Top 5 Reasons Why $FNI is a Bagger Stock

You may call this article a hype or “buzz”, rumor or speculation but this small-cap stock with the symbol, “FNI” or Global Ferronickel Holdings, Inc can be considered as “bagger” stock in the making. This could be my premonition ūüėČ and opinion and I fear this maybe similar opinion when I wrote the article on SINO or PLC on the secondary share offering.

There are 5 reasons on why Global Ferronickel Holdings, Inc. or $FNI is a bagger stock:

1.  Fundamentally, FNI is undervalued, currently trading at a cheap or low P/E 2014 of 8.78 based on conservative  assumption in 2014 based on available data. Please note that net income estimate for 2014 is P5.21B as a conservative estimate.

FNI PE

According to Peter Lynch, the legendary super investor, who detailed a few of the techniques he used to find winning stocks, (where his goal is to find ten-baggers and hold for years and end up selling when the amount he paid for the stock reaches 10 times), the stock P/E ratio should be below the industry average and also below the stock’s own 5 year average.¬† $FNI P/E 2014 is only 8.78 while industry P/E is 14.3.¬† Other analysts’ P/E 2014 is below 8.

Peter Lynch has also mentioned that “Institutional ownership should be less than average. This means when the institutions discover the stock, there should be large gains for investors who were in early.”

2. Earnings per share are seen to increase in the next few years

With this recent backdoor listing and new company, EPS growth is expected to dramatically increase based on the Management plans:

a.)  According to CRU Consulting, the Company is ranked no. 6 globally in terms of contained nickel in the shipments of nickel ore in 2013.  There is high visibility on future reserves at existing mine site in Cagdianao.  The company is only mining 2 of the potential 7 deposit sites.  Majority of the company sales by volume in the last 3 years come from ore supply, which is highly flexible (high iron, low nickel content and significant supply of high and medium grade ore), in terms of quality and nickel content as compared to other mining companies which are uniform.

b.) The Company has existing customer base in China and Australia including direct sales to smelters in China. It was also the Management’s plan to prepare itself for an overseas expansion with plans to grow its customer base in China and Australia as well as locate new countries where it can potentially establish its presence.

c.) The Company is also looking for possible mergers, joint ventures, mining agreements and acquisitions in the future including acquisition of smelters.  The successful and complete acquisition of INC (Ipilan Nickel Corporation) which is a mine located at Southeast nickel project in Palawan and FRI (Ferrochrome Resources, Inc.) mine (H3 Sandy Chromite project in Zambales) in 2015 and integrate these mines into its operations could tremendously add value to FNI, which is not yet included in its stock price.  The purpose of this follow-on offering is partly to fund these acquisitions.

d.) Diversification of other minerals such as chromite and other platinum group of metals could also contribute to its growth.  The Company through PGMC was incorporated in 1983 to develop nickel ore deposits and also smelting plants in the Philippines.  Its subsidiary also owns and operates barges in the mine site.

e.) Majority shareholder of FNI is Joseph Sy, who also owns 72.4% of the Smelting plant in China. This is one of the future growth strategies – to increase vertical integration through the acquisition of smelter operations in China including the plant and other business opportunities.

The increase of EPS is expected based on FOO proceeds:

proceedssource:  Initial PGMC Prospectus

Below is the shipment volume history of PGMC, courtesy of www.pgmc.com.ph

shipment

For more info on Platinum Group Metal Corp, 100% owned by FNI, here’s the link on the presentation about the company —–>> http://www.slideshare.net/scott_atayde/pgmc

3.  Institutional ownership is less than average

Current plans is to sell around 4.9B international offer of the 6.16B total offer shares or 80% of the firm shares to foreign institutions which should not be more than 40% foreign ownership as per SEC.

According to Peter Lynch, “Institutional ownership should be less than average. This means when the institutions discover the stock, there should be large gains for investors who were in early.”

Gerald M. Loeb, a renowned Wall Street trader and brokerage firm and successful author of investing books said, “Any stock in too many institutional portfolios or the subject of excess bullishness should be suspect. Someday a majority will want to take profits.”

