Initiating coverage with Heritage as a top pick in the European E&P space Heritage’s geographical focus is on Iraqi Kurdistan, Africa and Russia. The company has high impact exploration projects in Iraqi Kurdistan and Malta, as well as ongoing leads and prospects in Pakistan, Tanzania and Mali. Heritage currently produces around 600b/d of oil in Russia and reported 2009 2P reserves of 60Mboe

• In this note we look at the key factors determining Heritage’s value,
namely the resource potential in Miran and political backdrop in Iraq.
We also look at the risk/reward ratio at the current share price. Core to
Heritage’s value, we provide an economic scenario analysis of the Miran
West project. Given its advantaged location (onshore, close to a major
oil export pipeline) and favorable production sharing contract, we
estimate a very attractive project IRR at $80 per barrel of 63% and a unit
NPV 15% of $2.8 per boe

the group has set a 12.5-15.0% ROE hurdle on new retail business (20% ROTE) and
15-20% on investment banking – although it is not clear how head office and
preference share costs are allocated to this and both are set in relation to Basel 2 rather
than Basel 3. At the moment, the sale of entire businesses (e.g. Western Europe) is not
being considered as a way to boost ROE – there is “a lot of work to do first”. But sales
of asset portfolios are being considered. Overall, it seems that Barclays fully accepts
the challenges that lie ahead and the switch in focus from growth to returns in the last
few months – while stark – is a good thing. But a big turnaround is unlikely in the near-
term and as we discussed in our research last week we expect ROTE ~ COE for
several years capping the share price to TNAV. Furthermore, our 2010E TNAV is
340p but this ignores up to 30p of unrecognised pension fund deficit.

· Within weeks the third 15 cubic meter excavator is likely to arrive (the fourth in the New Year) and higher grade ore should be available to the mill – first from Andreevskaya and in December from Bakhmut which are within the Pioneer mine lease.

The mill at Pioneer is processing 14,000t/d (full capacity as we expected) but at 1.9 gm/t. However, the operations team were clear and confident on the availability of the higher grade ore from Andreevskaya and Bakhmut; which will be needed to achieve the targeted 4.4gm/t average grade for the December quarter.

· If achieved, this would give rise to a solid 160,000 ozs in Q4 from the Pioneer resin plant, assuming full availability for the period and 90pc recovery. Add that to a further 30,000ozs from the Pokrovsky plant in Q4 and we could see an additional 190,000ozs in Q4 from the plants before adding in perhaps some 10 to 20 thousand ounces from alluvials and the heap leach pads.

· But it is also clear from the site visit that the operations team has created a lot of production flexibility by developing access to many high grade but small areas of mineralisation. And with currently high gold prices, one could see the logic in bringing forward gold production by blending in more of the high grade ore. We believe from our inquiries on site that gold recovery measures would not be affected if substantially higher grades were fed to the mill. Remember, stage 1 of the Pioneer mill was processing 11.8 gm ore only last year with no impact on recovery. We are not suggesting this kind of grade will return or indeed anything other than the targeted 4.4gm/t average. But the option is there and what a nice option to have.

· Our summary of the detailed geology and exploration update is that there are plenty more small high-grade zones on the Pioneer lease with which to sweeten the large low grade resources there.

· Let’s see what tomorrow brings from Malomir and Albyn.

2. GSK
GSK is looking to diversify into non pharma assets. A move for Actelion would be a reversal of this strategy

3.Roche
There is market speculation that company could be a white knight…but Roche is in the process of trying to save costs, not add capacity

Special Committee:
In terms of speculation about the formation of a special committee to evaluate strategic options – my view is that this seems like a sensible process bearing in mind the string of failures in R&D ….but such a committee should be reviewing all options such as buybacks, dividends, cost savings, acquisitions – not just a sale of the company

Tracleer:
Tracleer US patent expires in November 2015 and 2016 in Europe. Jefferies research team sees marketed products being worth around SFr50 a share with SFr6 of cash. Pipeline and cost savings would be other considerations although partnerships important.

To close:
Its rather pointless speculating on speculation and you never say never but what Actelion (in one piece) has to offer is something that big pharma has been moving away from.

The suggestion, arising from a broader discussion about whether the two companies should ally against Apple, highlights Microsoft’s willingness to consider more radical tactics as it tries to counter Apple’s success with the iPhone and iPad.

One said that it had not led to any active takeover discussions, while the other added that no deal was “imminent”. Both characterised the discussion as part of a regular series of meetings to consider a range of possible areas of co-operation.