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There is an investing philosophy that looks for value in shares of companies beaten beyond recognition and left to sink slowly or sometimes to plunge to the bottom of the market.  Called by various names from bottom trawling to bottom feeding to bottom fishing, the idea is essentially the same.

Some shares end up at the bottom because they have sprung multiple leaks while others find themselves there by forces not totally within their control.  Fear and panic, of which there is an abundance these days, will send some stocks cascading downward simply because investors have had enough and are ready to put their investing dollars anywhere but in the market.  Those are sometimes the fish.  Others fall for genuine economic concerns over which they have no control.  We in Australia had nothing to do with the European crisis nor do we have any control over its impact on the Chinese economy on which we are so heavily dependent.

The key to successful bottom fishing is determining causes and making an educated guess as to how long the company in question will remain in the doldrums before recovering.  Without some understanding of what happened and little reason to believe in a potential recovery, bottom fishing is a fool’s game.  In the hands of a sceptical and skilled value investor, the potential rewards are substantial. 

In theory, bottom fishing makes perfect sense but in practice assessing cause and searching for future catalysts is a difficult task and not one to be undertaken without the time and patience for research and monitoring.  In markets as panicked as those we see around the world today, there is no shortage of fish to consider.

Having said all that let’s take a look at a pond often explored by bottom fishers – the worst ten performers in a share market.  At midpoint 2012 we have such a list – the bottom performers on the ASX for the first half of 2012. 

Here is the list, including start of the year share price, midpoint share price, percentage drop, current share price, and 52 Week Highs and Lows:

 

Company

 

Code

 

Sector

Share Price

30 Dec 2011

Share Price

03 Jul 2012

YTD Midpoint

% Loss

Share Price

Current

Share Price

52 Wk Hi

Share Price

52 Wk Lo

Mirabela Nickel

MBN

Materials

$1.12

$0.25

-77.68%

$0.24

$2.02

$0.22

Aquarius Platinum

AQP

Materials

$2.34

$0.735

-68.59%

$0.56

$4.71

$0.55

Coalspur Mines

CPL

Energy

$1.53

$0.625

-59.15%

$0.56

$1.94

$0.51

Dart Energy

DTE

Energy

$0.36

$0.165

-54.17%

$0.15

$0.72

$0.14

Ramelius Resources

RMS

Materials

$1.065

$0.49

-53.99%

$0.52

$1.74

$0.40

Aquila Resources

AQA

Energy

$5.85

$2.87

-50.94%

$1.94

$6.83

$1.93

Intrepid Mines

IAU

Materials

$1.09

$0.535

-50.92%

$0.25

$1.93

$0.19

Alacer Gold

AQG

Materials

$10.04

$5.2

-48.21%

$5.27

$12.30

$4.66

Seven West Media

SWM

Media

$3.24

$1.74

-46.30%

$1.52

$3.85

$1.40

Energy World Corporation

EWC

Utilities

$0.685

$0.375

-45.26%

$0.42

$0.86

$0.32

It should come as no surprise that nine out of the ten companies are engaged in some form of commodity mining production and exploration.  The energy companies listed have natural gas assets.  Our resources sector has been crushed by falling commodity prices and while the big names like BHP, RIO, and Fortescue have taken a beating, most junior miners and explorers have fared far worse.

In the glory days the juniors were a favorite target of the fast money crowd; a geologic find, a positive drilling report or a hint of a takeover could send share prices sailing.  The risk with junior miners and explorers is always high but in times of falling commodity prices for whatever it is they mine, the downward slide can be as steep as a prior upward spike.  In the face of falling commodity prices and fixed operating costs, these companies must find a way to fund ongoing operations.

The worst performing stock on the table, Mirabela Nickel Limited (MBN) is a good example of the risks of buying junior miners in economic downturns.  Based in Hong Kong, Mirabela trades on the ASX and in the US on the OTC (Over the Counter) market.  They are a nickel miner and explorer with 100% ownership of a producing mine in Brazil with a solid portfolio of exploration assets in that country.  Their Santa Rita mine began producing in 2009 but the company has struggled financing the mine up to full production capacity as well as to fund other exploration efforts.  Their two year share price performance chart tells the tale:

A $325 million capital raising in March of 2011 started the rout and the descent continues.  Another capital raising of $120 million to fund operations in May 2012 saw the share price tumble a further 9% and after two years the company’s share price is down a shocking 90%. Right now the price of nickel is only pennies above the company’s cost of production (cost of goods sold).  It goes without saying, if nickel prices keep plummeting, the company could be in trouble.

