Bumi - is it safe to go back in the water?

From today’s FT -

The board of Bumi Plc is weighing up severing ties with one of its Indonesian businesses as part of a restructuring aimed at reviving investor confidence in the controversy-hit London-listed coal miner.

Bumi said on Monday that it had asked for an independent investigation, to be carried out by law firm Macfarlanes, into alleged financial irregularities at PT Bumi, in which it has a 29 per cent stake.

The inquiry is the latest blow for Bumi, the vehicle part-owned by financier Nat Rothschild that has come to epitomise the risks investors face when putting money into emerging market entities and has tainted the model of reversing far-flung resources companies into London-listed shells.

The board hopes to have a preliminary report from the law firm “within weeks”, people familiar with the matter said, which is expected to focus on whether money supposedly spent on development projects at PT Bumi was invested on the ground.

Bumi’s board has previously discussed ways to take control of PT Bumi Resources, including through a merger of that company with Berau Coal, its 85 per cent owned Indonesian coal subsidiary.

However, the board is also considering ways to make a lasting split from the troubled Indonesian company and to focus on preserving the value of its Berau holding.

“The bottom line is that we have high quality, valuable Indonesian coal assets and we have been clear about delivering on high standards of corporate governance,” said Nick von Schirnding, head of Corporate Affairs at Bumi Plc. “We have clearly had our challenges and structure remains one of the key issues we are looking at – something we need to resolve over the next few months and then deliver on a simplified strategy going forward.”

A deal to separate Bumi Plc from PT Bumi would be complicated, given the challenges facing the heavily indebted Indonesian group and the cross-shareholdings between the various companies.

Options include spinning out the stake and selling it to other investors or a third party, or distributing it to shareholders in Bumi Plc. Another strategy could involve swaps of stakes in the London group and its Indonesian namesake held by the Bakries and Samin Tan, Bumi PLC’s chairman who bought half the Bakrie’s stake in Bumi in October 2011 as the family struggled to repay a loan.

While cutting ties with PT Bumi is one route being debated, no way forward has been agreed, people familiar with the matter cautioned. Some directors might prefer to focus on ways to take control of PT Bumi, especially when the collapse in thermal coal price has put the company under pressure.

Editor take - it could be that per the old saying re “buy when there is blood on the streets (in this case blood coloured blue!) is appropriate here. With a current market cap of just under £300m and a reputation at stake in Nat Rothschild’s stake, any divestment of the 29.9% stake in Bumi could yield as much as the current market cap, and so leaving the, as yet, unscathed PT Berau for free.

Natural buyers are of course the Bakries and Samin Tan. Alternately, if the Bakries are pressured by their lending banks over the collateral they pledged in Bumi stock to settle the loan then what chance Tan/Natty look to take this? 

Courtesy of Spread Betting Magazine

What next for Bumi?

We included Bumi Plc in our Dream Miners Stock Portfolio (link here - http://issuu.com/spreadbetmagazine/docs/spreadbet-magazine-v9_generic) which was released yesterday and it looks like the “market” is handing us an interesting opportunity. Here’s the explanation for the fall from todays Telegraph - ”the sell-off in Bumi continued as the company fell 54.2 – or 21.7pc – to 195.9p. It is rumoured that a loan to the coal group’s major shareholder, the Bakrie family, which is secured on Bumi shares, could be called in at the end of September. A spokesman for Bumi declined to comment.”

If the above is true then this presents investors with a potential gift as of course any pressure on the stock will and has pushed the price lower but, the valuation is becoming excessively disjointed from the fundamentals with the stock now trading at a shade over 2 times EV:EBITDA and around 3 times historic earnings. Given the recent history of friction between Natty and the Bakries I wonder whether Nat will take the stock the banks may sell from underneath the Bakries. One things for sure, Nattys no fool and I wouldn’t discount such a scenario as it would resolve a lot of issues for him. Of course Samin Tan may take the stock which would, if crossing the 30% threshold (he already holds just under 24%), trigger a full blown bid.

Here’s the chart over the last 10 days - one of the most oversold I’ve ever seen.

If the stock opens lower Monday we’re in with our hands full.

