Share price moves on expected vs unexpected announcements
24 minute read
Commentary: What makes a small cap 10x. Expected announcements, unexpected announcements plus macro themes. What we think led these companies to 10x, update on upcoming catalysts list.
Quick Takes: NHE, BOD, IVZ, AKN, KNI, TMZ, GTR, LNR (FNT), PRM & GLV
This week on Next Investors: GAL, MNB, ONE
In our other Portfolios: FYI, RAS, PRM & GLV
We have been investing in small cap stocks for many, many years and have observed there are several factors that lead to a share price re-rate.
We invest for 1,000% gains — holding a basket of small cap stocks where we hope a couple will deliver an outsized return over time.
Our long held Investment in GAL is edging towards potentially joining the rare 10x club.
Our Initial Entry Price was 24c and GAL touched $1.95 yesterday, closing at $1.70 with some pretty strong momentum.
Over the years we have observed that to get a major re-rate in a stock a few factors need to be in play:
- Expected announcements that exceed market expectations
- Unexpected announcements that are positive and surprise the market
- The macro theme to be currently loved by the market
The first is the company delivering expected announcements on time (or better yet, ahead of time) and that exceed market expectations.
Expected announcements include results investors know are coming because they have been forecast by the company - like drill results, clinical trial results, or revenue numbers.
If the results beat market expectations (which is hard), the share price should re-rate. If the results are good, but the market was expecting great, the share price may not react or go down.
Unexpected announcements that are positive and surprise the market include things like a new project acquisition in a currently hot macro theme (like lithium or green hydrogen), making an entirely new discovery from a run-of-the-mill drilling program, or a material deal or partnership the market wasn’t expecting.
Unexpected positive announcements are by nature not expected by the market, hence the speculation on the surprise news has not been priced in yet and can often re-rate a share price.
But if the market thinks the unexpected announcement isn’t exciting nothing will happen.
Macro themes are the industry or sector in which a small cap company is attempting to build a business.
Capital flows towards hot macro themes. These are possible to predict, but it is very hard to get the timing right, and even harder to pick the right company in that sector that will deliver the required expected AND unexpected announcements.
Battery metals are hot now and came on stronger than anyone could have predicted after two years of being very soft after the initial hype cycle in 2018. Green Hydrogen came out of nowhere quickly.
Small cap tech is soft at the moment after the NASDAQ big tech correction in the US.
Medical cannabis had its initial hype cycle for a while but is in a lull at the moment.
We expect both themes to come back again (like battery metals did) in the medium term.
We try to take positions in macro themes BEFORE they become hot, so we are currently looking at both potential new Investments in technology and medicinal cannabis stocks.
Over the years we have observed that a different combination of the three ingredients of expected announcements, unexpected announcements, and macro themes contribute to our best performers.
The absence of these ingredients will result in our Investments tracking sideways or down as they grind away hoping to deliver, and waiting for their macro theme to be in the limelight again.
Macro theme cycles generally roll in years, not months.
The reason some of our stocks have gone sideways or down is:
- Expected announcements have not met or exceeded market expectations or have been delayed.
- Unexpected announcements have not been exciting or haven’t happened at all.
- The Macro theme is currently out of favour or on the downswing phase of the market attention cycle.
We are patient holders, and have found that giving companies time (years) to deliver on their plan has yielded the best results for us, and hopefully their macro theme fires at the right time.
So which of these have been happening in our Portfolios recently...
Over the past couple of weeks we’ve seen a couple of our Investments make “unexpected announcements” that we thought were positive:
ONE (Memo) unexpected announcement: ONE’s Biggest deal ever. While the market IS expecting ONE to announce deals with hospitals, this was an unexpectedly big contract that increased ONE’s total bed count by ~20% in one hit.
We thought the announcement was incredible, the share price did move up but came back down again from what we suspect is nervousness in the general tech sector macro theme after the NASDAQ correction in US big tech, that is flowing through to sentiment in Aussie small cap tech.
MNB (Memo) unexpected announcement: Enquiries from tech partners, offtake partners, and financing partners had come in since it first announced it had a deal for cheap, clean hydroelectricity supply to power its Green Hydrogen-Ammonia Project.
The sudden and significant interest from these various parties certainly took us by surprise, and it seems the market liked it too as MNB was up from 13c to finish the week at 17c.
MNB’s macro themes of food security and green-hydrogen ammonia are very topical right now.
RAS (Memo) unexpected announcement: RAS announced the acquisition of a new lithium project along strike from $2.3BN Core Lithium. The lithium theme is very hot right now.
The market was pleasantly surprised, and during the week RAS went from 8c to hit a high of 20c, finishing at 19c on Friday.
