospace division, which contributed 64% to first-half group sales, visibility for build rates on existing aircraft programmes was solid and underlying market demand was in line with expectations. The market for large commercial aircraft remained robust. However, volumes on several of the group’s military programmes have begun to drop reflecting tightening of government budgets. In its Flexonics division, which accounts for 36% of group sales, trading has been largely unchanged from those reported in October. The company added that demand from the North American truck market was at reasonable, but at lower levels than earlier in the year. The Board continues to expect 2012 adjusted profit before tax to be in line with its previous estimates. The stock advanced 3.3% yesterday.

Our view: The large commercial aircraft market, Senior’s most important segment, is witnessing strong growth. Airbus and Boeing, which delivered a combined 841 aircraft in the first nine months of 2012, an increase of 16% y-o-y, has continued to increase their aircraft build-rates whilst continuing to report combined orders in excess of deliveries. The acquisition of GAMFG Precision in early November is seen as an excellent strategic addition to Senior’s Flexonics Division. The company is located in the US mid-west, close to both its major customers and the group’s existing Bartlett facility, providing an excellent opportunity to optimise the combined commercial and operational performance of both its businesses. Also, GAMFG’s well established presence in the off-road heavy-duty diesel engine market combined with Senior’s wider market access and financial strength is expected to drive growth. Considering the robust growth of its key commercial aircraft market, and the synergistic operations of its Flexonics division across niche strategic markets with longer-term growth prospects, we assign a Buy rating to the stock.

Stratex International (LON:STI)

Yesterday, Stratex International announced the sale of its remaining 30% stake in the Öksüt gold project in Turkey to joint-venture partner Centerra Exploration, a wholly-owned subsidiary of Centerra Gold Inc. As per the agreement, Stratex would receive up to US$40m with US$20m in cash on completion, which is subject to conversion of six exploration licences to two operation licences, expected before end of Q1 2013. Stratex would receive up to a further US$20m through a 1% Net Smelter Return (NSR) royalty. The company invested only US$1m in the project before bringing Centerra as its JV partner, resulting in a return of around 20 times its investment. The returns would be further enhanced once royalty payments are realised. The company would utilise the proceeds to advance the exploration and drilling activities in Ethiopia and Senegal (and elsewhere in West Africa), as well as explore new opportunities in Turkey. The stock rose 4.7% yesterday.

Our view: The sale of Stratex International’s 30% stake in the Öksüt project for up to US$40m, with initial cash payment of US$20m, is a very positive development for the company given the current market environment. This substantial return of investment reflects the company’s ability in monetising its exploration successes. The company can now divert the new funds to projects where it has a majority control such as Blackrock in Ethiopia and Dalafin in Senegal to drive future growth. Earlier this month, Stratex announced that it had identified a fifth priority area at its Dalafin gold licence in eastern Senegal. Geochemical sampling is being carried out at this new site, Faré, but so far values of up to a maximum of 229 parts per billion (ppb) of gold have been confirmed. The company plans to begin a massive drilling programme on the five identified target areas early next year and is confident of it yielding promising results. In Turkey, the company’s Altintepe project is expected to move into production later next year. We are optimistic the company will expand its exploration programmes in Ethiopia and Senegal and continue to build on its strong portfolio. We issue a Speculative Buy on the stock.

Economic News

UK jobless claims change

The number of people filing for unemployment claims in the UK dropped by 3,000 to 1.58 million in November, the Office for National Statistics (ONS) said yesterday. The previous month’s number was revised to show an increase of 6,000 instead of the 10,000 originally reported. Economists had forecast the claims to increase 7,000 in November. The number of people in work rose to 29.6 million, the highest since records began in 1971.

UK ILO unemployment rate

The number of people without a job in the UK held steady at 7.8% in the three months to October, in line with market expectations, the International Labor Organization said yesterday. The number of unemployed people fell 82,000 in the three months to October to 2.5 million, the lowest since March-May 2011.

US MBA mortgage applications

Applications for US home mortgages rose 6.2% in the week ended 7th December, following the preceding week’s 4.5% gain, the Mortgage Bankers Association said yesterday. The seasonally adjusted index of refinancing applications increased 8%, while the index of loan requests for home purchases, a key gauge for home sales, rose 0.7%. The refinance share of total mortgage activity rose to 84% of total applications from 82% in the preceding week.

US FOMC rate decision

The US Federal Open Market Committee (FOMC) announced yesterday that it would buy US$45bn per month in long-dated treasuries, replacing the Operation Twist expiring at the end of this year. Under the Operation Twist program, the central bank had swapped about US$45bn each month in short-term treasuries for an equal amount of long-term debt. The bond buying would be in addition to the US$40bn a month of existing mortgage-debt purchases, which began in September. The FOMC added it would most likely hold interest rates near zero, at least as long as unemployment remains above 6.5% and if inflation is projected to be no more than 2.5%.

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