Ambrian Capital started its corporate existence as Golden Prospect, a mining exploration company but at the turn of the century transformed itself into a remarkably successful mining equities investment company. Over the past three years, the company has grown almost ten times and metamorphosed into one of the most dynamic of the London investment banks.

The company retains significant cash and asset backing from the investment era and this more than underpins the current share price. However we believe that the earnings potential of the investment banking operation which contributes 72% of overall profits and has now raised £400 million in 45 equity raisings, is yet to be appreciated in the wider investment community.

Now ranked as one of the top three London corporate advisors in the mining sector but with an expanding and diversifying client base and increasing reach into new revenue generating streams including market-making and commodities trading we believe that Ambrian is well positioned to weather the temporary weakness of the equity markets – but that investors have over-discounted the threat of a slowdown.

In 2007 the Chinese investment bank Sun Hung Kai took a 9% stake in Ambrian and the two companies are now working closely together giving Ambrian an international dimension in the part of the world which is growing most rapidly. The company’s recent acquisition of Nabarro Wells further expands Ambrian’s business bringing additional clients in the natural resource sector, making the group the leading nominated advisor to the AIM Basic Materials sector and the AIM Oil & Gas sector. We do not expect that this will be the last corporate action involving Ambrian and in a market where there has been significant M&A activity in recent years we believe that Ambrian is an attractive acquisition target, given its strong niche position and asset backing.

We value the company on a sum of the parts basis looking at both its strong asset backing and the earnings stream from the Investment Banking activities at Ambrian. On the asset side, our valuation comprises of the company’s Investment Portfolio which is valued at £20.52 million plus a net cash position of £22.2 million – together with unlisted investments which equates to a total of £45 million or 40p per share (calculated excluding treasury shares). The valuation multiple for the earnings stream generated by Ambrian is clearly a matter of debate. Supporters would argue that the mid teens multiples accorded to companies such as Numis and Evolution or the low teens multiple on which WH Ireland trades merit such a multiple for Ambrian. There is a case to be made. However the high exposure to one sector (natural resources) is a risk and Ambrian does not have the longer term track record of its peers and we are concerned that the City faces a slowdown during 2008 and so expect the whole sector to be de-rated. However if we even value Ambrian on a multiple of five times historic earnings that gives the earnings side a valuation of 25.7p giving a sum of the parts valuation for the group of 65p. This is a cash rich company with a proven management team and strong asset backing. Although sector sentiment is poor, the value is clear and we do not believe the company should be trading below net asset value. Our stance at 39.25p remains buy with a target price of 65p.

Forecast Table Year to 31st December Sales (£million) Pre-Tax Profits (£million) Earnings Per Share  (p) Price Earnings Ratio       2005A* 13.64 9.29 6.03 6.51 2006A** 17.84 8.07 4.81 8.16 2007A 15.83 5.79 4.32 9.09 2008E 17.00 6.50 4.07 9.64 2009E 19.25 8.20 5.14 7.64

*reported under UK GAAP
**henceforth reported under IFRS

 

Background

Ambrian Capital was incorporated as Golden Prospect Plc in 1996 as a mining exploration company focused on platinum, gold and diamond interests in Sierra Leone and Ethiopia. The company joined AIM in February 1999 at 30p with a market valuation of £14 million, but with the outbreak of civil war in Sierra Leone and general interest in the sector rapidly diminishing, the company shifted its focus to become a direct investor in mining stocks. Subsequently to listing, the company raised £6.5 million from city institutions and acquired the CIBC Eyres Reed Australian Resources fund which added an additional £7.37 million to Golden Prospect’s balance sheet through the issue of 38 million shares at 19.5p each. The fund was managed by a pair of industry veterans Richard Lockwood and Malcolm Burne who diversified the company’s interests into non gold resource sectors such as diamonds, uranium and oil stocks and from 2002 until 2004 as mining stocks started to find favour and thanks to an investment strategy which yielded market beating returns, shares in Golden Prospect climbed sharply.

