Miners

SHG (Shanta Gold) up 7.3% today. Apparently it was tipped in Daily Mail on Saturday. SHG is attracting attention now. Interactive Investor also produced a video on it on 12-Jan-2012. I have a Google Doc on it, in which I guesstimated a fair value of about 100p. Current price is 25p, so there's plenty of upside left on this badboy.

AFF (Afferro Mining) up 2% today. Its rise continues unabated - hopefully they'll be a pullback soon. At 77.5p, it's now at least made it to its net cash position. Plenty of value still left.

AFF - Afferro Mining

I finally completed my AFF NFSC 2012 submission. Wish me luck. Links:

• TMF thread
• Google doc writeup

The text of the document appears below.

NFSC 2012: AFF - Afferro Mining

In April 2011, under a plan of arrangement, African Aura Mining split into two equal parts in order to “unlock the latent value” in both parts [3]; one of which is Afferro Mining.

AFF (Afferro Mining) is a TSX-V/AIM listed exploration and development company with iron ore projects in Cameroon and Liberia - both of which are in West Africa, for the geographically challenged people like me. It is ISA-able.

Some basic stats: based on a share price of 52.8p and 104m shares, the company has a market capitalisation of £54.9m. As reported for 30-Sep-2011 [1] , their equity amounted to $60.9m (£39.3m), with net cash $21.9m (£14.1m) [2]. They reported no turnover, and their  “comprehensive” losses for 9 m/e 30-Sep-2011 were $7.2m (£4.6m).

In December 2011, AFF sold its stake in “Putu” for $65m (£41.9m) cash, and a further deferred cash payment of $50m (£32.3m) [4]. The transaction requires shareholder approval and regulatory consents, but I am not anticipating any problems.

All told, the cash underpinning AFF is 77pps [5]. So, in the most simplistic of terms, for 53p, you get 77p in cash (albeit some of it is deferred consideration), and all the resources for free. For sure, AFF will need to plough that cash into developing its resources, so it’s a question of whether it can generate more value from the resources than it can by expending its cash. The company has stated that due to the divestment programme, it has sufficient resources to develop assets beyond 2013 [5]. Shareholders can therefore take comfort from the fact they are unlikely to be diluted in the near term.

VALUATION

DCF VALUATION -- In April 2011, Stockopedia published a report on AFF [6]. They cited Panmure Gordon’s note giving a DCF valuation before risk adjustment of 2047p per share, and a risk-adjusted value of 491p per share. Things have changed since then, but it’s worthwhile noting how things stood at the time, and just how favourable the discrepancy between price and value was.

COMPARATIVE BASIS -- A compelling valuation was provided yesterday by “j1nxed” posting on ADVFN [7]. The valuation method is relative, comparing EV/TFe (Enterprise Value over Total Fe) against a group of peers. Based on his figures, a fair value for AFF would be $4.37 - way above the current price of $0.81. By way of explanation, the beige box above the column is AFFs theoretical share price on the EV/TFe multiple for the comparator company. The black text inside the column is the EV/TFe (100% iron) for the comparator. Huh? Let’s take AFF, based on 103m shares at $0.81 ps with $78m in cash (ignoring the actual minimum Putu deal), Excluding AFF, the average EV/TFe for comparables is $0.579/t. Using that as a basis for AFF and TFe of 644Mt, that implies an EV of $372.876m, add on the net cash of $78m to give a fair market value $450.876m, divide by 103m shares to get a target share price of $4.37 (293p). AFF is currently trading at an EV/TFe of $0.008/t [9]

OUTRIGHT BUYER VALUATION -- As a further gauge on value, I considered the recent sale of Putu for £74.2m (=£41.9m cash + £32.3m deferred). According to AFF, the management target total resource is (greater than) 3.5 Bt. Mano River Holdings (owned by AFF) had a 38.5% stake, putting the value of an iron ore mine at  £55m/Bt (=74.2m / 0.385/3.5). Looking at the summary on ADVFN dated 13-Dec-2011, I notice that AFF has a 100% interest in the Nkout iron ore project, with a target of 4Bt. That implies a valuation for AFF of £220m (= £55m/Bt * 4Bt), or 211pps, which is about 4X its current market capitalisation. I have completely ignored the current cash position and the three prospects it also has in Cameroon (Ngoa, Akon, Ntem). Obviously, this is a very “finger in the air” valuation on my part, assumes “all things being equal”, which they are unlikely to be, and so on. But it does give you the distinct flavour that AFF is undervalued.

Summary of valuations:

* Current share price: 52.3p

* DCF basis: 491p - 2047p

* Comparative basis: 280p

* Outright buyer basis: 210p

DIRECTORS

da Silva, Luis - CEO and President

Evans, Dave - Independent Director

Granovsky, Boris - Independent Director

Netherway, David - Chairman

Pas, Guy - a non-exec director. At 13-Dec-2011, and RNS notice http://bit.ly/ApwHKT stated that director Guy Pas owned 6.2m shares, amounting to 5.89% of the company, or £3.4m.

Total board and management appears to be around 7.8m shares, which is 7.2% of the company. There are employee options of 7.3m shares, bringing the fully diluted number to 111.2m.

