Is Amur Minerals Corporation A Value Play Or A Value Trap?

At first glance and compared to their own trading history, shares in Amur Minerals (LSE: AMC) look to be great value. After peaking at 43p in the summer, Amur’s shares have now erased all of their gains for the year. In fact, year-to-date Amur’s shares are down by a quarter, despite the progress the company has made during 2015. 

So does Amur look to be good value after recent declines, or should you avoid the business’s shares altogether? In other words, is Amur a value trap or a value play after recent declines?

Value trap

Value traps are difficult to spot. Finding them isn’t an exact science and investors often get sucked into them when searching for bargains. 

Nevertheless, there are three key traits most value traps have in common and by avoiding companies that display these characteristics, you can increase your chances of avoiding these traps. 

Secular decline 

The first common characteristic of value traps is that of secular decline. More specifically, investors need to ask if the company in question’s share price is falling due to cyclical factors, or the company’s business model is under threat. 

Amur is in the process of developing its flagship Kun-Manie nickel copper sulphide project in the far east of Russia, and the nickel market is cyclical. Right now, the nickel market is oversupplied, so prices of the metal are falling. But over the long term, market forces should ensure that nickel prices stage a recovery as production around the world falls and demand rises.

What does this mean for Amur? Kun-Manie’s low cost of production means that Amur is well-placed to ride out the cyclical nature of the nickel market. 

Destroying value 

The second most common trait of value traps is the destruction of value. In other words, investors need to ask if the company’s management destroyed shareholder value by overpaying for acquisitions and misallocating capital.

Amur can’t be accused of destroying shareholder value. Management is working flat out to get the Kun-Manie project off the ground. What’s more, in January 2015, the Board of Directors, executive staff and other service providers even opted to receive new shares instead of compensation, a measure designed to help Amur save cash. 

Cost of capital 

The third and final most common trait of value traps is a low return on capital invested. Put simply, if a company continuously earns a lower return on invested capital (equity and debt invested in the business) than the group’s cost of capital (debt interest costs), it deserves to trade below book value. 

As Amur is yet to generate any revenue, the company isn’t earning a return on invested capital, so this criteria is redundant.

Nonetheless, figures suggest that the Kun-Manie mine has a net present value of between $0.71bn and $1.44bn, which implies that Amur could be set for a bumper payday if management can find a buyer for the mine, or develop the mine itself. 

The bottom line

All in all, Amur doesn’t look to be a value trap to me. The company looks well-placed for growth, and the shares are trading at a huge discount to the net present value of the Kun-Manie mine.