Continued validation of Ceres Powers technology provides re-assurance for shareholders

The RNS out this morning (full text below) provides continued encouragement for Ceres shareholders, key line from an independent expert being - Ceres has the potential for cost leadership in mass manufacturing of cells and stacks. The Company has developed a low-cost manufacturing sequence that can be conducted in a conventional factory environment using simple processing steps and common equipment.

We have covered Ceres extensively this year (check tags on the right and our July edition under the “5 potential 10 bagger piece”, adding the stock to our Conviction Buy list at 5.2p. Dominic Picarda our Technical Analyst expert covered the stock this weekend in this webcast - http://www.spreadbetmagazine.com/blog/2012/9/15/dominic-picardas-weekly-webcast-a-technical-take-on-ceres-po.html

This news and prior technology updates are all extremely positive for the fund raising required and we think David Pummell doing an excellent job in re-configuring the Company. With a massive market up for grabs and British Gas as a ready made end market partner we remain resolutely long.

Technology Update

The latest durability test data from short stacks demonstrates degradation rates of less than 0.5% per 1,000 hrs over 2,000 hrs of operation. Testing was conducted on simulated natural gas reformate which is identical to actual reformer output in systems operation. In parallel, Ceres continues to improve the already established core technology capability to withstand multiple start-stop events (shut-downs).  The latest results show completion of a 220 thermal cycle stack test (drawing power at c.600 centigrade, cooling down to 100 centigrade and then back to operating temperature in 5 hour cycles) with no reduction in rated power.

These results give the Board further confidence that Ceres core technology is compatible with the requirements for a real-world residential CHP appliance.  The Ceres development plan through to the next field trials in 2014 and the anticipated product launch in 2016, requires further testing and refinement of its core technology and validation of degradation and cycling on multiple stacks over extended periods of operation. 

Independent Expert Report

The Company stated in its announcement of 26^th July 2012 that it had commissioned a globally recognized fuel cell expert to undertake an independent assessment of Ceres’ core intermediate temperature solid oxide fuel cell (‘IT-SOFC’) technology.  This work, conducted by Dr Nguyen Minh a former Chief Scientist at GE Global Research, has now been completed.  Dr Minh’s expert opinion includes the following overall conclusions:

·     Degradation and robustness: Ceres core technology is on track to achieve the degradation level needed for residential CHP (0.5% per 1,000 hrs) with planned development work likely to meet or exceed this level by 2016.  The Company has resolved the rapid degradation caused by anode redox experienced during field trials last year.  Moreover, Ceres technology can exploit its low temperature of operation to address the key driver of long-term durability (interconnect oxidation/corrosion), and shows class-leading levels of interfacial anode-electrolyte strength (high delamination resistance) under representative operating conditions.

·     Manufacturing cost: Ceres has the potential for cost leadership in mass manufacturing of cells and stacks. The Company has developed a low-cost manufacturing sequence that can be conducted in a conventional factory environment using simple processing steps and common equipment.  The manufacturing processes currently used and under development are scalable for commercial volume manufacture, with high levels of quality control. 

·     Performance:  fabricated cells and stacks already show performance and reproducibility suitable for residential CHP under representative operating conditions. Further performance improvements are likely via planned anode, cathode and interconnect engineering.  In addition, the inherent thermal cyclability of Ceres technology is excellent and is likely to exceed the requirements for residential CHP. 

During Dr Minh’s 25 year career he has been responsible for the overall technical objectives and R&D direction for GE’s $multi-million fuel cell programmes, and led fuel cell activities at Honeywell, AlliedSignal and Argonne National Laboratory in Chicago.  He has consulted for the US Department of Energy, the UN and multiple companies, and served on review panels for the US Department of Defense, National Science Foundation, California Energy Commission and others.  Dr Minh co-authored the book “Science and Technology of Ceramic Fuel Cells” as well as 4 book chapters, 20 patents, and over 100 published technical articles on fuel cells and related technologies.  He is now Associate Director of the Center for Energy Research at the University of California, San Diego. 

Dr Minh was appointed by Ceres to conduct an in-depth assessment of the Company’s cell and stack technology, as these core components fundamentally drive performance and durability of the residential CHP product to be launched in the UK with British Gas.  Dr Minh was provided with test results, given access to key technical staff, and made extended visits to Company facilities to conduct reviews.  His report is available for download at:

www.cerespower.com/InvestorRelations/PresentationsVideosandReports/

David Pummell, Chief Executive Officer of Ceres Power, commented:

“We continue to make positive progress in improving the durability performance of our core technology.  The assessment report prepared by Dr Minh gives the Board significant confidence that Ceres core technology is on track to achieve the degradation requirement of residential CHP by 2016.  It also concludes that Ceres has the potential for cost leadership in mass manufacturing of cells and stacks, a key strategic advantage.”

