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Sell signals
Stock of the Week - Coeur d’ Alene Mines Corporation
June 30, 2008
Tim Morris, wise-owl.com analyst
Company: Coeur d’ Alene Mines Corporation
Code: CXC
Recommendation: Update
Market Cap: $1.8bn
A crucial aspect of investing which is often overlooked, involves the recognition of investment decisions that have gone against you. In addition to finding shares that can rise strongly, wealth creation in the stock market also requires the investor to acknowledge calls that have turned sour. Holding onto what we in the industry refer to as ‘dog stocks’ in the hope that one day they will turn good can create a severe drag on overall portfolio performance.
The occasional ‘sour bet’ is part and parcel to the world of investing which few astute investors would deny. When offset by the potential gains from those decisions that do go to plan – the occasional loss should not be feared. The key to having the gainers obliterate your wrong-way bets is identifying the dog stocks early on!
Rather than holding onto these stocks in the vain hope that they will one day turn around, it is often prudent to take a loss and reposition those funds into more attractive opportunities. Therefore in addition to profiling such opportunities, our column this week adopts a risk management focus.
Back in March we profiled Coeur d’Alene Mines Corporation, a well established silver producer, and ascribed a ‘buy’ recommendation based on its strong earnings outlook and ability to attract a scarcity premium being the only pure play silver producer within the ASX200 index.
The stock was trading just over $5 at the time, but has since plummeted to levels just above $3. Thankfully, our risk management systems spared our members much of this pain by advising them to sell out at $4.50. In other words, we identified this underperforming stock early on. While this resulted in a modest loss, significant opportunity costs were averted by avoiding further falls and ‘rolling’ our funds into better opportunities.
So what went wrong?
Already listed on the New York and Toronto stock exchanges, Coeur d’Alene joined the ranks of the ASX200 late last year following its takeover of Bolnisi Gold NL. This and other recent acquisitions had put Coeur on track to potentially become the world's largest primary silver producer, with a target to increase silver production three fold to 30m ounces pa in 2009.
At the time of our recommendation, valuation wise, the stock was trading on forward multiples below other local precious metal producers, and the silver price was enjoying bullish sentiment after rising to over US$20/oz – a level not seen since the 1980.
In summary – we were confident that Coeur’s unhedged and rising production profile combined with the strong silver price would produce attractive earnings growth and therefore share price appreciation, especially considering the lack of alternate silver exposures on the market.
While the company’s longer term silver ambitions remain firm, the punishment dished out to the share price over recent months has been due to a combination of factors – namely, an unexpected capital raising, downward revisions to near term production, and a pull back in the silver price from record highs.
Aside from those with a magical crystal ball, predicting all of these events is next to impossible for us mere mortals. Metal prices are inherently volatile, only insiders would have been aware of the recent production revisions, and, given that the company had over US$200m cash on hand while generating operating cash flow in excess of US$40m, the recent convertible note issue was somewhat unexpected.
However, before each of these events surfaced, our internal warning bells were sounded when the stock failed to rally along with the silver price. Therefore with our ‘stop loss’ in place at $4.50, we were more than happy to sell out when the share price breached this level. Stop loss levels are pre-set ‘sell’ points, or the price at which we acknowledge that our recommendation has ‘turned sour’. Stop losses accompany each wise-owl.com recommendation made to members, and often serve to prevent modest losses from turning into large regrettable positions that end up being relegated to the ‘bottom drawer’.
In this instance the stop loss has served us well, and while we have exited our position in CXC for now, we will continue to monitor the stock closely as large share price falls can open up value opportunities. Over the long term Coeur’s production ambitions of becoming one of the world’s major silver producers remains largely intact. However, whether this will create another buying opportunity remains to be seen. This week’s review demonstrates that, no matter how attractive a stock may appear – unforeseen factors can work against you. So risk management practices are essential.
Tim Morris is an analyst at wise-owl.com, one of Australia's leading independent stockmarket research houses. Click here for your complimentary report.
Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions.
More articles from this edition of CompareShares:
Share tips: Broker Recommendations 30 June 6 to BUY, 6 to SELL, 6 to HOLD
Sell signals: Stock of the Week - Coeur d Alene Mines Corporation
Resource stocks: Mining takeover season - mining stocks on the radar
Adviser Lounge: Clever DIY super strategy but is it legal with the ATO?
Commodities: Soft commodities the next boom
Petrol Prices: High petrol prices hitting outer suburbs
Oil: Oil leaders get new chance to slow price
Market Report: Dow on the brink of a bear market
Companies: Arcelor raises stake in Macarthur coal
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