The End of Erongo
18 March 2018
Those who have been following BMN for some time may need no introduction to the subject of Erongo. However there may be those who have recently discovered the company for whom some background explanation would be informative and illustrative of a number of issues when investing on AIM.
BMN's involvement with Erongo dates back to December 2016 when BMN first entered into an agreement to purchase a c 42% stake in the Uis (pronounced 'You - iss') Tin mine in Namibia. BMN would pay for this stake with 41Million of its shares (at that time worth a total of £620K). BMN was doing this in order to build a credible Tin portfolio of >100,000 tonnes contained Tin which could be, and was subsequently, spun off in 2017 as Afritin.
As part of the final agreement with the Uis sellers (who we refer to as a group as 'Erongo' which is the region of Namibia they are all from) it was agreed on the 15th June 2017 that they, Erongo would not sell any of the 41M shares that were issued to them for a period of 6 months. The 41M shares were formally admitted to trading on the 21st June 2017 so the 6 month restriction was expected to lapse at some point between the 15th and 21st Dec 2017, depending upon where you precisely count the start date (from agreement or admission.)
Skip forward 4 months - the Afritin demerger had been announced and voted through by shareholders on the 20th October, Afritin was itself floated on AIM on the 9th of November. Later that month, on the 30th November the company shocked and greatly pleased investors by announcing plans to purchase the remaining 55% of Bushveld Vametco 'BVL' that did not yet own (BVL owns 59.1% of the entire Vametco mine) - this was the stake that was taken by 'Yellow Dragon' (YD) which allowed BMN to purchase Vametco without having to be subject to a long and drawn out reverse takeover (RTO) AIM readmission process.
Nobody knew who YD was, whether they were friendly or not, and whether they would suddenly cause difficulty if asked to leave the party just at the point that the value of the Vanadium that Vametco was mining started to skyrocket. Thus it was a huge relief to be able to buy them out completely and have access to not just 26.6% of Vametco profits, as originally, but the full 59.1% that we could potentially own. The YD buyout deal went through on the 21st December 2017, and BMN's stake in the now hugely cash-generative Vametco rose by 125% that night.
As you can see from the graph above - whilst the cash generation of BMN rose by 125% on the 21st Dec the Share Price did not move at all. Why not ?
Remember that the first day that the Erongo shareholders could sell their shares was at some point between the 15th and 21st of December. Well guess what started happening on the 19th of December, just before the YD buyout went through ? - Correct - Erongo started selling - after all what they really wanted was cash in exchange for their Uis mine, and didn't want to have to hang around any longer than necessary to get it.
Naturally had they tried to sell all 41M in one go they would have got very little for their shares (at this point worth a total of around £3.5 Million) - thus they must have cut a deal with a market maker to allow their block to be trickled out in small tranches to cover the daily buying of all those Private Investors who could see how woefully undervalued BMN was, especially after the YD buyout in December.
The accompanying article details how it was possible to estimate which trades might be attributable to Erongo sells - this makes interesting reading for any current or potential future students of trading patterns. To cut a long story short, the graph below shows my best estimation of the remaining shares left from the original Erongo block of 41Million, and the extrapolation, made on the 5th of Feb, of this trend to zero.
The conclusion of this analysis was that on the 5th of February I predicted that the best guess date for the end of Erongo selling was the 6th March 2018.
As you can see from the plot of Share Price - during the entire 3 month period between the 10th Dec and the 10th March the share price was held tightly in the 8-9p range despite BMN buying out YD's share of Vametco AND the Vanadium price increasing by 75% over the same period. These two factors alone should have led to an increase in fundamental valuation of something like +220%.
The selling down of a large block of shares such as the Erongo 41M is called an 'overhang' and whilst it is underway can prevent ANY fundamental factors from having an effect on the share price. The fundamental value has not disappeared it's just that its acknowledgement by the market has been delayed.
Skip forward another 3 months to last Tuesday. Trading was more energetic than usual - spurred on by a degree of excitement on Social Media about the Australian Vanadium projects such as King River Copper and the more advanced Gabanintha based companies Technology Metals Australia and Australian Vanadium - all of whom had experienced significant gains in their ASX listed share prices in the previous couple of days.
Towards the end of trading last Tuesday some very large trades started appearing, as shown below:-
I believe that it was LSE poster gambitxjs who first spotted that the trades highlighted in pink added up to 13.8 million - exactly the size of the subsequent trade highlighted in yellow. How can we understand these trades, given the fact that almost all of them occur at 8.70p ?
Well the pink trades would all be at 8.70p if the 2x1 Million had gone through at 8.70p - however they cost the buyer 0.08p x 2 million = 1600 pounds more than the seller of the 13.8M at 8.70p got. This seems like a reasonable figure to cover the market maker's time and effort to try and obscure the nature of what has transpired - which the LSE community rapidly concluded was an Institutional Investor taking out the final block of Erongo shares via a series of choreographed market trades.
This 13.8M trade is clearly the right sort of size for the remaining Erongo block - see the second graph above. c. 15m were outstanding around the 21st Feb and there were few if any examples of sells that could be clearly ascribed to Erongo in the weeks after the 20th Feb. We can only be sure by seeing what happened next.
The topmost graph shows that on Wednesday the 14th March the share price took off (+7.5%) , Thursday was the same (+10.7%) and Friday also (13.6%). The market makers clearly have no source of shares to be able to supply buys with. The Erongo source must have been exhausted.
A better example of a share overhang being cleared you could not wish for.
The next question of course is where will the SP stop ? - well now that the rerate has clearly developed its own momentum it will draw in new momentum investors. The market makers cannot risk choosing to stand in the way of the share price appreciation and will simply allow it to rise each day until they can find enough people to buy shares from so that they can balance their books.
The next fixed point will be determined not by the short term behaviour of one or two sellers but much more by the company fundamentals - as explained above purely for self consistency this should be at a level at least 220% higher than the 8.5p SP of the 21st of December.
This would indicate that the share price should now rerate to a level of around 27 pence.
This article only conveys the personal opinion of the author. Whilst every effort is made to ensure the content is accurate, we cannot guarantee the accuracy of the data shown. This article does not constitute professional, financial or investment advice and must not be used as a basis for making investment decisions.
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