Savannah Resources v Bacanora Lithium

I hope that folks have enjoyed the rise on Savannah in the past month. As my last blog clearly mentioned when in the 5s and 6s, Savannah was a screaming and safe buy, the rise up to the highs of 16-17p was both dramatic and fully expected. Understanding the mining cycle, having patience and investing are key on AIM. Jumping around from share to share, “trading” is a game with winners and losers, particularly over time.

For the record Savannah Resources has really just started its journey. Achieving a 100m Market Cap, has been a form of “coming of age” for the company, it should allow the company to fulfil its dreams, deliver on its projects and become a serious midcap miner. All 3 of its projects have sufficient potential to deliver 500m-1bn of MCAP each, once into phase 2 or 3 of their product. Due to this and the excellent management of the company it will remain a very strong buy and sit pride of place as the bedrock of my investments. There remains strong share growth at the 3, 6, 12 month and beyond targets.

Whilst researching Savannah this year though I have continually come across an old favourite of mine, Bacanora Lithium. I was a fan of this company when it was just on the Canadian Exchange, I followed its admittance into AIM (and invested). Under Colin’s stewardship it was an example of how to identify good projects and explore them. I argued on this blog how toxic having David join the board would be, Colin and Cordy did not want any of the article changing and the ensuing lack of share price growth is a helpful indicator of how toxic this has been. Colin’s death was a blow to the company and a very sad piece of news, his ability to pick a path through difficult waters has been missed.

The company in the last 12 months has made a number of unforced errors, the arguing of the royalty payments to Cordy and family, left me angry as this was Colin’s inheritance for creating the company. He was the explorer who found the world class lithium project that will define Bacanora and to try and rob him and his family after his death was a low even for an AIM company. The decision to finance through Nextview capital was stupid on so many levels, thankfully the appointment of an experienced CFO and bolstering of the BOD post this debacle should help to ensure it doesn’t happen again. That a company would want a shady private Chinese company as a partner shows a total lack of directorial oversight.

Despite this, not everything has been doom and gloom at Bacanora. The company has quietly been progressing its Mexican Lithium project, concluding a feasibility study, finalising construction plans, getting the support of the local authorities and refining the complicated process of extracting the lithium from the clay. Aim however doesn’t like quiet and is slow to forgive bad decisions, so the share price is actually lower than the original admittance to AIM all that time ago. Despite the lithium price increasing from 5500 to 17000 over that time.

  

Comparison.

Both companies have considerable expansion on their lithium prospects.

	Savannah Resources*	Bacanara Lithium**
NPV	$356m	$1253m ($1380m)
IRR	63%	26.1% (31%)
EBITDA	$72m	$229m ($254m)
LOM(length of mine)	$1555m	$3206m ($3450)
Profit Margin	60%	63% (70%)
Capex	$109m	$420m
Production	2020 Q1	2020 Q1

*Savannah Resources figures are based on a scoping study with a higher degree of uncertainty.

**Figures are updated from the Dec 2017 Feasibility Study to take into account the lithium price increase and the lithium forecast figures used by Savannah for comparison purposes.

Production is planned to commence relatively quickly, Bacanora is considerably more advanced than Savannah, however Savannah’s project is far more nimble, smaller and simpler. Bacanora has published its final feasibility study and despite already having a start ceremony will be finalising its design in July 2018 prior to ground breaking. I fully expect both to slip a bit to H1 2020.

Both companies have a fantastic profit margin, both are exceptionally low cost compared to similar competitors. Savannah has a much lower cost than for example European Lithium’s Spodumeme, whereas Bacanora is lower than many of the proposed new Argentina brines. Both projects would be considered low cost(lowest 10% of lithium projects globally) and profitable even by Morgan Stanley’s hatchet job earlier this year, as well as comparable to the great Chilean lithium deposits of SQM.

The LOM (length of mine) and EBITDA are both very respectable. On the plus side they should be considered starting figures, as Savannah will undoubtedly increase their resource by at least 100% prior to production and Bacanora have already planned phase 2 to double production. The resources for Savannah and Bacanora, should have a true LOM of at least 30 and 50 years respectively, giving estimated figures of $3.3bn and $30bn. These figures should start to be recognised by the market as we get close to production start.