"The strangest market rally on record"

Considering that the U.S. economy grew at an anaemic 1.7 percent in the second quarter, the unemployment rate sits stubbornly still in excess of 8% and that the current rate of monthly job creation is only a fraction of the monthly hires needed to bring the unemployment rate back to pre-crisis levels by 2015 then the stock market hitting multi-year highs seems to have a lot of commentators in a lather.

With the uncertainty of a presidential election that looks potentially to go either way and also whether Congress and the president will reach an agreement to avert the so-called fiscal cliff—the spending cuts and tax hikes that could stall the US economy next year this strength seems to many even more perplexing.  Finally, throw into the mix, Europe’s financial crisis which is still unresolved and heads are being scratched all round…

In the face of all that the S&P 500-stock index is up 25 percent over the past 12 months, and 14 percent in 2012. Stocks have reached levels unseen since before the fall of Lehman Brothers and Bear Stearns. “This is about the strangest market environment I’ve ever seen,” says Donald Luskin, chief investment officer at Trend Macrolytics.

There are however some strong forces propelling the rally. Over the long term, stock prices tend to reflect corporate earnings. While S&P 500 profits may decline 1.8 percent this quarter, according to estimates compiled by Bloomberg, they will rebound 11 percent in the final three months of the year, 11 percent next year, and 12 percent in 2014, reaching record levels with every gain.

Investors are also expecting further stimulus from the Federal Reserve, potentially at tomorrows FOMC meeting where a third round of bond purchases to boost the economy may be unveiled. “The Fed has come out and said that things are weakening and that they’re willing to act,” says Gregory Peterson, director of investment research at Ballentine Partners. Also, it must be remembered that Apple’s stock price which is up 64 percent YTD is having an outsized impact on the indices. With a market value of $620 billion, Apple represents 4.8 percent of the S&P 500 and close to 13 percent of the Nasdaq Composite Index, which has surged to a 12-year high. .

Impressive though that may be, the threats to the market are formidable. Chief among them is the so called fiscal cliff and which we cover in the forthcoming edition of our magazine. Under a law passed last year in the heat of Washington’s debt-ceiling impasse, the failure of lawmakers to agree on some combination of spending cuts and tax increases could result in $1.2 trillion of automatic cuts and accompanying tax hikes in January 2013. That combination could shave 2.9 percent off economic activity in the first half of 2013, according to the Congressional Budget Office - something that Bernanke no doubt has his eye on. “These are significant risks that the market, in our view, hasn’t really appreciated,” said Goldman Sachs chief U.S. equity strategist David Kostin at a Sept. 10 conference. Luskin says that even if you assume there’s a 75 percent chance a deal will be struck, that means “25 percent of the time we sail off the cliff and into recession. Would you get on a plane if the pilot told you there was a 25 percent chance it would crash?”

Europe also remains a potent threat, what with Athens having yet to ratify the spending cuts necessary to receive life-or-death bailout funds—and no guarantee that Spain, already reeling from 25 percent unemployment, will agree to more austerity in exchange for the European Central Bank’s financial aid.

There is one wild card that could keep driving the market higher however and that is that hedge funds that through the leverage they take on have a disporportionate impact on the market, have woefully missed out on this rally. From the start of the year through to the end of August, the main Bloomberg hedge fund index gained 0.5 percent, compared with 13 percent for the S&P 500. “Hedge funds must be sitting on large cash positions or have outsized short positions—how else to explain their underperformance?” says Jenny Van Leeuwen Harrington, chief executive officer and portfolio manager of Gilman Hill Asset Management. High-priced money managers obviously don’t want to finish the year lagging the market by such a wide gap. If they capitulate and pile into stocks in a bid to catch up, that belated buying could send indexes even higher - at which point that’s our queue to get out as we have been long equities right through the summer and as our blog posts pay testimony to.

