ShareHub Hotlist 2019 Review – Week 30

A good couple of weeks for TheShareHUB picks as Amerisur Resources and Hummingbird put in solid recoveries from lows. Unfortunately, there’s always one that spoils the party of late and that one happens to be Petra Diamonds. The old adage that ‘Diamonds are forever’ is beginning to wear thin. It seems society today places less value on the once highly desired stones and instead prefers to focus on more important things in life like Holidays, Mortgages and School fees! Never before has the Diamond market looked so over supplied and weak. Data from Anglo American (owners of De Beers) paints a very sad picture of an industry that used to pride itself on its long lasting lure and sparkle. The problem for the small stone market is how to justify and maintain a value for diamonds if the higher volumes flood the market? It’s a fine art. Rolex are a prime example of how to support your pricing against weak demand. They simply cut supply. Reduce manufacturing or buy back some models. They invest heavily in sports advertising. They manage to convey a desirable but practical consumer message. In retail terms, it’s hard to tell the difference between a £10k diamond and a £5k diamond. Size is not everything. Purety and colour often wins the value game. But here’s the problem… the generations today do not buy into the same quality codes that the generation went on before. Couples are opting for £10k deposits (or contributions…) on the housing ladder and a cheap crystal ring that looks and sparkles the same as the real gem it copies. The view is they will buy a ‘real’ diamond once they can afford one. Then comes the kids and that gets postponed. Then comes the school fees. And so on. Of course this is a small part of the market and as carat sizes increase so does the variation in type of customer. In summary, everything has got more expensive for young couples and those in mid life. Many can’t justify the cost of Diamonds against more important top purchases. This isn’t just about Diamonds. It’s also about the car industry. Premium Car Brands are struggling to lure young buyers in. Instead, many are opting for cheaper more practical and affordable alternatives. The days of the hot hatch are fading. So in this changing world how does the likes of Petra cope with tough market conditions? Well, the CEO Mr Duffy has chosen to reduce capex and set a FCF target of $50m to $70m per year. Based on their debt pile of $528m, it will take through to 2022 before the debt pile reduces to $300m. At this point, some debt may require renegotiation and that’s not unusual. But that’s a long way off and the market for Diamonds is uncertain. Which is why Petra has been trading at all time lows. Investors do not know which way to turn. Bullish or Bearish? At 12p a share, Petra has lost 70% of its value in 2019. That’s after the stock halved from 79p to 38p in 2018. It would appear that the worst possible outcome is already priced in. The trouble is, it’s impossible to forecast. The Diamond market is into unchartered waters. And so is Petra. No one saw this coming. There is some hope on the horizon with US / China trade talks set to recommence. Should Trump/ China agree a deal, then that in turn could drive confidence in the retail and business sector which results in higher Diamond demand. For now, the jury is out on Petra. And it might take a quarter or two before the market sees signs of stability and life in the precious stone market.

Moving onto other more in demand precious commodities, Gold and OIL are beginning to shine again. As the ShareHUB has suggested on numerous occasions, the Oil market and speculators within it are taking a complacent view at present. Issues with Iran (tankergate) would normally see a $10pb premium added in. As would flaky numbers from US production which quite frankly have been flakier than a chocolate flake for sometime now. Rig count dropping. US production dropping. Strait of Hormuz issues. How on earth Oil is not trading at $75pb (Brent) is anyones guess. Give it time, the market will catch up eventually.

Gold continues to shine. You couldn’t find a buyer a year ago with prices at 1180oz. Now it’s in high demand driven buy weaker bond yields. Money is not likely to flood out yet while the FED Reserve remain dovish. US rate cuts are eagerly awaited by the markets and whilst some would like a 0.5pt cut, it looks like 0.25pts is more likely. Had they waited until September, then perhaps a 0.5pt cut would have been possible. Cutting in July looks a tad early but politically it might help Trump and China talks. The Fed Rate decision takes place today.

Finally, saving the best to last, Amerisur Resources have raised the For Sale flag. Management have already rejected the 17p initial offer which is a bullish message to the market. Multiple buyers/parties are involved in talks so it could take sometime for the advisors to strip out the pretenders from the real contenders. The latter are expected to be OXY, ONGC, GEO PARK and GTE. Amerisur Resources folio of assets is an interesting one. All based in Colombia (with exception of Paraguay) they already feature partners OXY and ONGC. Key infrastructure assets such as the OBA (pipeline to Ecuador) are crucial to the economic story on assets in the south. CPO-5 is seen as a bit of a standalone asset towards the north which AMER holds a 30% stake in with ONGC holding the operatorship. Finding a buyer that wants the entire folio may be tricky. Finding a buyer for individual assets could be the way to go in terms of gaining maximum return to shareholders. Whether that will be all cash or part cash and shares remains to be seen. The majority of II’s involved with AMER would naturally lean towards an all cash offer. If this is the case then it becomes more likely that ONGC, GEO PARK and OXY will make the final bidding rounds. Of course there could be a complete outsider that enters the end game out of the blue but until bids above 17p are announced, it’s all about keeping a straight poker face. Interest in Colombia has shot up of late driven by issues in Iraq, Iran and Africa.

If ever there was a good time to sell up, now is it. This is not a desperate forced sale. Amerisur management are nicely positioned with huge exit bonuses. Which is why a deal will be done. TheShareHUB predicts winning bids will amount to over 26p. But in today’s much sought after Colombian E&P sector, that price could rise as high as 35p. For now, the starting bid is in at half the top price. So long way to go to get there.

Fingers crossed… again!

Independent top picks for 2019 – week 30
Guardian top picks for 2019 – week 30
ShareHUB top picks for 2019 – week 30