Thursday, January 24, 2013

BVN: Peruvian mining breakout

Compania de Minas Buenaventura SA (BVN), a Peruvian mining company traded both in Lima and New York under identical symbols, dropped sharply below its 20-day price channel on Wednesday, piercing $34.02, and today continued to tumble for a third day.

The movement came on news: Buenaventura and First Mexican Gold corp. have signed a deal for joint development of a property in Mexico.

Movements on news are always problematic. In the case of BVN, there's the added caution that the break below the price channel doesn't move the price into the new territory. That will come if it falls below the 55-day channel, whose lower boundary is presently at $30.86.

BVN, however, has a history of profitable breakouts to the downside; eight out of 10 have made money, with an average gain on each of 6%.

That return adjusted by the 78.6% success rate givens an adjusted return of 4.8%, below the 5% that is normally my preferred minimum.

The stock has been in a downtrend since peaking at $57.20 in October 2010. This week's decline marks yet another reversal from a higher high in the long staircase down from that peak.

It is a bearish chart, and the handful of analysts following it are universally negative in their opinion as assessed by my enthusiasm index.

Buenaventura, headquartered in Lima, is Peru's largest owner of mining rights, with operations in gold, silver, coal, lead, molybdenum and zinc.

It is a money maker, with return on equity of 21% and no long-term debt. Earnings for the past 11 quarters have without a trend, but all have been profitable enough to produce a trailing price/earnings ratio of 10.92. It has surprised three times to the upside and eight times to the downside.

Institutions own 42% of shares and the stock price is high; it takes $5.85 in shares to control a dollar in sales.

In contrast to the chart, the financials have a bullish tinge.

BVN on average trades a million shares a day and supports a good selection of option strike prices, but with low open interest on the U.S. exchanges.

I would take that to mean that the speculative action, as is often the case with American depository receipts, is happening on the home-country exchange rather than in New York, except that options are trading at levels triple their average five-day volume for calls and nearly quadruple average volume for puts.

The open interest is at double and triple digits, and is spotty enough to make me wonder whether there is sufficient liquidity for an options play. For example, the February call options at the strikes bracketing the at-the-money point have no open interest, something I haven't often seen in a liquid stock.

And in the out month, where I would buy long puts, the delta 70 level also has no open interest. Under my rules, the lack of open interest at key levels is a deal killer.

The front-month at-the-money puts have a 30% bid/ask spread, which is quite wide.

BVN's implied volatility stands at 27%, near the low point of its six-month range. It has been on a shallow decline for most of that period.

Options are pricing in confidence that 68.2% of trades over the next six months will fall between $30.27 and $35.32 for a potential gain or loss of 7.7%, and between $31.58 and $34.01 over the next week.

The fair-price zone on today's 30-minute chart runs from $32.38 to $32.83, encompassing 68.2% of transactions surrounding the most-traded price, $32.82. Five hours before the close BVN is trading at about the most-traded level, having fallen the first hour of trading, risen in the third half hour and gone nowhere so far in the present fourth half hour.

Buenaventura next publishes earnings on March 11. The stock goes ex-dividend in May for a semi-annual payout yielding 1.83% annualized at today's price.

Decision for my account: I don't like the low open interest on options and would need to play Buenaventura as a short stock, which is possible but lacks leverage. 

The average return on successful trades adjusted by the rate of success is lower than I like. The success rate is high, but the return is fairly low, and without leverage it's simply not attractive -- I'm betting that there are more profitable uses for my funds.

For those reasons, I'm passing on BVN. No trade.


My trading rules can be read here.  A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found here.

And the classic Turtle Trading rules on which my rules are based can be read here.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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