How macro themes drive small caps

It’s hard to sleep at the moment...

After literally years of waiting, two of our largest Investments are expected to announce significant “make or break” drilling results within the next ~14 days...

IVZ is close to finishing its drilling, then running a 3 to 6 day test to see if they can announce a “basin opening” oil & gas discovery by bringing a gas/oil sample to the surface.

NHE has (finally) announced yesterday afternoon that they have commenced drilling their first helium well (seven years in the making).

NHE’s planned well depth is only 450m, so we should know the result in less than 14 days (assuming drilling and testing goes smoothly of course).

IVZ and NHE are two of the biggest positions in our Portfolio, and are also the highest risk-reward outcomes based on these upcoming results.

Both results are likely within the next ~14 or so days.

Holding just one big position into a significant risk-reward drilling result (that could be good or bad) is stressful/exciting enough.

Let alone two...

Let alone at the same time.

Especially where there is a slim chance that both might announce their results on the same day.

What if they both fail? Imagine if they both come in?

So after years of holding these Investments it’s all come down to what happens in the next two weeks...

Read our latest comprehensive overviews of IVZ and NHE below:

IVZ: Read it Here

NHE: Read it Here

Good luck to any fellow IVZ and NHE holders out there.

What makes a small cap share price go up?

What makes small cap share prices go up?

The answer is easy - there are more buyers than sellers.

What makes more people want to buy a particular stock than sell it?

That’s the impossible question.

Each investor is an individual with their own strategies, risk reward profile, emotions, hopes, dreams, electricity bills, mortgage payments, risk-averse life partner and personal financial situation.

It’s 100% up to them to decide what to invest in... and when.

And also when to sell...

A small cap share price is basically the average of thousands of these individual’s decisions on any given day.

These individual decisions may be influenced by things that a company CAN control:

For example

• Executing strategy
• Efficient use of capital
• Drilling or clinical trials delivered on time and budget
• developing a new technology or IP,
• paying a dividend,
• buying a new project etc..

the list goes on.

Looking back at the history of financial markets it's often what the companies CAN’T control that has the biggest influence on a company's share price.

We have previously discussed factors that affect share prices that are out of a company's control, such as:

• Broader market sentiment - positive sentiment = generally more buyers, negative sentiment = generally more sellers
• Individual investors’ personal financial circumstances - for example somebody selling a stock purely because they just need the money for something else.

Recently we have seen “macro themes” come into play.

A macro theme is a particular sub-section or “category” of stocks in the market,

For example uranium stocks, gold stocks, oil & gas stocks, lithium stocks, biotechs, revenue generating companies, exploration stocks, tech stocks, bank stocks, ... etc etc

It’s basically a category of stocks that fit a certain profile or operate in a certain sector.

And sometimes... one of these categories suddenly comes into favour.

If a macro theme sentiment is strong, then stocks that are IN that macro theme will likely see share prices go up (more buyers/holders than sellers).

If the macro theme is OUT of favour, then no matter what the company is achieving fundamentally, no one cares... and good company announcements usually get met with selling...

Investors generally look to sell shares in the stocks that have out of favour macro thematics and move that capital into stocks that have macro momentum.

It also works in the opposite direction when the macro thematic is strong.

Investors don't want to sell shares in a company with a good project in a good macro theme, more and more buyers come in and share prices can reach nosebleed levels...

Often reaching levels that materially overvalue the company.

Think of the early 2000s tech bubble, where companies that had “dot.com” in their names had market caps in the billions of dollars and nothing to show for it.

Tech was the hottest investment available, and it certainly wasn’t something any company could control, it was just the right place at the right time.

A more recent example (and much closer to home) was the 2020-2021 run up in lithium companies.

This was after a couple of years of the lithium macro theme being firmly out of favour.

When lithium sentiment turned positive. companies with lithium projects were bid up into the hundreds of millions of $ even before drilling a single hole.

Significant gains can be made for those invested companies where a sudden swing to positive sentiment occurs towards their macro theme.

(this is why we have been patiently holding all our small cap gold explorers for years...)

Even when broader market sentiment is negative, a strong macro thematic combined with a high quality project can deliver material returns and provide a small pocket of green in the otherwise woeful market conditions.

We watch the markets and the financial news like hawks on an almost 24/7 basis and even for us it is hard to keep tabs on all of the macro developments out there.

