Our Investment Approach, Energy Cold War, Ukraine, Supply Chain Crisis

  Portfolio Update Sent On: 22-01-2022 11:51 a.m.

17 minute read

With all eyes trained on Ukraine, the NASDAQ and S&P 500 logged their worst week since March 2020.

Things weren’t too much better on the ASX, either.

And with rising tensions in Eastern Europe, our macro analysis is pointing to one conclusion...the ‘Energy Transition’ is quickly turning into an ‘Energy Cold War.’

Meaning, as countries move quickly towards decarbonisation - there’s a race going on to secure critical minerals, secure domestic supply chains and outstrip political rivals.

This powerful mix of politics and commodities could well drive prices higher further still, and although we would prefer a more peaceful world - we’ve got significant exposure to critical minerals and the push to get domestic production going.

We believe companies that can help countries secure local (or friendly) supply of critical minerals needed to decarbonise the economy can thrive in a range of market conditions.

McKinsey in a recent publication put together a list of the “Materials critical for transition to a low-carbon economy” with a list of where the demand drivers come from. We have highlighted all of our exposures in yellow below:

We’ve got exposure right across the spectrum of commodities, across a mix of early stage exploration companies, through to later stage development.

To learn about the difference between exploration stage and development stage, click here

Here’s that list of companies that we are currently invested in that we think could benefit from this ‘Energy Cold War’ going forward:

Vulcan Energy Resources (ASX:VUL)

  • Zero Carbon Lithium, Development stage, European Union (Germany)

Kuniko (ASX:KNI)

  • Zero Carbon Copper, nickel, cobalt and lithium, Exploration stage, European Union (Norway)

Euro Manganese (ASX:EMN)

  • High purity manganese, Development stage, European Union (Czech Republic)

Grand Gulf Energy (ASX:GGE) - Catalyst Hunter portfolio

  • Helium, Exploration stage, North-america (USA)

Evolution Energy Minerals (ASX: EV1) - Wise Owl portfolio

  • Graphite, Development stage, Africa (Tanzania)

GTI Resources (ASX: GTR)

  • Uranium, Exploration stage, North America (USA).

Auroch Minerals (ASX: AOU)

  • Nickel, Exploration Stage, WA (Australia)

Pantera Minerals (ASX: PFE)

  • Iron Ore (steel) + poly metals, manganese, lead-zinc, Exploration stage, WA (Australia)

BPM Minerals (ASX: BPM)

  • Lead-Zinc, Exploration stage, WA (Australia)

Pursuit Minerals (ASX: PUR)

  • Nickel-Copper-PGE, Exploration Stage, WA (Australia)

Galileo Mining (ASX: GAL)

  • Nickel-Copper-PGE, Exploration Stage, WA (Australia)

TechGen Metals (ASX: TG1) - Catalyst Hunter portfolio

  • Copper, Exploration Stage, WA (Australia)

Aldoro Resources (ASX: ARN) - Catalyst Hunter portfolio

  • Nickel-PGE and Lithium, Exploration stage, WA (Australia)

Mandrake Resources (ASX: MAN) - Catalyst Hunter Portfolio

  • Nickel-Copper-PGE, Exploration Stage, WA (Australia)

FYI Resources (ASX:FYI) - Wise Owl portfolio

  • High Purity Alumina, Development Stage, WA (Australia)

Iron Road (ASX:IRD) - Wise Owl portfolio

  • Iron Ore (steel), Development Stage, SA (Australia)

European Metals Holdings (ASX: EMH) - Wise Owl portfolio

  • Lithium, Development stage, European Union (Czech Republic)

Thomson Resources (ASX:TMZ)

  • Silver, Development stage, NSW (Australia)

Again, there is an important difference in risk between exploration stage and development stage investments - click here to learn more

As long-term investors, we spend most of our time thinking about how to position our portfolio for success.

We think that predicting market movements in the short-term is very difficult and the only way to stay profitable in the markets is to have a clear and concise investment strategy built around the fundamentals.

