The Investment Column: Morgan Crucible is attractive in the long term

SkyePharma; Cluff Gold
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The Independent Online

Our view: Hold

Share price: 264.5p (+4.5p)

Takeover talks collapsed at Morgan Crucible on Monday, sending shares in the manufacturer of ceramics and defence materials tumbling. The company had been in negotiations with DLJ, the buyout arm of Credit Suisse, about an offer of up to 315p a share which would have valued the outfit at more than £900m.

So where now for the stock? There are certainly a large number of hedge funds in the City nursing heavy losses - they had been betting on DLJ succeeding with its takeover plan. It seems that the negotiations broke down over price rather than the private equity house having found something unsavoury at the company while it conducted due diligence. This will provide some consolation for those still holding the shares.

A takeover of Morgan Crucible would have been a perfect end to the recovery story at the group. At the start of 2003, it looked in danger of going bust. It was heavily loss-making and struggling under a mountain of debt alongside a pension-fund deficit three times its market capitalisation. It is little wonder that its bankers were threatening to pull the plug on the whole enterprise.

Since then, the group has enjoyed an amazing renaissance. Debt levels and the pension-fund deficit are now much reduced and firmly under control. An upturn in Morgan Crucible's key markets and a series of disposals took care of that. Last year, it made a profit of £53m and this figure is expected to rise to just shy of £70m this year.

Any company stalked by private equity must have strong cash flows and Morgan Crucible is no exception. Analysts believe that now it has the capacity to take on extra borrowings, opening the door to the possibility of share buybacks. Such speculation should bolster the share price in the near term.

On a long-term view, the stock is worth holding - although anyone who bought into the company back in 2003, when it traded as low as 30p, should have taken profits by now. The heavy restructuring of the past three years has left an attractive business with strong technology which is focused on growth markets.


Our view: Avoid

Share price: 24.75p (-0.75p)

Shares in SkyePharma have almost halved since this column advised investors to steer clear of them at the start of the year. But, could now be a time for investors to return to the biotechnology group?

There was certainly some good news from SkyePharma yesterday. Zileuton CR, the controlled-release asthma treatment it has developed, moved one step closer to getting the green light from the US Food and Drug Administration. The treatment is now on course to make it on to the market by the second half of next year.

But, as the saying goes, one swallow does not a summer make. Shares in SkyePharma actually lost ground despite the positive news. At present, the City seems to want just one thing from the company and that is for it to sell its US-based injectables business. The unit is burning vast amounts of SkyePharma's cash and needs to be sold asap. Frank Condella, its new chief executive, has promised to have a deal wrapped up by the end of the year.

But, given how desperate the company is to dispose of the operation, it is very unlikely that Mr Condella will get a good price for it. In fact, there is a danger that he will fail with the disposal altogether. Such a scenario could leave SkyePharma with less that £10m of cash in the bank by the year-end and will undoubtedly send the stock tumbling once again. A partial sale of the business is also unlikely to be greeted favourably by the City.

Until the future of the injectables business is clear, SkyePharma looks like an ultra high-risk investment - one readers would do well to continue to avoid.

Cluff Gold

Our view: Buy

Share price: 60p (-0.5p)

Algy Cluff is a veteran of the exploration sector. He made a killing in North Sea oil and, more recently, from selling Cluff Resources to the gold-mining giant Ashanti for £80m in the mid-1990s.

Cluff Gold, where he is the chairman, is his latest venture. It is focused on exploration in west Africa which Mr Cluff rightly believes has huge potential. Yesterday came news that the group is to bring to production its Angovia project in Côte d'Ivoire and its Kalsaka site in Burkina Faso.

Analysts expect Angovia to start producing gold at the end of next year and eventually to reach 60,000 ounces per annum. Much of the equipment to enable this to happen is already believed to be in place. In fact, the mine was in production during the period 1998 to 2003 when 180,000 ounces of gold were recovered. It is estimated that a further 800,000 remain.

Meanwhile, the Kalsaka prospect is tipped to go into production in 2009 and to achieve output of 100,000 ounces per annum by 2011. Cluff Gold has enough cash to fund its plans for both projects.

Getting gold from the two looks set to be a low-cost business - not more than $275 (£147) per ounce. With gold trading at $580 per ounce, that should leave plenty of profit for the group. Given Mr Cluff's track record in the sector, and his knowledge and contacts in Africa, investors would do well to back his latest venture.