Couldn't resist Rockhopper at these levels

With the huge fall out from the Desire Petroleum (DES) Liz well on all the Falkland Island drillers, the next prospect on Ocean Guardian drilling schedule looks interesting. During the previous drilling campaign by Shell in the 1998, oil was found on the Rockhopper prospect that the Ocean Guardian will start to drill early in April. After my holdings were sold automatically this morning falling through guaranteed stops, I have perhaps foolishly decided to reinvest back in Rockhopper (RKH) with a smaller position in Falklands Oil and Gas (FOGL). Having fallen from around 85p to its current 41.5p since January after the current 12p decline, the fall seems to have been overdone as the geological structure on Rockhopper's prospects are different to Desire's and I believe largely unrelated (not being a geologist). RKH's market capitalisation is only £76 million, despite a £50 million placing at the end of 2009, versus Desire's £167 million (it was over £300 million prior to today's announcement). The news flow in coming weeks will be largely from Rockhopper so I can see many Desire investors jumping ship to RKH to perhaps recoup some of the heavy losses. Speculative, but lets see what happens!

Norseman Gold looks solid Australian gold mining play

An article in this week's Investor's Chronicle, "My top Gold picks by Jim Slater" caught my attention, in particular what Jim had to say about Norseman Gold plc. "A gold mining share that ticks all the boxes for me is Norseman Gold (NGL.). It is in Western Australia and has been mining gold for 70 years. Cash in hand is A$23m (£14m) and future production is unhedged. Chief Executive Barry Cahill is hard working, experienced and capable, and has a substantial stake in the company. There are 3 mines with narrow vein nuggety deposits that feed a mill with a present capacity of 140,000 ounces of gold a year. Another mine, North Royal, is coming on stream later this year and there is potential for more mines as and when the capacity of the mill is upgraded. This year's production has been disappointing, with the target recently reduced to 65,000 ounces. However, the company's guidance for the year commencing July 1st 2010 is unchanged at 110,000 ounces. In the following year an increase to 140,000 ounces is likely, at which level operating costs should be reduced to about A$600 per ounce. With gold at say $1100 per ounce (A$1200 £726) this would give an operating profit of A$600 per ounce - A$84 a year compared with a market capitalisation of only A$128 million. Further exploration, administration expenses and tax would reduce net profit to A$45-50m. The prospective cash flow is so strong that I would be keen to invest in the company if it made widgets."

Norseman Gold (NGL) is both a UK AIM and Australian ASX listed Australian gold production company. The Company was listed on AIM in April 2007 and on the ASX on 25 June 2009. It acquired the Norseman Gold Project in May 2007, Australia's longest continually running gold operation. The Norseman Gold Project is located in the Eastern Goldfields of Western Australia in the highly prospective Norseman-Wiluna greenstone belt, 725km east of Perth and 186km from Kalgoorlie. Gold was first found on the Norseman field in 1894 and over the last 65 years it has produced over 5.5 million oz of gold. The mine is currently producing from two high-grade narrow-vein underground mines - the Bullen and the Harlequin. Currently, it has a total resource inventory of 3.7 million oz of gold at an average grade of 5.5 g/t. The tenements cover a 1,614 sq km area centred on the Norseman Township. The landholding comprises 179 contiguous tenements consisting of 13 Exploration Licences, 106 Mining Licences, 45 Prospecting Licences, 15 Miscellaneous Licences and 29 Mining Lease Applications. Reserves from the Norseman Project were 0.4 mn oz of gold (1.4 mn tonnes at a grade of 8.9g/t of gold), an increase of 29% from a year earlier.

The company also has three development projects: OK Decline, North Royal and Crown Reef:

– OK Decline: The Group recently approved the development of OK Decline, adding a third mine to the Norseman Gold Project. The initial life of the mine is two years, based on OK Decline reserves of 57,000 oz of gold. The company initially expects to mine 5,000 ounces and 30,000 oz in 2009-10 and 2010-11, respectively, from the Star of Erin, which is one of the three mineralised structures of OK Decline.

