Quarterly Reporting Season & U.S. Fed. Rate Hike

And just like that, the markets look like they might be back.

As quarterly season rolls around again on the ASX, we got a glimpse at the all important “cash reveals” for our Portfolio companies just as the US Fed raised rates.

And why did the market respond so well to this particular US rate rise?

Today we’ll explain how the US Fed rate decision impacts ASX small caps and share some of the highlights from quarterly reporting season across our Portfolio.

The rate decision coincides with the Australian small-cap world starting to hum again.

Stockbrokers and fund managers are back from holiday, deals and capital raisings are starting to ramp up again, it feels like the small cap market has well and truly returned after the Christmas break.

In between writing the daily emails that we send, we’ve been on the phone catching up with brokers, investors and company management teams about what's in store for 2023.

The takeaway is that there is a much bigger appetite for ‘risk’ assets like small cap ASX stocks so far in 2023.

The lithium market remains bullish and interest in battery materials is strong.

A couple of us are currently enroute to Cape Town in South Africa to cover the Mining Indaba conference - the world’s largest mining investment conference, “dedicated to the capitalisation and development of mining in Africa”.

We’ll also be popping in to the 121 conference which features small cap explorers with African projects, including a couple of our Investments.

The main purpose of the trip however is our next stop, where we will be flying out to visit one of our African based Investments - and we will share what we learn about the company, their project and the country itself.

We hold a number of stocks with projects in Africa, but will leave you hanging on which one it is until we give our full update after the site visit.

Speaking of reporting back, it’s that time of year...

Its Quarterly reporting season on the ASX

This week was “quarterly reporting season” on the ASX, also known as “confession season”.

This is the moment of truth for any small cap company, giving the market an insight into how much cash the company actually has.

As Investors in small cap stocks that are reliant on the capital markets to fund exploration and operations, the first thing we do when reading a quarterly report is scroll to the cash balance.

If the cash balance is relatively low, compared to the anticipated activities for the company going forward, we can start to assess whether or not the company will need to raise money soon.

Also, with a low cash balance the market may suspect a cap raise is coming, so there may not be much buying on-market for the stock (and typically more selling) because potential investors are anticipating a discounted capital raise.

This means share prices can drift sideways or fall until the capital is raised and the “fear of an upcoming cap raise” is removed.

To avoid this “fear of a looming capital raise”, we are seeing companies doing smaller “top up” raises of $1.5-$2M when they have less than $5M in the bank.

We think this is a sound strategy as it gives the company more time to deliver that game-changing announcement, without the weight of a looming cap raise holding back the share price.

Aside from being able to sniff out potential upcoming capital raises, quarterly reports are also useful for:

• Management commentary on what happened last quarter - You can generally tell how excited or apologetic the management sounds, which gives you an idea of execution success.
• Updated Management forecasts for current quarter (and beyond). Sometimes it can yield a juicy snippet of information.
• Cash burned - how much money did the company spend in the quarter.
• Cash remaining - this, combined with “cash burned”, and it allows investors to estimate how long till the company will next raise capital.

Keeping track of the cash balance of the investments in our portfolio is an important part of our decision making process when it comes to making investments.

We also track options on issue, performance rights and number of shares escrowed relative to shares on issue - which we find very helpful in understanding share price movements.

We collect this information for all our Investments in a document which you can access here:

Click here to check out our portfolio capital structure document

Please note that we cannot guarantee the accuracy of the information in this spreadsheet. We manually update the spreadsheet every day from information announced by the stocks listed, and sometimes this information may be incomplete or incorrectly transferred.

Don’t rely on this information to make any decisions and ensure that you have independently verified the information yourself.

Why didn’t this company release a quarterly report?

There was one stock in our portfolio that DID NOT report on their quarterly performance that we were expecting to see.

This company was Vonex (ASX:VN8), which didn’t report on its quarterly performance because suddenly... it was not required to.

There is a rule on the ASX that says any company that has recorded four consecutive quarters of operating cash flow positive no longer need to report cash flow on a quarterly basis, and can move to half-year and full year reporting cycles.

For small cap companies generating revenues, this is moving into the “big leagues” - an excellent milestone to achieve.

We want all our growth companies to achieve this, so congratulations to VN8 on being the first.

VN8 provides telecommunications services to Australian businesses. Its growth strategy involves acquiring smaller businesses, integrating their services and building through economies of scale.

Here is how the last few quarters for VN8 looked from an operating cash flow perspective:

According to ASX Guidance Note 23, section 12, companies can request to stop reporting quarterly and move to a half yearly reporting system.

As a general rule, the ASX first wants to see a track record of “at least four consecutive quarters of positive net operating cash flow”.

This is why you won’t see large-cap companies like Telstra or Woolworths update the market on a quarterly basis.

