Cloudbreak Discovery, CDL, Up 15% – Should We Trade It?

Cloudbreak Discovery (LON: CDL) shares are a pretty new addition to the lists of those that could be interesting to trade. It’s only just in this past month that they’ve thrown off their post IPO torpor which lasted the second half of last year. Cloudbreak shares are up from their 2 pence-ish level to a little over 8 pence today, having been up at over 10.

One thing that should be noted is that the spread was very large back a bit. This is important because with a large spread there’s little point in trying to trade in and out. Any potential profit will just end up with the market makers. That spread – as a result of more interest in trading, obviously – is now down to 3% or so, which is good for an equity of the valuation size of Cloudbreak. The effect of this is that with price movements of 15% – say, like today – it is possible to be in and out of Cloudbreak shares and to book a profit. Something not possible when the spread is greater than a likely share price movement.

As to why the new interest in Cloudbreak Discovery, both the share price movements and the increased trading, as we’ve said before that’s a result of what it is that the company is actually doing.

They describe themselves as being a “natural resources project generator” which is rather like the old idea of being an investment house. Instead of rooms full of trading desks buying and selling paper, going back to the idea of actually creating businesses.

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The world of junior miners – recall, those not yet producing anything – is very fractured. This is natural enough as every mining company does start off with absolutely nothing. Then there’s the search for something to dig for, the exploration and confirmation work, the raising of capital, and so on. Every mine simply does start as a small business.

So, there’s possibly space in the market for people to organise those series of small businesses. Possibly introduce folk to each other, or to note that this sector is looking good, let’s work on more projects for that mineral. To be a repository of knowledge and contacts for this very fragmented industry.

Now, whether it will actually work is another matter but that’s a reasonable enough description of what Cloudbreak is attempting. It has worked before, in the past. It’s also true that some who have attempted it have not succeeded.

This structure though produces a certain volatility in the likely share price. For each time there’s a deal there will be a new announcement, each new announcement – at this stage, certainly – changes the likely valuation of the company as a whole.

So, we’ve a likely to be volatile share in Cloudbreak Discovery, also one with a reasonably small trading spread of about that 3%. So, yes, something that could be usefully traded – all that’s necessary now is to know which side of the trade to be on at any one time. Something to be determined by the actual announcements themselves as they come.