– North Royal: The Group has initiated pit dewatering and surface diamond drilling at North Royal. . First round drilling on the southern end of the pit has returned promising results particularly around a footwall structure with follow-up extensional and infill drilling will commence this month. Mining is expected to commence by the last quarter of the 2010 calendar year.

– Crown Reef: Historically, the Crown Reef mine was a major producer within the field. However, it is currently inactive. Surface drilling operations that have recently commenced intersected a structure in the expected position in the initial drill holes with assay results currently pending.

The Company's strategy is focused on extending the mine life through the conversion of resources into reserves and identifying additional resources and obtaining additional ore for the operating mill through the development of a third and subsequent mines.

In early March the shares fell 17 percent to a six month low after the miner cuts its full-year production outlook for the year ending June 2010 to 65,000 ounces from 75,000 ounces prompting Investec Securities to reduce its price target on the stock to 52 pence from 80 pence citing increased cost per ounce on this reduced production.

This morning, the company announced that non-executive director David Steinepreis last week bought 56,750 shares in the company on the market for a total of A$39,965, and he now holds 4,313,857 shares in Norseman.

For the year ending June 2011, revenues are expected to be around £111 million with earnings per share (EPS) of £5.83.  Putting the company of a forward p/e of 0.1 based on the current share price of 49.5p. Today I initiated a position at 47p based on an expectation of signficantly increased production in 2010/2011, very strong cash flow increases based on a reduced cost per ounce and interesting development programmes. The fact that the company has a strong balance sheet also adds to the positive story with a cash balance of £14 million.

Falkland Island Oil explorers blast down through guaranteed stops

The Falkland Island drillers (Desire Petroleum, Falkland Island and Gas, Rockhopper and Borders and Southern) are sharply down this morning on Desire's Liz news. The shares were in auction (a period of time when there is no automatic execution on an order book and where Orders that are allowed during auctions may be entered during this period) but are now in full trading. Desire is down 63% at 36p, Rochopper is down 40% at 31p, Falklands Oil and Gas is down 15% at 115p. Fortunately the decision to move into CFDs with guaranteed stops ws sensible with all stops being triggered at the open. Today just shows the potential volatility of oil explorers on a "no show". Feeling a little bruised this morning. Ouch!! 

Desire Petroleum Liz field update broadly confirms Times story

Following the Times article yesterday which stated that the Liz field drilling had not encountered commercial quantities of oil, Desire Petroleum have today released an RNS (see below). The key part of the RNS "oil may be present in thin intervals but that reservoir quality is poor" indicates that the Times story was broadly correct although further testing is clearly in progress. Things aren't going to go well for the share price this morning when the market opens at 8am.

Due to recent press speculation, Desire Petroleum wishes to announce that the Liz 14/19-1 well, in the North Falkland Basin, has reached a depth of 3570 metres and logging is underway.

The primary Liz target was encountered at around 2550 metres with indications of hydrocarbons while drilling. Subsequent logging operations have shown that oil may be present in thin intervals but that reservoir quality is poor. Wireline sampling is still to be carried out. Deeper gas shows have also been encountered while drilling, particularly below 3400 metres and these have still to be evaluated by wireline logging and sampling.

Until the logging is complete and the results analysed it will not be possible to determine the significance of the hydrocarbons encountered and whether the well will need to be drilled deeper, suspended for testing or plugged and abandoned.

Operations are expected to be completed later this week when a full announcement will be made.

Desire PR company refutes today's Times story

Posters on bulletin board iii.co.uk are posting that, Buchanan, Desire Petroleum's PR company have stated that an RNS will be issued tomorrow morning at 7am before the market opens to clarify the situation following the Times story today which said that oil had been found but not in commercial quantities. Buchanan have reportedly said that testing is ongoing and there has been no final data to confirm the commerciality of the Falklands Liz drilling prospect. Lots of rumours which hopefully will be put to bed by an official statement tomorrow.

