November 2011’s Penny Shares to Watch…

I’ve picked two important subjects for November’s Penny Shares to Watch:

BIOVENTIX (PLUS Markets: BVXP). This tiny business pays a very attractive dividend, generates a lot of cash and is not rated by the stock market. Forget what a company actually does – when you find these characteristics, there is the potential to make money. Read on to find out why…

GALILEO RESOURCES (GLR). This company is going after rare earths from an abandoned open-pit phosphate mine in the Limpopo Province. This could just give investors exposure to one of 2011’s hottest stories. Below I’ll explain why.

A biotech startup already yielding 6.4% …

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

Last Wednesday I got the opportunity to meet the leaders of dozens of exciting small companies at the Growth Company Investor show in London. I left the Barbican centre heartened by these innovative companies that are succeeding in markets all over the globe. There were stories about takeovers and deals brewing, booming exports to China, product innovation and sales growth.

But the company that made the biggest impression on me was BIOVENTIX (PLUS Markets: BVXP). This tiny business pays a very attractive dividend, generates a lot of cash and is not rated by the stock market. Forget what a company actually does – when you find these characteristics, there is the potential to make money.

In my opinion, Bioventix is just the sort of business that we need more of in this country. It is based on real brain power, it sells to big overseas customers and it is in an industry that is sure to grow over time, whatever happens.

The idiot’s guide to antibodies

Chief executive Peter Harrison patiently gave me an idiot’s guide to his complex business. Bioventix makes antibodies. Antibodies are proteins that are produced naturally by the body in order to fight foreign entities known as antigens. Antibodies find these antigens, and then cling on to them. Like a Yale key, antibodies are very individual – one antibody will bind to one antigen only.

So the method of detecting whether you have antigens in your body is to take a blood sample, and then expose it to antibodies. If there are antigens in the blood, they will cling to the antibodies and thus can be identified. These antibodies can be made in the laboratory and are typically derived from mice.

Bioventix calls itself the ‘The sheep monoclonal antibody company’, and believes that better antibodies can be derived from sheep. The ability of sheep monoclonal antibodies to remain bound to their target is, Bioventix claims, 100 times superior than for mouse antibodies. They are also able to recognise targets that mouse antibodies cannot recognise, and are more effective where the targets are very scarce.

Revenues triple, with more to come

I’m certainly not qualified to pass judgement on these claims – but thankfully the market is deciding for us. Bioventix sells its antibodies to hospitals. Every time a test is run that uses one of Bioventix’s antibodies, it gets a small sum. Although this may be only a few pennies, it means a healthy profit margin for Bioventix. Once these tests are established, they’re used indefinitely, giving the company an enduring cash flow.

Bioventix has tripled its revenue in the last four years and moved from a loss into a profit by adding to its stock of antibodies. Furthermore, it closed its latest financial year to June with cash of £1.53m, up from £1.35m 12 months earlier. This allowed it to pay a generous dividend of 11p.

At today’s share price of 192p, that offers a handsome gross yield of 6.4%. The company is valued at £9.6m. The shares are traded on PLUS markets and admittedly suffer from a high bid/offer spread of 10p. The share register is also tightly controlled by the major holders. However, Harrison assured me that these major holders have undertaken to make shares available to any private shareholder who wants to get involved.

Bioventix has some real expertise and a good track record, and it should have a bright future. So far it is selling only four antibodies, but it has created eight more that could be on the market within three years. Add these to its existing revenue streams and profits should rise over time, which makes today’s stock market valuation look even more attractive.

Based at Farnham in Surrey, Bioventix is an excellent example of the sort of opportunity that is too small to interest City fund managers with millions of pounds to invest.

But for a private investor with a few hundred pounds to invest, a willingness to take a long term view, and an appetite for a nice dividend, Bioventix makes a tempting target. I’ll be watching its progress with great interest.

Why this industry veteran is betting on rare earths

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

Last Friday, I got a call from Colin Bird, a 67-year-old veteran of natural resources exploration. As we chatted, I put it to him that mining shares are offering pretty good value at present.

