How share prices can still go up in a bear market

Why do some small cap share prices surge upwards despite awful market conditions?

Against expectations, this week DXB went from 6.1c to a touch a high of 23c on huge volumes.

A couple of other beaten down small stocks out there are starting to deliver sustained share price pops on good news.

Here is why we think many other small cap stocks in the market could do the same soon:

Lesson number one for new investors is “always follow company fundamentals”.

We are told to “focus on fundamentals” and that share prices move in lockstep with a company’s fundamental progress.

The reality in the small cap market is that a share price IS NOT a function of fundamentals, but a mixture of emotions and expectations that drive interest in companies.

Combined with the personal financial circumstances of its various shareholders that determines if many will hold... or sell, and put more downward pressure on the share price.

The current market conditions we are seeing is that most companies are trading near 52-week lows, on miniscule trading volumes.

Likely due to the fact that capital is hard to access and everyone hates small caps at the moment... because "they only go down, right?”

Most people see that small caps just keep ticking down over time, so why would they invest in one?

...meaning no on-market buyers to meet the sellers.

And also big discounts on cap raises (plus free options) to attract new money, put downward pressure on share prices.

The days of 0% interest rates are over, and stock pickers - like us - need to be even more selective with their investments.

These conditions have delivered a contraction in the share price of many small cap companies.

(Source)

To summarise this article published by the AFR, it contends that there are a absence of buyers in small cap (micro cap) stocks right now.

We think this has presented a situation where a lot of small stocks are trading with very low expectations of success.

This has nothing to do with the company's fundamentals, which have probably been progressing and improving during these tough market conditions.

With expectations so poor the market throws the “baby out with the bathwater” or so to speak.

Any potential for good news is forgotten... and market caps get lower... and lower.

We think these conditions give companies the strongest position to be in to deliver a material share price re-rate on genuinely good news.

This is due to key reasons:

1. Negative sentiment in the market means stocks are oversold - Share price and valuations trading near its lows, market sentiment is currently very low and investors are impatient, consolidating their portfolios down to a small number of core investments.
2. Positive news can still shine through - When a company does have good news everyone in the market (in particular traders) will gravitate towards a select number of stocks, condensing the attention into a few key winners.

IF a company is able to deliver material news the whole market can be caught off guard and send a share price up... a lot.

And in our view, nearly every small cap stock out there is currently experiencing very low expectations, which is reflected in their woeful share prices.

It is a phenomenon we have seen in our Portfolio across three stocks this week - starting with DXB who had the biggest single-day rise in our Portfolio since the start of the financial year.

Dimerix (ASX:DXB) - up over 200% in two days

DXB announced a $230M deal to licence its FSGS treatment (for a rare kidney disease) with Advanz Pharmaceutical in key secondary markets Europe, UK, Canada, Australia and NZ.

Importantly, this deal was announced BEFORE any data has been published in its Phase III clinical trial - with an upfront payment of $10.8M - and the company retains its right to licence into the US.

DXB's share price rose ~140% on the day of the announcement and finished the week up ~203% on ~76M shares trading hands over the two days, around a fifth of the shares on issue, for context.

This deal came out of nowhere, and was an unexpected surprise.

In the lead-up to the deal, DXB was one of those companies where we think the market was constantly second-guessing its cash position.

Phase 3 clinical trials can be expensive, and DXB has spent ~$25M on the trial so far.

With the company conducting a $8.5M cap raise at 8 cents in June, it was a tight finish as to whether the company would have enough cash to carry it through to the Interim Analysis results in March next year.

(We participated in this raise. Like we do with all our portfolio companies, we try to participate in every cap raise during tough market conditions even if it feels counter-intuitive... wish we had done more now).

In the licensing deal signed with Advanz Pharmaceutical, DXB secured a $10.8M (non-dilutive) upfront payment.

This eliminated any question of more funding needed pre-trial, and provided a blue sky for the share price to run.

Investors now find themselves in a position where the company has de-risked itself from a cash perspective, lowering the probabilities of a capital raise before the results AND delivered a company making announcement.

The market, caught off guard by the news, rushed back in to buy shares, pushing the price up.

To read our full take on the news read: DXB signs $230M Commercialisation Deal for ~20% of the global market.

Share price runs like the one with DXB only happen in a bear market when companies with low expectations announce UNEXPECTED GOOD news.

And we think that the low expectations from stocks across the small cap market mean that there are plenty of other diamonds in the rough that could deliver.

Galileo Mining (ASX:GAL) - up 20% since Monday.

On Monday GAL announced a JORC resource from its Callisto discovery.

The share price went up ~39% on the day of the announcement and GAL is up 20% for the week.

The share price chart for GAL has looked grim for the last twelve months, with the company’s share price on a slow, steady decline.

Before the announcement, the share price was almost trading where it was pre-discovery - in spite of the company de-risking the project through definition drilling.

