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New COVID strain, Santa Rally, Market Thoughts

Published 27-NOV-2021 10:33 A.M.


16 minute read

The small cap market appears to be pausing for breath.

Will we see the proverbial ‘Santa Rally’? Investors might be a bit worn out at this stage and need some rest after a few solid months of bullish activity at the small end.

It seems Black Friday sales were not exclusive to just shopping centres as the entire stock market took a beating yesterday - and when that happens small caps suffer too.

Even during the last two weeks we noticed many small cap stock prices were generally tracking sideways or down, on very low volumes however, which is encouraging.

Fears of a new COVID strain spooked the US markets last night and we may be in for a turbulent couple of weeks as the world figures out exactly how problematic this new “Omicron” strain will be to the global recovery.

The most recent market softness before this was in September when we wrote about how uncertainty around the broader impacts of a default on giant Chinese property developer Evergrande were still unknown, but the market seemed to shrug it off after a week.

Before Evergrande, the small cap market went through a soft patch during ‘sell in May’ and June tax-loss selling earlier this year, which we wrote was contributing to a period of weakness.

We thought the weakness was compounded by many new investors piling into small cap stocks in the early part of 2021 around the top of the market, then selling when the market turned in May, exacerbating the drops in share prices, which were further compounded by tax loss selling in June.

Back then we were calling that the small cap market should bounce back in July when tax loss selling finished, but we were out by a couple weeks when it came back during August and happily hummed along through most of September and October.

So will the last couple of weeks of small cap weakness be just a blip before the traditional “Santa Rally”? Or will the market start its usual quiet period over Christmas a few weeks early this year?

Depends on how serious this new COVID strain is, which might take a couple of weeks for the market to figure out.

November and the first half of December are traditionally very busy on the market as companies try to squeeze in deals, listings and cap raises before the Christmas break, and investors decide on their portfolio construction leading into the holiday season.

Things usually stay fairly quiet until Australia Day on January 26th, when market participants come back from holiday - leading into a period of high activity till May.

January this year was certainly an exception to this rule, we remember the market roared to life on January 4th which was highly unusual.

Many of the early stage companies we invest in need time to execute on their business plan, and we hold a core position over the long term to see them execute on their plan.

We have added just five new investments to our portfolio in 2021, and while some of these had an early rise a few have come off that high - we are now waiting for the companies to execute on their plan and hopefully deliver announcements that will sustainably re-rate the share price.

Which is where our long-term investment plan comes in.

You can find our investment plans for the companies in our portfolio in the “our investment plan” section on most of our articles.

We will hold a position for 3 to 5 years, giving the company time to execute on its plan.

As the company delivers progress and the share price (hopefully) re-rates, we look to partially de-risk our position by “free carrying” (selling enough shares to recoup initial investment) and then eventually taking some profit, and most importantly holding a core position for the long term to see the company deliver its plan.

This has been the strategy that works for us, more details can be found in our ebook.

As always, remember that investing in small cap stocks is risky and you should only invest what you are comfortable to lose.

We look for the right companies that we think can deliver results over a long period of time and themes that should hold up well over various market conditions.

Back in 2020 we held firm in our positions through the March 2020 market panic, and it paid off. We’ll be honest this was no easy task. We were legitimately concerned about the state of the world and its uncertain future.

Since passing that hurdle, well, we know what the market did as central banks and governments around the world threw the kitchen sink at the problem.

Bull runs are not without corrections - a straight line chart is impossible.

Like we are seeing right now, with the ‘Santa Rally’ potentially called off it will be interesting to see what the market does over the next few weeks.

So, what’s next?

Despite the soft patches in the market mentioned above, we think there’s more room to run in a commodities supercycle and we’ve positioned our portfolio accordingly. This is a high conviction outlook of ours.

We believe green energy and battery metals will continue to be in demand and be mostly insulated from patches of market weakness. We think the switch to Electric Vehicles now has too much momentum to slow down, and will be a handy driver of economic activity post COVID.

We still think traditional energy (oil and gas) will be in demand no matter what happens in the global economy as the move to green energy takes longer than expected.

