The Elephant in the Room
Published 12-NOV-2022 12:00 P.M.
14 minute read
Why do stocks sometimes go up when you least expect them too?
And why do they sometimes fall when good news is released?
After what seems like forever being stuck in a rough market for small caps, it was great to see an overall positive week.
The US markets recorded its best day in two and a half years - and the positive mood certainly flowed into many ASX small caps.
Crypto had a shocker, with Bitcoin hitting the lowest point since December 2020 - perhaps some of that bitcoin money has been flowing back into traditional “stores of value” like gold, which has had an excellent few weeks up ~10%.
Could this be the start of the 2023 gold run we predicted three weeks ago?
The good thing about the market turning positive after a few really bad months is that small cap share prices are mostly sitting at yearly lows, after short term investors have exited and general expectations are low.
This means that material announcements now usually result in decent price spikes, coming off a low share price base with little positivity built into the pre-news share price.
This is why sometimes stocks go up when you don’t expect it - when sentiment is low. Stocks go down on good news when pre news expectations were too high.
Hence why our strategy is to hold during rough markets (and participate in capital raisings while everyone hates a stock).
Today we’ll cover a couple of examples of stocks that announced news from a low sentiment share price versus a high sentiment share price.
Obviously we can’t ignore the ‘elephant’ in the room, IVZ.
On Thursday, our 2020 Energy Pick of the Year Invictus Energy (ASX: IVZ) confirmed a working hydrocarbon system with gas shows 65x above background levels.
IVZ’s share price had halved in the weeks since drilling started in September, but finished 162% up on its biggest ever volume on the day of the announcement.
Speculation on a positive drill result usually sees the share price rise for an oil & gas explorer in the lead up to the result, then often fall when the result (even if good) doesn’t meet the lofty pre-drill expectations.
This phenomenon is common in a bull market when sentiment is “default positive” and greedy investors are fearful of “missing out”.
However, in a rough market like the last few months, investors are more fearful about losing money and seem to be more comfortable to hit the sell button on the expectation that the result will be bad.
In this kind of “low expectation” environment, if the news is positive (like it was for IVZ), then the share price has a better chance to materially re-rate upwards from a pessimistic base.
There is still more to do for IVZ - a wireline program (logging and sampling) will confirm if IVZ has an official “discovery” and have opened up a new oil and gas basin in Zimbabwe.
A “discovery” announcement is the one we are waiting for, because we believe a discovery on the first of 14 drill targets in IVZ’s unexplored basin will imply that the other drill targets could be successful too - that’s a lot of potentially successful targets.
Thursday was a write-off for the Next Investors team — we spent the entire day glued to the screen watching IVZ shares trade back and forth, making predictions about where the stock would close.
These days don't come around often, so sometimes it's good to sit back and just savour the moment.
Congratulations to all long term IVZ shareholders who held through a nervy past few weeks... it wasn't easy watching the share price drop by half on no news.
...also congratulations to all the lunatics that bought IVZ shares during the last few weeks, so close to a binary drill result - an extremely risky move but on this occasion it has paid off.
We ended up holding a much bigger position into the result than we expected (due to lack of pre-drill price rise to take some profit plus emotional attachment) - luckily it worked out this time, here is a snippet from our October 6th note, just before the share price halved:
With this week's IVZ announcement confirming a working hydrocarbon system and IVZ close to reaching total depth, it is a good time to revisit our comparison of IVZ to Africa Oil, which drilled a successful basin opening well on the East African Rift almost 10 years ago and re-rated over 1,000% into a multi billion dollar company.
The key takeaway from the image below is that Africa Oil’s share price run started once the discovery was confirmed and thick oil and gas columns were being announced, combined with Africa Oil’s basin master position (like IVZ has).
Read our full IVZ versus Africa Oil comparison here.
IVZ should be in a position to (hopefully) make similar announcements when it finishes its wireline program, AFTER it completes the drilling program.
The wireline logging results and bringing a movable hydrocarbon sample to the surface is the final hurdle that IVZ needs to jump before they can declare a discovery (remember there is still a risk that IVZ won’t be able to bring a hydrocarbon sample to the surface).
Another example of a share price re-rate from a low sentiment is Sarytogan Graphite (ASX: SGA), our graphite Investment in Kazakhstan.
After reaching a high of ~56c after its IPO earlier this year, SGA’s share price drifted back to its ~20c per share listing price — yet we haven't sold a single share.
Sentiment and expectations around SGA had cooled.