Now that the market has a maiden JORC resource to underpin GAL’s valuation, GAL has a launchpad to identify new drill targets and grow its resource.

Again, we think that GAL shares were over-sold as investors impatiently tired of the resource definition story.

But with a JORC resource published, GAL moves back to the more exciting “exploration phase” looking for more new discoveries that can help build on its resource.

Heavy Minerals (ASX:HVY) - up 26% since Tuesday.

On Tuesday HVY kicked off its PFS for its Port Gregory garnet project - which could be a globally significant mine once it is operational.

The share price went up 30% on the day of the announcement and HVY is up 20% for the week.

We think the reason for the re-rate was that HVY provided some material news to look forward to that carries with it an unknown outcome with potential for upside, while also de-risking its financial position with a royalty deal.

We think HVY is one of those stocks where the market is closely watching its cash balance and less focused on the company project deliverables.

As a result, the share price wasn't moving (likely because investors were waiting for a discounted raise).

Instead the company raised $500k through a non-dilutive royalty deal and kicked off its PFS.

HVY bought itself some time to deliver material news AND signalled to the market that it intends to continue raising money through the non-dilutive royalty agreement funding.

Speaking of companies that could deliver big news with low market expectations...

We have a set of oil & gas explorers currently drilling or about to drill potential company making wells.

The three companies are:

1. Invictus Energy (ASX: IVZ) - is currently drilling its second well into a 20 trillion cubic feet + 120 million barrel oil unrisked prospective resource in Zimbabwe.
2. Noble Helium (ASX: NHE) - is days away from drilling its first well at its helium project in Tanzania targeting a 15.3 billion cubic feet unrisked prospective helium resource.
3. Elixir Energy (ASX: EXR) - is about to drill an appraisal well into its QLD gas project, targeting a ~395 billion cubic feet contingent gas resource.

Usually oil and gas explorers like these three see share price runs leading up to drill programs like the ones they are running.

Perhaps the poor market conditions this year, and reduced access to capital, has meant that investors are looking to judge the three companies based on drill performance rather than speculate on an outcome pre-drilling?

All three companies are trading near the share price where they raised funding to run their drill programs.

• IVZ around 15c (where IVZ raised $15M a few weeks ago).
• NHE around 20c (where NHE raised $12M back in August).
• EXR around 7c (where EXR raised $7M in August and is now running an SPP).

This tells us that expectations are low going into the drilling results, and a bull case outcome is NOT priced in.

Just like we saw with DXB, more investors are putting themselves in a lower risk position where they may need to chase the share price after positive news is released.

This risk-off approach works out if the drilling results are poor or the company experiences issues during drilling BUT it can also work against the investors whereby they are forced on to market buying at much higher share prices after a material announcement:

How we invest in the bear market

There are no qualms about it, we are in a small cap bear market.

Markets work in cycles, and understanding the bear market dynamics is part of the journey to becoming a better investor.

Bear market investing is tough - holding onto stocks going deeper and deeper into the red as each day passes.

Cash is the king of the bear market as investors sell depressed positions, not because of the fundamentals of the company, but usually because bills are due.

It seems like the “smartest” thing to do at the moment is to put the cash in a bank account and wait for the rainy days to end.

At the end of the day, shareholder registers are made up of hundreds or thousands of individuals with different financial circumstances.

Some may prefer to put cash in their mortgage offset account, go on holiday, pay a tax bill or shuffle money into higher conviction investments... or even just free up cash to invest in other small cap stocks.

Oftentimes, this sort of behaviour accelerates as the market gets closer to a bottom.

Markets work off feedback loops.

Investors who liquidate positions into cash have money on the sidelines looking for the first sign of life back into the market.

And when life returns to the market (or to a particular stock), it returns quickly - as we have seen with DXB over the last two days.

Success stories like DXB are like a great big lamp post that attracts all of the money sitting on the sidelines with cash.

The more lamp posts that go up, the more money that is attracted and the cycle returns to the bull market.

But it happens in a blink of an eye.

We think the market is getting close to if not already at the bottom (for some stocks) - and we are looking to make investments BEFORE the lights go on.

But this can be tricky and we don’t always get it right.

Now fingers crossed the market gets a few big winners and can capture investors attention again... hopefully some of those are companies we hold positions in.

This is also why we have been adding new Portfolio additions during the recent bear market conditions while most share prices are depressed:

What we wrote about this week 🧬 🦉 🏹

DXB signs $230M Commercialisation Deal for ~20% of the global market

On Thursday our 2021 Biotech Pick of the Year Dimerix (ASX:DXB) announced that it had signed a commercialisation deal with Advanz Pharmaceutical for up to $230M. The deal Includes a $10.8M cash upfront payment to DXB who was capped at $26M at the time.

NTI’s clinical trial meets primary endpoints for neurological disease

On Friday, our most recent biotech Investment, Neurotech International (ASX:NTI), released successful phase I/II trial results for treating a rare childhood neurological disorder called PANDAS/PANS.

