March 2011’s Penny Shares to Watch…

This month’s penny shares to watch:

• The mounting backlash against miners…

AVOCET (AVM), NYOTA MINERALS (NYO), AFRICAN AURA (AAAM), FORTE ENERGY (FTE) and PETRA DIAMONDS (PDL)

• Here comes the Biotech Mania...

SAREUM HOLDINGS (SAR), PHYSIOMICS (PYC), NEXTGEN (NGG), VALIRX (VAL), ANTISOMA (ASM) and VERONA PHARMA (VRP)

The mounting backlash against miners

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

The 6,000 delegates at the recent Indaba Mining Conference in Cape Town were all loudly optimistic, almost to a man. Rumours swirled of Chinese envoys carrying suitcases full of bank notes. And one historian spoke of an “epic shift” that will drive mining for years – “the type only witnessed once every five hundred years”.

But even so, the mood was soured a little by talk of nationalisation. The big concern is South Africa. But many other African governments are talking tough too.

If you are invested in mining at all, you need to pay very special attention to these developments in the months ahead.

Could Africa revolt against Big Miners?

Tension between the world’s mining companies and the governments of countries in which they operate is mounting. Much as the industry’s leaders promise to engage with governments and support local economies, the fact is that they are making a huge amount of money but not many friends. Even in Australia, a persistent debate over a possible extra tax levy on the miners refuses to go away. But the real concerns lie with South Africa.

Mixed messages coming from the South African government caused Julius Malema, the strident leader of the African National Congress Youth League, to claim that nationalisation had in fact become government policy.

And President Zuma has hardly knocked this on the head. He recently described the country’s mineral wealth as a ‘national asset and a common heritage that belongs to all South Africans, with the State as the custodian’. Is this the beginning of a backlash against miners?

Where Miners are as unpopular as British banks

Last week I spoke to the director of a big coal project in South Africa. And he told me that Susan Shabangu, the South African Minister of Mineral Resources, had assured him that nationalisation would not happen. But things change and the very fact that industry leaders are talking about it reflects their concern.

When she was not entertaining Chinese customers at the Vergelegen wine estate, Chief Executive of the giant miner Anglo American Cynthia Carrol warned that ‘mining companies will simply not invest if they cannot be assured that the assets they create will be secure. In ignoring this truth the false prophets who argue for nationalisation are advocating the road to ruin’.

But will her argument carry the day? Across Africa, foreign mining companies have a similar reputation to British banks: too profitable, overpaid and not contributing enough to the economy. The temptation to sacrifice them on the altar of political expediency is strong.

Over in Guinea, the new president Alpha Conde who was sworn in just seven weeks ago is already setting about revising agreements with various international funds and companies signed by the previous government. There is talk that he will demand that the State hold a 33% stake in all ventures.

And the ructions in the Arab world, already spreading across North Africa, are only adding to the sense of mounting political risk. Africa has always been rich in resources, whether of the mineral or agricultural variety, but that has not lifted it out of poverty.

Will this latest mining boom be any different?

Harvard Professor: ‘an epic shift is underway’

Only time will tell if African countries succumb to hostility and suspicion against miners. But for now investors are pushing such misgivings to the back of their minds, focussing on rising commodity prices and staying bullish.

Harvard Professor Niall Ferguson advised the Indaba Conference that an ‘historic and epic shift’ is underway. The era of western economic and political influence is waning and the economies of the east have reawakened. Central to the upcoming transfer of wealth from rich to poor is Africa’s $312trn (the Professor’s calculation) of mineral resources: ten times that of the USA.

Look to the ‘holy grail of mineral exploration’

So where should investors look? With South Africa under a cloud of political distrust, attention is turning to the Continent’s heartland. The Democratic Republic of the Congo, with its vast reserves of copper, cobalt, gold and diamonds is seen as ‘the holy grail of mineral exploration’.

The West African greenstone belt has attracted investment to countries like Mali, Burkina Faso, Sierra Leone and the Ivory Coast. To the east Tanzania has become a significant gold producer, Zambia is seeing the development of new copper mines, while mining investors have homed in upon Namibia’s vast uranium resources.

Since 2000 foreign direct investment into Africa has increased from an annual figure of $10bn to $60bn, and there is no sign of the tide turning. Economists forecast fast economic growth, urbanisation and an alleviation of poverty. Foreign investors want a slice of the action and the mining sector is the obvious place to look.

Amongst London quoted companies to make a good impression at Indaba were AVOCET (AVM), NYOTA MINERALS (NYO), AFRICAN AURA (AAAM), FORTE ENERGY (FTE) and PETRA DIAMONDS (PDL). For the time being the picture looks rosy. But in the long run politics rather than commodity prices could determine the fortunes of foreign investors.

It’s a message that I have been telling my Red Hot readers for some time – when you invest in a miner, you need to pay very close attention to the political risk. And we’ve invested in some very promising mining prospects where I believe the governments are very unlikely to launch a surprise attack.

