Hybridan Small Cap Wrap: Gold, Encore Oil & DDD

This week: Shining examples of gold investments, positive comments again on on Encore, and the extra dimension of DDD adds depth to one’s interest

Atlantic Global Plc (LON:ATL) (ATL 13.5p/£3.03m)
The specialist provider of integrated business and resource management software announced interims for the 6 months to 30 June 2010. The Company has improved turnover to £728,000 (2009: £647,000), whilst making a profit of £21,000 (2009: loss of £148,000). A healthy cash balance of £2.11m (2009: £2.27m), and a sustained level of research and development of £198,000 (2009: £202,000) should serve the Company well going forward.
Atlantic currently provides solutions across three different areas, which include Professional Service Automation (e.g. timesheet and expenses management), Enterprise Project Portfolio (e.g. project management) and Organisation Planning (e.g. organisation mapping, budgeting), and has partnered with a number of blue-chip organizations in developing a number of its offerings, including GSK, Pfizer and Aviva, whilst its client base spans both private and public sector organizations of a variety of sizes.
Financials for the last 6 months have been positive (enabling Atlantic to pay an interim dividend of 0.1p per share, and implying a renewed sense of confidence), and the introduction of a fully automated SaaS (trial) platform for the Company at the end of October this year could well result in even more impressive gains.

Cubus Lux (LON:CBX) (CBX 16.25p/£3.88m)*

Cubus Lux, the Croatian-focused leisure resort operator and developer, announced its final results for the year ended 31 March 2010. The Company’s revenues remained flat of £1.48m (2009: £1.54m) while reported pre-tax losses increased to £3.6m (2009: £2.1m). Net loss per share amounted to 18.99p (2009: 14.2p). During the year £268,875 of additional equity has been raised.  Despite the slower pace of development, opportunities for Cubus Lux continue to emerge. Thus, the Company has identified seven locations in Croatia and Montenegro for marina developments and is working to secure finance to achieve their vision of a 'String of Pearls' across the Adriatic. However, the expansion of Olive Island Marina remains a priority. Cubus Lux continues to progress their strategy of creating value in leisure-related and general real estate projects in Croatia and the neighbouring regions. The 'Molatska' site in Zadar is now scheduled for completion in June 2011. Cubus Lux gaming operations are under review and overall management is looking at additional funding. Some big partners and commitments are needed for the projects Cubus has, but all things point to heading in the right direction.

DDD Group Plc (LON:DDD) (DDD 19.5p/£25.68m)

DDD Group, the Company that is engaged in the development and licensing of software and hardware intellectual property and technologies for the conversion of 2D content to 3D (and also the supply of originally made 3D content), published half year results for the period to 30th June 2010. The Company pleasingly announced that it had reduced its pre-tax losses to £342,000 (2009: £448,000), though revenue itself displayed negligible change. DDD strengthened its cash position through a placing to raise £3.38m, which resulted in it finishing the period with a balance of £3.371m (2009: £265,000). Unfortunately, delays to essential third party PC graphics hardware have resulted in the likely slippage of OEM TriDef sales to 2011, with full year results now likely to be £1.4m versus an expected £3.5m. DDD's technology is part of an industry that is likely to influence a large proportion of television users over the best part of the next decade (in its concentrated introduction) and beyond. 3D televisions and laptops were introduced to the mass market during late 2009/early 2010, though DDD has offered none of the hardware itself, instead developing a unique technology that turns a 2D visual into 3D, with seamless consistency. Samsung (who is currently the only fully integrated TV and chip manufacturer) has been using the software since the release of its first 3D TV (its offerings represent the vast majority of 3D TV's sold globally), whilst Acer, Lenovo and Fujitsu have introduced laptops with integrated software to provide a truly unique viewing and gaming experience. AMD currently use the software in their ATI Radeon graphics card, though it is anticipated that the real growth for DDD will come from Intel with their integrated chipsets- these feature in computers on a wider scale (currently 75 per cent of all computers sold) due to their relative cost effectiveness. Technical and commercial discussions with Intel are currently in process with a potential launch at the Consumer Electronics Show in January 2011. DDD also has content publishing (Yabazam.com) and content conversion (which it is seeking to launch in 2011) functions, whilst it continues to work with the mobile handset for its offerings.
The Company has a strong foothold in this rapidly developing sector, and we look forward to new developments and updates.

