5 mins. to read
Mining supremo Ivan Glasenberg

As mining stock enthusiasts continue with their collective head scratching (no wonder most of us are bald!), news today that Ivan Glasenberg – the head of mining powerhouse Glencore –  was looking to engineer a merger with Rio Tinto is perhaps the catalyst to finally put a floor under the ridiculously low valuations.

Largely as a consequence of the effective halving in the price of iron ore over the last 3 years (see chart below), it seems Glasenberg was looking to steal a march on his competitors and accelerate the age old commodity cycle of: undersupply evolving into oversupply and back to undersupply as prices fall. In this case, he was simply looking taking advantage of the relative decline of iron ore heavy Rio’s market capitalisation against Glencore’s more diversified commodities production base and, cleverly, going to Rio’s largest and most influential shareholder first – Chinalco – no doubt promising them first dibs on the coveted iron ore..!

News of the overtures broke after UK trading closed but the ADR’s in the U.S rallied by almost 10% at the close as we can see in the chart below.

Rio Tinto ADR 10 day price chart

Today additionally witnessed some potentially important reversals in the price of various metals – copper, silver, gold, platinum and palladium. From collectively, in varying degrees, sitting in extremely deeply oversold statuses, the price action today closing at or on their highs is, say it quietly, potentially a precursor to a lasting bottom…

While Glencore says it is now not actively pursuing a merger, industry watchers and investors would be silly not to heed the veiled message here – prices have hit levels where it makes sense to acquire/merge. Forget the “anal”ysts who are likely now wheeling out their sell recommendations right at the wrong time, the people to watch are the industry “insiders”. We have made the case on numerous occasions this year that on any medium term horizon, the purchasing of quality mining plays at current prices is likely to pay material dividends in future years. Indeed, it seems we are not alone, as Directors’ buying in the sector continues to increase and today Aquarius Platinum was another company that saw insider interest in its stock.

Many companies have also completed balance sheet bolstering exercises in recent weeks and it is these very companies that investors should concentrate on in tucking away potential multi-baggers.

Our pick of the sector (micro caps excluded) at present is Lonmin.

There is an old adage in mining investment and that is you “buy on a high PE and sell on a low one”. To many investors, this may seem counter-intuitive but, it is in fact the classic value investors approach. Basically, you buy when historic/near term earnings look bleak and wait for the sector to rebound over the cycle/the company to carry out restructuring and then, as the stock price rises and PE’s look low, you sell.

There is one important and absolutely vital ingredient also required however to make this succesful with mining plays. That is, you need a solid tangible asset backing as a safety net and no/nominal net debt. The latter is what caught many (including us) on the hop with London Mining.

I can hardly put together a more appealing wish list for Lonmin: – lowest price to book in over 20 years, the potential catalyst of Glencore selling their stake to a strategic investor/the company being acquired outright at a premium, a classic diminishing supply profile for platinum, weakening rand suppressing input costs, massively oversold on almost any timescale (indeed on a short term basis the stock has had a mere 3 up days in 25 – it could hit 200/220p and not even be remotely overbought) and trading at a very large discount to its peers.

Below is a chart of the stocks long term EV:EBITDA ratio.

We can see that the shares are now almost as cheap as when at the nadirs seen “when the world as we know it was ending” in 2008. Indeed, the stock is trading fully at a 50% discount to its long term average.

From a price:book perspective, the company is, amazingly, trading at just over 0.3 times. That’s right, 0.3 times. Considering that the estimated cost of creating from scratch a Marikana type mine in terms of ounces of platinum produced is estimated at $4bn, the real book value is likely 30-50% higher. This will not have gone unnoticed by smarter minds than us.

This isa Kazakhmys mark (2) to us and we have shouted about the real value apparent in the global mining sector HERE & HERE over a year ago. In our experience, these types of dramatic discounts to real value always get closed. We would not even begin to postulate here on the multitude scenarios that could catalyse this but, what we do know is that buying £10 for £3 without a prior claim on the £10 usually works out well. The current oversold basis of Platinum and the overhang of SA political and labour concerns is, in our opinion, a resolute buying opportunity for one of the pre-eminent platinum plays globally at a point of extreme depressed sentiment.

Mick Davis of X2

To make matters even more interesting, there is every possibility thata a potential buyer of Glencore’s stake in Lonmin could be ex Xstrata supremo Mick Davies who is currently sitting on almost $4bn in his new X2 mining vehicle. Today’s price action on heavy volume leads us to believe a bottom is now, finally, in place for Lonmin shares.

Lonmin YTD stock price

If you’d like to be exposed to a diversified basket of global mining plays of which Lonmin is just one and, additionally, where returns are totally tax free, click the image below for more details. 

CLEAR DISCLOSURE: EXPOSURE TO LONMIN SHARES IS HELD BY RICHARD JENNINGS AND TITAN INVESMENT PARTNERS FUNDS. This piece should not be taken as an advocation to buy (or sell) these instruments and you should always take independent financial advice in relation to your own circumstances.

Comments (0)

Comments are closed.