Investment Column: Hochschild is a solid mining sector punt

Shore Capital Group; LiDCO Group
Click to follow
The Independent Online

Our view: Buy

Share price: 276.2p (+10.3p)

It is all about the margin, says Miguel Aramburu, the chief executive of Hochschild Mining, the London-listed group that has its operations in the Americas, chiefly Peru. Yesterday's interim results showed that revenues were flat on this time last year, with the group blaming volatile commodity prices for the stunted earnings.

But Hochschild deserves credit for the action it has taken on costs, and when investors consider that attributable silver prices have fallen 22 per cent in the reporting period, the performance looks all the more impressive. Production, which was up 17 per cent in the first six months of the year, is also commendable, and the 27 per cent increase in the share price over the last three months should encourage punters that institutions are increasingly confident that the worst is over in the precious metals sector.

Mr Aramburu says the biggest risk to the group in the future is more commodity volatility, which we reckon can only be likely as the global economy edges its way nervously out of recession.

However, we would be buyers of Hochschild. Yesterday's numbers look good, and the share price has upward momentum. The experts at Liberum Capital argue that "the balance sheet looks safe to us, with net debt of $224m at a mere circa one times annualised Ebitda. Hochschild is trading on attractive multiples for a precious metals play on 5.5 times 2010 Ebitda. This compares to its bigger and higher margin peer Fresnillo of 12.6 times Ebitda and UK sector leader Randgold on 17.8 times."

The mining sector has become something of a dangerous place to put your money in recent months, with the industry having to contend with volatile prices, merger speculation and grumpy Chinese buyers. With Hochschild, at least punters avoid some of these hazards. Further cost savings are expected, and with the shares trading at an unjustified discount to the sector, we reckon it is worth a bet. Buy.

Shore Capital Group

Our view: Buy

Share price: 28.94p (+1.69p)

Small-cap and medium-sized stocks in the financial services sector have been well outside barge pole territory since the implosion of the industry a little less than a year ago.

What is remarkable, however, is the speed at which parts of the industry have recovered. Indeed, news that bankers are rubbing their hands again at the prospect of bumper bonuses this year almost makes you forget the pictures of Lehman Brothers bankers carrying their worldly goods around in cardboard boxes.

The bankers at Shore Capital, the boutique investment bank, are no doubt going to be joining the gravy train, judging by the group's first-half numbers, published yesterday. Profits were up 13 per cent and revenues jumped 12.7 per cent as the firm benefited from a surge of activity in the equity capital markets. The stock was up a further 6.2 per cent yesterday as investors cottoned on to the fact that (probably) the worst of the financial crisis is over.

We think it would be a good time to buy the shares, and at least then punters might benefit as the bankers celebrate the return of confidence in the markets, and, of course, their bonuses. We also think that the shares have some way to go, and this level, despite yesterday's increase, remains an attractive entry point.

There is clearly a risk that disaster will return to the financial markets, but there is no greater risk of that happening than a crisis afflicting another industry. We would buy Shore now, watch the stock rise and collect the dividend. Buy.

LiDCO Group

Our view: Tentative buy

Share price: 17.85p (+1.35p)

Certain events can change a company's fortunes and leave investors holding a stellar stock.

Terry O'Brien, the chief executive of the incongruously named LiDCO Group, an AIM-listed company that specialises in heart monitoring equipment, reckons that LiDCO has secured the change it needs. The group, which also issued encouraging first-half results yesterday, recently signed a distribution deal in the £8bn-a-year US market, giving it access to the world's most important healthcare market. Mr O'Brien says that the company has already sold its technology to more than 100 teaching hospitals, and that the future is rosy

Of course, this is the group's own projection, and investors barely need reminding that a punt on any AIM-listed healthcare group carries risk, but if LiDCO's hopes do materialise, investors will be sitting very pretty indeed. Tentative buy.