Weed and gold, the unloved investment thematics

Published 22-OCT-2022 13:00 P.M.

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13 minute read

Why is what we observed in battery metals driving our new investment strategy in unloved weed (cannabis) stocks?

We have all seen when a new “investment theme” goes through an initial period of “hype”.

This initial hype phase occurs when a shiny new “game changing” idea captures the market's imagination, many new small cap companies emerge, and share prices rise to reflect everyone’s excitement.

We have also seen how long it takes for the world to adopt new ways of doing things - it’s measured in years, not months.

While new ideas and technologies have amazing potential, causing investors to rush into new companies, it can take many years for consumer demand to develop and adopt a new idea.

After the initial investor excitement, the hype in a new idea will die down and share prices of companies leveraged to the investment thematic fall, reflecting actual, real world demand that hasn’t caught up... yet.

The particular investment theme then becomes “unloved”.

We’ve seen investors get burned, and companies give up because they can’t raise cash, although a few keep plugging away in the hope that demand for their product will eventually arrive.

The companies that survive the initial hype phase AND the following period of being unloved are usually the best performers when real world demand catches up to the initial hype many years later.

A famous example of this is in the dot-com boom, bust, then boom.

In the late 90s investors were hyped about internet companies — thousands of internet companies emerged, share prices rocketed, lots of money was raised, but not enough demand existed yet and it all came crashing down in 2000.

...and then everyone hated tech for a while.

Over the coming years, the demand caught up and the few internet companies that continued to build through the downturn became the tech titans of the world - Facebook, Amazon, Google.

Anyone who invested, or held on during the “unloved” phase, would have done very well.

This “hype, crash, hate, success” cycle is pretty common when a shiny new investment theme emerges and develops over time.

There has been a lot of early hype about new technologies such as blockchain, metaverse, drones, fake meat, artificial intelligence, 3D printing, etc.

While there will definitely be very successful companies over the coming years in those technologies, the above themes all had initial hype phases that went a bit too hard, too early.

The Gartner Hype Cycle is a useful visualisation for investors to try and identify where a particular new idea/technology may be in the “hype cycle”:

So what does this have to do with us looking to increase our Investments in cannabis stocks?

After going through an initial hype boom and bust, we think cannabis is a pretty hated investment theme right now (and has been for a while).

The most successful investments we have ever made were in battery metals following the initial hype when battery metals stocks were hated in 2019.

We want to try and replicate this and take positions in a few cannabis stocks in what we think is the current “trough of disillusionment” for the cannabis thematic on the Gartner Hype Cycle.

But first, here how this cycle played out in battery metals:

Before battery metals became a solid investment theme in late 2020, it went through a “false start” in 2016/17 and an unloved phase in 2018/19.

In 2016/17 people realised batteries would be the future for electric cars and as a result, recognised there would be a shortage of materials like lithium, cobalt, nickel, and graphite.

All battery metals stocks ran hard.

The problem was that it was a few years too early.

Aside from Tesla, the major car companies were years away from building electric models, so the demand for battery metals just wasn’t there... yet.

In 2018 battery metals stocks crashed, so in 2019 they were hated by investors.

In 2020, we saw Elon Musk speak of battery metals shortages at the Tesla Battery Day, there was also a Volkswagen Power Day, plus most other car brands announced they were going almost fully electric.

Gears on the real world demand for battery metals had started turning.

Suddenly, every stock related to “battery metals” was going up, and companies that had executed their business plan to survive the “unloved phase” performed the best.

Some of them are now worth more than $1 billion.

With the benefit of hindsight, the best time to be buying or accumulating battery metals stocks was in 2019 and early 2020, after the initial hype came and went and nobody wanted to hear a thing about battery metals.

We didn't get the timing perfect (nobody ever does), but we got it right enough that it paid off, with a couple of well timed investments including Vulcan Energy Resources (ASX:VUL) and Euro Manganese (ASX:EMN).

That brings us to why we are now looking to invest and build positions in cannabis companies.

Here is where we think we are on the cannabis curve:

Cannabis companies went through the early hype cycle back 2018, with the legalisation of recreational cannabis in California the key catalyst for the industry.

There was a rush on cannabis stocks, with investors thinking all of this would happen overnight and a giant legal cannabis market would suddenly appear.

The problem was that although cannabis was legalised in California, other jurisdictions like Australia, Europe, and the US at a federal level, made little actual progress to develop the industry in the near term (surprise, surprise - governments take ages to pass new laws, and many key markets still face various restrictions).

The hype lasted about two years, before dying down as people realised it's going to take a while for the market to properly develop.

