Australian miners fall on new plan for mining tax

The Australian government says it will impose a Resource Super Profits Tax — also known as the Henry Tax, after the Treasury Secretary Ken Henry — starting from July 2012 on earnings after exploration, capital and dividend payments. Officials said the tax would help the Australian economy and make the system "fairer and simpler" for Australia's working families and businesses. The tax on all mining projects there from July 2012 to raise A$12 billion in the first couple of years. The revenues will be used to trim 2 per cent from the company tax rate and increase pension contributions.The minister for Resources and Energy, Martin Ferguson, said that a "significant proportion of funds" raised from the tax "will be returned to the resources industry through a new resource exploration rebate and investments in the infrastructure," and that the mining sector will also benefit from a lower company tax rate.

Prime Minister, Kevin Rudd, said “Resource profits were more than A$80 billion higher over the past decade, but the Australian people received only an additional A$9 billion. BHP is 40 per cent foreign-owned, Rio Tinto is more than 70 per cent foreign-owned. That means these massively increased profits ... built on Australian resources are mostly going overseas. It’s time for the Australian people ... to get a fairer share of the natural wealth of this country, which ultimately is owned by all Australians.”

The news sent mining stocks operating in Australia such as BHP Billiton down around 2% on the U.S. and Australian market's after falling more heavily earlier in the day. BHP Billiton's Chief Executive Martin Kloppers said in a statement that the tax would result in an increase in the total effective tax rate on the company's profit earned from its Australian operations, from about 43% currently to around 57% from 2013. Xstrata PLC's Chief Executive ,Mick Davis, said that the the proposed tax reduces "the very cash flows that are reinvested in maintaining or expanding existing Australian mines and in developing new operations, protecting existing jobs and creating new ones."

Portfolio review of the week May 1st 2010

The Dow Jones Industrial Average fell 158 points (1.4%) last night to finish at 11,009, as financials fell heavily following the downgrade of Goldman Sachs (GS) to sell. Goldman fell 15 dollars to finish at $145, a fall of over 9%. The Dow ended the week down 1.8%, the first weekly fall in 9 weeks and the worst week since January. The S&P 500 fell 2.5% to finish at 1,187, and the Nasdaq Composite fell 2% to finish at 2,461. The FTSE 100 closed at 5,553 yesterday, a fall of 65 points on the day and a decline of 170 points or 3% for the week as Barclays (BARC) disappointed due to a benign performance in its retail division.

U.S. GDP in the first quarter came in at 3.2%, meeting analyst expectations. The number was driven by an increase consumer spending  in the first quarter and the core inflation rate fell to its lowest number in 51 years.

The oil spill resulting from BP's well in the Gulf of Mexico appears to be worsening and the news from the White House that new domestic offshore oil drilling will be on hold until the investigation of the spill is complete drove down offshore drilling stocks. The operator of the rig Transocean (RIG) finished down 8% at $72, whilst sector peer Noble Corp (NE) dropped 4% to $39.5. 

This week was a good week for the portfolio despite the fall in the overall market. I continue to watch Coal of Africa (CZA) for an entry point which fell this week to below 150p following its quarterly update.

GW Pharma (GWP) - A broker initiation from Rodman and Renshaw with an outperform rating and 300p target sent the company's share's up 10% on Thursday which was quickly following by a 6% fall on Friday to finish at 118p. Some of the holding was sold on Friday morning and bought back later in the day as the price slipped further. News flow is expected over the next 2-3 weeks, particularly the UK/Spanish national application phase for Sativex and then we have the interim results to look forward to on May 18th.

Ithaca Energy (IAE) - Ithaca finished the week at 193p, around flat for the week. Union Securities has issued a broker report with a $4.00 near term target. The report expects the company to produce 5,100 barrels of oil per day in 2010, field development of Athena, Stella, Carna and Polly in the North Sea is expected to increase production 500% within four years. They also say that the Company trades at a large discount to its proven and probable asset value of $5.38.

RockHopper (RKH) - A poor week for Rockhopper with the stock dropping below 40p during the week before finishing at 42.5p, a 9% drop in the last 7 days. News if expected from the Sea Lion prospect in the next couple of weeks. A small holding in RKH, but volatile.

Rodman and Renshaw put 300p target on GW Pharma

Broker Rodman and Renshaw have initiated coverage of GW Pharma (GWP) with a Market Outperform rating and a 300p 12 month target against the current share price of 122p.

