Nickel, the War and Under Investment in Exploration

  Portfolio Update Sent On: 12-03-2022 15:46 p.m.

15 minute read

As the war enters its third week, the market is making some wild gyrations.

Nickel shot up as high as US$100K a tonne in an epic short squeeze that forced the London Metals Exchange to halt trading on the metal.

Meanwhile, the palladium price is sitting just shy of all-time highs as Russia controls ~40% of production.

This kind of market behaviour is not uncommon in times of war. If globalisation creates downward pressure on prices, reversing it through localisation have the opposite effect.

Countries are now scrambling to become self-sufficient, conscious that old trade relationships may fray or simply end.

And it all points to commodities.

The commodities bull is being driven by a potent cocktail of inflation, war, growing demand from the energy transition, geopolitical squabbles, declining grades and years of low exploration spend.

On that last point, we think that the low exploration spend is coming home to roost.

There’s a classic phrase in commodities trading which says, “The cure for low prices is low prices.

It speaks to the cyclical nature of commodities - as you make less money on a commodity, the less money you have to pour into further exploration.

At some point though, the worm turns and higher prices funnel money into exploration which then as that supply comes on line, forces prices lower again.

We did some digging into ABS data on Australian exploration spend which you can see below:

That big runaway leader in exploration spend is gold. This points to the fact that a lot of gold companies are getting solid margins and are able to funnel more into exploration projects.

With gold sitting at nearly US$2000/oz, we expect this trend to hold up.

But to give you a sense of trends within a historical context we tracked down the same chart stretching back to 2005:

This chart shows base metals (the second line) trending upwards, and iron ore trending down (the third line).

The takeaway is that as this a nominal exploration spend, not inflation adjusted - so we expect exploration spend to continue.

Around the market and particularly our portfolio of small cap exploration stocks, we think we’re yet to see any truly powerful moves play out.

But we’re quietly confident that eventually the rising price of commodities will feed through to companies with these commodities and materials on their tenements.

From experience, there’s a bit of a lag on explorers. Big producers are generally more correlated with the underlying prices of their commodities.

Before the last commodities supercycle there was a tiny company called Fortescue Metals Group, and in June 2004 it was trading at around 5 cents.

Fast forward to June 2008, and it was trading at around $12.

If you’d taken a small stake of Fortescue shares $2000 in 2004 at 5 cents and cashed out in 2008 at $12 bucks, that $2000 would have turned into $480,000.

Not a bad return of ~24,000%.

Now, at Next Investors we make it explicitly clear that we are seeking returns greater than 1,000% over a long term hold.

We don’t think it’s outlandish either. We note our best performing companies in our portfolio are returning 4390%, 720%, 520%, and 500% on our initial entries.

Remember that investing in small cap stocks is high risk, and finding (and holding) an Fortescue level winner is very rare and it can take decades to hit one, but is ultimately what we are in the game to do.

Most small cap stocks will fail, and a small cap portfolio like ours relies on two or three outsized winners to offset all the investments that don’t make it, which is why we currently hold 40+ investments across our portfolios.

Who knows, maybe there is a baby Fortescue lurking somewhere in our portfolio?

A commodities boom should be the time to find out.

Here are all our current investments in mining/commodities small caps, click on any of the company names to see our investment memo for that company: Mining small cap portfolio

Upcoming investments

In keeping with our critical commodities theme, we have two new portfolio additions coming up on Next Investors.

We are looking forward to the Noble Helium (ASX:NHE) listing on the ASX on April 8th and joining the Next Investors portfolio - NHE Prospectus

Another addition to the Next Investors portfolio coming in April is the ASX listing of Sarytogan Graphite (ASX:SGA) - SGA Prospectus

📰 This week on Next Investors

Food security now a key global concern as fertiliser prices just keep rising

We ended the week with an update on our advanced stage fertiliser investment Minbos Resources (ASX:MNB) whose phosphate project has been recognised by the Angolan government as a ‘Project of National Importance to Angola’.

