Bear market M&A takes off

Last weekend we predicted more M&A (mergers and acquisitions) during the current rough market conditions.

Particularly in battery materials and energy, where share prices of good quality companies are well off their highs...

A few days later US$26BN Albemarle announced a takeover offer for ASX-listed lithium aspirant Liontown Resources at a 63% premium to the share price.

Excuse the little victory lap, but correctly predicting things is what we ultimately get judged on.

We noted that nearly every other small cap publication decided to “boldly” make the same M&A prediction AFTER the Liontown takeover was announced mid-week... bless them.

The attempted Liontown takeover lit a fire under lithium juniors, and nudged up small caps in other battery materials sectors.

Why?

Because nothing reminds the investor community that there is actual value in small caps like an attempted takeover by a giant, cashed up company.

When share prices are beaten up, it’s not only experienced investors that are hunting for bargains (buy low, sell high), but also big company CEOs looking for opportunistic acquisitions.

Big company CEOs are just regular people who experience the same investment emotions as the rest of us - fear and greed.

...so of course they will be interested in making some “greedy” bottom of the market acquisitions.

Big company CEOs hate having to explain to their boards and shareholders why they failed to make any decent bear market acquisitions when the bull market rolls back around.

Again, big company CEOs experience the same emotions as the rest of us and FOMO (fear of missing out) on M&A deals gets real once the competition to acquire cheap assets heats up.

So could Albemarle’s Liontown takeover offer this week be the start of big company M&A FOMO?

Will we see more big companies come out of the woodwork with attempted takeovers in the battery materials space?

The best part of peak M&A FOMO is when bidding wars start and takeover valuations start getting silly...

(remember when Rio Tinto paid way too much to acquire Alcan back in 2007?)

Eventually we could also see “left field” takeover attempts after big companies start missing out on their primary targets and start chasing their second and third best options.

A happy time for small cap investors.

These are usually signs that the bull market is back, but we are still a long way away from that.

But like we said last weekend...we think M&A season has started.

Real money chasing development stage resource projects.

In bad markets, big companies with healthy cash balances pounce on opportunities to acquire juniors whose share prices are being punished for being pre-revenue and relatively “riskier”.

When commodity prices are relatively high like they are now, the majors are printing cash.

BUT, cash strapped juniors are seeing their share prices trade near all time lows.

As experienced across our Portfolios, the share prices of small companies — hit by widespread negative sentiment across the market — are largely trading well off their highs, even as the underlying businesses continue to progress.

It’s these quality, yet beaten down, small companies that make excellent prey for cashed up majors.

Majors view bearish markets as a chance to capitalise on mismatches between share prices to company fundamentals.

They recognise opportunities to acquire smaller companies and their assets for far less than it would cost to replace or create those acquired assets.

Taking this week’s example that we mentioned earlier, Albemarle, the US lithium giant, made a bid for Australian lithium junior Liontown Resources — at a 63% premium to Liontown’s share price.

The offer was swiftly knocked back but talk followed that other majors, with names like Wesfarmers and Rio Tinto being thrown around, might want to up Albemarle’s bid.

Both Wesfarmers and Rio have mentioned in recent months that they were keeping an eye on lithium M&A.

A consequence of the Liontown offer was the market waking up to the fact that there is plenty of cash on the sidelines ready to pick up quality projects.

Liontown short sellers (who have financial bets on a share price going DOWN) suffered almost ~$176M in losses after the takeover offer was announced.

We always enjoy a little chuckle when we see short sellers get their faces ripped off in situations like this.

Of course Liontown is just one company in a sea of sold-down companies that are currently attracting M&A attention, particularly in the lithium sector.

As a key ingredient in the batteries required for the coming energy transition, lithium has an extremely bright long term outlook with a sharply rising demand forecast.

Yet in the short term lithium has lost some of its lustre — lithium prices are down some 40% over the last four months. And that’s hit the share prices of lithium companies, particularly juniors.

