Beware Bears Everywhere

In my previous blog http://icebergshares.blogspot.co.uk/2015/07/new-pumping-and-dumping-sentiment.html I talked about a few aspects of life on AIM and briefly touched upon the bear market.

Some won’t believe me, but the last 18 months has seen some fantastic gains in a favourable market on AIM. This has not lasted for the last 6 months and will only become worse…..

It’s difficult for invstors to grasp this, they will always think if they pick the right stocks they will make amazing gains. They will blame poor entry points. They will bemoan the timing of external factors. They will point to the time of year. Everything except realise the truth.

The truth is that the AIM market is on a Bear run. Now I have to quantify this statement, for my own purposes I am looking unapologetically at the exploration and resource sectors.

It’s on a bear run thanks to:

• Global Macro-economic factors.
• Massive withdrawal of AIM funds.
• Rising exploration costs.
• Falling commodity prices.

It will continue to worsen because of:

•          The lowering of potential profits.
•           An exponential rise in failed/delisted companies.
•           Short term continual lack of governance in AIM.
•           Crippling costs of capital.
•           Further degradation in the first 4 factors.

It will still be possible, I am sure investors will have it forced in their face, that some companies will make large gains. Where this happened 12 months ago though, it might only happen in 25% of cases now. In other words a guess from me might be that it becomes 4 times more difficult to make a substantial profit in in the next 12 months.

The only way is (down).

As an appendix at the bottom of this blog I’ve included 3 graphs from Infomine, they show the prices of Gold, Copper and Silver over the last 5 years. It doesn’t take an expert to see that prices are at 5 year lows. WTI oil has fallen back to below $50 a barrel. There are a string of experts claiming that the bottom has been hit in commodity prices and the only way is up. Please pardon my scepticism but I’ve been hearing this for the last 2-3 years. Every few months we get told that production is due to decline and China is going to hoover up all the resources. 

It simple doesn’t happen.

China is growing its internal production capacity rapidly and its demand is slowing down. BRIC’s in general are seeing only small real increases in demand. Coupled with this production is being increased due to a glut of projects(particularly copper) that started life 2-4 years ago in response to the higher prices.

Supply is also increasing due the declining commodity price. This might seem strange, when prices started to fall a few years ago, many projects were put on hold, producers stockpiled ore thinking that prices would rebound. Around 12 months ago Rio Tinto, stopped this strategy and decided to keep cash flow (to allow a share buy back) steady by increasing commodity tonnages.

This has been taken to another level by the likes of Unity Mining that have increased gold ouput by 50%, reducing cost per oz and keeping cashflow growth. This has been achieved by mining the higher grade areas (looking at 8g/tonne).

Oz Minerals another Aussie miner has increased copper production to maintain cash flow. This means that supply will only increase further as commodity prices decline, we have a bit of a dog chasing its tail scenario.

The market won’t price in any kind of rise in commodity prices in the next 12 months and so potential profits and NPV values will be hit.

This will have a consequence for the AIM, particularly within the mid-sized exploration production sector.

Oz minerals also shows the more problematic side of the fall in commodity prices. At its main copper/gold mine, as well as increasing copper production it’s suspended its gold production as it is no longer economical to mine gold.

Wood Mackenzie have recently commented that 10% of gold mines are now operating at a loss with gold at $1100 an oz.  Personally with stable demand and higher supply I think $1000 could fall and a low of $950 or so could be seen. This would put many miners in to a negative cash flow position.

Life is hard for any wanabe explorers turned miners and it’s getting harder and harder.

Good commodity companies can adapt, particularly those without debt. AIM however is dotted with many, far too many, lazy, hyped up companies and it will get ugly.

So what for AIM?

The consequences will be felt by private investors.

I mentioned that the decline set in 6 month ago, around this time the institutional investors started to leave AIM, funding was becoming scarce. Cornhill and a few others stepped up and started to offer more and more placements to private investors for companies that institutional investors would no longer touch with a barge pole. We all know the reputational damage this has caused, so I won’t go over it all again here. It did however help keep a bubble of “normality” for share prices of commodity companies across AIM.

The disparity of AIM over the other major alternative, commodity exchanges such as TSX and ASX grew and grew. Currently a company with a good current explorational asset might we worth $1m on TSX, if it were on AIM and with some pumping as much as $12m. A shell company on the look out to buy assets $350k on TSX and $5m on AIM.

This level of disparity cannot continue.

AIM will always be easier to raise money on than TSX etc , however it’s to the likes of TSX that the larger commodity companies  have come looking recently for good quality JV deals, as its simply far cheaper.

The last couple of months have seen even the private investor funded placements start to become unsustainable. Larger and larger discounts to the SP are more than evident along with higher and higher fee’s charged by the company’s brokers.  Private investors taking part in the placings are making less money, or indeed making a bigger loss.

Over the next 6-12 months, even this method of financing will become difficult for companies. Another problem, along with reducing liquidity in AIM, falling NPV’s, falling commodity prices and falling confidence.

So where does all this leave us?

Most, if not all commodity companies are overvalued by between 20-80%.

