Markets Taking a Beating. These Companies are Rallying...

Remember back in January when the market was going up?

Everyone was in a better mood and paper portfolios were looking healthier.

Seems like an eternity ago after the horror show we have sat through over the last six weeks in small cap stocks and the broader global markets.

Interest rates keep rising and the allure of cash becomes more attractive to investors...

Of course whenever the market goes ‘risk off’ investors sell small cap stocks first.

The market is all about supply and demand - when sentiment is low, small cap stocks have little to no buy bids on screen.

As people try to free up cash, they sell into small buy depths and share prices get smashed.

Most small caps are currently taking a beating.

In past rough market conditions we’ve observed an interesting phenomenon...

Investors sitting on cash seem to flock to any small cap with a bit of volume and some consistent upwards share price momentum.

The reasoning might be “if everything is going down, but this company is going up - there must be something to it”.

In a bad market, any stock that shows a bit of positivity seems to attract traders and volume seeking bull market style returns in a bear market.

And with very few other alternatives, stocks that can perform in a bad market seem to get outsized attention.

An example from our Portfolio was GAL last year, when it surged ~885%, during a really rough patch in the market, on its platinum group elements discovery.

It’s now been the worst couple of weeks we have seen in small cap stocks for a while.

But a few stocks have been consistently edging up.

A couple of “shining lights” in our Portfolio in what was a brutal week were MNB, NHE and 88E.

Minbos Resources (ASX:MNB) has held up very well over the last few weeks of small cap carnage, and on top of that went on a run on Friday, on large volumes.

MNB has two projects located in Angola, Africa — a “near construction” phosphate fertiliser project and “studies stage” green ammonia project for use in fertiliser production.

A few weeks ago we visited Angola to see MNB’s projects:

Here is a link to the summary of our site visit to MNB’s projects in Angola.

MNB is one of our favourites for 2023 and seems to be defying the broader market drop.

Another is Noble Helium (ASX:NHE) which is preparing to drill two helium wells this year with the first targeted for Q3-2023.

NHE has also seemed to defy gravity in the last week, rising gradually from a low of ~13.5c to touch 20c, possibly on anticipation of it pulling an IVZ style pre-drill run:

NHE will be targeting its potentially globally significant 176 bcf helium resource (mean unrisked prospective).

NHE says it has farm in bids due at the end of this quarter and is now only a few months away from its first drill program (Q3-2023).

Check out our latest NHE note here: Big Few Weeks for NHE - Farm in bids due end of quarter

88 Energy (ASX: 88E) is drilling its Hickory-1 well on the North Slope of Alaska, USA.

88E drills a well every year, and every year the share price runs in the lead up to drilling results.

Given the high levels of interest in 88E and its consistent pre-drill price runs, Friday’s action indicates that the 2023 lead up to 88E’s drill results could yet again deliver some volume and upward momentum.

Drilling started just before the market closed yesterday.

88E’s well is targeting a 647 million barrel prospective mean unrisked resource (net to 88E) across six stacked targets.

Many will remember when 88E ran over 1,000% in the lead up to its Merlin-1 well two years ago.

In our latest note we laid out the following comparison between the well 88E is drilling now and that well from 2021.

While we are conscious of market sentiment being a lot different right now, it was good to compare them to get an idea of what success may look like for 88E.

See the deep dive in our latest 88E note here: 88E / EEENF: Drilling underway

The upwards moves in MNB, NHE and 88E in an awful market may just be a fluke, we just don't know - but these will be the three stocks to watch next week.

When will the bad market end?

Probably as quickly as it started.

If you remember the first few weeks of January, everything was going up, then all of a sudden sentiment changed and trading volumes dried up.

Even though its only been about 6 weeks since the market turned bad, it feels like an eternity.

Over many years we have seen ups and downs come and go.

Recently the market seems to swing between amazing and awful a lot quicker than it used to, and in shorter time frames.

This phenomenon probably has something to do with technology...

News and information that drives sentiment flows round significantly quicker than it used to, and way more people have instant access to it.

Also back in the day people would have to call a broker who would then send a piece of paper to execute a trade.

Nowadays brokerage can be done at the click of a button, leading to instantaneous reactions to instantaneous information - good or bad.

