Tax loss selling over, market back in August?

  Portfolio Update Published On: 02-07-2022 09:51 a.m.

19 minute read

Finally - June tax loss selling is over.

That doesn’t mean the market will suddenly recover overnight, but we hope it should help ease the pressure on some parts of our Portfolio.

Yes, the July 1st trading on Friday was very encouraging, and yes the market bounced back pretty quick last July...

BUT - there are a couple of other factors to take into account when thinking about when the market might look better after June 30th.

Australian school holidays run from July 2nd to around July 17th.

Many key small cap market participants (think stockbrokers, fund managers, corporate advisors and high net worth investors) will be likely on holiday with their kids, and not active in the market.

We wouldn’t be surprised if many of them resolved to spend more time “on what’s really important in life” after the beating they all took in the market over the last few months - spending more time with the family.

After school holidays, many small cap market participants in the resources space will likely be attending the Diggers and Dealers conference in Kalgoorlie, which kicks off on August 1st.

In the past, generally once this conference is finished, the August to November window shows higher market activity as investors and companies work to get deals done before the Christmas shut down in mid December.

Also keep in mind that while tax loss selling June helps us try and make sense of why the Australian small cap small market is weak - we are just a minuscule part of a bigger global financial system.

We are a country of just 26 Million people in a world population of ~8 Billion.

And with the geopolitical and economic issues going on, the broader global market DOESN’T care that Australia’s tax year finishes OR that some stockbrokers come back from holiday.

The point being that while tax loss selling in June is real, there are broader global market conditions in play right now that will likely overshadow any of the local factors that traditionally affect the ASX small cap market.

So we are also watching the global markets situation AND sentiment closely.

Because if things DO stabilise globally and broader sentiment swings back to risk-on, we think the bounce back could be stronger than anything historically delivered by tax loss selling finishing in Australia.

Post June 30 post mortem

Over the last week around half of our Portfolio has moved up or at least stayed flat, which was good to see after what feels like six months of selling, which was particularly bad for a number of small caps in the end of the market we’re Invested in.

Notable rises include Euro Manganese (ASX:EMN) which appointed a financial adviser to progress project financing, and Kuniko (ASX:KNI) had a catalyst come through - they reported visible cobalt in the drill cores from their Norwegian cobalt project.

We’ve also seen a few big catalysts come through that we have been waiting for - we’ve got updates on those in our Upcoming Catalysts list.

The catalyst for KNI came through and it was enough to push it as high as 80.5 cents from a low of 50 cents. It’s still early days for KNI but we’re looking forward to the assays in August or September and importantly, KNI’s early results indicate that their cobalt project is open along strike to the north.

Meaning, we think there’s a good chance KNI could prove out a cobalt discovery, pending assays.

The other major catalyst to come through was Grand Gulf Energy (ASX:GGE), which confirmed a helium discovery in Utah, USA.

GGE was our 2021 Catalyst Hunter Pick of the Year and intercepted commercially viable helium grades ranging between 0.44% – 0.65% after completing a workover program at the Jesse #1A well.

With flow testing to come in Q3 2022 - this was an overall great result given it was GGE’s first well. We gave it an A in our GGE Investment Memo retro and the results pushed the share price as high as 3.1 cents from a low of 2.3 cents.

The GGE share price has settled at that low level again, perhaps because the flow testing to come in Q3 means GGE won’t be able to skip straight to production. However, as long term GGE Investors, our view is the results were just shy of our most bullish case.

We think the good results out of GGE and KNI and subsequent share price action demonstrate how there is still a bit of latent selling pressure in the market into liquidity.

And despite a nasty 6 months of selling, we continue to maintain our long term positions in companies as they execute on their business plan across a variety of market conditions.

Last weekend, we shared a spreadsheet of cash balances and EVs in our portfolio (data is relevant to last week), companies we think are best positioned to weather a market where capital is harder to come by - and also bounce back harder if the market begins to turn.

And this week, we want to delve into companies in our Portfolio that have been hit the most by this six month stretch of selling.

