Evergrand, Gold and Traditional Energy

It’s been another volatile week and the small cap market doesn’t seem to know what it wants to do, delivering some ups and downs during the week.

Evergrande hasn’t been talked about as much as it was last week, and it’s feels like a lot of the money that missed the huge run up in stocks since the March 2020 crash might be using down days to enter the market, as the risk takers who rode small caps up from lows of the crash start taking some profit on fears of a possible correction.

Lithium continues to run hot, uranium is taking a breather but still looks buoyant, and the battery metals theme continues to grow legs - the commodity super cycle feels like it is in full swing with the general mood around commodities and exploration very positive as the world continues to experience supply crunches across key materials.

But...

While it’s great to be invested in a theme that is currently running hot like those mentioned above, we are also invested in themes that are currently overlooked by the market, but we expect (hope) will have their time to shine in the near future.

Here are a couple of our key themes where we are invested that have been out of favour for a while but we hope will make a comeback soon:

Gold

Gold has been out of favour lately - after a great run up to $2,000 USD/oz last year, gold hasn’t been able to break out of the ~$1,800 range for most of 2021.

When the gold price does run (it will eventually) our early stage gold investments will go along with it, especially as they are all continuously building value through exploration and resource delineation while the gold price is hobbling along.

Exploration drilling is fascinating if you take the time to understand it - each drill result paints more of a picture of what is underground, and knowing what to expect from each drill result is critical to understanding the investment.

We spent some time covering our gold investments this week, focusing on really understanding the exploration work being done by TMR and LCL.

Traditional Energy (Oil & Gas)

While clean energy investments are all the rage globally and currently everyone’s favourite, we still invest in unloved traditional energy like oil & gas.

Our thesis for oil & gas is that renewable energy will take longer to come online than people expect and there will be a supply crunch on oil & gas to make up the shortfall.

Chronic underinvestment in new oil & gas exploration over the last few years in favour of renewables will only further exacerbate the supply crunch.

It appears this energy crunch we have been expecting has started to happen this week with gas prices soaring, an energy supply crunch in Europe and reports that China has asked top energy companies to secure supply at any cost.

Our investments in traditional energy include EXR, IVZ, 88E... and a new addition coming very soon.

Stock to watch: AHI

Speaking of out of favour investments that we think could make a comeback soon...

AHI has been a bit out of favour the last few months after it made some big promises last year but didn’t meet timeframes for delivery - specifically its $3.5M Nexus Vita deal, its NASDAQ listing and a couple of big partnerships that have not delivered revenue just yet (which has been frustrating for us and other AHI shareholders - AHI is around our 6th biggest holding).

AHI is a mobile based technology for face and body scanning with applications in health, fitness and apparel. The tech is embedded into partner apps.

We think these delays have been what has caused the AHI share price to come off from highs of above $2 to bouncing pretty comfortably around the $1.2 mark - big promises from a company are great to get a share price moving, but delivering on those promises on time is critical to sustain share price rises and give credibility to any new promises made by the company.

Here is why we are closely watching AHI this week:

Promise #1 imminent: Nexus Vita: AHI’s partner delays appear to be from their partners taking longer than expected to launch their apps (with the AHI tech embedded) which is out of AHI’s control.

AHI seems to have taken control of this delay risk by providing development services for Nexus Vita (and charging $500k for it) so we expect this timeframe to be more in AHI’s control going forward.

Promise #2 Imminent : NASDAQ listing - long promised listing appears to be getting real now, see this page listing AHI as an upcoming IPO on Nasdaq.com. We also managed to dig up the US prospectus document circulating to US investors here - AHI promise #2 looks to happen very soon.

Promise #3 Imminent: Revenue from Tinjoy China Partnership - yes there has been delays on many of AHI’s promised partnerships, but AHI’s 14th Sept announcement says that around this week they will get the initial revenue numbers from their TinJoy China partnership to see how many of the 144,000 reported pre-registrations will convert into paying users.

After we find out this initial revenue, AHI will know the follow up revenue numbers from Tinjoy China on a monthly basis going forward.

Here is OUR rough calc on what to expect: For AHI’s initial revenue, we will use the industry average conversion rate for “freemium” or “pre-registration” style revenue models of ~3% to ~5%.

