Are we Beyond The bear-zone...?

• Commentary: Ok so how does this affect my portfolio? “Confession season” quarterly reporting season is back again. Money has started flowing from big caps to mid caps... wen smallcaps? Portfolio commentary.
• Quick Takes: TEE, HAR, AL3, PFE, IVZ, NTI, EXR, TTM, GEN
• This week in our Portfolios: Educationals....

It’s week three of our “is the small cap market back?” watch.

A quieter week this week, not as green as the first two weeks of July.

But also not that red at all - more grey.

A fairly neutral week.

We were watching what looked to be a very strong finish on Friday...

But for some reason our trading apps stopped working in the afternoon and we couldn't watch the market close...

We also noticed various other key technology systems stopped working too.

Some of us couldn’t tap our phones to make payments.

Was this a major cyber attack?

The first salvo fired by an unknown enemy to take down our key societal infrastructure?

Had the time finally come to don some Mad Max style leather chaps with a Hannibal Lecter face mask and join a marauding gang of bandits trawling this emerging dystopian hellscape for food, water and petrol?

Turns out no... not just yet.

It was just an issue with a Microsoft system update and it’s fixed now.

Stock market websites are functioning and you can tap your phone to buy food again.

So with the leather chaps neatly folded back into the panic room closet, the mind instantly turned to “how does this news affect my Portfolio?”.

Given how important macro/global news events are to relevant small cap stocks, most small cap investors will read each news article under the lens of “is this good for my stocks?”

How many of you watched parts of the Donald Trump speech yesterday and for each policy statement quickly assessed which of your stocks would benefit (or suffer) if the proposed policy was implemented?

When we first suspected a cyberattack yesterday, our Investment WhiteHawk (ASX:WHK)’s cybersecurity technology instantly jumped out as a candidate to start getting more attention.

(turns out it was not a cyberattack in the end, but it certainly gives a taste of what could happen if somebody decides to try and take down our critical systems)

When cashless payment systems went down the instant thought was that many people are going to be reminded of the potential risks of going fully cashless.

(one of us had to run into the house to find a $20 note to pay for a cab because the phone tap payment wasn’t working yesterday)

Cashless payments not working may remind people to store some currency somewhere other than in an online bank system - like in paper money or physical precious metals like gold and silver.

Mithril Resources (ASX:MTH), Sun Silver (SS1) and Titan Minerals (ASX:TTM) are our Portfolio positions that instantly came to mind in the event of a rush into gold and silver resulting from a wide reaching decay of trust in the cashless economy.

These were our “shoot from the hip” examples as events unfolded yesterday.

New events happen every day that can impact the fortunes of particular small cap stocks, which is part of what makes holding a Portfolio of small cap stocks so interesting.

What’s happening on the ASX - Its quarterly reporting season again...

We are coming up to the quarterly reporting season for small caps again.

For most small cap investors (especially in a bear market) this means skipping past the management commentary straight to the back of the report and checking the company's cash balance.

And then doing the quick “back of the napkin” calcs to work out how much cash runway companies have before they have to raise money again.

Shareholders prefer companies raising money in a bull market - share prices are higher which means less dilution.

During a prolonged bear market, In the weeks before the Quarterly reporting deadline we often see a flurry of capital raisings as companies need to top up the bank account rather than revealing they don’t have much cash left, in conditions where raising cash has been hard.

(If a company shows a low cash balance during a bear market people would likely then sell in anticipation of a cap raise at a discounted share price)

BUT...

While there is still 9 trading days before the cash reveal deadline we certainly haven’t yet seen the rush of capital raisings we expected.

This could mean that companies either have cash or have a positive outlook on near term market conditions and are comfortable to wait a little longer for sentiment (and their share price) to improve before raising money.

We will test this theory once we have seen a few more of the current season’s quarterlies released over the next two weeks.

What’s happening in the US...Money flowing from big caps to mid caps - Wen microcaps?

Over the last week the market has seen some downward movements for strong running mega-cap companies in the US.

Think Apple, Amazon, Tesla, Netflix, Nvidia, Meta (Facebook), Microsoft etc.

On a “heat map” of gains and losses across big stocks in the US, this is what that looks like: \

(Source)

(the size of the box is the relative market cap, and green or red means if the share price traded up or down)

The image shows money is flowing from the bigger companies (red is share price down) into smaller companies (green is share price up)

While the "great rotation" took a pause for breath towards the end of the week in the US, we're hoping the trend ultimately flows through to our bear market-stricken microcaps in Australia.