Individual investors could also decide to get with the program. They pulled money from U.S. equity mutual funds for a fifth straight year in 2011, the longest streak in data going back to 1984, according to the Investment Company Institute. So far this year, they’ve yanked $75 billion. As ever and true to form, their timing has been atrocious.

So just why have equities continued to rise? The answer to us is relatively simple - there is just no other asset class that offers an alternate home for capital on anything other than an immediate term basis. Decent blue chips with well covered cash rich balance sheets still yield 4% + around the globe while bonds are, to use well into the 11th hour of the wily coyote/roadrunner sketch - running on empty over the cliff! Add the additional winds of a new round of monetary debasement that seems imminent and to us, equities are a one way ticket with Japan, Spain & Italy our favourite picks.

Ceres Power continues to push on

UPDATE - RNS just out. “initial tranche of fundng” - it looks like staged capital raisings as they reach technical milestones and prove up commerciality. Our money is on a 3rd party industry company providing the bulk of the funding and so avoiding major dilution to existing holders. Any move back towards 10p and we will be adding again.

The shares were shaken down and are already on the rise again. Per below someone, somewhere clearly knows more.

Ceres Power Holdings plc

(“Ceres”, “Ceres Power” or “the Company”)

The Board of Ceres Power notes the recent movement in the Company’s share price. The Board is not aware of any significant change since its announcement on 16 August 2012 and continues to work towards raising an initial tranche of funding before the end of Q3 2012 to continue to meet the Company’s planned expenditure. The Company will update shareholders in due course on progress in this regard.

As announced on 26 July, the Company remains on-track to delivering its target of a global cost leadership mass market micro-CHP product and will provide a technical update in due course on continued progress made to date.

The volume in Ceres in recent weeks has been particularly heavy with around 10% of the company’s shares turned over - I am beginning to wonder if stake building is occuring…

Following the positive update the company put out on the 26th July it is not beyond the bounds of possibility that the Company has been approached by another industry player as an alternate route to the new funding round that the company has to undertake. In fact, with the shares trading still only around current cash then the IP and technology is valued at nil - something that British Gas & Itho-Daalderop no doubt take issue with given the strong backing by these 2 players and commitment to purchase the final product that has been made.

I have spoken to a source close to the company and was encouraged that it seems management are not intending to throw existing shareholders under a bus and that in fact the funding that has been flagged is not likely to be massively dilutive to them - I can only therefore surmise that they have a 3rd party industry capital injection/licensing deal lined up, likely at a premium to the current share price with perhaps an open offer to shareholders or they are in fact being stalked - the latter is probably not likely to be well received by existing shareholders as the massive opportunity will be snatched from them, even if an offer of say 25p was pitched.

The chart structure below shows a clear break of 12p and with a channel height of 9p so targets 20p+ in the coming days/weeks.

The company has refused to comment on the share price movement. But someone clearly knows something… For all those readers who followed Spread Bet Magazine with our Conviction Buy at 5.2p - hold tight.

Editor

 

Spread Bet Magazine portfolio update

It’s been a good year so far for Spread Bet Magazine’s portfolio and hopefully for our readers who followed our calls! Take a look at our About Us page for a concise list of our Conviction Calls and Trading positions - both open and closed.

Here’s an update on our thinking on some of our Open positions - 

Research in Motion. Conviction Buy $13 - April 23 2012. Current Price $7.20.

This is pretty much the singular trade that we have got wrong this year with the stock halving in price from our entry point. Regular readers will be aware however that this publication is a BIG advocate of measured leverage and so allowing a trader to weather a position that goes wrong and, if the circumstances are appropriate, step back up (as we did with Nokia at the nadirs around $1.65 two months ago). With RIMM, we think the same circumstances now apply and find the divergence between the stock price and the MACD, sharp rebound from a double bottom and heavy volume last week interesting. With 2Q results on 27 Sep we are targetting the gap in the stock chart at $9 as a near term target. Accordingly, we ADD to our Conviction Buy today and double our position size.

Daily RIMM chart

Bowleven. Conviction Buy 59p - Jun 6 2012. Added to position - 30 Aug 2012 @ 68.5p. Current price 72.5p.

We are very happy holding our Bowleven shares here and point new readers to our feature on the stock in the July edition of our magazine, page 52 - link here - http://issuu.com/spreadbetmagazine/docs/spreadbet-magazine-v6_generic)

Nikkei 225. Conviction Buy 8600 - Jun 21 2012. Current value 8843.

