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M&A activity heating up in a down market

Published 25-MAR-2023 15:00 P.M.


16 minute read

This week was slightly less sickening than previous weeks, but still not much fun.

Global market sentiment remains low for the moment.


A couple of high profile, big bank face-plants have triggered GFC PTSD in the global investment community - big wallets have closed until certainty returns.

Smaller investors are wrestling with rising interest rates and reduced disposable income.

When big personal expenses roll around, share portfolios are usually the first thing to be chipped away at to free up cash.

This indiscriminate selling pressure is being felt in the small cap end of the market - share prices are down almost no matter what the company does.

Bad announcements are being punished, OKAY announcements are being punished.

Even great announcements are being sold into as some over-extended investors use the rare share price pops and liquidity to free up some cash.

NOT because of the fundamentals of the company or the great announcement.

But to pay for some unforeseen personal expense that needs urgent cash.

...probably to pay for bull market capital gains tax bills which are rolling around right about now.

Small cap companies are making progress fundamentally.

..but in this environment share prices aren't reflecting this progress.

This is just a temporary cycle of markets which trade more on sentiment than on company fundamentals.

As counter-intuitive as it seems we have been increasing positions in some of our Portfolio companies.

We have also been noting which of our companies are breaking down-trends on positive news.

GAL and KNI both had great share price runs on drilling results.

The lack of selling pressure could mean that any sellers have already been flushed out and the share prices are ready to move up again from a low base.

SGA, MNB and EV1 continue to hold up amazingly well - it looks like everyone on the share register wants to be there long term and can afford to wait out the rough market.

NHE has finally popped out of a long term sideways trading pattern as they get closer to drilling what could become the world’s largest Helium reserve held by a single company.

NHE’s major drilling event is expected in Q3 (July/August/September).

As always, we are betting on a price run in the lead up to drilling.

We hope the price run is set up to be material given the many months of consolidation at around 16c prior to NHE’s recent mini break-out.

This week NHE finalised and announced its two best drill targets, which is the culmination of many months of exploration work - read our quick take here

We are active in bull AND bear markets, but we have observed over many years that the best Investments we have made are in the brutal depths of a bear market

(this is our anecdotal observation and our personal strategy - it may not suit everyone, this is NOT financial advice).

Obviously we aren’t the only ones who have observed this and are acting on it.

Many investors try to live by the saying “Be fearful when others are greedy. Be greedy when others are fearful.”

But what do major global companies with healthy cash balances do in a bad market?

Mismatches in company fundamentals compared to share price trends throw up opportunities for major companies to acquire smaller companies for far less than it would cost for them to replace or create the acquired assets.

When company fundamentals are improving but share prices are falling we see more and more M&A deals come about.

Today we are going to look at three sectors we are invested in.

We will share recent M&A activity in each sector.

We will also list some examples of our companies that have made material fundamental progress that has not been reflected in the share price during a low sentiment market.

NOTE: We are NOT saying or implying that these companies might be taken over or are take over targets

What we are seeing in the junior mining space

A sign of where the market is at, this week saw Australia’s richest man Andrew Forrest make a takeover offer for WA based nickel player Mincor Resources for $760M.


This isn't the only example of a major coming in and buying out a smaller company though.

All of the following deals are playing out as of today:

  • ~$15BN Mineral Resources’ takeover of WA gas explorer Norwest Energy - Only a few years ago Norwest was a small cap Perth basin gas explorer trading at 0.3c per share, now it trades at ~6c per share after the Mineral Resources takeover offer
  • $974M Ramelius Resources’ takeover of WA gold explorer Breaker Resources - Ramelius’ offer was a ~41% premium to the market price of Breaker, valuing the company at $131M.

Another way takeovers happen is through mergers - this is where a company brings their business’ together to form one larger entity for economies of scale.

One recent example on the ASX is Saint Barbara & Genesis Resources merger.

The underlying premise here is that the larger more cashed up companies may come knocking on the door of smaller companies that are making progress fundamentally and not seeing their share prices rewarded appropriately.

We have a whole bunch of early stage resource companies that have made material progress over the last few months despite current market conditions, but the share prices have not responded.