In 2004, the company acquired 25% of Minesite.com, now known as Commodity Watch which is a website specialising in providing commentary and analysis and which also organises corporate IR conferences solely for the natural resources sector. More significantly, Golden Prospect bought a small investment banking boutique Ambrian Partners. The rationale for the Ambrian purchase was this it bought in a management team (led by Ambrian’s current CEO Tom Gaffney) and that it also offered Golden Prospect the chance to create a strong earnings stream from activities other than trading profits on its book of more liquid mining investments.

The company has worked hard over the past three years on a twin track strategy to create growth. Firstly it has sought to crystallise the value of its direct investments since the market did not appear to value the quoted and unquoted portfolio in full. Hence in mid-April 2007 Commodity Watch was floated as a separate entity onto PLUS Markets with a mid-price of 100p per share. In June 2007 the legacy exploration interests of Golden Prospect were injected into an AIM listed company called Palladex leaving Ambrian with a 39.82% stake in the enlarged company which is now called Minerva and is managed by a long-time Golden Prospect employee, Terry Ward. Most critically, in November 2007, Ambrian launched its first fund onto AIM and into it injected £9.4 million of its investment portfolio.

Golden Prospect Precious Metals (GPPM) Ltd is Guernsey registered and is the first dedicated precious metals fund to be listed in London and was placed under the management of Ambrian Asset Management. The GPPM fund focuses on equity investments in the gold, silver, platinum, palladium and diamonds markets. Originally capitalised at £12.9 million with an opening Net Asset Value per share of 96.2p, the NAV in December 2007, the date of the last financial results, is now 111.22p. Ambrian reduced its holding from 72% to 49.96% in May 2007 via the placement of 2.85 million shares of GPPM with institutional investors. As a result GPPM ceased to be a consolidated subsidiary but is now considered as an equity investment and we would expect the Ambrian holding to reduce further over time.

The second part of the strategy has been to grow the Ambrian business. Within the core mining competency additional analysts, corporate finance staff and salesmen have been recruited but the company is aware of the prudence of reducing its exposure to this one sector. It has therefore started to operate in other sectors including technology and renewable energy. The company also started to make markets and to trade not only metals equities but also to trade metals directly.

To reflect the change of focus from being largely an asset backed investment play to being a broader investment banking operation with Ambrian now the driving force of the wider group, in November 2006 the company changed its name from Golden Prospect plc to Ambrian Capital plc.

In March 2007, Sun Hung Kai & Co Ltd (SHK), a major Hong Kong financial institution acquired a 9% in Ambrian from certain former directors and this led to a change in the composition of the board and solidified a commitment to business cooperation between the two organisations. The two companies agreed to work closely to raise capital for Asian Companies in European capital markets, to offer Asian industrial and institutional clients Ambrian’s London Metal Exchange trading and broking expertise as well as to develop fund products that can be offered to clients of SHK in Asia. The link with SHK enables the company to take advantage of the rapid growth and increasing demand from Asia.

 

Operations

We cover the value of the investments held by Ambrian Principal Investing below. They are, however, relatively passive investments. While they provide strong asset backing for the company we would expect that, over time, Ambrian would seek to realise value from its investments by selling in order to grow its cash pile or to use that cash to support the growth of the core business.

Ambrian Capital’s four areas of expertise are represented by the company’s four businesses: Ambrian Partners Limited, Ambrian Commodities Limited, Ambrian Asset Management Limited and Ambrian Principal Investing. Together they aim to provide both investment in and investment banking services to companies active in the extraction of metals, minerals and oil and gas as well as innovative growing companies focused in sectors such as alternative energy and new technologies. The company also focuses on the soft commodities markets and works with companies which are looking to develop projects involving alternative and renewable energies.