One of the most useful ways of looking at a project’s profitability and particularly its attractiveness for obtain funding, is a companies IRR (Internal rate of return).  This is how quickly the projects capex will pay for itself. For example if the LOM is 10 years, it would make very little economic sense to have an IRR of 10%, as it would take 10 years to pay back the cost of the capex. It’s easy to see then that the IRR is also going to be impacted by the capex.

Generally an IRR of 30-40% is considered good. This is a rule of thumb only though. A certain small cap company a few years ago had an IRR of 40%, however the LOM was only 5 years and the EBITDA was only for 35m. The mine in question had a very low capex and was designed to maximise a small vein system of gold. Over the 5 years any profits for the mine were quickly eaten up by BOD salaries and further pointless exploration. Unsurprisingly the MCAP of the company never went over 30m.

Given the above example, a better rule of thumb would be less than 20% and the mine, except under extraordinary circumstances, would not be developed. 20-30% is only really acceptable if the capex is above 300m and the mine has a long life span. For a short life span mine less than 10 years ideally you would want an IRR of 40-50%.

If we look at a few IRR of other Lithium companies, European Lithium has an NPV of 263m and IRR of 21%, needless to say they are looking to improve this. Far resources has an IRR of 30% and Frontier Resources 38%, both of which have been deemed good enough to continue.

Savannah Resources will undoubtedly have a Length of Mine of over 15 years by the time the go decision is made. With an IRR of 63% and low capex it fits into the higher bracket of potential lithium producers. Indeed it puts it in a far more profitable position than the vast majority of small to medium lithium producers.

Bacanora Minerals with an IRR of 26.1% on the face of it doesn’t seem great. However it is worth remembering that even with a 20% discount to current lithium values its recalculated IRR is already just over 30%. For a higher capex mine this is respectable. The IRR for Bacanora is more complicated than this though. Phase 2 of the project is due to double output, some of the original capex and so IRR is forfeited for a cheaper phase 2 entry. When you factor in the incredible length of mine confirmed at 50-100 years by the company as recently as this weekend, a payback of only 3 years moves from respectable to highly respectable.

Of course the elephant in the room for both of these projects is how, with comparable MCaps of around £100m, can the two companies fund the capex’s already discussed?

The answer partly lies in the figures above. The healthier the figures the more likely the funding will be found. The better the figures stack up against other industry similar potential lithium assets the easier it will be attracting the funding.

Funding

Once we’ve established that a project has sound and healthy financials and will be attractive, we can assess funding and its implications. A mix of funding options are usually used, they include selling shares in the company, bonds, some kind of tiered structured loan facility backed by the asset used as collateral, funding secured against future offtake agreements or straight forward payment for future lithium sales.

Just like a mortgage to buy a house, financiers will often want the company to have some skin in the game. This is commonly around 25%, the table below shows how this should be accounted for as a percentage of the company.

Using Exchange rate of 0.75 pounds to 1 dollar.

	Mcap £	Capex £	Share of Capex £	Share Fundraising £	Share Fundraising % of company
Savannah Res	90m	81.75m	61m (75%)	15m	17%
Bacanora Lth	111m	315m	220m (70%)	55m	50%

Fundraising of this kind commonly concern 1-4 companies, funds or financials. The shares are unlikely to enter the market until the company goes into production.

Now that we have an educated guess of how much dilution might occur, we can address the rest of the fundraising for the two companies. I would expect funding against future offtakes to account for as much as 50% of the Capex. Particularly for Bacanora who already have an offtake agreement with an entity who is a major owner of the company. For Bacanora I would suggest the most likely option for the final 25% is probably a bond offering. Funding for Bacanora should be announced in the next 6-8 weeks.

For Savannah, the funding will likely be entirely offtake related (obviously with the equity component). Due to the low risk, pay back, this will be achievable.

Conclusion.

So where does that leave us? Which company should you invest in? Which company is better?

As always the purpose of this blog isn’t to tell you who to invest in. I just want people to think and research for themselves. I want investors to invest.

AIM has always been a gambling den, traders who like to pretend, frankly fools who invest on momentum and spikes and the next big thing. It’s always been assumed that long-term investment on AIM is for mugs. This philosophy is completely the wrong way round. I know that 90%, if not 95% of AIM companies never make money. This is where researching and choosing companies that are likely to go into production and make money, seems to me to be an intelligent way of investing. The mining cycle shows that companies often have a weak share price after a lengthy news wait for licenses and feasibility studies. Larger low-risk appetite corporate investors will often invest when the company is very likely to begin construction on a low risk project.

