The War Begins, Cybersecurity, Food Security, Energy Independence and Precious Metals

  Portfolio Update Published On: 26-02-2022 09:41 a.m.

17 minute read

The Russia-Ukraine story has been dominating news and markets the last few days.

The Russian troop build-up had been happening for the last couple of months and we think the market had slowly been pricing in a potential conflict, especially one that could accelerate the “west versus east” tensions and all the ramifications that come with it.

As troops moved in over the last 72 hours, the market dropped as expected, but seems to have come back overnight.

We think there is still a lot to unfold in this story - we hope for a quick, peaceful resolution, but even if that is achieved over the next couple of weeks, the genie is already out of the bottle and global tensions will likely run high into the medium term.

The last 72 hours could potentially fast track some of the key investment thematics we have been predicting around the transition to alternative (clean) energy, supply crunch in oil & gas, precious metals, food security and cyber security.

Two years ago COVID set the ball rolling on most of these thematics, revealing critical supply chain weakness, accelerating the move to clean energ, aggravating geopolitical tension and desire to secure local supply of critical materials.

We believe in all of the above thematics we were invested in, and our thesis is that each theme would have played over the next 10 years in peaceful global circumstances, driven primarily by each country's desire to “go green” to pull their economies out of the COVID recession.

Increased geo-politcial tensions from Russia’s actions are only going to accelerate each of these thematics, not cause them.

Here is what we think increased geopolitical tensions triggered by Russia entering the Ukraine is going to accelerate over the next couple of years:

1. Cyber attacks incoming

Modern wars are going to be fought in the digital space, by enemies attacking a country's critical companies, utilities and services, to take them offline.

The US mainstream media is currently awash with warnings to US companies to prepare for Russian cyber attacks in retaliation to last week's sanctions. Even president Joe Biden mentioned beefing up cyber defences in his address to the nation a couple of days ago.

There isn’t much precedent, or “rules of engagement”, for an all out cyber war, so we don’t know exactly what to expect here.

Yesterday, we provided a detailed explainer of how this urgency to improve cyber-defences will impact our investment in Whitehawk (ASX:WHK) who provides cyber security tech to US federal government agencies, defence and large corporations - read it here.

2. Food security - Grain/Food/Fertiliser prices to rise

Food price inflation was already a problem over the last 12 months, but could get a lot worse now that Ukraine has been disrupted and sanctions have been placed on Russia.

“Ukraine and Russia together account for more than a quarter of the global trade in wheat, as well as a fifth of corn sales... Russia is also a major low-cost exporter of nearly every kind of fertiliser. It’s hard to overstate how important fertiliser is to the food supply chain” - according to Bloomberg.

Further increases in food and fertiliser prices will likely impact our investment in Minbos Resources (ASX:MNB) who are developing a phosphate (fertiliser) deposit and expect first production late this year - read about how rising phosphate prices impact MNB’s plant economics here.

3. Energy Security - Oil & Gas Prices Up

We have been talking about how recent underinvestment in oil & gas is going to come back to bite when the transition to clean energy takes longer than expected.

Russia is a key supplier of gas to Europe, and last week’s sanctions have already pushed oil & gas prices higher - we think this is going to continue in the medium term.

Here are our current investments in oil & gas.

4. Energy Independence - New Energy Materials Demand to Soar.

What happens when oil & gas prices supply is disrupted, prices spike and withholding supply becomes a weapon of war?

Countries fast track their plans to achieve “energy independence” - which means moving faster to renewable energy like solar and wind, green hydrogen, nuclear and batteries to store this energy.

Problem is this requires raw materials like copper, nickel, cobalt, lithium, graphite, uranium and rare earths.

When many countries are simultaneously trying to secure energy independence in a world of oil & gas supply crunches, securing supply of these “energy transition metals" is going to become a matter of national security.

In a world of “west versus east” tension, we think hoarding of energy transition materials will occur.

Here are our current investments in energy transition materials

5. Safe Havens - Gold and Silver Prices to Rise

Gold and Silver has been relatively unloved during most of 2021, but increased geopolitical tension have seen precious metals prices rise as investors move into traditional safe haven asset classes.

We think this trend will continue - Here are our current investments in precious metals

Understanding what is happening in Ukraine

War is awful, and we were hoping to see a peaceful resolution to the troop build up.

Here are the information sources we have found most useful in understanding the situation in the Ukraine, the reasons behind it and possible outcomes in the medium term:

We are big fans of the all in podcast, here is their take on the situation:

Here is a summary of the key topics discussed:

0:00 Ukraine invasion: how should the US respond?