Ambrian Partners

Ambrian Partners Limited is the wholly owned corporate finance and stock broking subsidiary of Ambrian Capital. This unit deals with 135 institutional investors in England, Scotland and Continental Europe. It provides providing nominated advisory (NOMAD), financial advisory, corporate broking, institutional sales and research services to major multinational companies and governmental agencies as well as small and mid cap companies. It currently focuses on five industry sectors: mining, oil and gas, soft commodities, alternative energy and new technologies.

To date, the unit has taken part in 45 capital raisings with a total value of £400 million including 14 IPOs on AIM. The biggest deals of 2007 included acting as financial advisor to Kalahari Minerals plc on the sale of its uranium interests in Namibia to Extract Resources Ltd for £26.4 million, acting as advisor to Pan African Resources plc on its acquisition of 74% of Barberton Mines Ltd from Metorex Ltd for £35.6 million and as co-advisor to Zijin Consortium (the Chinese mining giant) on its recommended cash offer for Monterrico Metals plc for £95 million. Specifically in 2007, the company completed 14 capital raisings with a total value of approximately £148 million including £18 million for Sylvania Resources Limited, £15 million for Monto Minerals Limited, £15 million for TMO Renewables Limited, £6 million for Zenergy Power plc and £4.5 million for IPSO Ventures plc.

Ambrian Partners became a registered Market Maker in shares of selected companies on AIM in July 2007 which further strengthens revenue from secondary market activities. The company’s objective is to hold high market shares in all of the shares it makes markets in. Two experienced equity traders were hired to help put the systems required in place. 

Ambrian Commodities

Ambrian Commodities is a London Metals Exchange (LME), FSA authorised wholly owned subsidiary of Ambrian Capital and a member of the European Climate Exchange (ECX), Powernet and ICE. The unit offers broker/dealer services in LME products, physical metal trading, carbon emissions trading, services in soft commodities futures, energy futures and precious metals. In 2007 the subsidiary announced further expansions with an increase in the metals sales team to deal with the company’s fast growing client. The company now has 96 LME clients.

Ambrian Asset Management

The third subsidiary of Ambrian Capital is Ambrian Asset Management which is a specialist investment management business. The company launched its first fund, the Golden Prospect Precious Metals Limited (GPPM) in November 2006. In support of GPPM and to benefit from the low tax regime in Guernsey, Ambrian Capital transferred in approximately £9.4 million of its existing precious metals equity investment portfolio in return for the equivalent investment of ordinary shares and warrants in GPPM. Ambrian Asset Management generates cashflow through a management fee and a performance fee of 20% of the increase in the NAV of GPPM after a hurdle of 8% has been attained.

Since the launch of the fund, the net asset value per share has increased by 15.6%. Capitalised at £12.9 million at the start of trading, the fund is now capitalised at £14.7 million and the company plans to establish further investment funds in the near future.

Ambrian Principal Investing

The final business of the company invests its capital in its clients and provides equity financing, convertible financing and bridge loans. Ambrian’s portfolio of listed investments  - in part a legacy of the Golden Prospect era - was valued at £19.8 million in the last financial report. The most important investments included a £6.1 million holding in GPPM, a £2.7 million holding in Nido Petroleum and a £2.3 million holding in Jubilee Platinum. 52% of the investment portfolio involves precious metal investments while energy investments represent a further 30%.


Strategy for Growth

Ambrian Capital’s strategy over the past three years has been to crystallise the value of its investment portfolio while growing the earnings stream from its investment banking activities targeting a 20% return on capital in its fee generating divisions. We expect that it will continue to shift its emphasis from asset growth to earnings generation by gradually realising investment positions and using the cash generated to invest in its growing investment banking activities.

The company’s core competency remains in the resources sector and we believe that it is poised to benefit from the mega-cycle in commodities and to grow its presence in the London market. It can continue to leverage off its strong franchise in that sector by expanding the size of its market-making operation; by winning additional corporate retainers on the corporate finance side, by increasing the number of commodities traded and by the launch of additional specialist funds.