OTHER POINTS OF NOTE

• Nkout project is well located, with a 30km connection to Sundance’s planned rail line. Finance decision expected May 2012.
• Cameroon has stable government for over 20 years. Democratically elected government since 2006. USD 16bn foreign direct investment in mineral, oil and agricultural sectors. Sustained UN and US commitment.
• Nkout first production is as yet unknown.

GLOSSARY

BIF - Banded Iron Formation resource

DFS - Definitive Feasibility Study

DSO - Direct Shipping Ore

MRE - Mineral Resource Esitmate

PEA - Preliminary Economic Assessment

PFS - Pre-Feasibility Study

NOTES

[1] Consolidated Interim Financial Statements for the 3 and 9 months ended September 30, 2011. http://bit.ly/xXXx9F (PDF)

[2] Cash and equivalents are the only interest-bearing items.

[3] Completion of arrangement; commencement of trading. 13-Apr-2011 http://bit.ly/xtBGyI

[4] Sale of Putu Iron Ore Project http://bit.ly/xp5R4O

[5] Conference call 12-Dec-2011 http://bit.ly/w8vBWd (PDF)

[6] Afferro - An Iron Investment for 2011 http://bit.ly/ekekdS

[7] j1nxed - 5 Jan'12 - 12:45 - 11488 http://bit.ly/wMRy7t

[8] Putu, Liberia, Overview http://bit.ly/xqqndn

[9] Calculation of EV/TFe for AFF. Assuming a share price of $0.81, 103m shares, the market cap is $83m. Lop off $78m for cash (although the amount expected from the Putu is a lot higher), to give an EV of $5m.

Based on a 100% interest in inferred 2.0Bt at 32.2% iron at Nkout , that implies 644Mt at 100% (=2Bt * 32.2%).

Divide one by the other (5/644), giving $0.00776/t, or, as you round in your graph, $0.008/t.


Created: 19-Jan-2012

Diary: AFF, CPP, DNO

I'll tell you this for nowt: the market knows how to seriously test your convictions. The last couple of days have been very, um, "exciting" for me.

Yesterday, DNO (Domino Printing Sciences) dropped 12% on anticipation of today's results. A sure sign that the results will be bad, right? Wrong! In the final results RNS, it announced underlying EPS up 9%, 33rd year of sales growth with record profit. Dividends increased by 20%, currently standing at a yield of 3.99%. Come to daddy! It's currently up 12% in trading today - although there's obviously volatility there. Poster on ADVFN writes:

I agree, impressive numbers, though the rate of growth in H2 did slow quite a bit. The main worry must be the segmental dependence on Europe, which seems determined to embrace austerity, and I think that is what is spooking the markets.

 AFF (Afferro Mining) is a minnow iron ore miner that's really been putting my portfolio through the grinder. I had bought after seeing reports about the likely NPV calculations on its resources, suggesting it was severely undervalued. People were getting puzzled about the directors quietness as to its funding arrangement, with everyone wondering if there'd be dilution of holdings, or liquidity problems. Anyway, all that got blown out of the water yesterday when it announced:

Afferro divests interest in the Putu Iron Ore Project for minimum US$115 million cash ... allows the Company to focus on its 100% owned flagship Nkout project and minimises shareholder dilution. With the focus and cash, Afferro will be extremely well placed to enter a new and exciting phase of growth.

115m USD is  64m GBP. The company has a market cap of £57m, plus a lot of resources to exploit. This company looks very undervalued. It rose about 38% yesterday (!), and is down 4% after such a massive runup. I have renewed confidence in this company. The company has a tendency to spike up on good news, but then sag down. I'm thinking of waiting for the dust to settle and top up. Riskier play, and it is a commodity company, but I think that topping up is the right way to go. Unless Europe and China slide into the sea, of course, then not so good.

CPP dived a lot yesterday - about 12% if memory serves. The trading statement made for unpleasant reading:

 The FSA investigation ... continuing to have a material impact... in the UK. A new, non-insured service product ... will not be adopted by business partner.  [In] 2012, there are good opportunities to achieve improved revenue growth compared to 2011. Underlying Group operating profit in 2012 is likely to be significantly lower than 2011

An ADVFN poster writes:

The bottom line is that they have lost millions already due to the lenght [sic] of the investigation and will then doubtless have to pay a fine on top of the lost business.

Stay tuned on this one. It still has high ROE and low price. 

Diary: aff, kio, opts

First two stocks listed below are "buy" recommendations by Faraday Research on a video dated 10-Nov-2011.

AFF - Afferro Mining - Industrial Metals and Mining - 47.70p/£49.6m

Notes from video: west africa. contrary to popular belief, there is a lot of iron ore there, with big deposits being found (not just by aff). china has a big deposit in cameroon. they're building a 530km rail track to the coast. it runs 30km from aff's deposit in cameroon, so it's an easy way to piggyback when it's built. short-term catalysts expected: plenty of cash, mining feasibility studies in cameroon expected soon, potential expansion of 40% ownership of a mine in liberia.