While we aim to generate 1,000% returns over a long term hold, part and parcel of this strategy is the fact that we’ll have a large portion of companies that go down (sometimes significantly).

We intend to hold these companies as they knock down milestones and objectives as part of our long term investment thesis.

Below, we’ll summarise what the company does, market cap, cash on hand, why we like it, what we think caused the share price to go down, and what’s next for the company.

Here’s our list of stocks we believe in, and are long term holders in, that are down 50% or more in a six month period (click the company name to see our Investment Memo).

Remember that during the bull market many stocks overshot their fair valuations, and while many have come back and possibly overshot downwards, just because a stock price is currently down, doesn’t mean it can’t STILL go down more... especially if there is more pain coming from global markets in the near term.

We also make a comment on why, aside from the general market crash, we think the share price has been suffering recently.

*Also note that below are just our rough estimates of cash. Given how late we are in the June quarter, a lot of our Portfolio companies are likely to have used up a portion of this cash so this will not be 100% accurate. Please also note that these market caps are not fully diluted. The numbers below are just a rough guide and should NOT be relied upon to make any decisions.

Whitehawk (ASX:WHK)

  • What it does: USA based cybersecurity company, providing cyber risk products, services and solutions
  • Market cap: $15.2M
  • Estimated cash: $2.1M
  • Why we like it: We see big growth in demand for cybersecurity services, and have liked and been invested in WHK for many years now.
  • Why the share price went down: WHK often has a long time between announcements and despite being operating cash flow positive, this lack of newsflow and the general tech sell off have hurt.
  • What's next: When announcements DO come they are usually big $ contracts with big global names, one or two good announcements could see a re-rate, especially off a low base - the longer we wait the more likely an announcement will drop.

Dimerix (ASX:DXB)

  • What it does: Biotech research for respiratory and kidney diseases
  • Market cap: $38.5M
  • Estimated cash: $16.8M
  • Why we like it: We think there are few other ASX-listed Phase 3 biotech companies trading at such a low EV with large addressable markets. FSGS market is valued at ~$1B and DXB has Orphan Drug designation.
  • Why the share price went down: General biotech sell off, slow, poor progress with COVID-19 trials (“side bets”).
  • What's next: Update on patient dosing for FSGS trials.

European Metals Holdings (ASX:EMH)

  • What it does: Development stage lithium
  • Market cap: $117.2M
  • Estimated cash: $19.9M
  • Why we like it: EMH’s lithium project is “shovel ready” and can be put into development as soon as offtakes and financing is arranged. We also like that EMH’s project is located inside the European Union at the doorstep of some of the world's biggest carmakers. With supply chain security now a concern, we think EMH’s project is perfectly positioned to get its project developed.
  • Why the share price went down: We suspect the Goldman Sachs note calling for an end to the lithium bull market had some impact on EMH’s share price. This combined with the broader lithium market sell off.
  • What's next: Offtake agreements and development with project financing.

Oneview Healthcare (ASX:ONE)

  • What it does: Health tech
  • Market cap: $59.6M
  • Estimated cash: $20.1M
  • Why we like it: Hospitals need tech driven efficiency and we think ONE’s patient care platform is the way to drive that efficiency, particularly in the lucrative US healthcare market.
  • Why the share price went down: Broader tech sell off hurt tech/growth companies like ONE, despite it recently signing its biggest deal ever. Tax loss selling didn’t help either.
  • What's next: June Quarterly revenue numbers

Province Resources (ASX:PRL)

  • What it does: Green hydrogen
  • Market cap: $60.8M
  • Estimated cash: $21.5M
  • Why we like it: As the world looks to cut its greenhouse gas emissions, green hydrogen may prove to be a major building block of a net-zero economy.
  • Why the share price went down: We think the sell off in PRL mostly comes down to a combination of broader market sentiment, tax loss selling and the delays in signing the Joint Development Agreement (JDA) with project partner Total Eren.
  • What's next: Joint Development Agreement (JDA) to be signed with project partner Total Eren.