They estimate GW to be profitable in 2012 and estimate the company to earn £0.40/share in 2014. Applying a 20X multiple and a 30% annual discount rate they derive a 12-month target price of £3/share (300p).

This moved the share price up 10% yesterday to close at 127p. Profit takers have moved in today and Contrarian Investor UK took the opportunity to top slice the holding with major news not due for a couple weeks yet and the key date being the interim results on May 18th. The shares are currently down 8.5p or 7% to 121p.

U.S. market waits for GDP data

The U.S. Dow Jones Industrial average moved up 122 points last night to finish at 11,167 as fears about Greek debt contagion eased and earnings continued to meet or exceed expectations particularly in the health sector. Bristol Myers (BMS) moved 4% higher after Q1 earnings rose 16% year on year.

Today the FTSE 100 is down around 20 points to 5,601 after a 5% fall in Barclays (BARC) to £3.42 despite a 47% increase in Q1 earnings. Profit before tax from continuing operations rose to £1.82bn from £1.24bn in the first three months of 2009. Investment banking arm, Barclays Capital, earnt £1.47bn, 62% more than Q1 2009. Impairment charges for bad debts dropped 35% to £1.51bn compared with £2.31bn a year ago and 19% less than the figure for the final quarter of 2009, largely due to a £563m reduction to £191m at BarCap. The shares fell because of disappointment at weaker profits in the retail division, with a 6% drop to £403m.

The U.S. GDP data is due at 1.30 pm GMT with an expectation of a 3.2% seasonally adjusted annual rate in the first three months 2010, down from 5.6% in the fourth quarter. This will dicate the direction of the UK and US markets this afternoon.

Market continues to fall as market worries turn to Portugal

The Dow Jones Industrials finished down nearly 2% at 10,992, a fall of 213 points as Greek Debt worries drove  the sell off. The FTSE 100 is currently down 55 points at 5,547 as the Athens stock exchange bans short selling for 2 months to try and stem share price falls and the the Portugal stock market also fell heavily this morning. Focus has shifted to Portugal following S&P's debt downgrade as the next potential bail out victim.


After weeks of looking way too expensive, there are several stocks that are beginning to move into the value zone.

FTSE drops 150 points on Greece, Portugal worries

The FTSE 100 dropped 150 points or 2.6% today to finish at 5,604 whilst the DOW Jones industrials are currently down 101 at 11,101. The FTSE was hit hard as commodity related stocks took a dive as the "safe haven" U.S. dollar strengthened (e.g. BHP Billiton down 4.2%, Rio Tinto down 5.2%). The reason was debt rating agency S&P's cut to Greece’s credit rating to junk and also cut its rating on Portuguese government debt.

Greece’s rating on the short-term debt is cut to BB+ from BBB+, while the long-term rating has been lowered to B from A-2. Both ratings are below what is considered “investment grade”. The outlook for Greece is also negative. Portuguese government debt was cut by two notches to A- FROM A+, saying the downgrade reflects “the amplified risks Portugal faces” and the outlook on its rating is negative.

FTSE 100 component Reckitt Benckiser also fell over 4% to £34.97 as the company issued a strong performance in Q1 with earnings rising 14% to £461 million but warned of the potential impact of generic Suboxone competition in the U.S. during 2010 (these risks have been highlighted in a previous Contrarian Investor UK story).

FTSE drops 150 points on Greece, Portugal worries

The FTSE 100 dropped 150 points or 2.6% to finish at 5,604 whilst the DOW Jones industrials are currently down 101 at 11,101. The FTSE was hit hard as commodity related stocks took a dive as the "safe haven" U.S. dollar strengthened (e.g. BHP Billiton down 4.2%, Rio Tinto down 5.2%). The reason was debt rating agency S&P's cut to Greece’s credit rating to junk and also cut its rating on Portuguese government debt. 

Greece’s rating on the short-term debt is cut to BB+ from BBB+, while the long-term rating has been lowered to B from A-2. Both ratings are below what is considered “investment grade”. The outlook for Greece is also negative. Portuguese government debt was cut by two notches to A- FROM A+, saying the downgrade reflects “the amplified risks Portugal faces” and the outlook on its rating is negative.