He agreed: “Pick a company that had a stock market value of at least £75m before this year’s sell-off, because that tells you that it must have something of substance. Then buy in at today’s low prices and you could make five times your money from here”.

Of course, you need to do a bit more research than that! And if I find anything worth buying, I’ll reveal it in Red Hot Penny Shares.

But it’s always good to hear from an old-hand like Bird. And so I was keen to find out about what’s on his radar right now…

Colin likes JUBILEE PLATINUM (JLP), AFRICAN EAGLE (AFE) and, amongst the oil plays DOMINION PETROLEUM (DPL). But the reason he called was to tell me about his latest venture – one that can give investors exposure to one of 2011’s hottest stories.

Earlier this year investors discovered the rare earth story. Unknown one day, suddenly they were all the rage. And although the tide of enthusiasm has ebbed, the basic story is still the same. Let me remind you.

Why are rare earths so valuable?

Rare earths are a set of 17 chemical elements. Though they are used in small quantities, they are vital to the manufacture of many things. Rare earths are divided into two categories, ‘Light REEs’ and ‘Heavy’ REEs.

Light REEs are predominantly used for magnets, and as additives in steel manufacture, auto catalysts and petroleum refining catalysts. They are also used in colour televisions, LEDs, LCDs, medical devices, missile guidance systems and much else. Heavy REES are also used in magnets, as well as fibre optics, fluorescent lamps, ceramics, lasers and more.

Belying their name, rare earths are plentiful. But for producers there are two problems. Rare earths are typically dispersed, and not found in concentrated and economically exploitable form. And, because they are found together, it is not possible to mine sufficient allanite, for example, without potentially mining an excess of monazite.

China wants them all to itself

Consumers of rare earths are less worried about engineering problems than political ones. China has a stranglehold upon supply. It currently produces over 95% of the world’s rare earths, and at the end of 2009 it announced plans to reduce its export quota.

Ostensibly the move was to preserve scarce resources, but it was widely seen as a move to secure supplies for domestic users. The Chinese State Council plans to consolidate its rare earth industry to allow three major producers to control 80% of the industry, and in August it began a campaign to find and close illegal mines.

This is not a comfortable prospect for global rare earth users. In 2010, world demand for rare earths was 134,000 tonnes, already ahead of global production of 124,000 tonnes – with the difference supplied from stockpiles. By 2014, demand is forecast to grow to as much as 200,000 tonnes.

Several projects are under way, including Mount Weld (Australia), Mountain Pass (USA), Thor Lake and Hoidas Lake (Canada) and Steenkampskrall (South Africa). Meanwhile, advances in recycling technology have made it possible to extract rare earths from electronic waste, and a number of reclamation operations have started in Japan.

New value in an abandoned mine

Rare earth prices have retreated by 20-50% since midsummer on the realisation that supply can grow more than previously thought. But they are still far above prices seen a few years ago, and it is into this environment that Colin Bird launches a new South African rare earth producer.

The company is GALILEO RESOURCES (GLR), which listed on AIM a fortnight ago. Galileo has acquired the Glenover project, an abandoned open-pit phosphate mine in the Limpopo Province.

What’s of interest here is that mining on this site from 1957-84 left a series of stockpiles. These have been shown to contain rare earths. That’s what Bird and Galileo are going after.

Samples taken from three of the stockpiles have been assayed by SGS South Africa. On the basis of these tests, the independent consultant, Snowden, has calculated a very preliminary value for Glenover’s total mineral assets of between £4.6m and £12.4m. So what’s next?

With a rig on-site, Galileo is now clarifying the mine’s potential, and Bird is optimistic that this work will enhance the value of the resource.

If everything goes according to plan, he believes production is possible within three years. It seems likely that rare earths will still be strongly in demand by then. If they are… and if Galileo does indeed have the supply of them it hopes it has… then it could be a great success.

This is high-risk, of course, and only for the brave hearted. For me, it’s too early for RHPS. But it’s a story and a company I’ll be monitoring closely in the coming months and you can stay tuned by trying Red Hot Penny Shares today. Simply click on the following link.

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