Even the weakness of the yearly “sell in May” and “tax loss June” months that are pretty consistent each year may not happen this time around given how tough things are at the moment.

That sounds like exactly the type of curveball the small cap markets would throw at everyone.

The hardest thing to do in an awful market is to invest cash into new companies, because nothing feels like it will ever go up again.

Also difficult is putting more cash in to support companies that you are already invested in, that have been caught with their pants down and didn't raise money during the buoyant market.

While it’s very counter-intuitive, we have generally found that when sentiment is lowest, it’s the best time to participate in rights issues for our existing Portfolio companies and Invest in new companies.

Recently we have committed cash to rights issues or placements in LCL, TMZ, GTR, GLV, MEG, OKR and ALA.

(This strategy works for us but is not right for everyone, this is NOT financial advice.)

Emotions scream to keep cash out of the market at times like this, when no stock feels like it can ever go up again...

But we always recall the best Investments we have made were during the March 2020 Covid crash (as “ill-fated” as they seemed at the time).

A time when share prices were low and raising cash was so difficult that capital raisings had to be done at steep discounts to already depressed share prices.

Most companies we Invested in during, and in the months after the crash, are today still sitting above our Investment price.

The market always bounces back and it will again, and hopefully the Investments we are making now will be trading a lot higher when that happens.

It’s just a question of how long it will take and being able to accept that prices may trade lower than the prices we are paying in the meantime.

Also we are mentally prepared for it to take longer than we think... or it could be quicker we think - it’s impossible to predict the market.

This week in our Portfolios 🧬 🦉 🏹

88 Energy (ASX: 88E)

88E started drilling its Hickory-1 well on the North Slope of Alaska, USA just before the market close yesterday.

88E is drilling into a 647 million barrel prospective mean unrisked resource (net to 88E) across six stacked targets.

Here is the expected timeline for 88E’s drilling:

• Drilling started today - 10th March 2023. ✅
• Drilling to 3,500 feet - two weeks.
• Drilling to total depth of up to 12,500 feet - two more weeks to drill through all six reservoir targets.
• Wireline logging to target depth - straight after drilling is complete.

📰 Read the full Note: 88E / EEENF: Drilling underway

Province Resources (ASX: PRL)

Earlier this week, the six month deadline for PRL's term sheet with Total Eren came around and PRL announced that a JV will not be entered into.

While this news was disappointing for long term PRL holders like us, it’s the kind of risk that can and does materialise in small cap investing.

The day the news broke, PRL updated investors on a conference call giving some more details on Total Eren’s departure and the forward plan for PRL.

Our key takeaways were that PRL felt that Total Eren was moving too slowly and that there are various other interested parties that can be engaged when the exclusivity clause in the Total Eren MoU expires on April 17th.

With PRL now back to 100% ownership of the project, we expect the company to move more quickly in progressing its green hydrogen project.

With other parties interested and an exclusivity period with Total Eren ending 17 April 2023, get our deep dive on this development...

📰 Read the full Note: PRL and Total Eren Split. What happens next for PRL?

Kuniko Ltd (ASX: KNI)

Seeking to expand its battery materials asset portfolio, our Investment Kuniko Ltd (ASX:KNI) has secured exclusive option agreements to acquire a trio of promising lithium projects in James Bay in Quebec, Canada.

This region is probably the hottest in the world for lithium exploration right now, having been thrust into the spotlight via Patriot Battery Metals’ large lithium project.

Patriot publicly listed in December 2022 and its market cap has risen from $553M to ~$1.5BN currently.

The value creation of this now billion dollar lithium discovery sparked an exploration rush to the region.

The lithium projects that KNI is to acquire cover a total of 274 km2, each with distinct geological features, lending themselves to different types of potential lithium discoveries. Across these projects are at least 35 historically mapped pegmatite outcrops - the typical host rock of lithium bearing spodumene.

Meanwhile, we still expect plenty of newsflow to come from KNI’s nickel, cobalt and copper projects in Norway, which will continue to remain a focus of the company and a potential source of share price catalysts.

📰 Read the full Note: KNI acquires lithium projects in same region as $1.5BN capped Patriot Battery Metals

Evolution Energy Minerals (ASX:EV1)

Evolution Energy Minerals (ASX:EV1) has this week progressed a critical step for its shovel ready graphite project in Tanzania.