  • Evolution Energy Minerals (ASX: EV1) put out its updated Definitive Feasibility Study (DFS) and also agreed to the terms of a Framework Agreement with the Tanzanian Government.
  • Tyranna Resources (ASX: TYX) announced a lithium discovery in Angola after hitting 22.75m of lithium with grades of 2.02%.
  • Latin Resources (ASX: LRS) just put out more drill results from its Brazilian lithium discovery showing that its two discoveries might combine to form one larger lithium deposit.

As mentioned before - there are a couple that have started responding to positive news.

  • Kuniko (ASX: KNI) hit more visual cobalt mineralisation from its drill program at its Skuterud cobalt project in Norway
  • Galileo Mining (ASX: GAL) recently hit its thickest ever intercept at its Calisto platinum-palladium discovery

And one that has been a shining light in the awful market, and has grinded out a decent rise despite the poor global sentiment:

  • Minbos Resources (ASX: MNB) has just had the processing plant for its phosphate plant delivered to the port in Angola & a technical study being run for its ammonia plant.

What we are seeing in the oil and gas industry

With the oil price trading at a near decade high over the past 12-16 months, the major producers saw record profits from their existing assets.

Record profits lead to extremely high cash balances which means the majors have warchests ready to deploy into new projects.

Now we are seeing both Woodside & other US super majors looking for projects to acquire.


In line with the strong macro position for the major oil and gas producers, we saw US gas producer EQT completed the $5.2BN acquisition of THQ Appalachia and XcL Midstream’s assets.

In an environment where the majors are cashed up our oil and gas (including helium) Investments are all busy progressing their projects to points where majors may at the very least start to take notice of:

  • Noble Helium (ASX: NHE) just announced its two high priority helium targets, has farm in offers due by the end of the month and is gearing up for its first helium well in Tanzania in Q3-2023.
  • 88 Energy (ASX: 88E) is currently in the middle of drilling its Hickory-1 well in the North Slope in Alaska, USA.
  • Invictus Energy (ASX: IVZ) is gearing up to drill its Mukuyu-2 appraisal well following up on the success of last year’s drill program in Zimbabwe.
  • Grand Gulf Energy (ASX: GGE) is currently drilling its Jesse-2 helium well in Utah, USA.

What we are seeing in the biotech space

This is perhaps the hardest hit part of the market in recent weeks.

Biotech companies have a 7+ year journey from concept through to clinical trials and into commercialisation - which costs money.

Biotechs with little to no cash and a long way away from commercialisation have been sold down heavily.

While they have been punished for lack of cash runway, none of the selling correlates with the potential that the drugs/treatments have.

This has set up a situation where the larger pharmaceutical companies can come in and scoop up any projects they deem interesting.

We recently saw the US SPAC run by billionaire Chamath Palihapatiya IPO ProKidney for US$2.6BN and just this week saw Australian Clincial Labs put in a $1.58BN takeover offer for Healius.

The standout in Australia was also the $16.4BN takeover of Vifor Pharma by CSL.


Two of our picks in the biotech space are:

  • Arovella Therapeutics (ASX: ALA) which recently signed a partnership agreement with $803M Imugene for its Inkt cell therapy tech focused on cancer and solid tumours.
  • Dimerix (ASX: DXB) - progressed its phase 3 trials for treatment of a rare kidney disease (FSGS) and advanced partnership negotiations for commercialisation on success of trails

Both DXB and ALA have also been holding up quite well over the last few weeks, but certainly aren’t having progress rewarded as well as they would in a bull or flat market.

Again we are NOT saying or implying that any of the above companies we have mentioned might be taken over or are take over targets.

These are examples of companies in our Portfolio that have made material progress over the last 12 months, but the share prices have not re-rated to reflect the progress given the market sentiment.

More on current investor sentiment

Following our attendance at the INDABA conference in South Africa last month, we sent one of the team to the Brisbane Mining Investor Conference this week.

The conference attracts a good mix of retail investors, brokers and fund managers. This year’s event featured 35 ASX-listed companies presenting alongside a number of industry experts and analysts.


