GW PHARMA (GWP) - Lead drug approval close to fruition

ABOUT GW PHARMACEUTICALS

GW Pharmaceuticals (GWP) was founded in 1998 and listed on AIM, a market of the London Stock Exchange, in June 2001. The Group's lead programme is the development of a product portfolio of cannabinoid prescription medicines, including Sativex® Spray. In 1999 GWP commenced its first clinical trials evaluating different cannabinoid formulations as potential treatments in the fields of Multiple Sclerosis and pain. GW focused on the development of Sativex, an oromucosal spray with two principal cannabinoid components, Cannabidiol (CBD) and Delta-9 Tetrahydrocannabinol (THC). Since 1999, the safety and efficacy of Sativex has been studied in over 20 randomised placebo-controlled trials in over 3,000 patients. In 2003, GW entered into its first pharmaceutical licence agreement with Bayer Healthcare AG for the UK marketing rights to Sativex. This agreement was expanded to include Canada later that year. In 2005, GW and Almirall signed a licence agreement granting Almirall exclusive marketing rights to Sativex in Europe (ex-UK). In 2007, GW granted Otsuka the US development and marketing rights to the product.

Sativex was first approved in Canada in 2005 under Health Canada’s Notice of Compliance with conditions (NOC/c) policy for the treatment of neuropathic pain in MS. This approval was extended to cancer pain in 2007. In May 2009, a licence submission was made for Sativex in the UK and Spain for the treatment of MS spasticity. In the United States, the FDA granted a Phase III IND (permission to enter Phase III trials) for Sativex in 2006. A US-focused Phase IIb/III trial in cancer pain is currently ongoing.

SATIVEX APPROVAL IN EUROPE

GW Pharma submitted the European regulatory submission for Sativex for the treatment of spasticity due to Multiple Sclerosis on 20th May 2009. The UK regulatory authority (MHRA) in effect sponsored the application as RMS (Reference Member State). The application is being progressed through the DCP (Decentralised Procedure) which allows simultaneous approval in all EU member states once the paperwork for a MRP (Mutual Recognition Procedure) has been fully approved.

The DCP procedure timings are as follows: "The applicant requests one country to be the Reference Member State (RMS) in the procedure. After 70 days the RMS circulates the first Draft assessment report. The Concerned Member States (CMS) and the applicant can then make their comments. On the 120th day of the assessment procedure, the RMS circulates another Draft assessment report, including comments on the SPC, package leaflet and labelling texts. There is also a Mutual Recognition Procedure during the next 90 days, in which other Member States generally adopt the RMS's assessment, unless they have important objections on the grounds of a potentially serious risk to public health. In such situations, further discussions will also be held in the Coordination group for Mutual recognition and Decentralised procedures (CMD(h)). Once a positive opinion on products has been taken in the Mutual recognition and Decentralised procedure, translations of the SPC, package leaflet and labelling texts are submitted and a national marketing authorisation is issued"

So 210 days from 20th May is 16th December 2009. Approval will be pushed back as the company receives questions (which stops the regulatory clock) and sends in responses. Given the strong phase III clinical trial data, it certainly looks likely that Sativex approval will be granted by March 2010 in the U.K. and Spain and in the rest of Europe by the second half of 2010.

INVESTMENT CASE

Buy initiated at 84.5p. A likely positive outcome for Sativex approval within a 3 month time frame  backed up by a good package of large scale clinical studies plus the backing of 3rd party players such as Bayer makes GW pharma a long play.

Solid prices for Coal in 2010 boost investment case for Coal of Africa (CZA)

Today's Telegraph newspaper has the following quote, "Analysts from JP Morgan reckon that thermal coal, used in power stations, will rise from $70 to $85 per tonne next year, based on rebounding demand from China and India. While global inventories have been unusually high in the downturn, the bank believes stocks may decline from 40m tonnes this year to 22.7m in 2010.

"Supply will be tight in the next two years," said Stevanus Juanda, a mining analyst. "In the second half of 2009, we have observed sizeable imports of coal by China, due to the closure of mines in the Shanxi region and rise in electricity generation."

Experts are also predicting a shortage in coking coal used to make steel over the next year, driven up 12-fold by demand from China.

Macquarie, JP Morgan and Morgan Stanley estimate that prices may jump by between 23pc and 38pc in 2010, as global demand rebounds." *

As production ramps up at Coal of Africa (CZA),this should translate to solid earnings in 2010.


http://www.telegraph.co.uk/finance/newsbysector/energy/6896140/Old-King-Coal-will-stay-on-the-commodities-throne-for-years.html

AMGEN - A biotech with news and a reasonable valuation

Last week, the Committee for Medicinal Products for Human Use (CHMP) of the European Medicines Agency (EMA) has announced a positive opinion for the marketing authorization of Prolia((TM)) . Prolia (denosumab) is a key bet for Amgen(AMGN) and is critical in weaning the company off its anaemia portfolio.

The licence application for Prolia is for the treatment of osteoporosis in postmenopausal women at increased risk of fractures, and for the treatment of bone loss associated with hormone ablation in men with prostate cancer at increased risk of fractures. If approved by the European Commission, Amgen would receive marketing authorization for Prolia in all European Union (EU) Member States.Approval if expected some time in Q1 2010.