As a smaller invest, it seems to make sense for me to research projects, find projects that will likely enter production and make money. Then enter these companies when the share is unloved, just prior to the corporate investors.

Savannah resources fit this nicely when I used a new fund to buy shares at 5-6.5p. As expected the share price is nicely responding and production (at least to me), seems very likely. I have little doubt that the company will be considerably higher, in 18 months time, than its current share price, taking into account the share dilution. Being strongly up, I can relax, hold the share and probably make a return over the 2 years of at least 300-400%. If I wasn’t invested, I would still buy the shares, over the coming month or two. With a view of seeing considerable share growth as the corporate funds move in and important announcement de-risking the lithium project are made. There will also, in my opinion, be announcements on other Savannah projects that will drive share growth.

Bacanora is slightly different, it’s still in the unloved phase prior to any project unlift. As discussed above this is due to factors such as management mistakes, however I still believe that the project will go into production. Bacanora is currently valued at around 10% of its discounted NPV, even allowing for past management problems (which are hopefully behind us) and share dilution at 50%, there seems to be scope for the 100-150% share increase that Savannah has recently enjoyed. The catalyst for this will likely be the fund raising announcement for the project. Once the project has been fully funding and construction started, approx. August/Sept, the share price should gradually rise to meet 60-70% of the NPV prior to first shipment.

Savannah is a fantastic share in my opinion for a low risk, longer term investment.

Bacanora has a higher risk/reward ratio, mainly concerning director decisions and funding mix, but is a risk I am happy to take considering its closing in on production and its potential.

However both companies should delivery very good returns for investors, for those happy to shy away from the momentum chasing, gambling, stock chasing of more run of the mill shares.

For transparency, I have several holdings in Savannah Resources and have recently been building a holding in Bacanora Lithium.

Savannah Resource, It’s the mining cycle stupid!

For full disclosure. I have a stake in Savannah Resources (SAV), Several actually and have been buying more, with the last buy at 5.35p today.

I haven’t written a blog for a very long time, but the blatant lack of understand about SAV’s market mechanics and in particular the latest RNS has inspired me to correct a few misconceptions. Skip to part 2 if you want, the below can be a little insulting to 90% of investors.

*image not mine.

Firstly we need to cover a few basics, the mining cycle for junior miners. This is very well explained elsewhere, if you don’t know about it, then READ UP! It’s essential knowledge for any wanabe AIM mining investor. Simply put, a mine has an SP cycle. The SP responds upwards during exploration when the asset is first “discovered”. Then as we hit the feasibility and licenses stages it declines, before starting to rise again when construction on the mine starts and into production. It’s a touch more complicated than this but….

Secondly my favourite saying never underestimate the stupidity of investors. They are greedy, want a quick return and have been lured into AIM on the promise of 1000% share rises. They have no patience, expect everything to happen as planned and have next to no knowledge of what life is really like for a junior explorer. They also make the cardinal sin of going “all in” on a share. Going “all in” makes no sense at all. Have an initial stake and then average down if the SP drops or even up if the SP rises. All of the reasons I’ve outlined above apply as to why investors don’t do this, particularly greed and stupid. They want to maximise returns and be in it to win it and any one of a dozen clichés that just imply stupidity. They then complain if the SP falls a bit and they have a paper loss. If only they could see this as the perfect opportunity to top up, their life would be much easier, but alas this isn’t so.

As disputably attributed to Macmillan, “Events, my dear boy, events”. Events can impact a share, you need the flexibility to respond and adjust your investment strategy to events. You also need to differentiate events that affect the long-term share price and events that just move the sp up and down a bit.

Some events can be anticipated. For example the “stupid” investor will always assume that a mining licence can be obtained and given out like confetti. They will assume that a PFS and DFS can be produced at a speed that will rival a bullet train. They assume that just because a country might be classified as developing they will jump at a chance for a western company to come in and take all their assets. 

Mining licenses take on average 2-5 years to obtain, countries tend to be very strict as to environmental impacts, outreach projects, employment opportunities for locals, cherry picking of assets etc. A PFS isn’t just a fag packet appraisal of a potential mine. It’s a legal document. It needs to detail a thousand different aspects. The writes of a PFS/DFS will need to contact 100 different companies and govt offices. Many interconnections and dependencies will exist. If a company claims a PFS/DFS can be produced in 6 months, most of the time I would sell the company immediately, FRAUD would spring to mind. The average length for these can be anywhere from 12 months to 2 even 3 years. 

