Commodity play eyeing a breakout

Day trader Michael Taylor surveys markets which were surprised by Russia's aggression and spots a possible commodity play that could be set for a spike higher

March 2, 2022

by Michael Taylor

The markets have been caught napping. Nobody actually thought Putin would invade. Of course, there will be a few Harry Hindsights popping up saying they knew it was going to happen all along, but ask them what they were long and short of to trade it and their answer will tell you everything you need to know.

There is no other way to say this. The invasion of Ukraine is disgusting. Some of the videos coming out of the war are unsettling and disturbing – the sort of images that will rapidly harden outsiders’ opinions of sympathy for Ukraine. Perhaps that sympathy will turn into action. Over the weekend, higher sanctions were announced, with even Switzerland joining in. Never before has a country so quickly become a pariah. But one problem is that when you back a rat into a corner, they have no other option but to attack. That’s the danger of giving a megalomaniac no room to manoeuvre. I’m not going to pretend I know what’s best. I don’t. Because as with Brexit and Covid-19, I’m also not an expert in political strategy.

But what I would say is that anyone trading the Russian basket of stocks should be careful. Volatility in these stocks is off the charts. Anyone trading without strict risk management can easily be carried out. This week, I watched Polymetal (POLY) drop 40p (10 per cent) in seconds. These are the sort of rips that can easily see a trader with their full size on losing their dough rapidly.

Also, with the Deutsche Boerse suspending Russian stocks, I feel every day is a ticking timebomb with suspension looming large. Note: suspension is not delisting. But not being able to close a position because the stock is suspended is definitely not attractive. Plus, some brokers will mark these positions to 100 per cent margin. If you really have to, trade them with your eyes open.

Many people have expressed annoyance at people trading these stocks and profiting from the market. My view is that although I in no way condone the actions taken by Putin and the reported war crimes of the Russian army, the market is the market. Someone is going to make money in it.

One stock that came onto my radar this week is Bushveld Minerals (BMN). I looked at this stock back in 2020 in ‘The value of focus’ (29 December 2020). I believed that the stock had made a stage 1 base throughout 2020. Unfortunately, the ferrovanadium price failed to rally and so Bushveld slumped alongside this. I exited the stock as my stop loss was hit and the stock fell even lower.

We can see what happened in Chart 1. The stock hit as low as 9p and found support here. The key to understanding this stock is that it is completely geared to the ferrovanadium price. Bushveld has a cost to produce and sell this commodity and when the ferrovanadium price rallies then profits increase. But when the price slumps then this can mean profits reverse. Indeed, in 2021 Bushveld posted a loss because prices per kilogram were in the low 20s. Increased production wasn’t enough to offset this fall in price but there has been a recovery in prices since this time.

Ferrovanadium is currently printing around $48, which is the highest it has been since April 2019. There are signs that sustained demand is returning as the price has been above $30 since March 2021. Ferrovanadium is a tight market and in 2018 Bushveld Minerals multibagged as a result of a squeeze in the market that pushed prices as high as $128. During 2018, Bushveld Minerals achieved an average selling price of $81. With 20 per cent of the ferrovanadium market coming from Russia, a country that is now being heavily sanctioned, along with Bushveld ramping up production this year to between 4,200 metric tonnes of vanadium (mtV) and 4,400 mtV from 2021’s 3,592, it’s not unreasonable to believe that at 12p the stock has a real prospect of doubling from these levels. So long as the ferrovanadium price stays at $35 or above, then Bushveld will be cash-flow positive. That said, what matters is the chart.

Moving on to Chart 2, we can see that the stock is fighting with the 200 day exponential moving averages. I would expect tough resistance from the old resistance at 15.5p should the stock reach there.

What’s also important to note is that volume spiked massively this week. It’s the highest volume day since March 2018. I’m a big believer that volume often tells a story – shares swapping hands means that both buyers and sellers are active – and if the price rallies on big volume then it’s clear that the bulls are winning the battle. What I want to see now is continued elevated volume as a marker of continued interest. And it’s always important to check when you see high volumes if there was a significant amount of trading done in the stock. For example, sometimes you can see a volume spike yet when you check the trades it can be just two block trades that have printed in the market, and there is little to no activity done outside of these trades. When you see both volume spike and an increase in trading activity, these are the signs that tell you there is genuine interest in the stock.

I’m holding a starter long position in Bushveld Minerals for now with a stop below 9p. I’m looking for reasons to increase and will be watching the ferrovanadium price. Given some of the price moves we’ve seen in commodities, hoping for a repeat of 2018 isn’t as unlikely as some might think.