October 2010’s Penny Shares to Watch…

This month’s penny shares to watch:

• The seismic tech trends you need to follow…

K3 BUSINESS TECHNOLOGY GROUP (KBT), MONITISE (MONI), IQE (IQE)

• Why gold mining juniors can't believe their luck…

SOLOMON GOLD (SOLG), GGG RESOURCES (GGG), MARIANA RESOURCES (MARL)

The seismic tech trends you need to follow…

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

Technology moves fast. Powerful trends can develop quickly - sweeping away established ways of doing things in a matter of months. And it can be tricky to get on the right side of these moves before they take off.

First you have to contend with the jargon. Technology has a language of its own, making it sometimes hard to comprehend. The industry is fiercely competitive. And, in the case for instance of semi-conductor manufacture, it can require huge investments of capital which will not necessarily yield an economic return.

In spite of these difficulties this is an area of the stock market that can yield enormous returns. Companies like APPLE, MICROSOFT and eBAY have made fortunes for their early backers, and this success has not been confined to the USA.

Here in the UK the likes of IMAGINATION TECHNOLOGIES (IMG), ARM HOLDINGS (ARM), AUTONOMY (AU.) and translation software specialist SDL (SDL) are all proof that the UK is no back marker in the technological revolution.

And more will follow. In fact I think I have already found a penny share that could soon rival the success stories of these UK tech titans. I think this could be one of the most thrilling stock stories of the next few years.

But aside from that one stock story, there are a host of other tech markets that are enjoying seismic growth.

Take mobile phones. As mobile devices become smaller, smarter and easier to use and as broadband connectivity spreads its tentacles further around the world a virtuous circle is being created in which internet access simultaneously becomes of better quality and available to all.

Smartphone sales are growing at 40% per annum, and while it took 74 days to sell the first one million iPhones the first one million iPads were snapped up in just 28 days. On-the-move internet connectivity is a megatrend.

And I can think of at least three other major trends that could produce outstanding penny share opportunities in the year or so ahead.

Three megatrends you need to keep an eye on

1. Cloud Computing

Most of us have a PC under our desk, whirring away and crunching data - in other words, computing. But given a reliable broadband link there is no reason why this should not be done in some large data centre many miles away with just the results returned to our desk top.

Cloud computing relieves users of the need to house expensive hardware. Pay-per-use models can cut computing costs. And the files stored in the cloud, unlike those stored on your PC, can be accessed from any connected device anywhere.

One company now offering to take over an entire corporate IT department and deliver it from the cloud is K3 BUSINESS TECHNOLOGY GROUP (KBT). When presenting excellent annual results last week Chief Executive Andy Makeham said that he was ‘staggered at the response’ to this offer and described several significant contracts that K3 has already signed. Trading on just six times forecast earnings, shares in this cash generative, dividend paying business look undervalued.

2. Mobile Commerce

This is a huge growth area. It starts with the adaptation of web-pages for viewing on a pocket-sized screen, and includes mobile advertising that can be linked to GPS position finding devices, and secure payment.

According to Alastair Lukies, Chief Executive of MONITISE (MONI), ‘financial institutions in the UK and North America now see mobile banking as strategically critical’. Monitise has created mobile money networks that allow customers of different banks and mobile operators to perform banking and payment transactions directly from their mobile handset.

Monitise is adding 100,000 registered users per month and has a long term agreement with Visa. The City is clearly expecting big things. Monitise’s stock market value of £155m compared to last year’s revenue of just £6m. Although Monitise may be an exception, as a rule I don’t think you get rich by investing in companies valued at twenty-five times sales, so this one is not for me.

3. Optoelectronics

Optical fibre cables have routinely been used to transmit large amounts of data over long distances. But once this data gets into your home, or into a device, it is still transmitted by copper wire. This is about to change.

The industry is now set to replace all those copper cables and connections with optical fibre, in a phenomenon known as ‘ Light Peak’. This could improve connectivity speeds by 10-100 times and is, according to Intel a ‘logical future successor to USB’.

This view is endorsed by other industry giants. Sony’s Vice President Ryosuke Akahane talks of ‘a new generation of high speed device connectivity’ while Markku Verkama of Nokia says that ‘Light Peak technology will enable new wired connectivity solutions for Mobile Computers and Smartphones.’ The key enabling material for this is gallium nitride, and key supplier of compound semiconductor wafers that include gallium nitride is Cardiff-based IQE (IQE).

Excitement over IQE’s prospects has seen its share price double since June. Investors perceive it to be on the right side of one of today’s technology trends. And there are others. Riding the wave of technological change can be highly rewarding.

Why gold mining juniors can't believe their luck…

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

Last week provided an extraordinary demonstration of the power of penny shares to increase your wealth.