Folks should remember that sometimes these are legal documents used to raise money for 100m+ capex projects, they take a bit longer to produce than your plans for an extension on your house!

With the knowledge now known and information obtained this can be used to direct your strategy.

Part 2 Savannah Resources.

David Archer has a simple strategy, 3 projects all at different stages in the cycle. Combined it should even out the junior mining cycle as described above leading to steadily rising SP, the 3 year SP chart shows this perfectly with a 200% increase. NO, I hear you shout, the SP has been pretty flat recently.

I agree to some extent, from July 2017 to the end of the year the SP rose 25%, largely off the back of the new lithium project in Portugal, as per the junior mining cycle. This has been offset to a degree though by Oman and Mozambique being in the downward cycle as they await licenses and PFS. From Christmas the dominance of these down cycle projects has overcome the excitement around Portugal.  Particularly as investor patience has been tested by Oman licensing delays and unknown timeframes around the Rio Tinto Moz tie up. Both of these Events have affected the SP without affecting the long-term SP potential. Combined with this we have a now waiting for scoping study for Portugal (more patience required). Leading to a micro downward cycle on Portugal as well. The consequence is a 20% sp fall.

We now come to today’s RNS outlining the developments so far on the Rio Tinto PFS. This was incredibly misunderstood. David has been clear that there are 2 stages to the PFS. A few folks misunderstood that the PFS started in Aug 2017 would be finished soon. [I laugh out loud]. 

However it was clear that it was only stage 1 that would be finished after 6 months or so. Today’s RNS confirms this is nearly finished, but that more/extra work is needed. Stage 2 of the PFS will be completed in 2019. So we are looking at around 2 years for a +100m PFS with and to satisfy the world’s largest mining company. The lack of patience of the “investor” shows its head here and the price declines on what is expected news.

So where next. The turn on the mining cycle always occurs when the PFS is produced or the license granted.  Mozambique will require a lot of patience yet, it probably won’t turn to an upward mining cycle until summer 2019 and so hence won’t add to the sp until that time. However todays RNS should limit its downward affect. Oman should still get license approval allowing mine construction and production to start and so becoming a positive effect on the sp rather than a negative. The scoping study should unleash an upward cycle positive on the sp for Portugal as well.  Possibly strongly upward.

Events have so far just created a deepened negative cycle effect for SAV. Which should reverse in the very near future, probably June, lasting until the end of the year. Due to this the next 4-5 weeks will be all about buying as many shares as possible at each opportunity. Today’s RNS was a perfect example of this. 

Remember the smart investor takes advantage of the stupid investor. Buy value on the cheap, hold value for the long term.

My final word is that events can knock an sp, but that knock can be sharply upwards as well as down, look out for value positive disposals, buys and strategic partners. These don’t travel up the curve but displace the curve upwards.

2016 a Cracking Year, but help is needed.

All I hope you have all had a successful 2016. For the record I gave out 3 main calls this year. The first was Savannah Resources at around 2p, currently around 6p with a nice 300% paper profit. I also had a call on RIO at the start of the year thanks to its then 6-7% divi rate and good potential upside and landed a nice 50% profit and finally BCN which has had a neutral year so far. In total my PF is around 100% up, with a big chunk of it staying in cash this year.

Overall a very successful year.

This leads me onto my plea where help is needed.

As a family, my wife and our children have seen the effects that cancer can have on children, (not ours I should add for clarity), but to people we know. We have seen both the devastating effects on families of a child dying and the positive effects.

A few of you will know that I gave up working in investing banking and IT a few years ago and have spent the last couple of years working with children, both in and out of schools. All of us try and help out where we can and my middle child has also been affected and occasionally tries to raise money for good causes.

In December he’s decided to shave his head for standup to cancer.

If you’ve had a good year and I hope you have and want to help sponsor him then any money is appreciated. It happens next week.

https://www.justgiving.com/fundraising/Joshua-Swift

So to sign off, happy new year and I hope you are all healthy, happy and wise !

Getting eaten by sharks.

A strange title, but it sums up my view in the investing world at the moment, for a great many small investors.