Gold is always good when markets are rocky (it was one of the only commodities that rose overnight).

We are liking some opportunities in biotechs - our current investment DXB could be in the limelight over the next few weeks if the new COVID strain takes centre stage. DXB’s current Phase 3 trial is for a treatment for COVID symptoms, it’s anti-inflammatory not an “antiviral”, so if successful it should work on most new strains of COVID.

We’re looking at a range of new investments across the above themes and doing the necessary due diligence. We think we will squeeze one (maybe two) more in before Christmas.

Due diligence takes time and is what makes investing hard. Answering the right questions about a company and the macro environment takes work.

At least with a soft market entry prices should be better.

📰 This week on Next Investors

We started this week with a note on Vonex (ASX:VN8), our small cap Telco investment which has been on an acquisition shopping spree, gobbling up 3 other telcos over the past 18 months.

VN8’s simple acquisition strategy has been effective in capturing market share & accelerating growth, leading to its best ever quarterly earnings result announced last month.

Our note also touched on the history of M&A activity with ASX listed Telco’s, highlighting that any company ranging from nanocap to smallcap in size, is likely to be part of M&A activity, whether swallowing up smaller companies, or until a bigger group takes a look at you on their menu.

📰 Read more :VN8’s “Hunt for Growth” Strategy Now Delivering

In the middle of the week Tempus Resources (ASX:TMR) released some more assay results from the follow up drilling program at the new “Blue Vein” discovery at it’s Canadian Gold project.

The new assays confirmed that the newly discovered vein continues along strike for at least 380m and is demonstrating continuity down-dip with grades as high as 6.14g/t gold.

With 9 assays still pending (4 of which will extend our knowledge of the newly discovered “Blue Vein”) we are expecting results to come in over the next 12 weeks, positive results could mean TMR are not that far off being able to put a resource together for it.

📰 Read more : TMR’s Blue Vein mineralised at depth - now to see what's along strike.

🗣️ Quick takes on key portfolio company events this week:

Vulcan Energy Resources (ASX:VUL)

This week VUL executed a binding lithium hydroxide offtake agreement with Renault Group who are a major automotive manufacturer and pioneer in the European electric vehicle market.

The binding agreement follows the term sheet that was signed between the two parties on the 2nd of August 2021 which at the time was conditional.

The Renault Group of companies will purchase between 26,000 to 32,000 metric tonnes of battery grade lithium chemicals over the duration of the agreement.

Next: We want to see VUL’s demonstration plant operating, the Definitive Feasibility Study and listing on the main German stock exchange.

Elixir Energy (ASX:EXR)

On Monday EXR put out a comprehensive update on its hydrogen project. Key to the announcement was that EXR secured a land package where approvals have been granted for an undeveloped solar project.

EXR is still early in its journey to validate a commercial hydrogen project in Mongolia, but will undertake a number of studies that will inform various key decisions on the project.

Importantly, EXR is undertaking studies with PWC to identify the most appropriate legal avenue to production, and engineering studies at the concept stage have commenced.

Next: It’s exciting times ahead for EXR, we want to see regulatory support from the Mongolian Government to provide a pathway to tenure for a Green Hydrogen project (similar to PRL), and pieces in place to commence a formal scoping study on the project.

Although EXR suggested that they have commenced discussions with international financial institutions with regards to project financing, we understand that this can take time. We view any near term financing updates for this project as a bonus.

88 Energy (ASX:88E)

Late in the week 88E announced that after several months of planning they have chosen the highest priority drilling location for the Merlin-2 Appraisal well out of the three locations initially permitted for the program.

The Merlin-2 Appraisal well is targeting 3 different reservoirs (N18,N19 & N20) with a prospective target of 652 million barrels of oil and a geological chance of success of 56%.

Next: With the rig contract executed & the drilling location finalised we want to see site-works begin and 88E commence drilling at Merlin-2 in Feb-2022.

