At first glance and compared to their own trading history, shares inAmur Minerals (LSE: AMC)look to begreatvalue. After peaking at 43p in the summer, Amurs shares have now erased all of their gains for the year. In fact, year-to-date Amurs 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 businesss 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 isnt 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 trapsis that of secular decline. More specifically, investors need to ask if the company in questions share price is falling due to cyclical factors, or the companys business model is under threat.
Amur is in the process of developingits 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. Butover 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-Manies 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 companys management destroyed shareholder value by overpaying for acquisitions and misallocating capital.
Amur cant be accused of destroying shareholder value. Management is working flat out to get theKun-Manie project off the ground. Whats 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 groups cost of capital (debt interest costs), it deserves to trade below book value.
As Amur is yet to generate any revenue, the company isnt earning a return on invested capital, so this criteria is redundant.
Nonetheless, figures suggest that the Kun-Manie mine has a net present value ofbetween $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 doesnt 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 ofthe Kun-Manie mine.
But don’t just take my word for it.I strongly recommend that you do your own research before making a trading decision – you may come to a different conclusion.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.