Here is a quick run through of some of the key news items we have seen across some the macro thematics where we have Investments, where we think sentiment could be strong in the medium term:

Critical minerals

Australian PM Anthony Albanese was in Washington, USA to announce a doubling of the Australian Critical Minerals facility to $4BN.

Albanese poured another $2BN into the fund to try and attract more investment into critical minerals projects in Australia so that they can take advantage of the incentives in the US governments the Inflation Reduction Act (IRA).

USA Republican presidential candidate Ron DeSantis and the Biden administration have both recently made statements about the USA’s critical minerals supply:

(Source)

We are seeing competition for capital chasing critical minerals get hotter all around the world.

The EU recently announced an EU Critical Raw Materials act and the US has its US$500BN IRA.

The catch is that private capital is alert to incentives being offered by governments and will quickly move into jurisdictions where there is the most government support.

We are seeing governments fight for that capital and prompt moves like the one Albanese made earlier this week.

Our view is that with every year that passes, competition will get tougher and governments will be forced to show their hands by increasing subsidies/incentives to critical minerals projects.

This interest (and financing) is continuing to happen at high levels of government, and small cap critical minerals stocks should eventually follow, regardless of (for the moment) suffering in the midst of a broadly negative-sentiment small cap market.

See our deep dive on the critical minerals thematic here: Critical Materials: Long term macro thematics are still very strong

Lithium

The lithium carbonate price is down ~70% from its highs earlier this year.

...but Chile’s biggest lithium producer just lobbed an all cash $1.6BN offer for ASX listed Azure Minerals.

(Source)

Azure Minerals owns 60% of a pre-resource lithium project in WA but the critical minerals and battery metals (lithium) macro theme is so strong the project is still very much in demand.

🎓 See our educational on what makes shares prices go up here: Why do shares prices go up?

A few weeks ago we also saw Albermale’s $6.3BN takeover offer for Liontown Resources.

We mentioned earlier that critical minerals projects in good jurisdictions would get bid up strongly.

We see the SQM acquisition of Azure as a clear example of this.

SQM paying $1.6BN for a 60% interest in a project that has no JORC resource yet.

To us, this shows just how desperate the majors in the industry are to consolidate and acquire high quality projects that will benefit from global subsidies...

Australian projects are hot property because they will likely qualify for EU and US subsidies/incentives.

It’s no wonder that Australia’s richest person Gina Rinehart has gone and bought (on market) a blocking stake in Liontown Resources and is now buying up shares in Azure Minerals...

(Source)

Clearly, Gina sees value in the projects and is willing to buy shares on market to avoid the projects getting into the hands of the global majors.

Lithium prices may be low but interest in high quality projects still seems high.

Speaking of quality projects...

This week we wrote about Pursuit Minerals (ASX: PUR) which has just released a sizable lithium carbonate JORC resource that could get bigger in Argentina..

Argentina is part of South America’s “lithium triangle" which is responsible for the majority of global lithium supply.

And despite the recent cooling in the lithium prices, we feel comfortable holding PUR for the long-term and are confident that when the macro theme picks up steam again, PUR will be well placed.

Graphite

Speaking of critical minerals and lithium... The battery metals boom isn’t just about lithium.

Graphite is one of the most important inputs in an EV battery.

Graphite makes up ~50% of the raw materials in every lithium-ion battery and over 95% of every battery anode.

At the moment over 80% of graphite and almost 100% of graphite battery anodes are produced in China.

AND.... last weekend the Chinese government announced export controls on graphite supply.

(Source)

Diversity of supply overnight has become a problem with a serious sense of urgency...

Syrah Resources (which was deeply out of favour after it paused production at its graphite project) is up ~80% since the export controls were announced.

Our view is that the world needs to invest in more ex-China graphite supply to diversify global supply chains.

We think projects with size/scale & close to development will be the ultimate winners.

We are Invested in two companies that fit that bill:

• Sarytogan Graphite (ASX: SGA) - Holds the highest grade and second largest resource (by contained graphite) on the ASX. The project is located in Kazakhstan and is currently in the feasibility study stage.
• Evolution Energy Minerals (ASX: EV1) - Updated Definitive Feasibility Study (DFS) for its project in Tanzania with a net present value of US$338M. EV1’s project is ready to be put into development pending a final investment decision.

