That Ol' Black Magic

An extract from the diaries of infamous bear raider Evil Knievil

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27 August 2010

Rightly or wrongly, I have this morning bought another 30,000 GCM Resources (GCM) (at 187p). Apparently a potential contractor has started advertising for employees to work on Phulbari. This surely would not be the case if in fact Phulbari had not had the go ahead. However, and for quite other reasons, it smells as if events are finally coming investors' way. Indeed, I think that by the time Eid starts (10th September) there is a fair chance that GCM will have risen sharply.

Slightly to my surprise I have not yet had any news of improvements at Beximco Pharma (BXP). But I think I will. Still a strong buy at under 40p.

I also bought another 100,000 Kryso* (KYS) at 15p this morning. I see no hindrance to the Chinese bid emerging in a few weeks' time. It has to be at 21p or more, possibly quite a lot more.

Incidentally, time and again I note that resource stocks are very cheap, frequently throwing off cash like crazy. But the shares stay depressed. The reason is the wholesale withdrawal of credit worldwide. It eats and eats away at prices. But be patient and keep buying. I suspect that there are colossal rises to come. Start by buying Polo* (POL) at 3.5p and sit back and enjoy the ride.

1 September 2010

First Quantum (FQM) has now lost two mines in the Congo which it cheerfully believed was its to operate. And now Tullow is to lose its Ugandan oil assets which have lately been acquired from Heritage Oil and where the Ugandan government's grounds are declared to be Heritage's failure to pay local CGT on the profit on disposal of the Ugandan assets to Tullow. Thus we are in effect asked to believe that Tullow's lawyers failed to check the consequences of Heritage not paying CGT as far as Tullow is concerned. Needless to add what we are in fact looking at is that ancient African disease of confidence trickery grabbism. First, the risktakers holding capital develop the assets and, at the appropriate moment, local politicians grab them. The re-emergence of this factor in practice must now cause many Africa projects to be re-evaluated sharply downwards.

I lost £3 million on Regus (RGU) back in late 2003 and, since I abhor returning to old battlefields, I have only reluctantly considered what follows now on Regus. It has been submitted to me by a long-standing contact who knows Regus inside out. He writes:

"See the Regus results? I scent the smell of death again - occupancy rates falling into the 70's% and not being able to cut costs in line with falling revenue. If things in US get as bad as some economists fear, I see a re-run of RGU's previous problems.

It's all the same old issues. Because the numbers are so huge, people are blinded to the fact the operational gearing is frightening and the margins extremely thin.

- Revenues in H110 dropped 7.5%. Costs didn't (well, just 0.377%). Central admin costs remain stuck at a high level (£100m/19.4% turnover). At their best, they've never been able to get them much below 17%.

- This resulted in a fall in EBIT from £51.4m to just £10.2m. 2010 v 2009, REVPAW fell from £6932 to £6215 and occupancy rates from 79% to 77%. That remaining EBIT would be wiped out by REVPAW falling only to £6092, occupancy rates falling to 74.4% or, more likely, any combination of the two.

- The Balance Sheet. Net Current Liabilities of £55m transform 'reassuringly' into Total Assets Less Liabilities of £496.9m.......... but just look what those 'assets' are; Goodwill £272.3m, Other Intangibles £49.2m and Property Plant & Equipment of £242.2m. That last one may sound reassuring, but Regus' idea of a 'property asset' is a lease which they can't sell and F&F which they have to write off. Even their vaunted 'cash pile' is not quite what it seems - over 30% is "Blocked Cash" (i.e. tenants' deposits) which they are not allowed to touch.

- The company now claims to have "variable rent arrangements" with landlords and if genuinely achieved this (i.e. with head rent and service charges moving in line with their own occupancy/income levels) would indeed be the Holy Grail and I may be converted to the model. But have they? The £15.8m exceptional "restructuring and reorganisation charge" is payments to (mainly UK) landlords to 'buy' rent reductions and the write-off costs of closing unviable centres.

I suppose it's a straightforward play on the economies in which Regus operates - of which the US is still much the largest. If this is as bad as it gets, then they're scraping along the bottom at around breakeven and their operational gearing will produce huge returns if things turn up. If it gets only slightly worse, however, we're back into the old days of operational losses, bleeding cash and then those enormous capital write-downs as all those "assets" are shown to be liabilities.

I will never be convinced that this company is anything other than a house built on sand."

On that basis one should surely sell Regus without delay.

The Bahamian government yesterday announced a much more restrictive regime for offshore drilling. All this is post Macondo. The market's reaction was to slam BPC (BPC) ordinaries from 4p down to 2.2p. However, later in the day, it emerged that in effect BPC is largely unaffected. Accordingly I bought 1 million shares at 3p.

My bet on Accident Exchange (ACE) has come off the rails. Clearly trade is insufficiently robust to hold loan creditors at bay and the company is set to delist and develop a D4E stabilisation. Being a fathead I shall not sell in advance of that and, instead, I shall await the tidy up buy out. It might be a bit of a wait.

Yours sincerely,

Evil's Idiot Diarist

* The SF t1ps Smaller Companies Gold Fund owns shares in Kryso. Polo Resources is a corporate client of Rivington Street Holdings (RIVP), which is the ultimate owner of t1ps.com and UK-Analyst.com. Steve Moore, who is Evil's idiot diarist and an analyst at t1ps.com, has an interest in shares in Polo Resources.

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