We are now watching to see RAS detail its exploration plan for this new project which will then give us some expected announcements to look out for, which will hopefully come in above market expectations.
Unexpected announcements aside, over the last few weeks we have been following a list of our Investments that have near term “expected announcements” where we are hoping the results will exceed market expectations.
The companies are LCL, GAL, GGE, PRM, GLV, PRL, IVZ, KNI, BPM and LNR (FNT) and we provide our usual update on each remaining potential share price catalyst later in this note.
GAL has been the standout from the list, moving from ~20c to a high of $1.95 in the last 12 trading days.
Here is a quick analysis of how the ingredients we have discussed today may have contributed to GAL’s near 1,000% rise:
- Expected announcements: GAL’s expected drilling delivered a major discovery that far exceeded market expectations, which was followed up by more results that confirmed the discovery is getting bigger towards the east.
- Unexpected announcements: GAL announced that they had discovered highly valuable rhodium, which was not expected - we are not 100% convinced this was a major factor in the price rise, but it was very good to keep momentum going.
- The Macro theme Chalice’s discovery in the Julimar province made it one of the best performers on the ASX in recent years, so the macro theme for GAL’s discovery is very strong.
It’s early days for GAL, with the most important drilling still to occur over the coming months.
Let’s take a look back at some of our other Investments that have touched a 10x rise and try to understand if it was from expected announcements that beat market expectations, or was it from unexpected announcements that positively surprised the market?
Or were they just in the right place at the right time in a strong macro theme?
Or was it a combination of all three?
Here are our opinions on what happened - we continue to hold long term positions in all these companies, click on the company name to read our current investment memo for that company.
What made it go 10x: We Invested in VUL while battery metals were out of favour in 2019 (after being overhyped too early in 2018). Over the next two years VUL went as high as $16.65 and it is still our best ever Investment to date. The VUL team did everything they said they would and made significant progress towards producing Zero Carbon Lithium for the European EV market.
What we learned from the Investment:
- Macro theme: The rapid rise of the battery metals theme (especially lithium) contributed to VUL’s initial upward move from 20c.
- Expected announcements: Anticipation of VUL’s pre-feasibility study release caused a gradual share price rise in anticipation of the news, then an aggressive price surge after the PFS release as it exceeded market expectations.
- Unexpected announcements: Three unexpected off-take agreements announced in quick succession provided the next leg up.
What made it go 10x: Initial Entry Price of 3.9c, went as high as 51c. EXR made Mongolia’s first gas discovery and although it continued turning up gas, the share price has re-traced as expectations and business realities match up. We’re still strongly confident that EXR can deliver crucial gas to the Chinese market, and we want to see more concrete developments around its green hydrogen ambitions.
What we learned from the investment:
- Macro theme: The natural gas theme is stronger now, but wasn’t so much during EXR’s big initial rise off its gas discovery. Hydrogen macro theme addition was helpful.
- Expected announcements: Drilling of a basin-opening well in Mongolia delivered the first gas discovery in Mongolia, the result exceeded market expectations.
- Unexpected announcements: EXR used its strong in-country relationships to commence a green hydrogen project, which was well received by the market.
What made it go 10x: Initial Entry Price of 6.5c, went as high as 96.5c. This one was largely based on a growing market awareness of the critical role of manganese in the European EV supply chain — especially after Elon Musk announced that Tesla batteries will use 33% high purity Manganese, and then Volkswagen announced use of manganese batteries in its EVs. Early 2021 was when market fervour for battery metals projects reached an apex.
What we learned from the investment:
- Macro theme: We think the EMN macro theme has significantly contributed to its share price rise. Elon Musks and Volkswagen's manganese announcements helped EMN along - EMN was certainly in the right place at the right time.
- Expected announcements: Demonstration plant progress is still ongoing - EMN had been a bit slow making progress on their expected plan.
- Unexpected announcements: Joining European battery alliance, investment from EIT InnoEnergy and partnership with Nano One.
What made it go 10x: With an Initial Entry Price of 0.5c, we watched as 88E went as high as 9.6c in early 2021 in the lead up to its Merlin-1 well. 88E swings for the rafters with its high impact Alaskan drilling programs. Although Merlin-1 was a success, the subsequent Merlin-2 well was largely disappointing, in line with our strategy we took opportunities to de-risk along the way.
What we learned from the Investment:
- Macro theme: Oil exploration wasn’t the greatest macro theme around at the time of 88E’s 10x rise.
- Expected announcements: Speculation about the result of 88E’s Merlin-1 drill result created an extreme surge in the share price - which after the actual result settled at around 500% above the average price of the last year.
