intereactive investors stock to watch

http://www.iii.co.uk/articles/articledisplay.jsp?section=ShareDealing&article_id=10120353

Despite current fascination with gold and North Sea oil, it is worth being alert for other smaller explorer-producers where events are coming together after the harsh blow of the financial crisis two years ago.

The AIM-listed shares in European Nickel (ENK) are creeping up from the 24p level at which I drew attention last July, noting a significant improvment in the risk/reward profile.

ENK's price is currently 36p, which capitalises the company near ?80 million. It appears the involvement of an industrial investor willing to accept share placings at a premium is instilling the market with confidence, however the shares still deserve attention with project approval and debt financing to be confirmed hopefully in the next month or two. This would trigger a next placing at 44p hence the shares be likely to rise again in respect.

The Caldag project in Turkey involves a nickel laterite mine targeting 20,000 tons of nickel production over a 14-year mine life, and is the main driver for value despite another "heap leach" type mine planned in the Philippines.

As regards top-down influence, demand for nickel comes mainly from the stainless steel industry, whose demand for example from the construction industry makes for volatility with the economic cycle. Yet long-term bulls point to growing demand for cars and myriad consumer items in the developing world, which may explain why industrialists are taking a longer-term view than the fretful stockmarket.

The bottom-up reality has however involved enormous share price volatility in a range between 20p and 300p in recent years. Hopes rose then were dashed amid difficulties getting a forestry permit from the Turkish government, then the 2008 financial crisis causing funding to lapse.

Yet only the other day management was reported at an industry conference in Australia (where ENK also has a listing) saying approval is expected shortly, which would then enable about US$300 million bank debt to be finalised as project finance plus the next equity placing at 44p.

Instrumental to the re-rating is Hunter Dickinson, a Canadian industrial investor which has been sufficiently impressed by the long-term prospects to agree to invest ?40 million via share placings at a premium. The first, at 32p in July, raised ?3.4 million with the next at 44p to raise ?36.7 million. The sequence of events ought to see market price move up as the Caldag project is de-risked in terms of government approval and financing.

Constantia, an associate company of Hunter Dickinson, will end up owning a near 30% stake in ENK, the maximum allowed without being required to make an offer for the remaining shares.

Amid these developments and with the share price starting to creep up, it has been interesting to see directors buying shares and/or being granted options - as if they believe now is the time to lock in on price. In August the new finance director bought 50,000 shares at 21p to own 426,800 overall, and he has also been granted 1.5 million options at 28p. In September a non-executive director made a maiden purchase of 900,000 shares at 24p and two million options were granted to another executive director.

Performance criteria linked to the options are interesting as the remuneration committee would be realistic with its expectations. On a minimum one-year view, a third of the options will grant if the shares reach 56p or better; another third grants at 70p or higher within two years; and a final third tranche if 84p is reached within three years. All prices must be sustained for at least 10 consecutive trading days. So from the current share price level these targets imply upside potential of 50%, 90% and 130% over at least one to three years with expiry in five years.

A construction team has been established for Caldag, essentially the same that undertook the previous phase of development in 2006/07, and the company announced that negotiations for all principal construction contracts were expected finalised during the third quarter of 2010 as a prerequisite for project financing.

New broker/advisers have also appeared, potentially helping to improve awareness of ENK to new investors.

In late August, Mirabaud Securities was appointed as joint broker, and just recently Evolution Securities as another broker also the company's AIM nominated adviser. ENK cites this broker as "best placed to provide us with the support we need, across sales, research and advisory, to enable us to fully deliver the value of the Caldag project to shareholders".

Obviously project success will be the ultimate defining factor although a heap-leaching operation is relatively straightforward involving fewer risks. The main hurdle has been political but that ought to be overcome soon, a defining moment for ENK. While it is unlikely the new brokers will start promoting the shares beforehand, the prospect of improved coverage beckons and it will be interesting to see what share price targets are entertained.

So while the shares should still be treated as speculative, you can see how they are close to a watershed and being de-risked with the help of an industrial partner agreeing to intrinsic values at a premium. The technical situation ought also to improve with relatively fewer active traders clipping the shares as they come into view for serious institutional money.

Even if the stockmarket has a bout of profit-taking after September's rally continuing into October, ENK looks to be a transforming situation with risk on the upside and still well worth considering.

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