Investments: Talvivaara Mining hit by dire third quarter


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The Independent Online

Talvivaara Mining
SHARE PRICE: 214.1P (+9.1P)

It's been a tough year for investors in Talvivaara Mining, the FTSE 250-listed owner of a Finnish nickel mine. As if a 29 per cent drop in the nickel price in the past six months and a series of plant stoppages in April and May weren't bad enough, the company delivered a triple whammy of bad news on Friday.

Shares tumbled by a fifth at the end of last week, after Talvivaara cut its output guidance, warned of a strike and announced the surprise resignation of the chief executive, Pekka Pera.

Friday's slump brought Talvivaara's decline so far this year to about two-thirds, which will hit Mr Pera harder than anybody else, since he has a 23 per cent stake in the company. Mr Pera will relinquish his chief executive's jersey as soon as a replacement has been appointed, which is expected to be at some point in the next few months. He will remain on the company's board.

Talvivaara relies on an unusual mode of production known as bio-heap leaching. This employs microbes and sulphuric acid to extract metals, a process which is cheaper and more environmentally friendly than conventional smelting. And until recently, the business looked fit as a fiddle, with its share price enjoying a sixfold rise in 2009 and 2010 as its mine in Sotkamo, eastern Finland, produced a steadily rising stream of nickel.

But last week, Mr Pera cut his production forecast for this year to 16,000 tonnes from a previous estimate of between 22,000 and 28,000 made in May. The cut is the result of corrosion in the steel parts in generators of hydrogen sulphide needed to process the ore before smelting. Meanwhile, the threatened strike would fall between 21 October and 7 November if it materialises.

As one analyst put it "there is no sugar-coating a dire third quarter", while Mr Pera proclaimed that "as a 23 per cent shareholder I would sack myself".

Still, it should be noted that Goldman Sachs forecasts a strong growth in the price of nickel over at least the next year, while production should rebound next year. So Talvivaara might make a good investment in the longer term. Given the recent update, however, we would keep clear for now.

SHARE PRICE: 44.5P (+0.5P)

We reiterated our hold stance on YouGov in April as the valuation looked pretty full. At the time the polling firm was changing hands at just over 51p. And although they rose sharply in subsequent months, flirting with levels well above 60p in early July, the recent market turmoil has been taking its toll.

Indeed, at 44.5p, YouGov, which yesterday announced that its adjusted operating profits for the year to July had climbed by nearly 40 per cent, now trades on multiples of under 10 times forward earnings. That compares to around 17 times when we had a look earlier this year.

The results show that the market is being far too bearish. Alongside the improvement in profits, the company also expanded its adjusted operating profit margin, which came in at 9.4 per cent, against 8.5 per cent last year. Revenues were up by around 27 per cent at £56.1m, against £44.2m in 2010. It is clearly time to add to our holding.