- Unexpected announcements: We think that most of 88E’s short term rise was driven by speculation on the result of an expected announcement.
What made it go 10x: From our Initial Entry Price of 25c AHI hit highs of $2.19. We had high hopes for AHI and while we did de-risk some of the position along the way during the rise in line with our investment plan, we also added to our position near the top of the rise at $2.00. We still hold nearly 40% of our Total Position in AHI. AHI made a lot of big promises to investors that have not yet materialised, which we think has caused the share price to come back to around where we originally Invested.
What we learned from the investment:
- Macro theme: The health tech macro theme was pretty solid at the time, especially during the height of COVID-19 when there was a spotlight on remote diagnosis tools.
- Expected announcements: AHI aggressively forecast many deals and revenue growth which did not occur, the price rise was caused by the expectation of these deals being prematurely built into share price, and when the expected announcements didn’t materialise in the expected timeframes the share price re-rated downwards accordingly as investors lost patience.
- Unexpected announcements: AHI released many unexpected announcements about new partnerships, but they have not materialised into revenue streams.
What made it go 10x: From an Initial Entry Price of 1.76c, LRS went all the way to 22.5c on a Brazilian lithium discovery. Rapidly rising lithium prices lit a fire under just about every company that was exploring for, or developing, lithium. LRS was no different.
What we learned from the investment:
- Macro theme: Anything in lithium at the moment is going to do very well if the company can deliver drilling results like LRS did.
- Expected announcements: Lithium drilling campaign in Brazil delivered a result that exceeded market expectations - a lithium discovery.
- Unexpected announcements: Acquisition of lithium projects in Brazil was very well received by the market.
What made it go 10x: We had an Initial Entry Price of 2.5c for PRL (when it was called SVD and was exploring for gold). PRL’s reinvention as a green hydrogen company was a massive boon and it went as high as 25c on development MoU with Total Eren. This happened just as the Australian government announced policy commitments aimed at establishing a green hydrogen market.
What we learned from the investment:
- Macro theme: The move into green hydrogen was very well timed, as Australia is looking for clean energy independence.
- Expected announcements: PRL has deliveredascoping study and filled out its board with key personnel familiar with developing large projects.
- Unexpected announcements: The Total Eren MoU (19 April 2021) took the market by surprise and was very well received.
What made it go 10x: Our Initial Entry Price for KNI was at the IPO price of 20c and in the early days of its life on the ASX KNI went as high as $3.60. Spun off from VUL, we think early investors were expecting the world of KNI and traders got in on the act. Regardless of this early speculation, we have high hopes for its exploration projects in Scandinavia. Europe needs battery metals and KNI could be part of the solution.
What we learned from the investment:
- Macro theme: KNI’s initial rise to $3.60 appears to have been heavily contributed by the association to VUL’s success and being in a very hot macro theme of European battery metals.
- Expected announcements: KNI’s announcement of its exploration program commencing the day after IPO provided the next leg up in that initial share price run.
- Unexpected announcements: It’s still early days and most of KNI’s announcements to date have been “expected” with first expected drill results coming soon, aside from the acquisition of lithium projects to add to its portfolio.
These short, high level summaries are not exhaustive explanations of why we think these companies rose by 10x or more.
We also note that after an aggressive rise, we expect the share price should eventually settle below the peak at a new higher base, around a range where it will likely trade going forward.
Regular readers will know that we’ve been using Investment Memos to track our Investments and we’ve found these memos a way to track the key ingredients a small cap company needs to deliver to (hopefully) achieve a share price re-rate.
Some of these ingredients are in the company’s control, but others are not - which is why there is always an element of luck in small cap investing, especially in mineral exploration.
At the end of the year we will analyse how each of our Investments performed against our Investment Memo and the key ingredients discussed today.
We’re conscious that things do go wrong - and indeed small caps can fall just as they rise.
As long term holders we hope that a company's share price generally settles back at a re-rated long term higher trading range off the back of a large price rise.
With this in mind, here our list of near term “expected announcements” we are tracking each week where we want to see a result that exceeds market expectations (like GAL did):
⏲️ Upcoming catalysts
Expected results due in the near term:
- GGE is drilling its maiden helium well in Utah where it’s aiming to make a commercial helium discovery (memo).
- IN PROGRESS: No change, but we’ll know very shortly whether or not it has hit a commercial helium discovery - at a time where helium is desperately needed in the US.
- The Sasanof companies’ (PRM & GLV) high impact gas drilling event: one of the biggest oil and gas wells drilled in Australia by an ASX junior in decades (memo).