As investors, we like it when companies provide us information, however we understand that it can take up a company’s time and resources to prepare these reports.

For a company like VN8, who is operating cash flow positive, it makes sense to elongate the reporting cycle to focus attention and resources on growth... as is common for larger, cash generating businesses, where investors generally take a longer term investment horizon on growth and development.

Now we wonder when one of our small cap resource Investments might achieve this elusive goal... after financing and building an actual profitable mine...

We expect VN8 to provide an update in its half yearly report which we expect in the months ahead.

You can read more about our outlook on Growth Stocks in 2023 here.

Some of the highlights from this quarterly season

Galileo Mining (ASX: GAL)

Cash at 31 Dec 2022 : $20.1M

GAL ended the December quarter with $20.1M in cash.

In its quarterly report GAL flagged the upcoming assay results, metallurgical testwork results and most importantly the kicking off of another round of drilling.

With a heap of cash in the bank and a busy start to the year, GAL is in a fortunate position to be able to focus all of its efforts on exploration as opposed to trying to raise capital.

To see what’s next for GAL, check out our latest note here: GAL keeps hitting new mineralised structures - where’s the source?

Latin Resources (ASX: LRS)

Cash at 31 Dec 2022: $26.3M

LRS ended the December quarter with $26.3M in cash.

In its quarterly report LRS said that its 65,000m drill program for 2023 was underway with four rigs on site right now and another four on the way.

While the drilling program is ongoing LRS is also preparing to put out a Preliminary Economic Assessment (PEA) which the company had flagged as due before in Q1-2023.

The PEA would be the precursor for a Definitive Feasibility Study which LRS expects to have ready by the end of the year.

A busy year for LRS which is trying to catch up to its neighbour the US$3BN capped Sigma Lithium (who is due to start producing in April). The good news being that the company has the cash to execute on its plan for the year.

To see what we are looking out for next check out our most recent LRS note here: LRS now drilling west of its lithium JORC resource.

Grand Gulf Energy (ASX: GGE)

Cash at 31 Dec 2022: $4.99M

GGE ended the December quarter with a touch under $5M in cash.

We were expecting the company would have far less, especially after it drilled the Jesse-1 well, made a helium discovery, and then brought in a workover rig to try and get a flow test from the discovery.

We expected that costs associated with the workover rig would lead to higher cash burn, but were pleasantly surprised to see GGE still has a strong cash balance.

GGE is now preparing for its Jesse-2 well and its $4.99M in cash on hand should be enough to complete the well without needing to raise capital.

Of course this doesn't mean that GGE won't opt to raise capital in order to shore up the company’s balance sheet.

Either way, we are looking forward to the Jesse-2 well being drilled this quarter.

Pursuit Minerals (ASX: PUR)

Cash at 31 Dec 2022: $6.8M

PUR ended the December quarter with $6.8M in cash.

That’s a good position to be in ahead of its shareholder vote to approve the acquisition of its lithium project in Argentina.

The shareholder vote is scheduled to take place on 7 February after which we hope to see PUR put its cash on its new project.

To see why we like the project, check out our latest note here: PUR - Now a $31M advanced stage lithium stock.

Evolution Energy Minerals (ASX: EV1)

Cash at 31 Dec 2022: $10.2M

EV1 ended the December quarter with $10.2M in cash.

Another one of our portfolio companies that is cashed up well ahead of some major catalysts that we are expecting in 2023.

EV1 is working towards the following three major catalysts:

• 🔄 Updated Definitive Feasibility Study (DFS) - EV1 will be looking to improve on its already very strong $323M net present value from its 2020 DFS. EV1 expected the updated DFS in “early 2023” so we suspect that the market’s anticipation is building given January is almost over.
• 🔄 Framework Agreement - a key milestone that provides regulatory certainty to EV1 from the Tanzanian government.
• 🔄 Drill results - looking to find shallow high grade graphite to add to its already strong resource estimate. These results should feed the updated DFS.

EV1 is also progressing its downstream strategy which could mean outside of the three key catalysts above we could see even more positive surprises from the company.

To see our latest note on EV1 check out the following note: Why is the EV1 share price running?

The US Fed’s rates decision and how it impacts small caps

The US Fed unanimously decided not to spook markets and delivered what the market was already expecting - a 0.25% increase in rates.

In a press conference following the decision Fed chair Jerome Powell cited recent data showing inflation slowing in the US BUT he was also careful to call it job done yet.

Powell’s comment on the matter was as follows “It would be premature, it would be very premature, to declare victory or to think that we’ve really got this,”

Immediately he mentioned that there were no rate cuts on the horizon and that the Fed would be ready to increase rates further if needed to bring inflation into check.

