I’ve Made 170% On Lonmin Plc: Should I Sell And Buy 88 Energy Ltd?

Should I lock in my gains on Lonmin Plc (LON:LMI) and consider reinvesting some of the profits in 88 Energy Ltd (LON:88E)?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

As I write, my Lonmin (LSE: LMI) shares are worth around 170% more than they were when I bought them, just before Christmas.

I have to be honest: my investments are not usually so profitable over such a short period. When I bought the shares, I thought they had the potential to triple in value — but I expected it to take two or three years.

Should I cash in now for a quick gain, or hold on for more? This rally could easily reverse, and I might have to wait another year or two to be able to sell at the current price. Lonmin’s turnaround could still fail, leaving me in an even worse position.

Only sell on bad news?

If I’m unsure about selling, I usually continue holding until some concrete bad news emerges. That hasn’t happened yet. Indeed, a number of factors seem to be moving in Lonmin’s favour.

The price of platinum has risen by about 5% so far this year. Currency effects continue to work in Lonmin’s favour, as far as I can tell. Lower energy costs and a weak South African Rand should help keep a lid on Lonmin’s operating costs.

Another factor in support of holding onto Lonmin is that the firm’s current restructuring plans are much more substantial than anything tried before. Lonmin plans to shut a number of mine shafts and has already made more than 5,000 workers redundant this year.

Lonmin seems to have managed this without triggering industrial action or disrupting operations. This suggests to me that the group’s management and the unions that represent its workers are trying to work together to help the company survive. This hasn’t always been the case.

A final consideration is that Lonmin still looks fairly cheap, relative to historic profits. I think the odds are in favour of Lonmin’s results continuing to improve. City analysts seem to agree, and have steadily increased their forecasts for adjusted earnings per share since November.

What about 88 Energy?

The meteoric rise of 88 Energy (LSE: 88E) has understandably attracted a lot of interest. Has this firm found a source of shale oil with costs low enough to be profitable in the current market?

We don’t yet know. But it’s worth noting that the company is approaching a turning point. Last year’s Icewine #1 well seems to have been quite successful.

The firm is now planning a 2D seismic survey to prepare for Icewine #2. Final negotiations to approve funding with the firm’s lender, Bank of America, are underway and the company hopes to begin work in March.

Assuming there are no funding problems, a successful Icewine #2 well could trigger further gains for 88 Energy shareholders. But there’s no guarantee of success, and funding could become a problem once this campaign is completed. The tax rebates available for exploration costs in Alaska are set to be drastically reduced later this year.

In my view, 88 Energy remains highly speculative and quite a risky buy. If future results don’t meet or exceed investor expectations, the shares could fall heavily. A dilutive share placing or farm-out deal also seems likely to me at some point in the next year.

In reality, both Lonmin and 88 Energy carry certain risks for equity investors.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head owns shares of Lonmin. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

Just released: our top 3 small-cap stocks to consider buying in October [PREMIUM PICKS]

Small-cap shares tend to be more volatile than larger companies, so we suggest investors should look to build up a…

Read more »

Investing Articles

How I’d use an empty Stocks and Shares ISA to aim for a £1,000 monthly passive income

Here's how using a Stocks and Shares ISA really could help those of us who plan to invest for an…

Read more »

Investing Articles

This FTSE stock is up 20% and set for its best day ever! Time to buy?

This Fool takes a look at the half-year results from Burberry (LON:BRBY) to see if the struggling FTSE stock might…

Read more »

Investing Articles

This latest FTSE 100 dip could be an unmissable opportunity to pick up cut-price stocks

The FTSE 100 has pulled back with the government’s policy choices creating some negative sentiment. But this gives us a…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

As the WH Smith share price falls 4% on annual results, is it still worth considering?

WH Smith took a hit after this morning’s results left shareholders unimpressed. With the share price down 4%, Mark Hartley…

Read more »

Investing Articles

The Aviva share price just jumped 4.5% but still yields 7.02%! Time to buy?

A positive set of results has put fresh life into the Aviva share price. Harvey Jones says it offers bags…

Read more »

Investing Articles

Can a €500m buyback kickstart the Vodafone share price?

The Vodafone share price has been a loser for investors in recent years, and the dividend has been cut. We…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Growth Shares

3 mistakes I now avoid when choosing which growth stocks to buy

Jon Smith runs through some of the lessons he's learnt the hard way over the years about what to look…

Read more »