Deep Value

I try to keep things pretty simple.

Seeking asymmetrical investment opportunities in the small to mid cap equity sector.

Usually:

(1) Equities trading at a deep discount to net tangible assets, with a catalyst to unlock value.

(2) Cash-flow positive stocks with a low enterprise value, solid corporate governance and a compelling story.

Contrarian.

Long only.

I use leverage.

Chasing absolute returns, not risk adjusted.

I will trade the depth, scalp and trade what I feel as long as my net position remains long. I can't quantify this "feeling", but watching the same stocks depth months on end gives you a peripheral feel for it. Some people will know what I mean.

I can wait up to 12 months to enter a trade, then be out within days. I can enter a trade in days, but stay in for months.

I believe the turning points, in my case the bottom, is where the cream lies. That's where the smart money lies, waiting, patiently and that's where I want to be. The bottom, for me, comes in the form of cash backing per share, assuming stock is cash flow positive and risk of maintaining earnings in my eyes isn't too great. Pretty simple really.

I encourage constructive debate, that's where we all learn

 

First trade was initiated at the beginning of December. MCR (ASX) fits my criteria, as a strong balance sheet provides protection to the downside whilst maintining full upside exposure to a host of macro catalysts.

Below is a summary of trades thus far:

Date Description Opening Size Closing Net
6/01/14 Mincor Resources NL 0.55 6006 0.59 +$240.24
6/01/14 Mincor Resources NL 0.565 9994 0.59 +$249.85
27/12/13 Mincor Resources NL 0.525 1400 0.545 +$28
13/12/13 Mincor Resources NL 0.565 10000 0.5325 -$325
6/12/13 Mincor Resources NL 0.505 23300 0.535 +$699

And a summary of current open positions is attached.

I will add to my position this morning, as on Friday it emerged Indonesia physically stopped nickel laden vessels bound for China, enforcing what was expected to be a watered down export ban.

A brief research note I have written below, to see it in more detail please visit:
http://deepspecial.wordpress.com/2013/12/04/mincor-resources-mcr-leveraged-nickel-play/

From the bottom:
- Strong cash balance
- Yield of 10.51% or 13.66% after franking credits (assumption of 3 x .02 dividends over the coming 15 months).
- Highly leveraged to a rebound in Nickel, whilst a strong balance sheet and low production costs provide insulation to further falls (latest production figures of AUD4.39/oz vs LME NI price of AUD6.60/oz
- Top of field management who from a single capital raising of AUD5m in 2001, have generated AUD212m in profits with total franked payouts of over AUD112m. Further, after sailing through the GFC unscathed

Macro catalysts
- Indonesia’s ban on raw mineral exports
- Nickel Prices are cutting deep into the cost curve. Over 60% of global production is unprofitable at these levels and should Nickel continue to trade at current levels we would expect large production scale-backs and mine closures, reducing supply.
- Nickel is priced in USD, therefore any fall in the AUD will inversely increase the AUD NI price. Reserve Bank of Australia’s (RBA) Governor Glen Stevens has threatened intervention should the AUD remain uncomfortable high.
- The inevitable taper, will adversely impact emerging economies and there’s a real threat of an associated slide in commodity prices.
- The inevitable taper, will adversely impact emerging economies and there’s a real threat of an associated slide in commodity prices.The AUD is often referred to as a ‘commodity currency’, that is, it correlates highly with movements in the underlying commodity basket. This can provide the perfect hedge as the USD rises, commodity prices fall dragging the AUD along for the ride.

 

Nice thread. I will be listening.

 

Not at all my style but nicely laid out. I can see exactly where you are coming from.

 

Another profitable day.

More a function of the market going up. I'm trying to get a little too cute with my scalping, not overly happy as I'm drifting from my objective of trying to catch a larger overall swing.

MCR's quarterly is approaching next week, I will go into a little more detail later but I will most likely look to sell into what I predict will be strength.

Closed Opened Direction Size Opening Closing Funding Comm. P/L
14/01/14 11/12/13 BUY 3,994 0.5500 0.6450 -10.72 -5.78 +362.93
14/01/14 16/12/13 BUY 7,405 0.5250 0.6450 -17.07 -10.69 +860.84
14/01/14 11/12/13 BUY 8,600 0.5250 0.6450 -22.42 -12.43 +997.15
14/01/14 10/01/14 BUY 15,555 0.5550 0.6300 -5.11 -18.43 +1,143.09
14/01/14 14/01/14 BUY 20,000 0.6075 0.6150 - -24.45 +125.05

Open positions attached.

 

A ton of volatility in the NI this week, and also the AUD.

ASX nickel stocks are highly sensitive (obviously) to moves in the NI price, but noticeably less sensitive to moves in the AUD.

