The performance of Falkland Oil and Gas (FOGL) highlights the risk of investing in explorers that do not have revenues from production to provide cash flow to invest in its drilling campaign. Cash burn can be very high and such companies often have to repeatedly place shares to raise funds to carry on drilling – especially after a series of ‘dusters’ or dry wells. Private investors are locked out of such placings and this means that their stake is diluted – potentially on multiple occasions. FOGL has raised £80.5m in placings over the past two years alone compared with its current market capitalisation of about £95m. This is why Questor rarely recommended pure exploration plays. In August this year, Noble Energy farmed into FOGL’s licence. This followed a similar deal with Italian oil group Edison in June. Both these companies will be part-funding drilling and other exploration activity. Noble alone is expected to invest $180m to $230m in costs for drilling and seismic studies over the next three years. FOGL currently has about $220m of cash, worth 43p a share. This is higher than the group’s market value which means any future discoveries are priced ‘for free’. However, FOGL could burn through this cash relatively quickly. Although there is a chance that FOGL will find a commercial discovery, private investors should stay away as the risks to capital are too high, The Sunday Telegraph’s Questor team writes.

Things look like they could turn round at African Minerals. Shares in the iron ore developer, whose sole project is a giant mine in Sierra Leone, have fallen 40% since Alan Watling, its previous chief executive, unexpectedly left in May. They closed on Friday at 250p. Doubts about whether the company can deliver on the project have swirled around for years. It’s not surprising. Chairman, founder and 12% shareholder Frank Timis has form in over-promising and under-delivering. However, the Romanian-born tycoon also has a core of backers for whom he has made a lot of money. And he seems to have made a canny move by naming Keith Calder as Watling’s replacement. Investors are hoping he will whip African Minerals into shape the same way he did Western Coal. In a little more than a year he doubled production at the Canadian company to 6m tonnes. It was enough to attract the attention of Walter Energy, which bought the company last year for $12 a share — four times the price when Calder took over. African Minerals has similar potential. It is ramping up production at its Tokolili iron ore body after sorting out problems with the rail line and the port. Calder’s plan is to hit an annual output of 20m tonnes by next year. It is always hard to predict how things will go. It is also difficult to forecast whether the chemistry of two strong characters at the top will hold. ‘So far, so good,’ says The Sunday Times’s Danny Fortson.

AB

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