Explorers are buying assets, which I freely admit are very cheap at the moment, but these assets require considerable money to develop or prove up, that money will not be raised cheaply and will only get more expensive over the next 12 months.

Some small producers without flexibility and with debt will go under.

Companies will need to be innovative when exploring, they will need JV’s with deep pockets, they will need to costs to production with other companies, when producing they will need to share mill’s, processing, infrastructure all with other companies to gain economies of scale and reduce costs.

Having a world class asset is not enough. It needs to be scalable, easy and cheap to mine, low risk, high grade. The company needs to be professional enough to raise money and frugal with the money raised. Maybe with a bit of luck folks will continue to make some money, particularly if they remember to steer clear of the ramped stocks. Buy after de-risking news, not before.

#NEW, Pumping and Dumping (sentiment trading) and the Bear Market.

Evening folks. Well NEW has started trading again, as expected (as per my suggestion prior trading), it opened down 70% ish. This was not unexpected.

I don’t have too much to say on NEW, if you are looking for a short term sell out then .12 or .13 would be my target. If you want to hold for news then you might well get .3 or even (if its pumped enough .4) on CPR or asset buying news.

The current price looks to be the low point. I can’t see much reason to sell at this level, so I haven’t sold a share yet.

I still hope to update NEW investors on possible response and action, but that’s currently in the investigation process and might well be 3-8 weeks away.

With NEW we still have the unknown, as to whether or not Cornhill sold its shares to the market makers, or lent them the shares. This should be known by the end of Wednesday this week. We also saw incredible low volumes of selling on Friday. This was by far the surprise of Friday. I expected sell volumes to be maybe 2 or 3 times higher…..We also saw the bid being pushed up on occasion, again unusual given the circumstances.

If we look wider, we get nearly 5 year lows for many commodities, coupled with an expensive capital raising outlook. We have the mining majors cutting back and some chronic over supply.

We have lots of uncertainty, re Greece, Iran etc.

To top it all we have the change in pension funds which is seeing record money flowing out of SIPP pensions (many of which have been invested in AIM or small to mid cap stocks).

I know a few peeps are just waking up to this, but I’ve been all too aware for 6 months or so now and have continued to keep t least 50% in cash.

All this has helped to wash away the mud covering many of the more prominent private investors, particular those that earn a living as a full time job. They have suffered.

They also have no sympathy from me.

Underneath this scramble for the left over meaty scraps, we’ve seen investors turn on investors which has, unearthed the rather immoral happenings.

Pump and dumps are very easy to identify, simply look at the history of posters for the last 12 months. Are they still invested in the same stock?, after they stopped pumping the stock did it dramatically crash?.

The last 2-3 years has seen the emergence of “sentiment trading”…..A true sentiment trader will buy in to a stock and sell when they see sentiment disappearing….Its a widely held investment strategy and works.

However when this is applied to small cap, low liquidity stock and the sentiment trader then tries to influence the market through news, ramping (multi posts about “research”, frequent tweets etc) and this is done purely for short term trading gain. Then it’s not sentiment trading, but is in fact pumping and dumping.

It is made worse when folk sell whilst filling social media with this “sentiment based research”.

So where does that leave investors. Well as with MXO, if your looking to invest because of news then there is plenty of opportunity post news. If your looking to invest prior news and sell on news, then be honest with yourself and others about what your doing.

Keep a big pile of cash.

If others are urging you to buy, then assume it’s because they want you to push the share price up so that they can sell.

Maybe put aside a small amount to take a few risks with (but be prepared to lose it all).

Invest in proven quality, quality management, quality resources and a quality team of brokers, nomads and major holders.

A year in the life of the Lenigas Group.

I’ve put together a few facts and figures to show an objective view of how the key Lenigas companies have coped over the last 12 months.

I’ve included LGO and Stellar in this this. The reason being that they are both heavily invested in by private investors and both still have a strong connection (12 months ago they had an even stronger connection)

So I’ve made the assumption that an investor put £10,000 into these companies equally 12 months ago. The table below shows which are good investments and which are not.

All in All they would have made a loss of £730.

 

Company	12 months Ago	Current	Profit/Loss
UKOG	1.15	2.2	1141.304
AFRI	0.46	0.38	-217.391
REM	1.4	0.95	-401.786
LGO	3.6	3.13	-163.194
STELLAR	0.95	0.45	-657.895
SOLO	0.31	0.43	483.871
INSP	1.35	0.49	-796.296
EVO	0.21	0.19	-119.048

 

To be fair to David a loss of £730 is very small when considering a £10000 investment in AIM.

However that loss would be far worse without the Horsehill play….Now we can argue that the Horsehill play was/is a fantastic piece of skill or that it was/is a fantastic piece of ramping on what has so far delivered or proved zero.

This also doesn’t show spikes and troughs, investors could have brought cheaply and sold on a spike, or even brought on a spike and sold in a trough.

Personally I think it will be interesting to see where the above are in a further 6 or 12 months. My thoughts are that REM and LGO would be higher, UKOG and SOLO lower and the rest pretty stable.