We have taken money out of the Nikkei already this year in our portfolio but recently re-incepted a core long position as we expect the Japanese market to be in the vanguard of global equity markets advance throughout the balance of this year and into 2013.

The Japanese stock market has been weighed down recently principally due to the slowing of China - it’s major trading partner aswell as the strong yen that dampens exporters competitiveness. In the forthcoming issue of our magazine we have a special feature on China & how to play it (make sure you subscribe to the right in order to ensure you receive this “hot of the press” a week on Thursday) and the Japanese market is one way with a high degree of correlation. See our weekly chart below on the Shanghai Composite and which we think is in the very early stages of a meaningful rebound and that the index has just completed a 5 wave elliot count per below. Consequently, we have added to our Nikkei Conviction Buy today at 8850.

Shanghai Weekly chart

Ceres Power. Conviction Buy 5.2p - Aug 3 2012. Current Price 11.5p.

Ceres was covered in our July edition too (Link here, page 16 - http://issuu.com/spreadbetmagazine/docs/spreadbet-magazine-v6_generic). We have additionally update on the stock if you check our tabs to the right under Ceres Power. Having spoken with sources close the company last week, we believe that a funding update is due shortly and that it is not likely to be as dilutive as many investors feared. We believe Ceres to be a proper potential 10 bagger candidate over the next couple of years as they near market launch of the revolutionary fuel cell boilers.

Out of our open Trading positions we offer the following updates - 

Lonmin - Trading Buy @ 658p - 16 Aug 2012. Current price 613p.

The rationale for the Lonmin Long trade entry was premised upon the expectation that they are likely to prove an attractive candidate to a potential bidder at the current market capitalisation of £1.2bn. With Xstrata holding just under 25% then we expect some type of corporate activity upon the consumation or otherwise of the Glencore merger/takeover. Lonmin is to feature in our special Mining focused edition this month, due out a week on Thursday - register your email to ensure you receive this.

ENRC - Trading Buy @ 316p - 29 Aug 2012. Target 340p. Raised target - 360p. Stop 316p.

ENRC is also to be included in our special mining focused edition of our magazine. This trade is working out nicely and we expect ou target of 360p to be hit in the coming days as the stock has been excessively oversold. Here’s our resident Technical Analyst’s webcast overview on the stock from just over a week ago - http://www.spreadbetmagazine.com/blog/2012/9/1/dominic-picarda-weekend-webcast-on-enrc.html

To register your interest in our forthcoming “Follow me” funds which will allow you to replicate our trades with our partner spreadbet firm in a variety of dedicated funds - Oil Explorers, Natural Resources & Global Macro - email “FOLLOW ME” to editor@spreadbetmagazine.com. Unlike many “tipsters/advisers” - we have our OWN money on the line in these funds.</p

North Sea oil gold rush - risk:reward ratio improves further for investors

The North Sea oil sector had a boost this week when the Government announced further tax breaks to companies working over older oilfields in order to enhance production - a welcome change from the dark days of 2010 when the Government was seeking to do the opposite and hobble the industry!

Often with AIM and FTSE350 companies there are many pitfalls to cross – the sheer lack of finance available has hindered both exploration and the all important move to “first oil” for many companies. However, over the last few months, M&A activity has been in the ascendance. This week Edison Investment Research published a piece of analysis (Link here - http://www.edisoninvestmentresearch.co.uk/research/sector-commentary/#a-8272) in which they noted that since their previous review of the sector that, of the dozen players in the North Sea region that can be invested in, 6 have been approached or taken over in 2012. Whilst some of these companies like Encore and Nautical Petroleum effectively had to call time on their efforts to go it alone and accept offers some way below their potential value – they still managed to sell for between $8-12 dollars a barrel which is a not too bad return for investors. In fact this seems to be the benchmark level for North Sea players in takeovers.