FTSE 100 component Reckitt Benckiser also fell over 4% to £34.97 as the company issued a strong performance in Q1 with earnings rising 14% to £461 million but warned of the potential impact of generic Suboxone competition in the U.S. during 2010 (these risks have been highlighted in a previous Contrarian Investor UK story).

BP shows strong earnings growth on high oil price

BP (BP.) today announced 1st quarter results which exceeded analysts’ expectations. Replacement cost profit, which strips out the effect of changes in the value of inventories and fluctuations in the oil and gas price, was $5.6 billion for the quarter, up from $2.39 billion in the same period a year ago and ahead of expectations of $4.8 billion . Earnings per share were up 134 per cent at 29.82 cents, boosted by oil prices which averaged $71.86 during the quarter, compared with $41.26 during the same period last year.

Stripping out exceptionals, the rise in earnings was 118 per cent, well above analysts’ average expectations of a rise of about 85 per cent. The oil and gas exploration and production business reported a 94 per cent rise in operating profit over the year to $8.3bn, although this was slightly lower than in the final quarter of 2009. In refining and marketing, profits fell 33 per cent compared to the first quarter of 2009 to $729m. However, this still marked a sharp improvement from the $1.9bn loss reported for the fourth quarter of 2009. BP’s net debt dropped to $25.2bn at the end of March, down from $26.2bn at the end of last year. The company said that oil and gas production was unchanged at 4.01 million barrels of oil equivalent per day. TNK-BP, the group’s Russian joint venture, also lifted overall profits. Net income from TNK-BP increased to $543 million, compared with $134 million a year ago. The group kept its dividend frozen at 14 cents per share.

Amazon falls back but valuation still defies sense

At the end of last week, Amazon (AMZN) reported a 68% gain in first-quarter earnings. At one stage during trading on Thursday the company's shares moved over $150 and at their current $143, they still trade at 47 times forward earnings. For the first quarter of 2010, Amazon reported net income of $299 million, or 66 cents a share, compared with net income of $177 million, or 41 cents a share, for the same quarter in 2009 and compared with expectations of 61 cents. Revenue grew 46% to $7.13 billion, ahead of analyst expectations of $6.87 billion. Operating margins were 5.5% compared to 5% for the same period last year.

For the June quarter, Amazon said it expects net sales to come in between $6.1 billion and $6.7 billion. Analysts had been looking for $6.4 billion in sales for the period.

Though Amazon is the undoubted king of e-commerce, it still seems extraordinarily expensive on normal valuation grounds e.g. p/e, book value. Though most analysts remain positive on this stock, any wobble in its sales, earnings trajectory will leave it exposed to a big move down. I love the company, but I don't love this stock price.

Portfolio review of the week April 24th 2010

The U.S. stock market climbed to a 17 month high on Friday after strong new-home sales and good earnings from American Express, marking the Dow's 8th straight week of gains. New home sales posted their largest year-over-year increase in nearly five years. The Dow Jones Industrial average rose 70 points to 11204, its highest close since Sept. 19, 2008. For the week, it climbed 1.7%. The Dow has now had its longest weekly winning streak since a run that ended in January 2004, more than 6 years ago.

The Nasdaq Composite rose 11 to 2530, its highest close since June 2008 led by rises in energy stocks. It rose 2% on the week, like the Dow showing its eighth-straight weekly gain. The S&P 500 climbed 9, to 1,217, its highest close since Sept. 19, 2008.

The FTSE 100 finished up 58, at 5,724 despite the disappointing GDP data as a stabilisation of the Greek debt situation was anticipated. The index was down 0.3% for the week.

GW Pharma (GWP) - No news from GW pharma this week as further information on the Sativex European licence is anticipated in May. It finished flat at 110p. Patience with this one.

Ithaca Energy (IAE) - Ithaca moved up 17p, 10% yesterday to finish the week at 189p on new that it had secured a $140 million funding facility to exploit the Stella North Sea field and acquire other assets in the area. The future looks very bright for this company. The stock moved 17% higher on the week with momentum continuing to look very positive.

Rockhopper (RKH) - Position initiated in the Falkland Islands driller as the stock slipped to 45p this week after last week's spudding of the Sea Lion prospect. 

