What are the characteristics of the next FMG??

jet328 · 9 December 2007

For me, its all about SCALE, SCALE, SCALE

How many companies are there that will have BHP/RIO sort of scale?
You only have to look at some of these 2nd & 3rd tier iron ore players to realise that they have no chance in hell of getting near the economies of the scale the big 3 will have. When I last looked, BHP & RIO's cost of production were around the $10-15/t mark. Then look at some of these smaller players costs. Most will be 3 times that.

PROFIT = VOLUME * MARGIN

Companies with SCALE have bigger volumes and bigger margins

I think you've got to look for something that is out of favour (difficult the last year or two) and with a low market cap relative to its potential SCALE

Cheers

If you find any, let us know

jet328 · 9 December 2007

Should have added

I really don't think the number of shares on offer will make any long term difference.

At the end of the day, its the potential profit Vs the market cap (ie. the % of the company that you will own is still the same)

Bushman · 9 December 2007

For me, the FMG story comes down to one factor - the ability of Twiggy to sell his vision of the company to investors (both debt and equity), thus raising the funding for the huge infrastructure costs needed to get the Fortescue Valley IO project off the ground. It is a much quoted fact, but FMG is yet to produce a shipment of ore. Investors had to be convinced of the integrity and drive of mgt to get this project financed and built.

Personally I am not too concerned about market cap. While it is true that if a a share has a lower 'free float', the sp can appreciate remarkably, these shares are also invariably difficult to value as they tend to be more illiquid. What comes up quickly can come down quickly. Investors will always pay a premium for liquidity.

Does the company have a vision? Can the MD sell this vision? Will investors have the faith in the MD to buy in to the project? Do exonomic indicators and investor timeframes support the vaibility of the project? These are the questions I ask.

What do I believe to be the next FMG - I like POL/SDL (ore potential) and GBG (strategic value) and a few others. But there is much water to flow under the bridge before the full potential is realised, if ever. They will NOT be $50 companies though but that does not mean their market cap does not have the potential to be +$1b plus.

Scuba · 9 December 2007

mr_delta said:
On a similar note, but in a different country (India), there is a parallel story…

In 1977 a company called Reliance Industries Ltd was floated and any investor who invested Au$30 (IPO price – 30c per share)at the time today finds his investment at over Au$200,000 due to number of bonus shares & free shares allocated in 3 other companies.
...edited for brevity...
This is IMO a “really solid return on investment”.

Does anyone else know of any more of these "success stories" ie; like Warren Buffett's investment Co (please correct a noob if neccesary)?

Back to the question, I wonder if here in Australia whether the upbringing of Mr Forrest (?) and his ability to deal with the traditional owners and communities (not to mention) the way he looks after "his" workers has anything to do with the flow of the projects and hence the shareprice...?

kloid · 13 December 2007

the barry said:
What you are saying is completly incorrect, the question is asking what are the characteristics of the next fmg.

In your example above, say the two companies hypothetically have the same resource in the same country etc.

In your example the company abz would have a share price of $5 compared to that of xyz of $1

Now if xyz was to run to that of abz, it would have a market cap of 5 times that of abc which is completly illogical.

Market cap is = number of shares on issue x the current share price.

Now do you understand why the number of shares is one of the most important factors when determing a shares ability to run?

Hi,

I don't understand what you've said. To my (nooby) way of thinking how can the number of shares influence the likelihood of a "run"? Surely a company has a run when there is the perception that the company has a positive future e.g. strong earnings growth, good management, good products. If two companies exist with the same assets and prospects but one has 100m shares and one has 10m shares on issue would the first one have more chance of a run such as FMG?

Sorry if I've misunderstood but I am interested to know if this can really be the case.

Cheers
Kloid

prawn_86 · 13 December 2007

kloid said:
Hi,

If two companies exist with the same assets and prospects but one has 100m shares and one has 10m shares on issue would the first one have more chance of a run such as FMG?

It depends on the price of the share and not the # of shares on issue.

If there was a discrepancy between the market caps of the 2 companies then you would expect the one with the smaller/lower market cap to increase

kloid · 13 December 2007

prawn_86 said:
It depends on the price of the share and not the # of shares on issue.

If there was a discrepancy between the market caps of the 2 companies then you would expect the one with the smaller/lower market cap to increase

Thanks, that's what I thought. I was also thinking that if the number of shares really did influence their performance then directors would presumably want to have the maximum possible number of shares in issue (assuming that share price maximisation is one of their goals). One way to do this would be to issue shares (at the time of float) with a tiny nominal value i.e. by Barry's logic it would make more sense to issue 100m shares at 10c each rather than 10m shares at $1 each but I don't think this is the case in reality.

prawn_86 · 13 December 2007

barrys logic was the exact same as mine.

It doesnt matter how many issued/price it is all dependent on market cap.

In fact, psychology may indicate that investors would prefer a $1 stock as it is seen to be more 'solid'. although that is crap of course.

