Global food price rises adds to inflation risks

The United Nations Food and Agriculture Organization (UN FAO) said today that food prices had reached an all time high following the impact of the Egyptian crisis and potential knock on effect to traffic through the Suez Canal.

The FAO measures food prices from an index made up of a basket of key commodities such as wheat, milk, oil and sugar.The index hit averaged 230.7 points in January, up from 223.1 points in December and 206 in November. Ten years ago, the index was at 90, illustrating how prices have soared in the last five years. The FAO's Cereals Price Index, which includes prices of main food staples such as wheat, rice and corn, rose to an average of 244.8 points in January, the highest level since July 2008.

Prices have been driven up by a combination of increasing consumption, stockpiling and speculation. Bad weather has not helped, for example, with Australia badly hit in recent months by flooding and Argentina suffering a prolonged drought hitting beef production.

Rising food costs is bad news for the developed economies with inflation risks  increasing as a result of a general rise in commodity prices e.g. Brent Crude went over $103 dollars today. The Bank of England has a difficult task ahead with the threat of inflation but with sluggish growth.

Big day for markets tomorrow with U.S. employment data

The U.S. Dow Jones recovered to close up 20 points at 12,062.  U.S. Federal Reserve Chairman Ben Bernanke helped to revitalise the U.S. indices after he told reporters that recent economic data suggests that "a self-sustaining recovery in consumer and business spending may be taking hold" and said he expects the economy to grow at a faster pace in 2011. Bernanke minimised inflation pressures, which he said, in addition to a still-high unemployment rate, continues to justify the Fed's accommodative monetary policy and asset purchase program.

The markets will be highly geared tomorrow to the much anticipated U.S. non-farm payroll unemployment data for January. Economists are expecting payrolls to climb by145,000 in January after rising 103,000 in December. Expect a sluggish U.K. market until the news is confirmed before the U.S market open

No news again for Contrarian Investor UK portfolio, but tomorrow's another day!

Not one interesting RNS to get my teeth stuck into today for the Contrarian Investor UK portfolio. Surprisingly for a Falklands Islands oil share, even Rockhopper (RKH), seems to be keeping a firm lid on any rumours on the outcome of its latest drill, be they good or bad. Chief Executive, Sam Moody, Chief Executive, at Rockhopper seems to be keeping a tight ship compared with the likes of Desire Petroleum (DES) where we saw 30%+ swings in the share price on leaks, some more accurate than others. Nothing like that with RKH, a few pence here and there but nothing to write home about.

The FTSE 100 retreated 17 points to finish at 5,983 despite some good news from the U.K. service sector in January (services now represent 75% of the U.K. economy) which seemed to indicate that a double dip recession was unlikely due a further economic contraction in Q1 this year.

Shell dropped 3.3% over disappointment that its $18.6 billion profit in 2010 versus $9.8 billion in 2009 was not even higher due to some refinery output issues. Also analysts were expecting a dividend rise which didn't materialise.  At the other end of the spectrum, Glaxo Smithkline (GSK) rose 3.6% to £11.68 as it announced a £2 billion share buy back and an increase in its dividend of 7% to 65p. Sales for the year to 31 December was down to £28.4bn a 1% decline from the previous year, with its main pharmaceuticals business seeing sales drop 11% due to generic competition for some of its key drugs. Pre-tax profits were down to £4.5bn from £8.7bn.

Using CFDs (Contracts for Difference) and Spread Bets

When I first started trading my own portfolio I would buy actually equity positions on the stock market. I found that a lot of my money was tied up owning too little positions plus owning actual shares means you do not have the advantages of other vehicles such as guaranteed stop losses and the ability to leverage to buy a larger positon than you ordinarily would.

Several years ago I started using Contracts for Difference (CFD) and Spread Betting thorough Igmarkets and IgIndex respectively.