Like George Costanza in a classic scene from the “The Fix Up” episode - about 8 months ago we were almost without hope.

That’s now starting to change...

And on a serious note, there are some big moves afoot in the US as the Federal Reserve continues to soften its stance on rate cuts.

The Russell 2000 is an index which tracks US small caps (note: the median value of these companies is still ~$US1BN, we use the term “small cap” differently referring more to microcap level stocks on the ASX).

But we believe that as the heat comes out of the top end of the market, the liquidity will start to roll downhill to the small end of the market.

The Russell 2000 Index has shot up in the last month and a half, as seen below:

(Source)

And although the Australian market may be driven by different central bank policy settings due to sticky inflation - for better or for worse, Australia often follows the US lead.

Culturally, strategically and most importantly for us as small cap Investors, financially.

Looking at the ASX 200 [XJO] which covers Australia’s largest publicly traded companies we can see that XJO is well ahead of the WAM Microcap Listed Investment Company (LIC) over the last 2 years.

Note: The past performance is not and should not be taken as an indication of future performance. Caution should be exercised in assessing past performance. This product, like all other financial products, is subject to market forces and unpredictable events that may adversely affect future performance.

If we take the recent performance of WMI (which only invests in sub-$300M market cap companies) on the charts as a proxy for recent microcap performance it confirms what we’ve seen over the last 2 years or so - we’ve been in a small cap bear market.

But that doesn’t quite match up with what we’re seeing in terms of how small caps access capital markets in the last few months.

For instance in past weekend editions we’ve said the following:

16 March 2024 Weekender - we mentioned that the heavy selling might have stopped.

23 March 2024 Weekender - we were noticing scalebacks on raises, a good sign.

11 May 2024 Weekender - “Life back” in the small cap market.

1 June 2024 Weekender - “share price re-rates are back”.

Our point is this: the ability of small caps to once again access more capital, well before an improvement in sentiment (and broader performance), shows that there could be more to come from small caps.

And beyond that, what we’re seeing in our Portfolio and watchlist, is that CEOs are generally more bullish on their prospects of raising more capital at higher share price levels again.

(as we touched on above with the absence of a flurry of capital raisings before the July 31 quarterly cash balance reveals)

As a broad generalisation, we’ve seen the volume of raises cool off for a bit as CEOs that were traumatised by a 2 year bear market start to have the confidence to hold off on a raise to allow more company milestones to be delivered and market sentiment to improve.

We take all of this as good signs ahead of the rest of the year, now that the 2024 tax loss selling window is behind us and the potential for a big rotation into small caps starts to increase.

Some analysts quoted in the Australian Financial Review reckon it might take a bit longer for small caps to truly get going domestically:

(Source)

But we’re hoping the small cap winter is over, and green shoots appear sooner than expected.

Things appear to at least be moving in the right direction again.

A Quick Take tour from Gabon to the US...

Our Quick Take retro this week starts in Gabon, where we’re hoping one of our Investments, Genmin (ASX:GEN) can become a near term producer of green iron ore in Africa.

The ~$100M capped GEN recently appointed the former CEO of $66BN capped Fortescue Metals Group (yes, the massive Aussie iron ore producer) as a non-executive director.

It looks like GEN is putting together a lean mean supreme green iron ore team here - and it sounds good to us.

Especially as Gabon’s transitional president referred to GEN’s project by name this week in a speech.

Meanwhile another of our Portfolio companies which also has a connection to the “titans of the mining industry”, Titan Minerals (ASX:TTM) announced that its 9kms of its 100% owned Dynasty project has new gold/silver targets in Ecuador .

The big connection here is Gina Rinehart, who’s subsidiary Hanrine has a JV agreement with TTM for another of TTM’s projects which is focussed on a large copper discovery.

Here’s hoping the penny drops for the market, and it wakes up to TTM’s copper story.

And ideally, it’d be great to see TTM also deliver some big drill hits when it drills out these new targets at its 3.1Moz gold 22Moz silver project.

The gold price is still looking healthy, and we’re long term believers in the silver story.

Meanwhile the narrative from the major mastheads in Australia continue to warn of an east coast gas shortage in Australia...

Our domestic gas Investment Elixir Energy (ASX:EXR) said this week that it intends to kick off a flow test at its Daydream-2 gas project in Queensland in two weeks.

Sometime around then, in a perfect world, we get to wake up to an announcement from EXR detailing commercial flow rates.

Seems like Australia could certainly use the gas right now...