Tempus Resources (ASX:TMR)

  • What it does: Gold exploration in Canada
  • Market cap: $8.4M
  • Estimated cash: $2.2M
  • Why we like it: We hold TMR as an exposure to gold which has historically been seen as a hedge against market volatility. TMR is a unique exposure to gold because of its already existing processing infrastructure meaning any new discoveries could quickly be produced to generate cash flows. We also hope to see our gold Investments outperform in times of market distress.
  • Why the share price went down: Every year TMR has a period of slow newsflow whilst preparing for its next round of exploration. This year has been no different with the share price selling off over the Canadian winter months where TMR was mostly doing desktop works.
  • What's next: 2022 drilling program results, check out our coverage of this here: Visible gold to kick off new drilling season

Alexium International (ASX:AJX)

  • What it does: Advanced performance chemicals for cooling and fire resistance
  • Market cap: $15.5M
  • Estimated cash: $1.8M + credit facility
  • Why we like it: AJX has real revenues from a market leading product. We see plenty of growth ahead as it expands into new markets with scientifically validated competitive advantages.
  • Why the share price went down: Lack of newsflow, tax loss selling, general market impatience with AJX growth initiatives.
  • What's next: June Quarterly revenue numbers

BOD Australia (ASX:BOD)

  • What it does: Medicinal cannabis
  • Market cap: $7.4M
  • Estimated cash: $4.5M
  • Why we like it: BOD’s medical cannabis arm is building a suite of IP for future medical cannabis product commercialisation and licensing deals via clinical trials. Existing revenues too, at low price to sales multiples. When cannabis market sentiment turns, we think BOD is well placed to capitalise on this shift.
  • Why the share price went down: Market sentiment turned on medicinal cannabis companies as well as growth companies - so two categories BOD fits into too.
  • What's next: Patient recruitment updates for clinical trials

88 Energy (ASX:88E)

  • What it does: Oil and gas exploration
  • Market cap: $132.8M
  • Estimated cash: $32.6M (NOTE: Much of this cash is set aside to pay for costs of its last well)
  • Why we like it: 88E gives us exposure to regular high impact drilling programs chasing companies making oil and gas discoveries. When making oil and gas Investments we are typically looking for these “swing for the fences” type exposures.
  • Why the share price went down: 88E drilled its much anticipated Merlin-2 well and failed to make a new discovery. This combined with the negativity surrounding markets has made the sell off in 88E that much stronger.
  • What's next: We have been monitoring the exploration work of Alaskan neighbour (London listed Pantheon Resources’) near 88E’s Project Icewine. We think there is a chance the same reservoir sections Pantheon intercepted could run into 88E’s ground. We covered this in our last note which you can see here: 88E - what to watch out for in the next 12 months

Thomson Resources (ASX:TMZ)

  • What it does: Silver exploration in NSW
  • Market cap: $13.3M
  • Estimated cash: $500k + 5M in available funding via Securities Vault agreement.
  • Why we like it: We like having precious metals exposure when market volatility is around. When markets are in a panic, precious metals have generally provided protection against downside risk.
  • Why the share price went down: Over the past few months we have seen major shareholder SVL sell down chunks of shares (which we didn’t expect and was disappointing), this combined with general market sentiment being negative is leading to increased sell pressure, which was exacerbated by TMZ needing to raise money at lower prices.
  • What's next: - Drilling at Texas Silver District to extend resource and test geophysical targets, SVL off the cap table, or at least to stop the selling.

Los Cerros (ASX:LCL)

  • What it does: Gold exploration in Columbia
  • Market cap: $18.9M
  • Estimated cash: $17.4M
  • Why we like it: We hold LCL as an exposure to gold which has historically been seen as a hedge against market volatility. LCL already has a well defined JORC resource which gives it an indicative in ground value, in addition we hope to see our gold Investments outperform in times of market distress.
  • Why the share price went down: LCL drilled into the big geophysical anomaly (Jabba the blob) that sits between its two existing deposits. LCL proved out extensions to its existing miraflores deposit at greater depths but did not validate a giant porphyry theory and the market has since sold down the company. We think it has been an overreaction especially given that it was just a shot at growing LCL’s already existing JORC resources.
  • What's next: - Exploration across regional prospects chasing new discoveries.