For most of the past year I've been consistently saying that I am keeping 50% of my portfolio in Cash. To be honest from about September time that rose to 80%.
I've had a few new investments, either very risky or very short term, but most of it is simply out of the market.


I am more than happy to hold my hands up and say that OXUS was a disappointment. Thankfully I never advised anybody to buy in the last 6 months and when asked (which I was frequently) tried to always say that its a punt that could see you lose all of your money.
Indeed with OXS, a trawl through my posts will see that I advised buying at around 2p, taking profit and letting profit ride. I know a few folks who lost big time on OXS and I feel for them, I really do. It should only ever have been punt money or profit though and it should have been money that you were prepared to write off.


Apart from a bit of money in the likes of FOGL, most of the 20% went and remains in AEG and SAV, both strong, well run companies that form long term investments.


2016 will be the first year that we see significant amounts of AIM companies going under. Oil at or below $30 is only economic short term. Beyond 3-6 months its a death sentence for many companies.


I've got a few more blogs coming on commodity prices that have been written over the past few months but I need to get my laptop fixed to get at them, so they will have to wait for now.


The purpose of this blog is simply to re-iterate a few points.


Point 1: I could not, with a moral compass working, suggest stocks to invest in, with the current market. There are many many stocks (90%) that I can buy far cheaper now than 6 months ago. £10,000 can buy you 300% more good stocks now than it could 6 months ago. Waiting is actually a very valid strategy in the current market.


Point 2: I have been reading almost daily over the past 6 months how some extra-ordinary people feel they can call the bottom of the market i.e "you would be mad not to buy now, as the oil price will only increase going forward and will be xx(put whatever silly price you want in here) within a few months." So far they have been spectacularly wrong.


Point 3: There are a great many pundits who will never tell you to keep your portfolio in cash, this is because they trade stocks to earn a living and need to constantly pump and dump stocks to earn a living.


Point 4: We keep getting told that now is a good time to buy new assets, (by some of the same folks who said how clever MXO were buying Aje). It is NOT a good time to buy assets. The assets that are being sold are the crap ones that nobody wants. Any asset will require money to truly monitise it and most assets will be uneconomic in the current climate.


Point 5: Relax....there will be plenty of time to make money when the market turns, it is of course assuming you have any money left after buying some of the junk such as over valued shell companies, over inflated oil companies and simply piss poor commodity companies such as GGP.


No doubt a few very intelligent folks will take issue with what I've said, also no doubt they are same folks who ramp different stocks each week.


Anyway good luck in the market, keep safe, keep secure and most importantly keep your money !

Savannah Resources - step by step

Small update on Savannah looking at the new Aarja prospect. Step by Step the team are finding and proving up targets in their large Oman License areas.

I thought it would help investors by seeing the real state of the Aarja mine. Now pretty much a hole in the ground, very little vegetation, a more gentle slow to the NW and steep to the SE.

General thoughts are that it would be exceptional easy to take the shallow slope back and then start extraction of the ore that begins pretty much at surface out of the water, drain the water skimming underneath it. Then extend the pit SE towards Aarja south.

Just imho, but I can see Dogs bone extending closer to the surface, it looks to have a strong gold component as well.

All in All, it looks very cheap and simple to extract, very low risk, with proven and low EIA risks.

Exactly what the Omanis want.

For clarity I do hold Savannah Resources shares.

Falklands, it’s all coming together.

Until this recent drill campaign the Falklands, particular for FOGL was only a place of dreams, expense and not really very much to show for it. They brought DES and its associated licenses to gain a foothold in the Sea-Lion play. They managed to raise a few million dollars, get a couple of good industry experts on board in a number of JV’s, spent 2 years with some unsuccessful 2D driven drills, they then spent  18 months on 3D and acquiring enough data to sink a battleship.

All of this was good, needed and essential, particular for an unexplored new environment.

However none of it actual proved that outside of Zebedee, oil actual existed.

This current drill campaign is therefore the result of years of work and is a defining moment for FOGL.

The drill on Isobel was a resounding success, although it barely reached the main potential reservoir and it didn’t reach Target Depth(TD) it did exceed all expectations and oil samples were extracted that proved good quality, water free, high pressure OIL. Isobel was part of the northern license area and although wasn’t part of the same system as Zebedee was similar, albeit possibly larger and better pressured.

The current drill on Humpback in the south license area, is a completely different kettle of Falklands fish.

