Dear Lou,
Can you give a background to LIF and your thoughts on its future? Unless I am missing something it would seem they are not currently producing anything. I would welcome your perspective. Thanks.
Gordon
Hey Gordon,
Thanks for the assignment. This will be the second time that I examine the case for Labrador Iron Ore Royalty Corporation. The last time was on Oct. 17, 2014. Kaissy asked for my views on the stock for the short and long term. The shares were trading for $19.21, and the investigation outlined shares that were in a free-fall and had relentlessly melted through various support levels. There were no indications that we could expect a trend reversal in the short term. Not surprisingly, LIF continued to sell off.
In March of 2015, management announced plans to diversify, which will be put to a shareholders vote in May. LIF currently earns 100 per cent of its revenue in the form of royalties from their 15-per-cent ownership of the Iron Ore Company. The risk for shareholders is that the Iron Ore Company could suspend operations until iron ore prices improve and cut off the cash flow to LIF.
An fresh eyes survey of the charts will inform my thoughts on how best to manage an investment in these shares.
The three-year chart outlines the risks associated with bottom fishing. When Kaissy tasked me with the Oct. 2014 analysis, I surmised that it was motivated by the desire to fish the bottom and hook a big return. The drop to a 52-week low of $14.04 by March of 2015 serves as a caution when anticipating a bottom. Finding new lows with your capital can ruin an otherwise good day.
Over the last five months, the overriding patterns that still need to be respected include the waterfall decline, resistance along the 50- day moving average, and the death cross that surfaced in September of 2014. Until these issues are resolved, LIF needs to be viewed with caution.
The six-month chart highlights the resistance at $16.00 and $17.00 that will have to be overcome if LIF has any hope of starting a new up leg. In addition, their moving average convergence/divergence and relative strength index are not generating any signals that we can expect a move to the upside.
LIF needs an increase in the demand for iron ore before investors can expect a recovery in the stock price. The dividend yield of 6.35 per cent is attractive but has to be weighed against the risk of the royalty stream being cut off.
Next time I will scout the charts of EnCana Corp. (ECA TSX) for Lalit.
Make it a profitable day and happy capitalism!
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