I currently hold this stock - it's been a bumpy ride so far, I'll tell you that for nowt.

KIO - Kiotech Intl - Pharma and biotech - 88.5p/£16.5m

Notes from video: makes fish feed but going into other animal products. half of world's fish in china. china love carp. kio have discovered a food additive that naturally boosts a fish's appetite, so they grow faster. designed forfarmed fish, clearly.  kio is just breaking into the market. it's a play on global food demand. fish from sea is unsustainable.

Newsflow

11-Nov-2011 Will change its name to Anpario on 01-Dec-2011, EPIC ANP. This will ensure a clear distinction between the name of the holding company and those of the trading companies and product brands.

12-Apr-2011 Dividend up 74%

Financials

KIO is on a PER of 10.7, and has net cash of £3.4m. Analysts estimate 2011 EPS growth of 21%, and for a further 15% growth in 2012. Looks good. Director shareholdings are minimal, which is off-putting.


OPTS - Optos - Health care equip and services - 222.80p/£158.9m

This first came to my attention on at thread by AdamB1978 at Motley Fool. It was 186p at the time he suggested it, so it's since gone up in value by about 20%. He was the one who suggested CTN - so he's got my ear.


Background

It makes retinal imaging devices that create optomap images. The optomap is the only image that provides an ultra-wide 82% view of the retina. A simple optomap scan is an important tool for the screening, early detection and diagnosis of eye problems such as retinal detachment, glaucoma, cataracts, retinal holes/retinal tears and age-related macular degeneration. It can also indicate evidence of non-eye diseases such as diabetes, hypertension and certain cancers. Many of these conditions can be seen in the periphery of the retina as well as in the central pole which is why widefield imaging is so important. Optos believes that its technology provides an unequalled combination of widefield retinal imaging, speed and convenience for both the practitioner and patient.

There are a lot of IP barriers to entry. Their long-term target is to grow by 20%pa. They are entering new markets and launching new products so there should be plenty of growth left. Gross margins have been 60%-67% over the past several years.  WBIT has grown from $4.4m in 2005 to $18.1m in 2010.

Somewhat capital intensive, and the majority of their sales are in US. Their international sales are growing quicker.

Newsflow has been uniformly positive, and you get a sense of a company going somewhere.

BBS

What the bulletin boards have been saying

The company are looking at using the retinal maps as a marker for Alzheimer's disease. If this proved to be the case then the market for their products becomes vast. Unlikley to be a single test for AD but part of various other tests. The disease is associated with plaques in the brain. It is possible the vascular changes could be picked up from the Optimap that may indicate the onset of the disease . Might not be the case but if it was you could have one in every Doctors surgery.

I managed to speak at the weekend with a doctor I know who has had significant involvement in retinal imaging. His view was that Optos' wide angle views of the retina were incredibly clever (conventional camera based imaging cannot achieve those angles because the pupil is too narrow) but of limited use until the resolution can be improved. The resolution of the laser imaging is years behind that of conventional imaging, which is important because laser imaging's current resolution levels are too low for the majority of promising medical applications for retinal imaging, in contrast to conventional imaging.  However, if Optos can improve the resolution of their imaging then it would be a big breakthrough - the speed and, most importantly, the wide angle, would set this technology apart from conventional retinal screening. The doctor is convinced that retinal imaging has a huge amount of potential for diagnosing conditions - one area of medical industry where the hype is in his view justified as the retina is a unique window on the state of the body (he conceded that not all doctors share his view to the same degree). The more of the retina that can be imaged, the better. The million dollar question - how likely is it that Optos will be able to improve the resolution in a commercially viable way - "it's a punt". There is no certainty, or even likelihood, that Optos will be able to develop a successful laser imaging solution which has sufficient resolution for the many likely future applications, or even for many of retinal imaging's current applications. The "punt" comment relates to the possibility of technological breakthrough, not to investment in the company, about which the good doc said he didn't know enough to have an opinion.


Newsflow

02-Nov-2011 received CE mark clearance for its Daytona device. Remains on track to commence first product sales of its next generation, desk-top imaging device, Daytona, in the first calendar quarter of 2012 in its key markets of the US and Europe.


04-May-2011 Study revealed a highly significant association between AD (Alzheimer's Disease) and peripheral small hard drusen formation, suggesting that monitoring the peripheral part of the retina might become a valuable tool in the detection and monitoring of the progression of AD. Further work is being planned to investigate whether peripheral small hard drusen can be shown to act as a surrogate marker for plaque development in the central nervous system.

06-May-2010 In two clinical studies, results show that image-assisted examination using the Optos ultra-wide field P200C had a greater capability to detect retinal lesions compared to traditional ophthalmoscopy by approximately 30%. The study confirmed that there are wide ranging pathological retinal changes in the periphery even in those who have no central pathologies.

Financials

Beta 0.34. One director owns £11.4m of shares, which is pretty respectable. None of the other director holdings is significant. There have been no director deals in the last year.

Trades at a PER if 13.4, gearing 37%, interest cover 3.65, net debt 18.7m, and z-score of 3.14. These figures look fine. PFCF 11.3, which is very good for a growth company.