This week we got lucky with the European Union signing an MoU with Kazakhstan at COP27 to establish a partnership on battery materials supply to:
“...allow both sides to advance trade and investments into a secure, sustainable and resilient raw materials value chain, which is key to achieving the transition to climate-neutral and digitalised economies.”
On the same day SGA reported high grade graphite drilling results, and suddenly the market was interested in SGA again. SGA’s share price gained ~37% on the stock’s highest ever daily volume since its listing.
SGA also seemed to be sitting at a relatively low base prior to these two news items, with general negative sentiment weighing on the share price since August.
We still hold our full position in SGA because we expect the main share price re-rate should occur IF SGA’s second round of metwork can confirm their giant graphite deposit is battery anode grade AND commercially extractable.
We are expecting this news from SGA in the coming months.
Speaking of macro news, none of our companies are more topical this week than our long held cybersecurity Investment and 2019 Tech Pick of the Year WhiteHawk (ASX: WHK).
Reading all of the news on the Optus hacks and now the Medibank Private data leaks, things are starting to reach a boiling point for the cybersecurity industry.
The urgency to ramp up cybersecurity measures has been amplified over the past few weeks with the Australian government announcing increased penalties for data breaches (source).
We added WHK to our portfolio in May 2019, and while the company has been quiet over the past 12 months or so, our view was always that cybersecurity would only become more important for corporations and governments and that WHK’s tech would become increasingly valuable.
Admittedly we were too early to invest in this thematic, BUT we have seen before that mainstream adoption of technologies can be slower than expected (remember the gartner hype cycle curve we wrote about a few weeks ago).
Hacks like those on Optus and Medibank, and the unintended consequences that follow, FORCE companies and governments to act.
WHK is well and truly down from its 2020 highs and has been limping along around 8c for most of this year, so hopefully like SGA and IVZ it can come off a low base IF it finally releases some good news, into a very strong macro environment for cybersecurity.
Another company we have been holding while the share price tracked down, is Canadian gold developer Tempus Resources (ASX: TMR), which this week reported more bonanza grade gold drill results.
The assays came from the No.9 Vein and measured ~87g/t gold over 2.11m — way above our base case expectation of 5/gt gold.
While we thought this was a great result for the company, the best might be yet to come with assays from the ~25.75m thick quartz veining intercepted (where TMR also saw visible gold) still pending.
But even though we think TMR is at a low base AND they had a great announcement - the macro theme for gold is just not there at the moment, so the share price didn’t react.
Three weeks ago we predicted that gold would come roaring back in 2023 - and it looked like it may have begun with gold up ~10% in the last few weeks (read our article here).
When the gold price is surging - small cap gold explorers generally go along with it (remember the small cap gold rush in mid 2020?).
The common theme amongst the companies we ran through above is that they have all spent some time in the “unloved” category, with share prices depressed and investor expectations low.
One company in our Portfolio that had a slightly different situation was Tyranna Resources (ASX: TYX).
TYX is drilling for lithium (a very hot macro theme) in Angola.
Expectations were high for a big drill result in TYX’s underexplored, high potential project and the company had strong shareholder support.
This combination of factors saw the TYX share price running up in the lead up to the first drilling update, with TYX’s market cap sitting at over $100M pre-drilling result.
This week TYX announced over 20m of lithium mineralisation visuals from its project in Angola, yet its share price fell on the day of the announcement by ~26%.
TYX’s results would generally be considered good news for any lithium explorer, but the high expectations built into the share price resulted in a rerate downwards.
However, the share price does now seem to be finding a strong level of support at around ~3c per share, or around $80M market cap.
So if TYX had been at, say, a $40M market cap pre result, it would have risen 100% to its current $80M market cap, which is where the market values its first lithium drilling result.
But because TYX was at over $100M market cap pre result, it experienced a fall to $80M.
TYX still has assay results coming AND another four holes to go before Christmas - we hope the results are more of the same (and better).
Now that the market has had a chance to shake out speculators who may have been driving up the TYX share price pre-result, the market cap and share price are sitting at a level where the current news is priced in and hopefully the next result (if positive) can take TYX up to a higher trading range.
So in summary, it can be confusing why sometimes stocks go down on “good news” or surge upwards on OK news - it depends on factors like the strength of the stocks macro theme, what kind of share price base they are starting from and how much expectation of a news release has been already baked into the share price - then finally the actual significance of the news announcement.
That’s why we hold (and increase position) during down markets.