But for majors with deep pockets, any short term pain is of little concern as they have the means to look ahead and focus on the longer term outlook.

Across the universe of companies that we follow (mostly micro caps <$200M market cap) we noticed buying coming back into high quality companies with high quality management teams.

We suspect this sentiment may have been helped along by M&A activity elsewhere in the smaller end of the market.

We also saw this across some of the companies in our Portfolio.

Our fertiliser and green ammonia Investment Minbos Resources (ASX: MNB) is up almost 100% over the last 3-4 months (here’s why we Invested in MNB):

Another one is our helium exploration Investment Noble Helium (ASX: NHE) which is up almost 80% over the last two months and is gearing up for its maiden drill program planned for Q3-2023 (here’s why we Invested in NHE):

In an otherwise rough biotech market, our cell therapy biotech Investment Arovella Therapeutics (ASX: ALA) has seen its share price rise by more than 125% in the first three months of the year (here’s why we Invested in ALA):

(NOTE: We are NOT suggesting or implying that any of the above companies may be subject to a takeover offer, these are examples of companies performing well over recent months in an awful market).

M&A activity is a great remedy for negative market sentiment, and we hope we see more of it to bring back positive sentiment to the small end.

Our central case is that we are at the very beginning of this wave of M&A and that we expect this trend to continue as long as current market sentiment remains the way it is.

While investors sit on the sidelines, we expect bigger companies will scoop up all of the projects they feel are undervalued.

This week’s Quick Takes 🗣️

Macro: The changing landscape of the natural gas landscape in Australia

EXR: Positive update on CBM pilot production

MEG: MEG finds more carbonatites at Idaho Rare Earths Project

OKR: Uranium enrichment investment completed

RAS: Diamond drilling at lithium prospects underway

SGA: More Graphite in Kazakhstan - Drilling expected later this year

SGA: Pre Feasibility Study (PFS) engineers selected

This week in our Portfolios 🧬 🦉 🏹

Lanthanein Resources (ASX: LNR)

Our rare earths exploration Investment, Lanthanein Resources (ASX:LNR) has just started drilling in South Australia, targeting a new ionic clay-hosted rare earths discovery.

That's a big milestone in itself, however our main reason for investing in LNR — are its Gascoyne projects in WA.

Here, LNR is gearing up to drill multiple targets in the coming weeks.

LNR will drill test its shallow ironstone targets (that outcrop at surface) with 10,000m of RC drilling, and test its deeper carbonatite targets via two deep diamond drill holes.

LNR’s $21M market cap is only a fraction of its peers who have made bigger discoveries nearby.

📰 Read the full Note: LNR set to drill for Rare Earths in WA Hotspot

88 Energy Ltd (ASX:88E | OTC: EEENF)

Our oil and gas Investment 88 Energy (ASX:88E | OTC:EEENF) this week provided an update on its current drilling program at its Hickory-1 well on the North Slope of Alaska.

With this appraisal well, 88E is drill testing a 647 million barrel prospective mean unrisked resource (net to 88E).

88E has just drilled through the first three primary reservoir targets and found “potential hydrocarbon pay”. This is due to the presence of hydrocarbons evidenced by fluorescence under UV light in cuttings samples, LWD data initial interpretation looking positive, oil shows noted, amongst other positive signs.

88E will commence wireline logging preparations once drilling reaches target depth in coming days, with the wireline logging program expected to take between 5-7 days.

This wireline logging will determine net pay figures - so is something we will be watching out for.

📰 Read the full Note: “Potential” hydrocarbon pay for 88E with more results expected in next 2 weeks

Elixir Energy Ltd (ASX:EXR)

This week Elixir Energy (ASX: EXR) provided an update on its upcoming onshore gas drilling event at its 100% owned project in Queensland.

As it approaches an expected drilling start date in late 2023, EXR just executed a land access agreement that opens the way for field work to commence.

This drill event will be the main story and value driver for EXR over the next 9 to 12 months.

It should provide some near term excitement for EXR shareholders while the company progresses its coal bed methane and green hydrogen projects in Mongolia.

