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Why stocks go into "Quiet Execution Mode", how to spot a cap raise, stock "Confession Season"

Published 24-JUL-2021 11:40 A.M.


15 minute read

Some of our investments can take a long time to get moving from when we first invest.

At Next Investors we hold long term positions in all the stocks listed in our portfolio.

We share our investment strategies and ongoing commentary on each individual investment (you can find this on the company page by clicking the company on our portfolio page)

We hold a mix of early stage exploration companies and later stage growth investments across key thematics that we think will perform well over the next few years.

We have been investing in small cap stocks for a long time but we certainly don’t always get it right every time OR time our entries perfectly on each investment.

We will invest in a stock when we are impressed with management and think a near term share price re-rate is imminent, but sometimes it can take over a year after we invested before a stock really gets moving.

This is why belief in the management team, combined with patient long term holding, is key to the investment strategy for all of our growth stocks. We said no to six potential investments this week.

We have been invested in AJX for over 12 months and it hasn’t spent much time above our entry price of ~6c, but we think that the work AJX has done over the last year with private equity firm Colinton Capital, combined with a year long opportunity for stale holders to sell, has set AJX up for our long awaited re-rate - we will find out over the next few months if this time around it’s the real deal or another false start.

VN8 is another holding that hasn’t yet seen the sustained share price re-rate we were hoping for when we first invested, despite making some solid progress, revenue growth and progressing a material acquisition - as with all our growth investments patience is the key when building value and we continue to hold and increase our position.

We mix in a few early stage explorers with our longer term growth investments to keep things interesting in the near term, but sometimes they too can take a while to deliver.

Early stage explorer TMR just went through a 6 month “slow phase” during the drilling “off season” in Canada - we have held and built our position for over a year, and now that the new 6 month Canadian drilling season has started again we are hoping TMR will deliver.

Sometimes a stock has a great run but then goes into quiet mode while they execute on their plan and need to spend time working on their next batch of news announcements - if the share price shows weakness we might buy some more to top up our position.

We have found the best time to increase positions in stocks we believe in is when they are in quiet execution mode, there hasn’t been any announcements for a while and the share price drifts downwards as the heat comes out of the stock - we have been invested in cybersecurity tech company WHK since 2019 and we reckon they currently hold the record for not delivering a decent announcement in ages - the price drifted and we bought some more a few weeks ago.

Sometimes a lot of heat comes into a stock and the share price needs to resettle as hot money and impatient holders exit - as long term holders we wait for the stock to settle at its new base share price for a few months before we expect it to bounce back on the next news release... patiently holding is certainly not the most exciting part of investing but it has worked for us in the past.

We thought cashed up EXR had found its new base at around 25c after June tax loss selling from the 36c raise had tapered off, but it looks like there is still some loose holders that want to come out before its ready to rise again - we are patiently holding EXR as they deploy their new cash pile on more drilling (we will be surprised if it doesn’t bounce back soon give its cash at bank and current discoveries)

Our Small Cap Pick of the Year PRL is well and truly in quiet execution mode and the share price seems pretty happy at around 14c. We are meeting management next week to get an update on progress and will report back with what they have been up to. Same with AHI who usually like to pepper the market with announcements - we look forward to reporting back on what they have been working on too.

Our two golden children VUL and EMN have emerged from their recent share price holding patterns and both had good runs over the last few weeks as Europe turbocharges its move to electric vehicles using sustainably sourced and local battery metals. ONE has also been a golden child and looks like it wants to keep going this week.

Next week is “confession season” with quarterly reports for each company due by the 31st July - as small cap investors we get to see two key things:

  • Management comments: For the companies in “quiet execution phase” they get forced to provide a couple of paragraphs and commentary about what they have been up to and perhaps what we might expect next quarter.
  • Is there a cap raise coming? We can see how much money each company has left and what their quarterly cash burn is - so we can predict if there might be a cap raise coming.

For our exploration investments, the quarterly is mainly about seeing how fast they are burning up cash and if they need to raise.

For our development and growth investments we want to see revenue growth, management of costs and outlook from the CEO - we’ll be watching closely for quarterly reports from ONE, AJX, WHK, VN8, MNB.

Handy hint to spot an upcoming cap raise - if you want to see if a company is likely to raise cash soon, just go to their most recent quarterly “Appendix 4C” announcement and scroll to section 8 and find the line item titled “estimated quarters of funding available” and you will see how many quarters of funding management thinks it has left based on its current cash burn:

Estimated Quarterly Delivery

If the number is less than 2 quarters... expect a cap raise soon.

This doesn’t work every time as occasionally companies will get approached (even when they don’t need more cash) by strategic investors who want to build a position without buying on market. The company will quickly take the strategic placement to shore up their cash balance (looking at you LCL).

New stock coming soon - We are very close to adding a new stock to our portfolio, we are just going through the final due diligence process and expect to announce the investment in the next few weeks - this will be our third investment this year, the other two being BPM and ONE.

We actually have TWO new deals that we are excited about and are pretty close to investing in. We are also eagerly awaiting the listing of VUL’s spinout zero carbon battery metals IPO Kuniko (KNI) next month.