Prolia’s active ingredient, denosumab, has a unique mechanism of action. It is the first and only therapy in late stage development that specifically targets RANK Ligand, an essential regulator of osteoclasts (the cells that break down bone). Administered every six months as a subcutaneous injection just under the skin, denosumab helps stop the process that causes bone loss, resulting in greater bone density, stronger bones and reduced risk for fractures at the spine, hip and other non-vertebral sites.Given its potential to inhibit all stages of osteoclast development through a unique and targeted mechanism, denosumab is also being studied in a range of other bone loss conditions including rheumatoid arthritis, and for its potential to delay bone metastases and inhibit and treat bone destruction in patients with advanced cancer.

The CHMP positive opinion is based on data from six Phase 3 trials. Two Phase 3 pivotal studies with fracture endpoints in the osteoporosis and prostate cancer settings demonstrated that Prolia administered as a subcutaneous injection twice yearly (60mg) reduces the incidence of fractures. All six studies showed

Prolia is also under regulatory review in the United States (U.S.), Switzerland, Australia and Canada for the treatment and prevention of postmenopausal osteoporosis and for the treatment of bone loss in patients undergoing hormone ablation therapy for breast or prostate cancer. The F.D.A. asked Amgen for additional data in late October, which ultimately may require further clinical.

Amgen’s share price is currently $57 and analysts are estimating 2010 earnings at over $5, giving a forward P/E of 11, which is not aggressive for a biotech stock. Recent news that the company has won a patent dispute with Roche relating to its anaemia product, Mircera, gives further reassurance about earnings and the company approved an additional $5 billion stock buy back in Early December (adding to the $1.2 bn left in the previous buyback programme). The 52 week range is $44 - $64.

Given the forthcoming news on Prolia and the unchallenging P/E, Amgen looks to be a good buy for January.

Update on portfolio 27th December 2009

Coal of Africa (CZA): Has risen to £1.00, following buy at 95p, as South African Coal prices for export continue to rise. News on Vele Mine approval still awaited with anticipation.

NightHawk Energy (HAWK): Bought at 35p. After slipping as low as 30p, has stabilised at 33p. News on Jolly Ranch lateral wells and waterflooding at Revere anticipated in early January. News flow should drive signficiant momentum in this stock. The recent takeover of XTO energy by Exxon shows the potential valuations of shale oil/gas plays. An exciting stock to hold for 2010.

Desire Petroleum (DES) and Falklands Oil and Gas (FOGL): Desire purchased at 85p, now at 86p and FOGL at 131p, now at 128p. The Ocean Guardian Rig has reached Las Parmas.

Next leg:
Las Palmas- Recife, Brazil: 2,860 nm @ av. 4.5 kn = 26 days = ETA Recife 19/20 Jan

Last leg:
Recife-FI 1st location: 2,470 nm @ av. 4.5 kn = 23 days = ETA FI [1st location] 12 Feb 2009
@ av. 5 kn = 21 days = ETA FI [1st location] 6 Feb 2009

Amazon (AMZN): Short set at $146. Now at $138. Short closed

Short Dollar/Euro: Euro shorted at 1.51. Short closed at 1.47. Now at 1.43.

Short emerging markets: Shorts placed on JP Morgan Emerging and Templeton Emerging. Both investment trusts have risen since the short. Given momentum in this sector, watching closely with a view to close.

Investment ideas for 2010

Previous posts on the potential of a Dollar rebound came to a fruition, with a gain of over 2% against the euro last week, hitting a 3 month high, after Greece’s debt downgrade and further evidence that the U.S. economy may be coming out of recession faster than the Euro Zone. But a stronger dollar managed to hold back the Dow Jones Industrial Average, which closed down 143, to 10,329 and the S&P 500 fell 4, or 0.4%, to 1102. The U.S. stock market, has now risen 22% in 2009 and over 60% since the March low.

The U.K. FTSE 100 finished the week at 5,197 down from 5,320 as the fall in commodity prices hit the heavily Oil weighted index due to Shell and B.P..

Strong results from Research in Motion (RIMM) and Oracle (ORCL) both propelled the stocks higher on Friday, and for 2010 Technology is looking increasing interesting. Those companies which have been hit by a contraction in revenues during the recession could see better times in 2010. For example, Media companies such as Google (GOOG) and ITV (ITV) should benefit as advertisers return to the market. Chip manufacturers, like Intel (INTC) have already shown signs that inventories are waning and consumption is slowly increasing both in personal computing and Enterprise.

2010 could start strongly as companies spend the cash they had hoarded, replenishing depleted inventories and begin to take staff on after focusing on cost reduction this year. Analyst expect the S&P 500 companies to earn $76-80 in 2010, , versus $61.33 in 2009. U.S. companies cut capital spending by 16% in 2008 and another 32% in 2009 and cash now makes up 9.7% of their assets, well above the historical norm near 6.2%.. This cash is already being put to use, for example, the recently announced takeover of XTO Energy (XTO) by Exxon, and the purchase of Starent and Tandberg by Cisco (CSCO) in October. The inevitable takeover buzz should help to sustain momentum in the market in Q1 and Q2 next year.

