Why we invest in Oil & Gas and Precious Metals

  Portfolio Update Published On: 21-02-2022 23:44 p.m.

17 minute read

We invest in early stage companies across several different investment thematics that we believe will do well over the next decade.

Across our portfolios we have investments in battery metals, oil & gas, precious metals, medicinal cannabis, early stage tech, green energy, growth stocks and new energy materials.

Generally, the market’s attention cycles between investment themes year by year - each theme usually enjoys some time in the sun (eventually) and becomes popular amongst investors for a while.

But can THREE investment thematics have a strong run at the same time?

We’ve recently been talking a lot about our investment thesis for companies in the energy transition materials space (our “McKinsey shopping list”), a theme we are sure everyone can agree has momentum right now.

But today we want to pivot to some of our more “old school” investment themes in oil & gas and precious metals, that both look like they finally may be about to have a run.

Bitcoin types will tell you that “gold is dead” and Elon Musk/Tesla fans will say “oil & gas is dead as a doornail”.

But growing up in Australia it’s hard not to have learned about and followed oil & gas and gold stories.

We hold some positions in early stage oil & gas because we think the world still needs traditional energy sources as it transitions to green energy, and the last few years of under-investment in traditional energy will bite going forward.

We also hold investments in precious metals companies exploring for (and developing) gold and silver assets - as a hedge against inflation and global uncertainty, which appears to be manifesting now.

While energy transition metals have been getting a lot of attention - precious metals and traditional energy like oil & gas are starting to gain attention after a year or two of nobody really caring.

If you’d claimed that oil might hit $100 in 2022 back when oil went negative in April 2020, you would probably be laughed out of the room.

We’ve been saying oil & gas should have a run soon for well over a year now:

We also have talking about our gold/silver stocks portfolio on the expectation that the gold price will rise on global uncertainty, as seems to be unfolding now (gold just hit $1,900):

And while it’s true that some of our best investments have been in the battery metals space, we’re invested across a range of commodities, including oil, gas, gold and silver.

We think these investment themes have been unloved over the last couple of years but we are keenly aware that the market moves in cycles...SO we’re also interested in “old school” commodity companies that have the right assets at the right time.

The battery metals and energy transition materials cycle is obviously in full upswing - our battery metals portfolio has been doing very well.

Our “Traditional Energy and Precious Metals Portfolios” have started to become interesting as the relative commodity prices have started rising over the last few weeks...

Is it possible that all three of these portfolio themes can be in an upswing at the same time?

We will be watching the price of gold, silver, oil & gas over the coming weeks to see if the rise continues...

So here are the early stage companies we’re invested in across these commodities and what we are watching for them to do next:

Precious Metals Portfolio

  • Los Cerros (ASX:LCL): (Gold, Colombia, Exploration) - Next: We want to see the maiden JORC resource at the Tesorito project before moving its drill rigs towards the “Jabba the blob” anomaly.
  • Tempus Resources (ASX:TMR): (Gold, Canada/Ecuador, Exploration) - Next: We will be waiting for the drilling window in Canada to open up so TMR can continue proving out the new “Blue Vein” discovery.
  • Thompson Resources (ASX:TMZ): (Silver, Queensland, Development) - Next: We want to see the finalisation of updated JORC Mineral Resource Estimates.
  • Titan Minerals (ASX:TTM): (Gold, Ecuador, Exploration) - Next: We want to see TTM’s foreign resource estimate converted into a JORC resource.

Oil & Gas Portfolio:

  • 88 Energy (ASX:88E): (Oil, Alaska, Exploration) - Next: We want to see the Merlin-2 appraisal well drilled.
  • Invictus Energy (ASX:IVZ): (Gas, Zimbabwe, Exploration) - Next: We want to see the final results from the seismic acquisition program leading up to the maiden drilling in June.
  • Elixir Energy (ASX:EXR): (Gas/Hydrogen, Mongolia, Exploration) - Next: We want to see the commencement of production testing at its gas project and an update on its hydrogen project.
  • New Oil & Gas investment coming in the next few weeks...

With two major drilling events in the next six months (88 Energy’s Merlin-2 and IVZ’s maiden exploration well) the oil & gas investment portfolio is looking interesting, especially as gas prices remain elevated and oil prices are threatening to punch above US$100 a barrel.

With tensions in Ukraine threatening to boil over into outright war, even gold is starting to move after a long slumber - now sitting just shy of US$1900/oz for the first time in ages.

