interesting post8 Jan 2010 19:01
borrowed from iii
As a long term holder (since end July 2005) I concur with Durby and Big Chef.
The share price rocketed early on (from its opening at 43.5 in Aug04) in part based on a whole raft of good news including increased turnover (2H04 13.65m 1H05 22.37) increased EPS (2H04 8.3c 1H05 10.6c) the paying of a dividend (totalling 6c in FY05), increases in resource estimates, introduction of optical sorting and increased security and start of De Beers' style sight holder selling system plus the rarity aspect of the stone and opportunities for increased tanzanite prices over time raising profits further. Mr Market got a bit carried away with the story and positive results and the SP started to rocket from a max of 84.5 in July 05 to max of 169 in Jan 06. It became a momentum share. In Feb the max price jumped by about a pound in one month to 267.5. The peak sp was recorded in Mar06 at 277p (a PE of 14.66 given trailing year reported EPS for 2H04-1H05 of 18.9c). However by the end of Mar06 the minimum monthly price had dropped back to 218.5. Full 2005 year results were released for FY05 on April 6th and the minimum sp for this month dropped to 163. Prices continued to decline and by Aug 06 traded in the range of 96-105.5. The 2005 FY report indicated that while the PAT for 1H05 was 7.202m it had declined to 2.57m in 2H05 and it went on to drop to -0.153m in 1H06 (when %A class stones was very low) before starting to pick up again. Turnover dropped in 2H05 from 22.37m to 18.72m and cost of sales was up from 7.57m to 8.64m.
Thus the rapid crash back of the sp coincided with the news of reduced turnover and profits while the market had built up prices on the expectation profits were going to just grow and grow in this wonder company that was profitable and was generating cash.
Mary Buffet and David in the "Tao of Warren Buffet" sum it up nicely when they wrote "A stock price that is quicly rising will stop rising when the economic reality of the business finally sets in. It might seem as if it can go on forever, but if the business fails to perform up to the expectations that are driving the rising price, the companies shares will peak and then drop like a brick."
Pretty much what happened back then. A classic case of Mr Market getting overly enthusiastic with unrealistic expectations and then changing his mind upon the first bad news. Truth is that mining a rare gem that occurs in pockets will have variable results (eg % of A grade stones will vary) and we need a slightly longer time frame than just 6 months to really get an idea of the fundamentals of the business.
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