So what are the pros and cons of each:

CFD's
Pros - ability to leverage a position using margin (i.e. you can buy £20,000 of a FTSE 100 company for £1000 margin down payment), guaranteed stop losses are available (even if a company goes bust you are guaranteed the stop price, with normal shares you often cannot sell in a steeply declining market), can go short (sell a share with a view it is going down) or long (buy a share with a view it is going up), free from UK stamp duty
Cons - It is a leveraged product so you need to be careful about having enough margin if the price of one your portfolio constituents suddenly moves, you pay interest on the cash value of the positions you own (which can add up over time), guaranteed stops not always available on volatile AIM stocks, you are still subject to capital gains tax (if you go over the annual allowance)

Spread bet
Pros - leveraged like CFD's, not subject to capital gains tax or stamp duty (since technically a bet), guaranteed stops available (though not always on AIM)
Cons- limited time scale (you have to buy a position based on price 1, 3 or 6 months ahead), you pay a premium in the spread (the difference between buy and sell which is increased on guaranteed stops), a large margin can be required especially for small cap shares

FTSE back to 6,000 mark on manufacturing data

The FTSE 100 closed up 42 points at 6,000 after U.K. manufacturing data proved particularly strong and positive corporate results from constituent Imperial Tobacco (IMT) which ended up 6% after its sales for the final quarter of 2010 were up 5%. Strength in commodity stocks also helped the index. The U.S. market is relatively stable, with the DOW up 11 points at 12,051.

On the Contrarian Investor UK portfolio front its been a stable but uninteresting day. Every stock finished up, but by relatively small percentages. Interesting that Rockhopper (RKH) finished in positive territory after a sell off this morning and Xcite had some relatively big buys at the close. By generally nothing much to report. Hopefully some good RNS's to get my teeth stuck into tomorrow! Sorry to readers that there's nothing earth shattering to write about.

Rockhopper tension builds

I haven't posted much on North Falklands basin oil explorer Rockhopper this week despite buying a few spread bets over the last week or so. Most of the rumours coming out of the "pub in Port Stanley" brigade don't seem to hold any credence and after all the nonsense relating to Desire Petroleum and the huge swings in share price purely on a couple of bulletin board posts I'm taking everything with a big "pinch of salt".

Unlike other Falkland Oil drillers, Rockhopper isn't a complete shot in the dark i.e. not a binary bet of betting on exploration success. Goldman have RKH as a conviction buy with a 12 month target gives so the current £3.68 share price, because of the the Sea Lion discovery with its 200 million barrel reserves. This offers downside protection to any failure on the current well drill.

If the 14/10-3 well has a positive hydrocarbon result this will be transformational for Rockhopper. The new well is around 8km from the Sea Lion discovery, and oil will confirm the geology of the oil structure in the North Falklands basin. It is likely in this event that recoverable reserves could be closer to 1 billion barrels not 200 million. This would make it an exceptional commercial opportunity and move the share price many multiples higher.

So in summary I like Rockhopper's risk/reward ratio because £3.68 is protected on the downside by 200 million barrels of oil and the upside is £10-20. This is different from Desire for this key reason, the company already has oil and plenty of cash in the bank for additional wells and seismics if 14/10-3 fails. I believe a buy below £4 with news expected any day now, is not foolhardy by any means and not a roulette wheel gamble. I understand the caution after a lot of smaller investors lost buckets of money on Desire Petroleum, but we have a different much sharper animal here! Good luck all holders, I'm glued to the RNS screen.

Bit of Xcite fun whilst we wait for take off

In a dreary office in Banchory Business Centre (nr Aberdeen, Scotland), Jan 31st, raining hard, 2 degrees centigrade. Two cups of cold brown coffee and 3 day old croissants.

"Richard Smith (Chief  Exec Xcite Energy): So what do we do guys? Those folks at British American want that damn rig signed and they keep ringing me every day. I've put them off until the 11th with some bull about our lawyers not liking a clause.

Charles Lucas-Clements (Director of Strategy and Business Dev. Xcite Energy): Yeah, but the guys in London want to get £11 out of Stat and we can't  drop the Rowan Norway yet!

Richard: Just keep extending the rig talks until the city boys do the deal. I've bought the set of irons and we complete on the Spanish villa in March. I can't take another god damned week in Banchory!

Charles: I know, I know. If we have to take another trip on one of those helicopters to the rig again with my air sickness that'll be it for me !!

Richard: So you reckon we push up the takeover price to more like 15 quid if the CPR guy finishes?

Charles: Yep. He reckons it looking like 250 million reserves so at £11 they're buying us on the cheap.