So_Cynical · 14 December 2007

I would guess that company's with lots of shares would also have lots more holders and smaller parcels of shares per holder.

Have a look at the buyers and sellers of any penny dreadful and u see lots of little
parcels of shares....less shares = bigger parcels per holder.

Wysiwyg · 14 December 2007

So_Cynical said:
I would guess that company's with lots of shares would also have lots more holders and smaller parcels of shares per holder.
Have a look at the buyers and sellers of any penny dreadful and u see lots of little
parcels of shares....less shares = bigger parcels per holder.

Not so ..... the more shares available to be traded then the bigger the holding per individual.A stock at 10c with 100 mil on issue will have less available shares to buy so holdings of 1 mil could only be achieved if the buyer bought up sell offers to 1 mil which could be up to 30c and then no more.

A company with 1 bil shares tradeable would have 10 times as many shares available so holdings of 1 mil could be achieved by numerous individuals while the s.p. moves less percentage wise.

imajica · 14 December 2007

To me logically the next FMG will come from the company with the next largest iron ore JORC compliant resource - and that's AQA - Aquila Resources. 266 million tonnes and this will rise as their massive tenements are explored further + they own or have sizeable stakes in several coal mines.

alphman · 14 December 2007

the barry said:
What you are saying is completly incorrect, the question is asking what are the characteristics of the next fmg.

In your example above, say the two companies hypothetically have the same resource in the same country etc.

In your example the company abz would have a share price of $5 compared to that of xyz of $1

Now if xyz was to run to that of abz, it would have a market cap of 5 times that of abc which is completly illogical.

Market cap is = number of shares on issue x the current share price.

Now do you understand why the number of shares is one of the most important factors when determing a shares ability to run?

the barry,

I think you may have misinterpreted me. In my examples, I have used two companies with different number of shares on issue but same market cap ($10m).

Company ABC has 100,000,000 shares and has an initial market value of $10,000,000. Share price is $0.10.
Company XYZ has 500,000,000 shares and has an initial market value of $10,000,000. Share price is $0.02.

I have assumed both companies are exactly the same (management, vision, projects, balance sheet, cashflow, etc etc) and both companies are re-evaluated by the market to now be worth $500m each.

Company ABC will therefore be trading at $5 per share, while Company XYZ will be trading at $1 per share.

Company ABC has 100,000,000 shares and has a market value of $500,000,000. Share price is $5.00.
Company XYZ has 500,000,000 shares and has a market value of $500,000,000. Share price is $1.00.

As the market cap has increased 50-fold, so will the price of both companies (ie. Company ABC runs from $0.10 to $5.00; Company XYZ runs from $0.02 to $1.00).

I am merely looking at it from a (broader) valuation perspective which IMO is a valid contribution (ie, what is the characteristics of a company that can appreciate more than 300 times). In this case the number of shares makes no difference. FMG started off as a small cap company (<$50m) as do most explorers. It is now worth more than $17b. Any company can do this provided they have the right "characteristics" and it doesn't have to be the number of shares.

Take another hypothetical company, BOB, with 1 billion shares and a $50m market cap. Share price is therefore $0.05. BOB is FMG's little brother and follows big brother's footsteps and is now worth $17b. With 1 billion shares, share price would be trading at $17. The growth of these two companies are the same, therefore number of shares makes no difference.

I think you're looking at it more from a share price perspective, ie. what are the characteristics of a company that will run from $0.20 to over $60. This is also a valid contribution (and probably the type of answer that was sought). I agree in this sitution that it is more restricted when you take into account a realistic market cap, therefore the number of shares would play a significant part.

(All the above examples assumes no share reconstructions)

Timmy · 14 December 2007

This thread seems to have taken off again, with a lot of good info in it. I asked a question in the early part of this thread that I don't think was answered (maybe it was a stupid question!). Given the increased interest in the thread I would like to hear more ideas on it if anyone is so inclined? I suppose I could do the research to answer it, but 1. too lazy & 2. would be interested in input/ideas.

Timmy said:
Can I ask a question about this point? In the tech boom this was the case with a lot of companies, the shares issued only made up a small portion of the overall "value" of the company - eg. company may have been worth $100, but only $10 of publicly trader shares available (numbers just examples). So is this the case with FMG? That is, the actual "value" of the company is X but there are only shares with a value of x/10 (or whatever) on issue, or do the number of shares on issue reflect entire value of the company?

the barry · 14 December 2007

Timmy said:
This thread seems to have taken off again, with a lot of good info in it. I asked a question in the early part of this thread that I don't think was answered (maybe it was a stupid question!). Given the increased interest in the thread I would like to hear more ideas on it if anyone is so inclined? I suppose I could do the research to answer it, but 1. too lazy & 2. would be interested in input/ideas.