We think it has implications for its upcoming Rett Syndrome results - a treatment for the same disease saw ASX biotech star Neuren Pharmaceuticals re-rate ~1300% in 3 years and we’re hoping a similar re-rate is on the cards for NTI.

First “Platreef” style PGE-gold-nickel-copper deposit in Australia

Galileo Mining (ASX:GAL) declared the “First discovery of “Platreef” style PGE-gold-nickel-copper deposit in Australia” on Monday.

GAL’s maiden JORC resource came in at 17.5mt with grades equivalent to 2.3g/t palladium OR 0.52% nickel - equivalent to ~1.27m ounces of palladium or ~91k tonnes of nickel.

Platreef style deposits contain consistent mineralisation and the metallurgical work to extract the valuable minerals is simpler and less expensive than other styles of deposit. GAL continues to aggressively drill for further discoveries.

Mid Week Oil & Gas Update: EXR, IVZ, NHE

Our oil and gas mid week update profiles three of our small cap Investments with drilling events over the next two months. We expect the results to deliver a significant share price reaction when they come out, and even in the lead up to results. IVZ, NHE and EXR are all in the running.

HVY Royalty Funding paves the way for Garnet PFS

On Tuesday, our garnet Investment, Heavy Minerals (ASX:HVY) announced the start of its pre-feasibility study to bring its garnet mine into production by 2026.

Friday last week, HVY raised the first $500k from a non-dilutive, non-debt funding method called a “royalty agreement”.

We think this was the right move and a sound piece of funding as the company drives toward building a globally significant mine - right as US demand for garnet is primed to kick into high gear.

Quick Takes 🗣️

LCL finding more outcropping nickel sulphides

IVZ Drilling update

PUR - Rio Grande Sur Lithium Project Update

EXR to drill this month - update on funding

Macro News - What we are reading 📰

Uranium

Rosatom Refutes Claims of Halting Uranium Exports to the US (The Deep Dive)

Uranium brings a healthy glow to the resource sector (The Australian)

Graphite

Graphite to surge, Syrah and Talga the best bet for investors: UBS (AFR)

Lack of investment, diversification biggest challenges for European graphite market (Fastmarkets)

Lithium

The Lithium Panic of 2023 (Global Lithium)

Slumping Lithium Prices Signal Angst Over China’s Demand Outlook (Bloomberg)

Nickel

BHP braces for Indonesian supply surge as nickel hits two-year low (AFR)

Biotech

ASX biotech September winners: Healthcare down 5pc, but experts say it’s still best sector in a recession (The Australian)

⏲️ Upcoming potential share price catalysts

Updates this week:

• IVZ: Drilling oil & gas target in Zimbabwe, Mukuyu-2 (Q3, 2023)
  • As of Tuesday (3rd October), IVZ had drilled down to ~496m depth of its targeted total depth (~3,750m). Now IVZ is drilling through the first two of its six stacked targets. See our take on the news here.
• NHE: Scheduled to drill two targets at its helium project in Tanzania (Q3 2023).
  • The Marriott Rig #16 “rig-up” is close to complete, with circa 90% of the equipment now assembled in preparation for spudding of Mbelele-1. There has been the slightest of hiccups with some damage to the mast being repaired by a Drillmec specialist flown in from Italy with repairs to be completed over the weekend.
• EXR: Daydream-2 appraisal well, QLD
  • EXR announced that it had secured a debt facility backed by its future R&D grant claim for its upcoming well.
• NTI: Clinical trial results from its phase I/II PANDAS/PANS trial.
  • Our most recent biotech Investment, NTI , released successful phase I/II trial results for treating a rare childhood neurological disorder called PANDAS/PANS. The share price didn’t react positively - but we think the results have important and beneficial implications for NTI’s Rett Syndrome results which are due Q1 2024. See our note on the news here.
• GAL: Drilling at the company’s PGE project in the Norseman region, WA.
  • GAL put out a maiden JORC resource at its Callisto discovery AND said it would start drilling chasing new discoveries later this month. See our note on the news here.
• DXB: Interim Analysis of Phase III Clinical Trial on FSGS (March 2024)
  • DXB signed a big licencing deal which includes $230M in milestone payments, 15-20% in royalty payments AND an upfront $10.8M. See our note on the news here.

No material news this week:

• TYX: Second round of drilling at its lithium project in Angola.
• PUR: Drilling its Argentine lithium project in Q4-2023.
• TMR: Maiden JORC resource for its gold project in Canada.
• EMD: Dosing of first-ever patient with MDMA for PTSD.
• LYN: Assay results from its Bow River nickel-copper-PGE project in WA
• SLM: Assay results from maiden drill program at its Brazilian lithium project
• 88E: Flow test well, Alaska (Q4, 2023)
• TMR: Maiden JORC resource estimate for its Canadian gold project
• GGE: Drilling for helium in the US (Q4 2023)

Have a great weekend,

Next Investors