Investing in Early Stage, High Risk Companies in 2022
Published 04-APR-2022 13:36 P.M.
10 minute read
Regular readers will know our strategy well - we enter positions in carefully selected small-cap stocks that are aligned with the big changes we think are happening in the world.
We like to back a basket of early stage, high risk companies, in the hope that one or two of them will deliver outsized returns over time.
The stocks in which we have made the most gains are those that we identified early and held a position in as the company executes its business plan over time.
It doesn’t always work out though. In small cap investing things often don’t go to plan and we do suffer losses on some of our positions.
Our portfolios are currently heavily weighted towards commodities as we believe that the global transition to energy and mineral independence will fuel the “commodities supercycle” for many years to come...
Which drives interest in early stage small caps companies trying to make new discoveries.
Early stage exploration requires a healthy dose of luck when drilling in the hope of finding something valuable in the ground.
But when companies DO find something, the risk taken and the patient wait can be very rewarding for investors.
Most of the time the results ARE NOT inline with expectations. The risks materialise and share prices go down accordingly.
This week we saw both.
The exploration Gods smiled on our Catalyst Hunter portfolio investment Latin Resources (ASX:LRS) who returned some very high grade lithium assay results from its project in Brazil.
LRS is up ~500% over the last few weeks with more assay results yet to come. (We have held LRS since late 2020, here is our LRS investment memo for 2022).
On the flip side, 88 Energy (ASX:88E) delivered a disappointing result in its annual high impact drilling event in Alaska.
After confirming an oil reservoir in last year’s drilling event, this week 88E announced that it failed to hit a “production-test worthy” section of the reservoir they had just drilled.
88E is down ~70% from its high point this month on the back of this news - you can see our 2022 88E investment memo here - (forward plan to be updated shortly based on the recent drill result).
Both 88E and LRS investments were high-risk, high-reward positions.
In line with our investment plans (which you can read in each investment memo), we invested early and partially de-risked the positions prior to the key catalyst event (drill results) and held a position into the results hoping they would be successful.
One was. The other wasn’t.
We currently hold around ~40 early stage investments, so most weeks we expect there will be some sort of material news release that will impact one of our companies, hopefully positively.
Investors can’t control or predict the results of high risk exploration, but can control making an investment strategy and sticking to it. Here is our eBook on how we invest in early stage small cap stocks.
Click to see our investments across our portfolios Next Investors, Catalyst Hunter, Wise-Owl and Finfeed:
Follow our live comments on all our portfolio companies on our “Quick Takes” page here.
Here is what happened this week across our investment portfolios:
📰 This week on Next Investors
IVZ Gets a 7x Increase in Acreage, Focused on the Margins. Sovereign Wealth Fund on Board. Drilling Getting Closer
On Monday, Our 2020 Energy Pick of the Year Invictus Energy (ASX:IVZ) announced that it had signed a Heads of Agreement with the Sovereign Wealth Fund of Zimbabwe, leading to an increase in the size of its project by over 7x from 100,000 hectares to 709,300 hectares.
At the same time, IVZ confirmed that it plans to drill a second well in this expanded part of its project when the company starts drilling in June.
The Heads of Agreement (HOA) signed between the Sovereign Wealth Fund of Zimbabwe and IVZ had three other key takeaways outside of the increase in project size:
- Second well before June 2024: Changes to the work commitment IVZ has made in this “second stage of exploration, with a commitment to drill a second well before June 2024, IVZ has confirmed this second well would be included in this year's drilling program.
- 10% back-in-right for Sovereign Wealth Fund: This effectively a right of first refusal for the Sovereign Wealth Fund to take a 10% free carried interest if a discovery is made.
- PSA negotiations complete: Negotiations over the Production Sharing Agreement are complete and now await final governmental approvals.
The HOA is now subject to final governmental approvals - the last stage of the permitting process.
📰 Read the full breakdown: IVZ Gets a 7x Increase in Acreage, Focused on the Margins. Sovereign Wealth Fund on Board. Drilling Getting Closer
New sub-basin discovered
On Thursday, our 2019 Energy Pick of the Year Elixir Energy (ASX:EXR) confirmed that its maiden well for 2022 reached a total depth of 804m, intersecting 46m of potentially gas bearing coals, and with that identified a new sub-basin.
The new sub-basin is located immediately south of the Tavan Tolgoi mining complex (home to one of the world’s largest untapped coking and thermal coal deposits).
The drill rig has now been moved ~200m down dip from that well to test for extensions to the new structure whilst also testing permeability (gas contents).
The structure of today’s announcement was however more of an operations update and EXR confirmed all of the following:
- That the 2022 2D Seismic acquisition program had commenced with 47km of the targeted ~322km being completed to date.
- Drilling contractor discussions had commenced to firm up a contract for the drilling and long term production testing wells scheduled for mid-2022.
With a new sub-basin identified with the first well for 2022 so early on in the year, we are hoping EXR can deliver more of the same and grow the footprint of its coal bed methane (CBM) gas project leading up to the pilot production program scheduled for the middle of this year.
📰 Read the full breakdown: New sub-basin discovered
Drilling results are in as Uranium prices keep edging upwards
Earlier in the week our uranium exploration investment GTI Resources (ASX:GTR) confirmed a maiden uranium discovery at its ISR Uranium project in Wyoming, USA.
GTR’s discovery is timed with the Uranium spot price hitting the highest it has been in 10 years.