Richard: Sod it, I've got my eye on that vintage Ferrari. Keep those idiots on the bulletin sweating another couple of weeks.

Charles: Agree. Let's feed them a few more lines. Wasn't it great when they were all following Betty Knutsen for the flow test and we weren't even using it. Ha! Ha! Ha!

Richard: Phone the PR company and tell them to post some crap on the bulletin boards. That'll keep 'em guessing! Saw some idiots are selling their shares!

Charles: Yep, I gave them a big hint at oil barrel but they didn't take the bait! What can you do!

Richard: Anyway, I'm busy sorting out the Caribbean trip for the whole of March once we do the big deal. Another wet weekend in Scotland...no, no!"

(no offence intended of course Xcite board of directors!)

Xcite Energy rig signing postponed again but maybe for CPR?

Two RNS's this morning, one confirming that Xcite are still in negotiations with British American Offshore on Rowan Norway rig and deadline has been extended to February 11th and other saying that the company has had a further £5 million drawdown on the SEDA (Standby Equity Drawdown agreement) where shares are issued in exchange for cash. Groan.... more waiting!!

The 11th February date could well tie in with the Competent Persons Report (CPR) which is due late February or March. Apart from this, I cannot see a valid reason for a delay apart from takeover talks.

01 February 2011

THIS ANNOUNCEMENT IS NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION IN OR INTO THE UNITED STATES

TSX-V, LSE-AIM: XEL

1 February 2011

Xcite Energy Limited

("Xcite Energy" or the "Company")

Extension of Letter of Intent for "Rowan Norway" N-Class Jack-up Rig

Xcite Energy announces that its 100% subsidiary, Xcite Energy Resources Limited ("XER"), has entered into an extension to the binding letter of intent ("LOI") with British American Offshore Limited("BAOL"), part of Rowan Companies, Inc. for the N-Class "Rowan Norway" jack-up rig.

The LOI has been extended by mutual consent to 11 February 2011 with no amendment to the existing termination fee payable by XER in the event it does not enter into a definitive agreement by this date.

Some good stock market podcasts

I regularly listen to the following Podcasts available on the Itunes store for free:

S&A Investor radio with Frank Curzio - Weekly show largely U.S. focused but some good guests and Curzio is excellent.

The Disciplined Investor - Weekly show again with a U.S. focus but good market commentary from Andrew Horowitz and interesting guests.

Shame there's no decent U.K. focused share podcasts, unless I've missed something?

Good start to 2011 in U.S. and Contrarian, not so bright for FTSE 100

Despite all the tension in the Middle East, the Dow Jones Industrial Average ended up 68 points, to 11,892 making it a 2.7% rise for the month, its best January since 1997. The FTSE 100 has not been so fortunate, with the index falling 0.6% in January to 5,881. The discrepancy in performance is largely explained by the larger presence of cyclical stocks such as industrial group Caterpillar (CAT) in the DOW. Also the fact that it is a price weighted index (i.e. the higher the price of a stock the greater its weighting within the index) whereas the FTSE 100 is a market cap weighted index is not widely recognised (and hence the U.S. S&P 500 is a better measure of U.S. stock market performance).

The Contrarian Investor UK portfolio suffered again today on the market sell off and unfortunately Imagination Technology (IMG) fell through a stop loss set 10% below buy price. The strong start to the year precipitated by some good gains in Xcite (when it went close to 400p) and Bowleven, have been marred by the Imagination loss (fortunately not a huge position) and a stupidly set stop loss on Sirius Minerals which caught me out and which was only set to control my required margin requirements (daft to do given the volatility of SXX).  But still up nicely for the Month so a good start to 2011 but it could have been a lot better. Now for Xcite and Bowleven to come in February!

Will tomorrow bring the long awaited Xcite Energy RNS?

A day of anticipation of an RNS from Xcite Energy relating to the rig contract came to nought. However, no panic here. Disappointing that the share price dropped 8.5p late in the day to £3.62 after holding firm despite the FTSE taking a beating in the morning but I guess some of my fellow private investors are looking for bad news even if there's no hint of one!

Oil prices rose today to their highest in more than two years with WTI Crude for March delivery gaiing 3.2%, at $92.2 a barrel (its highest sine October 2008) and Brent Crude rose to more than $1.50 to as high as $101.08 a barrel. Its all time high is $147 a barrel hit in July 2008 before the financial collapse.

