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2022 Wrap-up, IVZ Drilling Results Imminent and more...

Published 24-DEC-2022 15:00 P.M.


14 minute read

2022 is about to wrap up and it’s mostly been a rough year for small cap stocks.

Like with any bad year on the markets, there have been a handful of stocks that managed to deliver some joy for shareholders.

Battery materials and energy stocks held up relatively well and some were rewarded with share price re-rates if they made a new discovery or materially de-risked their project.

In our Portfolio, there is still one more twist to come in 2022.

IVZ is expected to announce the long awaited final result of its basin opening oil & gas drill in Zimbabwe.

If IVZ announces a discovery we expect a material impact on the share price.

The news was expected this past week, but IVZ went into a trading halt on Friday, so now we won’t know if a discovery has been made until it comes out of halt on 29 December, at the latest.

A potential five day wait — talk about building suspense for long term holders.

IVZ’s long trading halt has injected some excitement (or anxiousness?) into the traditionally quiet and relaxing part of the year when the market is mostly shut for Christmas.

We are holding 3,692,102 IVZ shares and 1,217,101 options into the result — representing an uncharacteristically large ~7% of our Next Investors Portfolio.

While we generally stick to our strategy based on our past experience in small cap stocks, on this rare occasion we are holding more than our strategy dictates.

We usually wouldn’t be holding more than 2% of our Portfolio into a wildcat oil & gas result like this - limiting to a “less than 2% of portfolio” bet size allows more “rolls of the dice” on failed drill results before significantly denting the overall portfolio.

...but we do have an unhealthy emotional attachment to the IVZ story after our first ever successful oil & gas exploration Investment, Africa Oil Corp, drilled a similar basin opening well in Kenya back in 2012.

(Even though we are fully aware that past performance is not an indicator of future performance.)

We had held a “larger than comfortable” position in Africa Oil too.

While we did manage to Free Carry IVZ over our two year hold period, this upcoming result is material to our Portfolio and will certainly sting if it goes wrong. But we are locked into the result now, so best of luck to all holders, Scott and the IVZ team.

By New Years, after the IVZ trading halt is lifted, we will either be “genius small cap investors” or chalk up another life lesson and expensive reminder to always “stick to the strategy” ... no matter how much a stock reminds you of a favourite past investment.

UPDATE: Our best performing company for 2022

Back in October in a previous weekend email we listed our Portfolio Investments that we thought could end 2022 as our “top performer”.

Our approach to Investing generally involves chasing a couple of 5-10 baggers (500% to 1,000% returns) within our Portfolio, which results in overall strong performance to offset the remainder of our Investments that may deliver only average or even poor returns.

This year was a particularly tough year in the small cap market — “stock picking” felt a lot more difficult compared to 2021 when everything seemed to be going up.

Small cap stocks with lower quality prospects were battered with most trading more than 80% off their all time highs. On the other hand, companies with strong management teams and high quality projects outperformed.

Luckily we had a couple of these companies in our Portfolios that all delivered over 500% at some point this year, namely GAL and LRS.

For ease of this calculation, we define “best performer” as the company with the largest % increase in its share price from 1 January 2022 to today.

For the stocks that came into our Portfolios after 1 January, we will measure performance from our Initial Entry Price.

With just three trading days left in 2022, GAL is currently the front runner to claim the prize, even though it has come off from a sustained period at $1.20 to bounce around 90c per share now.

Current standings (with three trading days to go):

  1. Galileo Mining (ASX: GAL) gained 293% in 2022 to date
  2. Latin Resources (ASX:LRS) gained 222% in 2022 to date
  3. Sarytogan Graphite (ASX: SGA) gained 151% in 2022 to date
  4. Invictus Resources (ASX: IVZ) gained 138% in 2022 to date

BUT... like a good horse race, or World Cup final, anything can happen at the finish line — IVZ is currently in a trading halt and expects to announce whether it has made Zimbabwe’s first ever gas discovery before the end of this year.

IVZ started the year at ~12c so assuming no changes to the other candidates, IVZ would need to finish the year above 48c to claim the title. We are hoping for at least double that on a successful discovery (but are obviously mentally and emotionally prepared for a failure too).

..and our Worst Performers

Of course, we can’t mention the winners without recognising our worst performers for the year.

Prominence Energy (ASX: PRM) and Global Oil & Gas (ASX:GLV) lost 82% and 92% respectively after no hydrocarbons were detected at their Sasanof-1 well.

A good reminder of how risky oil & gas exploration is.

Alexium International (ASX: AJX) - down 77% after stalling on new deals and revenue growth - a new commercially focused CEO recently joined to drive growth and we are hoping for a rebound in 2023.

Thomson Resources (ASX: TMZ) - down 76%. Slow progress and a silver price run that never happened have impacted TMZ. This was compounded by a high-risk convertible note funding that caused a downward spiral in the share price, in a year where access to capital was tough for small caps. We are hoping for a precious metals run in 2023.