Our rough calculation: AHI gets A$44.8 per year fee for each conversion, so if we see ~3% of the 144,000 pre registrations convert that will be around A$200k to AHI this month. Of course these are just our rough assumptions and like anything in the small cap market this is no guarantee.

WHAT to watch for: if the initial AHI revenue from the Tinjoy China deal hits around our roughly calculated $200k mark, we think AHI will come right back on the markets radar, especially now that the NASDAQ listing appears to be legitimately locked in too.

Blue sky: AHI reckons Tinjoy China is targeting 1,000,000 paying users by this Christmas (meaning tens of million of dollars to AHI)... a big number like this sounds great but after a couple of false starts we will start getting excited IF we see initial revenue of ~$200k announced, which will be an early positive sign of reaching the bigger number over the next few months and a big tick in the credibility department for AHI going forward.

Like with our investments in gold and traditional energy that are currently out of favour but we expect to come back, we think if AHI can deliver some of its long promised traction sentiment will turn quickly.

You can see all our key investment thematics and the stocks we are invested in for each here.

📰 This week on Next Investors

As we mentioned last week, India’s drug regulator recommended approval for Phase 3 clinical trials of Dimerix’s (ASX:DXB) COVID-19 treatment. This was the final regulatory approval required to commence recruitment for the study and the first patient (of a planned 600 in total) expected to be dosed in the next few weeks.

We took a closer look at that news on Monday in the following note:

📰 DXB announces approval for Phase III COVID-19 trials

DXB yesterday reported that its Share purchase plan to existing shareholders had closed oversubscribed.

With a target to raise $2M, DXB received applications for multiple times more. As a result, DXB accepted $4M while still scaling-back applications. Under the SPP, approximately 20 million shares will be issued at 20¢ each, together with 10 million attaching unlisted options.

These shares are expected to be tradeable next Wednesday, because this was an SPP we expect most holders who are short term would have already sold existing shares to participate in the SPP, which we believe means that there will be less “post placement” pressure on the share price.

As long term investors we are pleased that DXB has now raised a total of $24M, putting the company in an excellent position to progress its three Phase III clinical trials.

The company also held its AGM this week. If you missed it, a transcript of the CEO’s address to shareholders (definitely worth a read!), as are her presentation slides.

On Monday, Vulcan Energy Resources (ASX:VUL) announced that it has produced a battery-grade lithium hydroxide monohydrate (LHM) sample. The sample from a pilot plant that grades better than the current best-on-the-market battery grade specifications required by offtake customers.

VUL is targeting Phase 1 commercial production of the battery quality material in 2024. In the meantime, it plans to ramp up production to supply samples to its offtake partners.

The recent rise in the lithium price is another positive for VUL. At a price of $20,000/tonne, the project’s valuation (as calculated at ~A$3.54BN in its PFS earlier this year) rises by approximately one-third.

The higher price price also increases in value of VUL’s recent offtake agreements with Renault and LG Chem. Further, since we sent the note on Monday, the lithium hydroxide has again reached a new historical level of $22,250/tonne.

📰 VUL Produces First Battery-Grade Lithium Sample

On Wednesday, VUL announced it has secured a site for its commercial lithium hydroxide plant — we covered that news on Wise-Owl (you can find a link below).

Tempus Resources’ (ASX:TMR) current drilling program is seeking to increase the estimated amount of gold underground at its Elizabeth gold project in Canada. TMR is testing whether historically mined gold veins extend further and looking to discover new gold veins that can be further drilled.

TMR announced another set of results from the program this week, which revealed two key things:

1. An unexpected visible gold hit in a new drill hole designed to test extension of an existing gold vein at depth indicated that there may be an entire new vein (assay results now pending).
2. Assay results to test whether two historically known veins connect came back with some gold grades, but not the bonanza grades we wanted to see.

TMR continues to drill and has 11 assay results in the lab, one of which is testing a far away possible extension of the south west vein — a high risk but potentially high reward hole if it comes in.

