The Investment Column: Time to cash in on Rio and the mining boom

GW Pharmaceuticals; Sportingbet
Click to follow
The Independent Online

Our view: Take profits

Current price: 4354p (-65p)

Happy days continue for investors in the mining sector. The bull run that commodity stocks have enjoyed has enabled Rio Tinto, the integrated miner, to almost quadruple in value over the last four years. The broad consensus among City analysts is that demand from emerging economies for finite natural resources is likely to mean that prices remain very much in producers' favour.

Rio's third quarter production numbers, released yesterday, were roughly in line with market forecasts, and despite the odd hiccup the company is operating near full capacity. Iron ore output rose to a record thanks to the Pilbara mine in Western Australia returning to full capacity following transportation issues, while copper output, although lower than City forecasts, also rose to record levels.

On the face of it, Rio paints a fairly rosy picture. However, the trouble with operating at full capacity is that any unexpected outage will immediately reduce forecasts. Rio is also in the process of paying $38.1bn for Alcan, and although it is still expected to be covered through debt, given the poor credit markets Rio could be forced into asset sales to prop up the deal.

Not so long ago, Rio looked good value despite the surge in its share price. The same argument is tougher to make now, and although it looks certain to hit full year forecasts of just over £5.6bn of pre-tax profits, the shares now trade on over 14.6 times forecast 2007 earnings. Not exactly expensive but not being given away either.

In the long term, no portfolio should be without exposure to the mining sector, and Rio remains a high quality, well-managed business. Economic growth across the developed and developing world relies on natural resources, and even if there is a slowdown in China and India demand is likely to remain robust. But investors should know that no-one ever went bust taking a profit, and at this stage in the game anyone who has made a substantial return on Rio Tinto should consider banking at least a small proportion of it.

GW Pharmaceuticals

Our view: Hold

Current price: 60.25p (8.75p)

Talk about jam tomorrow. It seems like GW Pharmaceuticals has had investors excited about its medical marijuana potential since the days of Methuselah, but disappointing newsflow has left the shares languishing at just above its all-time lows.

GW's flagship product, an oral spray called Savitex aimed at pain relief for multiple sclerosis sufferers, has had numerous setbacks but long suffering investors at least got some good news yesterday. A two-year study published in The Journal of Clinical Therapeutics concluded that Savitex is also effective in treating long term pain with only moderate side effects. Until now, Savitex had only been proved as an effective pain killer in the short term.

Better news, but probably still not enough to recommend buying the shares. Although Savitex has gained regulatory approval in Canada, major markets in Europe and the US are still to give it approval and GW has been forced to recruit more patients for extended Phase III trials that are not due to start until the first quarter of 2008.

Although there seems to be little doubt that the product is effective, it is hard to get away from the belief that regulatory approval was always going to be hard to come by. The use of medical marijuana is a political hot potato and has already come up on the campaign trail in the US. Investors had better hope that a Democrat wins in 2008, because the chances of FDA approval with a Republican in the White House are very slim.

Given the significant fall in the share price and the fact that Savitex still has good commercial potential, investors already in the stock should hold on. But for new investors, there is no rush to get on board.


Our view: Risky buy

Current price: 48p (-0.5p)

The decision by the US to ban online gambling lost Sportingbet 75 per cent of its business overnight. The impact of that was writ large in yesterday's results for the year ending 31 July, which showed a headline pre tax loss of more than £300m.

However, what has emerged from the wreckage looks to be in fair health. After stripping out the US business, Sportingbet turned in a profit of £7.4m, up by more than three quarters. That would have been even better had the company not suffered from a run of poor sporting results on the fourth quarter largely due to favourites cleaning up in football matches in Southern Europe. Even so, the company still won £121m from its clients, up 13 per cent.

It has also been busy during the year putting things in place for the future, moving its Paradise Poker business on to the Boss network, shifting customer support operations to Dublin and moving operations requiring a gaming license to the tax advantageous location of Gibraltar.

The shares trade on 12.6 times next year's full year earnings. The problem is the US still looms large over the business, playing a part in the termination of merger discussions with Bwin, the Austrian online bookie. You never know whether or not legal issues will come back to bite the company and that has to be factored into any investment decisions.

There are plenty of attractions to an online bookie with a pan-European presence and a decent Aussie business as well. But it has to be one for serious gamblers only.