A diamond prospect beginning to shine?

Day trader Michael Taylor senses a change in the market but he also thinks one diamond miner's fortunes are due an uplift

September 15, 2021

by Michael Taylor

Uncertainty appears to be creeping into the markets – is a correction coming?
Traders need to be disciplined and vigilant
One diamond miner looks to be turning its fortunes around

The past two weeks have seen some uncertainty enter the market. Everyone seems to be sure of a big US correction. Which leads me to think: if everyone is so sure about a US correction, who is left to sell? But prices can fall if everyone thinks a correction is coming. At the moment, the US indices are trading close to their highs with some slight pullbacks. Is it just another ‘buy the dip’ moment or the start of something bigger? Who knows, and who cares? So long as you have your exit plans then you don’t need to worry. As I said on my YouTube channel (search 'Michael Taylor – Shifting Shares'), you must make sure that you properly assess the risks. It’s no good wanting to dump 20,000 shares into a market that is best bid for 5,000 several ticks below the price you want to sell. Of course, nobody can predict the future, but remember that illiquid stocks can become more illiquid.

Know your limits

This is why I much prefer trading SETS stocks. Instead of only trading via market makers, you can become the market maker yourself by placing orders onto the book. This gives a far greater order versatility. For example, we can use stop limit orders that will automate the process. Let’s say a stock is trading at 52p-55p, and we view resistance around 60p. We can set a stop limit order that will trigger at 61p (the stop part of the order) with a limit of 64p. What this means is that when the price goes through 61p – and not before – the order will then buy up to a limit of 64p in the size dictated in the order.

SETS is ideal for people who aren’t at their screens all day. If you have a full-time job, then you can set a stop limit order and go about your daily business. If you want to automate, then stop limit orders will do that for you. There is the option to use stop limits for the day only, until a specified date, or GTC (Good Till Cancelled). Obviously, if you’re using the latter, then you need to ensure you keep a proper record of your trades because the last thing you want to happen is to end up being long a stock that you have long forgotten about. If you’re shorting then always use end-of-day orders. You can always put them on again tomorrow. But being short when you’ve completely forgotten about the order is no good.

You can also use stop orders, which are orders that are activated at a certain price then become market orders. When it comes to selling, stop orders are great because they get you out once a certain price is triggered and protect the downside. But a stop order to buy basically means you are giving the market a blank cheque to fill you at any price. Do you really want to buy whatever the price? Probably not – hence why I think stop limit is best.

Opportunity from a diamond turnaround play?

One share that I have a stop limit order in is Petra Diamonds (PDL). This is a diamond miner with operations in South Africa and a now-for-sale asset in Tanzania. It recently posted results that look like a turnaround is beginning along with strong cash generation.

Revenue was up 65 per cent to $402.3m, but this includes a $62m contribution from ‘exceptional stones’ – stones that are so rare they are sold as part of a small collection or as a one-off. Cash generation has started with operational free cash flow of $120.1m (we are told this is defined as cash generated from operations less acquisition of property, plant and equipment) and a restructuring of the debt has seen the balance sheet much strengthened.

From my very minimal analysis, the price of diamonds is rising, and carats mined is targeted to grow slightly. I don’t care much about what Petra Diamonds does – it could mine diamonds on Mars for all I care and I’d still buy it if the chart was right – but this is an easy enough narrative to understand. That, plus the fact that the chart has now turned bullish is enough for me to set a stop limit order at around 1.9p.

Chart 1 shows the value destruction in the business with a peak of around 140p and falling so low you can barely register a movement on the chart. Needless to say, this was a classic stage-four stock where there was no reason to gamble on the bottom. Those who thought the stock was cheap at half price or even 75 per cent off got a shock as the stock still fell another 90 per cent from their entries.

Chart 2 shows the price action from the start of 2020. We can see a huge amount of volume in March 2020 as the bottom forms. That volume then stayed elevated compared with the prior year. We can see another volume spike in July 2021 on a trading update and since then the stock has traded in a narrow range. I’m looking for a break to the upside and I’ve marked the highs on the chart with the red arrow. In my opinion, Petra Diamonds looks like it could be a strong cash generator and any luck with exceptional stones in the coming year (there have already been several post-year-end) will help to pay down debt even further.