Essar Energy (LON:ESSR)
Essar yesterday issued a statement of clarification following its announcement on Tuesday of a ruling by India's Supreme Court to the effect that Essar Oil, the Indian-listed business in which Essar Energy owns an 87% stake, will no longer be able to defer payment of a sales tax. It had hitherto benefited from deferrals of US$1.24 billion. In yesterday’s statement, Essar said that it is examining all legal options and intends to file a review petition. On Tuesday, Essar Energy shares plunged as much as 38%, before paring earlier losses to close down 26% at 127 p. The stock staged a partial rebound yesterday.
Our view: Essar was one of the worst performers in the FTSE-100 last year, with its share price declining by some 70%. The main reasons were the delays in environmental approval for the exploitation of coal resources which are situated close to Essar’s main power stations. Imported coal costs US$110/tonne, vs the estimated cost of US$18-20/tonne if Essar were allowed to mine its own resources. In addition, there has been slippage in the delivery timeline of Essar’s main projects, to the point where management has lost much of its credibility with investors both in India and internationally. The latest shock thus comes in a long series of disappointments on this company. Although we recognise the stock as cheap on fundamental valuation, we see little chance of its outperforming the market given the reputation which it has now acquired. Given the prospect of a legal wrangle and the associated costs, with the downside risk that Essar is liable to make immediate payment of US$1.25bn, we see no alternative but to accept a loss on this stock and switch to a higher-quality play. We downgrade from Buy to SELL.
Man Group (LON:EMG)
Man Group released a trading update for the nine months to 31st December 2011 yesterday. End-of-period assets under management decreased to US$58.4bn from US$64.5bn on 30th September 2011. The management announced the extension of the US$40m cost cutting program by US$75m. Of the additional savings, US$50m will be realised in 2012 and the rest in 2013. Net cash outflows aggregated US$2.5bn. Pre-tax profit for the period was estimated at US$257m and earnings per share at about US$0.1 per share.
Our view: Man Group is expanding its costing cutting program, which is a positive move. However, the current volatility in financial markets offers poor visibility of the company's revenues and compounds risks. In our opinion, investors would do well to SELL the stock.
Tullow Oil (LON:TLW)
Tullow Oil released a trading update yesterday for the year to December.. Sales in 2011 are estimated to have doubled to about US$2.3bn from US$1.1bn in 2010. However, the problems at Tullow's Jubilee field in Ghana continued, with gross average production at 66,000 barrels per day (bpd), well under the targeted 'field plateau rate' of 120,000 bpd. This pulled down the average for the entire group to 78,200 bpd; guidance had been for production of between 79,000 bpd to 81,000 bpd. For 2012, management estimates production at Jubilee will average between 70,000 to 90,000 bpd. The company also announced a partnership with Shell to explore oil in the Atlantic basin.
Our view: The company continues to be plagued by production issues at the Jubilee oil fields and disappointing output across assets. A widening of the production guidance range for 2012 indicates lower visibility of a ramp-up at Jubilee. We maintain a SELL recommendation for the stock.
BHP Billiton (LON:BLT)
Miner BHP Billiton said that iron ore production increased 4% q-o-q and 22% y-o-y in Q2 2012, while half-year annual production increased 23% y-o-y, in a production update for its first half which ended in December. Production of petroleum products increased 56% y-o-y in Q2 2012 and 36% y-o-y in H2 2012. Aluminium production was flat for the quarter and half year. The mining for base metals including copper, lead, zinc, silver and uranium oxide declined, with notable declines in production of zinc (H1 2012: -33% y-o-y and -23% in Q2 2012) and copper (H1 2012: -16% y-o-y and -7% in Q2 2012).
Our view: The company's aggressive expansion plans to mine iron ore in the Pilbara region of Australia matches that of rival Rio Tinto. However, BHP's stock is more expensive than that of Rio Tinto (P/E of 8.2x compared to Rio's 6.8x). We prefer Rio and maintain a Hold recommendation for BHP.
African Barrick (LON:ABG)
Gold miner African Barrick said production of gold declined 2% y-o-y to 688,278 ounces in 2011. The production for Q4 2011 declined 11% to 160,020 ounces. The average realised price of gold increased 19% y-o-y in Q4 2011 and 28% y-o-y in FY 2011. Power disruption at the Buzwagi and Bulyanhulu mines in Africa contributed the most to loss of production. The company has commissioned a 16MW diesel powered generator at Buzwagi to complement the 5MW generator installed in July.
Our view: Higher gold prices are more than compensating for the lower-than-expected production (against a full year production target of 700,000 to 760,000 ounces). The stronger US dollar will also support gold prices. We are positive on the stock, though our preference is Randgold Resources.
Fresnillo (LON:FRES)
Precious metals miner Fresnillo released a production update yesterday for the year to December 2011. Gold production jumped 21.6% y-o-y each in Q4 2011 and FY 2011. Silver production decreased 1.5% in Q4 2011 and 0.6% in FY 2011. In 2012, the company targets mining 460,000 ounces of gold following the start of mining operations at Noche Buena, in Mexico.
Our view: The decline in silver production marred otherwise good production numbers. This was expected after the company guided for lower y-o-y production following the shutting down of some mines in October to reinforce safety measures following a mining accident. Nevertheless, falling ore grades at its flagship assets are also responsible for lower output. The company could continue seeing lower output while production at its newer mines comes on-stream. We maintain a Hold recommendation. For the latest updates on the stock market, visit Stock Market Today For the latest updates PRESS CTR + D or visit Stock Market news Today
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