Small caps in a shocking market

  Portfolio Update Sent On: 14-05-2022 15:28 p.m.

16 minute read

Commentary: Sell in May, small caps in a shocking market, update on our upcoming potential share price catalysts list.

Quick Takes: AKN, DXB, EMH, GGE, IVZ, LCL, 88E

This week on Next Investors: GAL, KNI, MNB, BPM

In our other Portfolios: EV1, PRM & GLV

The last few weeks have been rough in the markets.

Overnight the US showed some signs of life with the S&P 500 closing up 2.4% after having been hammered all week.

Every year we expect to see some selling pressure across the small cap market as investors “sell in May and go away” and then come back in June to compound the pressures with tax loss selling.

This year we are in the middle of “sell in May” and “tax loss selling June” combined with a broader global market correction, the US tech space being sold off aggressively and now the crypto markets are being smashed, further denting broader investor confidence.

Investor sentiment has been quite low the last few weeks, with many investors pulling out of the markets or waiting on the sidelines to see how long this market correction will last.

The sentiment has been reflected across the small cap markets and much of our Portfolio, as skittish holders sell small cap positions into thin buy sides, which can push down share prices on low volumes.

Two weekends ago, we wrote about how even in a rough market, the right small cap stocks are capable of delivering “share price catalysts” that are so impactful on the future prospects of the company that their share price can still go up despite horror market conditions.

Not AS GREAT as if the same result was delivered in a buoyant market, but still great.

And almost right on cue... this week our investment GAL released drilling results showing a new major palladium/platinum discovery that saw its share price surge as high as 250% at open on record volume - even though much of the ASX small cap market was well in the red all week.

It shows how a highly material small cap result can deliver a share price catalyst that defies a correcting market.

There are lots of small caps out there with potentially company changing news in the works, even when the market is rough.

Remember though, an exploration success like GAL’s is a rare result. We have been Invested in GAL and waiting for 2 years for a result like this (and held through a few false starts).

It’s certainly not the norm for explorers to hit a significant discovery, in our view small cap exploration investing is more about being selective and then patiently holding for many years while the company drills, fails and learns about the geology it is working with before hopefully delivering that winning discovery, or even testing a different project.

We wonder what the GAL share price reaction might have been like during “peak Julimar” excitement last year, instead of the 250% open it managed in the middle of a global market correction.

Two weekends ago we compiled a list of upcoming POTENTIAL share price catalysts in our Portfolio - including GAL’s upcoming drilling results that turned out to be a discovery (list repeated below).

Over the coming weeks we will track the progress of each of these upcoming potential catalysts as they are released.

Our fingers are crossed for another GAL type result, but we’re well aware that ANOTHER result like this in our upcoming potential catalyst list would be an outlier success rate across a basket of just ~10 small cap Investments.

Again, remember that small cap Investing is risky. Small cap companies are working hard to deliver that holy grail share price catalyst, but the majority will fail OR deliver just an average result.

That means the share price will likely go down while they process the result and create a new plan based on the learnings... or find a new project and try again.

GAL’s discovery is a rare outcome, don’t expect this all the time. We are Investors and long term holders and we have been holding most of our Investments for a while now.

We don’t usually Invest close to share price catalysts because some speculation on a good result is usually built into the share price, which means the share price may fall if the result doesn’t meet market expectations - even if the result is actually quite good.

Here is the list we shared 2 weeks ago showing near term potential share price catalysts coming up in our Portfolio, with a quick update on what has happened to each one since (we have results from LCL and GAL):