The reason for the oil price hike continues to be Egypt, with 2 million barrels per day passing through the Suez Canal plus a a further 1 million barrels move through the Suez-Mediterranean pipeline.

Xcite Energy - still no Rowan Norway rig RNS!

The deadline for the Rowan Norway jack up rig is here but no RNS so far!

As a reminder:

4 January 2011

Xcite Energy Limited

("Xcite Energy" or the "Company")

Extension of Letter of Intent for "Rowan Norway" N-Class Jack-up Rig

Xcite Energy announces that its 100% subsidiary, Xcite Energy Resources Limited ("XER"), has entered into an extension to the binding letter of intent ("LOI") with British American Offshore Limited("BAOL"), part of Rowan Companies, Inc. for the N-Class "Rowan Norway" jack-up rig.

The LOI has been extended by mutual consent to 31^st January 2011 with no amendment to the existing termination fee payable by XER in the event it does not enter into a definitive agreement by this date.

If they were extending negotiations I would have thought we would have an RNS by now. Issuing an RNS saying "we have extended by an additional 7 weeks day blah. blah. in order to finalise detailed elements of the contract.". It doesn't smack of the Xcite board of directors that we know. The longer the wait, the more intriguing it gets! Maybe the directors have taken a well deserved break in the Caribbean with their share sale profits and they forgot to tell the PR to send the RNS out??!!!

Portfolio review of the week - 30th January 2011

Rioting in Egypt over the rule of President Hosni Mubarek sent shares down on Friday with the Dow Jones Industrial Average down 166 points, or 1.39%, to 11,823 (the biggest drop since November 16th 2010) The Dow fell 0.4% on the week, its first weekly drop in nine weeks. The FTSE 100 index dropped 1.4% to end at 5,88, a 0.25% drop on the week.

The issues in Egypt drove up oil by 5% to $89 (see previous post: http://contrarianinvestoruk.blogspot.com/2011/01/oil-surges-on-egypt-issues.html) and sentiment in the U.K. wasn't helped by news that a U.K. consumer confidence index dropped eight points in January to -29, the lowest figure since March 2009 and only the sixth time in 35 years it has dropped by so much. Despite the oil price surge, oil stocks were mainly in the red.

The fall in the markets was overdue since after 8 weeks of rises on the U.S. markets, a correction was to be expected and the Egyptian situation was the catalyst for a sell off and profit taking. Further volatility can be expected this week and at times like this opportunities for buying can be excellent as uncertainty and the bears take hold of sentiment. 2011 will be a volatile year in the markets.

There has only been once change in the portfolio this week with the addition of Namibian copper miner, Weatherly International (WTI) (see post - http://contrarianinvestoruk.blogspot.com/2011/01/weatherly-international-namibian-copper.html).

Xcite Energy (XEL):  It was good to see Xcite rising on Thursday and Friday after drifting for some many weeks following the oilbarrel.com presentation, finishing at £3.71. Given the market environment at the tail end of last week and general negative oil company sentiment it was reassuring to see a rise. There has been lots of rumours doing the rounds about Xcite this week, with FT Alphaville claiming that it was in takeover talks. The deadline for the rig signing is tomorrow and I am surprised they have left it to the wire. Director of Business Development, Charles Lucas-Clements said at the Oilbarrel conference that investors should not be worried and that the deal would be done but why wait until the 31st? Although I have dismissed the takeover rumours as just that, rumours, it does seem strange and as Lucas-Clements said at Oilbarrel, "don't sell you will see this share double or triple". Perhaps he was referring to February 2011 not a later date on a bid? I guess we'll find out soon enough! Hopefully an RNS tomorrow morning to explain what's happening. Even if a takeover is nonsense then news that they have got the Rowan Stavanger, instead of Rowan Norway, until Talisman Norway need it would be fabulous as production timings would be accelerated. If the Competent Person's report is due in February it would also be good to get an update on progress.