Despite the massive money printing exercises and bond buying by the major central banks, capital markets access remains tight however. What is noticeable in recent months though and encouraging for shareholders is that management of these companies are themselves now balking at further equity dilutions as they are finding their holdings being diluted too much. One prime example is Xcite Energy which has seen the decimation of its share price due to perpetual equity and attached warrant issuance and so structured a $155m RBL lending deal recently. Bearing in mind the corporate acquisition benchmark of an average around $10 to the barrel, and a typical undisturbed share price prior to acquisition of a discount of around 50% to $10 , this would imply an enterprise value of less than $6.50 per barrel being a good investment proposition. Xcite currently trades for around $4.80 a barrel implying 20% upside just to harmonise with the peer group. If one is optimistic on the Enhanced Oil Recovery (EOR) in relation to the believed 550m boe in Bentley then a share price meaningfully higher than 200p can be postulated in the event of a takeout.

Ithaca Energy, itself a successful producer, turned down an offer at 205p just a couple of months ago and promptly saw its share price halve and only recover today to 140p. This turning down of the bid does however demonstrate that as the field of companies suitable for take-over shrinks that those companies that address their intermediate funding needs are getting more pricing power when the raiders come knocking.

Below is the list of companies and their current resources that are listed on the FTSE and AIM markets. Of the North Sea players there are only a handful left in the smaller market – Enquest, Ithaca, Xcite, Serica, Faroe and Premier Oil. Premier is established enough that is an unlikely takeover target and indeed may in fact be a consolidator.

The lack of targets left in this politically stable, proven area of Oil exploration and, with easy access to the market and plentiful infrastructure, will help to underpin the prices of these remaining companies for sometime to come in our opinion. In fact, it is only a matter of time until the major players take out another few of these. 

 

Draghi Buys Time With Sterilised Bond-Buying Programme

The ECB kept its key interest rate unchanged at 0.75% and announced a new bond-buying program to save the Euro. Will it work and will it be enough? Those questions remain unanswered as Mario Draghi has, yet again, ommited much of the key detail, but for now, it seems investors are placated and today they embraced the extra risk and jumped feet first into equities.

At the ECB meeting, Mario Draghi announced a bond-buying program aimed at the secondary bond market which is named as Outright Monetary Transactions (OMT). According to Draghi, market participants are currently pricing the convertibility risk on yields from peripheral countries, a situation that is not acceptable and that should be addressed by the central bank. In order to eliminate such risk, the ECB will conduct open market operations to buy sovereign debt in the secondary market but without debasing the Euro and so avoiding an expansion of its balance sheet. In contrast to what happens in the US with quantitative easing, the ECB operations will be fully sterilised and are not seen as monetary expansion or easing. This particular detail is of high importance. Mario Draghi is not able to print money at this point and needs to “sterilise” any bond-buying intention to satisfy the will of 17 nations but it is a weakness in the program that may just bring it underwater and result in failure as happened with the program the ECB ran in 2010-11.

Draghi hasn’t given much detail on how the intervention would occur, at least, he hasn’t stated any cap on yields as many would wish him to do, similar to the EUR/CHF floor. As already stated in the press conference held in August 2, only countries that ask for help from the EFSF /ESM facility will be able to benefit from any ECB intervention. A country will need to ask for a full bailout or a precautionary program and adhere to the non-desirable austerity measures before benefitting from the ECB bond purchases. If, at any time, a country fails to comply with the adjustment program, bond purchases will stop.

The OMT program will target the short end of the yield curve and most bond purchases will be of debt with maturities between 1 to 3 years. Funds committed to the program are unlimited such that the ECB promises to keep buying debt until it eliminates convertibility risk. One important point advanced by Draghi regards seniority. The ECB will be treated “pari passu” with any other creditors.

The ECB put the ball in the hands of Italian and Spanish governments as these are the countries that can benefit the most from the program, and they will need to ask for help from the EFSF/ESM facility before the ECB steps in. We need to monitor closely what they will do over the next few weeks.

Traders seem to be happy with these terms as European equities rallied. The FTSE ended 2.11% higher, while the CAC 40 gained more than 3%. Bond Yields from peripheral countries benefitted the most as can be seen in the table below. As risks is deemed to fade, yields on German bonds will likely increase as happened today.

We believe that sooner or later there must be an agreement around issuing centralised euro bonds or engaging in a non-sterilised bond program. What the US has embarked perhaps too much on, the Eurozone hasn’t done yet, and yet the need here is much higher. Some currency debasement will be needed in Europe as a strong Euro is just an additional threat to growth.

Percentage movement in yields today

Courtesy of Spread Bet Magazine.