BPM Minerals (ASX:BPM)

On Thursday BPM released all of the assay results from the ~3,000m Aircore drilling program at it’s Santy Gold project. Although the drilling intersected gold mineralisation the grades were rather underwhelming, with the best results coming by way of Nickel-Copper-PGE intercepts.

We never viewed this gold project as a core project for BPM so the poor results did not change our investment thesis, we are invested in BPM to see them deliver on some drilling at the fully owned Earaheedy Basin lead-zinc projects, in the same region as Rumble Resources’ large discovery that put the Earaheedy Basin on the map.

Next: We want to see BPM get granted the remaining Exploration License applications in the Earaheedy Basin before they put together a detailed exploration program on them

Los Cerros (ASX:LCL)

LCL started the week off by declaring the Ceibal Prospect as a new discovery following the receipt of assay results from it’s latest round of drilling at Ceibal. Some of the peak results received were as follows:

  • 243.1m @ 0.49g/t Au from 87.2m
  • 120m @ 0.71g/t Au from 4m
  • 88m @ 0.51g/t Au from 314m
  • 252m @ 0.41g/t Au from 530m

These drilling results are follow-ups to the previously hit 500m+ Intercepts @0.5g/t Gold and LCL have now declared the Ceibal prospect a new Porphyr discovery at it’s Colombian Gold projects.

Next: We want to see the 5th drill rig added to the current drilling program and more Assay results from around the Tesorito project area.

Dimerix (ASX:DXB)

Earlier in the week DXB put out an updated investor presentation which outlined its business strategy and accomplishments for the year. Importantly, investors got an updated expected timeline for the near-term Phase III clinical trials for COVID-19, with interim data now anticipated for Q1 2022 (subject to recruitment).

We were expecting these results before Christmas, but with all biotech research, delays happen.

COVID-19 is still hot on the agenda, with a new COVID variant emerging out of South Africa. Compared to the recently successfully COVID treatments from Pfizer and Merck, DXB’s solution is anti-inflammatory compared to antiviral.

This means that DXB’s solution is more likely to be COVID variant agnostic. As new variants of COVID emerge, DXB will be well placed, if its treatment is successful, to service the demand treatment.

Next: We want to see the interim results of the two COVID trials (slated for Q1 2021) without further delay, and an update on the FSGS patient recruitment before the end of the year.

Advanced Human Imaging (ASX:AHI)

AHI officially listed on the NASDAQ this week, raising USD $10.5M.

The NASDAQ listing is one of the promised milestones we wanted to see AHI deliver after several delays.

We hope now that AHI has delivered a US listing and all the hard work/distraction that comes with it is completed, they can start delivering on their strategy and some of their earlier promises made to the market around their new product lines and revenue growth.

Next: We are still waiting for those Tinjoy revenue numbers and finalisation of the Nexus-Vita deal.

Province Resources (ASX:PRL):

PRL announced it has appointed Cameron Bateman as Chief Development Officer for the company.

Given Bateman’s previous experience in senior roles at oil & gas giant Woodside, this represents a milestone for PRL, and could be part of a broader trend of prominent fossil fuel executives leaving for new homes in the green economy.

In previous commentary we highlighted the important appointment of Roger Martin, also formerly of Woodside, and his key role in lobbying the state government for important legislative reform for green hydrogen projects in the area.

This announcement firms up the leadership team at PRL as it looks to complete its Scoping Study which will give investors, such as ourselves, a clearer picture of economics behind the green hydrogen project.

Next: More progress on community engagement and permitting, and a progress update on the scoping study with Total Eren.

Minbos Resources (ASX:MNB)

Early in the week MNB released an updated Mineral resource statement at it’s high-grade Angolan Phosphate project.

The updated resource estimate incorporated no new raw data (with the exception of Lidar topography, which has made a minimal, but favourable, impact). However, there has been substantial revisions in the way the geological structures are interpreted. The company also incorporated a new processing methodology into it’s resource estimate which required it to increase the cut-off grade for the resource.

Basically MNB updated the resources grade profile whilst also increasing it’s cut-off grade with no net impact on the size of the resource.