Bowleven (BLVN) - Wild oscillations in the share price this week with the price dropping to 330p on Thursday before rebounding to finish at 355p. News that JP Morgan had offloaded some of their stake and a feeling that this seller was out of the way took the pressure off. I am still surprised that the share price has dropped quite so much with so much good news from Cameroon but market sentiment is not as rosy as it was a few weeks ago.

Rockhopper (RKH) - Little change as the rumour mill starts on progress at the 14/10-3 exploration well. News likely later in the week. Frankly there's so much rubbish on the bulletin boards on RKH I can't even face ploughing through them!

Sirius Exploration (SXX) - A sharp sell off this week after the news from the North Dakota exploration drill (see post - http://contrarianinvestoruk.blogspot.com/2011/01/todays-sirius-minerals-action-is-par.html). The shares dropped 17% to 17.25p. I continue to hold for the reason's cited in the post above.

Imagination technology (IMG) - A 4% drop this week to 368p on no news. I continue to hold but may be one to cull this week as now close to 10% below my buy point.

Angel Mining (ANGM) - We still await the news of the dore shipment for the Nalunaq mine which was promised in January. Time running out? - news on Monday perhaps or another delay?

Weatherly International- a Namibian copper company with plenty of potential

Weatherly International (WTI) has been on my watch list for quite a while now and last week it was added to the Contrarian Investor UK portfolio on the market sell off precipitated by the Egyptian crisis. WTI is not an easy company to research with a complicated history and varied assets some in production others in development. It certainly is a turnaround story having come back from the brink in 2009 during the global financial crisis when its shares dropped to a couple of pence after being close to 30p in 2007. It has a full portfolio of assets, some already in production, so there is no exploration risk.

Background and assets
AIM listed, Weatherly International (WTI), was founded in 2005 by Australian Rod Webster (current Chief Exec).

In 2006 Weatherley bought the insolvent assets of Ongopolo, a Namibian copper producer, with the objective of turning around the performance of its mining and smelting operations. However, by 2008 a global collapse in copper prices meant the project was uneconomic despite production of 2645 tonnes of copper and the mines were mothballed or shut in October of that year with production ceasing in December 2008. Focus moved to the smelter which was subsequently converted to a stand-alone tolling business.

Weatherly has the following major mining interests in Namibia:
Copper assets :Working Otjihase, Matchless, Development: Tschudi open pit, Tsumeb West, Tsumeb Tailings
Zinc assets: Berg Aukas

It also has Manganese assets in Burkina Faso with partner Wadi but this has been put on hold due to licence and railway issues.

The existing licences and resources are sufficient to sustain a copper mining business capable of 20,000 tonnes per annum at an average industry cost of production for the next ten years. Mining was restarted in July 2010 at the Otjihase (3.2 million tonnes at 1.6% JORC) and Matchless mines (0.7 million tonnes at 1.8% JORC) (Central Operations) and full production is expected by the Second Quarter of 2011.

About Namibia
Namibia is a country in southern Africa whose western border is the Atlantic Ocean with a population of just over 2 million. It shares land borders with Angola and Zambia to the north, Botswana to the east and South Africa to the south and east. It gained independence from South Africa on 21 March 1990 following the Namibian War of Independence. Its capital and largest city is Windhoek. For an African country it is considered a stable, democratic country.

Funding
In mid 2010 a $7 million fund raising was complete with Louis Dreyfus Commodities Suisse S.A. Later in the year, the smelter (Kombat) was sold for $3.3million to Grove Export, contributing to a $9 million profit. In November 2010, the company raised further £4.4 million with a placing at 5p.Weatherly also has the benefit of $140 million of carried forward tax losses to offset agains future profits.

Major shareholders
Dundee Precious Metals 7.56%
Bank Windhoek 6.34%
RAB Special Situations Master 5.86%
Webster, Rod J 5.11% (Chief Exec. of Weatherley)
Gartmore Investment 4.73% (reduced following a disposal on January 12th)
Martinick, Dr Wolf G 3.60% (Chairman of Weatherly)
Ezenet 3.42%

Third party deals
In 2009 DPM (Dundee Precious Metals) subscribed for over 40 million shares in Weatherley at 3p per share for £2m, the company also signed a LOI (letter of Intent) with East China Mineral Exploration and Development Bureau (ECE) where they would subscribe for a 50.1% stake in WTI for £16 million. This latter deal with ECE was cancelled in 2010 when the Smelter assets were sold to DPM.