But as the global economy starts to expand, interest rates will begin to rise (as seen in Austalia). This will raise debt costs both for consumers and corporate. A higher U.S. interest rate would normally drive the U.S. dollar higher which will make life harder for exporters. However, the Federal Reserve seems set on an agenda to drive growth not fears of inflation so interest rate increases are likely to be modest. In the U.K., the reliance of the economy on the financial sector, and lower growth than the rest of Europe should mean that U.K. rates stay near 0.5% for much of 2010 which may pressurise the pound in addition to the deteriorating deficit situation. Investing in U.S. stocks therefore seems to be a better prospect than the U.K. during next year.

Recommendations for 2010:

Invest in U.S. tech, media, consumer

Reduce exposure to commodities

Reduce exposure to Emerging markets

Reduce exposure to U.K.

BEST ONLINE RESOURCES FOR FINANCE

Here’s my favourite web sites for online financial information, many of which are completely free!

PODCASTS

S&A Investor Radio with Frank Curzio: Itunes Store  S&A Investor Radio

Frank Curzio, ex-host of The Real Story Podcast on the Street.com, now at Stansberry hosts this once or twice weekly show focusing on Wall Street.

The Disciplined Investor: Apple Itunes store The Disciplined Investor or go to http://www.thedisciplinedinvestor.com/

Great insights on the U.S. markets  and guests hosted by Andrew Horowitz once a week

Stocks and Jocks:  Itunes Store Stocks and Jocks

Daily show hosted by Tom Haugh and Jon Najarian. Great analysis of the U.S. market, stock ideas and guests.

Thestreet.com Real Story: Itunes stores The Real Story

Now with Greg Greenberg so significantly inferior to the previous host Frank Curzio but useful wrap to the day on Wall Street

FINANCIAL WEBSITES -  U.S. FOCUS

Marketwatch:  www.marketwatch.com

Great news and analysis site and a lot of good content free of charge

Barrons: www.barrons.com

Partly subscription based but good blogs, news content and stock quote information. Plus access to Barrons magazine online.

Thestreet.com: www.thestreet.com     

Good source of news and some commen.tary, though a lot is subscription only these days

CNBC: www.cnbc.com

Coverage from the U.S. TV station CNBC.

BLOGS – U.S focus

24/7 wall street: www. 247wallstreet.com

Great aggregator of financial blogs, with easy to read lay out.

Seeking alpha: www.seekingalpha.com

Nice list of contributors and very much up to date, breaking news.

Fund my mutual fund: www.fundmymutualfund.com

Lots of interesting commentary on the U.S. market.

FINANCIAL WEBSITES – U.K. FOCUS

Sharecast:  www.sharecast.com

Excellent source of U.K. related financial news

Iii: www.iii.co.uk

U.K.’s premier discussion site focusing on U.K. companies.

Digital look: www.digitallook.com

Good source of research on UK and international stocks including historical quotes, financials, director buys. Plus good portfolio functionality.

Advfn: www.advfn.com

Nice site for real time news, portfolio analysis, real time pricing

Citywire: www.Citywire.co.uk

Similar news content to Sharecast.com, but good coverage of unit trust and investment trust news.

Morningstar: www.morningstar.co.uk

Great coverage of ETF, unit trusts and investment trusts.

FINANCIAL WEBSITES: GENERAL

Reuters: www.reuters.com

Best in class news and analysis site.

Bloomberg: www.bloomberg.com

Coverage of international financial news

U.K NEWSPAPERS

The Times: www.timesonline.co.uk

Very comprehensive business coverage.

The Financial times: www.ft.com

Limited access due to pay subscription model, but premier coverage at a price.

The Telegraph: www. Telegraph.co.uk

Good general interest financial stories, with focus on personal finance.

Falkland Islands Oil and Desire Petroleum- Exciting opportunity after years of anticipation

After occasionally dabbling with Falkland oil exploration stocks over the last 10 years with relatively little return and huge volatility ,news flow due in quarter 1 2010 means the region is starting to look an interesting speculative play with potentially signficant upside to the current share prices. 


There are 4 AIM listed explorers in the U.K. which offer exposure to the opportunity - Desire Petroleum (DES), RockerHopper Exploration (RKH), Falkland Oil and Gas (FOGL) and Borders and Southern Petroleum (BOR).

There may be up to 60 billion barrels of oil lying beneath the Falkland Islands in the Southern Atlantic. If the potential of the area is fulfilled it will be comparable in size to the world’s largest oil-field, Ghawar in Saudi Arabia, which is believed to contain around 80 billion barrels. The Falklands' North Basin is a relatively benign drilling region, similar to the North Sea with water depths of no more than 450 metres. It is where Rockhopper Exploration and Desire Petroleum, with privately owned partner Arcadia, are operating.The Southern Basin is where Borders & Southern Petroleum and Falklands Oil & Gas (FOGL) have licences, the latter in a joint venture with global mining giant BHP Billiton.

The North Falklands basin is distinctly different from the Southern Basin. The North is an in land lake in a failed rift system.. As the basin starts to pull a part it gets stretched and the rock thins allowing sediment to be deposited in the gap. The gap being thousands of meters. The lake was probably fed by multiple rivers which carry sediment and deposit it in the lake (basin) in deltaic systems. This is similar to the geology of the Gulf of Mexico delta, Nile delta, offshore Nigeria.