I will have to do more research, but i think if a company is trading as a publicly listed company it means that all shares are
'theoretically" traded. In reality this might not be the case if say directors hold 50 percent of the company then only the other 50 percent get traded. I'm not sure it is possible to only have a percentage of the company's worth available to trade. Will get back to you on this. So in short to answer your question the number of shares traded does reflect the entire value of the company.

tyson1 · 18 December 2007

ok, in a fortescue like company (a company which discovers huge profitable reserves of iron ore etc.) the number of shares on issue should IMO have an impact through simple supply and demand ie. less shares available, the faster and higher the market can run... in the short term. This is because many spec buys like this gain on market hype hence the opportunity for big short term gains. However the number of shares on issue should not (in theory) make any difference for the long term as the share price will generally balance out to reflect true value and true gains as other companies of like value but smaller market cap are realised. but as we all know the market rarely acts according to theory

kivvygosh · 26 December 2007

Prawn:
barrys logic was the exact same as mine.

It doesnt matter how many issued/price it is all dependent on market cap.

You should go read Barry's post again.

tyson:
the number of shares on issue should IMO have an impact through simple supply and demand ie. less shares available, the faster and higher the market can run... in the short term.

The number of shares doesn't matter. Supply and demand isn't about 'numbers' of things, it's about 'values' of things. And because the value of shares available won't change depending on number of shares on offer, the supply/demand curve won't change either.

If you had such a small amount of shares that there would be less than one per person, or just a few per person, or so high that it is greater than the average parcel, then you have a supply problem. You get that in Berkshire Hathaway (I believe the average price over the last year was US$140,000) and a few other American companies - most punters who want to buy in can't afford to do so. But if you're buying 10 or 100 or 10,000 shares in a company it doesn't matter. It doesn't effect supply or demand, doesn't alter the value of shares on offer or bids. It's irrelevant.

Ask yourself this - when an investor buys a parcel of shares, are they choosing the size of the parcel based on 'number of shares' or 'total cost'?

tronic72 · 27 December 2007

akumaslair said:
hello everyone,

was wondering if the more experienced can tell me what are the characteristics of a company to be the next FMG?????

Ive been trading mining/explorers, made a few hits and misses...

I know a guy who bought into FMG at 0.20 and sold out within a few days thinking they weren't very good.

with these miners, other then the obvious factors such as decent management, $$$ etc. etc.

do these so called nothing companies whose SP is like 1c each, simply try and gather as much money as possible to drill/explore, and they typically will shoot up 100%-1000% in matter of days or weeks if they hit the absolute goldmine of the century........

so what I am asking is, is it almost pure luck........ to be able to pick a stock in the early stages that are going to be like an FMG????

comments appreciated!!

A company like Ausquest could pull it off. They have a quality board and have had some recent success with their exploration. They now have Oxiana as a major share holder and most importantly nearly all their projects are 100% AQD owed, meaning both the company and the shareholder would have both control and reap the benefits of any successful discoveries.

NOTE: I have held AQD in the past but am NOT currently holding.

tech/a · 30 December 2007

Interesting watching this thread.
Comments from mostly Fundamental people.
Most technical people will be discretionary traders who are unlikely to hold long enough for moves which will rise 100s of %

Very large prolonged moves will ALWAYS come from long term slow declines or Sideways accumulation.
I have used as an example ESG

The will ALWAYS be a clear Breakout from these areas supported by Volume spikes AND an increase in overall volumes

Good moves will maintain an angle of 45 degrees in their move. This angle will often be evident over the life of the move.

You can maintain the life of the move through Volume and Elliot analysis.Topping in a longer range wave 5 will signal an end to the move.

The trick is to get on on the breakout which is rarely challenged in a great move and stay as long as the move has life.

It can be done and it can be done regularly.
Its a matter of taking trades which are small---so you don't panic on retracements.
If a trade revisits your trigger bar then sell and find another.
It wont take long and you'll have 5 to 10 of these in your stable chugging along.
don't be surprised if you get one or more FMG's over time.

I personally look for moves which break from consolidation or prolonged very slow down trends for a period of 2 yrs or 100 bars.
I use weekly charts

While the trading might not be sexy as in fast paced the potential profits will leave the gun traders gasping for breath and green with envy!

Boggo · 31 December 2007

TTY seems to be a contender, just need someone like squiggy to talk it up

Mike
-

treefrog · 31 December 2007

"Good moves will maintain an angle of 45 degrees in their move. This angle will often be evident over the life of the move."

turn it up Tech! - surely you mean a % increase with time as I can get any share to move at 45deg up or down the page during a run by adjusting either price or time scales; and not everyone uses the same charts or settings

otherwise agree with your chart analysis

have a good new year

What are the characteristics of the next FMG??

jet328

jet328

Bushman

Scuba

Don't f*#% around, buy a round

kloid

prawn_86

Mod: Call me Dendrobranchiata

kloid

prawn_86

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So_Cynical

The Contrarian Averager

Wysiwyg

Everyone wants money

imajica

alphman

Timmy

white swans need love too

the barry

tyson1

kivvygosh

tronic72

tech/a

No Ordinary Duck

Boggo

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Don't f*#% around, buy a round

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