Speaking of gas... another of our domestic gas Investments, Top End Energy (ASX:TEE) is now working on proving up MULTIPLE helium and hydrogen targets in the South Nicholson basin in the Northern Territory.

As these targets firm up, we think it can give TEE a chance to start “cooking with gas”, after a phase of quiet execution.

(These targets are at recently acquired permits from Gina Rinehart’s subsidiary Hancock too)

There are connections everywhere today, so we’re naturally happy to hear that our African gas Investment Invictus Energy (ASX:IVZ) this week renewed its licences at the Mukuyu discovery .

Ultimately we want to see its huge gas discovery link up with regional pipelines and help address the energy shortages in South Africa.

Having been in South Africa earlier this year, we can confirm the power outages are a major problem and we want to see IVZ help.

And energy is a near ubiquitous macro current running through the market right now - uranium prices remain sharply elevated from a decade of lows at a steady ~US$85/lb.

Which is good news for Haranga Resources (ASX:HAR).

HAR’s revealed this week that termite mound sampling at its project in Senegal turned up 11 new drill targets.

The little bugs are clearly proving to be quite helpful to HAR in finding more of the clean energy commodity, let’s hope the uranium price stays high... touch wood (get it?).

Which brings us to our final stop on our Quick Take tour - the United States of America.

Our 2024 Tech Pick of the Year is AML3D (ASX:AL3), which is about to open a new 3D printing facility in Ohio over the next 3 months...

AL3 has an existing contract with the US Navy to 3D print parts - something which we hope grows into deeper relationships with the wider network of contractors and suppliers to the US Navy.

We postulated this week that AL3 may even be able to help the AUKUS submarine deal meet its deadlines ...US Navy shipyards are under immense strain to speed up production right now.

Across the Pacific an Australian Defence and industry supplier also signed a contract with AL3 this week too .

Back to the USA heartland though, USA lithium Investment Pantera Minerals (ASX:PFE) picked up even more acreage in the Smackover, Arkansas .

We really enjoyed our time in the state earlier this year looking at PFE’s project, and the sweet tea and fried catfish was definitely a highlight.

PFE is gearing up to drill its lithium brine project very soon, and we want to see some rocking lithium concentrations in any samples they are able to bring to the surface.

(ExxonMobil’s lithium project is next door too).

Finally, on a serious note, we were very pleased to see NTI return more very strong data from the secondary endpoints of its Phase II/III Autism Spectrum Disorder trial.

The key takeaway from the ASD data was that children on NTI’s treatment scored significantly lower across metrics on anxiety and depression after just 8 weeks .

We know that the medications to aid ASD patients with these symptoms don’t necessarily have the best side effect profiles.

So another major win for NTI, but hopefully a major win for ASD patients, caregivers and families if NTI can bring its treatment to market.

Having just submitted an Orphan Drug Application to the US FDA for another paediatric neurological disorder, NTI is building significant clinical momentum.

Good on you, NTI.

Learn about small cap stocks -Educations Articles we’ve written

Reading Small Cap Quarterlies

Quarterly reports update on key activities, CEO comments, revenue, and cash flow. For small caps, a strong cash balance is crucial for funding needs.

With Q2 Quarterlies being released for 2024, now would be a perfect time to understand how to read and understand them.

Read: How We Like To Read Small Cap Quarterly 4C Reports

How to Read Assay Results

Assay results refer to the analysis of mineral samples (such as drill cores) conducted by a laboratory to determine the metal content.

For exploration companies, assay results are crucial as they indicate the presence and concentration of valuable minerals like gold, copper, or other metals in the rock samples.

Read: How To Read Assays And Drilling Results For Beginners

Why do share prices go up?

It’s all about the balance of expectations, find out why it happens by clicking the link below...

Read: Why Do Shares Prices Go Up

A Beginners Guide to Investing in ASX Listed Small Cap Stocks

Investing in small cap stocks for 20+ years has taught us key lessons: be patient, document research, diversify, have a selling strategy, avoid hype, stay objective, monitor cash, and understand your psychology.

Read: Beginners Guide Investing Asx Listed Small Cap Stocks 2022

Why Do Shares Go Down On Good News

Ever wonder why share prices drop after good news? It's all about supply, demand, and expectations. If news doesn't exceed high expectations, prices can fall. Market sentiment, delayed results, and old investors selling can also drive prices down.

Read: Why Do Shares Go Down On Good News

What is a share price catalyst?