Encore Oil (LON:EO.) (EO. 110p/£319.26m)
Following the highly successful drilling programme at the Catcher discovery earlier this year, operator EnCore has been able to secure a heavy duty jack-up rig to continue further exploration and appraisal work on the block. The Transocean rig is expected to arrive this week and the first well in a programme of four is on the Varadero prospect situated to the west of the Catcher discovery.

Equatorial Palm Oil (LON:PAL) (PAL 17.50p/£20.08m)
The news we reported in early September of the proposed $60m joint venture with Biopalm Energy Ltd (a wholly owned subsidiary of Siva Ventures Ltd) was well received by the market, with the shares rising 49 per cent in response. The relationship with the Siva Group has been cemented further with the appointment of their representative, Shankar Varadharajan to the board, as a non-exec director. The Company has also released its results for the half year to 30 June 2010. The period end cash balance of £7.6m is more than sufficient to enable payment of their US$7.5m contribution to the joint venture and pay the overheads for the foreseeable future. With production of Crude Palm Oil at the new mill expected to commence during Q4 2010, the Company is actively securing third party sources of palm fruit feedstock to fill the 5 tonnes per hour capacity. We look forward to this company bearing fruit.

Frontera Resources Corp (LON:FRR) (FRR 11.5p/£13.9m)
The oil and gas exploration company operating in emerging markets has published updated results of an independent estimate of its oil and gas resources at the Shallow Fields Production Unit on Block 12 in the country of Georgia. Without going into the details of the report prepared by Netherland, Sewell & Associates, the highlights include a best estimate for associated recoverable gross contingent and unrisked prospective oil resources of 60.8 million barrels and 1.5 billion cubic feet of gas.

Goldplat Plc (LON:GDP) (GDP 14p/£15.7m)
After a year of limited production growth, the African precious metals recovery and mining company has made an encouraging agreement with Wassa that will effectively double the processing capacity of Goldplat’s Ghanaian operations. Wassa will process 4,000 tonnes of ore per month which is expected to yield 3,000 to 4,000 ounces of gold per year. Last year Goldplat produced 4,200 ounces at its recovery operations in Ghana.
The previous financial year also saw a significant drawdown in feedstock for processing. To replenish its stockpiles, Goldplat has made an agreement with AngolGold Ashanti to purchase 20,000 tonnes of gold bearing feedstock with an estimated 3,000 ounces of recoverable gold.

Judges Scientific (JDG 322p/£13.44m)
Judges Scientific, the scientific instrument maker, reported another record set of interim results for the six months ended 30 June 2010, last week. Each product area in the group performed well through the first half of the year. Consequently revenues grew by 69 per cent to £7.6m (2009: £4.5m). Profits before tax rose by 73 per cent to £1,465,000 (2009: £848,000), 45 per cent ahead of estimate. Approximately 7 per cent increase in revenues and 18 per cent increase in profits is attributable to organic growth. EBITA margins rose to 20 per cent, ahead of the 17 per cent estimate. EPS rose by 45 per cent to 22.5p (2009: 15.5p). Regardless of the acquisition of Sircal for £1m, cash generation remained very strong with cash balances at 30 June 2010 of £2.7m. The interim dividend almost doubled in the past year to 2.5p (2009:1.3p).  Recently, the Company has grown through a series of acquisitions in specific engineering fields, including the Quorum and Sircal acquisitions. Quorum’s strong performance since joining the Group has fully justified the amount paid for the purchase. Overall, Judges Scientific showed a robust performance during the first half of 2010 and the second half of the year has started well. As a result the Board anticipates that the full year will be significantly in excess of current market expectations.

Lifeline Scientific (LON:LSI) (LSI 184p/£12.67m)
The Organ Recovery Systems business has announced another excellent set of results for the six month period ended 30th June. As Lifeline’s business improved dramatically after commercialisation of the LifePort Kidney Transporter, revenues jumped 120 per cent and profits swung from a loss of $3.6 million to a gain of $2.8 million during 2009. For the first half of 2010, this trend has continued with revenues increasing 44 per cent to $11.1 million and profit before tax growing to $1.7 million from $34,550. The business model is proving itself as sales of consumable items ($10 million) led to gross margins of 61.6 per cent.
Over 360 LifePorts are now in clinical use in more than 100 renal transplant centres across 17 countries with preparations underway to enter new markets including Brazil and China. The Company’s product development efforts are focused on extending the product line with devices for preservation of liver, pancreas, heart and lung of which a liver transporter is the most advanced product.