- IN PROGRESS: On Friday, PRM and GLV confirmed that drilling at the Sasanof-1 well had commenced. The well is being drilled to a total depth of ~2,500m with the primary target area being in the last 500m section (between a depth of 2,000m and 2,500m). PRM and GLV expect the drill rig to be entering that section between the 2nd and 5th of June.
- PRL signing a Joint Development Agreement with its partner, Total Eren to materially derisk its WA Green Hydrogen Project (memo)
- IN PROGRESS: No news from PRL this week.
- IVZ is about to drill its giant gas prospect in Zimbabwe - we have been waiting two years for this event (memo).
- IN PROGRESS: Drilling is scheduled for July and IVZ recently updated the market saying it had three separate farm-in offers that were being considered.
- Update: This week IVZ finalised its well services contract with Baker Hughes (one of the worlds biggest oil and gas exploration contractors) and re-affirmed that drilling was on track for July.
- KNI about to drill its cobalt targets in Norway (memo).
- IN PROGRESS: This week KNI put out an update on the drilling program confirming that it has completed ~1,007 metres of the total ~2,800m drilling planned. We covered the update in a Quick Take which you can read here. Drilling is still ongoing and KNI expects the assays from the drilling to be turned around in the next ~90 days.
- BPM about to drill its lead zinc prospect in the Earaheedy Basin close to Rumble Resources’ recent discovery (memo)
- IN PROGRESS: Two weeks ago, Monday, BPM announced that its ~7,500m AC/RC drilling program had commenced at the Hawkins project (along strike from Rumble’s discovery). This is a drill campaign we have been waiting for since May last year and we should start to see some of the first results from this over the coming weeks.
- LNR (formerly FNT) commencing drilling for rare earths (memo)
- IN PROGRESS: LNR is still in the process of getting approvals, so we are not sure exactly when the actual drilling will occur - this may be later than most of the above list but we are keeping an eye on progress. No change.
🗣️ Quick Takes
Here are this week's Quick Takes:
📰 This week on Next Investors
Galileo Mining (ASX:GAL)
Two weeks after announcing a major palladium discovery at its Norseman Project in WA — which sent the company’s share price ~600% higher — GAL announced assay results for the remaining five drill holes of its recent RC drill program.
Each of these drill holes exceeded our pre-discovery “excellent” expectation of 1.0g/t and indicate the potential for a large mineralised system.
In light of these results, GAL has now brought forward the next drill campaign to start late next week. This program will consist of 20 holes across 4,000m with holes spaced 50m apart.
The next few months of drilling out this grid is going to be where we find out exactly how big this major discovery might actually be, while in the near term, we should see results from new holes to the east of the discovery hole.
Additionally, initial samples are still being tested for Rhodium and other Platinum Group Elements (PGE) metals — decent assay results from that work could add to significant further prospectivity to the discovery.
📰 Read our full Note: GAL’s palladium-platinum discovery is getting bigger - ‘Target Zone’ drilling next...
Minbos Resources (ASX:MNB)
MNB reported that it has completed the sale of its Madagascar rare earths assets, freeing up funds to focus on the completion of the DFS for its Cabinda Phosphate Project and, perhaps more importantly, accelerating studies for the Capanda Hydrogen-Ammonia Project.
In the announcement on Wednesday, MNB explained that its Green Hydrogen-Ammonia Project is set to become a key value driver for the company, while its Phosphate Project proceeds towards DFS completion.
MNB confirmed that the power supply for the Green Hydrogen-Ammonia Project has now been sorted with an updated resolution regarding its power supply arrangement with Angola’s power network operator. Under the agreement, MNB will be supplied with 200MW of zero carbon hydro-electric power over a 25 years term at an average price of just ~US$0.011 per kilowatt hour (as compared to the US$0.157/kWh that industry is paying for power in Australia).
MNB also disclosed that it has already received “Significant enquiries from potential technical, offtake and investment partners for the Green Hydrogen-Ammonia Project”.
The company anticipates that a large proportion of the Green Ammonia produced will be used in explosives by mining companies. There is currently no local production of explosives, so as the only producer of mining explosives in Africa, MNB will be able to supply its ammonium nitrate — the explosives byproduct — to major miners operating next door in the DRC and right across Africa.
And lastly, MNB said it has received initial in-bound enquiries on the ability to use phosphate from the Cabinda Phosphate Project for the production of Lithium Iron Phosphate batteries. The quality of the phosphate proposed to be produced from MNB’s Phosphate Project (grade and impurities) has attracted initial interest from potential global battery partners and established battery producers.
