Van Eck - ETF Buying Opportunity

Before I start. I Personally believe the ETF craze is going to create some major issues in the future. However, as a trader, i'll take advantage of these opportunities when they present themselves. I believe such an opportunity is currently presenting itself in many of the junior gold stocks and in particular RMS.  Some of my analysis on RMS as a result of a non-company specific asset sell down from Van Eck based on their index reweighting. As always, feedback is appreciated.
Some of my analysis on RMS as a result of a non-company specific asset sell down from Van Eck based on their index reweighting. As always, feedback is appreciated.

Below is a table showing the impact of the rule changes from the Van Eck Gold Juniors (GDXJ) index reweighting. Basically for those who don't know Van Eck is a major ETF provider and the GDXJ, ETF allows people to buy this 'index' to get exposure to a large number of companies that fit the profile for this ETF, in this case, junior gold producers. The issue that brought about this change in the weightings, is because the popularity of this ETF (lots of people buy the ETF, so ETF has to buy shares in the companies that make up the ETF), the position size has resulted in Van Eck becoming a substantial holder in many of these smaller, illiquid companies and as a result nearing/exceeding the 20% cap that triggers take over declaration rules on the ASX/TSX.

As a result, they have expanded the list to incorporate more junior gold companies into the index (some might argue increasing the risk to the ETF as a result of this 'diversification' now investing in more sub-standard gold companies). Below is the table of the current holdings and the anticipated flows resulting from the sell down. As indicated, RMS will see estimated outflow of circa 49m shares - around 18 trading days of volume (bottom of image).

This Index rebalance is set to conclude by June 17th, more than likely Van Eck would have completed the sell down around a week before (June 10th) at a guess. Given the divergence in trading between RMS and other more illiquid gold stocks (SLR,PRU,BDR) in comparison to other larger gold stocks (NST,EVN,OGC) it's more than likely being caused from this Van Eck selling. The below chart shows a common base for the above-mentioned stocks and the divergence that has happened over the past month.


With the selling coming to an end by mid June, I'd anticipate there to be a significant re-rating as these stocks bounce back to a more 'fair value' as the divergence is purely due to this rebalance of the index - providing a very good opportunity.

On the 25th of April the Van Eck substantial notice was 76.6m, down from 99.2m in March (22.6m sold). The total number of shares traded in Mar was 106m of which Van Eck is 21.3% of the volume using the data from the substantial notice.



From the period 28th April to Present the stock has traded 66.3m shares. Assuming Van Eck is going down to that Estimated ~50.2m shares from the first table. They have 26.4m shares remaining to sell since April. Assuming they keep the same weighting of the selling, 21.3% of the traded volume, this means they would have sold a further 14.14m shares during this period until now.

This leaves them with a holding of 12.2m shares left to sell ($4.8m value). This is assuming they haven't increased the aggressiveness and also assuming the estimated new weighting is correct (may be higher leaving them less shares to sell, eg. if they are keeping say 55/60m shares as opposed to only 50m). I suspect the substantial notice when next lodged will give a good indication of how aggressive they have been.

Below is a table for Mar - May of the top sellers, Mostly insto volume for a total of 264m shares traded which is more than likely Van Eck, Citi being the major seller.  



Currently, the shorts are small only 2.62% or 13.7m shares. If there is a recovery post the Van Eck selling there could be some more buying pressure if this reduces to a lower perentage (1/1.5%). However, don't see this as being material at the moment.

As for the company. Well over AUD$90m in Cash, Directors buying on market, increased mine life and one-off production issues from last qtr raing being resolved, should see good results for this qtr and going forward. With the company expected to do around $31m NPAT at 40c the current market cap of $210m and an EV of $120m puts the P/E multiple to EV at 4x, which given the new mine life extensions looks extremely good value.

Below are from the Hartleys recent research report which has turned to a buy. Expecting more upgrades at these valuations soon. Note by June 21 the cash balance would exceed the current market capitalisaton of the busines.


In summary, the selling in the junior gold space has been caused from the Van Eck sell down due to a reweighting in the ETF. Being non-company specific has seen many stocks sold purely for this reason without taking into account and valuation metrics of the business. As investors become aware this selling is/has ended, it's likely many funds/investors/brokers will take advantage of the opportunity to capitalise on the mispricing as the stock trades back to fair value (circa 60c based on future cash flows). Should the mine life continue to be extended, this could have more upside.  

Hopefully this has been of interest. Any feedback appreciated.