Assuming no hedged sales, any movement in NI price can either be amplified or offset by a corresponding rise or fall in the AUD. It makes absolutely no difference to the bottom line of MCR if NI rises 10%, or the AUD falls 10%. Theoretically, the stock should trade at exactly the same valuation.

Infact, if I had the choice of either the NI rising or a corresponding drop in the AUD, I’d chose the latter. A low NI price will put pressure on global producers, most likely forcing more out of business, projects would struggle to find funding taking a load of future supply offline. Yet the market reacts with more weight to moves in USD NI price.

It’s good to have this vision, at the end of the day the market will look at the figures and the stock will adjust accordingly, but you can have a little head-start by being aware how the market ineffectively prices a move in the currency.

FURTHER

Last quarterly had negative net movement in cash of $AUD2.82m, however they paid out dividends of $AUD3.76m. So they are still operationally profitable. This stock may not show in most scans/screeners that may filter on positive cash movement.

I’m now at a crossroads with this trade, as the enterprise value has risen my safety net is far lower than when I entered. I love the story, and deep down think it still has a long way to run. But I’m now justifying staying in from an growth in earnings perspective rather than value. A 40k exposure on a 5k account based on future earnings inherits far more risk than a 40k exposure on a value story.

And at the end of the day, the wise man will look at risk and maximum downside as a priority, rather than how much they can make. In the fundamental equity game anyway...

 

Seems to me you need the "value overshoot" to win yet it is precisely that which may make it no longer your trade. Quite a nice crossroads to arrive at. Maybe a smaller position as you buy into the earnings story and maybe you can't buy into that new story for too long even if it's a good one. Simply not your style.

 

Yeah exactly right. The fact I'm at a point of indecision says I have deviated from my style.

Macro story continues to play our perfectly..... AUD on 3 year lows, NI largest 5 day gain since 2011. Can easily turn around and reverse, and the pain of the loss is probably stronger than the elation of further gain.

Another curveball....... MCR is now approaching the fringes of the ASX200 Index (still has a while to go, but needs to be taken into account). A rebalance of the index inclusive of MCR would just be insane, given the lack of liquidity. How does an index tracker fund position itself in a stock that trades $AUD75k per day?

Opens up to atleast another 3 months of macro/operational risk though.

hmm....

 

Sorry for the lack of updates.

No. of trades: 71
Starting Balance: £3,000
Current Balance (net of commissions + interest): £8,119

Total comm paid: AUD 1,039
Total interest paid: AUD 308.65
Total costs approx: £740~


One massive oversight, and potential flaw in my strategy, was being unaware that my CFD provider calculated interest daily on the closing price.

This to me was absurd, given I trade DMA, there is no physical roll or transaction ever takes place at the level. Imagine your mortgage interest repayments were calculated on the daily valuation, rather than initial transaction.

I need the leverage that they could provide, so tweaked my strategy with more focus on scalping and catching the 2-3 day swings. I’d say the increase in commission costs is roughly the same (maybe a little more) than the reduction in overnight interest costs. But there is also a reduction in overnight risk as I am holding positions for roughly ½ the of just buy and holding.


MOVING ALONG

I am happy with my results. My initial balance was quite small, however, it was an amount I feel I can aggressively trade with comfort. There’s no way I could replicate this on a 100k account (liquidity would also be an issue).

Don’t know what else to write really. I am constantly paranoid I will get complacent and every day challenge myself why am I profitable? What am I doing to differentiate myself from a bull who merely leveraged into a bull market.

I rarely make money going short, and burned £800 on a speculative punt. Was a nice reminder. Also made a little on SDM, a stock trading close to cash with a strong dividend.

The way the price of NI has moved, MCRs story has turned from value into aggressive growth. I am still massively long in my head, and it kills me to watch from the side-lines as I love the story. But there also is a level of satisfaction on knowing you’re remaining disciplined. That’s where the edge lies I guess.

 

