Major Announcements Driving Volatility in Small Caps

• Commentary: Binary result? Share price catalysts can go either way. How market expectations affect the share price result. Expected announcements. Unexpected announcements. And yes, some words about silver at the end.
• Quick Takes: TG1, L1M, EXR, SGQ, GUE
• This week in our Portfolios: SS1, EIQ, BPM, EXR

The mood is good in small cap land.

Cautious... but good.

It was another positive week, with plenty of green across the board.

Many small stocks are now trading higher, off their bear market lows as sentiment slowly comes back... and with it some liquidity.

Many of our small cap Investments are working towards delivering a big, binary share price catalyst.

(“binary” here means the result will be either excellent or terrible, pass or fail, yes or no - there isn’t really a “middle ground”)

It’s a piece of news that the market knows is coming...

And that could move the share price significantly up OR down depending on the outcome.

For biotech companies, it could be the results of a clinical trial.

For resource companies - the results of exploration drilling.

For oil & gas companies - the results of drilling or a flow test.

Beat market expectations, and the company is rewarded with high trading volumes and a rise in the share price.

Worse than market expectations? The company is punished with a sharp fall in the share price.

We saw both play out this week across two positions in our Portfolios with Echo IQ (ASX:EIQ) and Elixir Energy (ASX:EXR).

Here's what happened:

First, EIQ.

EIQ is a med-tech company developing an AI algorithm to detect various heart diseases from echographs or heart images.

This week EIQ announced FDA clearance for its AI algorithm that detects aortic stenosis, a heart condition that costs the US healthcare system US$10BN each year.

The FDA (Food and Drug Administration) is the US government body that is responsible for protecting the public's health by ensuring the safety, efficacy, and security of biological products and medical devices etc.

Any new medicine, treatment, or medical device needs FDA approval to be sold into the giant US market.

EIQ’s FDA clearance milestone has been years in the making.

The first clinical trial for EIQ’s technology was conducted in 2017, the company conducted two more studies before finally submitting an application for FDA clearance in early 2024.

FDA clearance has now opened the door for EIQ to make revenues off its AI product.

The stock reacted very well on the news.

Up 29% on the first day and more than $18M in volume traded (that’s six times the previous largest daily volume for EIQ).

Obtaining the FDA’s blessing to sell a product into the US market is the holy grail for small biotechs and aspiring health tech companies.

Many have tried, and often failed - which results in the share price coming down hard.

While EIQ’s share price was tracking up nicely in the lead up to the FDA decision, clearly there was some expectation in the market that there was a good chance that EIQ MIGHT NOT get FDA clearance....

So when they DID get FDA clearance, it beat market expectations and the share price was rewarded with many new buyers wanting to be on the “post-FDA clearance” journey into commercialisation with EIQ.

(we suspect the buying also included larger funds that are only permitted to invest in companies after they de-risk to a certain level)

This, is what a positive outcome that beats market expectations looks like:

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.

You can read our full commentary on the EIQ FDA clearance here

That was an example of when things go right...

But what if a result DOESN’T exceed market expectations?

EXR showed us what happens when the outcome of a catalyst isn’t as good as what the market was expecting...

EXR is working on its natural gas project in Queensland.

The company already knew that gas was there, so the main goal of its drilling program was to deliver a “flow rate”.

This basically means confirming if gas will “flow” out of the ground at a rate that makes enough money to justify the expense of moving into production.

Back in April, EXR was in a strong position after an INTERIM flow test result showed a stabilised commercial flow rate of 2.5mmscf per day.

(mmscf = million standard cubic feet)

This initial flow rate was from just one zone out of 6, and was accompanied by some impressive flaring photos.

The EXR share price surged, probably because many investors expected that if one zone flows so well, surely 6 zones combined would be even better when the final result was released.

(we certainly did... and held more than our planned position size into the result)

The share price rose in the lead up to the result as investors bet that the flow rate would improve with all 6 zones included.

Expectations were high, and after some technical delays, the FINAL flow rate results were published for all 6 zones and it flowed...

but came back at 1 mmscf per day.

Less than the 2.5mmscf per day interim flow rate from the one zone.

With the less than expected result, the share price reacted negatively:

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.

We think that the market punished EXR because of the high expectation set by the interim results.

If that interim result wasn’t as encouraging as it was, the market probably would have been less upset with the final result released this week.

BUT there also would not have been the share price run up in the lead up to the result.

EXR would have started from a lower expectation base from which to surprise the market with its final flow rate, giving the market belief in what can be, unburdened by what has been.

Was EXR oversold on the day? probably.

You can read our full commentary on EXRs result and the market reaction here

So really, it’s about figuring out how much of the “blue sky potential” has already been built into a share price, BEFORE the catalyst announcement is released.

And this is why it’s easier to pick eventual winners during a bear market, because “expectations” are at rock bottom.

(but also hard because in a bear market even good results often won’t get a market response)

Generally the higher the expectations, the harder the stock falls if results are less than what the market expects:

So it was a week of highs and lows in the “share price reactions to a binary result for a small cap stock” game.