Is there any upside at all to this gloomy picture?  A few days ago Mirabela released their quarterly production report and announced a 15% increase in nickel production over the prior quarter and reiterated its production forecast of 19,000 tonnes for 2012.  Investors remain unimpressed but there is another reason to believe MBN can recover.

In their most recent capital raise, the largest institutional buyer was a company called RCF-V, an investment house that focuses solely on the mining sector.  This is a big outfit with offices in Denver, New York, Perth and Toronto.  Their stated mission is to invest in, and partner with, companies of high quality with good assets that can create sustainable long term value for all stakeholders.  If these guys believe in MBN, there might be something there.

If you put a lot of faith in analyst opinion you may be interested to know right after the release of the quarterly production report, three of our major brokerage firms reiterated BUY or OUTPERFORM ratings on MBN.  Analysts at Macquarie, Citi, and Credit Suisse all noted the production improvements were accompanied by reduced operating costs which, along with the recent capital raise, takes the pressure off the balance sheet.  However, all caution that their assumptions are based on an improving nickel market.  Nevertheless, with $455 million in debt and debt to equity of 88% MBN has little margin for error.

The second worst performer, Aquarius Platinum (AGP) bears some similarities to Mirabela in that it is a single commodity producer and the stock trades in multiple countries.  However, its four mines are located in Zimbabwe and South Africa.  Unlike Brazil, which is resource friendly, operating in Zimbabwe and even South Africa comes with sovereign risk.  On 23 July 2012 the company warned of union strikes in their South African operation.  Their two year chart shows the impact of declining commodity prices on share price performance:

The company’s recent quarterly production report disappointed some major brokers in terms of both volume and costs and target prices were reduced.  AQP has 41% gearing with $301 million in total debt, but with cash on hand of $207 million; analysts applaud its relatively strong balance sheet.  Also on the positive side is a continuing track record of dividend payments despite tough times.  Current dividend yield is 12.8%.  Given the company’s dramatic share price slide, any improvement in the global commodities picture should bump up the price but there are other plays out there with less risk.

Coalspur Mine (CPL) is a Perth based coal exploration and development company with all its assets located in Canada.  Despite a capital raising in mid 2011 to fund the development of existing assets, the company has aggressively pursued the acquisition of additional leases. Over $1 billion Canadian dollars has been spent on developing existing properties, according to analysts.

CPL held up better than most junior miners over the past two years, as evidenced by their two year share price performance chart:

But in early May, investors started bailing out.  While no one can say for sure what started the flight, there are some events that bear mentioning.  First, investors are not stupid and the risk of corporate credit contraction is well known.  Although CPL as of now has no debt – relying instead on capital raisings to fund operations – in February 2012 they announced a $70 million “credit line” to continue the development of existing assets and for further development opportunities.  Then they went out and started buying up more leases. 

At the time of the announcement of the credit facility, shares of CPL were trading at $1.70 and they are now down to $0.55.  One could make a pretty strong case that investors are looking at the very real possibility of more capital raisings.  To make matters worse CPL announced the appointment of a new CEO following the resignation of the existing leader with the boiler plate reasoning of “pursuing other interests.”

As you know, the timing of an announcement like that can raise concerns that the stated reasons are masking something unfavorable to the company.  The short sellers have arrived in big numbers here as a recent ASX release had short positions at 300 million shares (as at 30 January 2012), ballooning to 12.5 million shares by 15 June 2012.  Given the company’s solid share price performance in the past and the potential for a short squeeze, this one bears watching, but investing right now is extremely risky.  Major analysts are not following this stock, making it more difficult to assess.  However, bear in mind that should they pull this off, their flagship mind under development, the Vista mine, will be one of the largest thermal coal export mines in North America.

Dart Energy (DTE) is Singapore based but trades on the ASX.  They have both CSG (Coal Seam Gas) and shale gas assets in 7 countries.  If you believe the golden age of gas is coming, DTE is one to put front and centre on your watch list.  There is risk of course and right now investors are becoming increasingly skeptical about the future of CSG and shale gas and the LNG (Liquefied Natural Gas) facilities in Australia they will supply.  The big players in the field like Woodside and others have experienced massive cost overruns and construction delays and there is resistance to the development of additional CSG wells due to environmental concerns.

