Top Gainer: Virgin Blue (VBA)
Continuing on its tulmultuous week, Murchison Metals shares jumped 8.3% higher on Thursday, however it was pushed back into second spot in the top gainers list by a resurgent Virgin Blue, which soared 9.5% higher to 34.5 cents. This is the second time this week Virgin has been the top gainer after rocketing 10.5% on Monday as rival Tiger Airways was grounded by CASA, taking its gains this week to a whopping 21%.
Virgin Blue’s share price had been in a tailspin since the beginning of 2008, when it was sitting at just under $2.00, 10% below its December 2003 listing price of $2.25. Although at that point it was already down 30% from its record high of $2.78 in early 2007, the worst was yet to come for investors. Amid the GFC and a raft of profit downgrades in the first 6 months of 2008 VBA lost 75% of its value to just 28 cents and has never recovered. This calendar year alone the share price has haemmoraged, dropping 30% since Jan 1 to be languishing at $0.345 even with today’s 9.5% jump and Monday’s 10.5% leap.
Most of the 30% fall since January has occurred since the half yearly report and accounts were released to the market on 23rd February. Although Virgin Blue CEO John Borghetti tried to convince investors that it was “a very solid result” it seems they didn’t buy his rhetoric, with shares tumbling 10% over the next few days and 22% in the eight weeks after results were announced.
Monday’s news that Tiger Airways would be grounded was welcomed by investors, with the stock already up 21% this week. The grounding of Tiger Airways Australia – which has been a thorn in the side of Virgin – will cost the airline $1.5 million a week, the airline’s parent company says.
Analysts say the Civil Aviation Safety Authority’s (CASA) suspension of Tiger Airways has put the future of the airline’s four-year-old Australian operations in doubt. CASA decided to take Tiger’s 10 Airbus A320 aircraft out of Australian skies on Friday night (AEST) as it believed the airline posed a “serious and imminent risk to air safety” if it continued flying. It was the first time the air safety regulator had suspended an entire airline’s operations, with the only comparable action the grounding of Ansett’s Boeing 767 fleet in 2001. Ansett collapsed six months later.
Credit Suisse research analysts Anthony Moulder and Nicholas Markiewicz expressed doubts about Tiger’s viability in Australia. “While management cite the earnings diversity for continuing to operate in Australia, we believe this a poor justification of Australian operations,” the pair wrote in a research note.
Mr Moulder said Virgin had most to gain from any withdrawal, given its flights overlapped most with Tiger.
Sean Conlan, Macquarie Private Wealth believes Virgin offers significant upside if it executes and delivers on its strategy. However, the macro environment is still challenging. The Delta Airlines alliance was one of the notable outstanding moves. With this deal now in place, management can focus on rounding out the virtual global network by the end of the year, and it should be in a stronger position to approach potential partners to associate with the airline’s loyalty program.
Intersuisse’s Cameron Bell has a sell on VBA, saying that the airline has experienced a tough run recently and that he doesn’t expect things to improve anytime soon. “Competitively, it’s struggling against Jetstar and even Qantas…the sector remains under pressure given the lacklustre domestic travel market and high oil prices.”
All in all, 2011 is shaping up as yet another tough year for Virgin Blue, with the company expecting “challenging” conditions over the second half. Natural disasters and soaring fuel costs forced Virgin Blue Holdings Ltd to issue another earnings downgrade a few months ago, its fourth in just 12 months. It announced that it expected to post a before tax loss for 2010/11 in a range between $30 million to $80 million assuming “no further significant increase in fuel prices and no material deterioration in the trading environment.” In more bad news for Virgin, oil prices have increased a further 10% since that announcement.
Whether at the high or low end of expectations, this is well below the $33.4 million pre-tax profit recorded in 2009/10.
But not all analysts are bearish. According to broker consensus data, 2 brokers hold Buys on VBA, 3 Outpeforms and 5 have Holds, with just one Sell. The highest 12 month price target is $0.46, and the lowest 12 month price target is $0.33. The average 12 month price target is $0.396.