Closed Opened Market Direction Size Opening Closing P/L Funding Borrowing Comm. Total
9/04/14 3/04/14 Mincor Resources NL BUY 22,222 0.66 0.72 1,333.32 -12.93 - -30.45 1,289.94
9/04/14 7/04/14 Mincor Resources NL BUY 22,222 0.66 0.72 1,333.32 -4.34 - -30.45 1,298.53
7/04/14 31/03/14 Sedgman Ltd BUY 13,333 0.47 0.47 -66.67 -6.25 - -6.26 -79.18
2/04/14 27/03/14 Mincor Resources NL BUY 6,329 0.67 0.70 189.87 -3.64 - -16.00 170.23
26/03/14 23/03/14 Sedgman Ltd BUY 7,190 0.47 0.50 215.70 -1.49 - -11.38 202.83
26/03/14 24/03/14 Mincor Resources NL BUY 9,999 0.68 0.69 149.99 -2.91 - -14.90 132.18
26/03/14 24/03/14 Mincor Resources NL BUY 22,222 0.67 0.69 444.44 -6.46 - -30.22 407.76
26/03/14 23/03/14 Sedgman Ltd BUY 2,222 0.47 0.50 66.66 -0.30 - -2.37 63.99
26/03/14 21/03/14 Sedgman Ltd BUY 11,111 0.45 0.50 555.55 -3.70 - -14.67 537.18
26/03/14 25/03/14 Sedgman Ltd BUY 7,000 0.48 0.49 105.00 - - -16.00 89.00
24/03/14 23/03/14 Sedgman Ltd BUY 9,476 0.47 0.47 - - - -12.46 -12.46
21/03/14 20/03/14 Mincor Resources NL BUY 9,925 0.67 0.68 148.88 - - -16.00 132.88
19/03/14 6/03/14 Mincor Resources NL BUY 197 0.63 0.72 17.73 -0.22 - -8.14 9.37
19/03/14 10/03/14 Mincor Resources NL BUY 20,000 0.62 0.72 1,900.00 -13.94 - -26.70 1,859.36
19/03/14 11/03/14 Mincor Resources NL BUY 12,222 0.61 0.72 1,283.31 -8.53 - -16.74 1,258.04
6/03/14 24/02/14 Mincor Resources NL BUY 12,279 0.57 0.62 675.35 -9.61 - -14.55 651.19
6/03/14 5/03/14 Mincor Resources NL BUY 1,580 0.56 0.62 102.70 -0.13 - -8.98 93.59
6/03/14 26/02/14 Mincor Resources NL BUY 1,500 0.56 0.62 90.00 -0.95 - -8.93 80.12
6/03/14 24/02/14 Mincor Resources NL BUY 2,721 0.57 0.60 81.63 -2.13 - -3.16 76.34
6/03/14 24/02/14 Mincor Resources NL BUY 19,501 0.57 0.60 550.40 -15.26 - -22.65 512.49
3/03/14 24/02/14 Mincor Resources NL BUY 9,999 0.57 0.55 -217.74 -5.46 - -13.67 -236.87
25/02/14 24/02/14 Mincor Resources NL BUY 15,000 0.57 0.56 -75.00 -1.21 - -16.88 -93.09
25/02/14 24/02/14 Mincor Resources NL BUY 3,000 0.57 0.56 -20.33 -0.24 - -3.38 -23.95
25/02/14 23/02/14 Mincor Resources NL BUY 2,000 0.57 0.56 -11.93 -0.16 - -2.25 -14.34
24/02/14 23/02/14 Mincor Resources NL BUY 13,000 0.57 0.57 52.43 - - -15.36 37.07
19/02/14 19/02/14 Panoramic Resources Ltd SELL 22,222 0.40 0.42 -444.44 - - -18.00 -462.44
19/02/14 18/02/14 Panoramic Resources Ltd SELL 25,555 0.37 0.39 -383.33 - - -19.30 -402.63
19/02/14 18/02/14 Panoramic Resources Ltd SELL 30,000 0.38 0.39 -300.00 - - -22.80 -322.80
19/02/14 18/02/14 Panoramic Resources Ltd SELL 55,555 0.38 0.39 -555.55 - - -42.22 -597.77
19/02/14 18/02/14 Panoramic Resources Ltd SELL 6,700 0.38 0.39 -67.00 - - -5.26 -72.26
18/02/14 18/02/14 Panoramic Resources Ltd SELL 10,000 0.37 0.36 100.00 - - -8.00 92.00
18/02/14 18/02/14 Panoramic Resources Ltd SELL 13,300 0.38 0.36 199.50 - - -5.32 194.18
18/02/14 17/02/14 Mincor Resources NL BUY 24,999 0.65 0.64 -249.99 -2.27 - -31.99 -284.25
18/02/14 18/02/14 Mincor Resources NL SELL 24,999 0.64 0.62 499.98 - - -31.24 468.74
17/02/14 12/02/14 Mincor Resources NL SELL 10,000 0.62 0.66 -429.17 0.18 -1.05 -6.67 -436.71
17/02/14 16/02/14 Mincor Resources NL BUY 10,000 0.66 0.66 - -0.95 - -6.60 -7.55
17/02/14 16/02/14 Mincor Resources NL BUY 10,000 0.66 0.67 50.00 - - -14.60 35.40