DTE’s goal is to become a major player in coal seam gas and they have the experienced management team to do it.  One of Australia’s most successful gas explorers, Arrow Energy, was taken over by Shell and Petrochina in 2010 with DTE born as a result of the takeover.  Their management has a wealth of experience from their Arrow days and quickly began acquiring CSG assets of their own in Australia and Europe.  The company has no debt and $100 million cash on hand at the end of FY 2011.  On 9 April 2012 DTE announced it had secured a $100 million USD secured borrowing facility through HSBC, a sign of both credit worthiness and confidence in their prospects.  Their two year share price performance chart, however, is pretty dismal.  Here it is:

If the LNG revolution actually comes to pass over the next decade, DTE has the assets and the experienced management to benefit.

Ramelius Resources (RMS) is an Australia-based gold miner and miller.  They have two operating gold mines in Australia and have shown a profit for five consecutive years.  They have substantial exploration assets throughout Australia and also in the US state of Nevada.  They have low debt – $4.70 million as of the most recent quarter – and low gearing – 21.5%.  In addition, they have $102.2 million cash on hand.  RMS is one of three junior gold miners that earned the dubious honor of making the bottom ten list, but their two year share price performance doesn’t look quite so bad.  Here is the chart:

If you have been following the gold story you know there is a disconnect between the rising price of the commodity and the price of gold producers and explorers.  Reasons for this vary from high costs of production to sovereign risk for some companies, to the stupidity of market traders. Many experts right now predict a sharp recovery in gold mining stocks.

Ramelius has basically been flat over a two year period but if you believe in the gold story and in an eventual reconnect of producers’ share prices and commodity prices, RMS is one to watch.  It has minimal analyst coverage, but all three analysts listed in Thompson /First Call have BUY ratings (1) and STRONG BUY (2) ratings on the shares.

The other two gold miners who made the list, Intrepid Mines (IAU) and Alacer Gold (AQG) did not fare as well over the past two years as Ramelius did.  Here is their chart:

Intrepid Mines (IAU) is Australia based with a gold-silver-copper project in Indonesia.  They are the classic example of what sovereign risk is all about as some new legislation in Indonesia could reduce their ownership to 50%.  In April of 2012 Indonesia changed the rules for joint project ownership so that by the tenth producing year 51% of any project must be locally owned.  To add to the company’s troubles on 23 July 2012 Intrepid’s existing Indonesian partner suspended exploration activities without consulting Intrepid.  If you believe in the gold story, stay away from this one and look for better opportunities.

Alacer Gold (AQG) Alacer is a gold miner with interests in several producing mines in Australia and Turkey.  Recent major analyst ratings on AQG are mixed but lower production volumes and higher operating costs released in the latest quarterly production report are enough to make even the most ardent gold bug look elsewhere.

Aquila Resources (AQA) is a Perth based minerals exploration company.  Their focus is coal, iron ore and manganese.  Although their exploration asset portfolio shows promise, there is real question as to the company’s ability to finance what they have.  In February 2012 an analyst at RBS Australia sounded the alarm about rising capex (capital expenditures) costs leading to asset sales and capital raises going forward.  Asset sales have already begun.  Sounds scary.

Seven West Media (SWM) began to take a beating before the GFC which accelerated the decline and the share price has yet to recover.  Here is a ten year share price movement chart for SWM:

It is hard to see in a ten year chart but a 16 July 2012 capital raising to improve the company’s balance sheet led to a quick drop in share price followed by a gradual improvement.  Major analysts chimed in with their approval of the move and only one of our biggest firms has a HOLD rating on the shares.  The other seven have BUY and OUTPERFORM ratings.  Seven West has strong brand identification but the rapid changes in the media space make this a high risk buy, at best.

The final stock to make the list is Energy World Corporation (EWC).  They derive revenue from two power generating plants, one in Indonesia and one in Australia.  They have ambitious plans to get into the LNG space, but it is questionable whether they can raise the funds to do so.  As of the most recent quarter they have $280 million in debt with only $183 million cash on hand.  Since the beginning of the trading year the ASX has asked the company for an explanation of its falling share price on three separate occasions.  EWC has no explanation. However, one could easily speculate that the well-known enormous capital expenditures associated with LNG might be causing investors to shed the stock.  If you believe in the future of natural gas, EWC is one to watch closely, but very risky to buy right now.

 

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