African Minerals – Who ate all the stock (and perhaps the pies)?

UPDATE – 17 SEP 14:00PM  – It has come to my attention that other websites have aligned themselves with ol Cawky and reasserted the belief that these are destined for 0p. That is music to my ears and I personally plan on adding to my own long position in the days ahead. This line is what I like best – ”.. the current market cap discounts all the bull points but none of the monumental risks…”  With a stock price that has fallen from over 600p to 26p I rather scratch my head at that line! R Jennings

Punters in the iron ore space have most certainly not had an enjoyable time of late if they have been positioned long (and the very vast majority of investors are positioned long at pretty much most points in time).The whole equity spectrum has taken a serious beating this year as the price of the raw metal material has endured an increasingly accelerated decline in recent weeks which the price below pays succinct testimony to…

African Minerals has been one of the worst hit of the group, being shellacked from all sides in recent months. Aside from declining margins as a consequence of the seemingly relentless decline in the iron ore price, the company has also being battered on the “Timis” front (as in Frank; the cough, cough, “controversial” natural resources entrepreneur) with alleged unauthorised payments of upto a whopping $50m by third parties to him and other senior executives of the group.

Additionally, the company’s iron ore mining operations are located in Sierra Leone – the West African nation that, sadly, has been at the forefront of the Ebola outbreak. Indeed, so damaging has been the outbreak that the Sierra Leone Government is to put the Country into an effective “lock down” this Friday for 3 days in an attempt to contain the spread of the virus once and for all.

Throw into the mix debt servicing worries and one can begin to rationalise the precipitous share price routing over the last 6 weeks in which the stock price has fallen from over 60p to, amazingly, just 15.5p at the beginning of this week. At that price the company’s market capitalisation was a mere £50m and change. With an NAV of nearing 200p, that is one serious discount and one that typically presages a company on the brink of equity wipeout.

Enter stage left one Mr Cawkwell aka the “Evil” Knievil. It was indeed only last Friday that he came out on the tape to relay that he had been “told” that the company was toast and that one should get their shorts on forthwith. I rather beg to differ on that position but then again I may just be part of the 99% of the population that he fancies his chances against. Time will tell on that one…

Aside from the very material discount to NAV and the statement put out by management on the 15^th August that was worded to assuage market fears, the chart below speaks volumes to me.

African Minerals YTD chart

We can see that circa 90m shares in the company have turned over in the last 4 trading days. Some of the less educated bulletin board commentators, in particular one exceptionally vile character that goes by the name of “Bad Robot” seem to think this is evidence of increased shorting of the company. The lack of RNS disclosures in recent days regardiing current short positions and indeed some of the major investment houses who were short reducing their positions kicks this theory into the long grass however.

90m shares is nearly 30% of the company and although, going by the volume of postings on the bulletin boards, private investors are likely to have been a decent participant in this, I rather doubt they have accounted for more than 20m-25m shares.

There is every possibilty that there has been stakebuilding in recent days, perhaps by Tianjin Materials and Equipment Corporation of China (Tewoo) who had committed to buy just under $400m at 660p per share (that is not a typo by the way!). At the current market cap they could have the entire company for a fraction of this investment!

Net effect of all this? As the saying goes – “for every seller there is a buyer” and it is all about price discovery. I rather suspect there has been some decent institutional accumulation in recent days. It seems that not everybody believes that the company is toast…

A rather bemused looking Mr Cawkwell, who very well may be looking even more bemused shortly!

Sentiment was no doubt helped today by the 500bn Yuan Chinese liquidity injection into their domestic economy (as the primary driver of the iron ore price this is of course a positive) and the 4% rebound in the iron ore price itself overnight. With an RSI measure in the mid-teens – generally a level from which very sharp rebounds occur; contrary to my old “friend” Mr Cawkwell’s assertions that one should get short pront, I rather prefer to play this game as we approach the release of the company’s results and likely finance clarification in the next couple of weeks from the long side.

An approximate 50% rise on the day today on record volume that eclipses anything seen in the stock since it was listed, and a close very near the highs makes me feel comfortable with our bull position accumulated in recent days. Indeed, on a purely technical rebound basis, I would not be surprised to see the late 30’s to mid 40’s before the week is out and, if they have sorted the offtake issue with Shandong and have a solid financing plan in place, a run back towards a more realistic equity valuation approaching £1 could very well be on the cards.

CLEAR DISCLOSURE – RICHARD JENNINGS & TITAN FUNDS ARE LONG AFRICAN MINERALS AND YOU SHOULD NOT TAKE THIS PIECE AS AN ADVOCATION TO BUY (OR SELL) THESE FINANCIAL INSTRUMENTS.