As a result of the Russia/Ukraine conflict fertiliser prices have increased strength and have underlined the threat to food supply chains around the world. Russia and Ukraine together account for a major portion of the world’s agricultural supplies.

Almost overnight, countries all around the world entered “food security” mode.

Angola (and most of Africa) are dependent on ammonia and/or fertiliser imports and ~45% of the cost of the landed product in Angola comprises transportation/internal handling costs.

This is why we continue to hold MNB in 2022. If Africa can source affordable local supplies, the whole continent could catch up to more developed countries’ food production, removing its reliance on food imports.

📰 Read the full breakdown: Food security now a key global concern as fertiliser prices just keep rising

Why we invested in EXR and what we want to see in 2022.

On Thursday, we launched our 2022 Investment Memo for our 2019 Energy Pick of the Year Elixir Energy (ASX:EXR).

EXR is progressing both a traditional energy (coal seam gas) project and a green hydrogen project in the sunny and windy Gobi Desert, right on the border of (clean) energy hungry China and Mongolia.

Energy security is obviously a key macro theme right now given the geopolitical situation and global gas crisis, and we took the recent market weakness as an opportunity to increase our position in EXR - topping up our position at 16.5c on market.

2022 is shaping up to be a milestone year for EXR with a two well pilot production program planned for the middle of the year which we hope will affirm commercial gas flows and facilitate EXR’s planned gas fired generation project.

The 2022 drilling program started just last week, and with ~$28.4M in cash in the bank, EXR is well funded to make progress on both its gas and green hydrogen businesses.

📰 Read the full breakdown: Why we invested in EXR and what we want to see in 2022

In our other portfolios 🧬 🦉 🏹

🦉 Wise-Owl

Never miss a chance to improve DFS economics with near surface exploration.

Evolution Energy Minerals (ASX:EV1), our 2021 Wise-Owl Pick of the Year, has identified EM targets over a 33km area on its late stage graphite project that are almost 15 times the size of the EM conductor that its current 20Mt JORC resource sits on.

Across the area, there is 8km that displays higher conductivity than the ~2km EM structure that the current JORC resource sits on. EV1 expects to drill these targets in May.

By drilling these EM conductors, EV1 will be specifically targeting high grade, near surface graphite, which can lead to lower strip ratios (waste mining) and an extended mine life. All of which, we expect, will make its project economics that much stronger.

EV1 has already completed a Definitive Feasibility Study (DFS), showing an NPV of US$323M with a low CAPEX requirement of US$87M over an 18-year mine life.

📰 Read the full breakdown: Never miss a chance to improve DFS economics with near surface exploration

🏹 Catalyst Hunter

ARN drilling to define a maiden JORC rubidium/lithium resource

On Monday, we put out an update on Aldoro Resources (ASX:ARN). ARN is in the middle of a 3,730m RC drill program across 66 drill holes at its Niobe rubidium/lithium project in WA.

At present, 45 of these holes have been completed and importantly ALL of the drill holes have intersected pegmatites — the thickest to date being 26m.

With another ~21 holes still to drill and all assays still pending, ARN has a busy few months ahead. The ultimate aim for the program is to put together a maiden JORC resource for the project.

We have set out our expectations for the assays as follows:

  1. Excellent: Average rubidium grades at or above the 0.15% upper range that ARN set for its exploration target, with the project also proving out a lithium resource at the same time.
  2. Good: Average rubidium grades above 0.07% and some indication of lithium mineralisation.
  3. Poor: Average grades <0.07% rubidium and no lithium mineralisation in the assays.

📰 Read the full breakdown: ARN drilling to define a maiden JORC rubidium/lithium resource

GGE Drilling 15 Miles Away from the Second Largest Helium Discovery in 70 years

Catalyst Hunter 2021 Pick of the Year, Grand Gulf Energy (ASX:GGE) has secured a drilling contractor for its maiden drilling program that is expected to commence in mid-April.