Greek problems get worse

Greek Prime Minister George Papandreou has asked the European Union and the IMF (International Monetary Fund) to initiate the recently negotiated €40bn emergency aid package. Earlier this month, a deal was agreed under which eurozone nations would provide emergency loans of up to 30bn euros ($40bn; £26bn) in the first year, with a further 10bn euros coming from the International Monetary Fund (IMF). Greece has 300 billion of outstanding debt with 56 billion euros due to be refinanced this year.

Moody's cut to Greece’s sovereign debt rating from A3 to A2 and warned of further possible downgrades added to pressure on the troubled country. The downgrade came after the European statistics office Eurostat increased Greece’s budget deficit in 2009 to 13.6% from 12.7% and warned that too could be revised further. Greece is aiming to cut its public sector deficit to less than 3% in 2012.

Confidence in the Greece economy has continued to fall, pushing its cost of borrowing to record levels in recent days as investors continue to worry that the government's attempts to curb the deficit will fail given the country's history of issues such as lax tax collection. On Friday evening, thousand's of protesters took to the streets of Athens to demonstrate against further austerity measures. The yield, or interest rate, on Greek 10-year bonds, fell to as low as 7.99% after Mr Papandreou spoke, after rising to nearly 9% on Thursday - its highest level for more than 10 years. It then crept back up to 8.66%.

The question is for government debt investors is what country could be next. Portugal, Spain and Italy look like likely candidates for pressure as their sizeable debt comes up for refinancing and if investors have little appetite to take on this debt or if the interest rates demanded are too high for the economies to sustain, we could see Greece being played out again.

But fell eurozone members have their own political problems. The German opposition SPD is demanding a full debate on their portion of the aid package which could delay any German contribution.

As George Soros warned last week, Greece is starting to experience the "Greek death spiral" as interest rates on the open market have climbed to unsustainable levels.

UK growth still sluggish

The UK economy continued to recover from recession in the first three months of 2010 with GDP growing by 0.2% in the 1st quarter according to the the Office for National Statistics (ONS). But this was weaker than the 0.4% growth predicted by many economists. The final quarter of 2009 saw GDP growth of 0.4%, revised up from an initial estimate of 0.1%.

The ONS said the particularly cold weather seen at the beginning of the year may have had an impact on  the economy, particularly in the retail and industrial sectors, although growth came from the financial and business services sector, which saw growth of 0.6% and manufacturing output grew by 0.7% over the quarter.

UK borrowing hits post war record

The U.K. government will borrow  a staggering £163 billion this year,  but down £12 billion from forecasts last year and £3billion less than projected in the budget.  This equates to £3,200 for every adult in the United Kingdom. 

Ithaca Energy announces $140 million debt financing

Good news from Ithaca Energy today with the announcement that they mandated Bank of Scotland as lead arranger on a $140 million senior secured borrowing debt facility. The money will be used to fund the development of the Stella field and the satellite discoveries Harrier and
Hurricane and/or fund future potential acquisitions of production properties in the North Sea. Furthermore the company confirmed that engineering scoping work has already started on the Stella development and satellite discoveries, Harrier and Hurricane based on the outcome of the Stella
appraisal well.

Iain McKendrick (Chief Executive Officer) commented:
"Further to our strong 2009 financial results and the very encouraging Stella appraisal well, the Company is well positioned to grow. This facility provides a major building block towards funding the capital expenditure required for the development of the Greater Stella Area but also the flexibility to finance a significant acquisition. The high level of support offered by the Bank of Scotland to Ithaca reinforces our view of the underlying strength of the Company cash flow and reserves".

The share price has responded positively with a rise of 5.7% to 177p despite a falling market. It means that the threat of a dilutive placing or rights issue has been avoided which is good news for Ithaca shareholders.  The company now has the prospect of a fully funded programme to exploit the Stella field and opportunities to pick up other assets which should drive earnings significantly upwards in 2011.

IMF predicts Europe growth will lag U.S.

The International Monetary Fund (IMF) is predicting that growth in euro area would lag that of other developed economies reducing its growth forecasts in the region to 1.5% in 2011 from 1.6%. It revised up its prediction for U.S. growth next year from 2.4% to 2.6% with the U.K. being revised down from 2.5% from 2.7%.

The IMF forecasts world growth at 4.2%, up from 3.9%, with 2011 unchanged at 4.3% growth. This supports the view that investors should be focusing on companies with a global earnings profile, not those with a large percentage of its earnings in the euro zone or the U.K.