Canyon Resources (ASX:CAY)

  • What it does: Bauxite exploration
  • Market cap: $35.5M
  • Estimated cash: $1.9M + $5M placement (21/6/2022) = ~$6.9M
  • Why we like it: CAY’s project has a 1 billion tonne + JORC resource making it a globally significant bauxite project.
  • Why the share price went down: Earlier in the year there was some confusion around permitting across ground that CAY holds as exploration prospects. CAY subsequently spent a lot of time in suspension and then came out having to raise capital in a tough market. As with most capital raises the share price has slowly moved to trade around the levels where CAY did its placement.
  • What's next: Signing of the Mining Convention agreement with the Cameroonian government.

Special mention: And finally, here is a company where we actually haven’t had a great experience from an operating perspective, with the company over promising and under-delivering, but we are still holding a position (all the way down from $2) and now “watching with interest”:

Advanced Human Imaging (ASX:AHI)

  • What it does: Body scanning tech
  • Market cap: $20M
  • Estimated cash: $7.8M
  • Why we like it: Tech for health diagnostics and other uses
  • Why the share price went down: The company overpromising revenue got the share price up to above $2, followed by under-delivering on these promises saw the share price come back down to where we first Invested, as many shareholders lost patience. In addition a savage tech sell off in the US didn’t help.
  • What's next: AHI just announced a notice from the NASDAQ warning that AHI’s share price needs to get back above $1 (USD) in the next 180 days OR they will lose their NASDAQ listing (read the ann here). We assume AHI will put in effort and resources to keep the hard won and costly NASDAQ listing, so will likely run an investor awareness campaign to US investors and rush to deliver announcements over the next 180 days. This is just speculation on our part but we will certainly be watching with interest.

⏲️ Upcoming potential share price catalysts list

Results expected 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: GGE’s maiden drilling program is complete with a ~203 foot (~62 metres) gas bearing column intercepted.
    • Update: Confirmed a helium discovery at commercially viable grades, and will return in Q3 to test flow rates.
  • PRL signing a Joint Development Agreement with its partner, Total Eren, to materially de-risk its WA Green Hydrogen Project (memo)
    • IN PROGRESS: The signing of the “Joint development agreement” (JDA) with TotalEnergies. PRL’s deadline to sign the JDA is now set at 31 July 2022.
    • Update: No update 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 scheduled for July. IVZ says it is considering three separate farm-in offers.
    • Update: Went into a trading halt as IVZ finalises an upgrade to the company’s prospective resource.
  • KNI to drill its cobalt targets in Norway (memo).
    • IN PROGRESS: KNI confirmed has completed ~1,007 metres of its total ~2,800m drilling planned. We covered the update in a Quick Take in late-May - read here.
    • Update: Visible cobalt mineralisation in all 5 drill holes, and will expand its drilling program from an initial 2,800m from 7 holes to approximately 3,000m from 10 holes.
  • BPM to drill its lead zinc prospect in the Earaheedy Basin close to Rumble Resources’ recent discovery (memo)
    • IN PROGRESS: BPM is completing a ~7,500m AC/RC drilling program at its Hawkins project (along strike from Rumble’s discovery).
    • Update: After brief delays due to unseasonal rainfall in the Pilbara, BPM restarted its drilling program this week. We put out a note on this development.
  • 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 drilling will occur. It may be later than most on the above list, but we are keeping an eye on progress.
    • Update: No progress has been made this week.

🗣️ Quick Takes

Here are this week's Quick Takes:

LCL: Drilling update at flagship gold project

DXB: Side Bet #2: Covid-19 trial recruitment closed, results soon.

TG1: Rig secured, drilling at newly acquired gold project in July.

EMN: Stifel to advise EMN on project finance

88E: 3D Seismic data to help define drill targets and secure funding?

MAN: Due diligence period extended on copper acquisition

GGE: Trading halt, flow test results pending.