📰 Read our full Note: Green-Hydrogen Ammonia is coming
Oneview Healthcare (ASX:ONE)
ONE announced its biggest deal ever on Monday, signing a major deal to get its platform into more US hospitals.
ONE’s primary product is a “virtual care and digital control centre” at a hospital patient’s bedside that’s designed to deliver the best possible patient experience during their stay.
The deal with the BJC HealthCare network, one of the largest healthcare organisations in the US, will see ONE’s technology in a further 2,441 beds.
It is our view that for ONE to get a healthcare network of BJC’s stature, and a deal of this scope, speaks directly to ONE’s potential to play a major role in the modernisation of patient experience and healthcare service delivery in the US going forward.
ONE generates revenue by charging an annual licence fee on a per bed basis and these 2,441 beds represent a material increase of 20% to ONE’s total contracted bed count. Doing some rough calculations, we estimate that this deal could be worth up to ~$2M per year in recurring revenue.
Further, this deal leaves ONE just shy of the 15,000 contracted beds target that we outlined as ONE’s number one objective for 2022 in our ONE Investment Memo.
📰 Read our full Note: ONE signs its biggest deal ever
In our other portfolios 🧬 🦉 🏹
FYI Resources (ASX:FYI)
This week we launched our 2022 Investment Memorandum for our specialist battery metals Investment, FYI.
FYI is on the path to commercialising its innovative High Purity Alumina (HPA) technology, a new process that is cleaner, purer, and much less expensive than conventional methods.
To achieve this, the company has signed a binding term sheet with $10BN capped Alcoa’s Australian subsidiary.
FYI is moving toward the construction phase of its demonstration plant prior to its main WA plant, and with Alcoa’s backing, FYI could be in a prime position to become a go to supplier for High Purity Alumina globally.
FYI’s JV with Alcoa greatly de-risks the project (it’s a ~65:35 split with Alcoa the major owner), removing almost all of the project financing required by FYI. Already progressed beyond a Definitive Feasibility Study and having secured funding through to commercialisation, FYI has passed a huge hurdle for other peer companies.
FYI expects to commence HPA production in 2024 before ramping up to full-scale production in the following year — a timeline that aligns well with the looming HPA supply deficit.
📰 Read our full Note: FYI to be first to market with a superior battery metals product?
🏹 Catalyst Hunter
Sasanof companies - GLV & PRM
After a lot of anticipation, drilling is now underway at the Sasanof Prospect on the North West Shelf of WA.
Drilling of the Sasanof well, part owned by our Investments Prominence Energy (ASX:PRM) with a 12.5% interest and Global Oil and Gas (ASX: GLV) with 25%, has been ranked amongst the Top 20 Highest Impact Wells happening anywhere on the planet in 2022... and it's happening right now.
The drill rig is expected to hit this primary target reservoir next week — between 2-5th of June. Rarely do we get to see ASX listed micro caps have exposure to oil & gas exploration events this big. On sheer target size alone, this must be one of the biggest drilling events ever done by an ASX listed micro cap in decades.
The Sasanof-1 well is targeting a prospective resource of17.8 Tcf and 449 million barrels of condensate on a 3U basis (high case), AND, 7.2 Tcf and 176 million barrels of condensate on a 2U basis (mid case).
We have set up the following as our expectations for the drilling program:
- Bullish case (Exceptional result) = Gas columns measuring greater than 20m.
- Base case (Good result) = Gas columns measuring between 10 and 20m.
- Bearish case (Poor result) = Gas columns measuring less than 10m.
📰 Read our full Note: PRM & GLV’s Offshore Drilling has Begun. Here’s what we’re Watching for Next
Ragusa Minerals (ASX:RAS)
On Monday we brought you news that RAS has picked up more lithium ground near that of $2.3BN capped Core Lithium’s and $61.1M capped Lithium Plus in the Northern Territory.
RAS’s new project has seen some prior exploration work, including the sampling of outcropping pegmatites that are scattered over the project area.
This sampling returned assays grading as high as 8.03% lithium and 23.1g/t gold and the the last group to look at the tenements in 2018 reported, “several distinct trends and many kilometres of untested strike length of pegmatites occurring within the leases”.
With this deal tucked away, RAS will hold ~570km2 in ground in a highly prospective lithium belt — a landholding larger than both Core Lithium’s (~500km2) and Lithium Plus’s (~490km2).
We are looking forward to seeing RAS’s exploration plans — given that the project vendor is a drilling company, we expect it wouldn’t take too long to get a drill rig in.
The news was well received by shareholders, with the stock ending the week 131% higher.
📰 Read our full Note: RAS Picks up Prospective Lithium Ground Near $2.3BN Core Lithium
Have a great weekend,