Today's highlights

Aspen (APN): Another great deal

South African Coal Mining (SAH): Rights offer above current price

LDTs – 25 July

Talking point: Oil dynamics

A big talking point over the last week has been the dramatic fall in the price of oil, which at $124/barrel last night in New York, was at a six-week low.

Cheaper oil has many implications, such as lower prices at the pump (petrol prices could fall by 30c/l in August), and in turn a better outlook for inflation. This in turn boosts confidence in interest-rate sensitive sectors such as banks or credit retailers.

However because oil often moves in tandem with other commodities, such as precious metals and coal, cheaper oil also has negative implications for the resources sector.

We hesitate to call the end to the commodity cycle, though. Demand and supply in the oil market remains tight, while the technicals also tell us a rebound in prices could be in the offing: Oil is currently trading below its 50-day moving average, which has acted as a strong support level. It has been tested six times since January 2007 and has resulted in an upward surge in the oil price on every occasion.

 Also, the stochastic oscillator has indicated that the oil price is currently heavily oversold. Speculators tend to watch this indicator closely and it provides buying pressure when the fast stochastic becomes oversold. 

 (At the same time, the oil price is testing a significant support level at around $125/barrel. If there is a break and significant close below this level it would be seen as a relatively strong bear signal. This does seem unlikely considering current oil fundamentals.)

Early morning markets

US shares were firmer overnight on lower oil prices as well as the announcement that US authorities had thrashed out a plan to help Fannie Mae and Freddie Mac.

The JSE finished higher overnight, with strong gains by banks and industrials offsetting declines by resources.

The rand weakened yesterday but remains within its range of the last few days, as the US dollar gained ground against the euro.

Commodity prices were mostly lower, as oil fell $4/barrel in US shares. Precious metals and most base metals were also lower.

Key indicators in a nutshell – Wednesday 23 July 2008

Company results and updates

Super Group says that it may need to revise its 2007 financials on the back of possible fraud in one of its divisions. It is reducing its HEPS for the year to June 2007 to 110c to 120c, and also says HEPS for the year to June 2008 will come in between 65c and 75c.  The group also announced a R750m rights issue, for which it had received confirmation of support from shareholders holding 67% of the shares.

Kumba Iron Ore reported HEPS for the six months to June of 875c, up from 502c previously. An interim dividend of 800c was declared.

Tongaat says it expects HEPS for the six months to June to come in at 245c, from a previous loss of 145cps previously.

Mercantile Bank reported a 61% increase in fully diluted HEPS, to 2.91c.

Morning ideas

Aspen (APN): Another great deal

Aspen (R40; market cap: R15.9bn; forward PE: 10x) There has been some great news flow out of Aspen of late, with the latest being yesterday’s agreement with Glaxo Smith Kline (GSK), which will see Aspen providing generics for GSK to sell through its networks in emerging markets, excluding Africa and India.

The 1200 or so lines of generics GSK gets access to through this deal gives it a good leg-up in emerging countries, while for Aspen, it opens up big new lines of sales and a chance for more throughput in its SA and South American manufacturing facilities.

We await more detail on the revenue sharing arrangement between Aspen and GSK, but estimates are that sales from 2010 could be worth up to US$1bn per year for each party.

With Aspen likely to earn between 350c and 400c in FY2009, it is on a 12-month PE of around 10x. This looks cheap considering the kicker this deal will give it in 2010. Longer term, Aspen’s ability to conclude deals of this nature tells us a higher rating may even be justified. Patrick Lawlor  

South African Coal Mining (SAH): Rights offer above current price

South African Coal Mining (348c; market cap: R1.4bn) is in the process of a capital raising, by way of a R100m rights issue and a R50m private placement, both at R4 a share. It is also planning to raise a further R250m on the debt markets. 

The rights offer and capital raising closes on Friday, 8 August.

It plans to use the funds in four different areas relating to its Ulambu operation near Ermelo: a production upgrade (which will push production up from 95ktpm to 150ktpm), a plant upgrade that will remove its reliance on 3rd parties for the processing of its export-quality coal and the creation of a new siding for linking production to the Transnet rail system. It also plans to upgrade its capacity at the Richards Bay Coal Terminal, from 17.25ktpm to 58.85ktpm.

The full upgrade programme, which should be completed by December next year, will reduce the cost per tonne by R96, out of a total of R446/t. 

SACMH’s key selling point is that it is, unlike many other coal juniors, already in production phase. It has correctly identified the importance of logistics in the assessment of the investment case of any coal share, as opposed to the potential of reserves in the ground.

Nonetheless, the current sentiment towards junior mining companies is very poor at the moment. More important, as long as the share price trades below R4, as it currently does, the rights will be worthless. Should the share price move above R4 before the last day to trade (1 August) the rights will have value – otherwise it makes more sense to buy the shares directly on the market at a lower price. Patrick Lawlor 

LDTs – 25 July

 Alliance Mining        40c
Reunert 5.5%Pref       5.5c
Astrapak                    14.5c
Cullinan 5.5%Pref         5.5c
Nampak 6% Pref          6c
Nampak 6.5%Pref        6.5c

Key market indicators – Wednesday 23 July 2008