The game continues in the coming weeks, here are some of our Portfolio company catalysts we are watching for next.

(some more binary than others)

So, what catalysts are looking forward to next?

We have a number of companies with important news expected:

• BPM - Gold exploration drilling results. Mid-October.
• SS1 - More silver drilling results. Imminent.
• MAN - Maiden lithium JORC resource. Imminent.
• MTH - More gold silver drill results and assay results from step-out drill hole testing previous high-grade intercept. Imminent.
• NTI - Orphan drug status granted for Rett Syndrome. Imminent.
• PFE - Results from US lithium well re-entry program and maiden JORC resource. Pre-Christmas.
• LYN - Drilling niobium-REE project next door to WA1. Before Christmas.
• EIQ - Reimbursement code secured for AI algorithm. Before Christmas.
• IIQ - Results of study on ovarian cancer screening trial. Before Christmas.

And a little later on:

• HVY - Garnet PFS results published. “Early 2025”
• CND - Maiden prospective resource estimate. “Underway”
• SS1 - JORC resource upgrade on Nevada silver project. Expected H1 2025.
• MTH - JORC resource upgrade on gold-silver project in Mexico. Expected Q1 2025.

The above are all potential share price catalysts where the market knows the company is working towards an announcement.

Big milestones where the company provides guidance to the market on when the announcement will be released...

But there are also companies where potential share price catalysts can suddenly come “out of nowhere”.

“Unexpected” announcements that could happen at any moment...

There is another type of catalyst in the small cap stock market, which is sort of a “semi-expected” catalyst, but no time frame is given for when it will be announced.

...or any guarantee that it will even happen at all.

For tech companies, this could be a big sale contract signed.

For mining companies, it could be the signing of an offtake agreement.

For biotech companies, it could be a licensing deal.

Unlike the “expected” share price catalysts we mentioned above, the timing of these “unexpected” catalysts are unknown to the market, and even the company themselves.

Why doesn’t the company know when these events will happen and guide the market accordingly?

The timing of “expected” catalysts like drill results or clinical trial results is largely in the companies control (the outcome is not).

“Unexpected” catalysts like offtakes deals, licence deals and commercial contracts are types of transactions that involve a counterparty that needs to agree to some sort of terms.

These counterparties have their own strategy, goals, problems, pressures, hopes and dreams, and will often take a long time to do a deal.

Hence it's difficult for a small cap stock’s management to predict even IF, let alone WHEN they will get a signature.

Hence reluctance to guide market expectations results in these “unexpected” style announcements.

It feels like we are perpetually waiting, but the news could come at any time.

If there ARE delays (and there always are), the company's stock price will tend to drift sideways or downwards as investors start to account for the possibility of a deal never getting done.

BUT, when these catalysts are announced it can result in nice share price rises.

This means that “at a moment's notice” one of the long awaited catalysts announcements could drop, affecting the share price in a positive way.

In our tech portfolio, we are waiting on deals that could be announced at any time:

• EIQ - First commercialisation deal post-FDA clearance.
• AL3 - New sale of industrial 3D printing product (ARCEMY) or custom 3D print contract.
• ONE - New hospital deal secured.
• WHK - Large cybersecurity contract signed. (c’mon WHK we believe in you!)

For our biotech stocks, here are the commercialisation deals that could drop at any time:

• IIQ - Lab partner secured to market its breast cancer detection product.
• DXB - Licensing deal to sell its FSGS product into China or USA.
• EMD - Payer deal for MDMA assisted therapy treatment.

For our development stage mining companies, here are the offtake agreements and financing deals that could drop at any time:

• GEN - Converting iron ore offtake MoUs into term sheets.
• MNB - Project financing for Angolan phosphate project.
• EMN - Manganese offtake deals.

Unlike a regular share price catalyst, where there is an obvious “good” or “bad” outcome, these catalysts are a little bit harder to anticipate.

Companies that can execute on their strategy and deliver news quickly and consistently are generally rewarded by the market.

On the other hand, delays can and do happen, which can cause share prices to drift as investors chase companies where the perception is that more is happening, or likely to happen.

This does however cause expectations to drop, which means if/when news does eventually get announced it can be met with an outsized share price reaction.

Catalysts are a key part of small cap investing.

It makes winners and losers but often the results or timing are outside of the company’s control.

For us, the goal is to have a diversified portfolio of a number of different companies at different stages with different catalysts.

We think that this gives us the best chance at finding that one company that provides outsized returns on a catalyst that WORKS, to make up for all of the investments where the catalyst didn’t work.

Speaking of things not in a company's control...

Every week we watch the silver price very closely.

If the silver price does go on a run, we expect our silver stocks to go along with it.

This week we wrote in detail why we think Sun Silver (ASX:SS1) is highly leveraged to a rising silver price.

After an early drop, silver finished the week pushing back up towards its 12 year highs again:

And SS1 closed on Friday at its highest ever closing price at 90c

The silver price running is one of the “planets that need to align” for our 2024 small cap Pick of the Year SS1 to deliver a significant return.