  • LCL drilling results from its large central gold target (we named it “Jabba the blob”) to significantly expand its multi-million ounce known deposit (memo)
    • RESULT: mixed
    • What happened: while the results didn’t prove the theory that LCL’s two separate gold systems were connected, it did show that one of its gold systems extends significantly deeper.
    • Share price: (-25%)
    • Next: LCL has already started drilling to test the extensions to its Miraflores deposit at depth, at the same time the company is targeting new discoveries all across its wider project area.
  • GAL nickel and palladium drilling results (memo)
    • RESULT: Excellent
    • What happened: Assays confirmed a new major palladium/platinum discovery at the company's Norseman project.
    • Share price:+180%
    • Next: GAL are waiting on more assay results around the new discovery hole whilst at the same time have started planning a new RC drilling program to test for extensions to the North/East of the discovery.
  • GGE drilling its maiden helium well in Utah where it’s aiming to make a commercial helium discovery (memo)
    • IN PROGRESS: Drilling is currently in progress. Earlier in the week the company announced that helium shows ~17x what was expected were picked up OUTSIDE of the primary target where the company is hoping to make a helium discovery. Drilling is currently at a depth of ~5,875 feet with the primary target starting at a depth of ~8,300 feet.
  • 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: PRM and GLV both confirmed that the rig was docked in the harbour ready to move towards the drilling site with the following updated timeline:
    • 16th May: Drill rig to mobilise to the Sasanof-1 well location
    • 20th May: Drill rig to arrive at the well location
    • 24th May: Drilling to commence
  • 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, but energy major BP was reportedly set to buy a “major stake” in the massive 26GW Asia Renewable Hub in WA. According to The Australian, BP is set to formally announce the investment at the World Hydrogen Summit in Rotterdam this week. This strengthens the WA hydrogen macro theme.
  • IVZ about to drill its giant gas prospect in Zimbabwe - we have been waiting 2 years for this event (memo)
    • IN PROGRESS: This week IVZ put out some updated analysis on all of the seismic data the company has leading up to its drilling event in July.
  • KNI about to drill its cobalt targets in Norway (memo)
    • IN PROGRESS: 7 hole drilling program in progress since 3 May. Drilling is expected to be completed in June with results available shortly after. Usually, explorers will release drill core photos if they get some good visuals, so we may see some news before then.
  • BPM about to drill its lead zinc prospect in the Earaheedy basin close to Rumble Resources recent discovery (memo)
    • IN PROGRESS: BPM announced this week its first drill hole into the Hawkins prospect has now commenced. This is a drill campaign we have been waiting for since May last year.
  • FNT commencing drilling for rare earths (memo)
    • IN PROGRESS: FNT 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.

We will provide weekly updates on the “in progress” potential share price catalysts as they move to a “result” - we would be delighted if one of them hit another GAL style result.

Also hoping that the broader markets do settle down from the current fear - last year everything turned around in mid July.

🗣️ Quick Takes

Here are this week's Quick Takes:

AKN: Early metallurgical results promising

DXB: FDA IND Approval for Phase 3 Study of DMX-200 in FSGS

EMH: Interview with Exec-Chair at the RIU conference in Sydney

GGE: Helium shows 17x higher than expected above primary target

IVZ: Seismic data showing potentially hydrocarbon bearing zones

IVZ: Wellpad construction ongoing, drilling to start in July

LCL: Miraflores deposit twice as deep as previously known

88E: Project Icewine an extension of its neighbours project?

📰 This week on Next Investors

KNI is Now Drilling for Cobalt in the EU - Three EM Targets to Aim For

Last week our battery metals exploration investment, Kuniko (ASX: KNI) started a 2,800m diamond drilling program across three of its highest priority cobalt targets in Norway.

The 2,800m drilling program is split across 7 different holes which will focus on the three targets that KNI put together by applying modern exploration techniques (geophysical/geochemical works) over areas of its project where previous explorers hadn't.

All of these high priority targets sit around the old workings of a historic cobalt mine, which produced over 1 million tonnes of cobalt ore, making it the world's largest cobalt producing mine of its time.

Interestingly, one of the three targets KNI is drilling is a massive EM anomaly found where previous owners of the project area (Berkut Minerals) had done some drilling in 2018... and completely missed.

With drilling already started, as we do with all of our exploration investments, we have set some expectations for the drilling results. These will be used as a benchmark to evaluate how KNI did with this drilling program.

Our expectations in its most simple format are as follows:

  • Bullish case = Several intercepts with cobalt grades ranging between 0.5-1%.
  • Base case = At least once intercept with cobalt grades around 0.5%.
  • Bearish case = No mineralisation found in any of the drillholes.