Safe regions, big deposits – and the chance of a very big payoff for us if it comes through.

Here comes the Biotech Mania

Dormant for years and abandoned by investors as a non-starter, biotech looks to be on the cusp of a thrilling revival. After a string of dramatic announcements in recent months, it seems that investors have discovered a newfound enthusiasm for these stocks.

Just look at what happened this week when drug researcher SAREUM HOLDINGS (SAR) revealed news of another exciting breakthrough…

The discovery that points to Biotech’s extraordinary revival

On Monday Dr Tim Mitchell, Chief Executive of the Cambridge based drug researcher, reported that its Aurora+FLT3 Kinase programme had, in a pre-clinical in-vivo study, appeared to slow the progress of cancer.

Ten leukaemia patients were treated with this compound and their ‘leukaemia regressed to such an extent that no detectable cancer could be found in any of the cases treated’. By contrast for those who did not receive Sareum’s compound their leukaemia ‘increased five to fifteen fold’.

That was enough to send Sareum’s share price multiplying. Having drifted along for months at a price of about 0.25p, the shares took off, hitting 1.65p the following day and 4.79p on Wednesday. It has slipped back a little today. But those lucky enough to have been holding the shares and smart enough to have got out at the top could have multiplied their money nineteen-fold in the space of just three days.

No less impressive was the extraordinary volume of shares that were traded. On Wednesday 1,142,362,883 Sareum shares were traded, representing over 80% of its entire issued capital, and the excitement spread elsewhere.

• Oxford-based PHYSIOMICS (PYC) has developed a simulation platform that can show how a tumour will react to drug exposure. It saw its share price surge from 0.25p to an intra-day high of 0.68p

• The US company NEXTGEN (NGG), which offers a suite of services that can increase the traditionally low success rates associated with biomarker development, flew from 0.11p to a high of 0.53p

• VALIRX (VAL), which focuses on the epigenomic analysis and treatment of cancer (the epigenome consists of chemical compounds that modify, or mark, the genome in a way that tells it what to do) almost doubled to 0.53p

This is an extraordinary revival for a sector that has been languishing for so long that most investors have given it up. But you need to be very careful here…

A sector shot through with risk - and scintillating rewards

A cure for cancer is the equivalent of finding a river of liquid gold. But still, the biotech industry is fraught with danger. It eats up money, and genuine successes are few and far between.

A few years ago high hopes were held for ANTISOMA (ASM), also a company looking for successful cancer drugs. This week it was described as a company ‘that develops drugs that do not work’. That’s a harsh but fair verdict on a company that has seen its share price sink from 36p to 2.2p over the last twelve months.

Those who rushed into Sareum are already being brought face to face with some of the realities of biotech life. Today the company took advantage of the surge of interest to tap shareholders for £500,000, through the sale of 500m new shares at a penny a time.

And a more careful reading of Sareum’s Monday revelation shows that ‘at six weeks following treatment, no detectable cancer could be found in two of the ten examples dosed with the Sareum compound. In the remaining eight treated examples, the average time taken for the leukaemia to increase five-fold was six weeks, compared to two weeks in the untreated cases’. So while Sareum’s treatment seems to have some advantages over others, it appears to limit the spread of cancer, rather than kill it off completely.

How marvellous it would be if Sareum had a cancer cure! But shareholders should prepare for a long and bumpy ride. Biotech research is a laborious process. While successful developments in this area often improve upon existing therapies, few provide a total cure.

In time Sareum will need to find licensing partners, most probably big pharma companies with deep pockets. As big pharma cuts back on its own research spending, it is increasingly looking for small biotechs to do the early work, but the big boys do not move fast.

For example, investors bid the shares of VERONA PHARMA (VRP) up to 18p in 2009 after it said that RPL554 compound was safe and effective for asthma patients. But it is yet to strike the anticipated licensing agreement.

How to decode the jargon and make tremendous rewards

So while there is no shortage of penny share drug discovery companies, this can be frustrating territory. You’ll find obscure medical jargon, long time lines and a record of setbacks that far outweigh the successes. Many of the investors who have just warmed to biotech will make grave errors.

I’ve been following biotech stocks for a long time. And to be honest, it took a great deal of research before I was entirely comfortable with the medical jargon and dangers of investing in this sector. And for all that caution, I think I can still sometimes overestimate the potential of some of the biotechs I invest in.

But do I think all that research has paid off. Having got in ahead of its trial success in Verona Pharma for example, Red Hot Penny Shares booked a tremendous gain in 2010.

And in the Red Hot portfolio today is a small cap drug developer that I think is facing into a transformational year. I have high hopes for this one. And there will probably be a few more biotech stocks in the Red Hot portfolio by the end of the year. It’s dangerous territory, but I love the excitement of this extra-high risk sector!

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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 February 2011. Penny Sleuth is an unregulated free e-letter written by Tom Bulford and published by MoneyWeek Limited)