UK INVESTOR MONEY // SHARES // INTERVIEWS
Metal Tiger: The UK Investor Interview
by Zak Mir
If we had to bet the ranch on only one share... Why I believe in gold
by Amanda van Dyke
ISSUE 3 // AUGUST 2015
Why Rob Terry must go to prison
Company of the month: Audioboom UK Investor Magazine — 1 — August 2015
Intro
INSIDE 4 Three shares to buy for August
Zak Mir
8 Xtract Resources – a producer with big plans Sheldon Modeland 10 Interview: Paul Johnson of Metal Tiger Zak Mir 12 Three stocks to sell in August Tom Winnifrith 14 Why I still believe in gold Amanda van Dyke 16 If we had to bet the ranch on one stock… ShareProphets team 19 Company of the Month: AudioBoom Steve Moore 20 The House View: It’s China wot matters 22 Warnings from the Baltic Dry Index Ben Turney 26 Why Rob Terry Must go to Prison and will go to Prison Tom Winnifrith
contact us UK Investor Magazine 91 - 95 Clerkenwell Road London, EC1R 5BX E: info@ukinvestorshow.com W: www.UKInvestorShow.com : EDITORIAL Tom Winnifrith Editor Cover David Lenigas
Editorial Welcome to the third issue of UK Investor Show Magazine and we hope that there is something here for everyone: buy ideas, sell ideas, some macro thoughts and above all a précis of the case for the prosecution against the stockmarket’s biggest fraudster for 30 years, Rob Terry. Folks say that we are a bit obsessed with Terry. Well we played our part in demonstrating his frauds and lies, in exposing his selling of shares when he said he was buying in the dodgy EFH deal and so, we admit, that there is a bit of triumphalism involved here. However there is a more important principle at stake and that is that of investor protection. We accept that buying and selling shares come with clear risks. “The value of your investments can go down as well as up, past performance is no guide to the future” is the standard health warning. For AIM shares perhaps it should be “Past performance is an excellent guide to the future and the value of your shares can go up as well as down but it is very unlikely that they will.” But investors have a right to play on a level playing field. That is to say to invest on the basis of RNS statements that are true and on annual reports which are not fiction. Those who traded Quindell under Rob Terry were afforded no such luxury. They traded on the basis of fiction and lies and Mr Terry grew very rich at their expense. That is wrong.
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And the authorities need to show that it is wrong and throw the book at Terry to discourage other crooks from turning to white collar crime on the AIM Casino. Sometimes we are accused of looking too much at process, at the failings of Nomads, brokers, lawyers and boards. But unless we get the system right there is little point in attempting company analysis since what you are analysing might not actually be real. We never call for MORE regulation – that will simply involve increased costs which will be passed on to PLCs and to investors and so reduce returns all round. What the writers of ShareProphets are united in calling for is effective and draconian implementation of the existing rules. Any transgression must be immediately and severely punished with the individual responsible barred from any involvement in PLC life or the City again. It is a simple request. We hope that the Quindell fraud will mean that are calls are, at last, taken seriously. Best wishes Tom Winnifrith Warkwickshire S Check out the speaker line-up for our new show – Gold, Bears & P Traders on November 28th 2015 as it is now pretty awesome – you can see the speakers and book tickets at half price until July 31 HERE UK Investor Magazine — 2 — August 2015
UK Investor Magazine — 3 — August 2015
Zak Mir’s three shares to buy for August By Zak Mir CEB Resources (CEB): 1p Target After Narrowed Losses As far as technical traders and investors are concerned there is nothing that lifts the spirits, and hopefully later the bank balance than the type of chart pattern currently
the potential upside scenario. This is likely to consist of a move to the top of the rising trend channel from April, a suggestion which while admittedly appearing to be over optimistic, does base itself on what has been a very con-
displayed on the daily timeframe of CEB Resources.
structive reversal / turnaround.
The reason behind this relative good cheer is the way it is possible to draw a rising trend channel from the end of April. This has guided the stock higher in a quite spectacular fashion, although it can be seen that in the post June period there has been a period of consolidation. This bottomed out towards the 0.4p level, well above the former initial 2015 resistance at 0.35p. The general rule is that when you see new support come in well above former resistance a very constructive technical set up is being former, and this certainly looks to be what is going on at CEB Resources.
We have the top of the May price channel so we are being primed for a target at the 3 months resistance line projection as high as 1p, a move that would easily take out the former 0.75p June peak. The timeframe is the next 2-3 months, while the stop loss is an end of day close back below the 50 day moving average at 0.42p.
CEB Resources is sporting the type of encouraging picture which should allow us to be generous in terms of
From a fundamental perspective the driver in the near term could very well be the recent news from the company which could ironically be argued did include one of the best phrases from the stock market – narrowed losses. This was achieved via gains from disposals , a $219,000 win on CEB’s coal investments in Poland and Australia, meaning that the annual loss was just $122,000 as com-
UK Investor Magazine — 4 — August 2015
pared to $701, 000 previously. Now that this is out of the wake it is likely that the focus will be on the latest deal which is an oil & gas joint venture in Indonesia. The rumour is that this company could be on the right side of 1,000 bopd output, which is not insignificant for a £3 million market capitalisation company. EMED Mining (EMED): Milestone Event Targets 7p Initially EMED Mining is, and has been, on the watch list of most private investors as a star minnow in its sector. However, just like many star prospects in this space the timing of the journey from hot prospect to even hotter reality, there have been timing issues. In particular, the process leading up to production at the Rio Tinto Copper Project has been an extended one. However, the doubts were apparently ended in January this year with final permitting being approved. At that time production was set to come in the autumn of 2015, with the company being awarded the final license to get the project underway in July. This has been described as a “milestone” moment, and one
would have difficulty disagreeing with the concept, especially as it would appear that EMED Mining is fully funded. Given that the market has been waiting 10 years for the Copper Project to come on stream it is clear that one‘s patience has been a virtue in a manner which is totally alien to the AIM market, and presumably now that the waiting game is finally over fans of this company should have a decent trajectory in terms of a significant mining play over the near term. Moving along to the technicals and it is clear that partly due to the vagaries of the fund raising process and of course the 4 year collapse in the mining sector, the charting pattern has taken the form of a three steps down / two steps up decline over the post 2013 period. While it may be the case that for the rest of this year it is the fun-
damentals which are the driver for the share price – and particularly the newsflow, it seems logical that the March floor of 3p will not be broken given the transformation just reported by EMED Mining. In the short term there is triple tested support at 4p, marking out a significantly higher support zone versus March. This is expected to hold, or even if it does not, any breakdowns should be only temporary. Otherwise, those who require a little more convincing regarding EMED Mining would wait for a technical momentum signal such as a weekly close back above the 200 day moving average now at 5.05p to suggest it is worth going long. Above the 200 day line the first chart target is the main summer 2014 resistance at 8p over the following 2-3 months. Infrastrata (INFA): 8p In Focus For H2 2015 Infrastrata, like many other minnows of note, first came to my attention in terms of being a potential turnaround stock in the Bulletin Board Heroes video which appears daily on Shareprophets.com. However, notoriety for a
stock from this source tends to be largely on a technical or a trading volume, or even social media basis, rather than fundamentally based. Judging from the recent initiation of coverage by Allenby of the UK focused AIM listed oil & gas play, it would appear that a positive turnaround here could be on the way. The catalysts for this are said to include de-risking and then possible divestment of the Islandmagee Project, the plan to spud Woodburn Forest-1, and securing a foothold in the North Sea. This adds to the way that from a valuation perspective we are looking at a situation where the negative sentiment on this particular part of the stock market in the wake of the great autumn 2014 oil price meltdown suggests we
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UK Investor Magazine — 5 — August 2015
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GOLD BEARS are looking at a company on a rock bottom rating. Indeed, it can be said that judging by the Allenby view the shares are trading at half their book value of 7.9p, a state of affairs which even in the current atmosphere in this space appears mean. While the broker is going for a 20p share price value I would settle for the book value, especially as it would mean the shares would have doubled from present levels. From a technical perspective it can be seen how we have a major higher low for July versus March. This could be
the catalyst for a rebound over H2 2015, especially if we are treated to a quick break of the 50 day moving average at 4.16p. This would provide an initial target of 6p at the top of a rising trend channel from January. Indeed, the 8p book value level was seen as recently as November. The best momentum buy trigger would be an end of day close back above the 50 day line for those who are still cautious on the sustainability of the recovery.