In July 2010, Weatherly signed a Memorandum of Understanding (MOU) with East China Mineral (ECE) to establish a joint venture company (ECE 65%, WTI 25%, WTI S/H 10%) to pursue development of Berg Aukas Lead/Zinc project in Namibia and set up a new UK company, China Africa Resource (CAR). In September, WTI signed a legally binding Implementation Agreement with ECE, whereby ECE will provide funding of £4.8 million for the transfer of the Berg Aukas mine to CAR. Weatherly will distribute 10% of its 35% shareholding in CAR to its shareholders as a dividend in specie.

The company entered into an off take agreement with Louis Dreyfus Commodities Metals in mid January 2011 for around 10% of total production to effectively de risk the initial start up phase. The forward sales contract entered is for 975 tonnes of copper to be delivered progressively over an 18 month period at a fixed price of $9,260 per tonne (current copper price is $9,489/tonne). Concentrate production is expected to commence in mid February and the first delivery under the forward sale contract is scheduled for the end of April.

Future development
The Tschudi open pit already already has enviromental approval. Production estimated at 11,000 tonnes of copper by 2013.

Financials
The company currently has a market capitalisation of £68 million with 535 million shares in issue. Debt is £4.6 million (as of 2010) with cash of $14.7 million (£9.2 million). The company Chairman (Martinick) and Webster (Chief Exec) own 46.6 shares, 8.7% of the company.

SWOT
Strengths
Producing copper assets at  Otjihase (3.2 million tonnes at 1.6% JORC) and Matchless mines (0.7 million tonnes at 1.8% JORC) with minimum 5 year mine life
Copper price strong at close to $9500 per tonne
Low cost of production $3,258 per tonne at Otjihase and Matchless
No exploration risk
$140 million of losses able to offset future production
Good institutional shareholder base e.g. Gartmore and Blackrock
Namibian government large shareholder which may derisk licences etc.

Weaknesses
Success geared to copper price
Activity focused on one country - Namibia (but low risk for Africa)
Blighted history
AIM listed so volatile

Opportunities
Investors in Weatherley will get shares in CAR (China Africa Resource) when CAR is floated in AIM in Spring 2011-  Weatherly will distribute 10% of its 35% shareholding in CAR to its shareholders as a dividend in specie.
Good development pipeline e.g. Berg Aukas, Tschudi open pit
Continued weakening of dollar boosts commodity prices priced in U.S. dollars

Threats
Delay in listing of China Africa Resources
Namibian political situation (considered low risk)
Delays in production ramp up at Otjihase and Matchless copper mines
Further fund raising (low risk due to forward selling contract with Louis Dreyfus Commodities Metals
Collapse in copper demand and price e.g. China

Outlook
If every falls into place during Q1 2011, things look very positive for Weatherly given its undemanding rating and low market capitalisation of just £68 million. With full scale production from Otjihase and Matchless of over 4000 tonnes in 2011 and close to 8000 tonnes in 2012 plus some interesting development projects such as Tschudi coming on stream in 2013 . So this should be a year to put its past mistakes behind it and look forward to 2012 and 2013. If we conservatively assume net profit of $4,500 per tonne of copper in 2012 and production of 7500 tonnes, that would make earnings of $34 million (£21.5 million).

The usual risks of investing in Africa have been reduced by Rod Webster's excellent work in getting the Namibian government to have a large shareholding and thus incentive for future success.

NOTE FOR THIS POST:
I may well have missed a pertinent fact for WTI. Please comment here or contact me directly to correct any errors or inform me of any additions. It's a complicated but compelling story. Thanks!

Oil surges on Egypt issues

Oil futures had their biggest one day increase since September 30th 2009 as the riots in Egypt raised concern that protests would spread to the rest of the Middle East and disrupt the supply of oil particularly through the Suez Canal. Opec tried to calm nerves with suggestions that it could increase output to offset any supply issues through the Canal.

After falling to a 2 month low earlier in the week, March delivery crude futures were up to $89 (a rise of $3.85 or 4.8%).

Hosni Mubarek is refusing to resign as President of Egypt but he has dismissed his cabinet in an attempt to move public opinion in his favour.