Rising off a low base?

The “high octane” wait continues for the big oil & gas results from IVZ and NHE...

Both are still in the running to declare a discovery, and based on guidance it looks like we will find out both in the coming week...

EXR has now joined the fray having spudded their well yesterday.

The big mover in our portfolio was TG1 who announced some very early sniffs of lithium in historical soil samples from a gold project they own in Western Australia.

TG1 started off a low base at sub $2M market cap to finish at ~$5M market cap on Friday (~3c to 6.5c.).

WA lithium exploration has been a shining light in an otherwise dark sentiment small cap market, and seems like people who have made money on other WA lithium mining stocks that have run over the last 12 months were willing to place an early bet on TG1 yesterday, even though it’s still just very early signs.

TG1 started the day at 3.2c or around $2M market cap...we have been Invested since the IPO at 20c back in April 2021.

It’s still very early days for TG1’s WA lithium and we are now waiting for news from the team heading over to site to map out any potential targets for drilling (read our TG1 update here)

In other news, TYX this week was forced to retract statements about “observed lithium mineralisation” in drill cores made by TYX’s geologist and technical director Pete Spitalny.

An experienced geologist can generally eyeball lithium mineralisation, but eyeballing doesn’t pass muster at the ASX... even with disclaimers included.

But what would Pete know anyway, he only discovered AVZ’s monstrous Manono lithium deposit...

Looks like we are going to have to wait till we get the official TYX assays now to confirm lithium mineralisation and also the grades.

Material news being rewarded with re-rates:

It’s a rough market for roughly 98% of small cap companies.

But for the lucky ~2%...

Discoveries, successful clinical trials and other company-making announcements are being rewarded with share price re-rates that were more common during the 2021 bull market.

One example is small cap super star WA1 Resources (we’ve never held shares in this one) - which made its rare earths and niobium discovery in WA.

Pre-discovery WA1 Resources had a market cap of $6M. Now, it trades at ~$600M.

WA1 Resources has gone from ~13.5c in October 2022 to a high of ~$11.35 per share - 84x higher than its price in October 2022.

Another is Wildcat Resources (also never held this one), which was trading at 2.3c per share in December 2022.

Earlier this week, Wildcat hit $1.01 per share - 44x higher than its price in December 2022.

Before acquiring its lithium project in WA earlier this year, Wildcat was capped at just $17M - now it trades with a market cap >$1BN.

We think the current state of play in markets can be explained relatively simply...

There is still plenty of cash on the sidelines waiting to invest... the only difference is that the cash is more selective when it comes time to put capital to work.

And the rare investors who made money in the last 12 months will generally be looking to cycle back into a similar story and thematic to try and “do it again”.

Once material news is put out and the company does something in a hot macro thematic, the capital starts flowing in and QUICKLY.

As we have seen, in a bear market this only happens for the select few small cap stocks that deliver truly good news.

Speaking of hot macro thematics and a wave of capital flowing into it....

Capital IS flowing into WA critical minerals projects:

We talked about how we think critical minerals projects in good jurisdictions are particularly in demand in a previous weekend email.

See that weekend email here: Critical Materials: Long term macro thematics are still very strong

One area we are seeing it play out is the battle for control of WA lithium projects.

Billionaires Gina Rinehart, Chris Ellison and the US/South American lithium majors are all fighting it out for control of companies like Liontown Resources and Azure Minerals (both in WA).

First it was the battle for Liontown - which Albermale has seemingly walked away from.

Now it is the battle for Azure Minerals which it looks like Chris and/or Gina is going to win...

So far interest in critical minerals projects has come from:

1. Major lithium producers - SQM, Albermale, Tianqi
2. Major battery makers/users - Tesla, Stellantis & LG..

AND

1. Australian billionaires - Chris Ellison and Gina Rinehart...

We have yet to see the Koreans, the Japanese or the Saudi’s start throwing capital at projects in any major way.

We think that as the electrification thematic gathers strength those on the sidelines will start to commit huge sums of cash to the critical minerals industry.

We note the $2.4BN nickel deal the Saudis signed with Vale back in August this year.

(Source)

We think there is still a lot more capital out there waiting to start making huge Investments in the sector and think that there could be another leg up for the whole macro thematic.

Keep in mind that all of the current re-rates are happening while commodity prices are near 12-month lows...

The move across the WA lithium juniors this week is a reminder of how quickly things can change..

An example came on Friday when one of the smallest companies we are Invested in TechGen Metals (ASX:TG1) put out some very early stage lithium news.

After looking through old exploration data, TG1 managed to define a lithium soil anomaly at its Ida Valley project - 50km north of $294M Delta Lithium.

A pivot from gold to lithium has led to some big discoveries across WA - think Kidman Resources.

TG1 now finds itself in a similar position to that of TG Metals (TG6) before it drilled under lithium soil anomalies and hit lithium bearing pegmatites.

Note: just because TG6 has performed well is not an indicator that TG1 will perform the same way. Early stage exploration is high risk.

While it’s still extremely early stage for TG1 (they may not even find any targets that are good enough to drill), we are hoping TG1 has success if it decides to drill this project.