With the SEC approval of the increase of authorized capital stock, the following changes in the percentage of ownership:

ownership

source: www.edge.pse.com.ph

Assuming FNI will be offered at P2.5 per share, even if the stock is trading at P3 per share during the time of offering, it will not matter so much as it will surely adjust to its current price and move upward within few days because of the tightly-held shares and intrinsic value of the stock especially due to its acquisition.¬† There is provision on over-allotment where the stabilizing agent, UBS AG will ensure to provide liquidity to avoid strong price movement and supporting the price by buying the share below a certain level.¬† This is the role of the stabilizing agent. UBS AG is ranked as one of the top bookrunners/underwriters in the world so expect an attractive and exciting FOO within 30 days from the listing date ūüėČ

4. Small-Cap Stock with calculated risk and flexibility

Others may be doubtful to invest because of the risk factors in the mining sector due to volatility in nickel prices in the world market, environmental hazards, changes in laws and regulations in the Philippines if there is any, general economic conditions in China, lifting of the export ban of nickel ore by Indonesian government, competition in selling nickel ore and others.  All I can say is there is risk in investing in a mining company so with other non-mining companies.  You will never eliminate all the inherent risk in mining. The big risks in mining, if everything is favorably underway, the rewards are equally too big!

 5.  Flexibility in Sales and Demand of Nickel in the World Market

FNI has flexibility in the sale of nickel ore.  Demand in low grade ore which is directly sold and shipped to customers depends on the demand of stainless steel and NPI in China and Australia.  The sales of high grade and medium grade ore are made to Chinese mineral trading companies and iron and nickel smelters.  FNI has also stockpile if prices of nickel is more attractive in the market.

What is interesting is the rising global nickel consumption by region from 2003 to 2020.

nickel consumption

Nickel is widely used in various products for consumer, industrial, military, transport, aerospace, marine and architectural applications.

  • Around 2/3 of¬†total production is¬†used in¬†the manufacture of¬†stainless and heat resistant steels
  • 20% in¬†non-ferrous alloys and other steels. There are some 3,000 nickel-containing alloys in¬†everyday use.
  • According to¬†the Nickel Institute, nickel‚Äôs use is¬†growing at¬†around¬†4% per year. The fastest growth is in industrializing countries. Nickel‚Äôs principal end use is¬†in¬†construction, where its resistance to¬†corrosion, strength, ductility, and high melting point all contribute to¬†its widespread use. Other principal demand sectors include automotive and electronics, where it¬†is¬†a¬†critical component in¬†re-chargeable batteries, as¬†well as¬†in¬†chemical processing and piping.
  • The world population is estimated at 9.6 billion by¬†around 2050, with the current and future global trends such as¬†growth in¬†demand for transport, accommodation, food/water and energy, future nickel demand is¬†expected to¬†continue to¬†increase, principally on¬†the back of¬†Chinese demand.
  • According to¬†estimates from Wood Mackenzie, based upon the outlook for stainless steel production and world industrial production trend growth forecasts, the world will need an¬†additional 400,000 tonnes per annum of¬†nickel production by¬†2025.

With these 5 reasons, are you still not convinced to invest in FNI while the current stock price is still in sleeping mode?

Why wait for the FOO price when you can hold it for long term when the industry P/E of 14 is easy in the short term.

If you have noticed, UBS securities is net positive worth almost P140M with an average price of P2.98/share. SB securities is net positive worth almost P47M with an average price of P3.02/share.  FNI Director is buying at an average price is P2.87/share.  The price as of this writing is P2.62 per share.

Addendum as of 28 February 2015

Thanks to Kevin Khoe, one of the mentors of Traders Apprentice Pilipinas for allowing me to share his article on Global Ferronickel Holdings, Inc. (FNI).  You can also read his article below:

Reposting what I wrote about $FNI last Jan 5.

The recent sell down did not alter my view on the stock. $FNI is poised to make P8.0bn this year and P10.0bn in 2016. This will make $FNI one of the most profitable company in the Philippines.

By 2016, $FNI will be the biggest mining company in the Philippines as it set to acquire a smelting plant in China. The plant will add an additional P10.0bn to its bottomline. This means we are looking at $FNI potentially making P20.0bn by 2017.

$FNI promised that the acquisition will be earnings accretive and I believe them.

I had a chance to meet with its owner – Joseph Sy and I must say he is “Mr. Nickel”. He has an intimate knowledge of the Nickel Pig Iron (NPI) market in China and at the same time knows the sourcing dynamics in the Philippines. In fact, he was the first one to export low grade nickel to China.

Mr. Sy reminds me of Andrew Tan. They both want to be big and I would not bet against that. His recent issues with immigration might have something to do with his “success”. He bought the existing mine in 2009 for less than US$100.0m and the current market value of $FNI is US$1.2bn.

Thus, the rumor that the FOO price will be at P2.50 is illogical. I still believe that FOO will likely be above P3.50 which is justifiable from all measures.

