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Beaufort Securities Breakfast Today including Caledonia Mining, Tomco Energy, Ophir Energy, Verona Pharma

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The Markets

Market opening: Markets may open higher today. FTSE 100 futures were trading 47.5 points up at 7:00 am.

New York: Wall Street rallied, as the retailing giant Macy’s upbeat reports increased optimism about holiday shopping in the US. Consumer discretionary led S&P 500 to close 0.8% higher.

Asia: Markets cheered a robust growth data from Japan and favourable signals regarding the future of the Fed’s monetary stimulus programme. The Nikkei closed 2.1% higher, while Hang Seng was trading 0.8% up at 7:00 am.

Continental Europe: Increasing speculations over future direction of stimulus policies of the Bank of England (BoE) and the Federal Reserve led to heavy profit booking by investors. Germany’s DAX and France’s CAC 40 lost 0.2% and 0.6%, respectively.

UK small caps: Yesterday the FTSE AIM All-Share index closed 6.10 points (-0.75%) lower at 802.60. 

Today’s news

UK jobless rate likely to decline further

The BoE stated that the jobless rate was likely to reach the threshold of 7% by Q3 2015. BoE had earlier predicted it would reach the threshold only by the end of 2016.

Japan’s economy expands 0.5% in third quarter 

Japan’s gross domestic product (GDP) rose 0.5% q-o-q in Q3 2013, the flash reading released by the Cabinet Office revealed today. GDP growth was higher than the expected increase of 0.4%, but below previous quarter’s reading of 0.9%. On y-o-y basis, GDP advanced 1.9%, against market expectation of a 1.7% rise and compared to a 3.8% gain in the previous quarter.

Japan’s industrial output slows down

Final data released by the Ministry of Economy, Trade and Industry showed that Japan’s industrial production rose 1.3% m-o-m in September vis-a-vis the prior reading of 1.5%. Capacity utilisation was up 1.2% for the month.

Company News

Caledonia Mining Corporation (LON:CMCL)

Yesterday, Caledonia Mining announced its operating and financial results for Q3 2013. Gold production stood at 12,042 ounces (oz) versus 11,588 oz in Q2 2013. The increase in production was mainly attributable to improvement in the realised grade to 4.03 grams/tonne (g/t) from 3.82 g/t and an improved gold recovery rate of 93.6% compared to 93.2% in Q2 2013. The management indicated confidence that the Blanket mine is on track to achieve its targeted production of 44,000 oz for 2013. Gold sales stood at 12,042 oz at an average sales price of CAD$1,330 per oz, leading to total revenues of CAD$16.6m. Gross profit was CAD$7.7m compared to CAD$8.6m in Q2 2013. Net profit improved to CAD$3.7m from CAD$3m during the same period, thereby improving EPS to 7.2 cents from 5.8 cents in the previous quarter. This improvement was owing to a drop in Blanket mine’s cash operating cost per oz of gold to US$554 from US$584 in the previous quarter. Also, the ongoing exploration drilling at the Blanket mine below 750m level and at Blanket’s satellite projects continued to deliver encouraging results. The development and exploration work at GG and Mascot continued to identify mineralisation. The production target for 2014 and 2015 was maintained at 48,000 oz and 52,000 oz, respectively. Caledonia owns 49% of the Blanket Mine in Zimbabwe.

Our view: Caledonia Mining delivered a robust production performance in Q3 2013. The company witnessed a rise in the production for the period, largely due to higher realised gold grades and better recovery rates. Besides, the company’s focus on reducing its cash operating cost, in a bid to improve its financial performance, seems to have paid off well during the quarter. However, a continuing decline in gold prices capped the revenues. Going forward, Caledonia is likely to avail a production upside from the surplus capacity of Blanket’s metallurgical plant. With record operational results and a strong cash position to fund future exploration activities, Caledonia seems well positioned to develop the Blanket mine further. We keep a Speculative Buy rating for the stock.