Next: We are excited about the potential zero carbon ammonia project, and also want to see the Ore Reserve for MNB’s phosphate project which is in the first quarter of next year.

Creso Pharma (ASX:CPH)

On Thursday CPH updated the markets with an explanation for the latest trading halt and confirmed that they had been served with a notice from ASIC which required them to produce certain documents in connection with an ASIC investigation on “ suspected contraventions by the Company, its officers, agents, employees and representatives in relation to trading in its securities”

The investigation is ongoing and it will probably be a while until we find out exactly what is going on.

CPH also announced that Adam Blumenthal had tendered his resignation to distance CPH from the ASIC investigation.

Next: Obviously the situation is disappointing for shareholders. Similar to our expectation set last weekend, we want to see a more coherent governance structure & a high end CEO appointment at CPH.

In our other portfolios 🧬 🦉 🏹

🦉 Wise-Owl

This week was full of ESG related updates for our Wise-owl Portfolio company’s. On Wednesday European Metals Holdings Ltd (ASX:EMH) put out the results from its Life Cycle Assessment study with the aim of exploring de-carbonisation opportunities across their lithium project.

EMH’s Life Cycle Assessment study came from the same consultants who completed a Life Cycle assessment study for another one of our portfolio company’s Vulcan Energy Resources in 2020.

The Life Cycle assessment study made 4 key recommendations including the use of a solar Power plant to power the mine, an electric mining fleet, use of environmentally friendly explosives to break down the hard-rock deposit & the use of hydrogen to power the project infrastructure. These initiatives have the potential to reduce the carbon footprint of the mine by over 70%.

📰 Read the full breakdown:EMH Life Cycle Study Paves Way for Low Carbon Lithium

Continuing with the ESG theme on Thursday Evolution Energy Minerals (ASX:EV1) moved to cement its Environmental, Social and Governance (ESG) credentials by adopting an ESG framework designed to make EV1 “Investment ready” for Global investment funds ahead of their expected final investment decision in H2 2022.

With capital markets placing an increasing amount of focus on the ESG performance of company’s and significant pools of capital unable to be deployed until companies adhere to ESG criteria, EV1 is moving quickly to increase its appeal to ESG focussed financiers.

📰 Read the full breakdown:EV1 Commits to serious ESG...

🏹 Catalyst Hunter

This week Ragusa Minerals (ASX:RAS) got confirmation that both of the tenements that make up it’s newly acquired WA halloysite project bordering one of the largest kaolin / halloysite deposits in Australia, the (207mt Cloud Nine Deposit) owned by another one of our investments Latin Resources had been granted.

With the tenements now granted, RAS can press ahead with the permitting process leading upto the maiden drilling program which will test to see if Latin Resource’s Cloud Nine Deposit extends into RAS grounds.

📰 Read the full breakdown: WA halloysite tenements granted - Drilling Plan Now Unlocked

🌎 Mainstream Media:

German Politics (VUL, EMH)

Germany's Scholz seals deal to end Merkel era (BBC News)

European Battery Metals (VUL, EMH, EMN)

The EU’s looming mismatch between climate ambition and minerals supply (Financial Times)

Nuclear Power / Uranium (GTR)

Bill Gates’ TerraPower aims to build its first advanced nuclear reactor in a coal town in Wyoming (CNBC)

Bill Gates’ nuclear startup picks a Wyoming coal town for its 1st advanced reactor, which will cost $4 billion (Business Insider) - Thanks Dave for sending this through

China’s Climate Goals Hinge on a $440 Billion Nuclear Buildout (Bloomberg)

Telco (VN8)

AustralianSuper targets telco assets amid digital demand (AFR)

Natural Gas (EXR)

CO2-free natural gas? CCS project powers grid for first time (Energy Wire) - Thanks Barry for sending this in.

Copper / Nickel (GAL, TG1, AOU)

Global need for copper, nickel will multiply over next 30 years -BHP (Reuters)

Covid-19 (DXB)

COVID-19 variant described as 'worst one yet' emerges in South Africa, prompting UK to ban travel from six countries (ABC)

Have a great weekend,

Next Investors

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