In summary, the message from the Fed was that the rate hikes were working but the battle against inflation isn't over yet.

The markets seemed to really like what he had to say, with all major indices trading higher off the back of the news.

For those interested in viewing the whole speech, check out the following video:

So what does the US Fed’s decision mean for the market?

The Fed is signalling that in the short/medium term rates will stay at elevated levels.

The thing is that equity markets tend to react to macro events well in advance of them occurring and the reaction in the “debt” (bond) markets has been no different.

Bond yields (which is basically the rate of return that investors hope to get on their cash holdings for lending them out) actually peaked late in 2022.

Below is a chart showing the US 10 year yield peaking in mid October last year.

You would have also noticed just like we did, that most of the selling across the small cap market coincided with Q3-4 last year - leaving a heap of small cap stocks trading near or at 52 week lows.

The sell off coincided with bond yields (borrowing rates) peaking.

At a very high level, there is nothing the markets hate more than uncertainty and in Q3-Q4 nobody knew how high interest rates would go.

Our view is that the markets have now started to become comfortable with where interest rates are at and the trajectory of rates over the next 12 months.

Effectively - all of the rate hikes are already PRICED IN to markets.

We now think that as investors become more at ease with the high interest rate environment they will look to re-enter markets (albeit more selectively) with a focus on the highest quality companies.

We think that the moves higher in markets this week were the first sign of capital returning to markets all around the world.

Hopefully this week is just the beginning.

Macro News - what we are reading

Battery Metals:

Lithium

CNBC: Land grab is just getting started with GM deal

Bloomberg: Scholz Seeks to End China’s Lithium Dominance in South America

QZ: The World Needs Lithium more than ever, and Latin America knows it

Graphite:

Investor Intel: Who are the graphite mining leaders in the world?

Copper:

Bloomberg:Coppers Fight for Critical Mineral status gets Political Push

REE:

Mining.com: How a Soviet Nuclear Site could be key to Europe’s EV Market

General:

The Economist: Joe Biden’s effort to remake the economy is ambitious, risky and - selfish

ABC: Australia not prepared for the fire-risk of Lithium-ion Batteries

Energy:

AFR: Energy Investors suffer ‘worst uncertainty in 15 years’

Eurasia Net: Kazakhstan moves Uranium exports through Middle Corridor

Australian Resources and Investment: Uranium Fundamentals strongest since early 2000s

Tech:

AFR: Private Equity Deals and few IPOs: how 2023 looks for tech

Digital Journal: Deep Tech Market to US $3733.80 Mn by 2032

Forbes: How does AI Work? And How it’s disrupting the tech industry?

Gold:

Kitco: ECB Signal not done yet...What does this mean for Gold?

Kitco: Three Factors that have transformed the Gold market in last 30 years

Gold.org: 30 Years of Gold Demand Trends

Biotechs:

Reuters: Palihapitiya-backed SPAC to take Biotech ProKidney public in $2.6bn Deal

Fierce Biotech: $825M SPAC Merger, ProKidney sets stage for Phase 3

This week’s Quick Takes 🗣️

AKN: Tanzanian uranium assets acquisition completed

EMH: Progress on a DFS, Permitting, Offtake and Project financing

EMH: EMH now on the priority list for a €49M government grant

EMN: Where to catch the next EMN conference call

IVZ: New chairman appointed ahead of second drill program

IVZ: Second director appointment this week

LNR: $2.52M raised ahead of its 2023 drill programs

PFE: More manganese samples bodes well for future drilling

TMR: Review of TMR’s 2022 exploration program

This week in our Portfolios 🧬 🦉 🏹

Invictus Energy (ASX: IVZ)

This week we took a look at new developments out of our 2020 Energy Pick of the Year IVZ which was just a “movable fluid sample” away from formally declaring a maiden oil & gas discovery in Zimbabwe.

This week IVZ brought onboard two new board members with experience in taking small African oil & gas explorers to developers, eventually leading them to takeovers by much larger companies.

This includes John Bentley who joins IVZ as chairman. John built Energy Africa from the ground up, listed it on the Johannesburg and Luxembourg stock exchanges and eventually sold the company to Tullow for US$500M.

It also includes Robin Sutherland who joins IVZ as a Non-Executive Director. Robin was also at Energy Africa before Tullow got involved.

After the Tullow acquisition, Robin led the Tullow Oil exploration team through multiple discoveries, including the ones made in the Lokichar Basin in Kenya, where Tullow was the joint venture partner in our first ever oil & gas Investment success Africa Oil Corp (the one we always compare to IVZ).

IVZ is now preparing to drill one of two wells:

• Option 1 - Appraisal well at Mukuyu-2
• Option 2 - Basin margin well at Baobab-1

📰 Read our full Note: New Year, New Drill: What is happening with IVZ?