We believe the longer-term story for oil, gas, gold and silver remains intact, and looking up the last few weeks.

We still need oil & gas as part of the transition to a renewables future and it will be hard to unseat gold as a traditional safe haven asset and store of value, which it has been for thousands of years.

At some point - despite the push away from fossil fuels - some assets are just too compelling.

In other words, as long as oil & gas have dollar values assigned to them - the companies that hold these resources need to have a dollar value assigned to them as well.

As evidence, we note that M&A activity in oil and gas almost doubled in 2021 compared to 2020:

We expect the trend to continue into 2022.

Listen to Dave Friedberg, influential entrepreneurial investor on our favourite podcast, All In, discuss this topic in last week’s episode:

There’s a lot of talk about contrarian investing strategies - and maybe it's possible to be contrarian against yourself.

So call it contrarian, call it a hedge, whatever it is, we still like these old school investments for when the market gets choppy.

In other news, after 6 months the Next Investors portfolio has finally added a new investment yesterday, our first for 2022:

Welcoming Arovella Therapeutics (ASX:ALA) to the portfolio.

Click here to read our ALA launch article.

📰 This week on Next Investors

⚠️NEW INVESTMENT ALERT⚠️

Arovella Therapeutics (ASX:ALA) is an early stage biotech research company seeking to develop an off-the-shelf cancer cell therapy treatment - part of the broader field of cancer immunotherapy.

ALA has a market cap of $26M and is going after a unique solution to the scourge of cancer - and has attracted some big names both at the board level and to its register.

ALA is backed by Merchant Funds Management who are well known for the 10,025% return in Polynovo, 2,900% return on Race Oncology and the 1,020% return on BARD1 Life Sciences.

ALA also has biotech heavyweight Paul Hopper in its corner as chairman. Most known for his success with the sale of biotech Viralytics for $500M in 2018 and the share price performance of Imugene and Prescient Therapeutics.

We back the ALA management and our plan is to patiently wait with our investment as the company delivers on a number of milestones towards its next major catalyst, which for ALA is the commencement of Phase I clinical trials in the first half of 2023.

📰 Read why we invested in ALA: Introducing our latest investment

On Wednesday we put out an update on our 2020 Energy Pick of the Year Invictus Energy (ASX:IVZ).

IVZ recently completed an $8M capital raise via a placement and Share Purchase Plan to shore up the balance sheet ahead of drilling, which is now scheduled to begin in June.

We took the opportunity to add to our shareholding in IVZ at 10c. The SPP was oversubscribed to a total of $9.4M which resulted in a scale back of 42% which meant we didn't manage to get as many shares as we would have liked.

IVZ is doing the type of exploration which brings with it the potential for “company making” discoveries. This type of discovery is generally higher risk, however, there are also outsized returns on success.

📰 Read the full breakdown: Years in the making: IVZ first drill now months away

On Wednesday BPM Minerals (ASX:BPM) announced that whilst running MLEM surveys over its Nickel project in WA it had identified 11 EM conductors.

With drill rigs hard to come by in WA, BPM also announced that it had opportunistically moved to secure a drill rig which is expected to start a 3,000m air core (AC) drilling program early next week

BPM’s Nickel project is one of our “side-bets” and will provide a short term roll of the dice on some nickel EM targets while we wait for the lead-zinc drilling program at the Hawkins project to start, which is the main reason we invested in BPM.

In our article, we set some expectations for the different types of results to expect from the program.

📰 Read the full breakdown: BPM Side-Bet: Nickel EM targets picked up in MLEM surveys - fast tracked AC drilling next week

In our other portfolios 🧬 🦉 🏹

🦉 Wise-Owl

⚠️NEW INVESTMENT ALERT⚠️

On Monday morning we launched our latest investment in Canyon Resources (ASX:CAY).

This is an ASX stock we ALMOST invested in back in 2020 but decided to wait for the company to deliver a few more progress milestones first before the time was right for us.

CAY is developing one of the largest, high-grade, direct shipping bauxite deposits globally in Cameroon, Africa.

CAY owns its bauxite project 100% outright – and is one of the only globally significant projects left that is NOT held by existing major industry players.

We took our position in CAY at 10c, which we think presents a great entry for our investment given the size of its project and how close to development it is.

We think the upside for CAY is that the project might be taken out by a bigger bauxite player in a couple of years’ time, at multiples of its current value.