Get your free copy of Zak Mir’s new ebook, Real Bulletin Board Heroes: The Ten Stocks to Buy for Summer 2015 by clicking here.
&T R A D E R S
Star speakers from the world of commodities and investment including Zak Mir,Zak Amanda van Dyke, Mellon, Evil Mir, Amanda vanJim Dyke, Knievil and Tom Willem Middelkoop andWinnifrith Tom Winnifrith.
Meet and chat to gold and commodities companies, their CEOs and Chairmen. Tickets half price for limited time. 28 November 2015 QEII Conference Centre, Westminster, London goldandbears.com
UK Investor Magazine — 6 — August 2015
UK Investor Magazine — 7 — August 2015
Xtract Resources – Small gold and copper producer with big plans By Sheldon Modeland
Research Analyst, Beaufort Securities
Chepica Mine, near Talcae
Xtract share price versus S&P/TSX gold index
source estimate is 0.3Mt grading 2.99g/t Au, 0.73% Cu and 12.2g/t Ag, we expect a significant increase in the resource estimate as well as increased mining flexibility on the back of recent discoveries of mineralised zones (on surface and underground) within the Chepica area. On 3 March 2015, Xtract Resources announced that it has signed a Deed of Assignment (DoA) with Mineral Technologies International (MTI) giving Xtract an option to acquire copper a sulphide tailings project located in the northern Cape province of South Africa. The project comprises the Carolusberg and O’Kiep tailing dams which contain a total of 33.8Mt of copper sulphide material which was mined by O’Kiep Copper Company between 1980 and 2010. The Carolusberg tailings dam contains 28Mt grading 0.19% Cu and the O’Kiep tailings dam contains 5.8Mt grading 0.23% Cu. Under terms of DoA, Xtract will have a seven month option period in which to perform drilling and metallurgical test
work in order to evaluate the economic viability of the project. Should the drilling and test work prove favourable, Xtract will pay MTI US$1.5m in cash for 100% ownership of the tailing dams. Most recently, Xtract announced its intentions to acquire 100% of the Manica Gold mining licence (3990C), which includes the Fair Bride, Guy Fawkes, Dot’s Luck and Boa Esperanza gold deposits in western Mozambique from Auroch Minerals for a total consideration of US$12.5m. The Fair Bride project is the most advanced, being six months from completion of a definitive feasibility study (DFS) and potentially 18 months from the start of production based on a JORC-compliant resource of 9.5Mt grading 3.01g/t gold. While Xtract paid a relatively high in-situ price equivalent to US$11.5/oz, when considering the additional resource potential as well as the first mover advantage in Mozambique the price paid may turn out to be the bargain of the century.
*Beaufort Securities Limited acts as Broker to Xtract Resources. At Beaufort Securities we offer a bespoke advisory service. Our people are dedicated to the markets day in and day out for one reason and one reason only - to help our clients profit. To discuss your strategies with a broker, please call us on 020 7382 8384. Beaufort Securities Ltd is authorised and regulated by the Financial Conduct Authority, registered number 155104 and is a member of The London Stock Exchange and ISDX.
Source: Xtract Resources
Source: Bloomberg
X
tract Resources, the diversified exploration and development company, has over a relatively short period transformed from what was essentially a shell with no cash and debt into a gold and copper producing Group with positive cash flow and no debt.
Having recently turned around operations to profitability at its Chepica mine operations in Chile, management is now focused on growth through strategic acquisitions of low cost, high margin assets. Despite the current malaise in the resource sector, quality assets with a low cost base can still generate substantial margins. With this mind, Xtract has recently acquired a suite of copper tailings facilities in South Africa with the aim of reprocessing the copper oxides and sulphides from the tailings. More recently, Xtract acquired the Manica mining licence in Mozambique comprising the advanced Fair Bride gold deposit and potentially propelling the company forward with its first mover advantage. Since acquiring the gold and copper producing
Chepica mine on 13 March 2014, Xtract Resources has restructured operating efficiencies and lowered total costs resulting in positive cash flows. There were a few challenges along the way, such as adverse ground conditions and ore body discontinuity that lead to production delays and increased capital expenditure. Since then, however, management has reinforced the declines at Chepica, established additional underground development areas and discovered new mineralised areas at surface. Now with a third ball mill installed, Chepica has 10,000t per month target capacity. In addition to the Chepica main (central zone), management has identified and is currently developing the Colin, Francisco, Theoni and Salvadori mining areas. While the current NI43-101 compliant mineral re-
UK Investor Magazine — 8 — August 2015
Hot Stock
ROCKETS S t ocks R e a d y t o t a ke of f hotstockrockets.com UK Investor Magazine — 9 — August 2015
Zak Mir Interviews Paul Johnson of Metal Tiger By Zak Mir Zak Mir: Paul Johnson, Executive Director at Metal Tiger, could you tell me about Metal Tiger, what it is, and what it aims to do?
ent from the average punter. We are looking for the multiple returns and the elusive ten baggers perhaps. We haven’t had a ten bagger as yet, but it would be nice to have one as soon as humanly possible. What we do have I suppose is a level of research and understanding of the market that is quite advanced. We’ve been doing this for quite a few years now. We have capital behind us that’s partly self-generated and partly from the placings that the company’s undertaken in the last year. We are able to go and have direct negotiations at board level with companies and discuss financing agreements with them that give us access to an equity and shares and warrants package that perhaps the average investor might struggle to get themselves. And, we’ve developed an ability as people hopefully have seen recently to walk away from holdings when we’ve seen significant valuation uplift, and generate profit on disposal.