On Wednesday EV1 announced that the terms of a Framework Agreement and Shareholders Agreement have been agreed upon with the Tanzanian government.

These agreements provide certainty around the rights and obligations of all stakeholders in EV1’s graphite project and deliver the level of certainty required by potential financiers of the mine construction.

A public signing ceremony before the President of Tanzania is now expected to be held later this month.

EV1’s 2020 Definitive Feasibility Study (DFS) showed the project has a Net Present Value of $323M, CAPEX of $87M and a payback period of 3.4 years.

An updated DFS is due in “early 2023” which will reflect the work and optimisation carried out over recent years that will impact the project's economics. With graphite being one of our favourite investment themes for 2023 we await this updated DFS.

📰 Read the full Note: EV1 settles landmark agreements with the government of Tanzania

Grand Gulf Energy (ASX: GGE)

This coming Monday our 2021 Catalyst Hunter Pick of the Year Grand Gulf Energy (ASX:GGE) will begin drilling its Jesse-2 helium well in Utah, USA.

This is a follow up on last year’s Jesse-1 discovery well, in which GGE hit net pay of ~31m and helium grades of ~1%.

With this latest well, GGE is aiming to produce a commercially viable flow rate.

Last year GGE drilled into the “water contact zone,” meaning the company couldn’t produce a flow rate at that time. But key lessons were learnt and this time round GGE plans to drill to just above the water contact zone, hopefully allowing it to produce the required flow rate.

A commercial flow rate is the last step before a project can be upgraded from discovery/development project to one that is producing and capable of generating revenues for a company.

📰 Read the full Note: Spud date set for GGE's US helium drilling - 12th March

Dimerix Ltd (ASX:DXB)

Our biotech Investment Dimerix (ASX:DXB) is currently in a Phase 3 clinical trial for FSGS, a rare kidney disease where a huge number of patients currently wind up on dialysis or need a kidney transplant.

This week we reported that a drug similar to DXB’s has just received accelerated FDA approval for an adjacent rare kidney disease. This drug is priced at US$120,000 per year per patient.

We believe that this provides a good idea of what DXB may be able to achieve when it reaches the commercialisation stage.

The licensing deal also provides an indication of the value of its kidney treatment to a potential partner (up to US$845M)... if it has a successful clinical trial and the drug gets to market.

📰 Read the full Note: What could commercialisation actually look like for DXB?

This week’s Quick Takes 🗣️

88E: The latest from Pantheon’s Alkaid well

BOD: Aqua Phase acquisition extended 3 months

BOD: Secures small cash injection ahead of insomnia relief trial

BPM: Drilling mid-2023 next door to $1.4BN Capricorn Metals

GGE: Helium drilling on track for Monday

LCL: Copper-gold drilling started

MAN: Updated investor presentation

PUR: Lithium project acquisition to be completed in just weeks

TG1: Drilling at NSW gold project set for Q2-2023

TYX: Metwork produces saleable lithium product

⏲️ 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 started drilling its Hickory-1 well yesterday just before market close. See our take on the news here.
• GGE: Preparing to drill its US helium project looking for a commercially viable flow rate.
  • Jesse-2 well is on schedule to spud on Monday (12 March). See our Quick Take on the news here.
• PRL: Awaiting final execution of a joint development agreement with Total Eren.
  • PRL confirms it will not enter a JV with Total Eren over the project. See our Note here.
• EV1: Updated DFS looking to improve on the already relatively strong US$323M project NPV.
  • Framework Agreement with the Tanzanian government agreed to; formal signing ceremony this month. Our Note on this news here.
• KNI: Drilling 2/3 of its Norwegian battery metals projects inside the EU.
  • No update regarding the Norway projects; expands asset portfolio adding a trio of James Bay (Canada) lithium projects. Our full Note here.

No material news this week:

• DXB: Interim Analysis of Phase III Clinical Trial on FSGS (Q3, 2023)
• IVZ: Drilling oil & gas target in Zimbabwe, Myuku-2 (Q3, 2023)
• NHE: Scheduled to drill two targets this year at its helium resource in Tanzania (Q3, 2023)
• GAL: Is undertaking a second round of drilling at its Callisto PGE discovery in WA.
• TMR: Maiden JORC resource estimate for its Canadian gold project.

Have a great weekend,

Next Investors