The reason we take so long to add new companies to our portfolio is because once we are invested for the long term it’s like a marriage - we need to be sure we believe in and trust the management team as we are in it for the long haul with them - some of our original investments in our portfolio model we have held since 2019.

📰 Here’s what happened this week on Next Investors

We recently increased our investment in Alexium International (ASX:AJX) shares on market at around ~5.49c after we saw a “change in substantial holder notice” announcing that private equity firm Colinton Capital was buying more AJX shares on market.

Colinton Capital is a well known private equity firm whose specialty and track record is a “hands on” approach to grow the companies they invest in from $100M's market caps to multiple $ Billions.

AJX is currently capped at around ~$31M.

AJX might be one of the smallest sized companies in Collinton’s portfolio - hopefully meaning big room for growth.

You can read all about it here: Private Equity firm buys AJX shares on market - So we did too

Tempus Resources (ASX:TMR) released drill core photos showing visible gold from its first holes in the new 2021 Canadian drilling season.

Assay results are now just a week or so away and we are watching out for some high grade results to kick off TMR’s 2021 season with a bang.

We are also waiting on interpretations of TMR’s recently run high-resolution aeromagnetic and radiometric survey over the entire 115 square km Elizabeth project - which should generate new targets for drilling (expected any day now).

TMR is drilling now with the aim of updating the resource estimate, and it is ultimately looking to deliver a Scoping Study on the project.

You can read all about it here: TMR season opening drill results due next week plus recovery rates revealed

Vulcan Energy Resources (ASX:VUL, FWB:6KO) released probably the most significant announcement in its history - its first official offtake with a Tier 1 battery producer.

VUL announced a BINDING term sheet for an offtake with the LARGEST lithium ion battery producer for EVs in the world - LG Chem.

The offtake with LG is for 10,000 tonnes of battery grade lithium from VUL’s geothermal brines per year, for 5 years, with an option to extend for another 5 years.

The contract says “Pricing will be based on market prices for lithium hydroxide.”

10,000 tonnes per year At CURRENT lithium hydroxide price of ~US$15,000 equals US$150 million per year of revenue to VUL.

You can read our views here: VUL signs ~$150M per year offtake with world’s biggest EV battery Maker LG

🗣️ Quick Takes - Our Other Investments:

Vonex Ltd (ASX: VN8)

VN8 is set to acquire part of MNF Group’s Direct Business for $31 million.

This latest acquisition is binding and will increase VN8’s annualised recurring revenue (ARR) by approximately 70% and deliver more than 5,250 new SME customers and more than 180 new channel partners.

VN8 will pay $20M in cash, plus $11M in deferred monthly cash payments to acquire MNF Group’s Direct Business. We think this is a good outcome for VN8 as monthly payments will help it manage its cash flow over the coming year.

To pay for the acquisition, VN8 has secured a $16M debt facility from Longreach Credit Investors which will be fully drawn down to partially fund the upfront $20M.

VN8 is also raising up to $12M at 11c via a well supported two-tranche placement.

Through this acquisition, VN8 is forecast to deliver $33.7m (almost double) its current revenue. The Direct Business delivered FY21 pro forma revenue of $15M and pro forma EBITDA of $5.5M. This gives VN8 high quality earnings and a strong platform for future organic growth through cross selling internet and mobility products to Direct Business customers.

We will provide a full commentary on the acquisition early next week.

Galileo Mining Ltd (ASX: GAL)

GAL released its quarterly report this week. There was nothing really new except an updated cash position

GAL is well-funded to continue exploration programs with approximately $5.4 million in cash as at 30 June 2021 - Plenty left to fund is Fraser Range Project (Nickel-Copper-Cobalt) and Norseman Project (Nickel-Cobalt-Palladium) drilling programs:

GAL Quarterly

BPM Minerals Ltd (ASX: BPM)

BPM got its drilling underway at its Santy Gold Project in WA.

The company started aircore drilling a total of 61 holes for a planned~3,000m.

All 61 holes are expected to be completed within three weeks.BPM also completed an 838-sample soil geochemistry program in early-July with assays now due.

The recently completed soil sampling program is expected to further delineate targets for follow-up drill testing.

Elixir Energy (ASX: EXR)

EXR provided an operations update on its exploration program at its 100% owned Nomgon IX Coal Bed Methane (CBM) Production Sharing Contract (PSC).

This new potential CBM bearing sub-basin has successfully established the presence of coal through two recently drilled strat-holes.

EXR drilled its deepest well to date – Kingston 2S.

EXR Drilling

A step out well – Kingston-3S – located about 6 kilometres east of Kingston-2S, has just spudded.

A core-hole will be drilled in the Kingston sub-basin to measure the key CBM parameters of gas content and permeability. This will happen later this year.

However, if investors are looking for something more immediate, a new appraisal well in the Nomgon sub-basin is due to spud in around a week: Nomgon Central-1.

Its objectives, in addition to taking cores and measuring permeability, will be to confirm a location and assist in other design parameters for one of the planned production test wells due to be drilled later this year.

Pursuit Minerals (ASX: PUR)

PUR will begin drilling at Phil’s Hill on ~27th July 2021.