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Things to know about $CMT

$CMT is emerging as an interesting nickel play for 2015 as it expands its mining assets and acquire a 100% interest in a smelting plant in China.

In 2015, earnings are expected to grow to P8.0bn (EPS: P0.45) ‚Äď from P5.0bn in 2014; as it ships out more high-grade nickel ore.

$CMT is expected to commence operations of its chromite mine in Zambales by 3Q2015. This has not yet been factored into the forecast. On an annualized basis, the mine is expected to produce 3m WMT and generate an additional P3.0bn profits.

By 2016, income from its mining operations could reach P11.0bn (EPS: P0.62).

Using these figures, $CMT is trading at 6x PE to 12/15 and 4.5x PE to 12/16 earnings respectively.

Philippine nickel companies should trade at a much higher valuations (PE) considering that the country is now the biggest exporter of nickel ore to China. On top of that, nickel prices are expected to go up by 20% in 2015.

Valuations of Philippine nickel companies do not reflect the inherent pricing power they can potentially command considering its proximity to China and the Indonesia ore ban. I guess the market will eventually see through this.

Against the backdrop of expanding PE and nickel shortage, $CMT should trade at a much higher price prior to its follow-on offering (FOO).

My thinking is that the follow-on offering (FOO) can be priced between P3.80 to P4.20, as the pricing will take into account 2016 earnings expectations. At those levels, we are looking at 5.6x to 6.5x PER (to 12/16 earnings) range which is defensible considering the prospects of the nickel industry.

After the FOO, we expect $CMT to acquire a smelting plant that will position the company as a fully integrated Nickel play with exposure in China and the Philippines. This will make the story more exciting.

 

Disclaimer: This article is for information purposes only. There are risks involved with investing including loss of capital. The information provided in the website is only an opinion of the author and  does not constitute as legal advice, research or recommendation to buy or sell any securities.  The author of this article may be biased as he has accumulated shares of this stock.

16 thoughts on “Top 5 Reasons Why $FNI is a Bagger Stock

  1. Hi,
    Do you have any idea whats with FNI the past week? Would you consider this bearish?
    Is your FV on this stock still 3.80-4.20?

  2. Hi.
    As of this day, are you still positive that fni is stil bullish after the price was down by more than 50%?
    I have huge paper loss on this stock.
    I plan to cut loss already but im not so sure now if it is good jump aftr reading this article.
    Please share your thoughts.
    Thanks

    • At FNI current price of P1.21/sh, the stock has high margin of safety if one has the patience to wait starting 2016 when FNI’s newly bought Ipilan mine will start operation. It is projected to have an annual production rate of up to three million metric tons when ran on full capacity, doubling the company‚Äôs annual production capacity. It is just unfortunate that prices of nickel is down and due to weather condition but take note that “the acquisition of Ipilan is considered strategic for the company because it would address the seasonality constraint of the Surigao mine. The Cagdianao mine in Surigao operates only from April to October while the Ipilan mines would operate from November to July.” Pls take note that when consumption will start to increase while supply could not meet the demand as per forecast http://www.statista.com/statistics/388091/global-nickel-price-projection-by-london-metal-exchange/ those who are on bodega mode will be rewarded soon. ūüôā

  3. hi sir, would like to know if you still hold the same opinion now? i still believe in FNI even if it’s .99 as of today. thanks!

  4. Nice read provided with hindsight in relation to today’s Oct. 30, 2015 share price of FNI. Still bullish o bullshit with FNI? Is it bodega mode pa rin, nickle is fickle that is why its in a pickle jar. In investing long term, one should consider one’s resources, time value of money and opportunity cost.

    • Hi Rafael, I suggest to read all updates related to FNI.

      If I have FNI @ P2 per share, what shall I do? The only sensible thing I could do is: 1.) If we have extra funds, increase volume. At this period, my average should be below 2.) Long term until price of nickel recovers does not mean 5 months, neither 5 weeks. 3.) With the current price with very good volume, 2 to 3 years from now, I don’t think the price would be the same especially that China plans to double the size of economy in 2020 to around $12Trillion. Don’t expect that we can immediately gain with this stock if your average price is above 2 especially the variable price of commodities and slowdown of China. This is the risk to consider. I believe that with the current price of FNI at 0.69 (as of Jan 1, 2016), lucky are those on bodega mode. If you are a short term trader, we expect that you made a cut-loss already before. If you’re on bodega mode, I don’t think you worry the extra funds you have on your paper loss ūüôā

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