88 Energy (ASX:88E) - down 63%. 88E delivers a “roll of the dice” on a high impact oil & gas well each year, and while it got so close with Merlin-1, it is yet to hit that elusive “discovery”. Hopefully its February-March drill will be the one.

As 2022 comes to a close it’s a good time to revisit some of this year’s most popular weekend notes for some reading over the holiday period:

The importance of commodity supply chains

In the wake of the global energy crisis spurred by the Russia-Ukraine war, OPEC made the decision to cut oil production. This set a ripple effect throughout Europe and much of the Western World as countries looked to tackle an increasingly inflationary environment.

In this article we looked at the importance of supply chain security from “friendly” western nations and how the US and Europe are overhauling the energy and critical minerals procurement strategies to reduce reliance on China.

Read it here

What world leaders say about the renewable energy transition and how we are Invested

Australia hosted the first ever “Energy Conference” this year. It was held shortly after the federal election and sent a clear message to the world that the Albanese government prioritised climate change.

The phrase “pace and scale” permeated the event and it was clear that critical minerals and energy supply would play a key role in the energy transition towards renewables.

Read it here

How do fund managers invest in small cap stocks

We investigated three key reasons why professional fund managers avoid investing in very early-stage investments and how this leaves opportunities for retail investors to get in on the ground floor of small cap stocks.

If such early stage investments can accomplish some key objectives to de-risk their projects, they may then become “investable” by professional fund managers, underpinning the share price as the company moves into the more advanced stages of project development.

Read it here

What we like most about investing in junior exploration companies

Did you know that since 2000, 71% of all mineral discoveries were made by junior exploration companies?

And this % has grown over the years.

In this note, we reveal why we invest in junior explorers and how the ASX is like the “Venture Capital” market for early stage mineral exploration companies.

Read it here

Raising cash in a rough market, how companies raise capital

It has been a challenging year for small cap stocks, particular for those that had to raise capital at lower valuations.

In these two weekend notes we looked at how small caps raise capital in a rough market, and what we are looking out for as Investors in these companies.

Read it here and here

The investment thematics primed for a big 2023

Battery materials and energy were strong thematics in 2022, but looking ahead to 2023 we named two thematics that we think are primed for a big year ahead.

These previously unloved investment thematics are due to make a comeback and in the following piece we examined where they sit in the Gartner Hype Cycle and explain how we position our entry early into particular unloved investment thematics.

Read it here

New 2022 Pick of the Year

This week we announced Minbos Resources (ASX: MNB) as our Wise-Owl Pick of the Year.

We are always careful about crowning a stock as a “Pick of the Year” as we reserve this label for Investments that we think have the best chance of delivering us a 1,000%+ gain over a 3+ year holding period.

MNB is currently progressing two projects at the same time — this makes it unique as a later staged company that has a project soon to enter production:

  1. Fertiliser project (project with potential near term cash flow opportunity) - MNB is building what it expects to be a high-margin phosphate fertiliser supply business (a phosphate plant) in Angola that has the potential to dramatically transform the country’s food security and crop yields.

    Project NPV of US$203.4M (base case) or US$400M when calculated using then current fertiliser prices (almost double the base case), and remaining CAPEX of US$40M - as per the October ‘22 DFS.
  2. Green hydrogen/ammonia plant (project with blue sky potential) - MNB is also seeking to develop a green hydrogen/ammonia business powered by cheap hydro-electric power in Angola. This would cut the reliance on expensive and carbon intensive natural gas that is typically used to produce ammonia.

MNB gives us exposure to a project that is currently under construction (its fertiliser project, first production expected in 2023) with the added blue sky venture (its green hydrogen/ammonia project).

Here are our Picks of the Year for 2022:

  • Minbos Resources (ASX: MNB) - Wise-Owl Pick of the Year (read article)
  • Tyranna Resources (ASX: TYX) - Catalyst Hunter Pick of the Year (read article)
  • Sarytogan Graphite (ASX: SGA) - Next Investors Small Cap Pick of the Year (read article)

This year we named just three as Picks of the Year, and unlike in previous years there were no Energy, Tech, or Biotech Picks of the Year.

The reason was that, simply, that we couldn’t find anything worthy of the title.

We do have an energy Pick of the Year that we were hoping to announce in 2022, but the company is just not ready yet - we expect to announce it in early 2023.

Again, we are always careful about crowning a stock as a “Pick of the Year” — it’s not a label that we dish out on a whim. These are Investments that we think have the best chance of delivering us a 1,000%+ gain over a holding period of 3+ years.

Given the challenges in the smaller end of the market over the past 12 months, we’ve been particularly discerning and are comfortable with our three Pick of the Year choices and their prospects over the coming years.

To see all of our Investments that have made the cut over the years to be named a Pick of the Year - click here.