Paul Johnson: Metal Tiger (MTR) is a UK A listed investment company focused on the natural resource sector. The company started an international resources group about a year ago in mid-2014. It is trying to find undervalued natural resources opportunities on AIM. We eventually split the business into two divisions, direct equities and direct projects. Direct equities are focused on finding listed natural resource companies into which we can invest either directly or through market. We tend to go for a model that includes both equity and warrants so that we have a potential upside Now, our philosophy is to support if the company performs as we companies we’re engaged with and anticipate down the line through Mir reinvest where we can. So far we inthe value of our equities increasZak vested £150,000 in Kibo Mining, at a 1.5p in ing, then the value of any warrants November and December last year. We made a that we have in the company will significant profit on disposal and reinvested the have a valuation uplift. money by converting our £300,000 warrant imIn addition to that we have direct projects and at mediately rather than leaving them to lie for three the moment we’re supporting them through joint years. We’ve reinvested in warrants in Eurasia very ventures, Spanish gold & tungsten exploration, recently, and our model is to generate profit but and Thai gold exploration. We are also looking for primarily to do that with full support for the comgold in Tanzania in joint venture with Kibo Min- panies we’re invested in so that the wider market ing (KIBO) and we have a uranium joint venture feels that we’re a safe investor in that company, with Kibo also in Tanzania. There is a project col- and runs with us with regard to the story. So, we laboration with Ariana Resources (AAU) in Turkey, try to be moral, balanced, fair, reasonable, supas well as looking for new gold opportunities with portive whilst still building the very big business in Eurasia Mining (EUA) in Russia, as well as for PGM the resources space as quickly as we can. and gold opportunities in Russia. Moral and balanced. That doesn’t sound anything like So that’s the overview of the company, it’s quite the AIM market! Would it be true to say that you do all a complex piece already after only one year’s life, the hard work so that private investors don’t have to? and we’re looking to build as hard and as fast as we can a fully diversified precious and strategic met- Not all the hard work but we certainly do a lot. als invest and play for investors on aim who like We’re engaged full throttle on this at the moment. We think we’ve got a reasonable view on where the the sector. market’s heading. You don’t have to be a rocket Most private investors are mad about resources stocks, scientist to know that our market place of natural they love them, and want to spot the next ten bagger. You resources runs in cycles. And, we’re pretty much seem to be in the same game? What makes you different at or near the bottom of this horrendous pull back from the average punter? phase that we’ve had over the last four years. So, based on everything that has happened in the past, Well I suppose in some respects we’re not differthe cycles turn around, the valuations change from UK Investor Magazine — 10 — August 2015
hopelessly undervalued to dramatically overvalued. We’re building Metal Tiger right at the bottom. Fortunately we’ve made significant returns on our investments to date so we’re able to build the business quicker than you would be able to with limited capital. And, we’re just finding those opportunities both – well in the UK and we’re also looking in Canada at the moment quite closely because the Canadian valuations have crashed even more than AIM in the UK. And I suppose, yes, we are doing an element of the research so investors don’t have to, but we would never want investors to go blindly into Metal Tiger, or any other natural resources stock.
one face-to-face, just to get a sense for where the business is going and to bolster your confidence levels, or if you’re not happy to enable you to form a view that you don’t want to be in that investment anymore. That’s important. We should do it.
It is. But given the degree of rules complexity I’ve got some sympathy for a lot of directors who may feel they don’t want to stray on the wrong side of things. That’s always, it’s a continuous battle. Equally at the moment it seems companies in the resources space can release very positive news and not see any share price reaction. In fact I think a lot of companies, and Metal Tiger has experienced this, release a really good piece of news and the share price falls back a little bit. But that’s just the nature of the game at the moment.
A final point is that you are buying distressed assets at a very cheap price so therefore you are not necessarily dependent on an overall rise in commodities to turn a deal.
We have just read the headline that commodities are at a 13 year low. Given that this state of affairs could go on for years, is there a danger that Metal Tiger could become a Metal Pussycat?
I think there’s always a risk that anything goes on for far longer than you’re anticipating, and you know there’s a famous quotation behind that, the markets can remain irrational longer than you can remain solvent. Now, we’re bolstered by You cannot have any other substitute for the fact that we’ve had some winyour own research and you have to thorners, early doors in the comoughly understand where you’re placing pany, so that gives us signifiyour money. Which is why we say to peocant underlying asset strength ple, and we’ve been reinforcing the point and working capital. So that’s recently, that when they put money into a good thing. We’re bolstered any company, and Metal Tiger is part of by the fact that the market can’t that, you must enquire of management. take share price as negative. So, in You must ask the questions that you our space if something has fallen have, do the research, ask more quesfrom 50 pence to a penny over the tions, and you should expect to get last four years there isn’t that much answers. We will speak to investors further it can go. We’re in the right at any time about what we’re trying time zone, I think, and it’s a judgeto achieve. We speak to them within ment call but these cycles simply do market rules, obviously, but we’re not go on forever. They go through P happy to discuss what the busiaul J o phases and we’ve seen that since time h n ness is doing. The investors are son began in the resources space. So nothwelcome to ask us anything they like. ing is 100 per cent, nothing is guaranteed but we think we’re pretty much right. PerSo the Metal Tiger USP is based on transparency, openness and a willingness to enter into discussions with your haps we were ever so slightly early by starting the investors? This is not something which tends to happen company last year, but if that’s the case then it’s that much on AIM or anywhere else on the stock market, not bad if we’re six months out. We’ve got our timing pretty spot on I think in the scheme of things. which can be a snooty place?
I think ultimately it’s incumbent upon everyone who occupies a position as a director within an AIM listed company to be responsive to shareholder queries. And you can actually do this in more than one way. By your news flow you can keep investors fully updated, you can supplement that with media work that explains what you’ve done and what you’re broad strategic objectives are. And, then you can answer questions on a one-to-one basis. You have to be very careful because you can’t give anything away, and you’re really just summarising what’s already in the public domain. But still I think it’s useful for people to be able to speak directly to a member of management. There’s nothing better than having a chat or seeing some-
No, I think sometimes with these things, as in Kibo last year, what the market needed to see was someone prepared to put a bit of money on the line and show a bit of confidence in the business model, which is what we did. The same with Eurasia. I think potentially the same with Ariana, our three bigger investments. We tend to be focusing our market portfolio in companies, normally shall I say, that have a degree of asset backing, reasonable projects and in some cases cash. So we went three per cent plus in Orsu Metals (OSU) which now currently has more cash than market cap by a large extent, and has some interesting copper and gold assets. So we’re being selective in where we put our money. We’re not placing it at a massive risk, we don’t think, for the most part. It’s an exciting portfolio of interest but it’s not one that, where anything individually could sink us tomorrow. It’s well balanced and it’s about right and where it needs to be. We are a small company, a £3m market cap business. We’ve got to grow this is in a very aggressive fashion, so we’ve got to take some risk. But we’re sensible enough in the approach we take.