See our TG1 note here:

Small cap Companies needing to raise money are being beaten up the hardest.

Right now, we are looking to participate in raises for beaten up small cap companies that are running low on cash.

Many small caps are trading at multi year lows (even though their fundamentals are the same or may have even improved).

Between 2020 and 2022, companies had the opportunity to raise capital on their own terms at valuations that were starting to become stretched.

Now, with market conditions a lot more difficult and money harder to come by, company valuations have started to get back to levels that we think are quite attractive, even undervalued if looked at through the lens of a future bull market.

Some companies with high quality projects are trading at valuations that seem reasonable even in an otherwise rough market.

These low valuations put many companies in positions where the risk reward for new investors is a lot better than we have seen over the last ~24 months.

(when we say “low” valuations, we mean relative to the project they own, the stage of development and what they may be valued at in a normal or bull market).

A rough example - If we think a company is worth $100M in a bull market and manage to Invest when the market cap is at say $10M during a bear market then there is 10x upside on offer when the market sentiment turns positive.

If we Invest at a $50M valuation during normal/neutral market conditions then the upside is 2x into a bull market.

(these are just illustrative examples that simplify the concept and make many assumptions)

We watch a basket of stocks almost on a daily basis and see many capital raisings announced throughout the week.

This week, one caught our attention because of pretty frank commentary from the management team (which we tend to agree with)...

Our key takeaways from the management commentary were:

1. “Microcaps have been thrashed” - especially the ones that need to raise funds.
2. “The cost of standing still and going nowhere is high” - meaning companies that decide to sit out the market and stop working on projects are burning valuable cash for no material outputs.
3. “Upside for discoveries are significant” - exactly what we wrote about earlier in today’s email... new discoveries are being rewarded with significant re-rates.

So in summary, we are trying to participate in cap raisings for our portfolio companies and some new companies right now because we think the market is soft, valuations are low and cap raise terms are generally very favorable to new investors to try and attract their capital.

Macro News - What we are reading 📰

Bite sized summaries of the latest mainstream news in battery metals, biotechs, uranium etc: The Future Money: https://future-money.co/

What we wrote about this week 🧬 🦉 🏹

TG1 now working up WA lithium drill targets near $294M Delta Lithium

Our tiny exploration Investment TG1 announced on Friday that they have found high concentrations of lithium and caesium in three locations from historical soil samples on one of their gold projects in WA. The project is 50kms away from $294M capped Delta Lithium.

EXR has just spudded THEIR well...

EXR spudded their QLD well on Friday, EXR is drilling an “appraisal” well into a ~395 billion cubic feet contingent resource - testing a known gas discovery which sits inside a ~3.3 Tcf prospective resource.

Just a couple more days... (again)

With three big drilling event’s on the go at the moment, we covered the latest two announcements from NHE and IVZ, and preview EXR’s drilling and what we expect.

Quick Takes 🗣️

FYI: FYI seals $3M WA Gov Grant for HPA plant

EMH: EMH produces battery grade lithium carbonates - DFS due Q4-2023

IVZ: Wireline Logging Update at Mukuyu-2

GTR: GTI Energy ready to drill

GAL: GAL following up drill program with geophysics

88E: 88E confirms a discovery on the North Slope of Alaska, USA

NHE: Noble Helium CEO Justyn Wood on Positive Progress

⏲️ Upcoming potential share price catalysts

Updates this week:

• IVZ: Drilling oil & gas target in Zimbabwe, Mukuyu-2 (Q3, 2023)
  • IVZ put out an update on its wireline logging program showing gas and liquid hydrocarbons “flowing through onboard compositional fluid analyser”. A good sign as IVZ starts sampling its well. See our Quick Take on the news here.
• NHE: Scheduled to drill two targets at its helium project in Tanzania (Q3 2023).
  • NHE announced that its sampling program had finished at Mbelele-1. NHE said preliminary results indicated helium grades in “the middle of the range of expectations”. Final results are expected within a few weeks. See the ASX announcement here.
• EXR: Daydream-2 appraisal well, QLD
  • EXR spudded its Daydream-2 well yesterday. See our note on the news here.
• 88E: Flow test well, Alaska (Q4, 2023)
  • 88E confirmed an oil and gas discovery at its Alaskan project by announcing a maiden contingent resource for the project. See our Quick Take on the news here.
• TYX: Second round of drilling at its lithium project in Angola.
  • TYX put out a clarification announcement earlier this week. It looked to us like the company was asked to clarify that spodumene in its drillcores doesn't necessarily mean lithium has been intercepted. We mentioned in our latest note that visual spodumene is always a good sign but that assays will ultimately tell the full story. See our latest note here.
• LYN: Assay results from its Bow River nickel-copper-PGE project in WA.
  • LYN put out assay results from its Bow River nickel-copper-PGE project. Unfortunately, the assay results didn't deliver grades at or above our base case expectations. See the ASX announcement here.

No material news this week:

• PUR: Drilling its Argentine lithium project in Q4-2023.
• SLM: Assay results from drilling at its Brazilian Lithium project.
• DXB: Interim Analysis of Phase III Clinical Trial on FSGS (March 2024)

Have a great weekend,

Next Investors