Following a company's progress and why context matters
Published 20-AUG-2022 14:38 P.M.
13 minute read
Natural resource exploration has been a good place to be invested in over the last few years.
There is a rush to find new sources of traditional commodities like natural gas, oil, iron ore, copper and nickel as the global economy decouples and countries seek to localise resource supply.
Lithium, cobalt, graphite, manganese, helium, uranium and rare earths demand is surging as key ingredients in the world’s shift to electrification and energy security.
Today we are going to share how to understand the progress of a resource exploration investment, how it translates to increasing shareholder value, and why it can take so long.
We will explain why we think it’s important to read each new exploration announcement in the context of what the company has said in the past and how it fits the previously stated exploration plan - even if it is just scanning some rough notes of key points from past material announcements.
Tracking how well management executes their strategy is impossible to do by reading only the announcement on the day, a quick scan of all the past key announcements is very handy to help form an opinion of what has happened.
But first, here are five company progress trackers we have shared that we are using to quickly understand the context of any new announcements the company makes:
ASX:IVZ - Large scale oil & gas exploration in Zimbabwe - we have been invested in IVZ for 2 years and as the company progressed in the lead up to its drilling event, the share price has steadily increased to reflect the progress made - the full IVZ story actually began many years before we Invested. Its incredible how much work has gone into the getting to the first drill campaign, which is expected to start in just a couple of weeks:
ASX:SGA - Giant Graphite deposit in Kazakhstan - SGA only recently IPO’d, so it is still early on its journey, but the project is already advanced with historical drill work from the 1980’s contributing to the new drill plan - now that we have seen first drill results will likely increase the resource size, we are very interested to see further assays and metallurgy work:
ASX:GAL drilling our a Palladium and Rhodium discovery - after 18 months of false starts and inconclusive drill results, GAL’s share price re-rated after announcing a Palladium discovery a couple of months ago, it then raised $20M to continue drilling around the discovery to figure out its extent. A discovery like this is a rare event and is fascinating to watch how the company plans to define its size and augments drilling plans based on each new drill result:
ASX:TMR - Trying to discover enough new gold to restart its historically producing gold mill. TMR has also been a long journey for us, with a couple of false starts and delays to drilling, but has started to look very interesting after announcing a significant assay result and large intercept over the last two weeks. Here’s what we are watching for next:
ASX:LNR - Early stage rare earth exploration next to successful neighbours. LNR is an early stage project that has been completing all the pre-work required prior to its first drill - now that most of the pre-work is complete, the price has started an upward run prior to drilling commencing. LNRs first ever drill should be very interesting:
Why is it important to recall historical progress?
Discovering a new resource deposit and commercially extracting it is no easy task - it can take 5 to 10 years to bring a new project into production.
Many never make it for a range of reasons, and it’s important to track what went wrong and how the plan changed over time.
Investors have different risk appetites that determine at which point of the resource project lifecycle they will invest.
Shareholder value is created at various points along the journey for investors who are patient enough to wait for companies to deliver material progress on a project.
We Invest at the earliest stage - in small cap exploration companies, seeking 1,000% gains as a project moves from the exploration phase to the development phase.
The exploration phase is very risky and most companies will fail to make a commercial discovery, so our strategy is to hold positions in a number of exploration companies in the hope of eventually hitting a couple of outsized winners to offset the losers.
Over the last few years a couple of our Investments have hit that magic 1,000% gain mark - In most cases it takes at minimum a year to get there, with a lot of pre-work and a bit of “exploration luck” required.
As a company gradually proves the existence of a commercial resource through exploration, we will partially De-risk our Investment, and retain a position to hopefully own a share in an eventually producing mine/plant.
A resource exploration project is like solving a puzzle
To figure out what lies under the ground, an exploration company must efficiently deploy its limited funds to:
- Collecting and analysing geological data
- Create a drilling plan from this data
- Drill the targets in the plan
- Learn from the new information gained from drilling
- Repeat step 1 to 4
Over time and repeated iterations, the company slowly builds a picture of what they have and can establish whether it is worth extracting, or if it’s time to move on to a new project.
The share price will re-rate if the market likes what it sees over time.
Before exploration drilling can even begin, a lot of pre-work is required to secure exploration permits and funding to drill.
The pre-work can take months or even years, and the share price usually re-rates upwards as the pre-work progresses before drilling has even begun.
As small cap exploration Investors, it is important to look at each new company announcement in the context of:
- The historical work already done on the project
- How efficiently pre-drill progress has been made
- The result delivered from each drill
- How that result contributes to the overall picture of the resource underground
- What the company learned from that result and how it changed their drilling plan
- How well does the company management execute its exploration plans
Obviously, it's crucial for a significant resource to be sitting underground, but actually “finding” it comes down to how well the company’s management team analyse data, choose their drill targets and refine their campaign as new information comes to light.
On top of that, we want to see them do all of this in the most capital efficient way possible.