As  a follow up, Reuters have just confirmed the iii reports that an RNS will issued at 7am tomorrow - "A spokesman for Desire said on Sunday that tests were ongoing, and the company would issue a statement on Monday morning clarifying the situation to shareholders." (http://uk.reuters.com/article/idUKTRE62R0WD20100328)

Times publishes story that Desire Petroleum's well is non-commercial

According to today's Times , The first well drilled off the Falkland Islands in 12 years has struck oil — but not enough to be commercially viable. Furthermore, "Desire is expected to say that the well drilled at its Liz prospect was “technically successful”, meaning it found oil, but that it is “non-commercial”, meaning that there was not enough oil to justify developing the field. The company declined to comment. Sources close to the situation said it had not finished drilling, but the signs were not encouraging. A source said: “It’s not a duster [a dry well], but it’s not commercially successful.” Desire has been working on the well for the past month.

Given this news is based on unofficial sources and the company has not commented it would be surprising if an RNS is not released tomorrow morning to clarify the situation as Desire Petroleum's share price (and the other Falkland drillers) will fall substantially on these rumours given they are published in a relatively reputable source of the Times newspaper. If true, very bad news for my Falkland's oil portfolio - I guess you win some, lose some!!

Source: http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article7078788.ece)

Portfolio review of the week March 27th 2010

The bulls seem unstoppable at the moment with solid gains around the world's stock markets for another week. The Dow Jones Industrial Average, ended up 9 points at 10,850 after being as high as 68 points higher. The index was up 1% for the week.  The Dow Industrials, S&P 500 and Nasdaq Composite all ended with a fourth week of  gains, the longest positive run for all three indexes since the summer of 2009. The FTSE 100 finished down 24 points at 5,703. The index was up 53 points, or nearly 1% for the week.

The market responded positively to the  news that the Euro zone countries had agreed a plan to bail out Greece together with the International Monetary Fund, driving the euro to a 10 month high against the dollar. On Friday afternoon, debt rating agency, Standard & Poor, confirmed it's rating on Greece.

Gw Pharma (GWP -  After last week's strong gains in GW Pharma on a positive regulatory update on Saticex and good trials results for the future U.S. application in cancer pain, the share price has dropped strongly from it's highs close to 130p to finish the week at 113p. This fall came despite Prudential increasing their holding from 10% to 12%. After selling down 3/4 of my holding close to the highs,  Contrarian Investor UK bought back at lower levels. News on the completion of the national phase of the UK and Spanish applications should be available around the time of the May interims so it's a case of sitting tight for now and waiting for further news flow.  Licensing deals in territories outside North America and Europe should also be announced in Q2.

Falkland Island Oil Explorers (Desire Petroleum, Falklands Oil and Gas, Borders and Southern Petroleum, Rockhopper Exploration) - As discussed on a previous post, I have sold my Desire Petroleum (DES) holding and moved into RockHopper Exploration (RKH) and increased my holding in Falkland Oil and Gas (FOGL) in order to be able to use IG Markets CFD guaranteed stops in case things don't go quite to plan next week. Protected trades, limiting any loss to 12.5%, were not possible on Desire for some time. News from the South Atlantic should be due Wednesday onwards on drilling of Desire's Liz field (but perhaps earlier but all conjecture). But it now seems plausible that Desire are testing the well because as a reminder the addendum to the Environmental Impact Statement (EIS) issued in December 2009 stated (http://www.desireplc.co.uk/pdfs/DesireFalklands_EIS_Adndm.pdf), "It is anticipated that the Ocean Guardian semi-submersible rig will be on location for between 18 and 30 days for each we and an additional 7-10 days if the well is tested. The earliest spud date for the first well is 1 February 2010. It is currently proposed to test the wells if hydrocarbons are found. During the well test up to up to 8,000stb/d of oil or 25MMscf/d of gas will be flared dependent on the reservoir fluids encountered and if the reservoir is found to be capable of delivering these rates...". Given it will be 35 days since the Liz prospect "spudded" on Monday (spud was 22nd February 2010), it is possible that Desire are testing the well and they would not be testing if there was nothing substantial in terms of an oil/gas find. On the other hand, drilling to target depth might have been delayed by unforeseen events, which of course is always possible in offshore drilling campaigns. Should be an exciting week either way - keeping my fingers crossed it's not a "duster". 