EXR’s Queensland gas asset already has a “contingent resource estimate” showing 395Bcf of potentially recoverable gas — within its initial 3.3 Tcf unrisked mean prospective resource.

The project is right next to existing processing and export infrastructure and acreage held by energy majors including Shell and Santos.

In our note this week we introduced our new EXR Investment Memo for the coming 12 months. We also provided commentary and assessment of how EXR performed against each item in our first EXR Investment Memo.

📰 Read the full Note that includes the new memo and memo commentary: EXR's major gas drilling event coming in 2023

Noble Helium (ASX: NHE)

Noble Helium (ASX:NHE) has a giant unrisked mean prospective resource of 176 bcf in Tanzania - which NHE says is the “best untested helium system on the planet”.

NHE is now less than six months away from drilling.

The mean prospective resource is five times the size of the now depleted US federal helium reserve.

In Q3 NHE will drill test its prospective resource via two high impact wells - together they comprise a 16.5 bcf unrisked mean recoverable helium volume.

NHE’s two drill targets are independent of each other and were chosen for their high probability of discovering gas-phase helium.

Either well could deliver a “company making” result in their own right.

The approaching catalyst has seen NHE’s share price finally kick out of the ~15-16c trading range that it had been in for the last five months.

📰 Read the full Note: NHE high impact drill event getting closer: Targets announced, Share price finally moving

Sarytogan Graphite (ASX: SGA)

This week our graphite Investment Sarytogan Graphite (ASX:SGA) released an updated JORC resource that easily surpassed our bull case expectations.

SGA already had the second largest contained graphite resource on the ASX, second only to $1.13BN-capped graphite producer, Syrah Resources.

SGA’s resource now stands at 229Mt with graphite grades of 28.9% for a total of 66Mt of contained graphite - 36Mt of which now sits in the “indicated category”.

We wanted to see SGA convert one third, or 20Mt, of its contained graphite from ‘inferred’ to ‘indicated’ status. It vastly exceeded that expectation, lifting over 36Mt (55%) from inferred to indicated status.

Along with the resource status significantly beating our bull case expectation, SGA improved on all aspects of its resource estimate. Tonnage of the JORC resource was increased ~10%, the grade by 1.4%, and the contained graphite tonnage by ~10%.

📰 Read the full Note on the resource upgrade here: SGA beats our bull case expectation for its graphite resource upgrade

⏲️ Upcoming potential share price catalysts

Updates this week:

• 88E: Drilling for oil in the North Slope of Alaska next to UK listed Pantheon Resources.
  • 88E successfully intersected all 3 primary SMD reservoir targets. Intersections were slightly shallower than prognosed depths, with reservoir thicknesses consistent with pre-drill interpretation. See our Note here.
• GGE: Drilling its US helium project looking for a commercially viable flow rate.
  • GGE is ~60% of the way through its drill program reaching a depth of ~5,928 feet. Next, it will start drilling down to the anticipated total depth of the well at ~8,150 feet.
• NHE: Scheduled to drill two targets this year at its helium resource in Tanzania (Q3 2023).
  • NHE released an updated investor presentation this week. Read our Note here.

No material news this week:

• EV1: Framework Agreement with the Tanzanian Government.
• DXB: Interim Analysis of Phase III Clinical Trial on FSGS (Q3 2023)
• GAL: Drilling at its Callisto PGE discovery in WA.
• IVZ: Drilling oil & gas target in Zimbabwe, Myuku-2 (Q3, 2023)
• KNI: Drilling 3/3 of its Norwegian battery metals projects in Europe.
• TMR: Maiden JORC resource estimate for its Canadian gold project.
• LNR: >10,000m drill program at rare earths project in WA next to Hastings Technology Metals and Dreadnought Resources.
• LCL: Maiden drilling underway at primary PNG copper-gold target.
• GTR: Maiden resource estimates across two of its uranium projects in Wyoming, USA.

Have a great weekend,

Next Investors