Lonmin shows JSE’s perverse nature
Strong recovery in Lonmin and ArcelorMittal leads to big profits for brave value investors.
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.