Monday, August 24, 2009

Low Float Leverage

Regular readers of this blog know about steelmaker Ternium (TX). No, I won't shut up about it. It's up 200% year-to-date!

Anyway, the main reason for this gain is the cash being paid to the company by Venezuela. But TX's limited float also plays a role. At the risk of repeating this too much, 85% of the company's shares are owned by a pair of conglomerates and only 15% of the total shares actually trade.

This is the kind of leverage I like, especially when fundamentals provide a valuation tailwind. Like all leverage, it works in both directions. But in this instance the majority shareholder can create a floor. If values get ridiculously low, the majority shareholder has an incentive to buy out the pesky minority shareholders at a discount.

With all the background out of the way, here is my next "low float" contender - Highveld Steel & Vanadium Corporation.
Both Ternium and Highveld are steel companies that do business in faraway places. Highveld is in South Africa. And both companies trade as ADRs. Highveld is listed under the ticker HSVLY. But the most important similarity is structural.

Here is a link to the company's website. I know, it's pretty sad. Despite its shortcomings, however, there is a lot of information to be had, including the following subtle reference to Evraz on the homepage.
Evraz should get top billing as it is Highveld's majority stockholder. A brief introduction: Evraz is a steel company that is registered in Luxembourg (like Ternium). It does most of its business in Russia and in 2007 it became the majority owner of Highveld due (in part) to a transaction with mega-miner Anglo American (AAUKY).

Of the 99,150,098 Highveld Steel shares outstanding, Evraz holds 84,386,344. So Evraz owns 85% of Highveld. Sound familiar? At $9.65 a share, Highveld has a market value of $957 million. Of that, only $143 million is up for grabs. And as I said, it is volatile. The 52 week low is $4.75 and the high is nearly $20. Fun!

Like all steel companies, Highveld is struggling at the moment, but it has a decent balance sheet and long-term earnings power. I'll let you have fun with the South African rand conversions and that pathetic website. Valuing Highveld is outside the scope of this post, but I do think it is cheap.

Whatever the value of Highveld, the company's shares will be volatile due (in part) to the leverage afforded by a very small float. Average volume is less than 20,000 shares a day!


  1. Just a cautionary note: shareholders who own a majority of the company may be tempted to act as if they own the whole thing outright. There are laws to protect the minority shareholders when this presumption takes the form of cupidity, but it doesn't change the downside with respect to overall corporate policy.

    "What do we care if it doesn't go up? We own it anyway; why worry about yappers..."

  2. I actually hope that Evraz acts as if they own the whole thing. If they pay themselves a dividend, then they have to pay me too. Sorry, but I don't see the downside in their incentive to act like the owners they are. How could this possibly affect me negatively as a shareholder?

  3. I have seen Russian shareholders who act like they own the whole company -- it is not a pretty sight if you're a minority shareholder! In my opinion, limited float per se is not a positive. (I am based in Asia, where most companies have large controlling shareholders.) However, if you believe that there is a good chance for a corporate action -- AND the local laws protect you -- then limited float can work to your advantage.