In 1998, Shell, Amerada Hess and Lasmo drilled 6 wells in the Falklands North Basin, five of which had hydrocarbon shows (both oil and gas) and one was dry. In 1999, the Oil majors relinquished their licences as given the geographical location extraction was uneconomic at the prevailing oil price of around $10 . The minors then stepped in. Desire Petroleum was founded in 1996 (named after the sailing ship Desire which made the first confirmed sighting of the Falkland Islands in 1592) and participated in the first round of drilling in the North Falkland Basin in 1998. Desire now operates 6 licences in the area, Tranches C, D, F, I, L and the recently awarded PL034. Over the last 5 years, Desire shares have moved in a range from less than 10p (2003) to 114.5p (20009) as interest in the area has followed movement in the oil price and news flow from the companies involved. In the last 12 months it has had a 52 week range of 40-114.5p.


Things have hotting up for Desire becasue the Ocean Guardian rig is currently being towed into the North Falkland Basin and will arrive in February after leaving the Cromarty Firth in Scotland in late November. In September, Desire agreed a deal with UK driller Diamond Offshore to contract the Ocean Guardian for a minimum four-well campaign. It has since agreed to sell-on two additional option wells to its partner in the region, Rockhopper Exploration.Falkland Oil and Gas, which is working in partnership with BHP Billiton, said it was in talks with Desire over using the Ocean Guardian rig as part of a third contractual slot. Over the minimum 80 day drilling campaign, Ocean Guardian could earn maximum total revenue of US$19.6 million with mobilisation and demobilisation fees estimated to be US$16 million.

In the past month £327million has been raised to explore for oil in the Falklands. On 10th September Desire announced that it was issuing new shares in a placing to institutions (£2 million before expenses) and an open offer (£20 million) at 70 pence per share.The total estimated net proceeds of the Placing and the Open Offer will enable Desire to drill at least two further wells in the planned drilling campaign and / or to have the flexibility to test any successful wells. Desire has signed heads of agreement, with Rockhopper for the take up of two of the six options available for additional drilling. At the end of November, Falklands Oil and Gas (FOGL) placed of 43.5 million new ordinary shares at a price of 115 pence per share to raise $50 million to fund its share of the planned drilling programme in the East Falklands Basin and help the company meet its working capital requirements through to the end of 2011.The company's joint venture with BHP Billiton is seeking a deepwater rig to drill the first ever exploration well in the basin and was in advanced discussions with Desire Petroleum over the Ocean Guardian rig. It is ontracted by Desire to drill a four-well programme and is expected to arrive in Falkland waters in February next year. The rig will be used to drill the Toroa prospect, which is estimated to have prospective reserves of 1.7 billion barrels and a range between 380 million barrels and 2.9 billion barrels.The total mobilisation and drilling costs couple with the modifications required for the rig to enable it to drill in this depth of water will cost the company a total £12 million. Other prospects in the area, lie at greater depths and are best suited for being drilled by a drillship or semi-submersible, with the JV currently looking to contract such a rig later in 2010 to complete its minimum work commitment of two wells and possibly drill other discretionary wells. The cost to FOGL for the use of a deepwater rig and the drilling programme is currently expected to be around £30 million.

Bernanke, rates and Dubai add to uncertain outlook

On Friday, the better than expected U.S. jobs number sent the dollar upwards and gold down nearly 5%. But after Ben Bernanke’s speech at yesterday’s Economic Club of Washington he scuppered the suggestion that U.S. interest rates were heading up any time soon. He said, “The improvement in financial conditions this year and the resumption of growth over the summer offer the hope and expectation of continued recover in the new year. However, significant headwinds remain, including tight credit conditions and a weak job market.” This sent the dollar down and reversed the decline in the price of gold.


Today as McDonald’s and 3M earnings disappointed in the U.S. and Tesco failed to hit revenue expectations in the U.K., the Dow was off more than 100 pts and the U.K. Ftse 90 pts. Further debt worries from Dubai also pressurized banks today.

The high volatility of the market underscores that the market is struggling for direction. After seemingly shrugging off Dubai’s worries last week, sentiment seems to be generally weak. However, it is unlikely the market’s will come off too significantly given trading pressure to finish December in strong positive territory.

A turn in the U.S economy - what now for 2010?

With data flow increasingly indicating that the major economies of the world are either already out of recession or close to it, the period of unprecedented economic stimulation and low interest rates may be coming to an end. Although the Federal Reserve is unlikely to increase interest rates quickly, it would not be unexpected that rates would be on the increase in the second half of 2010.

With a tightening of interest rates on the medium term horizon what does this mean in relation to certain sectors:

1. The down spiral of the dollar against other major currencies will certainly end. Currently investors can borrow at very low U.S. rates and invest elsewhere in the world for greater returns, the so called "carry trade". If U.S. interest rates rise in 2010 this should have the effect of stabilising the dollar and reducing returns on the carry trade. If the U.S. government  acts to get the deficit under control as the country comes out of recession this will accelerate the strengthening of the dollar.

Trade: buy U.S. dollar

2. The earnings of the major financials such as Goldman, JP Morgan, Barclays, Credit Suisse have been helped in recent quarters by the low cost of borrowing and the demise of competitor institutions such as Lehman Brothers. As interest rates rise, making money by borrowing cheap money gets harder.

Trade: Cautious shorts on financial stocks

3. There has been a huge move into gold as fears of hyperinflation grow and as a hedge against the weak U.S. dollar. If the U.S. dollar strengthens this should pressure this trade. Unlike copper, platinum and other precious industrial metals, gold has limited commercial use (apart from Jewellery) and produces no income .