ITV (ITV) - After a near 10% move upwards this week from 55p to 60p, I took the opportunity to sell off the position. There has been a significant shift upwards from the 50p level in february as Crozier/Norman have taken charge and the advertising market continues to improve.

Coal of Africa (CZA) - A steady move up in CZA to finish the week at 146p as main market listing in the UK is due in the next few weeks. After a wobble, where the share price dropped as much as 7p on rumours that the Vele mine project approval might be compromised by enviromental protestors, the stock recovered to finish broadly flat. Contrarian Investor UK is expecting a move up closer to 200p during Q2. 

ARM (ARM) - Chip designer ARM holdings continued to move up to a 52 week high as tech stocks stay in demand which has squeezed the short. However, the 5% stop loss on the sell has not yet been triggered and on anticipation of a market correction this position may come back in my favour. Holding for now.

SSL International (SSL) - After a positive trading update yesterday (see previous post), SSL moved over the £8 level and triggered a stop loss on the short. This illustrates the problem with shorting shares in this short of market where momentum investors are piling in. With this sort of market, fundamental analysis of a company's value can be for nothing. 

Genzyme (GENZ) -  Pharmaceutical company Genzyme  dropped over 14% in 2 days on concerns over an FDA sanction of a key plans. An initial position was stopped out but I bought back on Thursday night as the stock hit $51. This buy was rewarded with a bounce back on Friday as brokers started saying the FDA related fall had been overdone. Shareholder activist, Carl Icahn remains key to a rejuvenation of this company.

Genzyme position reinitiated

After falling another 7% yesterday, a position was reinitiated at the close at just over $51 in Genzyme (GENZ).  A broker upgrade today following the heavy falls, has sent the stock up 3.5% to just shy of $53.

Shorts continue to be bad bet - SSL International position closed

SSL International (SSL) issued a relatively upbeat trading statement this morning. Total reported sales for the period are expected to be in the region of GBP795 million over 22% up on the same period last year. This increase includes the impact of the acquisitions in Russia and Ukraine of Beleggingsmaatschappij Lemore BV, which was consolidated from 1st June 2009, and Gainbridge Investments (Cyprus) Ltd, which was consolidated from 1st October 2009. Both acquisitions continue to perform well and sales consolidated in this year are expected to be in the region of GBP120 million. Excluding the impact of acquisitions, SSL's branded consumer sales are expected to be approximately GBP630 million. After adjusting for favourable foreign currency movements, this represents underlying growth of around 4%, driven by both Durex and Scholl. Chief Executive, Garry Watts said ""Our geographic footprint has been significantly expanded by our acquisitions of the Russian and Ukrainian businesses. Good sales growth and an ongoing focus on cost control enable us both to invest in the business and expand margins. Our balance sheet remains strong and we continue to be confident in our 50% EPS growth target over the three years to March 2012." 

A short position initiated at 782p was closed this morning at 800p. Swimming against the tide on SSL with the overall strength of the market proved to be a losing trade. My other short, ARM holdings has also performed poorly with the rise in the U.S. market over the last week continuing unabated.

Genzyme falls through stop loss

A tight stop loss on Genzyme (GENZ) at 5% was triggered at the open as the company suffered broker down grades on yesterday's FDA news. The stock is currently down 6.5% at $51.7. 

Another strong day on Wall Street with jobless data

Dow Futures were recently up 59 points as the U.S. Labour Department reported that Americans filing for unemployment benefits fell 14,000 last week to 442,000 against expectations of 450,000 or so.  The FTSE 100 is currently up 48 points to 4,722.

New position in Genzyme on FDA problems

Contrarian Investor UK started a new position in biotech company, Genzyme Corp. (GENZ) after a 6% decline yesterday. The stock fell back after the U.S. FDA (Food and Drug Administration) took action at its Allston production plant to make sure products are made within the required specification, following a series of manufacturing problems dating back to 2008. The FDA will issue a consent decree, which means additional plant testing at extra cost until further notice and will affect its top two selling drugs, Gaucher's disease treatment Cerezyme and Fabry disease drug Fabrazyme. A consent decree may take several years to resolve. Genzyme said the likely consent decree would have a third party inspect and review the plant's operations for "an extended period" to ensure compliance but sales of products made there would not be interrupted. The move would require Genzyme to "make payments to the government and could incur other costs."

