25x is a pretty good price rise for a stock or share and that’s what will happen – roughly you understand – to Golden Minerals (NYSE: AMUN) on Friday 9th of June. One thought here is that since we know this is going to happen we should all load up and make our fortunes. Sadly, given that we do know this is going to happen money making isn’t going to be quite that easy.
Golden Minerals is also quoted in Munich (MU: 7GB) , Toronto (TO: AUMN) (TSX: AUMN), Frankfurt (FO: 7GB), Berlin (BE: 7GB) and London (LON: 01YU) which does seem like rather a lot of quotes for a miner worth only $20 million. Well, yes, but back in 2010 it was worth perhaps 200 times that. Which is where the story really happens here.
Golden Minerals itself isn’t really the point here
This isn’t, not really, about Golden Minerals itself, it’s about how markets work, AUMN is just the example. And the truth is that markets are driven by fads and fashions just as much as the rest of the human world is. One of those fashions is that there’s a “right” price for a share or stock. You know, one that’s respectable, sensible. As it happens in London that tends to be in the £1 to £10 range. In New York (despite there being those many German markets no one really cares about them) it’s $10 to $100. This is why the US ADR of a London listed stock tends to be 10 shares. To get into those right ranges on both markets.
New York takes this further and insists that anything that trades in pennies is a penny stock. Well, yes, obviously. But that comes with connotations of being manipulated by the Wolf of Wall Street and all that – and not too far wrong to be honest. So, there’s a $1 minimum bid price on NASDAQ and the NYSE. Be blow that for long enough and you get thrown off those exchanges – off to the over the counter, OTC, markets with you!
Stock markets follow fashions, even over gold stocks
This is, was, about to happen to Golden Minerals. So, something must be done. That something is a reverse stock split, a consolidation as Brits call it. Simply announce that what used to be 25 shares are now one share. This doesn’t – not directly – change the market capitalisation of the company nor the value of any one stake in it. It just changes the number of shares that make it up – so, the value of each share changes then. Obviously. And that’s what Golden is doing Friday, a 25 for 1 reverse stock split.
At pixel time here AUMN is about 11 cents US, $0.11. So, just through the power of basic mathematics we can calculate that the price late Thursday will be about that (around, -ish) and Friday morning it will be $2.75. A 2,500% price rise and an x 25 increase. Something which doesn’t change the value of the company at all, nor the valuation of any particular stake in it.
This isn’t a sign of success for Golden Minerals
There is one little joy in this – we normally consider a rising stock price to be the result of success by the company. This is of course the opposite. Back in 2010 Golden was trading around $25 a share. This now is all happening because Golden hasn’t been a very good miner. That’s why the price has fallen so much that this tactic, the consolidation, is necessary.
We can also take this tale as being just one of those things about fashion. These reverse stock splits are much more common on the American markets because of that $1 minimum bid price rule than they are elsewhere. There are a couple of handfuls each week. So, we need to know this so that we don’t get all excited by 2,500%, 1,000% and the like reported price rises. Or, at least, that we check whether they are stock split related when they’re reported.
The nominal Golden price changes, but the real?
But perhaps the most important lesson here is that we’ve got to make sure that we understand the difference between nominal prices and real prices. Nominal is just the numbers changing, real is the actual value changing. It’s possible – and we don’t know nor predict either way – that saving the NYSE quotation will mean that the real price of Golden Minerals rises. Or that it doesn’t because it’s not very good at mining. But this will all be entirely different from that 2,500% price change that we know is built into the system.
