ARTICLES

Feel the Risk

It has been well said that if you don't feel the risk when making an investment in the share market, you are probably not going to make too much money out of it. The point of this observation is that, typically, at the bottom of a share's cycle everyone is talking the share down. The press comment is all negative and it takes great courage to buy at that point. But that is precisely what you must do if you want to be a contrarian. As Warren Buffett has famously said, you must be greedy when others are fearful.

Let us consider the case of Sibanye. This is a mining operation principally involved in gold, but more recently getting involved in platinum and platinum-group metals (PGM's). Let us begin by looking at the chart:

From this it is clear that Sibanye has fallen heavily from its peak of just over R70 per share down to R24 per share over the past seven months. At least this means you will not be paying top dollar for it if you decide to buy, after all somewhere out there is an investor who filled his pockets with this share at around R70, and you are doing a whole lot better than him! There are number of risks in buying Sibanye.

Firstly, it is a mining share whose fortunes depend on the value of the precious metals that it sells. Many private investors stay away from resource shares because they are so volatile and must be considered speculations rather than investments. The second problem is that Sibanye has recently extended itself by buying the Stillwater palladium mine in America for $2,2 billion. This will force the company to undertake a rights issue for at least $1,3bn and that will obviously dilute earnings per share and dividends per share for a few years. So it is a considerable risk. But the CEO, Neal Froneman, is a very experienced operator and he has managed to take advantage of the recent slump in precious metals prices to buy up some excellent assets at rock-bottom prices. Maybe you should consider following his example by buying his shares at rock-bottom prices. If he is right and the precious metals cycle is about to turn up, then this share will not stay below R25 for very long. There is one institutional fund manager who considers the share to be worth about R120. Can you feel the risk? If you are going to buy then just make sure that your stop-loss is in place.  

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