Oil & Gas

Historically, oil & gas prices run the hardest when the geopolitical environment is unstable.

With the recent escalation of conflict in the Middle East, another supply shock is a genuine possibility.

Back in the 1970s instability in the Middle East took the oil price from ~US$3 per barrel to ~US$40 per barrel.

Then in the late 2000s supply concerns took it from ~US$30 per barrel to US$140 per barrel.

Oil and gas prices are prone to rallying when there is geopolitical instability - just like what we are seeing in the Middle East and in Russia/Ukraine right now.

Coupled with decades of underinvestment in new oil & gas projects, there is a chance oil & gas prices go for a run as a result of supply anxiety.

The world’s biggest producer Saudi Arabia extended its production cuts and so the supply situation looks like it is more likely to deteriorate than improve.

(Source)

We have already started seeing oil and gas prices have started creeping higher - up over 30% in the last few months.

We also saw the $84BN deal between Chevron and Hess announced this week which could spark an M&A rush in the sector...

There is a chance history repeats itself, and prices rally to levels a lot higher than where they are now.

This sets the scene for a confluence of events that could deliver big share price re-rates for oil & gas explorers that deliver big material drill results.

We are Invested in two oil & gas explorers drilling/about to drill potential company making wells.

• Invictus Energy (ASX: IVZ) is now days away from reaching total depth (TD) at its potential company making well in Zimbabwe, Africa. We should know whether or not the company makes a discovery in the coming days.
• Elixir Energy (ASX: EXR) is preparing to drill it’s QLD gas project. Spudding of the well is expected in November.

We are also Invested in Noble Helium (ASX: NHE) and about to drill for a different type of gas - helium.

We hope one (fingers crossed, ALL) of them can deliver a strong result into a relatively strong oil & gas macro thematic.

Uranium

Uranium spot price keeps rallying and is on the brink of cracking ~25 year highs.

For decades since the last bull run in the uranium price it traded below the cost of most of the world’s production.

Prices were so low it forced high cost projects out of production.

Now we are seeing the spot price run and the market finds itself in a position where it can’t work out how to bring new supply onto market to meet forecast future demand.

In the short term the supply/demand imbalance could lead to a spike in uranium prices like we saw in 2008.

We are Invested in three uranium companies, both looking to define and grow existing JORC resources, and one of them is trying to crack the code on uranium enrichment.

• Okapi Resources (ASX: OKR) has uranium projects with existing JORC resources in the US and earlier stage exploration projects in Canada. OKR also owns an interest in a private Australian company looking to develop uranium enrichment technology.
• GTI Energy (ASX: GTR) is looking to grow its existing JORC resource base in the capital of Uranium in the USA - Wyoming.
• Haranga Resources (ASX: HAR) is looking to grow its existing JORC resource base in Senegal. HAR is trying to execute the same playbook that took Bannerman Energy from a micro cap explorer to the ~$400M market cap it has today.

Gold

The market has hated gold explorers for the last few years...

(we know... we’ve patiently beed holding a few of them).

The gold price is the highest it's ever been against the Aussie dollar at AU$3,133 per ounce.

We are also seeing big M&A deals close.

Typically near a bottom (in sentiment), the junior explorers/developers will have depressed share prices because investors have abandoned the sector, AND the producers will have relatively strong share prices underpinned by revenues and cashflows.

This leads to a wave of M&A, which concentrates gold resources in the hands of fewer companies.

A prime example is all of the consolidation that has been happening across the Leonora region in WA.

Earlier this week, Genesis Minerals closed out the takeover of Dacian and consolidated its position in the region.

(Source)

We think sentiment will eventually turn positive again, and investors will have far fewer junior gold explorers/developers to invest in because of the consolidation that is happening now.

This should mean higher share prices in the juniors that survived the “gold small caps winter” will move quickly when that macro capital starts to pour back into the sector.

We are currently holding:

• Los Cerros (ASX: LCL) - has over 2.6m ounces of gold resources in Colombia and is currently exploring for gold-copper and nickel in the PNG.
• Titan Minerals (ASX: TTM) - has a ~3.12m ounce gold resource in Ecuador.
• Tempus Resources (ASX: TMR) is preparing to put out a maiden JORC resource estimate at its gold project in Canada.
• TechGen Metals (ASX: TG1) is an early stage explorer with a gold project in NSW.