The Mount Magnet Drilling Rig is anticipated to spud the 1st of 8 Diamond Holes in the upcoming 1500m program.

PUR will also expedite its assays.

Investors should note that 15 million unlisted options at 20 cents will expire on 28 August and 850,000 at 25c will expire on 14 August.

Creso Pharma (ASX: CPH)

Cannabis and psychedelics industry veteran Bruce Linton confirmed that he will join the HighBrid Lab Board of Directors as Chairman.

HighBrid Lab will be created from the merger between Creso Pharma and Red Light Holland.

This comes as recent CPH acquisition Halucenex Life Sciences - a psychedelics company - entered into a non-binding MoU with Nova Scotia-based support service provider Landing Strong, which will provide post clinical trial support and workplace integration for individuals that participate in Halucenex’s pending phase II clinical trial to test the efficacy of psilocybin on the treatment of Treatment Resistant Post Traumatic Stress Disorder (PTSD).

GTi Resources (ASX: GTR)

GTR reported results from drilling and the logging of additional existing historical holes at its Henry Mountains Uranium & Vanadium Project in Utah, USA.

A total of forty (40) new holes were drilled and an additional thirty‐two (32) historical drill holes were logged.

40 holes were drilled with 23 of the holes mineralised but the market didn’t like it - we continue to hold GTR as the Uranium market seems to be entering a buoyant phase.

Titan Minerals Limited (ASX: TTM)

Gold explorer TTM released a summary of historic work completed at the Linderos Project and an outline of planned exploration activity for the next 6 months.

The Linderos gold project is located near the Peruvian border in southern Ecuador’s Loja Province.

An exploration plan for the second half of 2021 will include geochemistry, geophysics and drilling activity, following compilation of historical work.

TTM plans to systematically explore Linderos and to discover what appears to be a high-grade epithermal gold project sitting on a porphyry.

🦉In our other portfolios 🏹

🦉 Wise-Owl

Wise-Owl covered Vulcan Energy Resources (ASX:VUL, FWB:6KO) this week.

As with our Next Investors article, we covered VUL’s lithium offtake with tier 1 global electric vehicle battery producer LG.

We calculate the deal to be worth US ~$150M per year to VUL.

We highlighted how this deal was part of a rush of ‘Lithium from Geothermal Brine’ deals globally in the last two weeks.

🦉Here is what we think: VUL’s US $150M per year Lithium Offtake Deal

EMN announced they have secured a new Preliminary Mining Permit, valid until 31 May 31, 2026 that gives it exclusive rights to the Chvaletice tailings resource as well as the right to conduct the Project’s Final Environmental and Social Impact Assessment - expected to be completed and filed with permitting authorities in the first quarter of 2022.

The existing permit was due to expire in 2023.

The permit is a huge endorsement of EMN’s sustainability credentials while other early stage battery metals companies Piedmont Lithium and Infinity Lithium recently reporting permitting issues due to environmental concerns.

🦉Here is what we think: EMN successfully secures government permits - while other ASX battery metals aspirants hit hurdles.

BHP has signed a deal to supply nickel to Tesla which could greatly benefit nearby nickel explorer Auroch Minerals (ASX: AOU).

In Western Australia, BHP is busy increasing its nickel ore reserves, acquiring projects, and is seeking to restart its Kambalda nickel mill with ore fed from third parties...

AOU owns 80% of a historical high grade nickel mine that used to supply BHP but was shut down after the nickel price plummeted a few decades ago.

AOU is now hoping to discover a giant nickel body underneath the historical nickel mine’s original ore body.

🦉Read our full report: Tesla inks Nickel deal with BHP – AOU Drilling for Nickel near BHP smelter

🏹 Catalyst Hunter

Aldoro Resources (ASX:ARN) is now just days away from diamond drilling at its flagship Ni-Cu-PGE project.

ARN is targeting two drill holes to kick off its drilling campaign.

ARN is about to start 5,000m of nickel drilling on a number of high confidence targets - holes have been pegged and drill pads prepared.

The drill rig is now mobilising after a slight delay in getting the rig to site and drilling will start in the coming days.

🏹 Read our update here: ARN Days Away From Nickel Drilling

🌎 Relevant Mainstream Media:

Cybersecurity (WHK)

Forbes: U.S., NATO And Allies Accuse China Of Hacking Microsoft

New York Times: U.S. Accuses China of Hacking Microsoft

Reuters: U.S. and allies accuse China of global hacking spree

Telecommunications (VN8)

AFR: M&A over for Uniti as it storms up the ASX boards

Hydrogen (PRL)

Olympics: At Tokyo 2020, hydrogen shows promise of a carbon-free future

Thanks Chris for sending this in

Electric Vehicles (EMN, VUL)

Bloomberg: Mercedes Accelerates Electric Shift With $47 Billion Push

Lithium (VUL)

AFR: Plenty of spark left in lithium’s bullish run

Monash: Supercharging tomorrow: Australia first to test new lithium batteries

Thanks Neville for sending this in

ESG Next mining supercycle will be different than any other — report

Have a great weekend,

Next Investors

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