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Lonmin Share Analysis

The Lonmin Opportunity

The sudden collapse of any share should always be of interest to the private investor because such a fall could represent a buying opportunity. Obviously, share prices do not collapse without a good reason, so it is important to begin by thoroughly examining the reason to establish whether it has merit and whether the fall is fully justified.

On 3rd November 2017, Lonmin revealed that it would be delaying the publication of its financial results for the year to end-September because additional time was required by its auditors to determine the value of impairments. This announcement came on the back of a series of setbacks for the third-largest platinum miner in the world. It is very fully geared and its debts are conditional on it retaining a book value of assets which it has agreed with lenders.

But the daily market action on the share is instructive. Consider the chart:

Lonmin (LON) – Chart by ShareFriend Pro

Here you can see that before the announcement, the share was rising steadily because of improved operational results and had reached over R20. The announcement caused the share to collapse down to 1254c at which point it executed a classical “hammer” formation and has since traded higher.

The hammer formation is a candle where the tail is at least twice as long as the body and it usually marks the end of a downward trend. The reasoning behind this is that the exceptionally long tail is caused by the bears, but they cannot sustain it and so the share closes close to where it opened – or as in this case, above where it opened. This indicates that bearish sentiment has run its course.

Since the hammer, the share has been hovering around the R13 level – which represents a very nice discount to where it was.

Obviously, Lonmin is a commodity share and so its future depends on the volatile price of platinum. But even taking this volatility into account the share appears to us to be cheap at around R13.

If you decide to take the risk of investing in Lonmin, you should make sure that you have a strict stop-loss strategy in place.

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