April 2011’s Penny Shares to Watch…

 
This month’s penny shares to watch:

• These penny shares could change the face of British science…

FRONTIER IP GROUP (FI.P), IMPERIAL INNOVATIONS (IVO), IP GROUP (IPO) and FUSION IP (FIP)

• A must-know fact about mining shares...

NYOTA MINERALS (NYO), GOLDSTONE RESOURCES (GRL), AFRICAN EAGLE (AFE), STELLAR DIAMONDS (STEL), SIRIUS MINERALS (SXX), HAMBLEDON MINING (HMB), CLUFF GOLD (CFG), OXUS GOLD (OXS) and CHURCHILL MINING (CHL)
 
These penny shares could change the face of British science…

(This article first appeared in Penny Sleuth in March 2011. Penny Sleuth is an unregulated free e-letter written by Tom Bulford and published by MoneyWeek Limited)

Some of the most exciting penny share stories over the last year have been hatched in university laboratories in this country. As readers of Red Hot Penny Shares well know, a number of very exciting penny shares have come to market recently with scientific breakthroughs that could yet trump the opportunity we saw in mining stocks last year.

Now I don’t want to betray my Red Hot readers by giving away any names. Or even to mention which universities these companies have spun out of. But it is well worth pointing out that, from drug research to material science, there are some very exciting things happening in our university labs right now.

The trouble with scientists of course is that they don’t always make the best businessmen. A great deal of money is wasted every year in the effort to convert innovation into profits.

But help is at hand. In recent years a number of stock market vehicles have been set up to partner scientists with hard nosed businessmen. And these companies just got some brilliant news. A new initiative for research funding will soon be introduced – and it will radically alter the way research is funded in this country. It could open the door for these penny share companies in a big way.

A new era for scientific research in the UK

The Research Excellence Framework, to be introduced in 2014, is a new system for assessing the quality of research in UK higher education institutions. Assessment of research work is crucial to the provision of research funds, and the new approach will have one crucial new ingredient.

As well as simply counting up the number of research papers published in academic journals and making a subjective view of the quality of their work, grant donors to universities will judge whether the research work is having a real impact. As much as 20% of their continuing research funding could depend upon an ability to prove that work done in university libraries and laboratories is actually translated into some material benefit to the world outside. This is going to require some skills that may be in short supply at certain universities, but one man keen to offer a helping hand is Neil Crabbe.

Crabbe is the man behind Frontier IP Group (FI.P) a £3m company that stepped up from PLUS Markets to AIM in January. He reckons that universities often lack a proper understanding of the demands of business and accordingly waste money and effort on fruitless projects that are never going to attract the support of partners.

While researchers do plenty of clever stuff, it is not necessarily going to be of interest to the commercial world. Big business is always looking for innovation and is willing to supply research funding. But it will not back blue-sky research. It has specific problems that it wants to solve; and it sees specific commercial opportunities that it would like to be able to take. It needs researchers to understand these commercial imperatives.

Crabbe believes that there is a role for a go-between, finding out what would be of real use to the industry and passing this back to the researchers. Frontier has already established partnerships with two Scottish universities, Dundee and Robert Gordon.

The former, with a £93m research budget and a high reputation in the fields of medicine and life sciences, especially pharmacology, is keenly aware of the value of research. It was here in 1975 that Walter Speare and Peter LeComber invented the amorphous silicon thin-film transistors that are the basis of today’s liquid crystal display industry – but Dundee has never earned a penny from their work.

Now though all universities are under pressure to conduct relevant research and exploit it. Effective research leads to generous funding; generous funding allows universities to attract the best academics; and a line-up of good academics will attract students waving those £9,000 per year cheques. So this should be a good time for companies that can help.

How to tap the inspiration of our greatest scientists

Much the largest player on the stock market is Imperial Innovations (IVO) which works exclusively with Imperial College. IP Group (IPO) has partnerships with ten universities and Fusion IP (FIP) works with the universities of Sheffield and Cardiff.

Frontier is the smallest of the group, but it hopes to add two more university partners to its roster, and sees plenty of ways in which these relationships can reward its shareholders. It can charge advisory fees to the universities themselves and it has also set up two new funds to invest in university spin-outs, for which it charges a management fee.

The real bunce, though, comes from the companies that it hopes will graduate from the universities to thrive in the commercial world. From these it can receive advisory fees, but it will also receive shareholdings and in some cases earn royalties. Already Dundee and Robert Gordon have thrown up some interesting candidates.

Take Advanced Underwater Surveys for example, which captures 3D images of objects on the sea bed. It is already employed by Government agencies and salvage companies to survey sunken wrecks and it is now winning contracts from the oil industry.

Counterweight is a business that equips general practitioners and practice nurses to produce evidence-based approaches to weight loss management, and is a play on the problem of obesity; while Nandi Proteins improves the functional properties of common proteins such as whey, egg and soy allowing them to replace fat and increase food shelf life.