Monitise Plc (LON:MONI) (MONI 20.25p/£140.32m)
Monitise, which provides an end-to-end solution enabling banks and their customers to undertake banking transactions via mobile phones, announced last week that it had launched the first iPhone mobile banking application in the Republic of Ireland (through Ulster Bank). The application allows iPhone users to conveniently conduct banking services, and is already available in the US and UK where it received a very warm welcome. The Company will soon extend the republic of Ireland offering by introducing SMS based banking services thus allowing wider access to instant banking facilities.  Alastair Lukies, chief executive officer of Monitise, said: "We are very proud to have launched, with Ulster Bank, the first app of this type in the Republic of Ireland… Our technology is trusted by some of the world's largest organisations including VISA, many of the UK's high street banks, and over 200 financial institutions in total around the world." The Company released year-end results during August, which showed growth in revenue of 126 per cent to £6m, though operating losses for the Company were up to £17.12m (2009: £13.73m). Much of these increased losses are attributed to Monilink, the former 50 per cent joint venture (UK based) which was completely purchased in August 2009. Though the financial results were not so favourable, the Republic of Ireland news together with the growing market for mobile banking (Africa and Asia being prime contributors to this) suggests a great deal of potential.

One Media Publishing Group (OMPP 2.35p/£2.15m)

PLUS quoted One Media Publishing Group, which is involved in Business to Business music and video rights, in light of improving communication with shareholders has undertaken an extensive review of its shareholder base. This review revealed that 52.7 per cent of the total shares in issue were under the control of the Liquidator of the collapsed Square Mile Securities.  The Company announced that it is now in the process of obtaining necessary shareholders’ and regulatory approval in order to purchase for cancellation the 48,116,434 held by the Liquidator of Square Mile for £225,000 or 0.46p per shares.  The aim is to complete the purchase from the Liquidator as soon as possible, in order to continue to focus on driving the business forward.

Polo Resources Ltd (LON:POL) (POL 4.14p/£100.59m)
GCM, of which Polo owns 15.22m shares (or 29.83 per cent of the share capital) has risen from 195p to 229p in the past week after the reported decision by the Bangladesh Government to establish a coalmine city at Dinajpur district to start coal extraction in the near future from coal mines at Barapukuria and, more importantly for Polo shareholders, Phulbari. Whilst GCM investors have experienced the disappointment in the past when similar announcements have failed to result in material progress, the state of the Country’s precarious position with regard to electricity power production would seem to indicate that mining coal at Phulbari is now very much a question of when and not if. In the meantime, Polo shareholders can sit back and enjoy their rising NAV per share.

Rockhopper Exploration (LON:RKH) (RKH 474.5p / £913.6m)
Having plugged its successful Sealion exploration well, Rockhopper has announced more details of its tests which have allowed it to upgrade Sealion’s expected production capability from 2,000 barrels/day to 4,000 – which, with a more optimum positioning within the field, it hopes could be ‘significantly’ better even than that. While that would be commercially viable, what remains to be seen is the size of the recoverable reserves and therefore the field’s life, and – vitally - whether other oil exists in the N Falklands estate that would add to the commerciality of the whole area. To answer this, the spotlight now is on the next drilling - that of Desire Petroleum’s Rachel prospect, 15 miles south of Sealion – and just beyond that to three other prospects about which Desire is becoming enthusiastic - Anna, Ninky and Elaine. Rockhopper only has a 7.5 per cent share of these, but success would rub off in other ways – improving the economics for all operators, who could thereby share expenditure on the local infrastructure.
So far we only know the programme for Rachel which should report results within the next month or so. Apart from this and hoped for upgrades for Sealion’s reserves (possibly at the AGM later this week) we are probably entering a quiet period for Rockhopper news, explaining the share volatility that has set in. It is understandable that short-termers are rushing to secure their profit, but conspiracy theorists will tell you that the market makers are ‘shaking the tree’ to make shares available for the ‘big’ buy orders they hope are still out there!

