The Investment Column: Time to cash inas miners startto lose their sheen

Davis Service Group; Equator Exploration

Our view: Take profits

Current price: 1377p (-108p)

Some of the shine appears to be wearing off the mining sector and yesterday's production numbers from Kazakhmys did nothing to change that perception.

Part of the problem in digging up natural resources is that Mother Nature can sometimes play a major role. Kazakhmys's third-quarter production was hampered by flooded mines, and as a result it mined 5 per cent less copper cathode. Year-on-year production was a whacking 19 per cent lower, so the bout of profit-taking that hit the shares yesterday should not come as a surprise.

The company was also hindered by lower-than-expected output from purchased concentrate, and the chances are that it will need to invest more than previously indicated to turn this situation around. A 1.2 per cent rise in mined grades was not enough to offset the lower production numbers.

Another problem in an industry operating at full capacity, to take advantage of demand and high metal ore prices, is that capital equipment and manpower are harder to come by, and the chances are that this will not be the last disappointing production update.

We continue to believe that the long-term outlook for the mining industry remains as bullish as it has ever been. Barring economic meltdown, demand from emerging economies is likely to keep prices high, and Kazakhmys is one of the most cost-efficient producers of metals.

Any major sell-off will create a buying opportunity, and on 11.9 times forecast 2008 earnings the shares are far from expensive. But, with more production jitters likely, the sensible advice at this stage for anyone sitting on decent gains must be to bank some profits.

Davis Service Group

Our view: Buy

Current price: 117p (-3.4p)

Not many punters would consider the local laundromat as an exciting investment prospect, but filling a portfolio with hares at the expense of the odd tortoise is not a sensible approach. Davis Service Group is in the tortoise camp, and as such is an attractive long-term prospect that is not going to lose many investors much sleep.

Basically, DSG does laundry, although it prefers to use the term "textile maintenance". On a grand scale, too: the company is forecast to make over £91m of pre-tax profit in the current year. Yesterday's trading statement was not exactly heart-stopping, but the company remains confident with current forecasts and expects to report double-digit revenue and operating profit growth in the third quarter.

It operates through two main subsidiaries, Sunlight in the UK and Berendsen in Europe, with operations across nine northern European markets. Its customers include almost any business that creates lots of laundry – hospitals, hotels and the catering industry. It does not just do the laundry, it also rents linen, and has extensive operations in workwear rental and washroom and hygiene services.

Senior management is very well-respected within the industry, and has a record of successful acquisition integration and providing meaningful, achievable forecasts.

This is not one for boy racers, but for anyoneserious about building a portfolio for long-term growth Davis Service Group ticks all the right boxes. On 13.3 times forecast 2008 earnings with a dividend yield of 3.5 per cent and a strong balance sheet, the stock looks fairly priced. But such reliable earnings deserve to trade at a premium. Buy.

Equator Exploration

Our view: Sell

Current price: 15p (-27.25p)

The problem with exploring deep waters for oil and gas projects is the potential to sink without trace. Investors in Equator Exploration know all about this, having already lost almost 95 per cent of their investment in the past two years by the time trading resumed yesterday.

Its losses in the first half spiralled from $3.6m last year to $84.7m in 2007. The group admitted it was overstretched by some projects, had problems with its partner Peak Petroleum in Nigeria, and was hit by failure to push through a merger.

Eighteen months ago, Equator hit a peak of 393p. By May 2006, following bear raids by hedge funds, it was at 114p, and newsflow was consistently disappointing to put it mildly.

The group is trying to implement a turnaround strategy by early next year. It is looking to draw a line under recent difficulties and secure the value of its exploration portfolio through farm-out and sales, already signing a deal with BG.

It has some quality assets, which will interest the majors, the problem is that production looks a long way off and needs multimillion-dollar investment.

There are plenty of investment opportunities in the small-cap oil and gas sector with exciting prospects that do not carry this level of risk. Some investors may wish to hang on, writing off their losses in the hope that some sort of favourable exit can be engineered by the company. But, despite the desperate current valuation, for everyone else this is a sell.