Broker tips: Acacia Mining, Petra Diamonds, Rathbone Brothers

Acacia Mining’s shares rose on Monday as Deutsche Bank reiterated a ‘buy’ rating and lifted its target price to 580p from 570p, citing progress on the company’s turnaround.

The miner last Friday reported it swung to a pre-tax profit for the third quarter and said full-year gold production is now expected to be about 5% higher than the top end of the previous output guidance.

Gold production jumped 25% to 204,726 ounces and sales of the commodity increased 24% to 206,488 ounces in the third quarter. Gold was sold at $988 per ounce, down 16% on the same quarter a year ago.

Production was driven by a strong performance at North Mara, which delivered output of 112,523 ounces, offsetting disruptions at the Bulyanhulu mine and slightly lower production at Buzwagi.

Acacia also reiterated its full year all-in costs guidance at the bottom of the $950-980 per ounce range, compared to $1,112 per ounce in 2015.

“Acacia's turnaround story is progressing well and the group increased its cash balance by another US$18m, during the quarter, to U$302m,” said Deutsche Bank.

“This should help in periods of more muted gold price performance, we maintain our ‘buy’ rating.”

Deutsche noted that Acacia’s earnings before interest tax depreciation and amortisation of $125m was materially higher than its $100m estimate, primarily due to the low-cost ounces coming from North Mara. It was also $104m higher than the third quarter of 2015.

“With total capital expenditure of $53m during the quarter and minor changes in working capital, the free cash flow of $43m was another positive outcome,” Deutsche said.

“We forecast full year 2016 free cash flows of $192m. The group pays 15% to 30% of the free cash flow as dividends.”

However, the bank said it sees downside risks include lower gold prices, higher-than-expected costs and taxes, and volatility in the Tanzanian shilling.

Deutsche also highlighted the risk related to Barrick Gold, which could further sell down its 64% majority stake in Acacia.

Canaccord Genuity reiterated a ‘buy’ rating and target price of 165p on Petra Diamonds after the miner reported its first quarter trading update.

Petra reported a 30% increase in production to 1,097,523 carats for the three months to 30 September, boosted by an increased contribution from undiluted ROM ore, improving ROM grades and additional tailings production from Kimberley Ekapa Mining.

First quarter revenue was $94.7mi from 745,447 carats sold, compared to nil in the first quarter of last year as no tender was held.

Net debt at period end was $463.9m - up from $384.8m at the start of the period, but within expected levels and excluding cash from the October diamond tender.

Chief executive Johan Dippenaar said the group continues to expect full year production of 4.4 to 4.6 Mcts, in line with earlier guidance.

Canaccord expects the full year to be weighted towards the second half when increasing volumes of higher grade ROM ore are produced.

Petra said new caves being installed at Cullinan and Finsch are starting to deliver undiluted ore and will result in a continued increasing ROM grade profile and improved product mix.

“These results were very much in line with expectations, and we see no need to change our fiscal year 2017 estimates," Canaccord said.

“We currently forecast full-year earnings before interest, tax, depreciation and amortisation of $274m, net profit of $82m and earnings per share of 15.2 cents.”

Investment and wealth manager Rathbone Brothers remains the quality play in the sector and justifies a premium rating relative to peers, Numis said on Monday.

Numis reiterated a ‘buy’ rating and target price of 2,350p on the stock after the company last week announced plans to raise about £38m via a share placing with institutional investors. The capital raise will fund the expected near-term requirements associated with changes the firm is making to its defined benefit (DB) pension scheme.

“We believe the decision to raise additional capital is prudent and provides the group with additional financial flexibility; something not to be begrudged in our view given the current uncertain market environment and the potential for further mergers and acquisitions,” Numis said.

“We continue to favour Rathbones as we believe its conservative operating model combined with the industry's numerous structural growth drivers will generate earnings growth of at least 10% pa over the medium to long term.”

Rathbones last Thursday posted a trading update for the three months to 30 September on Thursday, with total funds under management (FUM) sitting at £33.2bn at period end - up 8.5% from £30.6bn on 30 June.

The FTSE 250 firm compared it to an increase of 6.1% in the FTSE 100 Index and 5.2% in the FTSE WMA Balanced Index in the three month period.

Net operating income was £65.9m for the period, up 18.5% from £55.6m in the third quarter of 2015.

The group has also decided to close its DB pension scheme as the recent collapse in bond yields resulted in a sharp increase in the deficit to £58m from £32m in the first half.

Numis noted that while the decision to close this scheme is expected to generate higher regulatory capital requirements of around £20m in the near-term, the board believes it will be outweighed by longer-term benefits including reduced ongoing contributions and lower capital requirements.

“We favour Rathbones as we believe its reputable brand, steady investment performance and established network helps it generate one of the most consistent organic FUM growth rates across the industry,” the broker added.

“This has then been combined with additional team hires, bolt-on acquisitions and stable margins to drive consistent double digit annual EPS growth over the last six years.”