No oil has ever been brought back to the surface in the Southern License area, BOR successfully found liquid gas, however the true prize is the black stuff. Not only would Humpback prove that oil isn’t just a myth, it’s rated as containing half a billion barrels of oil, if indeed oil exists there.

The importance of Humpback is not just the half a billion barrels of oil it might contain. If it comes in as a success it massively de-risks very similar plays containing another 1 billion barrels of oil. Nobel the JV operator of the well has committed to a second well, if it makes a discovery. It also opens up the entire southern range, for considerable further exploration.

The impact on Humpback for FOGL cannot be underestimated.

More recent developments.

Humpback was already a mammoth drill, due to take 60 days, FOGL have announced that this will be nearer 100 days now due to complications (enough time to drill 2 holes in the northern license area). A side drill we take place off the initial drill pad and hole.

It also announced that it has $30m left in the bank after the pre-payment of the Isobel and Humpback drills.

So where does that leave us?

FOGL have received more than their fair share of luck. The lack of the Isobel drill to reach TD looks to be a certain contract failure. Premier the Northern License operator  have to make a second Isobel drill the next priority, once Humpback has been finished. A second free drill to prove up Isobel and its reserves will be greatly appreciated by the market and the BOD of FOGL.

The extra 40 days required for Humpback, will be paid for by the operator Noble.

A new drill at Humpback, if the first is successful will require a fund raising to the tune of $30m. However this will be at a much higher share price, due to the successful drill. An estimated MCAP might be $300-500m.

Unlike the last drill, which saw the drill rig move sharply away from the Falklands after just 12 month. The Eirik Raude is on a notice contract until 2018. This allows Premier and Noble sufficient opportunity for many drills to come and more news flow for the FOGL. FOGL will obviously have to raise money to help contribute to thiss(approx. $150m or so), but it’s estimated that until 2018 they will be proving up between 1bn and 3bn barrels of oil. Beyond 2018 and the Ocean Rig Santorini can potential be used for production holes. Both Premier and Nobel have ear marked larger exploration budgets for 2016. Once in production, if FOGL can maintain a good share of the licenses it will be a multi-billion company as exploration firms up the resources, CPR’s and routes to production are finalised.

I have brought some FOGL recently, the potential of a successful drill with Humpback and the culmination of years of work, outweighs the risk. It also falls nicely into the high quality portion of my portfolio. The partners and potential of the resources are really world class, this isn’t a story of an AIM minnow dreaming about finding something amazing after spending a few million on a wildcat drill. FOGL and its partners have spent a 9 figure sum getting to this stage. Due to the depressed oil price and bear market, the share price is massively undervalued.

14-18-2015 round up #OXS #CEB #FOGL #PEL #AFPO

Evening.

A few interesting things happening and a few on the horizon. So I thought a blog was in order.

Lets start with something positive, #FOGL has an important drill due to be announced. Depending on results this might indicate a massive increase in the OIL reserves and wealth around the islands. Logging should be finishing in the next two weeks so news is nailed on. Personally with oil at its current low price, I will be watching but not buying before news, but it should be interesting.

Now onto #OXS, usual fun and games, with an August result unlikely (historically) we are looking more and more at an Autumn/Winter result. Still a firm hold for me, but I am happy to ignore all the rumours and wait.

I have been researching #PEL as promised. My initial thoughts ( and I am only half way through researching) is that the company looks to be a classic rehabilitation candidate. The biggest problems with these, as I've learnt many times is that the market doesn't believe these recovering companies, until its seen the evidence of good profitability in trading statements. The real question might be when will the company release these trading statements, but anyway more work needed from me.
BTW when I mentioned that the company might be being ramped, it doesn't imply anything concerning the companies true potential, just that there is an influx on short-term money that will be leaving the SP at some point. When this happens we normally see either a dramatic decline or a gradual decline depending on who brought the shares when the short-term holders sell. This might well be a long-term hold in the same vein as #AEG, I am not decided yet.

#CEB....Wow..Just Wow on the day that the company announces its AGM, you get not one, but two director sells. One director sell, you can put down to bad luck or unusual circumstances, but 2 directors..