Arovella Therapeutics (ASX:ALA)

We recently increased our Investment in ALA’s January capital raise at 2 cents and after watching the cell therapy space closely for over a year now, we like what we see.

Now in partnership with the ~$899M capped Imugene, ALA’s technology aims to treat solid tumours, which accounts for 90% of all cancers.

AND

ALA’s treatment could prove to be cheaper, more readily available, and more effective than existing cell therapy treatments.

It’s early days, but we’re backing Dr Michael Baker and the team at ALA to move at least one of their three treatments into Phase 1 clinical trials.

Biotechs like ALA can generate significant shareholder value by simply advancing their projects to trials, and we believe Phase 1 clinical trials would be the catalyst for a significant re-rate.

This comes at a time when larger biotech players or big pharmaceutical companies with sufficient capital are looking to outsource their cell therapy R&D pipelines by snapping up promising new tech via acquisitions.

📰 Read our full Note: We just increased our Investment in ALA - Here’s why

Galileo Mining (ASX:GAL)

GAL is now on the hunt for the source of the sulphide mineralisation at its Calisto discovery in Norseman, WA.

GAL appears to be proving out a theory we have held for a while — that its Callisto discovery has district scale mineralisation potential.

It’s looking like there are multiple mineralised structures here, all coming together to form a larger discovery.

The assays are still coming in thick and fast and it's telling us more about what the potential resource could consist of.

This week we shared our latest 3D models of GAL’s discovery and what we’re looking for next.

📰 Read our full Note: GAL keeps hitting new mineralised structures - where’s the source?

WhiteHawk (ASX:WHK)

Cybersecurity is a major theme in the media headlines right now - and we think the market will eventually catch up.

Our cybersecurity Investment, WHK, has signed partnerships with Dun & Bradstreet, Amazon Web Services (AWS) Corporate, Sontiq, and Peraton - to essentially push the WHK cybersecurity products to their clients.

These are big companies with extensive client lists, many at the upper reaches of the US government.

It can take months upon months of negotiation to get deals over the line, however when they do land, they tend to be highly sticky clients that present huge scope for ongoing and expanded services for years to come.

We think WHK’s latest 4C shows evidence of growing traction on these contracts and CEO Terry Roberts can help make 2023 a good year for us and other WHK shareholders.

📰 Read our full Note: WHK Quarterly: We are pleasantly surprised - here’s why

Oneview Healthcare (ASX:ONE)

Our healthtech Investment, and 2021 Tech Pick of the Year, ONE released its latest quarterly on Monday and it showed us how ONE has adapted during a tough time for tech.

ONE has had to tighten its belt and reduce its workforce, but also has some material deals in the sales pipeline which we are looking for the company to convert (we think the market is waiting on these deals too).

ONE’s share price was happily trading around the 40c mark for most of 2021, then in 2022 got swept up in the broader tech malaise and is now sitting at around 10c.

A great move and some good fortune from ONE was raising $20M at 23c literally weeks before the tech crash (we participated in this placement) - having cash during a tough financing environment is critical.

From the current 10c base, we think a couple of the delayed, material contracts the market expected last quarter will be well received if ONE can deliver them in the next few months.

We note that key customer NYU Langone signed an expansion contract for 1,000 beds to deploy in the next six months. That should help take ONE past the 15,000 beds we wanted to see it hit in 2022.

A sign of things to come?

We hope so.

📰 Read our full Note: Can ONE deliver contracts as we emerge from the 2022 tech wreck?

⏲️ Upcoming potential share price catalysts

Updates this week:

• GAL: Is undertaking a second round of drilling at its Callisto PGE discovery in WA.
  • This week GAL put some new assay results out hitting more mineralisation ~250m to the north of its existing Callisto discovery. See our take on the news here.
• 88E: Drilling for oil in the North Slope of Alaska next to UK listed Pantheon Resources.
  • No news from 88E this week but the company did go into a trading halt for a capital raise late in the week, see that ASX announcement here.

No material news this week:

• EV1: Updated DFS looking to improve on the already relatively strong US$323M NPV; Framework Agreement with the Government of Tanzania.
• GGE: Preparing to drill its US helium project looking for a commercially viable flow rate.
• KNI: Drilling the first of its three Norwegian battery metals projects inside the EU.
• GAL: Is undertaking a second round of drilling at its Callisto PGE discovery in WA.
• TTM: Drilling its copper porphyry target in Ecuador.
• PRL: Awaiting final execution of a joint development agreement with Total Eren.
• TMR: Maiden JORC resource estimate for its Canadian gold project.
• TYX: Awaiting start of next drilling campaign

Have a great weekend,

Next Investors