Anyway the basis for my most profitable trading system is the following. Unfortunately few of you are in a position to benefit from it because it requires technical knowledge, as well as a bit of mining history. I have been doing this since I was 11yo (25years ago), when I started going to the Dept of Mines and stock exchange. Mining research was cheap back then, you could borrow reports for each company under the letter 'A' for $1.50. Most people researched a single share - I did them all - every report - every letter. That taught me what a good company looked like...often without reading the report. ...Just because of the way it was written.
There are several characteristics that made a good stock:
- Potential of some kind, whether a large world-class resource whose time had not come, or an exploration target that showed great promise. Maybe its 'nothing', but such companies at some time become something.
- Small market capitalisation, whether the company had a few shares at a high price, or 1billion shares at 0.1c, it mattered little if they were capitalised at less than $4million - even better if they had a few options since it gave me leverage. Not too many options that would potentially dilute the value of the company. You don't want stocks with partially paid shares or preference shares. Certainly not stocks with directors have control.
- Attractive management, whether competent or just well-connected. When you have read as many reports as me, you know who are the better connected and competent mining executives are. Sometimes the company association is better than the name because there are so many executives with the same name, eg. Tim Carter. But some of them are guilty by association since badly run companies tend to attract bad people who will take any association. A well-connected mining engineer or geologist will always find a project. eg. Vulcan Resources is a case in pointt. Bought this thinly capitalised company's option at 5-8c, 3mths later I sold for 15-20c before results on its Russian project were released. The company shares fell from 50c to 14c, but my brother who retained them for tax reasons, sold them despite my advise. They will turn a new project again, better to retain them. Be careful of retiring executives wanting a company to 'play with' part time. You want young, aggressive management.
- Cash in the bank: The target company should have some cash, at least $1mil, to give you a year so you don't have to worry about being diluted by new stock at a discount. And they should not be spending it quickly. They will also need cash for a new project, eg. to buy an option.
A listed company is a priced possession, particularly during a boom. It doesn't have to be a mining company. It might be a small company with a tangible asset that can be sold off, it might be a medical centre franchise easily sold off. The bigger question is whether the management can be bought out. That question often depends on the willingness of directors & major shareholders. You dont want the old directors staying around. Most will go. But its better to go with a mining executive with a history as a deal maker than an entrenched board sitting on a shell (or cash box) company. The reason is that they are still there because they are dug in, and no one wants to touch them.
When I bought Vulcan Resources opts (VCNO) back in 2003, no one was interested in mining stocks. After announcing that they had acquired a Ukrainan gold project with over 7km of development, I was amazed that others did not jump on it. No one was interested in a gold explorer which could be producing within 10mths. I jumped on. In the current mineral boom, I wouldn't get a chance. They would go into 'pre-open' and would open 50% higher, and might end 100% up. Its harder to trade such positions. It might open at their highs. Some go beyond fundamentals - others never get there. For this reason its critical to identify those companies offering potential before the deal occurs, or before the opportunity arises.
The opportunities appear in various forms, though the following styles are the most common. All of these opportunities are essentially contrarian positions - buying when no one else is interested. There are various schemes - but there is a common scheme - an unloved company abandoned by disillusioned shareholders.
- Stalled by legalities: Some companies are abandoned by shareholders because they are in a legal straightjacket. For example, years ago Xstrata sold its Windamurra vanadium project to Xstrata in exchange for a royalty interest. Xstrata closed the mine to allow it to realise higher prices from its African vanadium mine. Xstrata over the next 10 years offered to buy out Precious Metals Aust, but they resisted. Only now with Vanadium prices high is that stock able to move, in anticipation of Xstrata restarting production.
- Low commodity prices: Amazing opportunities are presented because stockmarket analysts are not interested in certain sectors of the market. In a cyclical downturn, mining analysts can't find work because there is no exploration, no need for mining finance. But in this environment I found a gem a few years ago. I bought Minotaur Res at 14c, opts at 5c because they were about to drill a huge geophysical anomaly 100km from the $US6billion Olympic Dam mine. The company was valued at $2mil, so little downside. The upside was spectacular. They eventually went to $2.80, opts to $2.60. Would have made me a millionaire. But I sold it because no news, and I thought I needed the money for a NZ holiday. That $2mil company became $200-300mil in 3mths.
- Political stocks : There are stocks like Anvil Mining which are unloved because their mining interests are in a country experiencing civil war or destabilised government. I bought AVM at 12c, at a time when the UN peace keepers had come in to monitor the election proceedings. I got impatient with this one, after waiting a year, I sold out. Despite being in production, it still only valued at 1x earnings. Actually technically, I sold when I should have been buying. A channel breakout resulted - It went to 70c (600% gain).
- Misunderstood commodities: The ascension of Australia as a financial centre is relatively new because this was not a sophisticated market 15 years ago. Things have improved. Analysts have more depth to monitor a broader variety of markets, and Australians are working in Asia too. But sometimes analysts just dont understand a market, and the stock is thus heavily discounted. eg. I made 3200% on Aquarius Platinum opts over 3years because Aust analysts did not understand platinum, and Sth Africans did not understand Open cut mining. It was not until the stock was listed in London that it got the attention it deserved.
- Corporate shells: There are listed companies in Australia, Canada & RSA that are doing nothing, perhaps have some cash, but more importantly ambitious management who are project-hungry. Suddenly these unloved companies go from $2mil market cap to $20mil when they find a great project. They are targeted because they are an easy entry into equity markets, without the sponsors having to prepare a detailed prospectus for investors. Eg. Vulcan Minerals (VCN) - I made 300% on this one in several months. It was an easy pick because the company had announced it was looking at projects in Eastern Europe.
Such opportunities don't just pertain to resources. I often find such opportunities in the technology sector - my other favourite sector. But I can't expect to understand this sector as well because I've not grown up with them. But often I find these stocks flying. Often I'm not patient enough, and thus I've found technical analysis a great tool for timing stock entries. Trading psychology has proved to be my greatest obstacle.
The other aspect of trading such stocks is when to sell. I offer the following suggestions:
- Cash backing: When cash reserves get too low ($400K) its time to sell - otherwise you risk dilution.
- Technical exit: Charts provide a useful tool for determining when to exit a stock. The unfortunate aspect of using them for entries is that they might rise 100% in a day on a good announcement, so you miss out.
- Fundamentals: Sometimes fundamentals give a good exit point. I assessed the value of VCN shares at 50c before I sold out. I got it.
- Critical news: You should sell out before news that bears risk as you might be disappointed, eg. Don't wait for drilling results to prove you right. I've seen miners fall 70% in value overnight. VCN for instance when Russian drilling proved unreliable.
- Lethargy: I waited a year for Anvil Mining to go up, but missed out. I was worried about the lack of disclosure. I sat on Aquarius because they always exceeded my expectations and offered great disclosure. This is a personal decision.
This trading strategy is a high risk strategy for those with little knowledge of mining, but very lucrative for those with such knowledge.
- Andrew Sheldon www.sheldonthinks.com