14/02/14 14/02/14 Mincor Resources NL BUY 10,000 0.63 0.64 100.00 - - -16.00 84.00
12/02/14 12/02/14 Mincor Resources NL SELL 2,000 0.62 0.63 -25.83 0.01 -0.04 -2.66 -28.52
12/02/14 12/02/14 Mincor Resources NL SELL 10,000 0.62 0.63 -150.00 0.03 -0.17 -14.67 -164.81
12/02/14 12/02/14 Mincor Resources NL BUY 8,927 0.61 0.62 44.64 - - -14.72 29.92
12/02/14 12/02/14 Mincor Resources NL SELL 1,701 0.62 0.61 8.51 - - -2.33 6.18
12/02/14 12/02/14 Mincor Resources NL BUY 4,445 0.58 0.62 177.80 - - -10.73 167.07
12/02/14 11/02/14 Mincor Resources NL BUY 13,854 0.60 0.62 277.08 - - -16.77 260.31
11/02/14 6/02/14 Mincor Resources NL BUY 18,854 0.56 0.61 942.70 -9.27 - -21.87 911.56
11/02/14 11/02/14 Mincor Resources NL BUY 11,146 0.60 0.61 111.46 - - -13.37 98.09
7/02/14 4/02/14 Mincor Resources NL BUY 6,919 0.56 0.58 105.35 -1.66 - -8.73 94.96
7/02/14 6/02/14 Mincor Resources NL BUY 4,479 0.56 0.58 89.58 -0.36 - -5.63 83.59
5/02/14 5/02/14 ProShares Short VIX Short-Term Futures ETF BUY 50 52.25 51.50 -37.50 - - -30.00 -67.50
4/02/14 2/02/14 Panoramic Resources Ltd SELL 19,000 0.24 0.24 - 0.04 -0.25 -8.00 -8.21
4/02/14 29/01/14 Panoramic Resources Ltd BUY 19,000 0.25 0.24 -95.00 -3.90 - -16.00 -106.90
4/02/14 4/02/14 Mincor Resources NL BUY 636 0.56 0.58 9.68 - - -8.36 1.32
4/02/14 2/02/14 Mincor Resources NL SELL 12,445 0.58 0.56 251.71 0.03 -0.20 -14.19 237.35
2/02/14 23/01/14 Mincor Resources NL BUY 1,555 0.59 0.58 -7.78 -1.41 - -1.81 -11.00
29/01/14 23/01/14 Mincor Resources NL BUY 13,000 0.59 0.58 -130.00 -7.45 - -15.61 -153.06
28/01/14 14/01/14 Mincor Resources NL BUY 3,999 0.63 0.57 -219.95 -4.75 - -4.78 -229.48
28/01/14 20/01/14 Mincor Resources NL BUY 15,555 0.60 0.57 -466.65 -10.27 - -18.20 -295.13
28/01/14 23/01/14 Mincor Resources NL BUY 445 0.59 0.57 -6.68 -0.22 - -0.51 -7.41
27/01/14 14/01/14 Mincor Resources NL BUY 5,926 0.63 0.57 -355.56 -7.10 - -11.70 -374.36
27/01/14 14/01/14 Mincor Resources NL BUY 9,629 0.63 0.57 -577.74 -11.53 - -11.46 -600.73
27/01/14 13/01/14 Mincor Resources NL BUY 18,371 0.60 0.57 -642.99 -22.01 - -21.41 -686.41
27/01/14 14/01/14 Mincor Resources NL BUY 16,000 0.63 0.57 -960.00 -17.70 - -19.04 -996.74
21/01/14 16/12/13 Mincor Resources NL BUY 2,594 0.53 0.60 194.55 -7.82 - -3.81 182.92
21/01/14 13/01/14 Mincor Resources NL BUY 9,406 0.60 0.60 - -6.62 - -11.91 -18.53
14/01/14 11/12/13 Mincor Resources NL BUY 3,994 0.55 0.65 379.43 -10.72 - -5.78 362.93
14/01/14 16/12/13 Mincor Resources NL BUY 7,405 0.53 0.65 888.60 -17.07 - -10.69 860.84
14/01/14 11/12/13 Mincor Resources NL BUY 8,600 0.53 0.65 1,032.00 -22.42 - -12.43 997.15
14/01/14 10/01/14 Mincor Resources NL BUY 15,555 0.56 0.63 1,166.63 -5.11 - -18.43 1,143.09
14/01/14 13/01/14 Mincor Resources NL BUY 20,000 0.61 0.62 149.50 - - -24.45 125.05
6/01/14 11/12/13 Mincor Resources NL BUY 6,006 0.55 0.59 240.24 -12.67 - -8.34 219.23
6/01/14 10/12/13 Mincor Resources NL BUY 9,994 0.57 0.59 249.85 -21.89 - -11.55 216.41
27/12/13 11/12/13 Mincor Resources NL BUY 1,400 0.53 0.55 28.00 -1.59 - -9.12 17.29
13/12/13 10/12/13 Mincor Resources NL BUY 10,000 0.57 0.53 -325.00 -2.32 - -13.65 -340.97
6/12/13 6/12/13 Mincor Resources NL SELL 23,300 0.54 0.51 699.00 - - -24.24 674.76

-308.65 -1,037.50 9,330.37