SIF September Review: Centamin Triggers Stop Loss (AGK, WIL)

6th Oct '20 by Roland Head

14 comments 4729 reads

Gold miners are currently popular with investors who want to generate real returns from the yellow metal. But when investing in miners it’s always worth considering what can go wrong. That’s especially true with companies which have just one operating asset.

When I added Egypt-based gold producer Centamin to the SIF Folio in September, I acknowledged this risk, but I didn’t expect things to go wrong quite so quickly.

On Friday, the shares fell 20%+ after the company said it had found signs of instability in one of the pit walls of the open-cast section of its Sukari mine. Fourth-quarter production is expected to fall by around 40% as a result, with an as-yet unknown hit to costs.

This week’s article was scheduled to be my usual month-end review, covering stocks that have been in SIF for at least nine months. Last week’s events mean that I have to add Centamin to the list of stocks under review. The latest news from the firm - and its sharp share price fall - may have triggered one of my sell rules.

Here’s the full list of companies which will be covered in this piece:

Temporary power provider Aggreko (LON: AGK)
Information, education and networking group Wilmington (LON: WIL)
Gold producer Centamin (LON: CEY)

SIF Q3 performance

Let’s start with a quick look at the portfolio’s performance versus the market during the third quarter (the blue link is SIF, the grey line is the FTSE All-Share index):

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Here’s how the SIF Folio her performanced against the market so far this year:

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Although SIF is still underwater so far this year, it’s stayed comfortably ahead of the market and did not suffer such a severe drawdown in March. I can live with this.

Finally, here’s a list of the portfolio’s current holdings, as they stood during market hours on 5 October:

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The two oldest stocks in the portfolio - Aggreko and Wilmington - are also its biggest losers. Perhaps this is unsurprising. Both were bought in December 2019, during the market euphoria which followed the Conservative’s decisive election win.

Centamin (LON: CEY)

(Original coverage: 02-Sept-2020)

What are the likely implications of last week’s operating update from the Sukari gold mine? Centamin says that it’s “detected movement in…

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Silver Moon

6th Oct '20

This makes for some very depressing reading.

Chriskay

Your point about mining risks is well made Roland. Although obviously not in your portfolio Anglo Asian Mining (LON:AAZ) is a recent buy for me only to see war break out in the area and the shares tumble as a result. The mines are some miles from the warzone and it is a regularly contested boarder issue but I guess it will take a while for my shares to recover long after the threat is past.

Will Marsh

I certainly would not write off Centamin at this price. The share drop is for a specific reason. Unfortunately rules are rules for you but I would see this as a buying opportunity not one for taking a loss. shares back to parr within 6-9 months??

Robert Middleton

Thanks Roland for sharing, as always. I saw the RNS at 7:30am and decided it was better to take a small loss rather than risk a large one. I hope Centamin (LON:CEY) SP recovers, but I fear coming back from 20% down could be a long haul. I'll wait for positive news before I buy back in.

The Phoenix

I think introducing the 25% stop loss is sensible Roland allows some wriggle room against normal market movements but you need some protection against holding onto something that could join the -99% club.

Also getting the losses back requires the portfolio to work harder a 25% loss requires a 33% gain to get back to break even not great but doable, where once your in 50% loss territory your looking at 100% gain to break even not so doable.

Regards Andy

Nick Ray

where once your in 50% loss territory your looking at 100% gain to break even not so doable.

Centamin increased by 100% in just over a year.

This theory that it is harder to to recover from a fall because 33 is bigger than 25 or 100 is bigger than 50 is a misunderstanding caused by applying ideas about arithmetic progressions to geometric ones. (i.e. trying to use additive arithmetic to understand multiplicative arithmetic).

If you buy extremely volatile stocks and then start worrying when they move down by 25% you should not be buying extremely volatile stocks in the first place.

LumpedOn

Hey Roland, good as always to read your updates. On the subject of cutting positions, I wish there was an easy answer to this one, but I have never found it - in either direction.
Rules-based is the way ahead for me, so I think your approach is sound.

Personally I find we are in a unique time period as we all wrestle with the impacts and probable future (and deeper) impacts of current government policies. I can see no way of predicting how these may affect the markets, so I am increasingly focussed on recovering and preserving capital rather than just looking at losers.

