May 2010’s Penny Shares to Watch…

(Compiled from articles published in April and May 2010)

This month’s penny shares to watch include:

• Why diamonds are anything but forever…

Petra Diamonds (PDL), Gem Diamonds (GEMD)

• Five penny share stars to watch…

Cinpart (CNP), Alliance Pharma (APH), Belmore Resources (BEL), Symphony Environmental (SYM), Forbidden Technologies (FBT)

Why diamonds are anything but forever…

(This article first appeared in Penny Sleuth on 4 May 2010. Penny Sleuth is an unregulated free e-letter written by Tom Bulford and published by MoneyWeek Limited)

“Buy land,” they say… “nobody is making it anymore!”

As investment strategies go this is certainly not the worst. Fortunes have been made by lucky individuals who have happened to own a small plot of land in places like Manhattan or Hong Kong.

But I can see a couple of flaws.

For a start land can be ‘made’ – by reclaiming it from the sea. But more fundamental than that, there is in fact no shortage of the stuff. Obviously there’s something missing from this equation. And that is demand.

The reason why property values in London are higher than in the rest of the country is not because there is a limited supply of land. They are higher in London because that is where so many people choose to live.

It is the demand side of this particular equation that matters. Put another way, if all Londoners decided to live elsewhere, the value of London land would plunge – regardless of its limited quantity.

This merely as a prelude to today’s hot topic, which is diamonds...
Diamonds are hot right now. At least that’s the view of Nico Kruger, chief executive of Namakwo Diamonds.

Last week, Kruger described the long-term supply/demand outlook for the diamond industry as “exceptionally promising”. Don’t you just love the barely-contained glee of that expression?

Few would disagree with Kruger. People just aren’t producing diamonds these days. Not only are the stones in short supply, but that supply is getting shorter. And there is very little possibility that it will be replenished.

Diamonds are only found in kimberlite. Kimberlite – a type of volcanic rock named after the South African town of Kimberley. It is rock that has come surging and bubbling its way from the earth’s core up to the surface. It forms carrot-shaped vertical structures known as ‘pipes’. And sometimes, these pipes can contain the most precious gem of them all.

The point is this. The location of these kimberlites is no secret. Geologists have long since discovered where they are, and that severely limits the potential for significant new diamond finds.

The best of the kimberlites discovered have hosted some major diamond mines. Forty years ago the vast Orapa diamond mine was discovered in Botswana. Ten years later another large mine in Botswana, Jwaneng, came into production. Then there was the Argyle mine in Western Australia.

Up to the mid-80s, thanks to these finds, there was no shortage of diamonds. In fact, the reserves held by the world’s diamond mines were 80 times their annual production.

Wind the clock forward to today and the picture is very different.

Why a diamond supply crisis is looming

Since Jwaneng and Argyle there have only been two discoveries of any significance: Ekati and Diavik in Canada.

Meanwhile demand for diamonds has steadily increased, so the producing mines have been running through their reserves. Today, the world’s diamond mines only have enough reserves to maintain existing levels of production for some 20 years.

Nobody is any doubt that a supply crisis is looming.

Speaking at a conference last week, Charles Wyndham of WWW International Diamond Consultants said that, while the recession had pushed back the timing of this crisis by a few years, the trend lines “remain positive, very positive”. He went on: “There is a long-term imbalance between supply and demand... it's not a question of if, but a question of when”.

This sentiment was echoed by a report from RBC Capital Markets analyst Des Kilalea, who wrote that “the prospect of constrained supply and firm rough diamond prices underpins the investment attraction of the sector”. Kilalea named Petra Diamonds (AIM: PDL), Gem Diamonds (AIM: GEMD) and Harry Winston Diamonds (Toronto: HW) as his preferred stocks.

Why you should have some exposure to diamonds

For me, there are two penny share diamond plays I’m interested in at the moment. Both are featured in this month’s Red Hot Penny Shares.

One is on the verge of starting production of diamonds and has other potentially highly profitable operations in development. The second could be sitting on an exceptionally rich seam of diamonds – and will find out whether it is within a year.

But whatever your pick, I am sure that you should have some exposure to diamonds in your portfolio. Think about it. Think of those people who owned an acre of land on Hong Kong island in the 1950s. Three of four decades later they were being offered millions for it. Why? It is simple. Rising demand and strictly limited supply.

Those who own diamonds, or diamond-producing mines, should find themselves in the same position in the years to come. It seems like an absolute certainty.