Trade: Short gold

4. Buy consumer sensitive stocks. As the global economy emerges from recession consumer sensitive stocks should do well e.g. P&G, Unilever

Employment data hunch pays off!

The big news of the day was the U.S. Non-farm payrolls data for November and they were a big surprise to investors with a  fall just 11,000 instead of the consensus forecast of a 125,000 drop. October’s decline was revised to 111,000 from the original estimate of a 190,000 decline. The unemployment rate fell to 10.0%  in November from 10.2%. After trading marginally positive for most of the day, all the U.S. indices reacted very strongly to the upside within seconds of the announcement, with the Dow Industrials rising in excess of 100 points and topping at around 150 pts higher.

As the day progressed, however, stocks pared those gains as commodity focused stocks began to drop as the Dollar strengthened significantly and In addition traders began to worry about the prospect of the Federal Reserve increasing interest rates as the economy recovers and hence increasing company debt servicing costs.  At close, the Dow ended up 22.75 points, or 0.22%, to 10388.90, after being in negative territory for a time.For the week, the Dow gained 79, or 0.77%, its fourth gain in five weeks.

Gold fell over 4% or $49 to $1169 and the dollar strengthened against all major currencies with higher U.S. interest rates driving speculators back into the green back and away from gold.

An exciting day of trading with short Euro/Dollar and long wall street positions being closed through the first few hours after the employment announcement. A short gold positon was well rewarded but was closed at -$18 so could have been a lot more profitable. Shorts on Amazon, Freeport and Caterpillar were also closed with good profits. Long wall street positions placed near the close.

AMAZON - back to tech boom madness!?

With Cramer hugely bullish on Amazon (AMZN) and forecasting a further upside of $74 dollars from its recent $146, 52 week high, this could a nice opportunity to take a contrarian view for those feeling a little brave.


With Amazon stock having increased nearly three times from the $50 it was at the start of 2009, the figures look eye watering! Analyst put the target price at $163, whilst Cramer has cited a figure of $216 based on EPS of $3.60, against consensus of $2.60-$3.00. $216 would mean a forward 2010 price/earnings of 60! Back to the 2000 tech madness again!

With Walmart and Best Buy looking like they’re serious about taking on Amazon on price plus expanding their presence online, achieving this sort of earnings growth looks a high risk proposition. Shorting Amazon seems to make a lot of sense despite the momentum in the other direction and if the company does trip up if any way at all, $146 is going to look expensive never mind $200! A cautious short against the crowd of sentiment.

Non farm payrolls give trading opportunity

With the U.S. employment due at 1.30 GMT, this sets up some trading opportunities.

Short Euro/U.S dollar - if figure is bad, the Euro should depreciate against the dollar as the risk trade is reduced i.e. flight to "quality".

Long Wall street - If the figures beat expectations, Wall street should rise signficiantly. Tight stop loss placed at 10340. Hedges short on Euro, Amazon, Freeport and Caterpillar.

Roll on 1.30!

U.S. Non farm payrolls gives a little Friday excitment

The U.S. employment data is released today at 1 .30 pm UK which is a major piece of news. The forecast is for 10.2% unemployment for November and a 125,000 reduction in jobs. Yesterday's the U.S. markets fell late in the trading day after oscillating between positive and negative territory, driven by weak services data (which drove the Dow down some 100 points) and poor retailer data (notably Abercrombie and Fitch ANF, down 9%) which drove the DOW down 86 pts and the S&P down 9 pts. This resulted in a positive short term, short trade on the Dow, which was closed at the close.

Shorts on Freeport McMoran (FCX), Amazon (AMZN) and Caterpillar (CAT) were initiated yesterday and remain in play. All three stocks all look to have got ahead of themselves.

A short position in Blackrock (BLK) looks interesting given the astronomic rise following the announcement of the Ishares acquisition from Barclays. Holding off for now. Long Dow is a possibility for this morning.

Appetite for risk continues

Gold continued its unstoppable rise today moving ahead of $1200 an ounce as the dollar fell heavily and the metal continued to have appeal as a safe haven against future inflation risks.In addition some of the emerging markets continue to be heavy gold buyers e.g. India. As some traders talk about $3000 an ounce it feels like we're well into yet another bubble. Remember the Goldman analyst who was talking $200 a barrel oil in 2007? Gold is the new oil! With the dollar getting hammered, it doesn't look like anything can stop the metal's upward momentum. But with everyone piling in, maybe it's going to be time soon to go against the stampede!

Emerging markets - time to short?

With the fall out from Dubai and the huge surge in the emerging markets from the March lows, now seems to be the time to short emerging markets. Short CFD's placed on Templeton Emerging and JP Morgan Emerging this morning.

NightHawk Energy - a shale oil bet with huge potential!

At 35p, AIM listed Nighthawk energy (HAWK) is a very interesting play on shale oil in the U.S. and with its share price currently depressed, there looks to be a strong investment case for signficant gains in 2010 driven by news flow.

The case for investment:

1. THE JOLLY RANCH PROJECT

Nighthawk owns a 50% share in the Jolly Ranch Project in Colorado (its U.S partner Running Foxes owns the remainder). Hawk owns approximately 400,000 acres in the SE part of the Denver Basin. The hope is that oil can be produced from its black organic shales.

