Broker tips: Petrofac, Kaz Minerals, Gem Diamonds

Investors have overreacted to the Serious Fraud Office investigation into Petrofac, reckoned analysts at Kepler Cheuvreux, initiating coverage with a 'buy' rating even though it predicted a maximum cash fine of £1.05bn.

In May, the SFO launched a criminal investigation into the FTSE 250 oil services company, its subsidiaries and its employees over suspicions of bribery, corruption and money laundering in connection to its use of consultancy services from Monaco-based Unaoil, primarily in Kazakhstan between 2002 and 2009.

Petrofac shares then later in the month the shares plunged to their lowest since 2009 after the SFO accused the company of failing to co-operate properly with its investigation, while chief operating officer Marwan Chedid resigned from the board after being suspended from his role.

Kepler said Petrofac's focus on onshore/downstream activities in the Middle East and Africa EA, mostly national oil corporation clients, was a segment it considered to be "a strong pocket of resilience".

Analysts at RBC upgraded their recommendation on Gem Diamonds on expectations for improvement in large stone recoveries.

In March, the broker downgraded the shares due to a lack of such recoveries at its Letseng mine.

However, since April it had recovered three large white stones and as the company moved towards the more "prospective" part of the Main Pipe RBC said it expected recoveries to improve.

The broker also noted how the recent appointment of Harry Kenyon-Slaney, former energy chief at Rio, had been taken positively by investors.

As a backdrop, the analysts further pointed out how the outfit's share price had recently underperformed versus peers, falling by 16% since its fiscal year 2016 results in March in comparison to a flat performance from rival Petra Diamonds and a 10% drop at Firestone.

The shares were also trading at lower multiples in terms of net asset value and free cash flow.

So after adjusting their models to the mine plan, which envisaged improved recovery rates, their earnings and cash flows estimates improved.

So too did their target price, which was rolled forward to fiscal year 2018, when the firm was expected to generate positive earnings per share.

Nevertheless, the company was not yet 'out of the woods' in terms of large stone recoveries and its rate of so-called 'cash burn' continued to be a worry, they said.

Analysts at Credit Suisse reaffirmed their 'Outperform' recommendation and 630.0p target price for Kaz Minerals say that funding risks for the copper miner were now "very limited" even under 'bearish' copper price assumptions.

The analysts said the company's successful re-financing of its pre-export debt finance (PXF) facility "will give more breathing room and should squash any further fears around funding".

Nevertheless, in their opinion that refinancing was unrequired.

The maturity of the new PXF was extended by two-and-a-half years until June 2021, with principal payments deferred until July 2018 and the interest rate set at a variable three to four-and-a-half percentage points above US dollar LIBOR.

Also, as long as the company net debt-to-EBITDA ratio remained above 3.5 it would have to abide by certain restrictions on spending and investing outside of its existing mines.

Furthermore, following two years of worries about operation and funding shortfalls, Bozshakol had reached commercial production and was generating cash-flow even as Aktogay ramped up at an even quicker rate.