However Ambrian is determined to diversify into other sectors. It has already established a strong presence in green and renewable energy markets. Its move into less closely related areas such as new technologies carries a clear risk but by reducing its reliance on resources it also de-risks the proposition and hence we would expect to see further diversification. The impressive track record of Ambrian means that it is increasingly able to attract high quality staff and through its Employee Benefit Trust – which now owns almost 10% of the equity – it provides a clear link between the interests of key staff and shareholders.

The link-up with Sun Hung Kai Financial should provide a platform to secure business from both investors and corporates in the Far East. SHK is Hong Kong’s number one non-banking financial services group as well as the number one retail and wealth management company.  It has client assets over £3.84 billion under its management and is capitalised at £0.83 billion with assets over £1.2 billion. Together the two companies plan to raise capital for Asian companies in European capital markets with a particular focus on AIM listings, offer Asian industrial and institutional clients access to Ambrian’s London Metal Exchange trading and broking expertise as well as to provide broker dealer services in other commodities.  SHK also has a joint venture agreement with Yongan Futures, one of China’s largest commodities brokers providing a massive opportunity for Ambrian. Ambrian and SHK plan to develop together investment fund products that can be offered to clients of SHK as well as investment products with an Asian focus managed by SHK that can be offered to European investors by Ambrian.

In April 2008 the company acquired Nabarro Wells, an independent corporate finance firm which is an important step in Ambrian’s strategy to expand its corporate client list and reinforce its commitment to the natural resources and new technology sectors where Nabarro Wells has a strong client base. Nabarro brought 35 retained NOMAD clients, 18 of which are in natural resources, a sector of importance to Ambrian.

 

Risks and Opportunities

Ambrian has built a strong position as a specialist investment bank focused on a wide range of resources as well as offering a wide range of services.  Its sector specialisation and range of activities give it a competitive advantage and the recent agreement made with SHK positions it well to take advantage of the resource intensive growth of China and India. Given the growth of the Chinese economy and the mega-cycle in metals and resource prices Ambrian has exposure to markets which have performed and, we believe, will perform strongly. This niche focus can thus be seen as an advantage although, were the natural resources sector to suffer a cyclical downturn, Ambrian would suffer more than the generalist investment banks in London.

The recent weakness of smaller company shares including resource stocks may hit both trading volumes and the flow of corporate transactions. As is the case with all investment banks, fixed overheads in the form of staff costs are high and therefore Ambrian is operationally geared and cannot be immune to such a slowdown. We believe that we have discounted for this in our conservative forecasts.

The past few years have seen a number of mergers and outright purchases of the smaller investment banks in London. The Nabarro Wells acquisition provides an excellent opportunity for a ramp up in Ambrian’s revenues and profits. The corporate finance firm reported revenues of £4.40 million and profit before tax, director’s emoluments and management charges of £1.01 million for the financial year ended 31st March 2007. The combined group will have a total of 70 retained clients which will make Ambrian the leading nominated advisor to the AIM Basic Material sector and the AIM Oil and Gas sector. Ambrian in return will strengthen Nabarro’s business by providing the necessary expertise and offer an integrated package of corporate finance, corporate broking, capital raising, market making and research. With its strong cash position Ambrian is a potential purchaser of further companies to spur its expansion as well as recruit more staff to grow the company internally. The company also remains a potential bid target.

 

Directors and Management


Lawrence Banks, Non-executive Chairman. Banks was Deputy Chairman of Robert Fleming Holdings Limited, the private London-based investment bank acquired by JP Morgan Chase & Co in 2000. Banks has spent his career in corporate finance after an initial period as a mining equity research analyst.