Five penny share stars to watch…

(This article first appeared in Penny Sleuth on 27 April 2010. Penny Sleuth is an unregulated free e-letter written by Tom Bulford and published by MoneyWeek Limited)

Interest in the penny share market is high – and rising. That was the conclusion I drew from last Saturday’s Master Investor Show in Islington, north London.

Private investors see this annual event as a chance to meet small company bosses and market gurus face-to-face. This year was exceptionally well-attended. What’s more, the mood was distinctly upbeat. The vagaries of the election campaign were forgotten for the day as investors focused on business and business alone.

Whatever the official statistics tell us, business seems to be pretty good at the moment. Unemployment may be high and the banks may not be lending, but businesses large and small have had time to adjust to the economic downturn and are now forging ahead.

As I discovered at the show, this is even happening in the housing market. Builders have come to terms with the pricing environment. They have set their budgets at the appropriate level. Now they are starting to buy land again.

That was the message from INLAND (INL), a company that buys brownfield sites and takes them through the nightmarish acquisition of planning permission...

Five penny share stars to watch

Inland’s Stephen Wicks was just one of several company bosses to give me a positive steer. Here are a few other titbits that I picked up.

CINPART (CNP): This manufacturer of energy-saving devices that regulate the voltage passing into a building is looking to move into the United States. It may need to raise more money to finance its growth, but with the support of its UK marketing partner, Scottish & Southern, this should not be a problem.

ALLIANCE PHARMA (APH): The integration of the recently acquired portfolio of drugs from Cambridge Laboratories has gone well and the business is going “unbelievably well”, says the management. Alliance was singled out for commendation by Nigel Wray – one of the UK’s most successful small company investors. Wray drew attention to Alliance’s low price/earnings ratio, powerful cash flow and longevity of the drugs that Alliance sells to the NHS. “It is like collecting rent for 40 years,” he explained.

BELMORE RESOURCES (BEL): Belmore, whose shares are traded on PLUS markets, has a 100% interest in ten mining licences in Ireland’s County Clare. In 2008 it discovered a high-grade lead and zinc resource near the old Kilbricken Silver Mine. Last year, it struck a deal with Canada’s Lundin Mining Corporation. By spending €14.7m, Lundin can acquire the right to earn up to a 70% interest in Belmore’s licences and now has four drilling rigs on the prospect. Results should be coming through in the next few months. The message from Belmore’s managing director, Patrick Mahoney, was “watch this space”.

SYMPHONY ENVIRONMENTAL (SYM): This manufacturer of oxo-degradable plastic – plastic that simply vanishes when exposed to oxygen – seems to have overcome scepticism about its technology and is now powering ahead. With distributors covering the global map, Symphony is enjoying a rapid rise in sales. It is looking to expand the use of its plastic additive from the staple supermarket carrier bag or refuse bag to the whole range of plastic packaging. All of the world’s leading consumer businesses are under pressure to respect the environment and Symphony is attracting the attention of some of the biggest names. Analysts at Allenby Capital expect profits to double this year.

FORBIDDEN TECHNOLGIES (FBT): Most bullish of all was Stephen Streater, founder of Forbidden Technologies. Streater has already made one fortune out of video games console maker Eidos. He has now embarked upon a second stock market venture. Forbidden is developing methods of editing videos over the internet. Streater gave me a demonstration of the technology. He clearly believes that this system is ahead of any competition and could be very widely adopted. As to the share price, this is currently just 16p, but Streater described a scenario in which it could reach £100!

How you can become a ‘master investor’

So the show left me with plenty to reflect upon and to follow up. It served as a useful reminder that while politicians come and go, business adapts and moves on. The various speakers also offered some very useful wisdom which could help you to master the art of investment…

…Pay attention to earnings and cash flow.

…Beware corporate arrogance.

…Back companies where the directors have substantial shareholdings.

…Great rewards come from taking risk - little acorns will become oaks.

…And perhaps the most significant of all, do not underestimate the importance of compound interest.

Don’t forget that a seemingly modest return of 10% a year turns £1000 into £2600 over ten years and nearly £6,700 over 20 years.

You don’t need to be greedy. So long as you do a little research, back good companies – and persevere, you can expect to be a pretty satisfied investor.

Good investing,

Tom Bulford Editor, Red Hot Penny Shares

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(This article first appeared in Penny Sleuth in April and May 2010. Penny Sleuth is an unregulated free e-letter written by Tom Bulford and published by MoneyWeek Limited)