UK Investor Magazine — 11 — August 2015
Three stocks to sell in August By Tom Winnifrith
T
he market mood music is changing. I suspect that you have guessed that I have been rather bearish for quite a good while. But it seems that more and more folks are coming round to my way of thinking. It is not that I see one cataclysmic event causing a crash although both China and as a wild card ISIS have scope to cause a mega-wobble. It is just that in relation to projected earnings growth I continue to regard equities as overvalued. As the profits warnings – indicating poor earnings visibility - and also insolvencies such as Afren continue to arrive on a daily basis, it seems as if the bear case is getting stronger. Now it could be that equities just tread water for a few years until earnings “catch up” but I sense that such a prognosis is really just wishful thinking. The mood change is particularly dangerous for those companies with trivial revenues, that are burning cash at an alarming rate and whose valuation is based on projections of earnings many years out. For such enterprises are wholly dependent on investors “believing” and being prepared to support such companies with fresh cash until their prises of future revenues and cashflow arrive. If indeed they ever will arrive.
does this company do exactly? I am buggered If I know and I suspect most of its investors could not really explain its Big Data business plan in any coherent way. But here is a lot of jargon and buzz words but revenue, well that is another matter. Following the Q2 Trading update analysts took red pencils to forecasts for the second time in three months. Revenue visibility is clearly dire. In March current year forecasts for revenue were cut by 7% and for EBITDA by 10%. Noting “continued disruption from the Q1 reorganisation of the (‘Application Lifecycle Management’) sales team”, analysts have now further reduced their revenue forecasts for the current calendar year and next by 16% (to $14.2 million) and 10% (to $25.9 million) respectively. This sees net cash reducing to $6.2 million at the year-end and an $8.5 million net debt position at the end of next year (there is currently a $10 million revolving credit facility in place with HSBC to March 2017). Well it only needs one more warning and Wandisco bursts its borrowing limit but which bank was mad enough to lend a loss making cash burning company money in the first place? This stock has bailout placing written all over it but if the mood carries on darkening given its lamentable record of profits warnings the price of such a bailout will be nowhere near today’s levels.
the thoughts of others. Avanti is wallowing in debt and in the last quarter sent $30 million to money heaven leaving it with $120 million cash. The company has an extraordinarily consistent record of missing forecasts and of changing the metrics of what it regards as KPIs. What I regard as a KPI is cash generation but that has never been part of the game at this operator of satellites. I sense that the market’s patience is wearing extraordinarily then with this company and its bombastic boss David Williams. It is now almost five years since the first Avanti satellite was launched it all its capacity is still to be sold out. In ten years it runs out of gas and vast capex will be needed to launch a replacement tin can into space. But there is no sign of Williams generating that cash or the vast sums needed to clear this company’s debts. At 208p the market capitalisation is £291 million. A joke.
The concept here is that a boring business in an ultra-competitive market which has NEVER generated cash is suddenly worth a ludicrous multiple in both absolute terms and relative to all its listed peers simply because the fraudster Rob Terry has bought 9.9% and is ramping it aggressively.
Finally, I have to be boring and return to a stock I flagged up as a cracking short in the first issue of this magazine – Daniel Stewart (DAN). Its shares have duly tanked from 4p to just over 2p with a £1.2 million placing at 3.35p on the way down. Even so the company is still valued at £20 million but had free cash of less than £1 million and is – I believe operating in a cashflow negative manner.
As I explain on pages 24 and 25 Mr Terry will not be at liberty to meddle in listed stocks for much longer and gravity cannot be defied forever. Fair value for this basket case remains c0.25p and it is one of the most ludicrously overvalued companies on the AIM Casino. As investor sentiment in general sours and as Terry is banged to rights these shares will collapse.
Tom Winnifrith’s
5 m o d el p o rt fo lio s:
My Nifty Fifty colleague Steve Moore flags up one such stock in his company profile on page 19, that is to say Audioboom. Dam you Steve you beat me to it. But I can still give young Steve a hat tip for my first idea of a blue-sky stock to sell this month, Wandisco (WAND) which at 192p (down from 1500p) is capitalised at £56 million after a fairly piss poor trading update a few days ago. What
My second sell? This time it is a hat tip to Lucian Miers for Avanti Communications (AVN). I see no shame in pinching other folks’ ideas as long as I give attribution. Only geniuses on Bulletin Boards know everything and have all the answers. Mere mortals such as myself have to learn by reading
UK Investor Magazine — 12 — August 2015
Growth Income Gold Recovery Penny Shares
Su b scribe today
newsletters.advfn.com/tomwinnifrith UK Investor Magazine — 13 — August 2015
Why I still believe in gold
ly credited with saying “the time to buy is when there’s blood in the streets”. And Rothschild took his own advice, he made his fortunes by buying panic – the oldest contrarian investing strategy in the book. I’m not advocating being a contrarian investor just for the sake of being contrarian. I’m talking about mid- to long-term holdings of assets that has better fundamentals than the average reactionary thinks they have. Jim Rogers defines panic investing as buying whenever there is a huge dip. When Ukraine was first in the midst of its geopolitical issues, the currency and markets dropped. Then the currency bounced back a bit. Jim says he has known some great traders who buy right at the time when blood is in the streets, then hold waiting for that bounce as their exit. Others, he said, hold for a longer term understanding that there will be more chaos and volatility, but are willing to slog through it. Of course, doing this can be hard. People will tell you you’re a fool. That’s what it’s called contrarian investing, you are taking a position contrary to what the majority of the market tells you to. Gold has solid demand, and is trading at slightly below the average all in cost of getting it out of the ground. Either half the world’s gold mines close, and gold demand goes through the roof, or the prices rise. It’s basic economics. Also gold producers are trading at the lowest PE ratio’s in the market, 3-4x, Apple and most of the tech boys trade at an average of 16-18x. Just because it isn’t a popular investment doesn’t mean that it isn’t a good investment.
By Amanda van Dyke Gold is cyclical, it always has been and the irony of history is most people buy at the top and sell at the bottom. Gold has been a non-dilutable store of value for 3,000 years that has always tracked the real rate of inflation in the long term. Over the last 7 years western governments have printed unprecedented amounts of money, ultimately devaluing Western currencies in real terms despite how they trade against each other. Unless more than 2,000 years of monetary history are about to be upended, gold will go up. The
currency and stock markets are overvalued in real terms: how long until that bubble bursts I do not know, but it will burst eventually. Governments around the world including Russia, China and India are buying gold and rates never seen before to try to store up national coffers and offer an alternative to the devalued American dollars sitting in their treasuries. In times of economic uncertainty people flock to gold, and the flock is always preceded by a last fall. 19th century tycoon Baron Rothschild is wide-
UK Investor Magazine — 14 — August 2015
The one thing mainstream media seems to agree on right now is that the long awaited bursting of the stock market bubble appears to be underway, there are indicators to that effect everywhere. Venture capital (VC) firms invested $19.19 billion last quarter. The Wall Street Journal says it’s the most money invested by VC companies since the fourth quarter of 2000, when VC funding hit $19.72 billion. The last time VC funding hit this level, the stock market crashed soon after. But that doesn’t mean stocks are due for a crash today. It just means the stock market is likely closer to a top than a bottom. And that was the beginning of the climb in gold prices after the tech bubble burst in the late nineties. When the market crashed in 2008, gold started climbing again in 2009. The cycle is playing out, and contrarian investors all over the world who don’t trust debt laden western countries, are all buying gold. What you do is up to you. Amanda van Dyke is organising the major conference Gold, Bears & Traders on November 28th in London featuring speakers including Jim Mellon, Evil Knievil, Dominic Frisby, Matt earl and many others to book your seat go HERE
UK Investor Magazine — 15 — August 2015
If we had to bet the ranch on one stock… We asked members of the ShareProphets team if they had to bet the ranch, gamble their entire net worth on one London listed stock, what would it be? Of course noone is mad enough to do this in reality but just for fun, here are what the team came up with. We start with the oldest and wisest head among us.
