Midas Extra share tips: Intermediate Capital and Serabi

By Joanne Hart for The Mail on Sunday
Updated: 12:55 EDT, 15 January 2010

Midas Extra

Intermediate Capital
Epic: ICP

There is an old stockmarket adage, dating from the time when brokers wore pin-stripe suits and shares were traded on the Stock Exchange floor - sell in May and go away. The end of May marked the advent of summer, when anyone who was anyone left London and disappeared to the country. Nothing very much was done in June, July and August and the stockmarket tended to drift.

Today, that relaxed approach to life is open only to the select few. Most brokers, analysts, traders and financiers work through the summer months, and even holidays are interrupted as a matter of course. But the 'sell in May' advice seems to have taken hold regardless. June has been a pretty horrible month for equities and the outlook for inflation and the economy is going from bad to worse.

Some bright spots remain however. The oil price continues to defy gravity and that benefits not just straightforward oil producers but any company involved in the industry – equipment manufacturers, consultants, even businesses that supply component parts for rigs and such like. Midas will look at this sector in more detail over the next few weeks. This week though, we are looking at two companies that may be less obvious beneficiaries of the current economic climate.

Intermediate Capital straddles two stools. It specialises in complex lending facilities to companies and other organisations, and it manages specialist funds in which large institutions invest.

The type of lending that ICG does is known as mezzanine finance which is a cross between debt and equity. It is riskier than straightforward loans but, if a company goes bankrupt, the providers of mezzanine finance get repaid before shareholders so it is less risky than equity.

In recent years, when banks were lending money virtually to anyone who wanted it, mezzanine finance became very popular. Investment banks became involved and competition to offer it to companies was fierce. Now the market is much less crowded and this presents ICG with plenty of opportunities.

The company was founded nearly 20 years ago by six investment experts who decided to focus on lending to higher-risk businesses, using mezzanine finance in particular.

Since then ICG, run by chief executive Tom Attwood, has lent more than €9.6bn and gained a reputation for intelligent investing. On the fund management side, meanwhile, ICG is one of the leading operators in its field with almost £8bn under management.

The group recently reported results for the year to 31 March, showing a 22% increase in core income to £136m. The dividend was raised by 18% to 65p, demonstrating ICG's confidence in the future.

Indeed chairman John Manser specifically said the current environment is helpful to his business. Competition is less intense and ICG can charge more for its loans.

The group is also experienced at riding through difficult economic times, choosing its investments carefully and making sure it is rigorous in the way it manages risk.

Midas verdict: Intermediate Capital shares have had a bumpy ride over the past few months as some investors have expressed concern that the business will lose out as economic conditions deteriorate. This seems unduly negative. Times like these offer ICG the chance to show its mettle. The stock is now trading at £13.82, down from a peak of nearly £19. Clever brokers believe the shares should go higher. Buy.

Serabi
Epic: SRB

Our second company is Serabi Mining, a small business with lots of potential. Serabi mines gold in Brazil but it is run by a British management team and trades on Aim.

The company was founded by an Australian entrepreneur, Bill Clough, known throughout the mining industry as a man with a nose for good opportunities. Clough has had several successes in the field, not just in gold but in metals such as nickel too.

Serabi owns land in the Para region of Brazil, in the far north of the country. The specific area in which it is based, Tapajos, is about the size of Belgium and is known to have rich deposits of gold strewn across it. Local miners, known as garimpeiros, have been scratching a living out of Tapajos gold for years but Serabi is the only company to have established a hard rock mine in the area.

The group hit a rough patch last year when it decided to become more sophisticated in its mining techniques. This decision will undoubtedly bear fruit in the long-term but in the short term, there have been teething problems as Serabi was forced to wait months for state-of-the-art equipment and in the meantime, produced less gold than the market expected.

Some of the equipment has still not been delivered but the company expects it to arrive in the next couple of months, so production should rise significantly in the second half of the year.

Last year, the group produced 34,000 ounces of gold; this year, production should be at similar levels but next year it should bring more than 40,000 ounces of gold to the ground and by 2011, around 100,000 ounces are expected from the company.

Serabi has a number of advantages. First, as the only serious commercial mine in Tapajos, it is well respected by the local authorities, particularly as it employs more than 300 Brazilians on site. Also, the price of gold is around $880 an ounce, up from $250 an ounce when Clough first invested in the region nine years ago. Gold has come down from record highs of $1000 an ounce earlier this year but it is still in big demand and likely to remain so for some while.

Midas verdict: Serabi shares are trading at 20p, against a high of 38p last year. The company is run by experienced and savvy operators; it owns a large amount of land in a gold-producing area; it has cash in the bank and its shareholders include some of the most serious investment institutions in the world, such as Black Rock and JP Morgan. Ultimately, this company expects to produce at least 250,000 ounces of gold a year. Buy a few shares and watch Serabi grow.