🗣️ This week’s Quick Takes
This week in our Portfolios 🧬 🦉 🏹
Elixir Energy (ASX: EXR)
This week Elixir Energy (ASX: EXR) announced a “contingent resource estimate” showing 395Bcf of potentially recoverable gas at its newly acquired gas project in the Taroom Trough in Queensland's Bowen Basin.
EXR is in the early stages of planning a significant gas drilling event expected to occur in late 2023, on a recently acquired gas project in Queensland. The aim of this appraisal well, which is just 3km from Shell’s previous successful well, is for EXR to see if it can flow gas at sustained commercial rates.
Importantly, the project is right next to existing processing and export infrastructure and acreage held by energy majors like Shell and Santos.
📰 Read our full Note: EXR to drill for gas in Queensland - Next Door to Shell and Santos
Invictus Energy (ASX: IVZ)
Currently drilling the biggest conventional onshore oil and gas prospect in Africa, our 2020 Energy Pick of The Year Invictus Energy (ASX: IVZ) has this week confirmed a working conventional hydrocarbon system in the Cabora Bassa Basin.
On Thursday IVZ reported:
- Elevated gas shows: 65X above background gas levels (65x is a lot)
- Elevated fluorescence: 100% fluorescence, indicating condensate or light oil (the high value easy to refine type of oil/gas)
- Elevated logging while drilling resistivity: elevated resistivity demonstrates potential hydrocarbons when no mud gas readings are available
IVZ still has a few hundred metres left to drill through the primary targets, followed by wireline logging to confirm that it does indeed have an “oil & gas discovery”.
📰 Read our full Note: IVZ Confirms Working Hydrocarbon System - and is still drilling
Sarytogan Graphite (ASX: SGA)
The European Union this week signed a MoU with Kazakhstan to establish a partnership on battery materials supply. That came as very welcome news for Sarytogan Graphite (ASX: SGA) which has a large graphite project in Kazakhstan.
Graphite, a raw material used in the manufacturing process for lithium-ion batteries, is listed as a “critical mineral” in the US, EU, India, Japan and Australia.
Additionally, this week SGA reported more high grade drilling results that complement its already huge Inferred Mineral Resource.
Half of the intercepts reported graded higher than SGA’s existing 209Mt @ 28.5% Total Graphite Contained (TGC) Inferred Mineral Resource, suggesting that SGA could increase the overall grade of its resource.
📰 Read our full Note: Kazakhstan and Europe announce battery materials MoU - SGA releases high graphite grades
Tyranna Resources (ASX: TYX)
This week we got the first material update on Tyranna Resources’ (ASX:TYX) now underway drilling program at its lithium project in Angola.
We had hoped to see spodumene in the drillcores — and that's exactly what we saw from TYX which is now mid drill campaign with more holes to come.
TYX reported ~21.75m of lithium mineralisation from just 30m down-hole and, more importantly, confirmed the presence of large zones of spodumene mineralisation.
Drilling is expected to be completed by the end of the year with assays arriving between late December and February.
📰 Read our full Note: TYX intersects more than 20m of lithium mineralisation
⏲️ Upcoming potential share price catalysts
Updates this week:
- IVZ: Drilling its giant gas prospect in Zimbabwe
- Has confirmed a working conventional hydrocarbon system with elevated gas shows and elevated fluorescence. IVZ is now looking to drill down to a final depth of 3,500m before doing a wireline logging program (this is where we hope IVZ is able to officially declare a discovery). Read our full take.
- GTR: Drilling results for uranium in Wyoming, USA.
- Now completed 70 holes for 10,300m of drilling out of the planned total of 30,480m drilling program. Total strike length of uranium mineralisation increased by 1,609m to a total of ~7.8km with half of all drill results meeting cut-off grade requirements. Read our quick take.
- TYX: Drilling for lithium in Angola.
- More than 20m of lithium mineralisation was reported from just 30m down-hole, and the presence of large zones of spodumene mineralisation was confirmed. Read our full take.
- LNR: Has recommenced maiden drilling for rare earths along strike from Hastings Technology Metals
- Satellite imagery identified 41 new targets that could be related to rare earths bearing ironstones. Read our quick take.
No material news this week:
- PFE: Assay results for its manganese (Weelarrana) and its polymetallic (Hellcat) project.
- GAL: Undertaking a second round of drilling at its Callisto PGE discovery in WA.
- RAS: Drilling for lithium next door to Core Lithium in the Northern Territory.
- PRL: Awaiting final execution of a joint development agreement with Total Eren.
- TTM: Drilling its copper porphyry target in Ecuador.
Have a great weekend,
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