In July 2009, Schlumberger Data and Consulting Services, completed a survey of the oil in place at Jolly on an area of 246,000 acres.

The results were highly encouraging:

P10 - 1.22 billion barrels

P50 (most likely oil in place) - 1.46 billion barrels

P90 - 1.742 billion barrels

Schlumberger concluded that " the regional continuity of the formations was such that the resources in place were likely to be laterally continuous across the total acreage".

Hawk's efforts to date has been focused on proving the reserves in place and recovery rates using a combination of traditional vertical wells and a newer technique known as Lateral or horizontal Drilling. During the second half of 2009, it has been shown that oil recovery has been economic from several of these wells e.g. Craig 4-4, 65 barrels per day.

What is horizontal drilling?

The use of horizontal drilling technology in oil exploration, development, and production operations has grown rapidly over the past 10 years. Horizontal drilling technology achieved commercial viability during the late 1980’s and  It has been used successfully particularly in the Bakken Shale of North Dakota and the Austin Chalk of Texas, Of the three major

categories of horizontal drilling, short-, medium-, and long-radius, the medium-radius well has been most widely used and productive. Achievable horizontal bore hole length grew rapidly as familiarity with thetechnique increased; horizontal displacements have now been extended to over 8,000 feet. The technical objective of horizontal drilling is to expose significantly more reservoir rock to the well bore surface than can be achieved via drilling of a conventional vertical well. Significant successes include many horizontal wells drilled into the fractured Austin Chalk of Texas’ Giddings Field, which have produced at 2.5 to 7 times the rate of vertical wells, wells drilled into North Dakota’s Bakken Shale, from which horizontal oilproduction increased from nothing in 1986 to account for 10 percent of the State’s 1991 production, and wells drilled into Alaska’s North Slope fields.

Comparisons to the Bakken field

The Bakken Formation, occupying about 200,000 square miles (520,000 km²) of the subsurface of the Williston Basin, covering parts of Montana, North Dakota, and Saskatchewan.

There are significant reservoirs of oil in the Bakken shale. Oil was first discovered in the Bakken in 1951, but efforts to extract it have historically met with difficulties. An April 2008 USGS report estimated the amount of technically recoverable oil in the Bakken Formation at 3.0 to 4.3 billion barrels (680,000,000 m³), with a mean of 3.65 billion.The state of North Dakota also released a report that month which estimated that there are 2.1 billion barrels (330,000,000 m³) of technically recoverable oil in the Bakken.

Geologically, Jolly Ranch is similar to the Bakken shale field which is currently the largest shale play in N. America . Because the Bakken shale has generally low porosity and low permeability, it made the oil difficult to extract and until recently recovery rates were poor and it was the advent of the new horizontal drilling techniques that has signficantly increased recovery rates. Jolly appears to have superior porosity and permeability characterisitics and this geology together with the promising early drilling results give credence to the theory that Jolly could be more productive than Bakken in the longer term.

Bakken fields have attracted strong prices per acre e.g. Jan 08 Crescent point/londex $17,000 per acre, Dec 08 Cpe/vilanum $7398 per acre, March 09 tristar/cpe $9332 per acre.

Jolly Ranch financial models based on Schlumberger anaylsis

There is a strong financial case for investment in Hawk based on the Jolly Ranch Project alone. With relatively conservative assumptions, namely;

• p10 oil in place estimates (Schlumberger July 2009)
• 10% recovery rate
• 25% cost per barrel
• $55 per barrel oil price - WTI

Estimated earnings for the life of the project are $2.35 billion, which equates to lifetime earnings per share of $72 (£45). 


2. Financial health


In August 2009, Nighthawk raised US$37 million (£22.4 million) at 35 pence per share via an institutional placing. Cash balances of 30th June 2009 were $6 million. At the AGM in November, David Bramhill (MD) stated that if oil stayed close to the current $75/barrel level, the company would continue to be cash flow positive and as production ramps up (expected to be 700-800 BPD by end 2009), cash flow would continue to improve. Nighthawk is currently debt free and the board is clearly of the opinion that equity is advantageous to bank debt. It is unlikely that  a further placing of shares will be necessary until the end of 2010 and the financial position is helped because Running Foxes contribute 50% towards all costs as well as sharing 50% of all revenues. 


3. Other prospects.


As well as Jolly Ranch, Hawk also has an interest in the Revere prospect. This is a 40,000 acre waterflood project and is located on or around the State border between Kansas and Missouri. It is comprised of the Devon Oilfield (80% interest), Buchanan, Worden and Xenia projects (50% interest).


The reservoir is underpressurised, therefore it is not possible for oil to reach the surface without water injection which displaces the oil in the well. This is a well used technique called Waterflooding.  


Initial gas production from Xenia is expected to be 500,000 cu ft per day plus oil. In addition the P50 (most likely) of the Devon, Buchanan and Worden sections of Revere has been calculated to be 210.5 million barrels. This is expected to increase as further deveopment occurs.


Nighthawk also own interests in smaller projects, Cisco Springs (50% owned) and the Cliffs shale gas project (80% owned).


