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Trader Talk is produced by a team of active traders, analysts and various derivatives professionals from multiple organisations. Trader Talk provides comment on equities, commodities, and other financial instruments based on both technical and fundamental analysis.
Afferro Mining has irons in the fire
Global equities began the fourth quarter in an increasingly volatile fashion, as investors sentiment surrounding the future of the Eurozone fluctuates daily.
News that Greece would miss its deficit targets for the next two years, caused finance ministers to delay the next tranche of bail-out funds to Athens until November, heightening fears of default. The single currency suffered, falling to an eight month low against the dollar and a ten-year trough against the yen.
Several global indices fell to levels last seen in September 2010 and credit default swaps, the cost of insuring against a default, on many US banks rose sharply. Morgan Stanley’s CDS rose to its highest since the financial crisis in 2008, re-igniting liquidity problems between banks.
Mid-week rumours over a report that Eurozone authorities were examining ways of co-ordinating recapitalisations for financial institutions, after agreeing additional measures were urgently needed to shore-up the regions banks, caused a surge in risk appetite. US Federal Reserve chairman Ben Bernanke also raised investors’ hopes for more action to stimulate the weak US economy, sending global equities markedly higher.
Global economic data has been mildly encouraging this week, with manufacturing reports in China, the US and the UK beating analysts’ expectations. Domestic manufacturing demonstrated a return to growth with the purchasing managers’ index rising to 51.1 last month from an upwardly revised 49.4 in August, well above forecasts of 48.6.
Growth in Britain’s dominant service sector also unexpectedly picked up pace in September, growing to 52.9 from 51.1 in August, although forward looking indicators suggest further weakness in the final quarter of the year.
US manufacturing unexpectedly accelerated last month, driven by gains in production and exports. The Institute of Supply Management’s factory index climbed to 51.6 in September from 50.6 in August, implying the world’s largest economy is not sliding into recession. US ADP employer services also reported a stronger than expected increase in private sector jobs, intensifying optimism about Friday’s key non-farm payrolls report.
Uncertainty over the Eurozone was however heightened by September’s PMI data, confirming the region contracted for a second consecutive month, to its lowest level since July 2009.
The Bank of England, on Thursday, announced a second round of quantitative easing to defend Britain’s faltering economy, by pledging to buy a further £75 billion of assets in a dramatic move to stave off recession. The ECB also announced that it sees “intensified” threats to the Eurozone economy and will provide struggling banks with long-term liquidity to ward off a new credit crunch.
Technical analysis illustrates the continued volatility with 400 point swings occurring within a matter of days. This all, however, continues to occur within the three-month trading range between 4900 and 5400. The RSI remains mid-range and I believe investors should continue to trade the extremities until the range breaks.
In conclusion, fundamentals appear almost redundant as sentiment fluctuates in relation to the outlook for the Eurozone. The actions of Central Banks show a sense of urgency, but details about any co-ordinated action in Europe is likely to be painfully slow, meanwhile the volatility is likely to continue.
Mining stocks have been the hardest hit during the last quarter with the sector losing an average of around 40% during this period. Underlying pessimism about the global economic outlook has weighed on sentiment, whilst a stronger US dollar has pulled down industrial metal prices, with copper and silver falling 35% and 43% respectively, from earlier this year.
Despite the recent weakness, iron-ore has been extremely resilient, only falling circa 5% with many analysts expecting China’s demand for the metal to increase throughout 2011. This week Morgan Stanley slashed its EBITDA estimates for many diversified miners by a weighted average of five percent, but those with high exposure to iron-ore had the smallest downgrades.
A related stock that looks oversold following negative investor sentiment towards the sector is Afferro Mining (CVE:AFF). Afferro is the iron-ore part of former AIM quoted African Aura Mining, spun out on the 13th April 2011. Its two main projects are in West Africa and recent production updates show both continue to grow.
Afferro and Russian partner Severstal are accelerating work at their Putu project in Liberia, of which Afferro owns 38.5%, where drilling has increased the resource by 36% to 3.24 billion tonnes, with scope for further discoveries as many drill cores are still to be assayed.
Afferro also recently announced a near 40% rise in the resource at its 100% own Nkout project in Cameroon to 1.42 billion tonnes, with additional finding expected to be announced by the end of November.
To put it into perspective, heavy weight miner BHP Billiton has just extracted its first billion tonnes of iron-ore, emphasising the size of Afferro’s net combined recourse of at least 2.67 billion tonnes, which in simple terms at current prices implies they have circa $470 billion worth of un-mined resources.
The group has a market value of £59 million and with cash in the bank of almost £20 million, it represents almost 20p (35%) of the share price. Aggressive drilling is targeting over three billion tonnes of additional recourses across both projects and brokers have a range of price targets from 177p to 408p, all a considerable premium to the current price.
As can be seen from the above chart of Afferro, the shares have fallen almost 70% since the demerger in April. Following a double-bottom at 42.4p in September, the price has moved higher with both the RSI and stochastic at three-month highs, indicating a significant improvement in buying momentum.
At the time of writing the share price is 59p and I believe the shares are worth buying below 53p, with medium-term targets seen at 63p, 77p and 96p, with a stop-loss based on a close below 45p.
This report was written by Mark Allen – Head of Derivatives at Simple Investments Stockbrokers. The writer does not hold a position in Afferro Mining, but client accounts may. The material in this report has come from Simply Charts and Afferro Mining’s corporate website.