In a discussion this week, while doing due diligence on a new lithium exploration company, we noted a very interesting comment from an experienced resources investor:
“The resource has been sitting underground for millions of years, its up to the current management team to prove it and get it out of the ground”
We generally observe gains in small cap resources stocks as the company progresses the project over years, adding up small wins over time.
It’s easy to get caught up in just looking at each individual announcement an exploration company makes as they are released, but it's important to consider each announcement in the context of all previous announcements and how it fits into what the company said in the past.
That way, you can see how each announcement fits into the grand scheme of the story, and helps understand the importance of each new development.
It’s also important to catch any sudden changes in narrative, exploration plan or the overall strategy.
To understand each new announcement as it comes out, it’s helpful to be able to quickly scroll through the key points of past announcements, the findings and how the plan changes over time based on results.
It’s much easier to check the project history with all the key historical info all in one place, instead of trying to find, open and read 20 past announcements.
To help us better track the progress of each of our Investments, we have started sharing our “company progress trackers” where we record the progress of a company over time:
🗣️ Quick Takes
Here are this week's Quick Takes:
BOD: Awarded US Hemp Authority certificate for CBD products
DXB: Patient recruitment for COVID-19 study completed
EMN: Key takeaways from Quarterly
EMN: Detailed quarterly; healthy cash balance
EMN: Where to catch EMN quarterly management call
FYI: Managing Director purchases shares off market
GAL: More RC holes intersect sulphides; diamond drilling underway
LRS: Spodumene bearing pegmatites 500m west of existing discovery
SGA: Multiple thick & high grade graphite intercepts
TTM: Maiden drilling program at Cu/Au prospect commences
TTM: UPDATE - TTM webinar this Wednesday morning at 1am AEST
TG1: NSW gold project drilling completed - Assays pending
⏲️ Upcoming potential share price catalysts list
Results expected in the near term:
- GGE is drilling its maiden helium well in Utah, USA (memo).
- IN PROGRESS: GGE has confirmed a new helium discovery and is planning a follow up flow testing program in Q3 2022.
- Update: No progress this week.
- PRL signing a Joint Development Agreement (JDA) with partner, Total Eren, to materially de-risk its WA Green Hydrogen Project (memo)
- IN PROGRESS: The signing of the JDA with Total Eren. PRL’s deadline to sign the JDA is now 10 August 2022.
- Update: We were hoping we would see the deal signed on Monday morning, but PRL extended its suspension this week. We are hoping the company puts out an update on the JDA this week.
- IVZ to drill its giant gas prospect in Zimbabwe - we have been waiting two years for this event (memo).
- IN PROGRESS: Drilling is now scheduled for August. IVZ says it is considering three separate farm-in offers.
- Update: IVZ was granted additional exploration rights and committed to drilling a second well targeting the “Basin Margin” play. We covered all of this in a note this week, which you can read here: It’s pre-drill time
- KNI is drilling its cobalt targets in Norway (memo).
- IN PROGRESS: KNI has completed its first cobalt drilling program in Norway, hitting visible cobalt in 7 out of the eight holes at their highest priority target as part of its expanded 11 diamond drillhole campaign.
- Update: No material progress this week.
- BPM has completed drilling at its lead/zinc prospect in the Earaheedy Basin, close to Rumble Resources’ recent discovery (memo)
- IN PROGRESS: ~3,740m of AC/RC drilling completed along strike from Rumble’s discovery. Assays are now pending.
- Update: No material progress this week.
- PFE is drilling its polymetallic (Hellcat) project (memo)
- IN PROGRESS: PFE is doing 1,700m of diamond drilling across four EM targets at its Hellcat project targeting base/precious metals.
- Update: No material progress this week.
- LNR is commencing drilling for rare earths along strike from Hastings Technology Metals. (memo)
- IN PROGRESS: LNR is now running heritage surveys and expects to be drilling in early September.
- Update: LNR completed its heritage surveys this week and is now cleared from a permitting perspective for its first ever drilling program over its rare earths project.
- GAL commenced its latest round of drilling at its Callisto PGE discovery in WA.
- IN PROGRESS: GAL is testing for extensions to the north of its discovery hole. The 10,000m, 50-hole RC drilling program is currently ongoing.
- Update: Diamond drilling has now commenced; 4 more RC drill holes intersected sulphide mineralisation.
📰 This week on Next Investors
Tempus Resources (ASX:TMR)
Our junior gold exploration Investment Tempus Resources (ASX:TMR) is currently working to prove out enough gold to restart its existing gold mill at its Canadian gold project, which could quickly turn them into a gold producer.
TMR recently announced some of the biggest gold grades we had ever seen — at 523g/t of gold over 0.42m at its project’s Blue Vein — which saw TMR’s share price break out of its downward trend, gaining 47% in a day on record volumes.