With the high aluminium prices but bauxite trading near multi-decade lows, we think this disconnect will eventually correct and the market dynamics will feed into this company’s project economics.

With CAY we have taken an investment in a commodity that is unloved and underappreciated ahead of market sentiment changing. We think that when market sentiment turns CAY could become front and centre of investors minds.

📰 Read the full breakdown: Introducing our latest investment

🏹 Catalyst Hunter

On Tuesday we covered Frontier Resources' (ASX: FNT) announcement from last week showing that EM surveys had generated 12 high priority drill targets, with drilling expected to start in the June quarter.

With a total of twelve “priority 1” targets generated, FNT has already announced that the team was on-site doing some “ground-truthing” - which to us means they are on-site collecting rock chip samples in and around the target areas, looking at outcroppings, and pinpointing exactly where drilling needs to be focussed on.

The 12 EM targets are separated into three clusters, the biggest of which sits on the northwestern border of FNT’s grounds, trending towards $500M capped Hastings Technologies rare earths deposit.

FNT is now working on permitting ahead of a drilling program expected to be in the upcoming quarter.

📰 Read the full breakdown: EM targets identified - Rare earths drilling event next quarter

On Wednesday afternoon Latin Resources (ASX: LRS) announced that it had intersected multiple zones of potentially lithium bearing spodumene immediately down-dip from high-grade (2.71% lithium and 1.45% lithium) outcropping pegmatites.

The significance of this is that spodumene generally has one of the highest lithium contents of all known minerals and is a proven source material for battery production.

With lithium prices up over 500% in the last 12 months and the broader investor community catching onto lithium, LRS is wisely drilling its hard rock lithium project right now in Brazil.

LRS is only halfway down the first hole, and there are 13 more to go over a 2,000m drill campaign.

If LRS can turn this first intercept into discovery with a JORC resource then it will enter the conversation as a serious lithium explorer in a part of the world where majors like Sigma are pouring capital into.

📰 Read the full breakdown: Spodumene alert: Has LRS just made a new lithium discovery?

🗣️ Quick takes:

VUL: Dual listing on Frankfurt Stock Exchange

On Tuesday VUL announced that the German regulators had approved its listing on the Frankfurt Stock Exchange. This has been a long time coming for VUL and makes them the first ASX listed company to have a dual listing on the regulated market of the Frankfurt Stock Exchange.

This should open up VUL to a range of new investors which we think is important given it is progressing its project closer towards the most capital intensive period of a mining company’s lifecycle - the development stage.

MNB: EPC contractor secured for the Fertilizer project

On Tuesday MNB announced that it had signed an agreement with Brazilian EPC contractor EPC Engenharia, to begin work on the design and scheduling programs for the Cabinda Phosphate Fertilizer Project.

The company will work closely with MNB’s newly appointed Implementation Manager and in-country General Manager to design the infrastructure of the construction site and schedule key aspects of the construction project (like equipment delivery and scheduling subcontractors).

The wheels are firmly in motion for MNB to create their Phosphate Fertilizer plant and we would be very happy to see production beginning in 2023.

AHI: Vlado Bosanac steps down as Chairman and CEO

A number of readers have reached out to us asking us ‘what is going on with AHI?’.

With the disappointing Tinjoy result revealed in the latest quarterly, and Vlado Bosonac stepping down as Chairman and CEO, it has been a tumultuous few weeks for AHI.

The share price has reflected this, closing the week at 30c - still above our initial entry but well below the $2.00 mark where we increased our position in February last year.

With investing, we don’t always get it right, and like others who have invested in AHI, we have been disappointed in the company’s ability to execute and generate revenue.

It can be frustrating to watch stock prices slowing tracking down and it highlights the importance of de-risking your portfolio through diversification.

Have a read through this educational piece that we wrote on this topic.

We continue to hold a position and with a change of CEO we will be watching AHI closely and hoping the company will adopt a more “under-promise, over deliver” approach to market communications.

On a positive note, the company did execute the NASDAQ listing as promised and does have a decent chunk of cash in the bank.

PUR: PGE-nickel-copper project exploration update

On Monday PUR announced an exploration update at its PGE-nickel-copper project in WA.

In the update, PUR highlighted that it had recently completed ~40km^2 of sampling and is currently completing the second program in the southern parts of the project which is expected to be completed by the end of the March quarter.

PUR looks to be gearing up for an air core drilling program that will test the highest priority targets identified by the sampling program planned for sometime in April.