Ophir Energy (LON:OPHR)

Yesterday, Ophir Energy announced further successful appraisal results for the Mzia discovery in Block 1, Tanzania. The Mzia-3 appraisal well encountered 56 metre (m) of net pay combined in the Lower and Middle sands, confirming the reservoir quality to be in-line with that seen in the Mzia-1 and Mzia-2 wells. In addition, the gas down to level proven in Mzia-3 is 107m deeper than that seen in the previous wells. The provisional interpretation of the Mzia-3 result has increased the overall mean contingent recoverable resource for the Mzia discovery by about 0.7 trillion cubic feet (tcf) to 5.2 tcf. Currently, the well is undergoing completion operations.

Our view: The Mzia-3 well is another good addition to the set of existing appraisal wells in Tanzanian blocks having successful track record. On similar lines, Ophir Energy had reported strong flow testing results from the Pweza-3 appraisal well last month. Following this Mzia-3 discovery, Mzia prospect is likely to play a key role in the LNG development project planned by the company. Besides, the recently commenced drilling operations in Ghana would enable the company to expand its geographical footprint further. Considering Ophir’s strong position in deep water acreage in the African region and the series of drilling successes recently, we are confident about the future prospects of the company. We remain Buyers of the stock.

J Sainsbury (LON:SBRY)

J Sainsbury released its interim results for the 28 weeks ended 28th September 2013, yesterday. Total sales rose 4.4% y-o-y to £14bn, while total sales excluding fuel was up 4%. The like-for-like (LFL) sales excluding fuel grew 1.4%. Warmer summer and a strong performance from own-brand, non-food, convenience and groceries online, led to an increase in revenue. The underlying profit before tax was up 7% to £400m on account of operational cost savings of around £55m, with a full year target of £100m. Consequently, the underlying basic EPS increased 9.2% to 16.6p. Return on capital employed stood at 11.4%, up from 10.8% last year, due to movement in the net pension deficit. Excluding pension fund deficit, the ratio inched up to 10.5% from 10.3%. The Board proposed an interim dividend of 5p, up 4.2% from the previous year. The underlying operating margins advanced 7bps to 3.47%. The company won 15 out of 28 Grocer 33 Service and Availability awards. Sainsbury’s own brands grew at twice the rate of branded goods and the company achieved 100% British fresh pork. ‘By Sainsbury’s’ was re-launched while ‘Taste the Difference’ showed double-digit growth. The General Merchandise and Clothing division rose at around twice the rate of food sales. The company successfully re-launched ‘Tu’ clothing brand and extended ‘by Sainsbury’s’ brand into general merchandise. In the Complementary Channels and Services division, groceries online grew at over 15%, with over £1bn in annualised sales and orders mostly over 180,000 a week. ‘Convenience’ expanded over 20%, opening around two new stores each week. Sainsbury launched ‘Mobile by Sainsbury’s’ and opened fourth hospital out-patient pharmacy. In total, around 393,000 sq ft of space was opened during the period, including six supermarkets and 50 convenience stores. Property value was up £0.3bn from March 2013 to £11.8bn. Following a review of its property pipeline, the company identified some sites where it decided not to build a supermarket, resulted in £92m in impairment costs.

Our view: A consistent focus on fair pricing and an increasing proportion of British-made produce in the offerings led to strong growth of Sainsbury’s own brands, pushing the overall performance of the company significantly higher. The opening of new space during the period should provide further room for revenue and profit growth, going forward. With an effective promotional strategy, a portfolio of good quality own-label products and high level of customer service in place, the company is well positioned to deliver strong performance in the near future. We retain a Buy rating on the stock.