AJX: New products planned as bedding market hit

📰 This week on Next Investors

MNB Signs MoU with technical partner for 300kmtpa Green Ammonia Plant

MNB announced it signed an Memorandum of Understanding (MOU) with Stamicarbon to be its technical partner for a 6-month Technical Study on MNB’s Capanda Green Ammonia Plant.

Stamicarbon likes MNB’s project so much their Director of Technology Licensing said it was:

“not only one of the best Green Energy-Powered-Projects globally, but potentially the first Green Ammonia project that is truly competitive with traditional fossil-fuel alternatives.”

📰 Read our full Note: MNB Signs MoU with technical partner for 300kmtpa Green Ammonia Plant

BPM drilling restarted - tiny market cap leveraged to success

At the time of this note, BPM was capped at $7.8M, has plenty of cash (~$6.8M), an EV of ~$1M and is trying to follow in the footsteps of $184M capped Rumble Resources, which it sits along strike from.

Rumble made a lead/zinc discovery in the Earaheedy Basin in 2021 that sent its share price from ~10c per share to ~80c per share, adding almost $370M to Rumble’s market cap at the time.

Drilling officially restarted on 22 June, comprising a ~7,500m drilling program, which BPM expects to run for around three weeks.

BPM is using both an aircore rig and an RC rig to make up for lost time as they go after a lead-zinc discovery.

📰 Read our full Note: BPM drilling restarted - tiny market cap leveraged to success

KNI Hits Visual Cobalt in all 5 Holes at Middagshvile Target

KNI announced it has hit what looks like cobalt mineralisation at its cobalt project in Norway.

We can see some strong early signs of mineralisation - i.e enough mineralisation to actually see it in the drill core.

In all 5 holes drillied at its Middagshvile target.

It’s early days - we just have some visuals and will have to wait between 60 and 90 days for proper assay results when we will find out the all important grades.

But it’s the result we were hoping for at this stage - and one we’ve been eagerly waiting for.

📰 Read our full Note: KNI Hits Visual Cobalt in all 5 Holes at Middagshvile Target

📰 This week in our portfolios
🧬 🦉 🏹

🏹 Catalyst Hunter

GGE confirms helium discovery - next step is to bring it to the surface

Our 2021 Catalyst Hunter Pick of the Year, Grand Gulf Energy (ASX:GGE), just took another step towards going from helium explorer to helium producer.

We've been following GGE closely for the last few weeks in our “upcoming share price catalysts” list - and that catalyst just came through.

GGE confirmed its maiden drilling program at its helium project in the Paradox Basin, Utah, USA intercepted commercially viable helium grades.

After completing a workover program at the Jesse #1A well, GGE received multiple samples with consistent helium grades ranging between 0.44% – 0.65%.

Importantly the helium grades are higher than the already producing Doe Canyon field, which is only 24km to the east of GGE’s well location.

For context, Doe Canyon is producing helium with average grades between 0.4-0.5% and is the second largest helium discovery in North America over the last 70 years.

Flow testing to come in Q3 2022 - overall great result given this was GGE’s first well.

📰 Read our latest full Note: GGE confirms helium discovery - next step is to bring it to the surface

LRS’s lithium deposit getting bigger - plenty more drilling to come

Our lithium exploration Investment Latin Resources (ASX:LRS) is currently in the middle of a 25,000m drilling program with the ultimate aim of producing a JORC lithium resource over its new lithium discovery in Brazil.

LRS recently took another step towards achieving this with drilling results confirming that LRS’s deposit continues to show commercially viable lithium grades and an increase in the size of its discovery.

Importantly, LRS put out the assay results from its thickest intercept to date returning 25.24m with a lithium grade of 1.25%.

An intercept with both thickness and grade to rival the sort of drilling results LRS’s neighbour Sigma Lithium (capped at $2.3 billion) was getting across its project.

All of this drilling is part of LRS’s strategy to get a JORC resource defined on its discovery as soon as possible.

📰 Read our latest full Note: LRS’s lithium deposit getting bigger - plenty more drilling to come

Have a great weekend,

Next Investors