GGE is set to drill in a region of Utah dubbed the “Saudi Arabia” of helium that is just 20 miles from a helium processing facility and only 15 miles from North America’s second largest helium discovery in the last 70 years — the Doe Canyon Helium Field.

Helium is a critical gas that is needed to manufacture high-end computer chips and other semiconductors — an industry experiencing a global supply crunch.

With geopolitical tensions reaching fever pitch and countries rushing to secure their own supply of critical materials like helium, we think the timing couldn’t be better for GGE’s drilling program.

📰 Read the full breakdown:GGE Drilling 15 Miles Away from the Second Largest Helium Discovery in 70 years

🗣️ Quick takes

NEW: We are now releasing our quicktake opinions as they happen so you don't have to wait until the weekend to see them.

Bookmark our LIVE Quicktakes page here.

This week we saw news from GAL, MNB, AOU, TMZ, 88E, GTR, EV1, and ALA.

GAL: More palladium from air core drilling at Norseman project

On Thursday, GAL announced another batch of assay results from its recently completed 8,700m air core drilling program at its Norseman project.

The goal of this air core drilling is to identify targets for follow up RC drilling, and the assay results released today delivered some impressive intercepts, with peak results as follows:

  • 18m @ 0.29g/t palladium from surface.
  • 22m @ 0.21g/t palladium from surface.
  • 32m @ 0.2g/t palladium from surface.

These type results are more than enough for GAL to commit more capital to its Norseman project and come back with heavier rigs to test these anomalies at depth.

We covered the first batch of results and highlighted what we think is the most interesting target at the Norseman project in our last note on GAL.

The palladium price was up ~15% at one point overnight on Wednesday. Markets are fearing supply disruption from Russia which accounts for ~40% of global production. So any GAL palladium discovery at the Norseman Project would be coming at a great time.

We have two clear objectives for GAL in 2022 and want to see the company aggressively drill both its projects, as outlined in our 2022 GAL Investment Memo.

MNB: Madagascan rare earths divestment completed

On Tuesday, MNB announced the divestment of its interests in its Madagascan Rare Earths Project.

Divestment reflects the company’s focus on its Angolan operations, including its Phosphate Fertilizer, Green Hydrogen, Green Ammonia and Soil-In-Carbon Projects.

The divestment supports the objectives that we outlined for MNB in 2022 as found in our Investment Memo that we added to our website this week.

TMZ: $2.6M placement with strategic investment fund

Today, TMZ announced a $2.6M placement with energy and resources focused institutional investor Patras Capital.

The placement is split into 4 separate tranches meaning TMZ will get the $2.6M over a 4 month period with the first $650k received today.

The placement is being done at a 15% discount to a “benchmark price” set by TMZ at 6.9c meaning the first $650k was placed to Patras at 6c/share. Patras will also be receiving listed TMZOA options on a 1:2 basis (1 listed option for every 2 shares issued).

We generally prefer simple cap raise structures, but at least this gives TMZ the potential to raise subsequent tranches at less dilutive share price levels during a time when silver (and all precious metals) prices are likely to rise (which would likely improve TMZ’s share price).

TMZ is currently in the middle of updating its resource estimates across its deposits so the extra funding comes at a good time, check out our 2022 Investment Memo here to see what we want to see TMZ achieve in 2022:

IVZ: Rig contract executed, drilling to commence in June

Ahead of its anticipated June drilling program at its Muzarabani-1 well in Zimbabwe, IVZ confirmed that the final drill rig contracts had been signed, along with an option to drill a second exploration well.

IVZ is currently waiting on the formal granting of the extended licence area before committing to a second well.

The rig agreed on is the Exalo #202 rig, which is powerful enough to drill to a depth of ~5,000m. Mobilisation to the project area is expected to begin in May.

In the most recent investor webinar, managing director Scott Macmillan said that by drilling to a depth of ~4,500m, the seismic data showed that five different structures of interest could be tested.

