Saturday, April 16, 2011

AQP.L - Aquarius Platinum

In the earlier part of the 2000's I took a punt on LMI.L (Lonmin), which mines platinum. It did exceptionally well for me, although it was definitely vastly more luck than skill. Since then I've pretty much fallen asleep at the wheel on platinum miners, although I still remember it as one of my great successes.

Fast forward to today. I noticed that directors of AQP.L (Aquarius Platinum) forked out £654k on shares. The share price is down 56% over 5 years, compared with a flat Footsie over the same period. Shares peaked at about 1691 in 2007Q3. They now stand at 344p - a loss of nearly 80% from the peak. This seriously piqued my interest: shares severly underperforming the market over a 5-year period, coupled with director purchases could be indicative of a huge undervaluation. I decided to dig a little deeper.

According to equity clock[]: "Demand for platinum in 2011 is expected to increase significantly thanks mainly to continuing recovery in auto production and sales."

Look at the net profit margins for AQP over the last 5 years:

YEAR 06 07 08  09 10
NPM% 38 26 39 -47  6

We see that 2009 was a disasterous year for AQP, with only weak margins in 2010. LMI painted a similarly bleak picture. Median NPM over the last decade was 21%. This increased my enthusiam, as I figured that I could be getting a big bargain due to the depressed margins. Factor in my previous arguments, and the shares look enticing.

However, my enthusiam waned when I considered the following arguments. Recent interims put net profit at £58m against revenues of £208m, giving it an NPM of 28% - slightly above median of 21%. Assuming that the next half is like the first half, AQP will have a net profit of £116m. At a price of 344.5p, the market cap of the company is £1.6bn. That gives it a PE of about 14. Suddenly, a huge undervaluation looks like only a fair valuation at best.

There are other factors to worry about, too. According to Platinum Today [], platinum was around 500 UPTO (USD Per Troy Oz), rose to a peak in 2008Q2 to 2060, and then dived to 844 in 2008Q4. In March 2011, platinum is at 1770. The average from Jul 1992 to Apr 2011 is 770.

In summary, platinum is rather high at the moment, and the shares look only fair even when you use that high valuation.

In conclusion, it seems that AQP has a lot of downside risk and is not undervalued, despite a long-term decline in the share price and director purchases. It would appear to be better to stand aside from this one, and wait for a much more opportune moment. Perhaps other, wiser, men would care to share their insights as to why my thinking is right, or wrong.