17:03 Importance of energy independence when dealing with Russia; solutions: Solar, Natural Gas, Nuclear, etc

32:51 Reflecting on the media coverage so far, Putin's ambitions

42:20 Biden's new sanctions, Chamath's Russia story, doing the maths on how the US can leverage energy independence

53:19 Markets signalling a potential turnaround, great businesses are available to buy at compressed prices, is Putin mad?

We also got value from this summary: Putin’s Logic for invading Ukraine.

📰 This week on Next Investors

To end the week we put out an update on our cybersecurity investment Whitehawk (ASX:WHK) which is a US based cybersecurity technology provider servicing US federal government agencies, defence and large corporations.

With the escalation of geopolitical tensions globally and the imminent cyber attack threat on the US, we think now is the time for WHK to accelerate new contract signings, which we think will translate to increased share price performance.

We have been invested in WHK’s cyber security tech since 2019, calling it our 2019 Tech Pick of the Year and in November last year, we purchased an additional 1.3 million WHK shares on market at 16.77c back anticipating some of the contracts in the pipeline would finally start coming in.

WHK recently confirmed a contract with a “global social media company” for US$1.5M per year via its website and in a response to an ASX query a few days ago - hopefully, this is the first of a couple of big contracts we will see from WHK in 2022.

📰 Read the full breakdown: US braces for Russian Cyber Attacks in Response to Sanctions

On Tuesday we put out an update on our oil exploration investment 88 Energy (ASX:88E) which is now only a few weeks away from drilling its much anticipated Merlin-2 appraisal well.

Last week 88E was issued a drilling permit for the Merlin-2 well and off the back of this completed a $32M raise at 3.5c to shore up its balance sheet ahead of the drilling program which is expected to cost AU$39M.

With ~$64m in cash including the funds from the latest raise, 88E also acquired some production assets in the Permian Basin, Texas, USA., paying US$9.7M (split US$7.2M cash and US$2.5M in 88E shares at 3.5c).

The assets are already producing ~220 Barrels of oil equivalent per day net to 88E and with some workovers planned, 88E is planning on doubling the production numbers by the end of 2022.

Most importantly 88E acquired a non-operator interest in the project which means the company can fully focus on its “swing for the fences” high risk high reward exploration activities in Alaska.

With drilling on the 652 million barrel prospective resource at Merlin-2 now only a few weeks away and the oil price trading at 5 year highs of US$95/barrel, 88E’s drilling program is one that we think the market will show a lot of interest in.

📰 Read the full breakdown: 652 million barrel oil drilling event starts early March

In our other portfolios 🧬 🦉 🏹

🦉 Wise-Owl

This week our 2021 Wise-Owl pick of the year Evolution Energy Minerals (ASX:EV1) announced that it had joined the European Battery Alliance.

EV1 is now the third company in our portfolio to enter the European Battery Alliance, along with Vulcan Energy Resources and European Metals Holdings.

The European Battery Alliance is an organisation that brings together over 600 stakeholders, including government organisations like the European Commission, the European Investment Bank and corporate giants like Tesla, Umicore and LG Chem.

Its purpose is to fast track offtakes, financing and partnerships to drive the European electric vehicle sector.

By joining the European Battery Alliance, EV1 is signalling its intent to become a supplier of battery materials to Europe and is aiming to be the greenest supplier of graphite with a commitment to maintaining strong sustainability and ESG credentials

📰 Read the full breakdown: Graphite to boom in 2022? EV1 targeting greenest graphite into European markets

🏹 Catalyst Hunter

On Monday our copper exploration investment Auking Mining (ASX:AKN) announced a monster copper intercept of 105.3m @ 1.94% Copper from 46m including a high grade section of 16.6m @ 10.20% copper from 130m.

The result sent the AKN share price to as high as 31c intraday, up over 100% from the 15.5c share price when we launched AKN as our latest investment in the Catalyst Hunter portfolio.

Normally a large intercept like this would be enough to send the share price of a junior explorer to multiples of where it was trading before the news, but the difference with AKN was that the current round of drilling is mostly in-fill and so it is not an entirely new discovery.

There looked to be a fair bit of selling as well, probably from stale holders. We still hold our full position given our 90 day trade blackout after launching a new investment.

AKN is drilling straight into a known ore body to try and get clean samples that can be sent off for metallurgical testing. AKN followed up Monday’s hole with a few more high grade hits later in the week.

The key to unlocking the value of AKN’s current 6.8MT @ 1.3% Copper JORC resource is to find a processing solution for the deposit where this week’s assay results were made.