🗣️ This week’s Quick Takes

ALA: ALA gets option for cytokine tech to enhance iNKT platform

AKN: Tanzanian uranium asset acquisition on track

AKN: Scoping study commences for Halls Creek base metal mining hub

BOD: $1.5 million R&D rebate bolsters cash balance

CAY: Strategic investor tips in $12.1M - 42% premium to share price

EMN: Euro Manganese releases quarterly, with cash balance update

EXR: Promising early flow rates at coal seam gas project

EXR: EXR wraps up a strong year at its 3 energy projects

GTR: Uranium strike length more than doubled in 2022

NHE: Noble Helium’s 2022 Operational Review & 2023 Forward Plans

RAS: Assays are in for RAS’s kaolin-halloysite project in WA

TG1: Intrusive rock types confirmed at NSW gold project

TG1: Soil sampling completed at WA nickel/copper/PGE project

This week in our Portfolios 🧬 🦉 🏹

Minbos Resources (ASX:MNB)

MNB as our Wise-Owl “Pick of the Year” for 2022.

MNB is seeking to build high-margin phosphate fertiliser supply business and develop a green hydrogen/ammonia business powered by cheap hydro-electric power, both in Angola.

Last week MNB signed an agreement (MoU pending successful studies by MNB) with the Angolan power network for the supply and installation of 100%-renewable hydroelectric power for its green hydrogen/ammonia plant.

This sees MNB secure access to power that is ~90% cheaper than what is paid by industry users in Australia and the USA.

MNB’s ability to secure extremely cheap (AND green) power is what makes this project so unique, interesting and economically competitive in the global ammonia market. We think it sets up MNB very well for delivering a technical study on its green ammonia project in 2023.

As for MNB’s phosphate fertiliser project, development is currently underway and it is expected to start producing in late 2023.

📰 Read our full Note: Announcing our Wise-Owl Portfolio’s 2022 Pick of the Year

Invictus Energy (ASX:IVZ)

On Monday, IVZ announced that evaluation of wireline logging was expected to take 2-4 days to complete.

IVZ had already proven a working hydrocarbon system and encountered multiple zones of fluorescence and elevated gas shows at its giant gas prospect in Zimbabwe.

But it is these pending wireline logging results that would confirm if “moveable” hydrocarbons are present — the final step required for IVZ to declare a rare and coveted oil & gas “discovery”.

On Friday, IVZ requested a trading halt and said it would provide an update “in relation to results from the Mukuyu-1 sidetrack wireline logging programme, formation pressure and fluid sampling” on or prior to 29 December 2022.

📰 Read our full Note from Tuesday: Discovery? We will know within 72 hours

88 Energy (ASX:88E)

Our oil exploration Investment 88E is busy ticking the final boxes before it drill tests a large oil and gas target on Alaska’s North Slope.

The well is scheduled for spudding in late February / early March 2023, and will test six conventional reservoir targets with 647 million barrels of oil to be appraised (mean, unrisked resource, net to 88E).

88E will be targeting the same reservoir units where its neighbour drilled three successful wells in recent years - driving that company from a $60M to just under $2BN market cap at its peak.

With drilling fast approaching, we’re hoping it is next year that 88E makes a big discovery.

📰 Read our full Note: 88E to drill test a 647 million barrel target next quarter

⏲️ Upcoming potential share price catalysts

Updates this week:

  • IVZ: Drilling its giant gas prospect in Zimbabwe
    • Results from wireline logging, formation pressure and fluid sampling now expected “on or before 29 December”.
  • 88E: Drilling for oil in the North Slope of Alaska next to UK listed Pantheon Resources.
    • Spud anticipated in late February to early March (see full Note).
  • GTR: Drilling results for uranium in Wyoming, USA.
    • GTR closed out its 2022 drilling program more than doubling the strike length of uranium mineralisation at its project to ~12km (up from ~5km before drilling started), see our Quick Take on the news here.

No material news this week:

  • GAL is undertaking a second round of drilling at its Callisto PGE discovery in WA.
  • TTM: Drilling its copper porphyry target in Ecuador.
  • PFE: Assay results for manganese (Weelarrana) project.
  • PRL: Awaiting final execution of a joint development agreement with Total Eren.

We’ll be taking some time off over the next few weeks and will return to normal coverage in the new year.

Have a great Christmas and happy New Year.

Next Investors.

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S3 Consortium Pty Ltd (S3, ‘we’, ‘us’, ‘our’) (CAR No. 433913) is a corporate authorised representative of LeMessurier Securities Pty Ltd (AFSL No. 296877). The information contained in this article is general information and is for informational purposes only. Any advice is general advice only. Any advice contained in this article does not constitute personal advice and S3 has not taken into consideration your personal objectives, financial situation or needs. Please seek your own independent professional advice before making any financial investment decision. Those persons acting upon information contained in this article do so entirely at their own risk.

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