TomCo Energy (LON:TOM)

Yesterday, TomCo Energy announced its final results for the year ended 30th September 2013. Revenue dipped to £11,000 from £13,000, with all the revenue coming from the US. Operating loss before tax was £865,000 vis-a-vis £1.0m in 2012, coming almost fully from the UK operations. Loss per share dropped to 0.05p from 0.10p. In March, the group successfully raised £1.78m through a share placement and the funds are being used to take the Holliday project towards commercial production and to meet the group’s working capital needs. The liquidity facility agreement with Windsor Capital Partners was initiated on 28th January 2013 and later amended in September. TomCo completed the drilling activities for the Holliday Block to appraise the water quality, quality of any aquifers and the permeability of rock below the surface area. The results of water quality and permeability testing are expected by the end of current calendar year. TomCo was granted a Small Mine Permit by the Utah Division of Oil, Gas and Mining (DOGM) to carry out trial mining during 2014, while the work on its Large Mine Permit application showed good progress. The group is working closely with the Utah Division of Water Quality (DWQ) and the DOGM to ensure its Groundwater Discharge Permit and Large Mine Permit applications meet the required standards and are issued as soon as possible. DOGM has already approved its Notice of Intention to commence Large Mining Operations at Red Leaf’s Seep Ridge project, conditional on a Groundwater Discharge Permit.

Our view: TomCo has made rapid progress towards clearing all the legal hurdles in starting the drilling operations in Utah and is in process of obtaining all the relevant permitting required by Utah State law for the said purpose. TomCo’s Holliday Block is expected to hold approximately 126 million barrels of reserves in its main tract. The unconventional equity arrangement with Windsor Capital Partners enabled a convenient way of capital raising for TomCo, besides ensuring complete funding through to the final investment decision stage of the Red Leaf joint venture. The use of EcoShale, an environmentally sensitive and proven technology, could pose to be game-changer for TomCo in the coming period. Besides, the 401 permit secured in May continues to help the group towards cost reduction. Given these positives, we believe TomCo could reap impressive exploration success at the Holliday project in the near term and record meaningful appreciation in the stock price. We reiterate a Speculative Buy rating on the stock.

Verona Pharma (LON:VRP)

Yesterday, Verona Pharma decided to present at the Therapeutic Area Partnerships (TAP) Meeting, to be held during 18th to 20th November 2013, in Boston, Massachusetts. The presentation would focus on the company’s lead development programme – RPL554, which has been selected as one of ten `Top Projects to Watch’ in the anti-inflammatory/autoimmune therapeutic area. Verona Pharma is scheduled to present on 19th November and would be available for partnering meetings during 19th to 20th November.

Our view: Verona’s decision to present at the TAP meeting would provide further visibility to the company’s lead drug, RPL554. This drug is being developed as a novel treatment for chronic obstructive airways disease such as COPD and asthma with bronchodilator and anti-inflammatory effects. RPL554 is currently in phase II for both the diseases. Given the huge upside through success in the clinical trials of this drug and the ongoing progress of the VRP700 drug, we issue a Speculative Buy rating for Verona.

Economic News

UK jobless claims change

UK jobless claims in October dropped a seasonally adjusted 41,700 to 1.31 million, following an upwardly revised decline of 44,700 in September, the Office for National Statistics said yesterday. Markets had expected claims to fall by a lesser margin of 30,000.

UK ILO unemployment rate

UK unemployment rate for the three months ended September stood at 7.6%, down from 7.7% witnessed in the preceding three months, the International Labour Organisation stated yesterday. The rate hit its lowest level since the March-May period of 2009. The actual reading came in line with the economists’ forecast. The number of unemployed people dropped to 2.47 million, while the number of employed people rose to 29.95 million.

US MBA mortgage applications

US mortgage applications decreased 1.8% w-o-w in the week ended 8th November, after lowering a revised 2.8% in the prior week, the Mortgage Bankers’ Association said yesterday. Refinance index fell 2.3% and prior week’s index reading was revised upwards to a decline of 3.9%. The seasonally-adjusted purchase index inched down 0.5% during the week.

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