ROC Solid Growth Potential

ROC Oil is listed on the junior UK AIM market as well as the ASX Australian stock exchange and is a fasting growing and acquisitive upstream oil and gas producer. The firm has assets in four regions, Australia, Africa, China and the UK. The key assets are Asian focused with 80% of current production in Australia and China. ROC’s strategic preference is to secure large stakes in assets and to manage day to day operational matters.

Some basic financial statement analysis supports the firm’s claim that it is on track to becoming a serious production player. Revenue over the 3 years to 2008 has grown spectacularly from $109.7m to $358.2m, a compound growth rate of 80% whilst trading profit has progressed even more impressively from $22.7m to $163.8m over the same period. Net cash flow from operations, an even more useful measure, rose from $47m to a very healthy $182.5m. Due to ongoing investment, balance sheet debt has increased from $137.5m to $168.7m 2006-2008 though the burden appears to be more than manageable considering operating cash flow growth.

ROC has also built strong strategic alliances with global producers and interestingly is the only foreign company that has an operating contract with PetroChina (Source: ROC Oil).

The ROC share price (AIM listed) has faded over the past two years and the market wide recovery since March has failed to re-coup the majority of those earlier losses. The price is now loitering under 40p, compared to a grossly oversold low of 13.5p seen in January 2009 and a somewhat optimistic 165p seen late in 2007. Even taking recent and temporary production cuts into consideration and possible future dilution, (in the event the firm needs to raise equity capital to fund further expansion or acquisitions), the downside risk seems limited. ROC is as likely to receive a bid, as make one, over the course of the next year as global players with deep pockets seek to boost their reserves and secure ROC’s valuable strategic and commercial influence in China.

Ferrochrome Producer IFL Scales up Output

International Ferro Metals (IFL) is one of the lesser known commodity plays listed on the London Stock Exchange. The firm is one of the leading global producers of ferrochrome, an essential ingredient in the manufacture of stainless steel. Commodity geeks will cite 18% of stainless steel consists of chrome. I am in no position to argue.

IFL’s mine and processing operations are located near Johannesburg, South Africa. The firm proudly states its cost ratio resides in the lowest quartile relative to like-for-like producers encouraging commodity investors to dig a little deeper and in search of further reasons to invest as the global economy recovers, and with it presumably demand for steel. In fact steel is arguably the most cyclically sensitive commodity based asset and production data from the company not only reinforces this view but puts in total clarity the vulnerability of chrome producers to the ebbs and flows of fast changing global demand.

Production in the 3 months to end of June totalled 18,437 tonnes compared to a painfully low 1,168 tonnes in the previous quarter. That data at first glance implies a business back to normal level of output, until a year-on-year comparison is made. In the same quarter a year earlier the production was 56,608 tonnes. Production does not, of course, always equate to sales and the volatility in revenue as also startlingly varying from 10,484 tonnes in Jan-Mar 2009, to 89,091 tonnes during April-June 2008.

The next inevitable question addresses current inventory levels. I predict a lot more picks and shovels are now being put to work. As at the 30th June, the firm had less than 9,400 tonnes of ferrochrome ‘on the shelf’ for sale. That is a lower level of inventory than was sold in the catastrophic depths of the global recession during the first three months of 2009.

Elsewhere on the balance sheet cash levels remain adequate, the firm clearly has a skill for controlling output and therefore costs and it’s certainly one for the watch-list.

Chief Executive David Kovarsky added the following statement to the firm’s production update: “The furnace restart in April to monetise our inventory went very smoothly and we are on track to achieving our production target for this three month campaign. We are encouraged by the perceived improvement in market conditions, specifically by the increase n ferrochrome demand and spot prices as a result of the Chinese stimulus programme. We will continue to monitor the market to assess global inventory levels, demand and pricing going forward. The combination of our healthy cash balance and recently upgraded facilities means that IFL can respond quickly to a sustained increase in demand.”

He makes it sound so easy.

Chinese Q2 GDP Beats Forecasts

Surpassing even recent upgraded forecasts China has reported GDP growth in the 2nd quarter of 7.9%, relative to 6.1% in Q1. Forecasts for the full year include the International Monetary Fund at 7.5%, Goldman’s at 8.3% and the Chinese government’s own estimate of 8.0%. Responding to the news, other economists scrambled to improve their targets for this year and 2010.

Also announced were strong increases in industrial output 10.7% better in June, year-on-year whilst fixed asset investment jumped more than 30% in H1 2009 relative to the same period a year earlier.

The Chinese economy has enjoyed significant fiscal and monetary stimulus during 2009 which has attracted significant investment, partly due to the paucity of attractive big-ticket opportunities elsewhere globally. The stimulus has effectively off-set the loss of export generated revenue due to reduced demand from key trading partners.

The news follows yesterday’s confirmation of China, for the first time, reaching $2 trillion in reserves.

Chinese Reserves Surpass $2 Trillion

The People’s Bank of China has announced the nation’s reserves have increased to more than $2 trillion for the first time. Reserves grew by $178bn in Q2 to $2,132bn and now double those of Japan, the 2nd largest foreign holder of dollars.

Also, money supply increased by more than 28% in the year to June whilst The IMF recently upgraded its forecast for Chinese GDP growth for the current year to 7.5%.

The data, combined, reinforces the consensus view that China is the dominant economic force on the global stage with the other three largest economies, US, Japan and Germany still struggling to re-surface from the global recession.

Ironically, China’s strength will directly assist the US which has a growing fiscal deficit and desperately needs foreign buyers for its treasury issuance. It is inconceivable China could diversify away from the dollar, as a reserve currency, in the short-term due to the paucity of viable alternatives, the erosion in value of its existing holdings if it became a dollar seller and the disruption it would cause across global markets.

Predictions vary but it is thought between 60-70% of China’s reserves are in dollars with the rest spread across other major currencies, gold and other assets.

US Dollar Index Weekly Chart to 15th July 2009