After our note, AKN announced assays from a further 3 holes from the 7-hole infill drilling program.

Below are the assay results from the three holes AKN announced after our note on Monday:

  • 64m @0.97% copper, 1.73% zinc, 2.52% lead.
  • 106.1m @0.53% copper, 2.69% zinc, 0.49% lead.
  • 50m @0.37% copper, 0.91% zinc, 0.91% lead.

📰 Read the full breakdown: Monster Copper Intercept Hit - So what’s Next?

This week our junior exploration investment Ragusa Minerals (ASX:RAS) announced that its programme of works application had been approved and that drilling at its halloysite project was expected to commence before the end of the quarter.

RAS’ halloysite project sits along the border of another of our portfolio companies - the $55M capped Latin Resources, 207 Mt JORC resource of kaolinised granite - one of the largest kaolin/halloysite deposits in Australia.

RAS’ drilling program will be done right up against the tenement boundary where we think there is a very good chance the Latin Resources deposit extends into RAS’ ground.

The ultimate aim for the drilling program will be to try and estimate a maiden JORC resource that demonstrates Direct Shipping Ore (DSO) characteristics.

At the time of writing our note, RAS had a market cap of ~$7.1M, $3.4M in cash at Dec 31st, which gives it an Enterprise Value of a tiny $3.7M.

BREAKING: Late on Friday RAS announced that it was looking at opportunities in the hard rock lithium space and that it had received a “Writ and Statement of Claim” related to a sale of a business venture in 2015. At this point it is still too early to tell what will come of it, we will have to see how the impact of both plays out next week.

📰 Read the full breakdown: RAS to drill WA halloysite project in coming weeks

🗣️ Quick takes:

GGE: Appointed a Managing Director: Catalyst Hunter

On Wednesday GGE announced the appointment of Dane Lance as its managing director.

Lance is a senior oil and gas professional and reservoir engineer with over 16 years industry experience. He has a focus on “resource maturation and monetisation” - a perfect fit for GGE who will be drilling its maiden well at its helium project very soon.

Lance has worked for Woodside, Ophir (including technical evaluation of the ~$500m Ophir acquisition of Salamander) and Oil Search in previous roles.

We think the experience in monetising new discoveries is important especially given GGE’s project sits in an infrastructure rich area where new discoveries can quickly be brought to market.

CAY: Trading Halt: Wise-Owl

On Monday, our latest investment CAY went into a trading halt with respect to permitting at its bauxite project.

We read this news piece on Saturday afternoon which showed that the two tenements (sitting outside of the area where CAY’s resource is) were under an MOU with a Chinese state owned entity.

The MOU listed that they would be handed as exploitation permits (earliest stage of permitting in Cameroon). Importantly the MOU was with the national mining company Sonamines and not issued by the Ministry of Mines.

It didn’t look great for CAY holders however 48 hours later, we read this news piece which showed the Ministry of Mines (the main regulatory body in Cameroon) had cancelled this MOU and said that permitting was a ministry duty and not up to the national mining company Sonamines.

This was swift action from the government who look to us like they were not consulted when that MOU was signed.

We will be watching to see updates CAY provides and hope that everything is resolved this week.

ONE: Earnings call and preliminary Annual report summary

ONE reaffirmed revenue guidance of €12.5 - €14m for 2022 - ONE remains one of our favourite investments and biggest positions.

Key metrics (with commentary):

5% Recurring Revenue growth - slightly disappointing, but still time to make up ground

37% Total Revenue growth (due to lumpy outlay of lower margin hardware sales) - this is reflected in non recurring revenue up 120% and cost of sales up 86%

9,487 beds live at 31 December 2021 (+3%) vs 9,121 at 30 June

2,355 beds contracted not yet installed.

11,842 contracted beds - we want to see 15K contracted beds by the end of 2022

40% increase in sales and marketing - means ONE is spending 20% of receipts on sales and marketing so they did what they said they would do here, hopefully, they reap the rewards in the sales pipeline

We think the lag from hardware push should come through in coming quarters with recurring revenue, potentially in the 20-25% range.

ONE has 12,123 beds in RFP/RFI which are still waiting on decisions - these formal processes represent 64% of ONE’s total sales pipeline of 18,927 beds.

RFPs (Request for Proposal) and RFIs (Request for Information) are lengthy affairs that push ONE’s contracted beds through the bureaucratic pipeline.

It’s good to see so many beds potentially there for ONE, now we just want to see its sales and marketing team convert.

BPM: Drilling commenced at Nickel targets

Last week we put out a note on BPM’s Nickel targets identified next door to our other portfolio company Auroch Minerals nickel project.