We are hoping SS1 can deliver us a “right commodity at the right time” type of story like we had with VUL a couple of years ago during the lithium boom.

Here is our theory on how if a few things out of SS1’s control go right, SS1 might be able to deliver the VUL success formula.

Friday’s finish for the silver price and SS1’s share price is encouraging.

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.

What we wrote about this week

BPM Minerals (ASX:BPM)

A few weeks ago BPM Minerals (ASX:BPM) hit high-grade gold at its greenfields exploration project directly next door to $2.2BN Capricorn Metals.

The drillhole returned 30m @ 1.84g/t gold from 25m, inc. 5m @ 7.12g/t gold from 35m.

A classic ‘discovery hole’ - and at the perfect time - with the gold price at all time highs.

BPM has drilled two more aircore holes either side of the discovery hole to test if they are really onto something big...

These assay results “are expected in mid October”, which means any day now...

Read: BPM drill results due any day now. Last day before loyalty option ex date.

EchoIQ (ASX:EIQ)

This week EchoIQ (ASX:EIQ) secured FDA clearance for its AI-powered algorithm that helps detect heart diseases.

FDA clearance is a BIG milestone for any early stage life sciences company.

This means that EIQ can really start marketing and selling its product in the USA - generating revenues via hospitals and partners that use its technology.

EIQ also signed on a highly experienced new US based CEO to drive commercialisation of its product.

Read: EIQ Secures FDA Clearance - can now market and sell in the USA.

Elixir Energy (ASX:EXR)

A disappointing few days for this stock...

... but has the market over-reacted?

Six months ago, Elixir Energy (ASX:EXR) flowed 2.5 mmcf/day from just ONE out of 6 zones at its Queensland gas project.

This was deemed to be a “commercial” flow rate - the deepest unstimulated flow of gas onshore Australia east of the Perth Basin.

Then, after some unexpected delays, EXR went back to flow test the remaining 5 zones...

The stabilised flow rate from five out of the six reservoirs came back at 1 mmcf per day.

Less than the initial single zone result - and the market didn't like it.

The market wanted a “bigger than 2.5 mmcf flow rate” and some more epic flaring photos with an even bigger fireball this time around.

EXR gave some reasonable explanations for why the flow rate was down on its previous numbers, and we should find out more next week in a webinar hosted by EXR MD Neil Young (more details in the article)

Read: Market Reacts: EXR flow test result... and what’s next.

Sun Silver (ASX:SS1)

Silver has been on another strong run the last few weeks.

Last Friday, silver nearly hit US $33 per oz...

Higher than the 10 year record it broke in May this year.

And a new 12 year high.

Sun Silver (ASX:SS1) already has the largest primary silver resource on the ASX at 432M ounces of silver equivalent.

On Tuesday SS1 announced a 73m thick intercept OUTSIDE of its current resource estimate, with a peak grade of ~524g/t silver (via pXRF readings).

Read: Silver price about to break out? SS1 delivers high grade extensional hit.

Quick Takes

TG1 Uncovers High-Grade Antimony at Station Creek

Fieldwork begins at WA lithium exploration project

EXR completes flow test, not what we were hoping for

L1M kicks off sampling program at Brazilian lithium project

SGQ Niobium-REE acquisition approved by shareholders

GUE drill results from its US uranium project.

Macro News - What we are reading & listening to

Iron Ore:

BHP ASX: iron ore prices to $US120 if China delivers on stimulus that the market expects (AFR)

• Citi bets on iron ore hitting $US120/tonne if China continues its stimulus push, but warns of a pullback if expectations aren't met.
• China’s 200B yuan stimulus disappointed markets, but more measures are expected to support demand and stabilise prices.

Lithium:

Why Rio Tinto wants to be a new cornerstone for the lithium sector (AFR)

• Rio Tinto's $6.7 billion acquisition of Arcadium Lithium is a long-term bet on lithium demand, positioning Rio as a stabilising force in the volatile sector and a key supplier for electric vehicle manufacturers.
• CEO Jakob Stausholm acknowledges Rio's limited lithium experience but believes Arcadium's tier-one assets and long-term lithium market potential justify the investment, despite shareholder scepticism.

Uranium:

Cameco (CCJ) Eyes Expansions of Uranium Mines on Rising Nuclear Demand (Bloomberg)

• Cameco Corp. is considering expanding its uranium mining projects to meet the growing global demand for nuclear power, as stated by CEO Tim Gitzel.
• Despite a 22% drop in uranium spot prices this year, Gitzel highlights the strong long-term fundamentals for nuclear energy, which he describes as the best he’s seen in his 40-year career.

Other media we are consuming

The Great Silver Bull (audiobook)

Dave Ricks, CEO of Eli Lilly | The All-In Interview

Four Corners: Series 2024 Nuclear Gamble : ABC iview

BPM Drill hole analysis by Discovery Alert (this one is worth a read for the BPM fans out there)

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Have a great weekend,

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