Serabi Mining (LON:SRB) (SRB 2.7p/£12.09m)*

Serabi has announced that the Federal Environmental Agency (IBAMA) suspension notice that was served on its Brazilian subsidiary has been lifted. In doing so, IBAMA acknowledged that the two conditions of the Operating Licence that had been called into question had been fulfilled. This effectively draws to a close a frustrating period for the Company’s Directors and shareholders alike – with just the matter of a possible fine remaining outstanding. On the question of the level of fine that may be levied, Management understands that IBAMA is of the view that the original penalty was unnecessarily severe relative to the alleged breaches and so are therefore optimistic that the fine will be much reduced or eliminated entirely.
The way is now clear for Serabi to embark upon its 7,500 meters of discovery drill programme over its nine identified anomaly targets. Thus investors can look forward to an interesting series of news flow over the foreseeable future. Time to strap in for the ride!

Shanta Gold Limited (SHG 32p/£38.147m)

We have been keeping an eye on Shanta Gold for a little while and with the latest drill results from their Chunya project, combined with the granting of a mining licence for a mine, we feel compelled to comment. Shanta Gold is a Tanzania focused gold exploration company. Its most advanced projects are Singida, which has a JORC compliant resource of just over 1m oz Au (480,000 measured, 149,000 indicated and 400,000 inferred), Chunya with a JORC compliant resource of 845,000 oz Au (357,000 indicated and 488,000 inferred), and Mgusu with 127,000 oz Au indicated and 614,000 oz Au inferred.  

There is no doubt that the Management and Company are on a roll, the recent drilling results from Chunya show an extension of the five known ore zones and several new targets. The important fact to note is that the ore bodies in question contain economic grades, are continuous and are open along strike and in some case at depth too. There is no doubt that when the necessary assessments have been carried out there is the prospect of a significant increase in the level of measured resource. 

The Chunya drill results doubled the potential strike from 3km to 6km requiring Management to revise extensively their drilling plans, with a commensurate increase in the budget. Thus the announced equity placing raising up to US$20m is understandable and easily justifiable. The Company has secured an agreement in principle with a cornerstone investor for half the money at a price of 25p per share and is now looking to secure the balance.
With the news flow likely to be both prolific and exciting we expect increased investor interest in Shanta and would want to be aboard for the ride on this particular gold train.

Solomon Gold (LON:SOLG) (SOLG 37p/£83.75m)
Solomon Gold, the gold and mineral exploration company, provided an encouraging update for its operations. In total, 215 samples were studied, with updates being provided in two batches- the first 58 samples showed significant gold mineralisation, with up to 173g/t of gold in the Meriguna prospect, whilst results showed that the Hornbill gold prospect has up to 139 g/t defined over a 300m by 400m area. Significant Molybdenum mineralisation of up to 0.43 per cent from samples at Ballyorlo were also found. The second batch (with the remaining 157 samples) from Fauro revealed up to 97.6 g/t of gold and 90.1 g/t of silver, with additional high tonnage porphyry style targets for copper, gold and molybdenum being identified- in particular, the Kiovakase prospect has yields of up to 169 g/t gold and 0.16 per cent copper. These results suggest potential for a large gold deposit similar in size to Lihir Island in PNG.

A third exploration campaign is due to take place in late September to explore the Piru and Masa Masa Islands (northern prospects), whilst frilling at Fauro is planned for late 2010. With a spate of healthy updates, Solomon continues to provide conviction to its resounding belief in selected sites. The fact that gold continues to benefit from the flight of investors to hard assets provides further comfort in the jewel that is Solomon.