On Wednesday BPM announced that drilling had commenced across the 11 identified EM conductors. To read more about these 11 targets, read our last note here.

The 3,000m of Aircore drilling is expected to take a few weeks and we don't anticipate any assays coming in for at least another 4-6 weeks after that.

GAL: RC drilling scheduled on Fraser Range EM targets

On Monday GAL announced that it had contracted 1,000m of RC drilling over some EM targets in the Fraser Range region.

Drilling is planned to commence later this month, and assays to start coming back from the labs in April-May 2022.

KNI: Target generation works are ongoing and drilling is scheduled for Q2-2022

KNI announced on Tuesday that the drilling program at its main cobalt target (Skuterud) is on track for Q2-2022.

With the applications for a drilling permit lodged and drilling contractor “Norse Diamond Drilling AS” awarded the contract, the 7-hole, 2,800 metre program apears to be on schedule.

KNI also announced that after further review of the geophysical and geochemical data the Vangrofta copper target wasn't of sufficient size to warrant further drilling.

This comes as KNI has spent the last 6 or so months refining the highest priority drill targets to allocate its funds to drill test in 2022.

DXB: Regulatory approvals for FOUR new jurisdictions on FSGS clinical trial

This week DXB released a new investor presentation which showed regulatory or ethics approval had been secured in FOUR new jurisdictions for its Phase III clinical trial on FSGS - Argentina, Taiwan, New Zealand and France.

This is a promising milestone and we’ll provide a full update on DXB early next week.

AJX: Half yearly results

On Friday, AJX announced that it had increased its revenues by ~46.3% with gross margins consistent with 2H FY21 and from the same period last year's results at 40.1%.

AJX showed a US$1.9M loss in its income statement, but the actual cash outflow was much lower at ~$900k and we note that with the addition of the new BioCoolTM products and new customers AJX had increased its inventories by US$600k.

PFE: EM surveys completed at newly acquired lead/silver project

On Monday PFE announced that it had completed EM surveys over the two main target areas at its newly acquired lead/silver project in WA.

The EM survey results are yet to be received but PFE is aiming to analyse the results and prepare a drilling program which is expected to commence in Q2-2022.

Read our deep dive into the newly acquired Hellcat asset, where we discuss why we like the project and where we compare it to Galena Minings' deposit that is currently being put into development.

FOD: New products hit shelves at Coles: Wise-Owl

We noticed something new at our local Coles this week, FOD’s plant based protein smoothies had hit the shelves.

We bought both, and our key takeaway (from flavour point of view) is that these things are filling - essentially an entire breakfast / lunch replacement.

Banana was our favourite, but we did like the Raspberry & Chocolate one too.

If you’re invested in FOD, go down and try one for yourself and let us know what you think.

We are keeping an eye out for early sales/market share data from this new product, and how it will help improve FOD’s overall sales and financial performance.

AOU: Massive nickel sulphides intersected at the Saints nickel project: Wise-Owl

On Thursday AOU announced that it had made two massive sulphide intersections at its Saints nickel project.

The 7 hole diamond drilling program is mostly being done so that ARN can upgrade its 1.02mt @2% nickel JORC resource. The drilling is mostly infill so the intersection of massive sulphides was somewhat expected by the market.

We are more interested in the grades of the intercepts as opposed to the massive sulphide intercepts themselves, if the drilling was targeting a new discovery then we suspect the market would have reacted a lot differently.

With 3.01m in massive sulphides intersected in one hole and 0.84m in another, all eyes are now on the nickel grades that come back from the drilling program, before AOU can try upgrading the JORC resource.

🌎 Mainstream Media:

‘The Sky’s the Limit’: Food Inflation to Worsen on Ukraine (Bloomberg)

Wind Industry Warns EU to Take Urgent Action as China Rises (Bloomberg)

US plans to boost mineral supply for electric vehicles (AFR)

Germany freezes Nord Stream 2 gas project as Ukraine crisis deepens (Reuters)

ESG investing and the ethics of turning ‘tools’ into ‘jewels’ (AFR)

Gold regains safe haven lustre while bitcoin struggles (AFR)

Biden Team to Hold Off on Sanctions Hitting Aluminum From Russia (Bloomberg)

Renewables Stocks Spike On Fears Of War-Provoked Energy Shortage (Oil Price)

Oil soars past $105 as Russia’s attack on Ukraine rattles markets (Aljazeera)

Helium Prices Are Set To Soar As Supply Shortage Looms (Bloomberg)

Have a great weekend,

Next Investors