Tom Gaffney, Chief Executive Officer. Until founding Ambrian in 2001, Gaffney was director of JP Morgan’s Metals and Mining Team and from 1995 was a director and member of the Management Committee in the Corporate Finance Department of Robert Fleming. He has worked in investment banking for over 20 years and has specialised in the natural resource sector. He has advised many of the major natural resource companies on acquisitions, divestitures and capital markets transactions, including BHP Billiton, Glencore, Norsk Hydro, Stora Enso, Total and Rio Tinto. Gaffney previously worked in senior executive positions at Nesbitt Burns (the investment bank of the Bank of Montreal) and Lehman Brothers in London, New York and Toronto.

John Coles, Finance Director. Coles has over 20 years’ experience in investment banking and asset management. After qualifying as a chartered accountant, he worked with Robert Fleming in private equity, investment banking and stockbroking. Prior to joining Ambrian, John was Deputy Managing Director of JP Morgan Fleming Asset Management in France. John holds an Honours degree in business and economics from Trinity College, Dublin, and is a member of the Institute of Chartered Accountants in England and Wales.

Charles Crick,  Non-executive Director. Crick has over 30 years' experience in corporate finance and was previously Head of Corporate Finance and a main board Director of Numis Corporation PLC. Crick qualified as a solicitor in 1974 with Allen & Overy where he worked until 1980, specialising in corporate and international finance and banking law. After a short spell at Middleton Potts & Co, he joined DJ Freeman & Co in 1981 becoming a partner shortly thereafter and again specialising in corporate finance and banking law. In 1996, he joined Numis Securities Limited, the investment bank and stockbroker, where he was involved in the fast development of the company. Following his retirement from Numis in 2004, Crick is now a Partner of Longbow Capital LLP, a private equity business.

Lee Seng Huang, Non-executive Director. Lee was appointed Executive Chairman of Sun Hung Kai & Co., Limited on 1 January 2007. He was educated at the University of Sydney and has wide ranging financial services and real estate investment experience in the Asian region. He has previously served, in various capacities, on the Board of Directors of Sun Hung Kai, as well as Lippo Limited, Lippo China Resources Limited in Hong Kong, Auric Pacific Group Limited in Singapore, as well as the Export and Industry Bank, Inc. in the Philippines. He is currently the Chairman of Mulpha International Berhad, a Malaysian-listed conglomerate with operations in South East Asia, Australia and China, and a director of FKP Property Group, a leading property developer, listed on the Australian Stock Exchange.

Nathan Steinberg, Non-executive Director. A chartered accountant, Steinberg is a partner in the London practice of Munslows, through which his services are provided to Ambrian Capital. He is an experienced tax advisor and has considerable corporate experience of public companies. He is also a member of council of the Institute of Chartered Accountants in England and Wales. Steinberg is the only member of the original Golden Prospect team to remain on the board of Ambrian.
Significant Shareholders

Ambrian Capital’s total issued share capital is 111,036,208 shares with 325,000 shares held in Treasury. The major shareholders with a 3% or more holding in the company are:

Dain Rauscher Investors LLC	11.95%
Ambrian Capital plc Trustees (EBT)	9.99%
Rule Investments Inc	9.71%
Sun Hung Kai & Co Limited	8.83%
Artemis Investment Management	6.42%

 

Recent Results, Balance Sheet and Cashflow

On 3rd April 2008, Ambrian published its results for the final year ended 31st December 2007 reporting a total revenue of £15.83 million, down from the previous years £17.84 million and a profit before tax of £5.79 million down from £8.07 million. Of the revenue figure, £10.64 million was attributed to investment banking revenue, which showed a 26.2% increase from the £8.43 million reported in 2006. The 2007 profit comprises £4.16 million from investment banking, up from £3.26 million and £1.63 million from gains on the investment portfolio down from £4.81 million. The group’s basic and diluted earnings per share were 4.32p and 4.18p per share respectively, down from 4.81p and 4.57p. Ambrian declared a final dividend of 1.00p per share, bringing the full year dividend of 1.75p unchanged from the levels of 2006.

