ShareHub Hotlist 2019 Review – Week 38

A tough week for TheShareHUB picks as SXX falls heavily on funding disaster. It beggars belief that the Government have allowed this to effectively fail. Yet again, the UK gov prefers to rely on foreign investment to bail blighty out. With Brexit around the corner isn’t it about time the UK started to learn to stand on its own two feet? According to Labour, Chris Grayling has squandered around £2.7bln on blunder after blunder. £85m apparently going to a Ferry/shipping company which didn’t even have the fleet to deliver. Contract terminated yet £85m still paid? Surely investing in the future in Potash/North Yorkshire makes sense pre Brexit? The UK farming industry will be under pressure to deliver goods which will likely be uncertain once Brexit kicks in. That said, we’ll all be on Star Trek style ‘meal in one’ tablets by the time the UK see the back of the EU.

Elsewhere across the ShareHUB top picks weakness dominates the bottom four. The best chance of recovery looks suited to SOLG which is trading in the wrong direction due to unknowns on Cornerstone acquisition as well as the next inevitable funding phase. Last year, the company secured funding in mid October bagging £45m at 45p from major shareholder BHP at a whopping 30% premium to the 20 day VWAP. Today, the share price is trading at 21.4p which is over half the value of the last placing. This seems at odds with the progress the company has made of late and the all important improving permit/legal/social community issues in Ecuador. Near term, it’s all about that Cornerstone acquisition and funding phase. Will BHP or Newcrest snap Cornerstone up or will they allow SOLG to purchase it through an all share offer and then take more stock via equity placing? There’s clearly a level of conflict within these interests and the market appears to be discounting SOLG heavily. If all goes well, then like last year the market might find itself having to mark the share price up by 30%.

Another stock struggling is Petra Diamonds. The Diamond market is going through a tough time of late and PDL’s debt is high but importantly, it is capable of repaying it which is why the debt holders have been very helpful with covenant issues in the past. The CEO has outlined a 3 year plan which on a basic business level should see $150m to $200m paid off the $525m NET debt pile. However, there is further upside through what Petra call ‘exceptional’ large diamond discoveries. These stones often sell for anywhere between $5m and $45m. Much depends on size, clarity and colour. Petra’s Cullinan mine is world class and has a history of discovering some real beauties. As per recent news, Petra pulled out a very rare blue diamond which could be worth inexcess of $20m. Hence, it’s these large stone finds that can reduce the debt pile much much quicker than the market is expecting. At 8p a share, the stock is priced for a D4E swap. That’s far too early to call hugely premature. That may well end up being the case in 18 months time, but equally, the stock could deliver $100m FCF in current year with just 1 further large stone find. My bet would be on Petra finding more than 3 or 4 large stones per year and if proves true, and the core business delivers as promised, then debt piles by 2022 could be in the sub $150m levels. With resources of around 250m carats, that clearly leaves plenty of upside for shareholders. A rerate should be on the way as the debt pile reduces Quarter upon quarter. Throw in a few exceptional stone finds and it could be multi-bagging in no time.

The best performing stock in the 2019 list is Petra Matad and that’s after they’ve hit dust again. With a number of drills underway, surely they can bank one? Fingers crossed… news due soon.

Finally, a pointer on Oil prices. At $62pb (Brent) the market is acting like the MENA region is a happy and stable place. Wake up for goodness sake. Iran (apparently) have just bombed the living daylights out of the Saudi’s main export plant removing initially 5m barrels per day. Add to this, the US rig count has been dropping like a stone. Either the US shale industry has found a way to drill without rigs or one would conclude drilling is slowly up in a big way. In my time, I have seen plenty of “market complacency” moments. But this one has my mouth wide open. Never before have I seen a market so dumb and ignorant to the risks that lay ahead. War in the middle east is closer than ever and that includes Israel. There is a real threat of the Iranian’s bombing more Oil export points as well as blockading the Strait of Hormuz. Factoring in the risk and usual premium of 30%, Oil prices should be of $80pb (Brent).

Investors want a market that prices ‘fairly’ not a market that prices based on some computer code. Bring back the humans or beam me up scotty. I’ve had enough!

TheIndependent top picks 2019 – week 38
TheGuardian top picks 2019 – week 38
TheShareHUB top picks 2019 – week 38