Weed stocks have been hated for about three years now, with the industry getting a small boost in late 2020 with the Biden administration passing the ‘MORE’ act before the investor appetite slumped again.

At the bottom of the 2018/19 hype cycle, this is how one investor put it:

That said, we think there have been some green shoots (pun intended) appearing that indicate weed stocks could come back in 2023.

Earlier this month, the Biden administration said it intends to expedite how cannabis is scheduled under federal law. And as recently as this week, a draft of Germany’s plans to legalise cannabis was leaked (which you can read more about here).

We have been following a few companies for a while that have good management and a focused plan working hard to refine their business models during the unloved phase of the cannabis curve.

As we said before, it's the companies that kept building and refining their business during the post-hype “unloved phase” that we think will perform the best when real demand kicks in.

We are predicting cannabis stocks to emerge from the unloved phase in 2023 when major markets and demand starts to emerge.

And it will be quality cannabis stocks that survived through the negative sentiment that emerge the strongest.

We have recently added to our position in BOD Australia (ASX: BOD) which is a cannabidiol wellness and medical cannabis company. We actually invested in BOD during peak cannabis hype (in late 2020), and have held it all the way from 50c when we invested, down to 8c where we participated in the rights issue this month.

Like we said, we don't always get it right, but we really like the BOD management and they have been working hard during the unloved phase of cannabis and we hope to see BOD emerge strong on the other side.

We are also following an upcoming IPO in the space: a vertically integrated European pharmaceutical quality medicinal cannabis company that could emerge as a market leader in Germany — the largest and most attractive medicinal cannabis (and now recreational) market globally.

The company is already in operation with purpose built, state-of-the-art production facilities in North Macedonia with EU GMP licences.

One of our analysts is on site this week viewing the growing facilities and we will share the IPO prospectus over the coming weeks once it's ready.

We are also on the lookout for any quality cannabis companies that have been around for over five years and managed to come out of the “unloved” phase stronger and with a focused business plan - reply to this email with any suggestions.

Our prediction is that weed will come back in 2023, but we could be wrong.

Trying to build positions at the point of lowest sentiment is great if it works out, but if you get it wrong and are a year or two early, expect to be stuck in some boring positions for longer than you hoped.

Speaking of unloved sectors we think will come good in 2023...

Everyone hates gold right now - gold explorers are probably the most scoffed at investment class going around.

Most gold explorers we follow or are invested in have suffered significant losses in recent years.

We think gold explorers are in the depths of the trough of disillusionment, so we are looking for any heavily discounted cap raises to participate in, OR to increase our holdings in our existing gold explorers that have been beaten up.

We expect to announce a new gold investment pre-Christmas.

One of our favourite gold Investments, Tempus Resources (ASX: TMR) is making progress, but has also suffered from poor market sentiment. We recently increased our holdings in the rights issue at 5c, after originally Investing at 20c, then at 34c, 14.5c and 17.86c.

We also participated in Titan Minerals’ (ASX: TTM) cap raise at 10c around a year ago, on which we are now underwater at 8c.

Another of our gold Investments, Los Cerros (ASX: LCL), has seen its share price slide over the past 12 months, despite ongoing exploration that has expanded the known discovery at its Quinchia Project in Colombia, LCL has been hit particularly hard due to a recent change in government in Colombia that isn’t as mining friendly as the previous one.

We recently increased our Investment in TechGen Metals (ASX: TG1), which announced a gold discovery from the first hole ever drilled at the John Bull Project. The company is currently running geochemical surveys to plan out the next drilling campaign.

Again, if the gold price rips early next year, we will look like geniuses. But if it continues to stink for another 18 months we will need to wear the opportunity cost of deploying capital into an unloved sector, and missing out on opportunities elsewhere.

So in trying to repeat our good timing on battery metals, we are betting that gold and weed will make a comeback in 2023. We will find out whether we are right or wrong over the next 12 months.

If you think we have missed an unloved theme that will make a comeback this year, let us know.

🗣️ This week’s Quick Takes

Macro: McKinsey on Battery Materials Demand

BOD: Patent lodged for anti-ageing skin process

GGE: Helium grades 20% higher ahead of second well

GTR: German sentiment toward nuclear power turning positive

LRS: Final lithium assays are in

LNR: Visuals from LNR’s first WA rare earths drill

LNR: WA government tips in $200k for LNR’s drill program

NHE: North Nyasa Soil Gas Survey Commenced

RAS: RAS approvals allow for significantly expanded drilling program

TTM: US$5M cash injection following revised asset sale

IVZ: Update on drilling

This week in our Portfolios 🧬 🦉 🏹

Minbos Resources (ASX:MNB)

Minbos Resources (ASX:MNB) released its long awaited Definitive Feasibility Study (DFS) — the key study required to bring on serious investors.