A "share price catalyst" is expected news that can significantly impact a company's stock price. Before such events, speculation often drives prices up. Our strategy involves early investment, holding through preparation, increasing positions before results, and taking profits. This applies to biotech trials and mining drills. Catalyst investing is high-risk, high-reward, suitable for a diversified portfolio.

Read: What Is A Share Price Catalyst

Find these and more in our Learn To Invest.

Quick Takes

TEE proving up multiple gas, helium and hydrogen targets

HAR identifies more uranium drill targets

Could AL3 help AUKUS sub deal meet deadlines?

PFE snaps up another 3,728 prime lithium acres

AL3 signs a deal with Australian Defence and industry supplier

IVZ renews licences at its Mukuyu discovery

NTI’s autism data is still improving...big implications

EXR to kick off Daydream-2 flow test in two weeks

TTM’s 9kms of strike has new gold/silver targets

Momentum building in Gabon for GEN’s iron ore mine

Bite sized summaries of the latest mainstream news in battery metals, biotechs, uranium etc:

• The Future Money: https://future-money.co/

Macro News - What we are reading

Copper:

Friedland warns of copper ‘crisis’ as mine costs soar (Mining.com)

• Miners and analysts convened in southeast Florida to address investor disinterest in the mining industry, highlighting concerns over copper supply shortages and inadequate price support.
• Robert Friedland of Ivanhoe Mines emphasised a looming copper crisis due to underinvestment and rising costs, stressing the need for significantly higher prices to sustain new project development amid growing global demand.

Copper Whale Fuels Speculation of Major China Shift as State Grid Buys Aluminum (Bloomberg)

• China's State Grid Corp. has decreased copper wire purchases and increased aluminium wire acquisitions this year.
• This shift has raised speculation about potential policy changes impacting global copper demand and prices.

Energy:

Kuwait Announces ‘Huge’ Oil and Gas Discovery in Offshore Field (Bloomberg)

• Kuwait Oil Co. announces significant discovery of light oil and associated gas in the Al-Nukhida field offshore, near Failaka Island.
• Initial estimates suggest reserves of approximately 2.1 billion barrels of light oil and 5.1 trillion cubic feet of gas, totaling 3.2 billion barrels of oil equivalent; plans are underway to commence production soon.

Stockhead's Great Big Aussie Gas Digest Part 1: East Coast (Stockhead)

• Australian gas sector resurgence: Price surge in 2022 and impending supply shortages have reinvigorated interest.
• Key projects: Santos' Narrabri, Senex's Atlas and Roma North, and Tamboran's Beetaloo operations aim to alleviate looming gas deficits from 2025 onwards.

Hydrogen:

EU Plan to Expand Green Hydrogen Market Is 'Overly Ambitious', Watchdog Warns (Bloomberg)

• EU's ambitious green hydrogen plan deemed overly ambitious by European Court of Auditors.
• Challenges include scattered funding, insufficient demand, and doubts over hydrogen's role in short-term emissions reduction.

Lithium:

China’s Batteries Are Now Cheap Enough to Power Huge Shifts (Bloomberg)

• FP battery cell prices in China have dropped 51% to $53/kWh over the past year, driven by lower raw material costs and overcapacity.
• These price declines are accelerating the adoption of electric vehicles in China, where EVs are becoming cheaper than internal combustion engine cars across most vehicle segments.

LTR ASX: Liontown Resources will do lithium deals with China after all (AFR)

• Liontown Resources has shifted its strategy by signing its first lithium supply deal with Sinomine, a major Chinese player, marking a departure from its previous focus on Western partners.
• The short-term agreement covers 100,000 tonnes of spodumene over 10 months from Liontown's Kathleen Valley lithium mine in Western Australia, with pricing linked to the battery-grade lithium carbonate market.

China Lithium Giant Plans to Build a $1.1 Billion Trading Desk (Bloomberg)

• Ganfeng Lithium Group Co. is setting up a derivatives-trading desk to hedge risks in the volatile lithium market.
• The desk will trade instruments linked to equities, indexes, commodities, and rates, with a daily trading limit of 8 billion yuan (US$1.1 billion).

Silver:

Could the Silver Price Really Hit $100 per Ounce? (Updated 2024) (Investingnews.com)

• First Majestic Silver CEO Keith Neumeyer predicts silver could exceed US$100 per ounce due to supply deficits, industrial demand, and its undervaluation compared to gold.
• Other experts are cautious, considering factors like interest rates and geopolitical tensions that could impact silver's price trajectory.

Have a great weekend,

Next Investors