📰 Read the full breakdown: KNI is Now Drilling for Cobalt in the EU - Three EM Targets to Aim For

$10M capped BPM drilling now, 40km along strike from $223M capped Rumble Resources

Earlier this week our exploration investment BPM Minerals (ASX:BPM) confirmed that drilling had commenced at its lead-zinc Hawkins Project which sits along strike from ($223M capped) Rumble’s discovery.

BPM’s Hawkins Project sits ~40km northwest along strike from the Rumble Resources Chinook lead-zinc discovery and has similar “structural geological fundamentals” — meaning it sits on similar rock formations to the discovery.

Having recently raised $3M to add to its $3.8M in cash in the bank (on 31 March), at the time of writing our note, BPM had a tiny enterprise value of just ~$3.2M.

As part of the drilling program BPM confirmed that the ~7,500m of drilling would be a combination of aircore and RC drilling.

This is because BPM has designed the drilling program so that the aircore drilling is used to map out and better understand the geology beneath the ground. The RC rig is used concurrently to test any deeper prospective targets.

BPM is effectively making up for lost time. Instead of doing aircore drilling, waiting for results and then coming back with a heavier rig, are doing both at the same time.

📰 Read the full breakdown: $10M capped BPM drilling now, 40km along strike from $223M capped Rumble Resources

GAL Hits a Significant Palladium Platinum Intercept - A New WA Metals Discovery

A highlight in the Next Investors portfolio this week was our long term exploration investment Galileo Mining (ASX:GAL) announcing a new major palladium-platinum discovery in WA.

We first invested in GAL in March 2020 and after holding for over two years and a couple of false starts in previous drilling campaigns, we are delighted that patience has paid off - combined with GAL’s hard work, methodical exploration approach, and finally a bit of that coveted exploration luck.

GAL announced the discovery hole with an assays that returned palladium- platinum- gold- copper- nickel mineralisation over 33 metres grading 2.0 g/t 3E (palladium + platinum + gold), indicating the potential for a large mineralised system.

GAL confirmed that it would be back RC drilling the new discovery in a few weeks time (mid-June) to continue to flesh out the discovery which it believes extends over a ~5km prospective strike zone to the east of the discovery hole.

After reading this week's announcement, we thought it would be interesting to see how the market responded to ASX-listed palladium explorer Chalice Mining’s first intercept.

In March 2020, Chalice hit a 25m intercept at Julimar with palladium grades of ~8.5g/t. Its share price rallied from $0.14 to eventually hit ~$10.00, while it trades at ~$5.84 today.

At today’s share price, that’s still an over 40X return for shareholders, with Chalice now trading with a $2.2 billion market cap.

Whilst it’s early days here for GAL, and we aren't suggesting GAL will deliver a similar return, it is a promising early discovery hole and the next few months will be about defining the extent of the economic mineralisation.

On the day of the announcement, the share price briefly touched ~70c and has now settled at a price of ~54c per share. Considering the overall market sentiment right now we think the market reaction has so far been very positive and we are looking forward to the upcoming drilling programs to see how big of a discovery GAL has on its hands.

📰 Read the full breakdown: GAL Hits a Significant Palladium Platinum Intercept - A New WA Metals Discovery

MNB Planning a Zero Carbon Green Ammonia Plant - Leveraging Angola’s Cheap Hydropower

On Tuesday our food security investment (and one of our favorite Portfolio companies) Minbos Resources (ASX: MNB) is building a fertiliser project to tackle food security head on, and this week received support on a long term supply agreement of zero-carbon hydroelectric energy from the local electricity operator.

The key terms from the key outcomes with the Angolan electricity network operator are as follows:

  • MNB will have certainty of zero-carbon hydropower at some of the cheapest prices in the world over 25 years, averaging US$0.011 (1.1c) per kilowatt hour.
  • MNB won't need to spend any capital upfront to develop renewable energy power to get this energy.
  • Provides long term power and price security. The agreement would cover a 25 year offtake term, ensuring MNB faces no risk of increased energy supply costs.

Taking a step back, MNB’s two projects in Angola are:

  1. Phosphate Fertiliser Project: Approaching production. The project has an NPV of US$191-308M (A$260-420M) calculated BEFORE the phosphate price doubled.
  2. Green Ammonia (and Hydrogen) Project: At a much earlier stage of development. MNB is close to securing cheap power from a hydro plant for 25 years - this power comes at a fraction of the cost of other projects.