4. Attractive share price below 40p


Nighthawk's current share price of 35p, gives it a market capitalisation of £116 million (329,639,480 ordinary shares). This is equivalent to the institutional placing price of 35p  which occurred in August 09. The 52 week share price range is 22p to 59p (the 59p coinciding with the release of the Schlumberger data in July 2009).


At the November AGM, David Bramhill (MD) stated that the share had been depressed by some institutional selling and this stock overhang as well as short term profit taking by private investors has moved Hawk's price down from the mid 45p range prior to the AGM to the current 35p. Certainly the news from the 2009 AGM that the company was producing only 250 BPD compared with an expectation of closer to 2000 BPD declared at the 2008 AGM made investors feel that this was "jam tomorrow" story and drove a lot of shorter term speculators out.  Production expected at the end of 2009 is closer to 850 BPD. However, investors should buy Hawk as a "production proving" play not a producer with an expectation of signficant news in Q1 2010:

• Production updates from the Jolly Ranch wells
• Production updates from the Revere Waterfloods and Xenia gas project

5. Moderate risk profile


Although recovery rates are being proved at Jolly Ranch, the Schlumberger assessment gives confidence that there is a signficant quantity of oil contained within the shale rock. Given development in horizontal drillig technology which has been succesfully applied in the Bakken, recovery prospects are encouraging.


The fact that this is a play in the United States cannot be underestimated. Infrastructure for the transport of oil and gas is good and geopolitcal risk is low. Cost of extraction is also low relative to deep water projects in the Gulf of Mexico, the Falkland Islands or Santos basin off Brazil.


6. Listing of ADR's on U.S. Market


Nighthawk was listed as a level 1 American Depository Receipt in November 2009 giving U.S. investors easier access to purchasing shares. 


7. No sale of stock options by directors


It should be noted that the following options for Directors of the company vested on the following dates:

• 4,500,000 shares , exercise price 7p, earliest vest date 15/8/09
• 500,000 shares, exercise price 7p, earliest vest date 25/9/09
• 500,000 shares, exercise price 12p, earliest vest date 11/12/09
• 1,250,000 shares, exercise price 53p, earliest vest date 1/11/07

The directors have not yet exercised these options at current share price levels. Though no directors have purchased, it gives confidence that the directors have not taken early profits.


8. Rumours of takeover


There have been some rumours of a bid for Nighthawk circulating. None of these have been confirmed but they may add spice to the share price. Competitors have been buying up land around Jolly Ranch so it is not inconceivable that a buyout may occur, but probably later in 2010 or 2011.

Coal of Africa - a quality South African coal play out of favour

Coal of Africa (CZA - AIM) has been an interesting stock for some time and now looks a compelling long opportunity as production is set to increase signficantly and there is takeover potential. Buy at 95p (52 week range 130 p - 32p).

ABOUT COAL OF AFRICA
CoAL is primarily focused on the acquisition, exploration and development of thermal and metallurgical coal projects in South Africa. The Company made the transition from explorer to producer when mining at the Mooiplaats thermal coal mine commenced in 2008. CoAL currently has four coal projects in various stages of exploration with the first of its coking coal projects, Vele, expected to commence H2 2009. CoAL also owns NiMag, which manufactures Nickel Magnesium alloys. NiMag’s growth strategy will be via the acquisition of similar alloy or foundry supply manufacturing enterprises.
CoAL’s four coal projects are:
Mooiplaats Coal Project
Vele Coal Project
Makhado Coal Project
Holfontein Coal Project

Coal of Africa Ltd, originally Golden Valley Mines, was incorporated in Western Australia in 1979, and listed on ASX Limited (Australian Stock Exchange) in 1980 primarily focused on minerals exploration in Western Australia and Indonesia. Through a series of strategic acquisitions CoAL has moved its focus from being a gold, platinum and base metals exploration company to becoming a coal mining and metals processing business, targeting predominantly South African mining and minerals processing assets. In 2005 it was decided to seek listing on the Alternative Investment Market (AIM) in the UK in order to expand the shareholder base. This was achieved in December of that year and has been the first of some major developments for the Company. At the end of November 2006 the Company listed on the Johannesburg Stock Exchange (JSE), a move which will assist the Company to further expand its interests in South Africa by allowing the Company to acquire assets by means of share issue.

REASONS FOR A CONTRARIAN INVESTMENT IN CZA

1. The company had a placement issued at 95p in October 2009 to raise £59.8 million and fund the acquisiton of Nucoal Limited, a thermal coal producer based in South Africa. Following the announcement of the placing, the share price has fallen from 130p to today's 95p (UK AIM). The current share price is equivalent to the instritutional placing price, which was 1.5 times oversubscribed.

2. The company plans to move to the main market and away from UK AIM in Q1-Q2 2010 increasing UK investment access and visibility

3. The VELE coal project approval is expected Q4 2009.

The Vele coking coal project is located in the Limpopo Province. CoAL will develop Vele in two phases, with phase one commencing in the second half of 2009 which will initially comprise the establishment of a modular coal treatment plant, and have the ability to deliver in the order of 1 million saleable tonnes (yield dependant) of coking coal per annum, likely to be delivered to ArcelorMittal for use at it steelworks in Vanderbijl Park. Phase 2 will produce the planned full capacity of 5 million tonnes of coking coal per annum.

