100. Base Resources
An unfortunate ticker aside, there’s a lot about Base Resources’ (BSE) investment case that looks good on paper. Kwale, the group’s ageing mineral sands project in Kenya, is currently throwing off cash. In the six months to December, zircon prices were sufficiently high for Base to both cut A$51.7m (£28.2m) from its debt pile and pay for a costly stage-two optimisation programme, which should – touch wood – wring out the last of the project’s ore reserves by 2022. So long as titanium dioxide feedstocks remain in a structural supply deficit, there should be plenty more cash generation in the years until then. Analysts at Numis expect post-tax profit of A$59.6m this year, and A$57.4m in the 12 months to June 2019.
For those investors who were wondering what Base plans to do over the next decade, the group now has an answer – the Toliara Sands project in Madagascar, which Base acquired for a minimum $75m. The bad news, in our book, is the risk involved in relying on a project that is not forecast to enter production until mid-2021. Hold. AN
99. Eland Oil & Gas
Investors, executives of junior oil and gas companies are increasingly wont to argue, no longer have much patience for exploration work or lengthy development programmes. Given the long-term record of the sector – as well as its long-term prospects – it’s not hard to see where those investors are coming from. Eland Oil & Gas (ELA) is one of the few stocks on Aim that is not only growing its cash flows, but also where management might justifiably argue that the group’s exploration assets are substantially undervalued.
The thorn in the side of all of this is the location of Eland’s assets: Nigeria. Bountiful its oil and gas fields may be, but the West African state is hardly known for its stability or simplicity. But growth-oriented investors prepared to take on this political risk – and confident in Eland’s mitigation efforts such as multiple export routes for its product – will find that their interests are aligned with Nigeria’s government. That is, in order to avoid reversion to a hefty 85 per cent tax rate on its profits, Eland has been incentivised to keep on drilling, and develop its wider asset portfolio (increasing the government's future royalty stream in the process).
Current production centres on the Opuama field, where the group is in the process of completing its fifth well. Once this is done, and if Eland and its drilling partners complete a sixth well (Opuama-10) before the middle of the year, gross production should far exceed a target of 30,000 barrels of oil per day (bopd) for the field (approximately 14,000bopd net to Eland's joint venture, Elcrest).
Forecasting the likely smoothness of that increase is no easy task. Eland may have had an excellent track record in the last year and a half, but recent issues with the rig used to drill Opuama-9 shows that past performance does not always translate into future results. Then again, well flows remain strong, and Eland has lots of options to put its cash generation to use. Production from two of the company’s most attractive prospects – Gbetiokun and Ubima – should lead to average output of 17,600bopd in 2019, according to Peel Hunt. And while this will start to deplete the reserves base, Eland has a raft of exploration fields and contingent resources with which it can replace production. Those same analysts have lifted their risked net asset valuation to 150p, which, in keeping with the attitude of strawman investors, assumes nothing for exploration. The shares, increasingly backed by cash, trade at a 43 per cent discount to Peel Hunt’s net asset valuation. Buy. AN
98. Falcon Oil & Gas
For a company with next to no revenues, hardly any outgoings and less than $10m (£7m) in the bank, Falcon Oil & Gas (FOG) has a remarkably high market capitalisation. The group soars into this year’s Aim 100, the result of a wild jump in its valuation as we were putting together 2017’s cohort. The reason for that monumental ascent was sparked by a report from Origin Energy, licence operator for Falcon’s acreage in the Beetaloo Basin, Australia, which marked the Aim group’s share of technically recoverable resources at a humongous 25 trillion cubic feet (tcf), or 1.94 tcf of 2C best estimate net contingent resources. Falcon has a $200m carry on the development, which could one day provide a major source of gas for Total and Inpex's enormous Darwin LNG plant.
Since that resource upgrade, Origin bought out 35 per cent-owner Sasol, underlining its belief in the potential for the asset. Until this week, the obstacle to turning this potential into a commercial asset – in which Falcon is largely a passenger – has been politics, namely a moratorium placed by the Northern Territory government on fracking. Although confident these risks can be mitigated, lawmakers have now lifted the ban. Falcon may be sitting on a gold mine, but we’re watching from the sidelines until there is clarity on Origin’s drilling programme. Hold. AN
97. Amerisur Resources
Amerisur Resources (AMER) has clung on to a place in the Aim 100, although investor sentiment is slipping. In 2017, the company just about made good on its pledge to finish the year with a production rate of at least 7,000 barrels a day, although local disruption at its operations in Colombia has perennially prevented the group from hitting the kind of consistency promised by management, and required by the market. Output in the months since has failed to grow.
With transport costs of just $4 a barrel, the benefits of the OBA pipeline are as good as promised. But, in truth, this is the year when Amerisur must deliver, starting with the upcoming drilling programme, centred first on the Pintadillo-1 well, which is targeting P50 resources of 11.44m barrels. Reserves declined 15 per cent in 2017 and, without a demonstration that it can easily find replacements, Amerisur may soon see the residual faith in its growth story evaporate. We’re hanging on: buy. AN
96. Mattioli Woods
Mattioli Woods (MTW) has come a long way in its transformation from solely an employee benefits provider. While competitors such as fellow Aim 100 constituent Brooks Macdonald have suffered margin erosion during recent months, the wealth manager has benefited from increased scale in its investment and property management businesses.