We engaged with companies and investors from all walks of life, keen to understand their views on investments and the market.

Overall, we found sentiment to be quite favourable across most commodities, in particular battery metals, copper, nickel and gold.

This was tempered by current weakness in equity markets, and talk of the inflationary environment and rising interest rates.

As one broker explained, those struggling with higher mortgage rates will first look to liquidate their stock portfolios rather than offload their homes... no matter how good the prospects of those stocks are.

Hard to argue with that.

We sat in on several company presentations, most notably our Investment EXR which recently executed a term sheet with a subsidiary of Japanese financial giant Softbank for the co-development of its Gobi H2 green hydrogen project in Mongolia.

We get a lot of value from attending such conferences, as we can gather a lot of information on companies, projects, management teams, jurisdictions and on-the-ground investor sentiment.

Looking forward to a hopefully better week in the markets coming up.

This week’s Quick Takes 🗣️

88E: 88E’s primary targets to be hit in the next two weeks.

DXB: Dimerix reveals “material offers received from multiple parties"

EXR: Positive update on CBM pilot production

GGE: GGE to hit total depth at its helium well within a month

GTR: Increasing our Investment through GTR's rights issue

LNR: Heritage surveys completed - 10,000m+ drill program next.

LRS: Drilling results to lead to a major resource upgrade?

MAN: MAN’s US based lithium project just got bigger

MEG: More rare earths at Idaho rare earths project; 15.85% TREE

NHE: Noble Helium announces first two drill targets at North Rukwa

OKR: OKR starts geophysical surveys in world’s best uranium districtOKR: Uranium enrichment investment completed

Macro (Hydrogen): US Department of Energy plans for hydrogen commercialisation

This week in our Portfolios 🧬 🦉 🏹

Kuniko Ltd (ASX: KNI)

Kuniko (ASX:KNI) this week reported that five out of six drillholes at its European critical metals project have visible cobalt.

The cobalt is near-surface, from as shallow as 7 metres, and while initial signs are positive these are only visual results that need to be confirmed by assays. Plus, KNI still has four more drill holes to go in the current program.

Visual cobalt mineralisation like this is generally rare — but this is the second time KNI has hit a high proportion of visual cobalt mineralisation in its second pass at the Norwegian cobalt project (Skuterud).

We think today’s cobalt results could be the start of something much larger for KNI in Norway, at a time when Europe continues to import the vast majority of its cobalt.

In addition to its Norwegian projects, KNI recently acquired a trio of promising lithium projects in James Bay, Canada.

KNI has prioritised on ESG and zero carbon across its cobalt, copper, nickel and lithium projects in regions of the world that are desperate for battery materials and are pushing through laws to ensure supply.

📰 Read the full Note: KNI hits “Exceptional Mineralisation” at Shallow Depth as EU launches Critical Materials Act

Galileo Mining (ASX: GAL)

Galileo Mining (ASX:GAL) this week discovered another new sulphide zone at its palladium-nickel discovery in WA — its latest drillhole revealing thick sulphides that remain completely open to the north and east.

With the company’s share price snapping higher on the news, we wondered whether we might have seen the bottom for GAL as it continues to expand its Callisto Discovery.

We now want to see confirmation that mineralisation continues along strike and that the same geology continues as we go north-east, where GAL still has 5km of strike left to test. Because, simply put, the larger the project, and the higher the grades, the more valuable it becomes when looking ahead to eventual development.

Of course to get to that stage, GAL would first need to compile an initial JORC resource that shows strong economics (i.e. size and grade).

We think GAL already has more than enough drilling data to define a resource, and would support it doing so, however it is not something GAL has yet flagged.

📰 Read the full Note: Drilling Results - GAL delivers its thickest intercept yet

GTI Resources (ASX: GTR)

GTR has four uranium exploration and development projects in the USA — three in Wyoming and one in Utah. Both are “uranium friendly” states with a rich history of uranium mining.

Over the coming four months, GTR plans to announce two uranium JORC resources across its Wyoming projects.

Of these, it is GTR’s newest project that we are most interested in — 8,000 acre Lo Herma project, which could be the one that results in a sizable re-rate of the company's share price.