IVZ is still finalising the interpretation of seismic data acquired in 2021, as well as the US$30M legacy dataset leftover by Mobil, as it works to firm up exactly where it will drill in June.

This drilling program was set as our #1 objective for IVZ for 2022 in our Investment Memo, which you can check out here.

GTR: Uranium drilling program on track for completion next week

GTR’s maiden drilling program at its ISR uranium project in Wyoming, USA is nearly complete.

GTR expects the final 9 holes of the ~100 hole maiden drilling program to be drilled next week. The full set of final results and interpretations are expected in the first half of April.

The ultimate aim of the current drill program is to identify the depth, grade and width of mineralisation over the project area with a target of announcing a maiden ISR uranium resource, or at the very least, an exploration target which will form the basis for follow up exploration.

In a previous note, we set some expectations for what we want GTR to achieve in this drilling program and we look forward to seeing the last batch of results before we can make an assessment of what GTR has on its hands.

This drilling program forms the basis for the first objective we set for GTR in our 2022 Investment Memo.

To see what else we want to see GTR achieve this year check out our 2022 Investment Memo here.

EV1: Marvel Gold shareholding update

Marvel Gold is exploring whether it can conduct an in-specie distribution of its shareholding in EV1.

Marvel holds 50,000,000 EV1 shares, or ~31% of EV1’s register, that are escrowed until November 2023, meaning Marvel can’t sell until then.

An in-specie distribution is when a company passes on its shareholding in another company to its shareholders. In this case, Marvel would transfer its 50 million EV1 shares to its shareholders pro rata, rather than have the company’s treasury hold onto them.

As mentioned in our launch note, one of the key reasons we liked EV1 is because of its tight capital structure.

With Marvel's shareholding escrowed, ~31% of the shares can’t be sold on-market until 16 November 2023. This means there will be a limited number of shares to purchase on-market, so if EV1 can deliver progress on its graphite project we could see a share price re-rate.

Whatever happens with the shareholding, ideally we would like to see the escrow remain in place.

AOU: More high grade nickel intercepted from its infill drilling program

AOU has returned another batch of assays from its 2,667m drilling program at its Saints Nickel Project.

The stand out assays include:

  • 2.13m @ 3.26% Nickel from 167.99m
  • 4.79m @ 2.05% Nickel from 311.98m

While these are both high grade intercepts, they are from a drilling program made up mostly of infill drilling. The drilling program is preparing AOU to conduct metallurgical testing which will form the basis for a planned scoping study.

With the nickel price having hit US$100,000/tonne this week, we expect the scoping study to show some favourable project economics.

🌎 Mainstream Media:

Can the world cope without Russia’s huge commodity stash? (Economist)

How Conflict in Ukraine, Soaring Inflation and Rapid “Techification” Have Disrupted the World in 2022 (Goldman Sacks )

*Great Read* Will the Ukraine war derail the green energy transition? (FT)

Commodity crisis bigger than 1970s oil shock (AFR)

Oil heading to $US300 a barrel, Kremlin warns (AFR)

Nickel Tops $100,000 as Big Short Tests 145-Year-Old Exchange (Bloomberg)

What is lithium and is it a fast ticket to wealth? (AFR)

Supply chains must move from just in time to just in case: PM (AFR)

LME nickel soars by a record 30% on Russia supply concerns (Reuters)

The Fog of Cyberwar Descends on Ukraine and Russia (Bloomberg)

Twiggy signs deal with Airbus to back hydrogen planes (AFR)

Wheat prices hit record highs as war halts exports from Ukraine and Russia (FT)

Big bets on fossil fuels, iron ore pay off for fund managers (AFR)

The science behind the $174,000 luxury space balloon experience (AFR)

Russia Threatens to Cut Natural Gas Flows to Europe Via Nord Stream 1 (Bloomberg)

ESG Goes to War (Bloomberg)

Russia Says Global Oil Embargo Could Push Prices Over $300 (Zero Hedge)

Have a great weekend,

Next Investors