Lon­min shows JSE’s per­verse na­ture

Strong re­cov­ery in Lon­min and ArcelorMit­tal leads to big prof­its for brave value in­vestors.

Finweek English Edition - - MARKET PLACE - Editorial@fin­week.co.za *fin­week is a pub­li­ca­tion of Me­dia24, a sub­sidiary of Naspers.

the per­verse na­ture of stock ex­changes is ev­i­dent in the price move­ments of Lon­min, which cur­rently oc­cu­pies the top spot in the list of the weak­est shares. Amid spec­u­la­tions that it won’t sur­vive its se­ri­ous fi­nan­cial prob­lems, it reached its low­est level of 821c in Jan­uary. Since then it has re­cov­ered dra­mat­i­cally to 4 000c – an in­crease of close on 400% – giv­ing it the big­gest per­centile in­crease of all the larger min­ing shares.

The com­pany was forced to make an un­pop­u­lar rights is­sue to keep its head above water. Sub­se­quently, it has down­scaled dra­mat­i­cally, which has, among other things, led to the loss of thou­sands of jobs. The group’s ob­jec­tive is to even­tu­ally re­duce its work­force by 6 000. Its chair­man, Brian Beamish, said in a note to share­hold­ers that the down­siz­ing – which in­cludes the re­duc­tion of pro­duc­ing shafts – is hap­pen­ing faster than planned (more than 5 000 jobs have al­ready been lost) and that the group is al­ready op­er­a­tionally “fit” to utilise op­por­tu­ni­ties.

It is typ­i­cal of min­ing that painful ad­just­ments are made when com­mod­ity mar­kets ex­pe­ri­ence a re­ces­sion. His­tor­i­cally, share prices pre­cede a re­cov­ery in com­mod­ity prices. It has, how­ever, also hap­pened in the past that what is hoped to be a new bull phase is merely a strong rally in an on­go­ing bear mar­ket, which once again leads to a drop in prices. The risk is high.

But it’s not only at Lon­min that buy­ers moved in caus­ing a dra­matic turn­around. For ex­am­ple, the ex­pe­ri­enced John Bic­card of In­vestec As­set Man­age­ment’s value fund, pur­chased 15.6m ArcelorMit­tal South Africa (Amsa) shares in the De­cem­ber quar­ter on which the fund should be show­ing a fat profit. The share reached a low of 290c in De­cem­ber when it seemed that Amsa didn’t have a friend in the world. At the time of writ­ing, the share was trad­ing at about 1 000c.

As in the case of Lon­min, it took great courage on the part of buy­ers as things seemed ex­tremely bleak for the steel­maker. Gov­ern­ment has since an­nounced that it would not like to see the group go un­der.

De­spite the high risk, value in­vestors some­times also see op­por­tu­ni­ties when there is a be­lief that a large com­pany is too im­por­tant to go un­der. Cor­po­rate ac­tion is ex­pected at Lon­min as well as Amsa.

Bic­card has also made large pur­chases of Im­plats, which has firmed by more than 170% since its low in Jan­uary, while its long-term 200-day ex­po­nen­tial mov­ing av­er­age (EMA) has started to move up­wards for the first time since 2011 and 2013. This is usu­ally seen as con­fir­ma­tion that the so-called smart money is ex­pect­ing a bull mar­ket.

Pick n Pay is an in­ter­est­ing ad­di­tion to the strong­est shares, but with a very high val­u­a­tion. Its P/E stands north of 30 and is the high­est of the food re­tail­ers, which has made some an­a­lysts wary of the share. It is seen as vul­ner­a­ble.

Among the shares that have bro­ken through their 200day av­er­ages, Pi­o­neer, At­tacq, ArcelorMit­tal and Naspers* look in­ter­est­ing. In the case of Pi­o­neer, which has weak­ened con­sid­er­ably since Oc­to­ber last year, its im­prove­ment has been suf­fi­cient to cause an up­turn in its long-term av­er­age, which usu­ally hap­pens when there is steady buy­ing by in­formed in­vestors.

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