Quite simply for experienced AIM investors, director sells are a red flag. Its very rare for a company to see its SP rise after director sells. When the directors sell, just prior ground breaking news I have never heard that it bodes well.
We will hear all kinds of things from the ramping crew about this as they struggle to sell out. Over the years I've heard all the excuses as to Directors selling, from pension arrangements, divorce, needing the money to put the kids through education, ill health. The consequences for the company though are pretty uniform.

A simple question these directors will have known most things about the company, they will certainly be aware of the potential for any new Indonesian deals. So why sell now and not in 30 days time?
For me it indicates that the Directors were pretty certain (at least in their minds) that large dilution will occur when the deal goes ahead.
I've been accused of not being researched in #CEB, but that's simply not true. I've researched Indonesia and the Philippines at length, producing a PEST analyst on both. The reason for this is that both companies were considered excellent frontiers by Aussie mining companies when the Aussie industries were booming. There is a graveyard of projects left by this Aussie expansion.

Indonesia in particular had some bad experiences and developed a bad reputation for investment. Recently,  last year it declared it was going to pull out of its trade agreements (BIT's) with most countries, including the UK. This essentially removes protection for companies. We recently saw a terrible Mexico auction of its licenses and there is nothing to suggest that it will go much better for Indonesia.
At the end of the day until CEB tells investors what its investment will be, how its funded, what percentage of the deal it will keep (its already given away a chunk of anything) and importantly who will fund the exploration, its impossible to put a figure on the SP and its nothing more than a gamble. One the two Directors selling don't seem to want to take...

#AFPO is another one, where its impossible to justify the SP until we know the profit and figures from any deals. Take the profit and run IMHO.

Be careful out there folks.

Enjoy your summer !

“Where has all the mxo ramping gone from last month. Wait a minute it went to afpo. Another bunch of spiked pi’s , so what stock is next?”

I am not surprised in the slightest but my first post on AFPO and one of only a hand full this year was greeted with insults and abuse…

Was it because the post was incorrect? Well if we look at the “investors” who pumped MXO or reacted rather negatively we might see. On the 13^th of July I posted that the “pump” crew had sold MXO and has moved onto their next target…Funnily enough the same “pump” crew that told me that people selling at 4.5p was stupid, or that I was clueless. Since then they have become rather quiet about MXO and the MXO price has fallen……

They are also the same “pump” crew that have been ramping AFPO and have been selling in their droves whilst pumping away. They have already started the next pump.

So was I wrong?, NO.

So why the response….Maybe in the same way that when you tell a child off for being naughty, their first response is often one of denial. Maybe it’s because they are so incredibly insecure they need to response to every single negative comment. Maybe it’s because they are bullies.

Whatever the reason, if you post anything negative that they deem threatening it’s the same comments.

I am Clueless, It’s down to Envy, I must have made a loss, etc etc. It’s all rather juvenile to be honest. Occasionally you get a true comment about how it’s all about buying low and selling high, where they singly fail to realise that buying low, pumping a share, selling and then watching it fall back is the very definition of a “pump”…

Equally, investors shouldn’t be concerned if you get a negative comment in a negative market. We could all just say positive things about companies, but this would only lead to PI’s losing lots of money. If something is negative then say it’s negative, if something is being ramped then admit it’s being ramped, if it’s positive then say it’s positive. If you say this many times in the hope of changing market sentiment then it’s a problem.

It’s the same mentality of MP’s that claim £500 for a 5 mile bike ride, or investment bankers that sold the rather dodgy CDO bundles, or even the tried and trusted second hand car sales men.

I am more than happy making money in AIM in a rather more moral way.

I actually quite liked the MXO deal, far better than its Mexico licenses and said so (although I also said that I wouldn’t buy any yet).

Equally I quite like the AFPO deal. The problem is that we don’t have a clue how much profit will be made for AFPO, its margins on the revenue might be 2% or 50%! Nor have we heard why these hefty margins are going to be taken by middle men and yet the MOU buyers are happy to buy it?, why don’t they just cut out all the middle men and go straight to where AFPO are sourcing the product?. This will happen if AFPO are not adding any value. We simply don’t have enough information to justify a re-rate of the SP IMHO.

Finally not all investors are part of the “pump” crew some are genuine investors in these companies.

You might want to follow the “pump” crew, however for every “pump” that catches and works, there are maybe 2 or 3 that don’t get the traction.

Let’s see which one gets it this time round, maybe EDL, maybe AVP, maybe PEL,  RMP, AVP.

Enjoy your Summer, I know I am !

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.