Our process goes like this:

  1. We take a top-down approach - Looking at the macro-economic landscape and try to visualise what the world looks like in the next 5,10 and 15 years. Of course this is difficult and we never expect it to look exactly like what we thought it would. We are only trying to increase the probability of us being correct.
  2. Next we bring about an investment thematic - With an image of what we think the world looks like we start to think about the sectors and industries that are most likely to benefit from the ever changing world landscape. Again this is just us trying to work-out where we think opportunities will be.
  3. We find companies with the best projects and the best people - Having selected key investment thematics and industries that we think would benefit from our image of the future we then move into the company identification phase. Here we are looking at the company’s in these sectors that we think have the best assets and the best people to succeed should the macro-tail environment allow it to.
  4. We make our investment - The final step, we look at taking a position in these companies at a time when the market is yet to catch on to either the company’s or the macro thematic's potential. Once we make an investment it is down to the company to execute on its business plan and grow into what we envisaged when making our investment.

From here on in it is all about patience, but the key takeaway from this is that a lot of our time is spent in the first 3 phases. Visualising an investment thematic and then finding the companies we think will succeed should we be right.

This is what we did in 2020 when COVID came about.

We began to realise that there was a massive shift towards the onshoring of supply chains globally, especially for critical materials.

With the pandemic halting supply chains and leading to the massive bottlenecks that still plague the world a full 24-months after the pandemic began - Geopolitical tensions like the ones we mentioned earlier are rearing their ugly heads.

Securing domestic supply chains was going to become increasingly important to the point of them becoming of strategic importance for a nation's ability to grow - and decarbonise.

Here’s what happened this week...

📰 This week on Next Investors

On Thursday our battery metals investment Kuniko (ASX:KNI) announced that ‘advanced interpretive analytical’ geophysical work had brought about two new high priority drilling targets which KNI are looking to drill in the upcoming drilling program targeted for Q2 2022.

KNI’s projects sit on grounds with a long history of production where we hope older and now outdated exploration technologies may have missed extensions to these old deposits and/or new discoveries completely.

With two additional high priority drill-targets added to the planned 7-hole drilling program in Q2 2022 we thought we should do a deep-dive on these two new targets.

📰 Read the full breakdown: Modern exploration methods lead to additional drilling targets

In our other portfolios 🧬 🦉 🏹

🦉 Wise-Owl

This week in the Wise-Iwl portfolio our EU battery metals investment European Metals Holdings Ltd (ASX:EMH) announced the results from an updated pre-feasibility study (PFS) – increasing the project’s post-tax NPV by 75% from US$1.1 billion to US$1.94 billion.

At the same time EMH raised ~$14.4M in a placement to two big institutional backers, one of which is Ellerston Capital (a Sydney based fund with over $4bn in funds under management).

The first of the two key highlights from the updated PFS was that EMH updated the long-term lithium price for lithium hydroxide to US$17,000 per tonne, which is currently long-way below the current market prices of ~US$36,000 per tonne.

The 2nd of the highlights was a change in the mining method which in the last PFS was considered too costly to pursue but with lithium prices where they are the added CAPEX required to carry out the updated mining method is in-significant compared to the positive NPV uplift increased production gives.

📰 Read the full breakdown: EMH Raises $14M and Edges Closer to Lithium Production

🗣️ Quick takes on key portfolio company events this week:

Province Resources (ASX:PRL)

Our 2021 Small Cap Pick of the Year Province Resources (ASX:PRL) indicated that it had completed its Scoping Study with Total Eren in its Quarterly Report on Tuesday.

Investors have been waiting since last August for this report and we will provide a full commentary when it is released.

Next: We are waiting to see what the scoping study has in store for us.

Thomson Resources (ASX:TMZ)

On Tuesday, TMZ came out with an update on the work being done to update the resource estimate for the twin hills silver-gold deposit.

TMZ is currently working on updating its understanding of the previous drilling data-bases as well as conducting some metallurgical testwork updates so that more of the drilling results can be put into the resource estimates for its projects.

Some of the highlighted re-validated drilling results were as follows:

  • 36m @180 g/t Silver and 0.42g/t Gold from 66 m
  • 32m @210 g/t Silver and 0.37g/t Gold from 32m

Most of the work being done is in labs and not on the ground for TMZ but we liked that in the announcement they highlighted that by the end of Q1-2022 they expect to have announced JORC resources across all of the Texas project deposits.

Next: We want to see the JORC resources delivered and an updated “global” resource announced that validates the hub and spoke strategy TMZ are working towards.

Vulcan Energy Resources (ASX:VUL)

On Thursday VUL put out an update with respect to its efforts to list on the Frankfurt stock exchange in Germany.