The DFS gave some firm numbers around completing the build of the mine, along with calculations of the project’s value, with first production now scheduled for late 2023.

Our initial takeaways were:

  • NPV of US$203.4M (base case) - US$399.4M (using current fertiliser prices - almost double the base case)
  • Remaining capital expenditures (CAPEX) of US$40M
  • Relatively short timeline to first production in late 2023
  • Post-tax internal rate of return (IRR) of 61%
  • Payback period of 3.6 years
  • Project economics improve significantly as fertiliser prices rise

We are still watching for offtake agreements, supply MoUs and also any progress on the very interesting Green Ammonia project, which is separate to the phosphate mine and provides further potential to add shareholder value over time.

📰 Read this week’s full MNB Note: MNB building phosphate (fertiliser) mine as prices at record levels

GTI Energy (ASX:GTR)

Actively drilling its US uranium projects, GTI Energy (ASX:GTR) this week released a batch of assay results from drilling at the first of its projects, Thor.

We like that half of GTR’s drillholes at the project have now delivered results exceeding that of a typical economically viable uranium system that’s amenable to in-situ recovery (ISR) mining methods. One standout intercept was almost ~13x the typical economic cut-off for grade thickness on ISR projects in Wyoming.

GTR is still only 6,209 metres through its planned 30,480m drilling program, so we expect to see a whole lot more assay results over the coming months.

The company is aiming to declare a maiden JORC resource for the project, which we hope will see it on the radar of a major like Uranium Energy Corp as a takeover target.

📰 Read our full Note: GTR’s regional neighbour buying up USA uranium projects

Auking Mining Ltd (ASX:AKN)

Another junior that is betting on the outlook for uranium is Auking Mining Ltd (ASX:AKN), which has just struck a deal to acquire uranium assets in Tanzania.

We originally invested in AKN for its WA copper assets,but sometimes in small cap investing a new “blue sky” project comes along to make for a more interesting journey and adds an extra bet that could deliver significant returns.

And when it comes to AKN, we like its chances, knowing that Tanzanian deal maker and project vendor Mr Asimwe Kabunga is onboard as new AKN chairman.

As major shareholders, we hope Asimwe can deliver the same sort of success seen from the three other ASX listed companies that he has brought Tanzanian deals to.

📰 Read our full Note: Can this Tanzanian Exploration Maverick Lead AKN to Uranium Success?

Tyranna Resources (ASX:TYX)

Keeping with the African exploration theme, lithium explorer and Catalyst Hunter 2022 Pick of the Year, Tyranna Resources (ASX:TYX), has just started the first ever drilling campaign at its underexplored pegmatite field in Angola.

We expect drill core visuals within weeks and first assay results before Christmas.

While a new addition to our portfolio, of the six Investments in the race to be our Portfolios’ top performer for 2022 (as we wrote here last week), TYX has a good chance of coming out ahead — assuming drilling results deliver the goods, which is never a guarantee.

Regardless, this is one to watch as its results roll in over the coming months.

📰 Read our full Note: Lithium drilling started - vast pegmatite field being prodded

⏲️ Upcoming potential share price catalysts

Results expected in the near term:

  • IVZ drilling its giant gas prospect in Zimbabwe - we waited two years for this event (memo).
    • Update: Responded to an ASX price & volume query - see our QuickTake.
  • LNR has recommenced maiden drilling for rare earths along strike from Hastings Technology Metals (memo).
    • Update: visuals in RC chips & awarded $200k by the WA government for drilling at the Lyons prospect.
  • GGE is drilling its maiden helium well in Utah, USA (memo).
    • Update: Helium grades increased by ~20% above previously reported grades.
  • KNI is drilling its cobalt targets in Norway (memo).
    • Update: No material news this week.
  • PFE has drilled its polymetallic (Hellcat) project (memo).
    • Update: No material news this week.
  • PRL: Awaiting final execution of a joint development agreement with Total Eren (memo).
    • Update: No material news this week.
  • GAL is undertaking a second round of drilling at its Callisto PGE discovery in WA.
    • Update: No material news this week.
  • BPM: results pending from drilling at its Hawkins lead/zinc prospect in the Earaheedy Basin, close to Rumble Resources’ discovery. (memo)
    • Update: No material news this week.

New company progress trackers

AKN Progress Tracker

MNB Progress Tracker

Have a great weekend,

Next Investors

tags

GOLD CANNABIS


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