WHK: Trading halt, response and new contract revealed on WHK website

On Thursday WHK went into a trading halt pending a price query from the ASX, WHK responded after market on Friday, so should be out of halt Monday.

A few readers have emailed us this post released on WHK’s website about a new USD $1.5M contract with a global social media company:

https://www.whitehawk.com/blog/white-hawk-signs-cyber-risk-radar-contract-with-global-social-media-company-for-1-5-m

We will provide a full update on this next week.

FYI: Achieves 99.999% (5N) purity from its third week of HPA pilot plant operations. (Wise Owl Portfolio)

On Monday, FYI announced the results from its third week of HPA (high purity alumina) pilot plant undertaken in collaboration with global alumina leader Alcoa - achieving purity between 99.999% to 99.997% HPA.

The aggregated results from the first three extended pilot plant trials seem to be showing an increasing overall average purity. Delivering 5N (ie 99.999% purity) HPA is significant as it fetches about ~US$50k per tonne, a substantial premium to 4N (ie 99,.99%) HPA which sells for ~ US$25k per tonne.

With the pilot plant operations complete, FYI and Alcoa will now be focussed on finishing off the engineering phase progressing the project closer towards commercialisation.

IRD: Trading at near year lows, director buying on-market (Wise Owl Portfolio)

Iron Road Limited (ASX:IRD) is advancing one of the world’s largest, development ready, high-gironrade ore projects, in South Australia

Whilst the commodity has surged ~50% over the past 3 months to trade above US$140/t this week, this hasn’t helped IRD’s share price, which remains near 52-week lows.

So we took encouragement from seeing IRD’s executive director Glen Chipman continuing to buy on the market, snapping up ~$58k of stock at around 19 cents late last week. Directors buying their own company provides confidence that they back their vision, and see the value going forward.

ARN: Pegmatite intersections encountered during drilling (Catalyst Hunter Portfolio)

On Thursday ARN announced the completion of another 13 holes from its lithium/rubidium project in WA.

All 13 of the holes intersected pegmatites and ARN confirmed that the thickest pegmatite intercept of the drilling program so far was made for a total of 26m. Intersecting pegmatite is an encouraging first sign for the drilling program but the proof will all be in the assays.

The ultimate aim for ARN is to get good enough drill results to put together a maiden JORC resource for the project before moving the drill rig to its other greenfields pegmatite project ~40km to the northeast.

TG1: EM surveys and drill testing scheduled for its copper project (Catalyst Hunter Portfolio)

On Monday, TG1 came out with an exploration update at its Mt Boggola copper project. This follows on from the EM surveys that were run in the past, the upcoming program will mean that the entire project area is surveyed.

The survey is due to commence in the second half of 2022 and TG1 hopes to be drilling before the end of the year.

RIU Investor Conference

A few of our companies presented at the RIU Investor conference, watch the presentations here:

🌎 Mainstream Media:

Nickel (PUR, GAL, AOU)

High EV battery demand is causing a nickel supply crunch: McKinsey & Company's Hoffman (Bloomberg)

Forrest backs IGO takeover of nickel miner Western Areas (AFR)

Lithium (VUL, EHM, LRS)

China Scientists Flag Rich Lithium Find in Mount Everest Region (Bloomberg)

Liontown Resources shares rally as it snares Tesla lithium supply deal (AFR)

Lithium’s early stages remind ex-FMG executive of iron ore (AFR)

How Australia’s lithium miners hope to play in wary Europe’s backyard (AFR)

The Black Forest Holds a Secret to Making Electric Cars Greener (Bloomberg)

Aluminium (CAY)

Hold That Tesla! Inflation Will Be Made of Aluminum (Bloomberg)

Oil & Gas (88E, EXR, IVZ)

Refiners in Oil’s Top Market Want More - Even Near $100 a Barrel (Bloomberg)

How the energy sector went from pariah to powerhouse (AFR)

How Chinese firms have dominated African infrastructure (The Economist)

Rare Earths (FNT)

China swoops on Australian rare earths junior (AFR)

Australia backs rare earths mine to reduce China’s supply dominance (FT)

FMCG (FOD)

Why Maggie Beer is now an e-commerce queen (AFR)

Helium / Semiconductors (GGE)

Intel boss has a stark warning for governments around the world (AFR)

Gold (TMR, TTM, LCL)

Gold hits eight-month high as investors rush to safety (AFR)

Have a great weekend,

Next Investors