In April I cut Jupiter Fund Management (LON:JUP) and Lloyds Banking (LON:LLOY) heavy loss making positions (as we discussed here) and used that capital in a high-risk strategy of doubling or trebling up some positions to drag my average down to a point where I can break even (or a little ahead) as results are released and/or sentiments change - thus avoiding the painful holding of too many underwater stocks. Just this week I have cut Craneware (LON:CRW), Scs (LON:SCS), Harworth (LON:HWG) under this new thinking to good effect. I also have a list of others including Wincanton (LON:WIN) and D4t4 Solutions (LON:D4T4) who will update in the next weeks and may go the same way.

I am undergoing a complete shift in rationale for the foreseeable - I am taking positions in funds that hold my favoured stocks rather than direct positions thereby spreading risk (but limiting return of course), focusing on rules-based trading for directs I hold, and picking up or holding a few long-term recovery plays at rock-bottom prices - e.g. Saga (LON:SAGA)

I guess it makes me more of a trader than an investor, but we each need to find the solution that works for us individually, always guided by our own appetite and ability to manage the risk. But I am determined to be more rules-based as we head towards 2021.

Good luck with your plans, and look forward to the updates.

Tommy H

Hi Roland

I appreciate your honesty, and it is good to see people admitting to losses, and your thoughts about trying to avoid some of these going forward. There are too many this was our wonder share (which you do have) without admitting those that were not so wonderful.

I have tried stop losses this year, but got hit by a bounce on most of them - set too tight with hindsight, so I think that your approach of 25% and/or Profit Warning is good. Thinking that Ed's seminar on Profit Warnings was a wonderful hindsight lesson for my biggest loser last year Card Factory (for some reason the keyboard has changed language today to USofA) so would certainly recommend this approach.

Keep up the good articles.

Tommy

Matthew Wood

Taking losses hurts but I've never regretted keeping them small - absolute max 15% on each position but I maintain an overall aggregate stop loss of <5% most of the time (some positions -15%, some +30% etc). I do understand the long term horizon investing thing but if you are getting into 50% underwater territory, I think you need to admit you bought at the wrong time. Imagine you'd had a 15% stop on these big losers - you could now eye up positions in them at prices you never dreamed of (and while you watched it going down you'd have been able to put that capital to work elsewhere).

bohenie

7th Oct '20

Re £CEY The trouble with a SL is that by the time it triggers its so oft too late to sell - and in this case - probably makes the share a dare I say it - 'value' buy. So, for now I will hold on. On the other side - I am frankly more nervous of the political sitn in Egypt - going from bad to worse but then thats the situation all over the globe..

aflash

Thank-you Nick Ray, well expressed.

The other relevant question on the arithmetic side is: What is your position size?

If it is acceptable to sell 50% of your position when it doubles and continue to hold with 'house' money then why not in the other direction?

If you sell half of a position that has dropped 25% but you think it is oversold, the remainder may increase in value over time. You will lose less, ignoring the time value.

The problem comes if you are wrong and the share continues down.

Position sizing is aimed to protect you from that kind of misjudgement. A 100% loss on half a position can be compensated for by a 100% gain on a full position.

intuitive6191

This has to be quite bad luck.

I personally though would not hold just one small/medium sized gold miner in a portfolio as I see this as being far too risky. I would prefer to hold say 3 or 4 with risks spread across a wider geographical and political landscape.

This of course means smaller positions to achieve the same level of investment, which might have been expensive in the old days of paying 1.6% trade commission, but less so nowadays.

Obviously the above approach interferes with the rules by which you build your portfolio. - so you may decide to exclude a gold miner that passes your rule but would leave you with just that miner in your portfolio.

Gromley

Indeed my favourite simile to this is that the average high daytime temperature at the Kew Gardens weather monitor in July is 23.5 Celsius by December it drops by nearly 2/3rds (*) but pretty much without fail it will manage the near 300% increase to get back into the 20s by July.

* Of course you cannot really use percentages on the Celsius scale, but the numbers look far less dramatic when quoted in Kelvin.

Looked at another way, if it really were twice as hard for stocks to rise 100% than it is for them to fall by 50%, then the entire stock market would trend to zero over time. - If you really think that is the case, why would you be investing in stocks?

That said, there would be better times to buy the 'Kew gardens temperature ETF' than after a 50% fall to November.

gus 1065

6th Feb '21

Footnote to the the Aggreko (LON:AGK) story as a putative 880p per share Private Equity backed cash offer surfaced late Friday afternoon. 39% premium to the CSP and roughly 130% up since Roland’s article. Seems to be M&A “open season” for U.K. plc. at the moment.

SIF September review: Centamin triggers stop loss (AGK, WIL)

SIF Q3 performance

Centamin (LON: CEY)

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Roland Head

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