With most of the ammonia produced globally being done using fossil fuels, natural gas prices account for ~70-90% of the production costs for ammonia. With natural gas prices surging globally because of the supply side shocks the Russia/Ukraine conflict is causing, MNB could not have timed their announcement any better.

Ammonia is the key building block for nitrogen-based fertiliser which is considered to be one of the most important inputs in the agricultural industry due to its impacts on crop yields. Consider that without nitrogen fertilisers, US corn producers’ crop yields would decline by an estimated ~40%.

This is particularly important in Africa where low fertiliser consumption, and ultimately lower crop yields, ultimately comes down to a lack of access to cheap domestic supplies.

MNB’s two project’s (phosphate fertiliser and zero-carbon ammonia) are looking to address this very real issue, not just for Africa but for the whole world.

📰 Read the full breakdown: MNB Planning a Zero Carbon Green Ammonia Plant - Leveraging Angola’s Cheap Hydropower

In our other portfolios 🧬 🦉 🏹

🦉 Wise-Owl

EV1 Signs Binding Graphite Offtake, Eyes Downstream Joint Venture for EU Market

Earlier this week our Wise Owl 2021 Pick of the Year Evolution Energy Minerals (ASX:EV1) ticked off a major milestone on the road to obtaining project financing for its development ready graphite project in Tanzania.

This week EV1 signed a BINDING offtake agreement with Yichang Xincheng Graphite (YXGC) - a global leader in the manufacture of high value graphite products that has been supplying customers in Europe, North America, and Asia for over 20 years.

We were also pleasantly surprised to notice in the conditions of the deal: “EV1 to fully finance and commence construction of its project before 31 December 2022”.

The offtake agreement is primarily focused on the “coarse flake” portion of EV1’s resource which comprises graphite with +100, +80, +50 and +32 mesh sizes. The pricing for this coarse flake portion of EV1’s resource can range US$970/tonne all the way up to US$3,000/tonne.

So whilst only 50% of EV1’s initial three year production is coarse flake graphite, the higher prices mean that the offtake agreement represents around 70% of its forecast revenue over the first three years.

Of note is EV1’s 2020 Definitive Feasibility Study (DFS) which shows a 3.4 year post-tax payback period. This is generally the most sensitive period for a junior mining company looking to develop its project whereby debt financiers want to see certainty of revenues.

With ~70% of forecast revenues over the first three years under a BINDING offtake agreement we think that EV1 will have a lot more leverage when discussing project financing given financiers will be shown there is a buyer ready for the majority of the projects revenues during this critical pay back period.

📰 Read the full breakdown: EV1 Signs Binding Graphite Offtake, Eyes Downstream Joint Venture for EU Market

🏹 Catalyst Hunter

The rig is in the outer harbour - towing to begin in five days

This week our oil and gas exploration investments Prominence Energy (ASX: PRM) and Global Oil and Gas (ASX:GLV) announced that there drilling rig for the ucpoming Sasanof-1 well was docked in the harbour and ready to start being towed to the drilling location.

In the announcement our investments confirmed the following timeline for the rig mobilisation:

  • 16 May: Drill rig to mobilise to the Sasanof-1 well location
  • 20 May: Drill rig to arrive at the well location
  • 24 May: Drilling to commence

PRM and GLV both have exposure to the Sasanof-1 well on the North West Shelf of WA which is targeting a prospective resource of 7.2 Tcf gas and 176 million barrel condensate.

Earlier in the week we also came across a video released by “Stockle” covering the Sasanof-1 drilling event. Stockle gives a “deep dive” into the background of the drilling, the geology and the chances of success.

We have no idea who this guy is, but we found the analysis in the video to be quite insightful, and obviously, Stockle did a lot of research in producing it.

The link to the video is here - Stockle Deep Dive on the Sasanof Prospect, or just click the image below.

With the drilling program less than three weeks away things are shaping up nicely leading upto the drilling of one of the top 20 highest impact wells for 2022 (as per IHS market).

📰 Read the full breakdown: The rig is in the outer harbour - towing to begin in five days

Have a great weekend,

Next Investors