That meant beefy margins of almost 23 per cent during the first half of the year. Like its rivals, it has benefited from the growing popularity of discretionary wealth management, along with regulatory drivers such as the introduction of pension freedom changes. That’s given it a high proportion of recurring revenue – 85 per cent of the total at the end of November. It has also been broadening its range of funds, launching four multi-asset funds during the last six months, to improve its bartering power with the underlying asset providers. At 748p, the shares trade at 20 times forward earnings, putting them in line with pricier wealth management stocks. While we think the underlying market will continue to grow, it doesn’t look like an attractive entry point into the shares. Hold. EP
95. Avesoro Resources
By its own admission, Avesoro Resources (ASO) takes an engineer’s approach to mining. Managed (and 74 per cent-owned) by a team of Turkish construction specialists, the group’s West African gold mines are currently undergoing a surge in output. From 64,000 ounces (oz) in 2016 to pro-forma output of 192,000 oz last year, 2018 production is on course to surpass a 240,000 oz target, if last week’s strong first-quarter figures are anything to go by.
This year, the group has two challenges. The first is to reverse the rapidly shortening lives of its New Liberty and Youga/Balogo mines, in Liberia and Burkina Faso, respectively – infill drilling targets have already been identified to upgrade inferred ounces to resources. The second is to put the group on investors’ radars, a task we think might be hampered by the free float. As chief financial officer Geoff Eyre recently told us, this liquidity issue might be tackled either through a corporate transaction, or potential selling from non-executive chairman Mehmet Nazif Gűnal (aka Mr MNG), if the shares approach £3 a pop. The ramp-up has been impressive, but we’re prepared to watch from the sidelines. Hold. AN
94. Bluejay Mining
Last month, in recognition of its work on separate titanium and nickel-copper-platinum projects, Bluejay Mining (JAY) was awarded ‘Prospector and Developer of the Year 2017’ by the government of Greenland. It’s not an illustrious hall of fame. Australia-listed Ironbark Zinc, the 2013 recipient, has made similar off-the-chart promises for its zinc-lead Citronen project; four years on, the mine is yet to be commissioned. In half a decade, the group’s shares have gone sideways, a better performance than 2015 winner North American Nickel, which is yet to define its Maniitsoq prospect. The year it won the gong, iron ore-focused London Mining entered administration.
Consequently, investors should not put too much emphasis on this kind of puff, even if broker SP Angel thinks that the award suggests “that the permitting [for the Dundas ilmenite project] should go to plan”, and production should begin to ramp up in the summer. Less doubtful is investor enthusiasm for what has been billed as the highest-grade mineral sand ilmenite project globally, although the shares’ price-to-book value has raced away from peers and looks a little frothy at 25p. Hold. AN
93. Arbuthnot Banking
Diversification is the name of the game for management at Arbuthnot (ARBB). Since selling part of its majority stake in Secure Trust Bank in 2016, the capital-rich challenger bank has focused on expanding its newly launched commercial bank and making bolt-on acquisitions. The former more than trebled its loan book last year, accounting for more than a quarter of the group’s £1.04bn total.
However, many alternative lenders have warned of rising funding costs this year, following the closure of the Bank of England’s Term Funding Scheme (TFS), which gave lenders access to funding at the base rate. Proportionally, challengers drew on the TFS more, given the difficulties of accessing the securitisation market for smaller lenders. Therefore, growing its small- and medium-sized enterprises (SMEs) deposit base via the commercial bank and launching a retail deposit product later this year make sense. Arbuthnot managed to maintain its average net margin at 4.8 per cent last year. If it can do this in 2018, while growing its loan book, it will stand out from many other challenger banks. At 1,420p, its shares trade at a slight discount to forecast net tangible assets for December 2018. Buy. EP
92. Verona Pharma
Had we compiled our Aim 100 list in February, Verona Pharma (VER) would not have made the cut. But a recent positive drug trial result gave the share price the boost investors had been waiting for. The drug in question – currently known as RPL554 – has now successfully completed 12 different clinical trials and proved to be effective in treating asthma, chronic obstructive pulmonary disease (COPD) and cystic fibrosis.
RPL554 is now technically ready to proceed to a final pivotal study, but chief executive Jan-Anders Karlsson doesn’t want to take any risks. He intends to complete a trial in a group of severely ill patients before deciding on the appropriate dosing for the final phase of clinical development. Then, it is likely the drug will be partnered with a large pharma company. The depth of the positive trial data proves the great potential for this medicine, while the recent Nasdaq fundraising round means the company has enough cash to keep it going until 2020. Buy. MB
91. Manx Telecom
As the incumbent provider of telecom services to the Isle of Man, Manx Telecom (MANX) enjoys a near monopoly. It owns all the fixed-line telecommunications infrastructure on the island, controls 80 per cent of the retail broadband market, and customers in its mobile business account for about three-quarters of the island’s population. That’s given it a highly reliable revenue stream and supported its generous dividend payments. The 2017 payout of 11.4p a share was equivalent to a yield of around 6.2 per cent, and Peel Hunt analysts forecast it could rise to 12p this year. Yet, despite the income on offer, Manx's shares have flatlined during the past 12 months. Perhaps investors are growing frustrated with a lack of growth initiatives? Its fixed, broadband and data division reported £31.5m of revenue last year – flat on 2016 – while mobile sales dropped 1.4 per cent to £19.9m. The roll-out of its fibre network began during the second half of last year and around £2m will be spent on a full-fibre roll-out to just 10 per cent of premises, to test customer appetite. Nevertheless, for 13 times forward earnings, we reckon the shares remain a solid income buy. EP.
For the first half of our Aim 100 analysis see below:
