The Investment Column: If Hochschild Mining hits all its targets investors could strike gold

Regent Inns;
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The Independent Online

Our view: Buy

Current price: 375.5p

The mining sector has been on fire over the last three years but value investors might be tempted to ignore it due to the lofty valuations some stocks trade at. However, there are one or two pockets of value left and no portfolio should be without some exposure to mining. Given global political tension, the precious metals end of the market is particularly attractive at the moment.

Yesterday, US investment bank Citigroup upgraded its forecasts for gold and silver prices in 2008 and 2009 and Hochschild Mining looks like a strong play and underrated player in both. The company listed just 12 months ago and has world-class assets across Latin America.

Although those locations may put some investors off, Hochschild has been operating profitably for over 50 years and its mines, barring one project in Mexico, are all producing. By the end of the current year it should produce over 14 million ounces of silver and 200,000 ounces of gold. The company is confident that it will hit these production targets and the City forecasts that production will hit 50 million ounces of silver by 2011.

Hochschild is a low-cost producer because it follows seams of silver, rather than spending lots of time and money proving reserves before starting. While staffing and professional costs across the industry are rising, Hochschild has managed to reduce its cost base.

The shares trade on 10 times forecast 2009 earnings, according to Citigroup's upgraded forecasts. Be aware that the stock is tightly held, which contributes to the volatile trading since the company came to the market. Executive chairman Eduardo Hochschild owns just under 60 per cent of the stock.

Investors with a healthy appetite for risk should, within reason, ignore the lack of liquidity. There is little to suggest that demand for precious metals will fall sharply any time soon and if Hochschild's production targets are hit, the risk is firmly to the upside. Buy.

Regent Inns

Our view: Buy

Current price: 71.25p

It always looked like the pub and bar industry was approaching the smoking ban in England and Wales with confidence bordering on arrogance. And so it has proved, with the wet summer, lack of any major sporting events, and the smoking ban all helping to hit beer sales across the UK.

But the news is not all bad. Full-year results from Aim-listed Regent Inns were in line with expectations, with pre-tax profits rising 23.5 per cent to £6.1m on a 16.7 per cent increase in turnover to £148.9m. However, against tough 2006 comparisons, like-for-like sales for the first 14 weeks of the current year are down 1 per cent.

That is a decent performance, and Regent should be in a strong position in comparison to its peers, thanks to the niche attractions of its portfolio. It operates Walkabout pubs and Jongleurs comedy bars. Neither should be particularly affected by the smoking ban, and refurbishment elsewhere in its estate looks to be paying dividends.

Shares in Regent Inns have fallen sharply in the last four months and now trade at an attractive 10.1 times forecast 2008 earnings. That looks a good entry-level price, despite the tough current conditions, and with more consolidation in the sector almost inevitable, Regent's strong cash generation and position in niche markets make it a contender to play a part. Buy.

Our view: Hold

Current price: 53.5p

It has been an annus horribilis for the Individual Voluntary Arrangement industry, plagued by falling applications, higher marketing costs, and big banks declining to play ball. Judging by share prices across the sector, the market is not expecting things to improve any time soon.

Despite reporting a 61.9 per cent jump in full-year profits to £3.4m yesterday, languishes at an all-time low. Its business model has proved resilient compared to its peers and it remains the only IVA provider not to have warned. Even so, investors are nursing ugly losses, and in line with its rivals, the stock is down more than 75 per cent since hitting a high of 220p just over 12 months ago.

So has the market got this one wrong? Second-half pre-tax earnings rose by 64.6 per cent against the first half to £2.1m on the back of a 90.2 per cent rise in turnover to £11.6m. On the face of it, an excellent set of numbers.

But it is difficult to escape the feeling that is swimming against a rising tide – there is no guarantee that the industry will recover or that the big banks will suddenly decide to go along for the ride. The fees IVA provider charge, usually a percentage of the total amount of a customer's debt, are falling and unlikely to recover significantly, while the company itself reiterated just how competitive its market is.

Without any obvious short-term catalyst to get the shares moving in the right direction and despite the stock trading on a multiple of just over seven times forecast 2008 earnings, now is not the time to gamble on a recovery.

For investors already in the stock, should be given the benefit of the doubt. It looks like the best play in the sector and should remain profitable, and the number of UK consumers seeking help for bulging personal debt problems remains high. But for new investors there are far less risky options. Hold.