Spiritel (LON:STP) (STP 55p/£9.73m)

AIM listed SME business telephony provider reported preliminary results for the year ended 30 April 2010. The business continues to perform well in difficult times. Revenues increased by 8 per cent to £21.3m (2009: £19.7m). More importantly, Business Division revenues are up by 71 per cent to £17.7m (2009: £10.3m). Gross profit increased by 12.4 per cent to £8.6m (2009: £7.6m) and Business Division gross profit increased by 44.8 per cent to £7.9m (2009: £5.4m). EBITDA for the Group as a whole has increased by 6 per cent to £1.6m (2009: £1.5m), while Business Division Underlying EBITDA is up by 70 per cent to £3.1m (2009: £1.8m). SpiriTel Business is the main focus of the Group and now represents 90 per cent of revenues and 98 per cent of underlying EBITDA before central costs. The customer base has increased by 74 per cent to 4,055 at the yearend (2009: 2,337).The are currently no dividends being paid to shareholders. The Company has seen an impressive 15 per cent organic growth rate over the past year, which was predominantly driven by cross selling. During the second half of the year Spiritel Plc announced five acquisitions.  The year ended 30 April 2010 was the Company’s third consecutive year of growth in revenues, underlying EBITDA and customer numbers. Overall, the Company has experienced growth across all key operational and financial performance criteria. Moreover, current financial performance is much higher than the reported results. SpiriTel’s ability to drive sales from existing customers and new customers gained by acquisition is a key differentiator for the Group amongst its peers and one that offers significant upside for future organic growth.  Therefore it is safe to say that SpiriTel is well positioned to exploit the opportunities arising from the anticipated recovery of the wider economy.

Stellar Diamonds (LON:STEL) (STEL 6.25p/£6.33m)

AIM quoted diamond mining and Exploration Company focused on West Africa, announced the Placing of 38m new Ordinary Shares of 5p each in the Company with institutional and other investors at par value in order to raise gross proceeds of £1.9m. The Company has also agreed to grant warrants to each placee on the basis of one warrant for every two Placing Shares subscribed. Each Placing Warrant will entitle the holder to subscribe for one new Stellar Ordinary Share at a price of 12 pence each for a period of 18 months from the date of admission of the Placing Shares to trading on AIM.  Approximately £1m of raised funds will be used to accelerate exploration at the Droujba Kimberlite pipe in Guinea and to commence a drilling Programme in November. Another £200,000 will be allocated to the completion of the ongoing Tongo kimberlite dyke bulk sampling programme in Sierra Leone. Remaining funds will be utilised for general working capital purposes.  Overall the Placing attracted high level of interest not only from existing shareholders but also from a number of new investors, indicating good prospects for Stellar Diamonds in the near future.

The Mission Marketing Group (TMMG 10.5p/£7.61m)
Advertising group, Mission Marketing, has announced its interim results for the six months ended 30 June 2010 and that whilst they were in line with the Board’s expectations, they were nevertheless disappointing for investors. Operating income fell to £17.4m (2009: £18.6m) with headline operating profit of £1.9m (2009: £3.0m) resulting in a loss before tax of £0.2m (2009: £1.7m profit). On a positive note, post the conversion of vendor loan notes and the placing of new shares earlier in the year, cash inflow from operating activities increased to £4.2m (2009: £2.8m).

The Company continues to strive for new business wins and picked up contracts from Danepak, moneysupermarket.com, nPower, Sensodyne and Scania Trucks, to name a few. Net annualised business for £1.4m of operating income has been secured so far this year. However, the Chairman’s statement that “our actions and renewed support in the public sector will help alleviate any downside” did cause us to raise an eyebrow, as we would be surprised if the public sector spend on advertising, marketing and media was to be anything but down for the foreseeable future. The Company would have to buck a very entrenched trend for the statement to prove true.

Drilling down, Brand & Advertising held up well – with the level of operating income, operating profit and operating percentage broadly in line with the whole of 2009; Media turnover and operating income were broadly similar to last year, but operating profit and operating profit percentage were down noticeably; Digital, which is supposed to be one of the driving engines of the business was, quite frankly, a big disappointment, with all three financial parameters way below what investors may have expected from what should be a growing segment of the business. On Events & Learning and PR, one has to question the rationale for the retention of these areas – a combined operating expenses total of £2.91m resulted in operating profit of just £26,000. As we doubt (for reasons of offering a complete service to clients or cross-selling opportunities) that the Company needs to operate in these areas, the return from these businesses is insignificant and we would argue that management time and capital would be better deployed in the main areas of the Group.