This week TMR followed that up, reporting multiple visible gold intercepts at a previously mapped (but unexplored) vein, the “No.9 Vein”, which is northwest of Blue Vein.
TMR confirmed that the visible gold in the No.9 Vein is coming up in quartz veining with thickness of up to 25m. While the 523g/t for 0.4m headline was great, this latest result is over a much larger 25m intercept and given its thickness, there may be gold mineralisation over that entire width.
We await assays to verify this theory. We also await assays that are looking to extend the Blue Vein along strike and down dip. TMR still has around 10 drillholes to go in the current drilling program, so we could still see some surprise results.
📰 Read our full Note: TMR announces potential new “Layer of Icing in the cake”
Invictus Energy (ASX:IVZ)
Invictus Energy’s (ASX:IVZ) drill rig is on site and about to start drilling the biggest conventional onshore oil and gas prospect in Africa.
IVZ now has full exploration rights over the entire Cabora Bassa Basin in Zimbabwe, controlling ~360,000 hectares of ground. This week’s announcement followed an agreement executed with the Sovereign Wealth Fund Of Zimbabwe, assigning the exploration rights over the two remaining blocks inside IVZ’s acreage.
Drilling site preparations are said to be well underway, with IVZ just weeks away from starting its planned two well drilling program. We expect IVZ to start drilling in September and take 30 to 45 days to drill through the six stacked targets.
The two-well program is planned as follows:
- The Mukuyu-1 well - Targeting 20 trillion cubic feet (Tcf) of gas and 845 million barrels of gas condensate (Prospective resource of ~4.3 billion barrels of oil equivalent on a gross mean unrisked basis).
- The Baobab-1 well - Targeting the basin margin play, which IVZ compares to the prolific East Africa Rift “String of Pearls” play. This play provided material discoveries in the Lokichar Basin in Kenya and Albertine Graben in Uganda.
📰Read our full Note: It’s pre-drill time
In our other Portfolios 🧬 🦉 🏹
🏹 Catalyst Hunter
Auking Mining (ASX: AKN)
This week we provided an update on Auking Mining (ASX: AKN) and its Koongie Park copper/zinc project in the established mining region of Halls Creek, northeast WA.
AKN owns 75% of the project (Astral Resources owns 25%), which has a recently expanded JORC-compliant resource of 8.9Mt containing 1.01% copper, 3.67% zinc, 0.77% lead, 0.16g/t gold, and 26g/t silver (inferred and indicated).
AKN is down ~40% since we first Invested in February, and now has an Enterprise Value of ~$12M.While AKN’s resource looks substantive when weighed up against its relatively low valuation, the big question mark is around some of this copper resource being hosted within an oxide deposit. Our bet for AKN is that it can find a metallurgical solution that unlocks the currently stranded oxide resource, continue to grow its total resource inventory, then ultimately demonstrates so much value that the company is either taken over by a bigger company or move into production itself.
📰Read our full Note in which we provide a comparison and ranking of the project’s deposits: WA Copper Stock - AKN - What we are looking to see next
Have a great weekend,
tagsMINING EXPLORER OIL AND GAS
General Information Only
S3 Consortium Pty Ltd (S3, ‘we’, ‘us’, ‘our’) (CAR No. 433913) is a corporate authorised representative of LeMessurier Securities Pty Ltd (AFSL No. 296877). The information contained in this article is general information and is for informational purposes only. Any advice is general advice only. Any advice contained in this article does not constitute personal advice and S3 has not taken into consideration your personal objectives, financial situation or needs. Please seek your own independent professional advice before making any financial investment decision. Those persons acting upon information contained in this article do so entirely at their own risk.
Conflicts of Interest Notice
S3 and its associated entities may hold investments in companies featured in its articles, including through being paid in the securities of the companies we provide commentary on. We disclose the securities held in relation to a particular company that we provide commentary on. Refer to our Disclosure Policy for information on our self-imposed trading blackouts, hold conditions and de-risking (sell conditions) which seek to mitigate against any potential conflicts of interest.
Publication Notice and Disclaimer
The information contained in this article is current as at the publication date. At the time of publishing, the information contained in this article is based on sources which are available in the public domain that we consider to be reliable, and our own analysis of those sources. The views of the author may not reflect the views of the AFSL holder. Any decision by you to purchase securities in the companies featured in this article should be done so after you have sought your own independent professional advice regarding this information and made your own inquiries as to the validity of any information in this article.
Any forward-looking statements contained in this article are not guarantees or predictions of future performance, and involve known and unknown risks, uncertainties and other factors, many of which are beyond our control, and which may cause actual results or performance of companies featured to differ materially from those expressed in the statements contained in this article. S3 cannot and does not give any assurance that the results or performance expressed or implied by any forward-looking statements contained in this article will actually occur and readers are cautioned not to put undue reliance on forward-looking statements.
This article may include references to our past investing performance. Past performance is not a reliable indicator of our future investing performance.