The Investment Column: Highland Gold worth holding despite two 'nightmare' years

Alexon; Ardana
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The Independent Online

Our view: Hold

Share price: 184p (-7p)

Highland Gold, the Russian miner, has a reputation for being a little accident prone. In fact, the past two years have been something of a nightmare for the company which boasts the mining giant Barrick Gold and the Fleming family among its biggest shareholders.

Highland itself admitted to 2005 being a "miserable" year as the AIM-listed group suffered from an equipment crisis in Russia. Then in 2006 things took a tragic turn for the worse when a fire at its Darasun mine killed 25 workers and hit output hard.

A trading statement from Highland yesterday said that production at Darasun would be down 18.7 per cent on the year to 16,398 ounces as a result of the disaster. Output from the site's open- cast mine has continued at a reduced rate, but the underground mine where the tragedy occurred is not operational at present.

Overall, it is fair to say the update from Russia's fourth biggest gold miner disappointed the City. It showed that total production had risen just 4.6 per cent in 2006 to 167,544 ounces - a figure below analyst expectations.

There was some good news for shareholders. The company said that development mining at the Novoshirokinskoye project, a 50:50 joint venture with the Swiss commodities giant Glencore, is scheduled to begin this year with production starting next year.

Highland is yet to turn around its operations after two difficult years. That is very clear from yesterday's trading statement. Nevertheless, the presence of Barrick Gold on the shareholder register with a 34 per cent stake - making Highland its vehicle in Russia - is positive and means the under-performance is unlikely to go on for too much longer.


Our view: Sell

Share price: 205p (+2p)

This week it emerged that takeover talks at Alexon had failed. Private equity is believed to have been interested in the retailer, but clearly not interested enough to spend serious money on buying it. One can't blame them. Alexon is a thoroughly uninspiring enterprise.

Although the group boasts a diverse portfolio of brands they are hardly de rigeur. In fact, the likes of Bay Trading, Eastex and Dash have been largely left behind by competitors.

Last year Alexon was hit by the collapse of the department store group Allders where its brands had concessions.

This year it again faces risks - namely from the new owners of House of Fraser. Baugur, the Icelandic investment firm, recently completed the purchase of the famous department store operator and there are fears in the City that it may reduce the space within HoF allocated to Alexon. Meanwhile, the clothing sector remains very competitive, adding to the pressure on the group.

The private-equity bid is believed to have been pitched at slightly above the current level of Alexon shares. But, even at the current 205p they are unappealing. Although the stock boasts a strong dividend yield (4.4 per cent) this is only just covered by earnings while its valuation, of 22 times forward earnings, represents a big premium to the wider retail sector.


Our view: Buy

Share price: 115p (+1.5p)

Ardana yesterday unveiled a deal granting exclusive rights for the marketing of its Striant SR product in Holland. The news is significant for the Edinburgh-based biotech company for two reasons.

First, it means Ardana should soon enjoys revenues from Striant SR in the Netherlands. Second, it helps the group build up its sales and market infrastructure for the launch of its key Teverelix drug.

Striant is a unique testosterone replacement therapy for men - unique because it delivers the hormone at a constant rate avoiding the peaks and troughs of doses associated with alternative treatments on the market. Testosterone shortage is a common problem - about 1 in 200 men suffers from it - and can result in sexual problems, breast enlargement and muscle loss.

However, it is Teverelix that really gets investors' pulses going. The drug is being developed to treat prostate cancer, prostate enlargement and endometriosis, a painful condition linked to infertility in women.

Many in the Square Mile are convinced it has the potential to become a blockbuster. At present, Teverelix is in phase II trials, but it could be on the market as soon as 2009 if everything goes to plan.

Unlike many rivals, Ardana has no shortage of drugs. Alongside Striant SR and Teverelix is Emselex - a medicine to counter an overactive bladder which Ardana is bringing to the UK in partnership with the Swiss pharmaceutical giant Novartis - and Invicorp, for men suffering from erectile dysfunction.

The potential revenues from Teverelix alone make Ardana, valued at just £75m, look good value. When Invicorp, Striant and Emselex are factored in, their propects make the stock an outright buy.