The company cited a challenging second half of the year for the investment portfolio due to difficult market conditions. The adoption of IFRS has had a major impact on the presentation of the Group’s results. The value of its investments are now valued at market prices and reported as revenues which inevitably results in short term fluctuations in reported profits. Investment banking performed well due to the completion of 16 transactions totalling £300 million, the commencement of Market Marking in July 2007 and the expansion of the LME metals sales team. At the year end, the company’s investment portfolio was valued at £20.52 million compared to £30.05 million in 2006. This reduction is a result of Ambrian realising a substantial portion of its investments with a reported Investment Portfolio gain of £5.2 million which is considerably lower than the £9.4 million reported in 2006 but still represents a 17.3% increase in value during the year. The group has cash resources net of client deposits of £22.2 million, up from £17.04 million and a net asset value of £45.04 million.

Our balance sheet analysis of Ambrian shows the group strengthening its solvency position with an improved current assets-to current liabilities ratio of 4.8 compared to 3.3 in 2006, although this measure is extremely volatile on a day to day basis. In addition, post year end in March 2008, the company entered into a £8.5 million unsecured revolving credit facility with RBS which remains undrawn further strengthening the group’s flexibility in pursuing suitable opportunities in the market.

Forecasts, Valuation and Conclusion

Ambrian’s headline earnings figure will not show much growth between 2006 and 2008. This in part reflects the expansion of the cost base and in part slightly weaker market conditions. However there is still a strong underlying growth story within Ambrian’s investment banking business which is expected to grow as much as 25% per annum. The numbers for 2006 and 2007 were inflated by the significant profits booked from the company’s portfolio of listed investments. While we expect that the company will continue to realise gains from its portfolio this cannot be guaranteed as headline figures will be affected by volatility of its investments and therefore we have not assumed it in our forecasts. After the publication of the 2007 results we revised our 2008 forecasts downwards to reflect volatile market conditions and our 2008 turnover estimate has been reduced from £18.5 million to £17 million and the profit before tax forecast has been cut from £13.6 million to a more conservative figure of £6.5 million. In 2009, we forecast a stronger financial performance by the group overall reflecting the prospect of improved market conditions.

We value the company, since it is both an earnings play and an asset play, using a sum of the parts methodology. The valuation multiple for the earnings stream generated by Ambrian is, as we noted above, not a precise art. It is far from incredible to suggest that the mid teens multiples accorded to companies such as Numis and Evolution or the low teens multiple on which WH Ireland shares trades mean that such a multiple for Ambrian would not be unfair. However the high exposure to one sector (natural resources) is a risk and Ambrian does not have the longer term track record of its peers and moreover the fact that a good portion of its earnings comes from profits made on investments which is by its nature a one-off event means that those earnings are of a lower quality than those from, say, corporate retainers. We are concerned that the City faces a slowdown during 2008 and so do expect the whole sector to be de-rated. However even if we value Ambrian on a multiple of five times historic earnings, it would give us an earnings side a valuation of 25.7p.

On the asset side, the company’s top ten holdings as of 31st December 2007 have a current market value of £19.2 million:

Golden Prospect Precious Metals	£6.1 million
Nido Petroleum	£2.7 million
Jubilee Platinum	£2.3 million
Anglesey Mining	£2.1 million
Minerva Resources	£2.0 million
Kairiki Petroleum	£1.4 million
Samson Oil & Gas	£1.2 million
Commodity Watch	£0.7 million
Uranium One	£0.4 million
European Gas	£0.3 million
Total	£19.2 million

Ambrian has a current cash position of around £22.2 million. Ambrian’s Investment Portfolio is now worth £20.52 million which along with unlisted investments gives a total of £45 million or 40p per share for the asset side of Ambrian. Our total valuation for Ambrian is therefore 65p.  This is a well run business and its strong asset and cash backing limits the downside case significantly. Our stance at 39.25p remains buy with a 65p target.