What's occurring - my 'fun' exploration stock has gone quiet?

Wednesday, 26th September 2018 07:23 - by David Harbage

Many private clients are attracted to oil, gas or mining companies whose exploration efforts could lead to their transformation - potentially resulting in a many-fold upward move in their share price or lead to bigger industry participants making a generous bid.

Mining companies have been in the news this week - as Barrick Gold makes overtures towards FTSE100 constituent Randgold Resources and Glencore plans to repurchase a further US$1bn of its own stock. Elsewhere, while the major oil & gas stocks like BP and Royal Dutch Shell have benefited from an oil price pushing through US$80 per barrel (despite President Trump’s efforts to persuade producers to increase their output), the upstream specialists can benefit the most from such strength in the commodity’s price. 

Based on communication with readers and a casual perusal of bulletin boards, it would seem that many private clients have an affection for small (often AIM listed) ‘boom or bust’ natural resource company stocks. The title of today’s article is based on one of the most frequently asked questions, which this blog will endeavour to answer by reference to one particular example of BlueJay Mining, a Greenland-focused owner of a huge Titanium Dioxide (derived from ilmenite and a chemical used in white paint amongst many other applications) resource. After rising from 5p in January 2017 to reach 25p in April this year, the share price has fallen back to 14p as the market appears concerned about the slow progress on two particular issues.

First, the company needs to get clearance to mine its ilmenite resource from the Greenland government (exploitation, cum environmental, license). Secondly, management need to sign ‘takeoff’ agreements with prospective end customers in order to establish financial security (essentially to meet production expense and for other purposes - e.g. to gain bank lending).

These issues may not be progressed until 2019 and as a consequence the company stock have lost their momentum label with some private client speculators and traders - who have disinvested in search of other opportunities.

Placing a value on such a ‘start-up’ business like BlueJay is always difficult - so many imponderables in terms of calculating potential worth (guess production, price of commodity, cost of extraction etc to determine profitability - before assessing the present day value of such future earnings).

According to one’s perspective the current worth of such a future profit stream (say over the decade between years 2022-2032) could vary dramatically - by which we mean if the assessor is a shareholder or a potential acquirer of the business. Hence the ‘speculative’ descriptor applied to such enterprises speaks beyond its current lack of revenue or profits to cover its future status.

The importance of procuring positive outcomes on the two aforementioned aspects cannot be overestimated, as history has taught that a delay in developing a potentially lucrative resource can bring a sad end to many an exciting investment prospect - as money initially raised to develop a mine or oil well has run out and financial backing has not been forthcoming.

The race to develop an asset within the constraints of its finances can be seen in stock market listed businesses. Like all such investments, the potential risks and rewards are assessed by market participants and the consensual opinion will be reflected in the price of the equity. New, little known or researched, unprofitable concerns are inherently difficult to value and the emotive forces of fear and greed will inevitably impact the stock market’s valuation - as the scope for surprise (positive or adverse) is that much greater. When news flow is good then many momentum-driven investors (typically traders, who are not assessing fundamental worth, but rather are simply anticipating a continuation of an upward trend) are attracted to a stock. Sometimes the ‘bigger fool’ strategy would seem to then apply: traders who will buy a stock for the sole reason that they believe that they are ‘early’ in a bullish trend and expect to exit at a higher price before the positive momentum slows.

Active traders will also seek to ‘make hay’ by selling stock (usually that they do not physically own, via derivatives such as Contracts For Difference (CFDs) or spread betting) when they expect a share price to fall - usually prompted by an anticipation of bad news - before ‘closing’ or exiting such positions by effecting a purchase at a lower, beneficial price.

In terms of making a judgement on likely future direction of a stock price, traders will assess Technical patterns - amongst other factors including the volume of shares traded. By contrast, a more fundamental factor might be to consider who is buying or selling: directors or senior management (known as ‘insiders’), as well as major institutional investors (these 3%+ stakeholders may be short term hedge funds focused on absolute returns or longer term investors, some of whom might be especially highly-regarded industry sector specialists).

An absence of news or an expected event - especially when clear guidance has been given by a board of directors - will disappoint both traders and serious long term fundamental investors. Those traders who are having to borrow to maintain their non-physical exposures are incurring a cost and may be particularly inclined to exit a situation which they deem as ‘dead money’ because they think news of consequence will not emerge to impact the share price in the foreseeable future.

Investors must be mindful that at the current valuation it will be more difficult for Bluejay Mining to obtain additional equity funding (after raising £17m in February this year at a price of 22p per share). A judgement on how long the last advised (31 May final results) £15m cash can last ahead of a takeoff contract is critical, but much of the work to be carried out in the second half of 2018 has already been pre-paid - according to the company’s broker SP Angel. It is important to carry out one’s own diligence and investigation, with the company’s own website (www.titanium.gl) being a good place to start.

Fundamental investors in BlueJay Mining will be encouraged by the fact that the company’s senior management have major personal interest in the business’ success via their shareholdings. In addition, a number of institutional shareholders have maintained faith in the business and not been ‘shaken out’ by the weakness seen since 1 August’s 22p level.The author would suggest that private individuals exercise especial care in monitoring start-up, speculative, Alternative Investment Market (AIM) and unprofitable businesses - limiting their total ownership of such stocks to a small proportion of their portfolio worth (and a much smaller amount of their longer term savings). 

Finally, when wider market concerns or uncertainties are lower or higher than normal (as judged by either consensual, media or in the opinion of the individual investor) sentiment can be more or less supportive of such businesses. The stock market sayings “buyer beware” or “mind your eye” come to mind, when share prices move lower without obvious reason of explanation, but other investors will view such unexplained weakness as opportunities to pick up neglected or potentially undervalued stocks at bargain prices. 

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.