When will First Island clear ?

Alfacomp

28 October 2018

The 1st October TR1 RNS that indicated that First Island had reduced their holding by around 8 Million shares (to sub 3% of the business) resolved one question - who was selling during the post-strike/post-Sojitz price recovery. However it raised another one - namely would they continue selling ?

Following our previous success at monitoring and then predicting the final sell-down of Erongo (neatly summarised in the Bushveld Minerals in a Minute video) earlier this year we now turn our attention to the First Island situation.

Key to this, and the previous monitoring, is the very detailed analysis of the entire day's trades - in this instance conducted continuously since the 5th of September. Without this it is not possible to have the context to reliably assess either the precise type of each trade or the accumulated Market Makers position. It is worth pointing out to those new to this site that I know of no other stock, on any market, or website that this is done for as regularly on as it is for BMN here.

So to the data - the embedded spreadsheet below shows the 52 large trades since the 18th september that I think are pertinent to this analysis.

The 18th September is chosen as the start as it is the point that a long sequence of duplicate pair trades was first observed  - this coincided with the apparent closing of a Market Makers short position that they had built up during the strike but which they had been caught holding once the excellent news of the Sojitz buy-out was released on the 13th September. There may have been First Island Sells before this point but as the 1st October RNS gives us a good data point for their holding on the 28th September this only really affects the subsequent discussion of the ignored Sells above 30p. 

These large trades are shown on a bubble chart below (small bubbles are 250K, medium 500K and the largest 750K or larger):

The initial sequence of pair trades, shown in yellow, runs until the 24th September and at prices of less than 28p - as you can see from the chart below this significant accumulation of First Island shares appears necessary to allow the Market Makers to close their c. 6.5M short position and to go further, building themselves a long position of c. 3.5M. By the 25th September there are 7M shares taken as duplicate pairs followed by another 0.75M in singles - more than 75% of the 10M shares needed to convert a 6.5M short position into a 3.5M long one.

With a 3.5M long position in their pocket the Market Makers allowed the SP to rise so that Private Investors could have the pleasure of spending a lot more on buying these shares than they, the Market Makers, spent in acquiring them. And boy did they need to do this - they had to counter the c. £280,000 loss that they made on their disastrous short they took out during the strike. [6M shares x (26p buy price - 21.3p average sell price)]


Now we come to the green bubbles - these are marked as 'ignored' - why ? Why do I not think these are from First Island ?

Two reasons - firstly if you are market maker with a long position you don't want to sell someone else's shares before you sell yours - these will simply suppress the SP price rise and you won't be able to make as much money on the shares you have sitting in the back room. You want to make profit on YOUR shares, not hand profit to First Island.

(So what do you tell First Island IF they ask 'why aren't you selling our shares' - possibly something along the lines of 'we already have too many shares, hang tight'. Ha ha , like taking candy from a baby !)

Secondly the 1st October TR1 gives us a firm known shareholding for First Island on the 28th September. If we did associate all the (green) trades above 30p with First Island my estimation of First Island's holding, the blue line in the chart below, would undershoot the red measurement point by some 2M shares - about the width of the red marker. It is not a long way out but it does seem reasonable to hypothesize that the 2M or so shares covered by the green trades are coming from a different shareholder and do not need to be ascribed to First Island.


Between the 27th September and the 4th of October the Marker Makers progressively sold down their long position - remember they acquired these shares at around 26.3p average price - guess what - they sold these at between 31p and 27p  and made sure that they did not allow the price to fall below 26.5p to Buy. Long Position now closed, some profit made but nowhere near enough to cover their strike/Sojitz howler.

In the previous couple of weeks the trading volumes were typically 7-10M shares per day, but after the 4th October this fell to only 2-3M per day. As a result there was really no need for the Market Makers to make use of any of the shares on offer from First Island. They were happy to build themselves a short position that they no doubt expected that they could fill using cheap First Island shares at a later date.

This continued for just over two weeks until the 17th of October when a large buy of 1M appeared right at the opening of trading (its main effect came the day before when I believe it was being worked and the SP was allowed to increase from 27.5p to 29p). As the trade analysis for the 18th October describes I believe the arrival of a 1M buyer was the point when it became apparent to the Market Makers that they needed to double the size of their short in order to give them a fighting chance of making money on it. 

Unfortunately for the specific Market Maker who is short general buying pressure has also recently picked up alongside the arrival of yet more large worked trades that I consider to be Buys [25th Oct (2.383M) and 26th Oct (0.55M)]. If the Market Makers did not take the First Island shares now they would have been forced to increase their short position by some 6M shares - taking it to over 10M shares. I suspect that they do not wish to expose themselves as much as this, especially since positive news is expected shortly AND the horrific experience they had courtesy of the Sojitz announcement - thus they have no option but to take the First Island shares.

The Market Makers can currently just about keep on top of things at around the 28.30p that they got when building their short position. However the situation is currently very delicately poised - if another large buyer comes in or if significant news, and momentum buyers, arrive then they will have to rapidly backtrack on their short position. 

Another possibility raised on the LSE board is that First Island have only sold sufficient shares to cover the cost of their initial stake - leaving them with what is termed a 'free-carry'. The initial First Island stake in March's $22M placing was c. 41.35M shares at 10.3p - thus they would have needed to recover £4.25M from their initial tranche of share sales. The number of shares sold to reach this depends on the SP - but has now been reached, just, and the threshold is shown by the red dotted line in the chart above. There is therefore still the possibility that First Island will cease selling imminently if this is, or now becomes, their strategy.

Assuming that nothing changes, however, and that buying pressure remains as it is currently, then with c. 25M shares still remaining it would appear to give a final point for the selldown of First Island shares as the 21st of November 2018. Remember however that Market Makers have yet to find the 5M shares to fill their current short position - so only 20M more need to be sold to Investors before the Market Makers call time on First Island in order to make sure they get the last 5M cheaply for themselves.

Naturally we shall continue to monitor this situation closely. Suffice it to say that the era of sub 30p Share Prices may not last more than 4 more weeks.

This article only conveys the personal opinion of the author. Whilst every effort is made to ensure the content is accurate, we cannot guarantee the accuracy of the data shown. This article does not constitute professional, financial or investment advice and must not be used as a basis for making investment decisions.

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