US Edition International Ferro Metals
25p +¼p
Questor says HOLD
This tip has been an utter disaster and investors are sitting on large losses. The shares are now down 56pc.
In investing, timing is everything. Questor got the timing utterly wrong in this case. However, this happens and the trick is to have more winners than losers. This year, the winners have by far outnumbered the losers.
International Ferro Metals mines ferrochrome in South Africa. Between 80pc to 90pc of ferrochrome is used in the production of stainless steel, which is used for a wide variety of purposes – from making cutlery to constructing building façades. About 18pc of stainless steel is made up of the ferrochrome alloy.
Questor recommended the shares as the ferrochrome price appeared to be at a bottom. However, fears have grown that the price could actually fall further next year. Ferrochrome prices are set on a quarterly basis in discussions between producers and customers.
Last week, Merafe Resources, a South African competitor that runs a ferrochrome joint venture with Xstrata, said the first-quarter European benchmark price for the steelmaking ingredient fell by 2 cents to $1.01 a pound. This venture is the world's largest producer of ferrochrome.
There are also concerns that a strengthening of the rand could squeeze margins because costs are in the local currency and ferrochrome is sold in dollars. Then there's South Africa's structural shortage of power to consider. There are lingering doubts that there may be delays to a new coal-fired power station being built at Medupi. This could limit the company's expansion plans.
These problems are common to the company's peers. About 45pc of the world's entire ferrochrome reserves are contained in South Africa. Kazakhstan and India are also major producers.
In November, International Ferro issued a trading update in which it said the outlook for the short term was cautious, but it expected a return of stainless steel demand over 2010. Another major producer, EMRC also said that the Chinese recovery in demand was sustainable.
Based on current forecast the shares are trading on June 2010 earnings multiple of 40.6, falling to just 5 in 2011. The company does not pay a dividend.
Shares in International Ferro Metals were recommended on August 6 at 56¾p and the shares are now 56pc below this level, compared with a market up 12pc.
However, there is so much bad news in the shares that it is not worth selling just yet. There is a case for buying more of the shares at this level to "average down" the initial purchase price. That is a decision to be made based on your own personal circumstances.
However, with uncertainty remaining into next year, Questor's stance on the shares is now hold.
Gem Diamonds
197.9p -0.9p
Questor says BUY
This is another tip that was badly timed, but Questor is confident in the long-term prospects of the diamond industry – and Gem.
The shares are down 32pc from the initial recommendation and 21pc from when they were recommended as buy on August 27.
The recession has hit the luxury goods sector hard – and the diamond price has fallen by about a third. Profits at De Beers fell by 99pc to $3m (£1.86m).
However, the investment case remains the same. The assets that Gem Diamonds owns are some of the best diamond mines in the world.
The company's Letseng mine in Lesotho has produced three of the world's 20 largest diamonds in the last three years alone. Four of the 20 largest rough diamonds ever were recovered from the site.
Its latest large diamond was the 478-carat Light of Letseng, which it sold to Graff Diamonds for $18.4m. This follows the discovery of the massive 603-carat Lesotho Promise in 2006 and the 493-carat Letseng Legacy in 2007.
Note that Laurence Graff, the diamond billionaire and art collector behind Graff Diamonds owns 10.1pc of the company. Mr Graff first bought into the company in November 2008 when the share price was north of 250p.
In the first half of this year, the mine recovered 20 diamonds which sold at prices greater than $20,000 per carat.
Then there is the group's Ellendale mine in Australia, which is the world's largest producer of fancy yellow diamonds, which are becoming more fashionable. Indeed, Tiffany is expected to launch a coloured diamond early next year in Asia. Ellendale produces more than half of the yellow diamonds mined globally.
Ellendale was bought in December 2007 for $249m. Present resource estimate stands at 98m carats, at a grade of 5.1 per hundred tonnes.
The company is also debt-free with about $100m in cash after an equity fund-raising earlier this year. This cash pile represents about 23pc of the group's current market cap. Now is a good time to snap up quality, strategic assets from distressed sellers and Questor is looking for news soon on what it will do with this cash.
The shares are trading on December 2010 earnings multiple of 69, based on current forecast, but this slips to 17.7 in 2011 when the market is expected to show a recovery.
The financial crisis has created demand problems in the industry, but the supply side remains tight. Because of this and the quality of Gem's assets the stance remains buy.