By Tom Winnifrith
M
alcolm Stacey, the Grandfather of share blogging plumps for Barclays Bank. He says: I rather think that shares in all four of Britain’s big banks will rise in the next year, possibly quite spectacularly, when it becomes apparent that they’re making juicy profits again. Also PPI claims will abate fast, as will fines for earlier dodgy dealings. The best bet among the banks, in my view is Barclays (BARC). It still pays a dividend – the yield is currently 2.29 %. It has very little exposure to Greek debt. The share price continues to rise, often on days when most of the other Footsie shares are giving way. The shares are now at a year high. When things don’t go the right way, this bank can be ruthless in adjusting its top management. It recently announced that it wanted more attention paid to its investment arm. It has continued to make a profit over the last difficult five years. And the share price is up by a third over the last 12 months. It’s not as easy for banks to make big money in investment banking any more, thanks to crippling new legislation. But I’ve confidence that Barclays can still make a good fist of it. From the oldest to the cleverest, City whizz kid Chris Bailey of Financial Orbit who says there are three criteria, in my mind, for a ‘bet the ranch stock’. First it has to be in a business with persistence qualities: a casual look at the huge differ-
ences between the FTSE-100 of a generation ago and today tells you this. Second the company has to be well capitalised and capable of generating sustainable cash flows as debt is the scourge of all equity investors whilst an ability to grow dividends and reinvest in a business should always be the great longed for characteristics. Third it should offer a specific angle or edge that differentiates it from the norm. With this in mind my pick is the gold miner Randgold Resources (RRS) – a stock I’m happy to have in my portfolio. I don’t need to expand why gold has persistence given as an asset class it has been with us for thousands of years. With a net cash balance sheet position and gold mines capable of generating good returns at US$1,000 gold it has the balance sheet and cash flow. Finally the depression currently afflicting the gold sector offers strong return scope for investors putting new money into sustainable, cash flow centred sector plays today. And on to the token chartist, the Sith Lord Zak Mir who takes a three month trading view. Translated back into English, Zak states my pitch for intellectual property minnow TekCapital (TEK) stems from not only the pitch which was suggested to me, but from a situation where one and one should equal significantly more than two. The pitch is that there is a FTSE 250 listed com-
UK Investor Magazine — 16 — August 2015
pany called Allied Minds (ALM) which exploits opportunities in intellectual property, largely from Un ive r s i t i e s . The idea is that a university might invent a new type of Teflon – which can be bought at a relatively low price, say tens of thousands of Dollars, and then exploited via a sale to leading kitchenware manufacturers. Allied Minds was backed by such luminaries as Neil Woodford and now has a market capitalisation of £1 billion plus. In contrast, relative market newcomer Tekcapital has a market cap of just £18 million even after recent share price gains. While it would be unfair to suggest that the two companies are totally aligned in their respective business models, it should be the case that the roll out of the IP’s that Tekcapital will lead it towards the valuation of Allied Minds over the next few years. The latest coup last month has been acquiring the licensing rights for two technologies designed to commercialise energy harvesting from human movement to power mobile technology. This adds to the “fried taste” coating for food, and non invasive blood sugar and optical technology patents for Virtual Reality applications. From a technical perspective above 40p targets as high as 70p over the next 3 months. And then the bear, Lucian Miers whose bet the ranch call is a short on Avanti Communications (AVN). The Bard of the Boleyn argues that the winds of change look poised make cheap money much less readily available in the nearish future and this will kick away the props from many flaky business who have only survived the last few years as a result of unbelievably lax and forgiving credit markets. Avanti fits the bill here in spades. Its business model is questionable. It is incapable of turning sales growth into profit or cash. Despite its assertions to the contrary it will need more cash within a year. It a matter of when not if the shareholders get wiped out. Gary Newman is back on the bull tack with a blue chip. He writes: Currently I am bearish on oil in general, and the futures markets going into 2017 would tend to support that, so might choice of share to ‘bet the ranch on’ might come as a surprise!
Whilst I’m not that keen on oil companies currently, the big ones will ride out even a prolonged period of low oil prices, and Shell would be towards the top of that list. Now you could just go out and buy some Royal Dutch Shell A or B (RDSA or RDSB) shares, but given that I don’t really see them suddenly rocketing any time soon, and the dividend, although decent, isn’t as high yielding as some other income stocks, I don’t see a rush. Especially when you can effectively buy Shell shares at an 11% discount to their current share price simply by buying BG Group (BG.) shares instead! The takeover offer from Shell – which has already passed regulatory approval in the US and Brazil – equates to a BG share price of 1183p at today’s prices, yet it is currently trading at 1053p and offers a nice bit of arbitrage if you’re patient, and I think offers great value at around this price level. Guys, you have all been so terribly boring. My ranch is perhaps worth a lot less than you but a lot of the Real Man Ranch is bet on AIM listed Optibiotix (OPTI) which at 39.5p is capitalised at £29 million. It has just over £2.5 million of cash and is working on a string of microbial products which can essentially be added to food to make them sweeter but actually make you lose weight. Right now it has no revenues but trivial costs but it is already signing up big names such as Proctor & Gamble to commercialise its technology. Get a few of these away and the royalty streams could be anything. Yes there are clear risks but the upside is massive – one broker talks about the shares being 200p by 2017. Only a moron would bet the ranch on any stock, let alone a biotech tiddler but I expect a string of announcements in coming months to validate the IP and show transparency on commercialising it and that will drive a material re-rating. Certainly enough to look to top slice at closer to 50p very soon and then enjoy the ride for free thereafter. Please, please do not bet your ranch on any one stock. Sensible investors create a balanced portfolio spread across sectors. This article is just a bit of fun.
UK Investor Magazine — 17 — August 2015
Social Media’s corrupting influence on AIM Social media has had a huge impact on the AIM market, but unfortunately often not in a good way
company of the month
Audioboom (boom)
Can this AIM-listed company really make spoken audio financially boom?