So in summary, it can be very boring to hold stocks that are in “hated” macro themes, but every so often a particular theme quickly comes back into favour, sometimes only for a few months... but hopefully for a few years, and you quickly move from feeling like an idiot to a genius investor.

Alternatively, sometimes a strong macro theme can have a few bad months (like lithium and critical minerals have had) and then come roaring back if it is truly a real thing.

Those moments of weakness might be the right time to take some positions.

Gina, Albermale and SQM seem to think so.

What we wrote about this week 🧬 🦉 🏹

Just days away now... the IVZ result we have been waiting for

As of Wednesday IVZ hit 3,296m of its planned ~3,750m deep Mukuyu-2 well.

IVZ should be hitting total depth (TD) within the next few days, after which it plans to run a wireline logging program.

We expect the wireline logging program to take ~5-7 days, after which we should know whether or not IVZ can declare a potential company making new oil & gas discoveries.

PUR maiden lithium JORC resource - and drilling hasn’t even started yet...

PUR announced an 251.3kt maiden JORC resource at its lithium project in Argentina.

Without drilling a single hole into its project, PUR has already managed to define a JORC resource of its own larger than its much larger capped peer Argosy minerals.

$239M AGY has an indicated lithium carbonate equivalent JORC resource of 245kt.

PUR’s inferred lithium carbonate equivalent JORC resource is 251.3kt and the company is capped at ~$29M.

EXR drilling for gas in the coming weeks...

EXR is now just weeks away from drilling its Daydream-2 appraisal well at its QLD gas project.

This week EXR completed all of the site infrastructure work and is now waiting for its rig to be released by the current operator.

EXR expects to be drilling in the “First few weeks of November”.

Quick Takes 🗣️

GAL drilling to the north & south of its Callisto discovery.

HVY starts permitting for its garnet project

LYN starts downhole EM in hunt for big nickel-copper system

NHE’s Helium Drilling Event Begins - Mbelele-1 Spudded

OKR receives important permit at large US uranium project

PFE lays out USA lithium ambitions

SLM second drill rig arrive as it chases major lithium discovery

TEE identifies multiple stacked oil & gas targets in QLD

Macro News - What we are reading 📰

Copper

Glencore to shed 1200 jobs and shut Mount Isa copper mines by 2025 (AFR)

Oil and gas

Dealmakers see Chevron-Hess tie-up as the start of oil ‘arms race’ (Financial Times)

Uranium

US Sees a Role for Nuclear Technology in Africa’s Energy Shift (Bloomberg)

Graphite

Why China is restricting exports of graphite (The Economist)

Lithium

Tesla, EV Investors Face a Reckoning (Bloomberg)

Biotech

What’s been eating CSL? Blue chip company feels the Ozempic effect (AFR)

USA Battery Materials

DeSantis Says China Creates Conflict by Propping Up Russia and Iran (Bloomberg)

⏲️ Upcoming potential share price catalysts

Updates this week:

• IVZ: Drilling oil & gas target in Zimbabwe, Mukuyu-2 (Q3, 2023)
  • IVZ is now just days away from reaching total depth (TD) at its Mukuyu-2 well. See our deep dive on the latest from IVZ here.
• NHE: Scheduled to drill two targets at its helium project in Tanzania (Q3 2023).
  • NHE spudded its Mbelele-1 well yesterday. See our Quick Take on the news here.
• EXR: Daydream-2 appraisal well, QLD
  • EXR completed most of its site works in preparation for its drill program, now scheduled for early November. See our note on the news here.
• PUR: Drilling its Argentine lithium project in Q4-2023.
  • PUR put out a surprise maiden JORC resource before drilling a single hole in its project. See our note on the news here.
• LYN: Assay results from its Bow River nickel-copper-PGE project in WA.
  • LYN kicked off downhole EM surveys at its Bow River project. See our Quick Take on the news here.

No material news this week:

• TYX: Second round of drilling at its lithium project in Angola.
• TMR: Maiden JORC resource for its gold project in Canada.
• 88E: Flow test well, Alaska (Q4, 2023)
• TMR: Maiden JORC resource estimate for its Canadian gold project
• DXB: Interim Analysis of Phase III Clinical Trial on FSGS (March 2024)

Have a great weekend,

Next Investors