But the reason for the purchase is simple. In February, activist Carl Icahn, announced he had nominated four directors to Genzyme's board, including himself, for election at a May 20 shareholder meeting. Icahn Capital LP more than doubled its Genzyme stake to 4.8 million shares from 1.5 million shares during the fourth quarter of 2009. The FDA action may help Icahn gain control of the board and push for a sale of the business.

At $55 (52 week range $47-63), GENZ has market cap of close to $15 billion and a high historical p/e of 35. Analysts were expecting earnings of $2.88 for 2010 but this is certain to be revised down. Assuming earnings of $2.5 per share, this puts the company on a forward p/e of 22 which is not outrageous given Icahn's action to oust the board. Options traders were buying the June calls at $60 heavily last night, indicating that some investors are confident of a bounce back to over $60 in the next few weeks. Though competition is increasing for Genzyme's key drugs, it may be a good takeover candidate for a larger pharmaceutical company looking to establish a presence in the specialist medicine sector. Though the company may fall further, the downside from the FDA action should not be more or less priced in and therefore from a contrarian point of view this stock ticks the right boxes.

Reconfiguration of Falkland Islands oil holdings

With the rise back above £1 for Desire Petroleum (DES) I took the opportunity to de-risk the Falklands Islands portfolio. Unfortunately IG are not accepting controlled risk Contracts for Difference (CFD) trades on Desire which makes a "duster" on the Liz prospect risky for the portfolio. However, there are still accepting controlled risk trades on the other Falklands Oil drillers and therefore I have closed the Desire position and opened a new long positions in Falkland Oil and gas (FOGL) and Rockhopper (RKH) since the downside is protected to a 12.5% loss whilst allowing me unlimited upside "hanging on the coat tails" of a Desire positive update, should it occur. The gains in the other Falkland Islands drillers may be less marked than Desire but an unprotected trade feels foolhardy given the risks.

The RNS from Desire on the results of the Liz field drilling should be due very soon since we are nearly 30 days into drilling.

Prudential ups stake in GW Pharma

Prudential have increased their stake in GW Pharma (GWP) from around 10% to just over 12% in the last few days which adds reassurance to the buys put in place yesterday. It now looks increasingly likely that the steep drop yesterday was market maker manipulation, triggering stop losses for private investors to fill the large Pru order.  Certainly looking at the pattern of trades there was no evidence of large sells and the price was forced down to 113p at one point yesterday morning. GWP is now trading up 0.5p at 119p to buy.

U.S. market turns down on Euro fears

Although the FTSE 100 finished in marginally positive territory after the budget, the DOW Jones Industrials dropped 53 points to finish at 10, 836 as the Euro continued to fall heavily against the dollar.

The Euro was hurt by Fitch, the credit rating agency, which downgraded Portugal’s credit rating to AA- from AA, citing “significant budgetary underperformance in 2009” and “structural weaknesses” in its economy. German Chancellor, Angela Merkel, continues to resist pressure to offer economic aid to Greece as unsurprisngly a bail out would be politically unpopular. Germany is holding out against any deal until the Greek governnment has exhausted its options to borrow on the bond markets, or from the IMF (International Monetary Fund) and allow it to roll over its debt. The Eurozone continues to look a mess as there is no mechanism to devalue which would have been Greece's preferred option under the Drachma.

It was interesting to watch Jim Cramer's Mad Money TV show (CNBC) the night before last where he said the market was going much higher and the bears had been turned into cuddly koala bears.  Yet with all thus exuberance many risks exist for the global economy.  The first quarter earnings season in the U.S. is due to kick off in 3 weeks time and earnings will probably do well as firms continue to drive bottom line profits through cost cutting. However,  top line sales growth will be needed to continue the momentum in the second half of 2010.