By Gary Newman
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he various bulletin boards, and Twitter, have meant that PIs can now easily discuss all aspects of the companies listed on AIM and exchange ideas and information instantly. The same is true of any listed company of course, but it is mainly the smaller, illiquid AIM ones that will often see fairly large fluctuations in share price, and volumes, based around the level of chatter on social media at the time. On a pure exchange-of-information basis you would have to say that social media has been a positive development and has given private investors access to more information on the companies that they are invested in, or are looking to invest in. But unfortunately I believe that it has also become a very good way of helping some unscrupulous people to engage in market abuse and line their own pockets by fleecing those who are far too trusting of people they’ve never even met! Read any bulletin board and it will be full of talk of rampers and de-rampers, along with pumpand-dumps, and although people sometimes get a bit carried away thinking that every share price movement is caused by people either promoting the share or slating it, there is little doubt that this does go on a lot. Unfortunately with pump-and-dumps, or even dump-and-pumps, it is only those who know that one is coming and have taken their position early, before the herd arrives, who usually tend to make any money – with their profits coming from the losses of those who arrived late to the party. This has been going on for years and probably always will happen, and they’re aided by the fact that many PIs don’t take the time to properly read RNSs and rely on others to tell them what it means for the share price! What has been more worrying though, and something that I’ve been noticing more and more recently, are the pumps on shares where brokers, or those who took place in recent placings, have large numbers of shares to get rid of. It has got to the extent where I now have to wonder if some brokers actually use Twitter, or people on there, to ‘help’ if they have a large client who wants to sell (or conversely buy in some situations) and needs volume of retail buyers (or sellers if they want to buy) to enable them to do so and to get the best price they can given the situation. I certainly suspect that there are plenty of fake identities on Twitter and that some will have multiple accounts, and at times might even be having a
conversation with themselves over how good a buy a certain share is! A good recent example of this has been a company called Atlas Developments (ADSS) where there has been a persistent seller. Now it could of course be a coincidence – I don’t believe in those though where the markets are concerned! – but having never seen this company mentioned previously, suddenly it was all over Twitter and the forums one morning, and ever since then, resulting in much higher volumes traded than usual and many PIs were piling into it at the ‘bargain’ price in the 3p to 3.5p range, which was very handy for any background seller with a large amount to offload! Even the company itself released an update which at best could be described as ‘optimistic’ when you went beyond the headline figures they’d picked out and actually looked at the accounts. A further update this morning giving a truer picture sent the share price below 0.8p! Now just to be clear, I’m not going to start blaming individual posters on Twitter or the forums as it is impossible to tell where these rumours originate from, and it could well be the case that the people who subsequently spread them actually believe them themselves. But I do think that in some cases they are being deliberately fed bad information in the knowledge that it will be spread – everyone loves to think they know more than the rest of the market, you only have to look at all the rumours during a certain recent oil drill near Gatwick airport! Whoever was feeding them that info – whether it be brokers or others looking to influence the market – would only need to give them the odd genuine snippet in order for these posters to get a reputation of being ‘in the know’ and to build a following, as most only remember the ones they called right! And best of all, the poster might genuinely believe the rumours they were spreading, rather than thinking they were being used, as most people think they’re too clever for that to happen! It is always worth remembering that the only reason anyone would spread anything verging on price sensitive information is because it was beneficial to themselves to do so! So by all means follow the latest ‘in’ AIM shares, and if you get your timing right then you can make money trading the volatility, but just remember there will always be others way ahead of you in the food-chain.
UK Investor Magazine — 18 — August 2015
By Steve Moore
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n 24th July Rob Proctor, CEO of Audioboom Group plc (AIM: BOOM) was “delighted to provide an overview of trading for the 6 months ended 31 May 2015 and a summary of our results for that period, during which we marked our first year as a listed company following our admission to AIM in May 2014”. The market wasn’t as delighted – the shares closing down approaching 7% at 5.125p, capitalising the company at £27.4 million. This was despite it emphasising continued progress in its near-term focus of achieving a critical mass of active registered users (“over 4m registered users, Nov 2014: 3.14m”) and partnerships (“over 3,000 active content partners, Nov 2014: over 2,000”). Financial progress has yet to follow though – the reported loss increasing to £3.27 million on revenue up to just £46k. So what’s the story here? Incorporated in 2009, the business was originally conceived as a platform for user-generated content though since Rob Proctor’s appointment as CEO in 2012 has shifted its focus to professionally produced content from branded media owners. Its digital, on-demand, streaming platform enables the creation, broadcast and consumption of audio across multiple global media outlets, now focusing on “the very best spoken-word content in news, current affairs, business, entertainment and sports”. The company emphasises “over 3,000 active content partners, including the BBC, Telegraph, Guardian, Cumulus Media, Sky Sports, Premier League, Southern Cross Austereo, Reuters, CNBC, Universal and Fox”. The present financial performance partly reflects a current own free-to-use, advert-free service as considerable critical mass is sought to be built up. The company notes initial revenues are derivable from agreements including a share from content providers that use its platform to embed audio content across their own websites and apps. However, with “typically, less than 30% of our total listens come from our owned and operated app/ website with more than 70% coming from the distributed network of third party websites and apps”,
there is clearly much to do to enhance the financial model – particularly to meet a stated target of cash generation and profitability in 2017. The company emphasises that it remains focused on achieving this goal and is particularly confident following a recent purportedly “big step towards significant revenue generation” agreement with Cumulus Media Holdings, Inc, the US’s second largest radio group, “which will see them use our platform to roll-out their entire digital strategy”. House broker to the company, Arden Partners, is (unsurprisingly) also bullish – seeing, once a critical mass is reached, “significant potential to monetise the user base through the placement of advertisements through recognised ad exchanges” and noting that “during H2 we anticipate accelerating monetisation of this content such that the business will enter FY16 at a monthly run rate sufficient to achieve our revenue forecast of £7m”. The broker concludes that; “Audioboom is differentiated by its focus on the spoken word rather than music and on audio rather than video. Based on $25 per user (compared with industry averages closer to $100), this would give us a share price target of around 24p using our forecast of 8 million users by end FY16. This valuation methodology takes no account of either the content syndication opportunity or for in-read advertising. The latter alone could justify twice the current valuation in our view.” Hmmm. I would argue that the company has much to do to demonstrate commerciality that warrants a valuation of $25 per user and note that investment great Benjamin Graham warned that “the more dependent the valuation becomes on anticipations of the future… the more vulnerable it becomes to possible miscalculation and serious error” as the future is almost entirely uncertain. With the current market cap comparing with cash (net) of £6.19 million at the half year end, this currently looks one for optimistic speculators only. The Benjamin Graham-style value investor would avoid/sell.
UK Investor Magazine — 19 — August 2015
the house view
It’s China wot matters Over the past few months the eyes of the world have been on Greece. Well the eyes of the media world anyway. But in stockmarket terms we have argued consistently that while the Greek story may be a human tragedy (or farce), it is a sideshow.
T
he main event is China. And events over the past few days have only reinforced that view.