Last week GTR paid $950k for a dataset over the project — which has a ~$15M replacement value — saving GTR both time and money so it can accelerate the pace and get a defined resource over the ground.

GTR intends to convert the drill data into a modern database before it develops a resource model.

📰 Read the full Note: Uranium in the USA - GTR Entitlement Offer about to go live

Evolution Energy Minerals (ASX: EV1)

Our graphite Investment Evolution Energy Minerals (ASX:EV1) just released an updated DFS and updated Front-End Engineering Design (FEED) over its Chilalo Graphite Project in Tanzania.

Here are our quick takeaways:

  • Project NPV increased to US$338M, up from $323M in the initial 2020 DFS.
  • High operating margin of US$841/t (52% operating margin) driven by its world-leading coarse graphite flake size.
  • The CAPEX of US$120M is higher than the $87M estimated in the original DFS, however it remains low compared to other development-ready graphite projects - and its using up to date cost inputs that reflect a realistic higher inflationary environment.
  • OPEX remains steady - even in this inflationary environment.
  • DFS assumptions led by former Syrah Resources’ team - we trust in the figures accuracy given the team’s graphite industry knowledge and experience.
  • Environmental improvements that reduce ESG risk.
  • Project timed to come online with forecast graphite supply shortages.

Now with an updated DFS in hand, together with the formal signing of the (now agreed upon) Framework Agreement with the Tanzanian government that’s expected this month, EV1 is in a position to secure funding for the project and move into the “construction” phase.

📰 Read the full Note: EV1 releases DFS for its graphite project in Tanzania

BOD Science Ltd (ASX: BOD)

A recent change by the Therapeutic Goods Administration (TGA) of Australia allows for approved, low-dose CBD products to now be sold over-the-counter (OTC) in pharmacies.

Our cannabis Investment BOD Science (ASX:BOD) is keen to be first to enter the national market.

BOD is at an advanced stage with its CBD insomnia product — a Phase IIb clinical trial will begin shortly and it already has a licensing agreement in place so it can quickly start making sales.

The Phase IIb clinical trial is the final step in R&D for the product and it should provide sufficient data for application of a low dose CBD product with the TGA.

If the trial is successful, BOD is almost certain to be first-to-market with a regulatory-approved CBD product.

📰 Read the full Note: Clinical trials set to begin on chemist-available, cannabis insomnia treatment

⏲️ Upcoming potential share price catalysts

Updates this week:

  • KNI: Drilling 3/3 of its Norwegian battery metals projects in Europe.
    • This week KNI hit visual cobalt mineralisation at its Skuterud cobalt project in Norway. See our deep dive on the news here.
  • 88E: Drilling for oil in the North Slope of Alaska next to UK listed Pantheon Resources.
    • 88E completed the first phase of its drill program. The next phase will be drilling into the company’s primary & secondary targets. See our Quick Take on the news here.
  • GGE: Drilling its US helium project looking for a commercially viable flow rate.
    • GGE put out a drilling update early in the week and then went into a trading halt for a capital raise on Wednesday. See our Quick Take on the drilling update here.
  • EV1: Updated DFS looking to improve on the already relatively strong US$323M project NPV.
    • EV1 put out its updated DFS increasing its project’s Net Present Value (NPV) to US$338M. See our deep dive on the news here.
  • NHE: Scheduled to drill two targets this year at its helium resource in Tanzania (Q3, 2023)
    • NHE put out two of its high priority drill targets it plans on testing in Q3 this year. See our Quick Take on the news here.
  • GAL: Is undertaking a second round of drilling at its Callisto PGE discovery in WA.
    • GAL hit its thickest platinum-palladium intercept to date and its share price was up ~43% at its peak intra-day on Tuesday. See our deep dive on that news here.

No material news this week:

  • DXB:Interim Analysis of Phase III Clinical Trial on FSGS (Q3, 2023)
  • IVZ:Drilling oil & gas target in Zimbabwe, Myuku-2 (Q3, 2023)
  • TMR: Maiden JORC resource estimate for its Canadian gold project.

Have a great weekend,

Next Investors

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