Any one of these, or any other business that makes the journey from University lab to business success, could make good money for Frontier IP. Based on tenuous assumptions, broker Arbuthnot already believes that the shares, now at 50p, are worth 200p. But their true value over time will depend upon the inspiration of academic researchers, and Frontier’s ability to help them into the commercial world.

A must-know fact about mining shares…

(This article first appeared in Penny Sleuth in March 2011. Penny Sleuth is an unregulated free e-letter written by Tom Bulford and published by MoneyWeek Limited)

We’ve had it so good, for so long, with small cap miners. But what’s this…?

Since hitting a peak at the turn of the year, London’s mining index has lost 12% of its value. Last week alone the index lost 10%.

Investors have seen the share price of some of the favourite junior miners – including Nyota Minerals (NYO), Goldstone Resources (GRL), African Eagle (AFE) – slip as much as 30% from their highs. Is this just a blip or should investors be worried?

That’s what I’m looking at in today’s Penny Sleuth. And I start with an interesting parallel from history…

Andronico Luksic, the late owner of the Chile’s massive Antofagasta mine, started his immensely successful business career by selling copper for the post-war reconstruction of Japan. As his successors view the present day destruction of Japan, they must be wondering whether just such an opportunity has arisen once more.

The earthquake that struck Japan has sent tremors through the mining world, adding to the jitters that have been building in recent weeks. Yet clearly the Japanese quake cannot be held responsible for any of the retreat that happened before last week.

So what has caused this pull-back?

Three reasons why mining stocks are falling

There are a number of factors behind the falling share prices of mining stocks:

1) Retreating Metal Prices

Prices of most metals, both industrial and precious, have retreated from their highs. Copper is down from $10,200/ton to $9,040/ton, and nickel from over $29,000 to $25,670. Other industrial metals show a similar pattern. Gold is off from $1445/oz to $1424/oz, while at $35.8/oz silver is below its recent $36.6/oz high.

2) Capital Raising

Mining projects need regular dollops of cash. Executives know that they must hold out the begging bowl when investors are feeling in a generous mood. In the first two months of the year AIM-listed mining companies raised £344m. In recent days Stellar Diamonds (STEL), Sirius Minerals (SXX) and Hambledon Mining (HMB) have all raised new money from investors.

But neither of these factors should worry investors unduly. Metal prices enjoyed a strong run up in the second half of 2010. The reversal of metal prices hardly constitutes anything more serious than profit-taking. Crucially it has very little impact on the very positive economics of mining projects.

As for the recent instances of capital raising, there is little sign of any acceleration of last year’s pace, when £1.6bn was raised for AIM-listed miners. And while miners at the development stage are raising cash, producers are handing it back by the shovel-full. Antofagasta (ANTO) itself announced last week that it would hand a massive $1.1bn back to its shareholders in June. To the extent that its shareholders are mining funds or other dedicated mining investors, I would expect much of that money to be reinvested back into the sector…

No, the real cause of the jitters is neither of these things, but something entirely more worrying. It’s the creeping political antagonism towards the international mining industry that I discussed last month in this column.

3) World governments start seizing mining assets

Last month I reported that the main talking point from the Indaba Mining Conference in Cape Town was the increasingly strident calls for mine nationalization by opposition politicians. These have been strenuously denied by the South Africa government.

The debate has highlighted the uncomfortable truth that while foreign owned mining companies the world over are enjoying spectacular profits, the countries in which they operate feel that they are not benefiting to the same extent. Tensions are evident around the world.

In some countries this is all too predictable. Zimbabwe, for instance, is to establish a sovereign wealth fund to own up to 51% of all mining companies operating in the country, effectively nationalizing its key resources.

In the Ivory Coast where fighting has erupted since defeated President Laurent Gbagbo refused to step down, Cluff Gold (CFG) has been unable to secure critical supplies, notably fuel and explosives, for its Angovia mine and has been forced to put it on care and maintenance. Guinea is revising its mining law amidst speculation that the government wants to grab a 33% stake in mines.

But the problems are not confined to Africa. Oxus Gold (OXS) is resorting to international arbitration after its interest in the Amantaytau gold field was seized by parties backed by the Uzbekistan government. And in Indonesia Churchill Mining (CHL) has lost a legal battle to prevent regional authorities from cancelling its licenses to the world class East Kutai coal project.

As metal prices rise, host nations inevitably (and not without some justification) feel that they are being exploited. Political risk is rising and many junior miners are at the mercy of undemocratic governments and corrupt officialdom. The more enlightened nations know that heavy handed treatment of foreign miners will deter investment and hold back their own economic development.

But that won’t necessarily stop them. Investors ignore political risk at their peril. I’m watching developments very carefully and will be advising Red Hot Penny Shares readers exactly what to do with the mining shares in our portfolio and which ones I think they should be buying.

If you’re thinking about buying penny shares in the mining sector, tread carefully. And you’re more than welcome to come along and share the intelligence I’ve already gathered for Red Hot subscribers.

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Good investing,
 

Tom Bulford Editor, Red Hot Penny Shares

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(This article first appeared in Penny Sleuth in March 2011. Penny Sleuth is an unregulated free e-letter written by Tom Bulford and published by MoneyWeek Limited)