The Great China growth story has always = in our eyes – been somewhat suspect. We believe that it has been built on a credit bubble and that in, what is still, a quasi-command economy, an awful lot of capital has been misallocated. That is just not a sustainable way to grow your economy. Yet China has continued to report GDP growth of 7-10% per annum almost come what may for the past decade. Equity markets perma-bulls, those who believe that it will be “different this time” have argued that China’s unstoppable economic growth has not only created a super cycle for commodities but has made it the mainstay of global economic growth in a period when the US is not exactly firing on all cylinders and Europe is lucky if it is firing on even one cylinder. The fact that base metals prices are now at 13 year lows and crude is heading for $50 tells you that something has gone wrong with that engine of global growth. There ae two aspects to the China engine malfunction: the real economy and the stockmarket. According to PRC data the real economy is still growing at 5% per annum. That data is just wrong and the clue is in base metals prices. It is perfect-
ly conceivable that the Chinese economy is in fact already in recession. And while interest rates remain negligible it will be recessionary forces – as opposed to monetary tightening – that reveal who has been swimming with no trunks. The chickens of capital misallocation may soon come home to roost. The Chinese stockmarket posted extraordinary gains for the first five months of the year driven by leveraged margin buying and the mania one sees in bubble situations. By all normal fundamental metrics valuations were insane. But since May it has slumped despite the Government taking extraordinary steps to protect the bubble including banning big investors from selling, threatening shorters with prison and lending money to big brokerages just to buy stocks. Those panic measures have been seen as much and thus last week Chinese shares crashed again. Is that crash – which is far from over – discounting the ailing real economy? Or will it spur the downturn in the real economy as hundreds of thousands of speculators are wiped out and worse (thanks to margin trading)? The market meltdown certainly won’t stimulate economic growth. This is bad news for China but it will also impact on earnings for corporates across the West. China is a far bigger worry for equity markets in London than is Greece.
UK Investor Magazine — 20 — August 2015
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What are the Baltic Dry Index and Chinese stock market crash warning us about what is to come? SOURCE: http://www.forbes.com/sites/michaellingenheld/2015/07/23/the-baltic-dry-enigma/
By Ben Turney As the Chinese stock market continues to implode, with the Shanghai Composite down 12% in the last week of July, international seaborne movement of goods and materials has experienced a surprising surge in activity.
S
ince 01 June the Baltic Dry Index, which tracks twenty-three of the world’s busiest shipping lanes, has leapt from 589 to 1,104, at the time of publication. What does this contradictory message tell us about the state of global growth?
To attempt to answer this question it is a good idea to put the current level of the Baltic Dry in context. Although the recent rally to 1,104 might give optimists some cause for cheer, further examination of the numbers quickly contradicts this. The Baltic Dry reached an all time high of 11,793 on 20 May 2008. The latest reading is less than 10% of this value. Arguably, the peak was a symptom of a general market top in international trade. With the benefit of hindsight, the performance of this index at that time was a warning that the global economy was overheating. As Chinese consumption of raw materials reached its climax and the rest of the de-
veloped world gorged itself on debt, very few paid heed to the portents of what was to come. Just over seven years later and the limp performance of the Baltic Dry has reflected wider and persistent economic weakness, at odds with the story of the so-called “recovery”. While major stock markets took off in a QE-addled spin from March 2009, international freight shipping limped lower and lower. This lack of genuine economic activity seems to have escaped most policy makers and on 03 February this year, the Baltic Dry hit an alltime low of 509. Even though the index has more than doubled in value since, it is clear that global growth remains sluggish at best. And there is a further problem with the Baltic Dry’s recent rally; the nature of what is being shipped. A casual glance over the majority of re-
UK Investor Magazine — 22 — August 2015
source charts, commonly used as leading indicators for economic performance (e.g. from oil to copper), and it is immediately obvious that bearish forces remain firmly in control. While the majority of resource prices have fallen further since February, the Baltic Dry has staged its recovery. So what might have caused this?
maintains that current prices don’t reflect current conditions, but rather the market’s expectation of conditions in six months time. Of course, no one can predict the future with certainty, but this is at the heart of investment opportunity. Ill-founded expectations lead to mispricing which can lead to profit for those on the other side of the trade.
In an excellent piece of analysis, Forbes recently suggested the rise in the Baltic Dry might be down to Chinese corn imports. Apparently in June these were up 30-fold compared to the same month a year ago. In total China imported 872,919 metric tons. This meant that in the first half of the year, total Chinese grain imports were 2.65million tons, double the volume of the same period in 2014.
A contrarian might view the collapse in Chinese stocks as a buying opportunity, but this would be a very brave move. The severity of the official response to China’s sell-off, from suspending trading in over 1,300 companies to vast injections of liquidity directly to cover margin calls, there is a growing sense of panic in the world’s largest centrally controlled economy. A choice bit of contemporary market wisdom has been that China is immune to market forces because its government is meant to hold such a tight rein over the nation. This observation now looks like it is going to be put sorely to the test.
See chart above showing China’s corn consumption since 1995. If you look at the chart, you can see that Chinese corn consumption has levelled off recently. The long-term trend continues to be up, but the Forbes article suggests the current spike in imports might be explained by China restocking its warehouses. In 2012 Chinese grain imports slowed dramatically, reinforcing the view that the latest surge is a consequence of that. If this is the case and Chinese grain imports have been behind the Baltic Dry’s recovery, then it stands to reason that this is not sustainable. Unless general global growth, and Chinese growth in particular, regains momentum, the Baltic Dry could well test its lows before the end of the year. If the performance of the Chinese stock market is anything to go by then the omens are not good. It is broadly accepted that stock markets are meant to operate on a six-month horizon. This axiom
So far, the rout in Chinese stocks has not yet spilled over into other markets. Had such a similar breakdown occurred in America you can imagine the apocalyptic outcry this would have caused. Although this lack of reaction calls into question the true current strength of China’s economy in a global context, if the crash continues to grow in strength, it is likely to have an increasingly profound effect on the country’s trading partners. This could lead to knock-on effects elsewhere. Commodity consumption has already been badly hurt, which has triggered one of the worst secular bear markets in resource stocks in the history of industrialised economies. Whether this spills over into other sectors remains to be seen, but if the Baltic Dry Index resumes its downward spiral then this could be a sign of worse to come.
UK Investor Magazine — 23 — August 2015
Why Rob Terry Must go to Prison and will go to Prison By Tom Winnifrith
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ob Terry was the mastermind of Quindell, the biggest UK stockmarket fraud since Maxwell Corporation in the early nineties. Terry had made £30 million from Quindell, shares in which remain suspended 80% (£2 billion) down from their peak. If and when they resume trading they will collapse even from here and meanwhile the Serious Fraud Office, FCA and other regulators are all over this one. Robert Simon Terry must be tried for fraud and will without doubt go to prison for this one and here’s why. Quindell was a fraud from day 1. The prospectus for the IPO on April 29 2011 contained discrepancies with other company’s house filings but at that stage it was small beer. But Terry quickly showed his hand with his first material act of accounting and tax fraud on July 11 2011 when it paid £150,000 in cash (raised at the IPO) to buy a company called Utility Supply Services. This company was established on May 17 2011 and had no assets and had never traded. It has still, to this date, never traded yet sits in the books at £150,000. The reality is that it was a shell which cost lawyers Blake Lapthorne just £68.40 (inc VAT) to establish. Blake Lapthorne acted for Quindell on its IPO but appears to have charged almost nothing for its services. It got its “fees” from selling USS to Quindell. The net effect of this is that no-one has to worry about VAT (tax fraud) and that Quindell overstated its profits (and its net assets) for the 15 months to December 31 2011 by £150,000. That may only be c4% (stated pre-tax profits were £4.1 million) but it is accounting (and VAT) fraud none the less. We do not know how many other similar deals Rob Terry engineered.
