Small Talk: Cupid leads the way after a rocky quarter on the AIM 50 index


The summer months are often marked by volatility on the markets. Ordinarily, the spikes and slumps are the result of dwindling volumes, as traders decamp to the beach. There tends to be little in the way of hard news, and the swings are often pinned on flimsy premises.

But the past couple of months were anything but quiet. There was no shortage of market-moving news, with the US debt ceiling negotiations going right down to the wire and the eurozone debt crisis flaring up like a mid-summer barbecue. We also saw several days when the sharp market movements were matched by heavy volumes, as nervous traders shuffled their investments.

The convulsions have left their mark, with the AIM 50 index down by nearly 11 per cent over the third quarter. But there were winners amid the turmoil, with Cupid, which gained around 41 per cent in the three months to the end of August, leading the way.

The company, which operates dating websites, has had a busy quarter, announcing the acquisition of no less than two online dating business – first a deal in Germany in June, and then of one in Brazil at the end of July. Along the way, Cupid also benefited from some supportive broker comment, with both Numis and Canaccord Genuity beginning coverage in the quarter. Both said "buy".

Further down the AIM 50 leader board, at number four, regular readers of this column will recognise Avocet Mining, the gold miner we featured back in February.

It notched up an impressive quarter, gaining just over 35 per cent over the period. On the face of it, there seems to be an obvious reason for the surge. Avocet mines gold, the one commodity that has stood out amid all the market stress. The safe-haven metal booked record high upon record high as investors sought cover from the unfolding crises.

But there are other, company-specific reasons, too. The quarter saw resource upgrades at Avocet's flagship Inata mine in west Africa. Investors also had the chance to scrutinise its second quarter results, which revealed that the miner had bought back 20 per cent of its gold hedge book.

The hedge has long been seen as a drag on the share price, as it limited the company's exposure to the surging gold price by tying it to selling a certain proportion of its production at a fixed price. By buying back part of the book, Avocet thus increased its gearing to the metal's gains.

Still, Avocet was outdone by sector peer Patagonia Gold, which came second. Other risers include Monitise, the mobile banking and payments specialist that was at the number three spot, and the pawnbroker Albemarle & Bond, which was the ninth strongest AIM 50 stock in the quarter.

Of the losers, Bowleven stands out, taking the wooden spoon with a decline of more than 57 per cent between June and August. The oil prospector appears to have been caught in the market sell-off, although there was an early August update on the company's Sapele-2 offshore well in Cameroon that disappointed some analysts. Much of the slump over the quarter came in August, with Bowleven falling by nearly 50 per cent over the month.

Another notable loser was Gulfsands Petroleum, which was number four on the loser board. August was particularly bad for the oil company, with its shares falling by nearly 27 per cent as its Syrian operations came under the microscope. With President Bashar al-Assad's violent crackdown on protesters, Gulfsands was forced to defend itself amid criticism of its links with Mr Assad's cousin, Rami Makhlouf, a major player in the Syrian economy.

In a market update, Gulfsands said it was fully compliant with sanctions on Syria, and that while it had had "constructive commercial relationships with various Makhlouf interests", all such dealings had been "conducted on arms-length commercial terms, have been properly documented and have been disclosed as required by the pertinent laws and regulations".

Gulfsands added that, following UK sanctions in May, it had suspended payments to the Makhlouf interests under its agreements, along with voting, dividend and transfer rights connected to the Gulfsands shares held by a Makhlouf investment company. Still, the fall over the course of August meant that its stock was down more than 40 per cent over the third quarter.

Anglo sidesteps inflation headache

The London-listed mining sector is vast and varied. Investors can take their pick from big, diversified conglomerates that deal in every metal under the sun – or rather, the earth – to specialists that are focused on just one or two commodities.

Anglo Pacific, however, is an outlier in that it deals in mining royalties. These royalties give Anglo a percentage of a project's sales revenues, without it having to worry about things like production costs.

The most straightforward part of the business is where it buys existing royalty agreements such as those retained by the initial explorers. But it also takes on new agreements that come about when it provides financing for mining projects. This is usually done to help the mine progress to production, where Anglo helps with the money in return for royalties. Its interests are spread around the world, and across various commodities, including iron ore, uranium, coal and gold.

If the business sounds like an unusual one, it is. A recent circular from Bank of America Merrill Lynch, for example, highlighted the lack of comparable companies as one of the challenges in valuing Anglo Pacific.

Unusual isn't a bad thing, though, particularly in light of the cost inflation currently troubling miners around the world. As Bank of America's analysts noted, Anglo Pacific is not exposed to surging inflation, as its royalties are derived from revenue rather than profit, and the company is not responsible for the miners' capital expenditure.

This is not to say that there aren't risks. An obvious one is that it is the operators, not Anglo, who make decisions about the mining projects. Another, related one flagged by Bank of America is that it is "reliant on mining companies to bring projects into production and operate them effectively".

But there are always risks. And as Liberum Capital highlighted in a separate note, not only does Anglo offer protection against cost inflation, it also represents exposure to a range of key commodities.

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