VUL confirmed that their application had been submitted and that they are expecting the company to be formally admitted in the first half of February 2022. VUL is on track to become the first ASX-listed company to have a dual listing FSE.

VUL also mentioned that they are considering whether or not it is worth doing another capital raise as part of the listing considering the new access to a whole new investment community.

We like that VUL will now be easily accessible by EU based investors and hope that this makes it easier for VUL to raise capital in the future when the Lithium project is closer to being construction ready.

Next: We want to see VUL’s demonstration plant operating, the DFS complete, and for the listing to finally get done.

Elixir Energy (ASX:EXR)

Early in the week EXR put out an update on its green hydrogen project in mongolia. They even gave the project a name - the “Gobi H2” project.

The highlight from the announcement though was that EXR managed to sign an MOU with Mongolia Green Finance Corporation (MGFC) under which the parties will cooperate on multiple fronts ranging from research into carbon offset opportunities at a household level, developing forestry assets and with respect to financing EXR’s proposed green hydrogen pilot production plant.

The MGFC is a public-private entity established to facilitate the financing of Mongolian projects that will assist the global energy transition to a net zero carbon future, a great partner to have an MOU signed with this early in the project's lifecycle.

In the announcement EXR also confirmed they are making progress with government and other key stakeholders whilst also confirming the abundance of renewable energy resources over its project area.

With $30.9M (as at the end of the September quarter) in the bank (most of which was raised at 36c) we couldn’t resist picking up some EXR shares on the market at 16.5c on Friday.

Next: For EXR it is all about production testing. We will monitor the project over the next 12 months and provide updates and commentary as it progresses.

Grand Gulf Energy (ASX:GGE)

On Monday GGE announced that drilling permitting had commenced and that an experienced drilling manager had been appointed.

GGE managed to appoint Doug Frederick in the role of drilling superintendent for the Red Helium project. Doug’s CV looks really strong having worked as an Shell engineer with 20-years experience at the neighbouring Doe-Canyon helium project. Doug’s local knowledge and experience at a project that is being considered analogous to GGE’s is a major positive for us.

GGE also announced that the optimal well-site had been selected and permitting had commenced for the maiden well named “Jesse #1”. GGE is expecting permitting to take just under 3-months so we can expect to see a drilling event very soon.

Also this week, news emerged of an explosion at Gazprom’s massive Amur helium facility in SIberia which will keep it offline for at least the next six months. We suspect this played a role in GGE share price action from early in the week.

Next: We want to see permitting completed and the drilling of the 1st well at the Red Helium project.

88 Energy (ASX:88E)

Early in the week 88E put out an operations update in the lead up to the highly anticipated Merlin-2 appraisal well.

As we expected (88E share price does this every year) the share price has started to move higher as we approach drilling at Merlin-2. The share price started the week at ~2.9 cents and ended the week just under 50% higher at 4.2 cents.

With permitting and planning now in the final stages of review by the Bureau of Land management and the commissioning of the Arctic Fox rig, it looks like 88E are on-track to drill in February of this year.

We note that there was a complaint put in about the environmental impacts of the drilling program by the center for biological diversity.

We think that this is unlikely to be an issue given the same group had put together a lawsuit against BLM for ConocoPhillips exploration programs at the Willow Project only for the US government to go ahead and grant the permits anyway.

We also note that AIM listed Pantheon Resources recently had their Theta-West drilling permit granted, so in our opinion it is just a matter of time before the permits are issued.

Late in the week 88E also announced that the company was now listed in the US OTCQB market as of 19 January 2022 trading under the code: EEENF. This is a nice first step towards attracting investment from North-American investors so we expect more interest to come to the stock from it.

Next: We want to see permitting completed and final rig mobilisation works completed so the merlin-2 appraisal well can start drilling.

Invictus Energy (ASX:IVZ)

On Monday IVZ announced another increase to the amount being raised by the SPP. It isn't often you see a company increase the capacity of a capital raise by 100% so clearly there was a lot of demand for shares.

As we mentioned last weekend, we applied for our full entitlement so we are not surprised.

IVZ was our 2020 Energy Pick of the Year and we are very excited that IVZ is finally drilling its basin opening well in the next few months (this is what we have been waiting 2 years for).

The SPP is being done on the same terms as the $3.5m placement that was completed on the 29th of December. The shares are being offered @10c and come with a 1 free option for every 2 shares subscribed for, exercisable @14c with a 3-year expiry.