But by July 2011 a far bigger fraud was underway – this is both securities and accounting fraud. At the IPO Terry gifted a large number of shares to a company called TMC Southern in return for unspecified services. Later on in November 2011 Quindell issued yet more shares to TMC in return for surrendering certain contracts (unspecified). The reality is that outside of its relationship with Quindell, TMC has always been a bit of a non-entity of a company.
In its 2011 accounts Quindell admits that one – unnamed – customer accounted for c41% of its sales (c£5.6 million). In 2012 Quindell bought a company called BASL and in the RNS it stated “A 10 year long business relationship also exists between the vendors of BASL and key members of the Company’s management team” On 19th August 2014 on the Quindell website the company stated that the man who had that 10 year relationship was Mark Ford. Hence in its own terms Mark Ford was a key member of the Quindell management team. Mark Ford is the sole owner of TMC Southern Ltd which we know from 2011 RNS statements did at least £2million of business with Quindell. Why was TMC Southern not declared as a related party in the 2011 accounts? We know from looking at the TMC annual reports for 2011 and 2012 that it made a £5.6 million profit from flogging shares that Quindell had issued to it. And we know that TMC historically reported trivial profits and indeed in the year to April 27 2012 it did report profits of only £55,000. So where did the £5.6 million go? We know that £2 million was booked by Quindell as revenue and on a 100% gross margin. Is it possible that the other £3.6 million was also booked by Quindell – we know that its largest customer in 2011 accounted for £5.6 million of sales? If this were the case then without TMC being issued Quindell shares, flogging them and spending £5.6 million with Quindell then Quindell would not have achieved a PTP of anywhere near £4.1 million or operating cashflows of anywhere near £4.5 million. Indeed both numbers would have been negative. This type of fraud (the creation of bogus profits and cashflows by effectively just flogging shares
UK Investor Magazine — 24 — August 2015
in yourself via a third party which then uses the cash to pay bogus invoices – is known as a panama pump and is wholesale securities and accounting fraud. And TMC was not a one off. In 2012 more than 100% of Quindell’s stated operating cashflows came from another panama pump this time involving a firm called Himex, a bogus telematics operation run by an old pal of Rob Terry’s which would later be bought on a joke valuation. Businesses including Ingenie and PT Health care which were both subsequently bought by Quindell both engaged in panama pumps pre-acquisition to boost the Quindell P&L via fraud. The biggest fraud is the one that the FCA is focussing on, bogus revenue recognition. This happened all over the Quindell shop in a variety of ways. For instance there were the sales booked of C$5 million in 2013 and 2014 to a near bankrupt Canadian Company Biosign (run by an old pal of Rob Terry’s natch). Biosign generates sod all revenue and has no cash so clearly could not afford to pay Quindell the money. Eventually an auditor was going to force Quindell to write that revenue off so instead Quindell leant Biosign C$6.8 million and the dents were paid in full. But will Quindell ever get that cash back? No way Jose. So that is bogus revenue. As this investigation accelerates the regulators will find dozens of these little frauds used to inflate revenues and they all add up. The big issue on revenue recognition concerned the accrual of income on legal cases – that is booking sales before an invoice had even been issued simply in the expectation that one would be issued. PWC had already stated that in some cases the Quindell policy was at the “aggressive end of acceptable” (that is largely Road Traffic Accident or RTA work) while in other cases (Industrial Deafness) it was just not acceptable at all. Thanks to these huge imaginary revenues Quindell managed to report dramatic earnings growth but that growth did not equate to operating cashflows. Indeed with the tax paid on these “fake profits” Quindell was by 2013 and 2014 a monumental cash guzzling machine. And that could be solved in only two ways: more accounting fraud and shed loads of securities fraud. There was also a bit of VAT fraud as a bonus. Some of the frauds were relatively small. For instance on September 2nd 2013 Quindell issued £2.77 million of shares as an accelerated defcon to the vendors of a firm known as Quindell Property Services because it was trading ahead of forecast. As it happens QPS was trading well below forecast. And as it happens the shares were not issued to the QPS owner at all but to a chap called Jon Stretton Knowles, now starring in the reality TV show Life on Marbs. Were £2.77 million of shares to be sold (as they were) then post CGT JSK would have been left with £1.97 million. On the very same day JSK paid £1.95 million plus stamp duty of £20,000
in cash to buy Skylarks, the owner of Quindell’s Country Club although this was not announced at the time. The truth was this was a disguised mini placing to get in some cash for a company that was almost out of cash. Securities and accounting fraud not to mention telling an outright lie to investors via RNS, all in one. The far bigger fraud was that in November 2013 Quindell raised £200 million from investors by issuing shares. Investors were buying those shares on the basis of 2013 interims showing a PBT of £43.4 million and also an upbeat Q3 trading statement. But as we now know those profits were bogus and of course the stated Q3 cash position was also inflated by the Skylarks and other fiddles. When 2013 results are fully restated we will see that Quindell was in reality loss making (hence the cash burn). In other words Rob Terry managed to raise vast sums on the basis of a wholly false prospectus. Without that fund raise Quindell would have been in net debt and possibly bust by January 2014. Numerous RNS statements made by Quindell have now been shown to be outright lies and on the basis of that the company was able to raise vast amounts of money from share placings but also do numerous paper funded deals – many with old mates of Terry – where the vendors quickly cashed out at inflated prices. Terry himself made at least £30 million from Quindell from pay, bonuses (on the basis of fake profits), dividends ( justified by fake profits but effectively funded from the proceeds of share placings) and from selling nearly all his shares (on one occasion at a time when he was sitting on undisclosed price sensitive information, the resignation of joint broker Cannacord). Investors meanwhile will have seen anywhere between £2.5 and £3 billion head to money heaven by the time this is all wrapped up. This is the biggest stockmarket fraud since Maxwell and Polly Peck in the early nineties and as such the authorities just have to act. The need to act is made by pressing by the total failure to act against Terry after shareholders suffered either total or near total wipe-out – while he laughed all the way to the bank – with the two previous listed entities with which he was involved, The Innovation Group in the Uk and Lava Systems Inc in Canada. Crime cannot be allowed to pay or to be seen to pay and that is why Terry (and others including hapless Quindell FD Laurence Moorse) must now be contemplating a long jail sentence as well as actions to recover the proceeds of crime. Nothing less than the confiscation of every cent that Terry made from Quindell as well as a long custodial sentence is acceptable if UK regulators wish to retain any credibility at all.
UK Investor Magazine — 25 — August 2015
UK Investor Magazine — 26 — August 2015
UK Investor Magazine — 27 — August 2015
UK Investor Magazine — 28 — August 2015