It was all about Solomon Gold (ticker: SOLG). Shares in the company, which were trading at just 10p at the start of last Monday, suddenly took off. They reached 85p on Thursday – a whopping 750% gain – before running into some profit-taking and closing the week at 44p.

The reason for this spectacular jump? Mineral samples taken from the island of Fauro in the Solomon Islands have revealed some exceptionally high grades of gold.

That would have been exciting enough. But this came in a week in which the gold price soared to $1,300 – an all-time high. The timing of Solomon’s breakthrough was perfect, landing on a market eager to snap up any crumb of good news from the gold sector.

Why is the gold price rising? There is no shortage of theories. China wants to boost its gold reserves. Investors have lost faith in paper currencies. Rising inflation means that bond yields and cash deposit rates offer negative returns. And, as is usual at times like this, there is no shortage of fervent gold bulls, talking up the price to $2,000 or even beyond...

We’ll see about that. When the oil price hit $150, Goldman Sachs famously predicted a $200 price – and not the $79 we see today. It pays to hold tight to your seat at a time like this and not get too carried away.

But the fact remains that gold’s bull run shows no signs of coming to an end. And this has crucial implications for the gold mining sector.

There may never be a better time to invest in junior gold miners

With the price of gold as it is, penny share miners cannot believe their luck. Previous cycles have gone something like this. The gold price rises. Opportunists take the chance to raise cash to go gold prospecting. They spend it on geological surveys, rock sampling and some exploratory drilling. Then, by the time they have found some gold, its price has subsided. Nobody is interested and they cannot raise the money to get any further.

This time it is different. Not only is the gold price high, but many of the world’s biggest gold miners have given up on the struggle of finding new reserves. Instead they are relying on buying into the discoveries made by small adventurers.

Mine construction needs finance but today the chances of attracting a rich big brother have never been better. In addition, the financial forecasts look rosy.

Most gold projects launched two to four years ago assumed a gold price of $650-$850 per oz. At that level, all things being equal, they would be a commercial proposition and yield a decent profit.

But changes to the gold price make little difference to the cost of developing a mine. Every dollar on the gold price rises adds to the forecast profit. No wonder the gold sector is hot! And no wonder gold mining companies are beating a path to my door – literally!

Two penny share gold explorers in ‘bonanza’ territory

Last week Dr Peter Ruxton, chairman of GGG Resources (ticker: GGG), came all the way to Oxford to press his case. Formerly known as Central China Goldfields, this mining junior has, after being stitched up by its Chinese partner, withdrawn from its Nimu gold and copper project in Sichuan. It now has a 50% stake in the Bullabulling open-pit gold mine in Western Australia’s prolific Coolgardie Goldfield.

Mined since 1998, Bullabulling has already produced 370,000 oz of gold. At the time of GGG’s acquisition in March, it had reserves of a further 430,000 ounces.

Now that reserve figure assumed a gold price of $315 per oz, but on the basis of today’s price GGG believes the mine’s reserve could be increased to two million ounces or more.

Adding to the excitement is evidence that this hitherto low-grade mine could reveal richer seams deep down. There should be plenty of news coming from GGG over the next few months and the signs are already pretty exciting. The broker Westhouse has a price target of 26.5p – three times the current 8.3p

Another gold miner with imminent newsflow is Mariana Resources (ticker: MARL). I met 65-year-old managing director John Sutcliffe in London last week.

One of the sector’s greybeards, John is not one to over-egg the pudding. Even so, he described the gold grades found from two drill samples at Mariana’s Las Calandrias North gold mine in Santa Cruz, Argentina, as “bonanza”.

“This is off the scale,” he told me. “The best I have seen in 45 years.”

The question to which we will soon have an answer is whether these extraordinarily gold-rich samples were flukes or part of a broader seam. If the latter, then the shares could take off and Mariana could eventually go the same way as another Santa Cruz gold and silver miner Andean Resources. That’s up 205% in 2010. As the big miners scramble for proven reserves, Andean is being fought over by Goldcorp Inc and Eldorado Gold Corp in a $2bn bidding war.

Don’t miss my top penny share tip for the gold bull market

For junior gold miners there is hardly a cloud in the sky. And many investors are making money fast. I’ve got one play already in my Red Hot Penny Shares portfolio and in the October issue I’m releasing a brand new top tip for the gold sector. If you’re prepared to stake some money on a high-risk penny share play, you should check it out.

If you’re already a subscriber to Red Hot Penny Shares, you can expect that new recommendation – and two other intriguing plays in the booming natural resources sector – in your October issue. If you’re not a subscriber yet…

Good investing,

Tom Bulford
Editor, Red Hot Penny Shares

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