As part of the drilling program, GTR confirmed that it had intercepted 5,376m of mineralised ground across only ~20% of its project area during its 14,795m maiden drilling program. That means there remains plenty of exploration upside with ~80% of the project area still untested.
A summary of the results was as follows with our emphasis being on the GT measure (Grade X thickness):
- 23 holes met both the grade and GT cutoff with an average of 0.57 GT.
- 35 holes met or exceeded the cutoff grade of 0.02%
- 12 met the grade cutoff but did not meet the GT.
With 23 of the holes averaging a GT of 0.57 (well above both our expectations and the company’s), the news was a positive first sign for what we hope will be the building blocks of a large uranium discovery.
📰 Read the full breakdown: Drilling results are in as Uranium prices keep edging upwards
88E Fails to Hit Production-Test Worthy Reservoir Section in Alaska
On Wednesday, our oil and gas exploration investment 88 Energy (ASX:88E) put out an update on the wireline logging program at its Merlin-2 appraisal well in Alaska.
Unfortunately for all shareholders, including us, 88E drilling failed to hit a “production-test worthy” section of the reservoir.
Our investment in 88E is a high-risk, high-reward position and around this time every year, like clockwork, they drill a high impact oil well.
88E struck oil in their Merlin-1 well in last year’s drilling and the share price re-rated from around 0.8c to trade in a range of 2.5c to 5.0c for the next 12 months. It has now come back to around 1.6c as the market continues to digest news of the Merlin-2 well
After big binary drilling events that have disappointing results, we often see a sharp market sell off that assumes that it’s game over and the company has no other projects or assets left to work with.
This is not the position 88E is in. It still has the recently acquired portfolio of production assets in Texas, USA, multiple other projects in Alaska (Project Icewine and the Yukon assets), plus other drilling prospects over its Project Peregrine acreage.
📰 Read the full breakdown: 88E Fails to Hit Production-Test Worthy Reservoir Section in Alaska
In our other portfolios 🧬 🦉 🏹
🏹 Catalyst Hunter
Drill Rig Secured as US Pledges to Fund Aussie Critical Minerals Projects
On Thursday, our rare earths exploration investment, Frontier Resources (ASX:FNT) announced that it had secured a drill rig contract ahead of expected drilling in April/May. The 5,000m drilling program across 65 holes will drill to an average depth of 75m.
FNT has managed to secure an RC drill rig capable of drilling deeper, should FNT intercept any targets of interest. We like that the company has the option to continue drilling deeper if any interesting intercepts are made.
With drilling to reach an average depth of ~75m, we looked at the JORC resource of FNT’s neighbour Hastings Technology Metals’ Bald Hill deposit. Here, the Bald Hill orebody is shallow and sits at a maximum vertical depth of ~80m below depth. (The Bald Hill Lineament runs through both companies’ ground).
FNT will now work towards completing heritage surveys and permitting before it can mobilise its drill rig and start testing its grounds.
📰 Read the full breakdown: Drill Rig Secured as US Pledges to Fund Aussie Critical Minerals Projects
High Grade Lithium in Pegmatites, Open Across Strike Length... Four More Holes from LRS Still to Come
Our exploration investment, Latin Resources (ASX:LRS) came out of a trading halt onTuesday confirming high grade lithium mineralisation in the freshly drilled pegmatites.
We had initially set an expectation for lithium grades of ~1%, but LRS reported a peak grade of 3.22% along with grades of 2.22% and 2.00%, significantly exceeding our expectations.
The market liked what it saw too - the share price rose by no less than 90% over the course of the week.
LRS’s assay results are coming at the perfect time - attention on lithium has never been higher - and there’s four more holes worth of assay results still to come in the next few weeks.
LRS has so far managed to intersect pegmatite intercepts across a ~500m strike zone in the “South Target” area. Assays are pending across this section of the project, while LRS has reverted its rigs to the south to conduct infill/extensional drilling.
LRS could be moving quickly towards establishing a maiden JORC resource for its project.
📰 Read the full breakdown: High Grade Lithium in Pegmatites, Open Across Strike Length... Four More Holes from LRS Still to Come
🗣️ Quick Takes
NEW: We are now releasing our Quick Take opinions as they happen so you don't have to wait until the weekend to see them.
LRS: Trading halt for Brazilian lithium project assays
LRS: Assay results confirm high-grade lithium pegmatites - Brazil
LRS: Major shareholder converts $1.2M in options @ 1.2c
IVZ: Farm-in process restarted, new offers being considered
PRL: Twiggy pens multi-billion dollar green hydrogen deal
MAN: Assays received from WA nickel, copper, PGE project
EXR: New coal bearing sub-basin identified, more drilling to come
GAL: “Fantastic” nickel cobalt drilling results
BPM: Aircore drilling in the Earaheedy near Rumble Resources
LCL: Commentary on Tesorito’s new JORC resource
DXB: $3.7M R&D tax incentive rebate received
88E: Merlin-2 reaches total depth. Wireline testing commenced
88E: Wireline logging program unsuccessful at the Merlin-2 well
VN8: Bigger fish eating smaller fish supports growth strategy
FOD: Major shareholder buys $178k in shares on market
TG1: High grade copper and silver in rock chips
TMZ: Another $3M raised via a convertible note
Next Investors: Budget measures to boost critical minerals
Have a great weekend,
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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.
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