Chart: Share price over the year to 07/07/2011 versus ASX200 (XJO)
Stock code: VBA
Charts: Virgin Blue Australia Limited
More news: Virgin Blue Australia Limited
Investor Centre: Virgin Blue Australia Limited
Biggest Loser: Gryphon (GRY)
Gryphon Minerals (GRY), a West African focussed Gold exploration company with projects in Burkina Faso and Mauritania, was the day’s biggest loser, falling 6.6% on Thursday. This happened despite its announcement yesterday of “exceptional drill results” at the Banfora project in Burkina Faso, with a resource of 29Mt @ 2.1g/t for 2 million oz of gold. According to GRY “the Project has numerous regional exploration targets with real potential for Gryphon Minerals to uncover a multi-million ounce gold district.”
Late last year GRY acquired ASX-listed Shield Mining (ASX:SHX) which gave Gryphon exposure to a number of highly prospective gold and copper projects in Mauritania. But with a depressed share price and a healthy gold price, GRY could be a takeover target itself.
According to Peter O’Connor resources analyst with Merrill Lynch, mid-tier and third-tier miners with strategically important assets – which saw their share prices fall further than underlying commodity prices -are likely to attract big-end mining stocks that have exceptionally deep pockets.
The momentum of M&A activity that started within the resources sector two years ago is expected to continue. But James Wilson senior resources analyst with RBS Morgans expects three M&A sweet-spots for the sector in 2011 to include iron ore, copper and gold. “The domino effect of big fish being eaten by even bigger rivals means the M&A deals are likely to increase on both frequency and magnitude,” says Wilson.
He says with the premium applied to gold explorers having come off by between 20-25 percent, the sector has been brought back into buying territory. Courtesy of perceived sovereign risk attributed gold explorers operating in West Africa, Wilson says Gryphon Minerals (GRY) – now trading at a 50 per cent discount toits former highs – look attractively positioned for acquirers. Adding to the attraction, the company is 18-24 months away from production.
Les Szancer, of Alpha Broking, maintains that what drove gold up in 2010 will push the precious metal higher this year and beyond. Essentially, the positive drivers are gold is a safe haven, it’s a hedge against inflation, it’s an alternative currency, the US dollar is weak and demand, particularly from India and China, is strong. “We consume more gold each year than is produced,” Szancer says. He says the gold price, like almost anything that’s traded, will go up and down, but $US2,000 an ounce within 18 months is “certainly achievable, before it really goes through the roof”.
And there’s a lot to like about Gryphon Minerals, according to Szancer. The West African gold explorer recently announced a 520,000 ounce increase of its JORC (Joint Ore Reserves Committee) inferred resource estimate at the company’s flagship Banfora Gold Project in Burkina Faso for a total of 2 million ounces. The company is planning about 600,000 metres of drilling in the next 12 months as part of an aggressive $30 million exploration program. Szancer says the Banfora Gold Project benefits from a shallow depth – most of the resource is within 100 metres of the surface. That keeps extraction costs down. “Investors like positive news flow, particularly from explorers,” he says. “Gryphon is a company that keeps hitting targets.” However, Szancer says potential investors must pay close attention, as any good news tends to be rapidly factored into the share price. “In actual fact, buying now is buying on potentially more good news,” he says. “However I see the share price rising to around $3 in the next 18 months.”
There are plenty of other analysts bullish on GRY’s prospects and you can download research reports from Deutsche Bank, RBC, Argonaut and Eagle Research here. Eagle Research has a $2.20 target price, RBC has a $2.30 target price, and Deustche Bank has a $1.90 target price.
Based on Thomson Reuters data, five analysts have a buy on GRY, three have an outperform and three have a hold.
Chart: Share price over the year to 07/07/2011 versus ASX200 (XJO)
Stock code: GRY
Charts: Gryphon Minerals Limited
More news: Gryphon Minerals Limited
Investor Centre: Gryphon Minerals Limited
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