📰 TMR intersects unexpected visible gold - “accidentally” discovers potential new gold vein

Los Cerros (ASX:LCL) continues to aggressively drill out its Tesorito South prospect, a large, near surface, gold porphyry discovery in Colombia.

As drilling continues, the known gold envelope of its discovery continues to grow, and there seems to be no end in sight to the size of the deposit in three directions.

LCL has now reported over a dozen spectacular gold intercepts over the past year at its Colombian gold project, and has brought no less than four drill rigs on site to keep up the pace of exploration.

This week we took a deeper dive into the drilling plan and LCL’s theory that two separate gold systems may actually be one giant system, plus how they plan to prove it.

📰 Read more: Even more stellar gold hits from our gold investment, ASX: LCL

🗣️ Quick takes on key portfolio company events this week:

Minbos Resources (ASX:MNB)

Earlier this week MNB signed an MoU with local distribution partner Sandgrind to establish a Nitrogen, Phosphate, Potassium fertilizer blending plant and distribution business in Angola’s Malanje region. The parties are at the early stages of negotiating the finer details of a partnership, and we will be watching closely how the relationship develops.

It’s important for MNB to build up it’s strategic local partners who have built networks and relationships in the area over a long period of time. So we think that this is a step in the right direction towards MNB’s vision to support the Angolan agricultural industry.

In our other portfolios 🧬 🦉 🏹

🦉 Wise-Owl

After announcing on Monday that it has produced its first high-quality, battery-grade lithium hydroxide sample from a pilot plant (as covered on Next Investors), Vulcan Energy (ASX:VUL) followed up on Wednesday announcing it has secured a site for its commercial lithium hydroxide plant.

VUL expects to begin commercial production of battery grade lithium hydroxide in 2024. The product will be transported from the plant to VUL’s European customers in the battery and electric vehicle industry — dramatically lowering the transport footprint of the current lithium supply chain.

📰 Lithium price keeps rising as VUL locks in lithium production plant site

Speaking at the International New Energy Summit 2021 this week, Elixir Energy (ASX:EXR) Managing Director Neil Young outlined the company’s plans for a hydrogen project at its massive landholding on the Mongolia-China border — a move that complements its coal seam gas operations.

EXR’s core strategy of exploring for coal seam gas just north of the Chinese border has obvious potential synergies with evaluating hydrogen (blue and green) production related opportunities in the same location.

The company’s core assets and skill sets — including dealing with multiple levels of government, local communities and potential energy markets — are as relevant to renewable energy and hydrogen production as they are to gas exploration.

You can watch Neil’s presentation here:

📰 Watch Now: EXR reveals hydrogen plans at International New Energy Summit

FYI Resources (ASX:FYI) signed its long awaited binding term sheet with Alcoa that essentially free carries FYI into producing high purity alumina (HPA). This sets out the pathway to a JV that would lead to the world’s first significant kaolin-based HPA production by as early as 2023.

FYI was sold off on the announcement in what seemed to be a combined case of “buy the rumour, sell the news” along with the announcement seeming to somewhat understate what this agreement means for FYI.

This news substantially derisks the HPA project’s development. The cost to FYI comes as a reduction from full ownership to a 35% holding, while Alcoa gains a controlling 65% stake — at a cost of funding some US$194M of development.

The $9BN+ NYSE-listed leading aluminium producer will also provide its expertise and global distribution networks to make the project a success.

📰 FYI signs JV with Alcoa - now free carried into production, leveraging global networks & expertise

🌎 Mainstream Media:

Energy Shortages

AFR: World energy crisis offers Australia a $349b opportunity

AFR: Energy crisis is moment of truth for Europe’s green ambition

The Economist Natural-gas shortages threaten governments’ green goals

Minerals

Official Government Response: BACKING AUSTRALIA'S CRITICAL MINERALS SECTOR

Bloomberg: China Orders Top Energy Firms to Secure Supplies at All Costs

Psychedelics (CPH)

The Guardian ‘Psychedelics renaissance’: new wave of research puts hallucinogenics forward to treat mental health

ABC: MDMA and magic mushrooms could be used to treat mental illness in Australia after promising report

Stocks / General

‘Most Americans Today Believe the Stock Market Is Rigged, and They’re Right’

Have a great weekend,

Next Investors