I didn't sell out at 24c by the way, I got the 25.5c before it dropped. Whilst only a small capital profit, I initially bought for the dividend, so overall profit was 50% in 2 years which I was quite happy with but for me the risk profile of the company has changed and I'll explain why.
Just to go back to Smockie's question, and its a fair one. Yes the costs have reduced, thats clear to see (on a C1 basis) by about 10%, or around $7 per tonne from the last half which is great and I agree the acquisition has had some part to play in this, howvere DD&A has increased and whilst this is non-cash it certainly impacts upon EPS and therefore company valuations. DD&A increased from $5 / tonne to $10 / tonne on the prior half, almost wiping out any C1 gain, and why when I mentioned about the acquisition that a lot would be smoke and mirrors. Why have the costs gone down compared to other miners, well thats a hard one to answer with the info that we have been given as we haven't been given a full breakdown of costs anywhere, but I take this as a simple Investor Relations position. If they purchased another company, and said they would make a $10 / tonne C1 cost saving, wouldn't you scream that from the rooftops if you achieved it???? Its simple Investor Relations basics, when you achieve something you said you would, you shout it loudly, when you can blame cost increases on someone else you do it. So the situation to me is simple, either these guys are awful at PR, or the likelihood is that the savings that were expected, did not materalise at the level they were expected to.
The other thing that pushed me to sell, was the price of iron ore. The achieved price in the first half was pumped up by hedging. This is a positive in some ways, as it shows an engaged finance department, doing a very good job at managing risk, and their continued hedging policy is a good thing to manage downside risk, but my concern is they barely made any money with the iron ore price they achieved in H1, back out the fake "profit" on the acquisition (I'm still not sure this will pass audit, the "gain" was all based on an Intangible related to the contract value from FEX, so the "gain" was based on an intercompany contract. Either way, if it remains, the mechanism they are doing is effectively bringing "profit" from that contract forward, and then amortising that over the remaining contract term, which will increase DD&A costs (as we see in H1) and have an effect on decreasing EPS, so to me that "gain" is artificial and if you take it out, what was the profit? Maybe $3m? Tax wouldn't be affected as the "gain" was removed from the tax calc through timing differences (its all in the notes). So my concern is that whilst the IO price is higher, it needs to stay high to offset the hedging gain, just to realise the same revenue as H1, so will there be that much of a profit increase? Maybe, it it remains high possibly, but if it declines, then profits will not remain high, and thats where the risk rose too high for me, and to get out with a 50% profit over 2 years I was comfortable with.
Obviously everyone has different risk perspectives, and different opportunities they may choose to go after. I prefer other stocks right now, but it doesn't mean FEX is a dud. Personally I don't expect the SP to move much, its all dependent on end of year dividends, if they manage to maintain them then fine, if they don't then the SP could come under pressure, but as I say I wasn't prepared for that risk so moneys off the table, but I hope I'm wrong and everyone here makes a lot more money.
I'll keep looking in here, generally its pretty good discussion and if the situation changes, maybe I will be back.
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