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Solid analysis Eshmun - good post - think you have it covered....

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Alphonsus

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19/09/16

17:41

Post #: 19262489
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Originally posted by eshmun ↑

I think a little trading/investing discipline needs to be applied in this situation.

Facts

1) We have "Annual group gold production for FY2017 full year is expected to be 135,000 ounces at an AISC of A$1,050/oz" and Sept quarter guidance expected at 31-35,000 ounces at an AISC of ~A$1,100/oz. Taking in account existing hedging and the gold price for the quarter the margin on production we should receive if guidance is met should be at minimum A$501/oz and probably closer to A$570/oz if the company equally divides the remaining hedge at $1601/0z over the next 6 quarter to Dec 2017 and one assumes production maintains a mid range guidance of 33koz over all 6 quarters as well (and this doesn't include the higher value hedge at $1,830/oz). These margins are well ahead of many of RMS's ASX peers and in theory the Sept quarter and the full FY2017 production should be enviable periods when figures are compared (if guidance is achieved).

2) When one compares RMS to its Australian peers using recent historical ratios of MC or EV to metrics like earnings, profit and production, RMS is in the top decile so clearly represents one of the best value gold stocks on the market.

3) RMS's share price this week has been sold-off over and above its peer group.

So how do you reconcile facts 1 and 2 with fact 3. We broke 46cents this week so the discussion should begin.

There are probably 3 possible likely scenarios driving the move this week IMO.

1) Word has escaped that there have been operational problems and guidance for the Sept quarter is not going to be met or worse still there are problems at Vivien (or another operation) that are challenging the mine plan assumptions in a significant way. If this is the case the trading in the stock we have seen this week is illegal and should be investigated by ASX/ASIC and if this has actually happened then the company would also need to be questioned as to how information could have been leaked and why it didn't act to stop the trading in the stock. The problem here is that ASX/ASIC are toothless tigers (unless they find a case to suit them) so we can't expect any protection from that quarter. So far since I've been in this stock I've found that this management has been giving very clear and transparent communications and I'd be very surprised if the above is what has actually driven the share price fall this week. If it does turn out to be the case however that this mechanism is at play I'll be selling my entire considerable shareholding and won't be sticking around any longer to take that sort of medicine. No shareholder should ever be disadvantaged in that sort of way.

2) One (or more) of the recent subscribers to the discounted share placement was counting on making some very quick stag profits based on further rising gold price expectations but when the market moved against them they chickened out and started to cut losses. If this is the case the selling is clueless and not FA based so it would represent an excellent period in which to accumulate some stock IMO. At the time of the placement I investigated the NY based brokerage that managed the issue. It seemed to me that that brokerage could be described as boutique at best. Clients of this brokerage may not be the most astute resource investors and could actually be totally clueless. If this is the case RMS management need also to be accountable for allowing these people onto our register. What we need are cornerstone investors with an understanding of the mining industry and not some trigger happy Johny Come Lately high net worth types that are better off trading in fine art than in gold stocks.

3) The third possibility is the often cited "accumulation" strategy by funds, driving the share price down to trigger stop loss selling and hence accumulate a stock at a cheaper price. Well this is what is almost always blamed for share price falls on HC but I'm not a big fan of this explanation. For starters this is another form of market manipulation and almost certainly illegal so if this practice is as wide spread as people claim we are all definitely on a very uneven playing field as small investors. In any case this would be another reason to continue accumulating.

So what to do?

Well personally I find that you need to become highly disciplined in this situation, even if it might cost you a little money (or future profits in my case).

I've personally sold down positions I'd accumulated at 37.5cents and 42cents in preparation for a full sell-off if it is actually scenario 1 which is driving the move down. I'm pretty annoyed about having to do this but I can always buy my positions back once the reasons become known (ie once we establish there are no problems with guidance or any of the operations).

If it does happen to be scenario 1 that's driving the price down I'll be making contact with Mark Zeptner and giving him the full spray and I'll be sure to retain one share in the company so I can go to the AGM and make some noise about the company's reaction (or lack of reaction) to the illegal trading in the stock that would have happened this week if scenario 1 has actually happened. There is nothing that can be helped about things going wrong with the company's operational performance or mines but all shareholders need to be privileged to that information at the same time. If it's not scenario 1 I'll lick a few wounds and buy my positions back. I'd personally not recommend averaging down in this situation (for people with higher entries) as the risk in scenario 1 is real (until the company tells us differently) and we have no idea of how bad the news could get. If Vivien doesn't work there will be a mighty big hole in the mine plan.

Please DYOR and your own thinking. Eshmun

Expand

Solid analysis Eshmun - good post - think you have it covered. Call me naïve but I don't think it is (1) (so far I see management as having played a fairly straight bat) and that would really have serious negative long term implications for the company and management - and not really in the (2) box either but never rule out entirely the unsophisticated "sophisticated" investor (though this sort of makes RMS look a bit silly as well in terms of their choice of placement). I think it might be more of (3), I'd be interested to a do an analysis of volumes traded to see whether the recent placement shares might have been traded in whole or in part across the period as a driver of the decline (as this would presumably see a decent spike in volume) and also to see how easily manipulated the share price might be by a determined player.

RMS Price at posting: 44.5¢ Sentiment: Buy Disclosure: Held
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