The New Order Mining Right application for this project was lodged in October 2008.
The Environmental Scoping Report was submitted to the Department of Mineral Resources(DMR). Specialist studies for the Environmental Impact Assessment and Environmental Management Plan were also completed and submitted to the Department of Mineral Resources(DMR) as the final phase of the NOMR application process. A revised mining schedule to include both underground and open-cast sections was announced H1 2009. This revised schedule will result in significantly improved coking coal yields, reduced mining costs and an extended mine life to beyond 2040. The Company is ready to launch Phase 1 immediately upon the granting of a New Order Mining Right, currently under review by South African Department of Mineral Resources ("DMR"). A significant amount of preparation has already been completed for Phase 1, and some capital expenditure committed to shorten the production lead time. Phase 2 expansion will deliver 5 million tonnes per annum of saleable coking coal.

4. The company's flag ship Mooiplats coal mine is in production and increasing capacity.

The Mooiplaats coal project in which CoAL has a 100% interest is situated in the Ermelo coal fields 1.7km from the recently re-commissioned Camden Power Station. Development of the underground single seam thermal coal operation using the first continuous miner , resulting in the extraction of the first coal was on 20 October 2008.The second Continuous Miner was handed over on 24 November 2008. Mooiplaats which involves capital expenditure of R1billion will take approximately 18 months to ramp up to its full production of 3Mtpa of coal and 0.5Mtpa of middlings. The colliery sccessfully railed its first load of ’lean’ coal on the 11th of September 2009 to Matola and will continue to transport product to the port to fully utilise the 80000 tonne stockpile facility. Although the mine is currently mining the lower grade ’lean’ coal the target is to intercept and mine the high quality bituminous coal by Q1 2010. Life of mine has been estimated at 20 years. Infrastructure development has progressed according to plan.The coal handling and preparation plant (CHPP) was commissioned in May with capacity to process 110000 tonnes of run-of-mine coal per month.The completion and commissioning of the second CHPP module is planned for Q4 2009. CoAL expects to ship export quality thermal coal in Q1 2010. The latest consolidated resources statement indicates that Mooiplaats has 88.2 Mt measured and 25 Mt inferred resources with the potential of another +200 Mt from neighbouring unexplored properties.

5. Arcellor Mittal bought a 16% state in the company in April 2009. There have been persisitent rumours that they are interesting in increasing this stake or buying the company outright.

6. Strong balance sheet. No debt and $43 million in cash (sep 2009)

7. The company will be profitable in 2010. Expected Revenue of $187 m Aus (year ending June 2010). EPS of 10.12 A cents and forward p/e of 17.

8. Strong recovery in global coal prices following slump in 2008.

U.S. dollar flight to quality trade comes good

The markets reacted badly to the announcement on Wednesday that Dubai (part of the United Arab Emirates federation), asked to delay payment on billions of dollars of debt issued by conglomerate Dubai World and its main property subsidiary Nakheel. This has been the culmination of the end of a property boom that that gripped the Kingdom and was part of its strategy to diversify away from Oil and make Dubai the leisure capital of the world. A strategy that has been scuppered by the collapse in the property market.

Both the FTSE and Nikkei fell over 3% yesterday with the U.S. markets being closed for Thanksgiving. Prior to this news, the U.S. dollar was under heavy pressure during the week as the release of minutes of the last Federal Reserve meeting worried traders of the currency because the decline of the dollar was considered "orderly" suggesting that intervention to strengthen or stabilise the currency was unlikely in the short term. The Greenback has faced multiple pressures as the growing budget deficit, low interest rates and the Carry Trade * have all conspired to weaken the U.S. currency. It is a fact that a tightening of Fed policy to increase interest rates will cut off the opportunity for the Carry Trade and there seems to be an opportunity to be long on the dollar (short term trade) for the following reasons:

1. The uncertainty in the global markets caused by emerging markets bank exposure driving a flight to quality
2. The possibility that recovery in the U.S. economy will happen faster than anticipated will cause the Fed to tighten
3. Pressure from the Chinese to stabilise the decline in the dollar
4. Any government signals that the deficit will be brought under control in the medium term

With the U.S. dollar out of favour a contrarian bet was placed on Wednesday. - short Euro/U.S. dollar from $1.51 and buy U.S. dollar/South African Rand at $7.59. Profits taken this morning at 8am but trades resumed at 11am.



* Carry trade: A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a diff erent currency yielding a higher interest rate

DUBAI DEBT DEFAULT and US DOLLAR

The one way down bet on the U.S. dollar came abruptly to an end yesterday as the flight to riskier assets was finally questioned by investors. With the announcement of the Dubai debt standstill agreement. After hitting a 14 year low against the Japanese Yen on Thursday, triggered by the release of the Federal Reserve minutes which spoke of an "orderly" decline in the U.S. dollar, traders sold off the green back. However, the slide came to an end last night with the realisation that there were still structural risks in the emerging markets after Dubai told debtors that it would hold paying down debt until 2011. After after an overall 70%+ increase in the MSCI emerging markets from the march lows, the markets responded with a surge in the dollar and a signficant fall in market indicies e.g. FTSE and Nikkei both down over 3% with U.S. market closed for Thanksgiving holiday.

The decision to short the Euro/Dollar and buy US Dollar/South African Rand was vindicated nicely after some initial jitters on Wednesday. After taking profits this morning, these trades have been reestablished on a pull back.