Tower Resources (LON:TRP) (TRP 3.8p/£38.27m)
AIM listed oil and gas exploration company with interests in sub-Saharan Africa, has announced interim results for the six months ended 30 June 2010.  The Company reported a loss for the period of $821,099 (first half 2009 $264,789). An increase of $556,310 is essentially represented by the effect of exchange rate movements ($334,162) and the IFRS Share Based Payments provision ($112,976) Capital expenditure on exploration studies, drilling operations, licence management costs and licence fees amounted to $7,555,852 after receiving $1,851,180 from partners. Cash balances at 30th June 2010 totalled $3,429,108. The year to date has seen some important and positive developments. Namibia - Licence 0010 has been completed and that quality of the data is excellent. Independent experts have confirmed the world class potential of the prospects and a well may now be drilled within the next 18 months. Such prospects are extremely rare in the industry. Total EMV for the Tower 15 percent share of Licence 0010 has been estimated as $696 m (£0.44/share). Uganda – Licence EA5 still has significant potential value for shareholders, as the second well result in Uganda gave sufficient positive encouragement for the Company to carry on into the third and final exploration period. The Company is part way through a farm out process coordinated by ENVOI, a consultancy that specialises in identifying funding partners for exploration programmes. Global Petroleum retains an option under agreed terms to become a 25 per cent licencee and to participate in future operations. Moreover, the Company is intending to raise a small amount of cash via a share placement, to meet the projected cost of working capital requirements over the next 6 months. It is known that some members of the Tower Board are prepared to participate in the funding. Overall, the first six months of 2010 have been marked by steady progress.

Valirx Plc (LON:VAL) (VAL 0.425p / £1.46m)*
AIM listed life science Company with a focus on cancer diagnostics and therapeutics for personalised medicine last week announced that it has entered into an agreement for the sale of its Belgian subsidiary diagnostic development business, ValiBIO SA to Singapore Volition Pte. Limited - a Singapore-based cancer diagnostics specialist, for a total consideration of $1.0m. Also as part of the transaction, ValiRx will continue to retain a significant share in the future upside value and revenues of ValiBIO and its embedded primary diagnostic technologies. The sale will ensure that ValiRx can concentrate the Group's focus on its core therapeutic, targeted and personalised cancer therapeutic and companion products, whilst benefitting from and realising the value and revenue generation inherent in ValiBIO's more peripheral R&D activities. The sale will also ensure that ValiRx will see a commensurate reduction in its on-going cost base. In addition, ValiRx will receive all eligible expenses owed to the Company under the Wallonia regional funding agreement previously announced on 28 December 2009. The Company is also entering into a consultancy and services agreement with Volition. ValiRx retains the rights over technologies and products currently under development including the HPV test in clinical validation.  The Company intends to use the cash proceeds for working capital purposes and to finance its development programme. The Company having disposed of ValiBIO has two main divisions going forwards, as well as the retained ongoing value in ValiBIO. The first is diagnostic test kits. ValiRx has a portfolio of ten retail products in the market. The latest new product, which checks for Chlamydia in about 10 minutes at home, is expected to be significantly cheaper to the consumer than existing products, and which is now available to consumers. We like the diversified risk profile of ValiRx; the second division is completely different and is a platform technology - GeneICE – which is funded by European grants and where ValiRx has two compounds in pre-clinical studies. We think now is a great time to invest in this exciting Company. We like the model of product on the market generating revenues in the test kits and the more blue sky upside that its proprietary drug development programmes provide in the technology platform. ValiRx remains far from fully valued at these levels.

Industry Update- Gold exploration

This week has seen gold surge past the $1,300 mark. A weakening US dollar, further talk of quantitative easing on both sides of the Atlantic, continuing (current and forecast) demand growth from gold funds and countries such as China and India, plus rumours of central bank purchases have all been cited as reasons. The price of gold has risen by close to 20 per cent so far this year, and a survey of attendees at the London Bullion Market Association suggests there could be further significant gains during the year ahead, with a gold price of $1,450 being the forecasted figure. Such news has continued to benefit gold miners and explorers - Solomon Gold (SOLG, written about above in the small cap wrap) was a notable riser (350 per cent increase) after providing an exploration update, whilst Serabi Mining (SRB, again, written about above in the small cap wrap) demonstrated a gain of more than 50 per cent. The hunt is now on for those companies that have been overlooked.

*A corporate client of Hybridan LLP