It looks to us like this will be the last increase in the amount being raised, with IVZ announcing that the SPP closing date would be brought forward to 18 January 2022.

Next: We want to see detailed results and final interpretations from the 2D Seismic data acquired, and the finalising of the SPP, before we turn our full attention to the drilling program scheduled for May.

FYI Resources (ASX:FYI)

On Tuesday our battery metals investment FYI announced that the third run pilot plant operations commenced.

The pilot plant operations are being run together with FYI’s US listed partner Alcoa (Capped at over $10bn) with the ultimate aim of forming the basis for the commercialisation of FYI’s innovative process for refining high quality HPA.

With this third-run we expect to see further refinement of the processing flowsheet and will be hoping the success from the previous 2 runs can be confirmed.

Techgen Metals (ASX:TG1)

In the middle of the week TG1 announced the assays from the 2nd stage of RC drilling at its gold project in the Leonora province in WA. In the same announcement TG1 also announced that a tenement that is adjacent to the area drilled had also been granted.

The RC drilling program consisted of 15 drill holes for 1,395m and was designed to follow-up highly the last drilling program from June-2021. This program tested the gold anomalies taken from soil samples in the northern/southern areas of the tenement. Peak results from the program were:

  • 1m @2.65g/t Gold from 60m.
  • 1m @2.17 Gold from 58m.

Not the greatest results, but we are more interested in TG1’s copper projects so these results don't change anything with respect to our investment thesis.

Next: We want to see the exploration license applications from the recent acquisition get completed and the 2022 drilling programs at TG1’s copper projects commence.

Creso Pharma (ASX:CPH)

This week CPH appointed William Lay as CEO with Bruce Linton joining as a director until the end of the year. Both Lay and Linton worked together at Canopy Growth which peaked at US$15BN market cap, and executed over CA$5BN in cannabis transactions together.

We are looking forward to seeing what this new leadership team can deliver for CPH shareholders and their strategy for business development and growth.

BOD Australia (ASX:BOD)

On Monday, our medical cannabis and hemp healthcare investment BOD Australia announced that they have now received UK regulatory approval to commence trials into medicinal cannabis efficacy on long-COVID.

Next up will be the recruitment of 30 trial participants to be administered BOD’s medical cannabis product, MediCabilis, and treatment and outcomes monitored over a 6 month period.

We view this as a substantial opportunity, given the large market size – an estimated 1.3m people in the UK suffer long-COVID, with one in forty COVID-19 infections having symptoms lasting upwards of three months.

Despite its prevalence, there is currently no leading treatment for long-COVID.

Of note, Bod Australia is backed by global healthcare giant H&H, (better known as the owners of Australia’s leading multivitamin brand Swisse).

Next: We want to see further growth in receipts in the upcoming quarterly, and further progress across the ongoing insomnia trial and the long-COVID trial.

🌎 Mainstream Media:

Raw Materials / Mining / Supply Chain

The raw-materials challenge: How the metals and mining sector will be at the core of enabling the energy transition (McKinsey & Company)

How Beijing’s omicron battle can help Australian exporters (AFR)

Mining bosses warn of ‘high-wire act’ ahead (AFR)

Why The U.S. Has A Massive Lithium Supply Problem (YouTube)

Oil & Gas

BlackRock’s Larry Fink backs oil and gas (AFR)

Lithium (EMH, VUL)

Serbia revokes Rio Tinto lithium project licences amid protests (Reuters)

Graphite (EV1)

Graphite will be in deficit from 2022 – here’s what EV battery makers need to do to secure the critical mineral (Electric)

Hydrogen (PRL, EXR)

Blackstone Makes ESG Splash with Green-Energy Lending Strategy (Bloomberg)

This ship is carrying Australia’s energy future - at minus 253C (AFR)

Wave of hydrogen companies tipped to go public this year (AFR)

Hydrogen power forecast to bring new dimension to energy geopolitics (Financial Times)

Hospital Care (ONE)

Code brown called for Victorian hospitals under pressure from COVID-19 (ABC)

Fertilizer (MNB)

India Plans $19 Billion Fertilizer Subsidy to Placate Angry Farmers (Bloomberg)

Helium (GGE)

Kornbluth: Latest Amur fire tightens helium supply for 2022 (Gas World)

Psychedelics (CPH)

How magic mushrooms changed my life (AFR)

Have a great weekend,

Next Investors