The fallout from the VUL short attack explained

The short seller attack on VUL was the biggest story of the week, gaining a lot of online and media attention.

Short sellers (who profit when a share price goes down) took a “short position” in VUL and commissioned an extremely negative report to try and push the VUL price down, so they could increase their gains.

VUL went into a trading halt and released a detailed rebuttal to the disinformation published in the short attack report - yesterday was the first session that VUL traded AFTER the short attack report release, and we assume it was THE CRITICAL DAY for the short sellers to make all their profits.

We shared our theory and workings on why we thought that IF the VUL share price opened at above $13.50 then the 1,290,385 shorted VUL shares would be showing a loss and likely be forced to be purchased back on market, pushing the VUL price upwards and generating a “short squeeze” as more and more short positions would need to be covered as the VUL share price started rising, compounding the price rise.

You can see our full workings, including facts, assumptions and links to supporting data in yesterday's commentary.

While VUL didn’t open above the $13.50 where we calculated the shorters would be showing a loss (and be forced to cover), the share price held up very well, trading at a weighted average of ~$12.70 for the day and closing at $12.51, back to where it was last week, giving back just 7 trading sessions worth of gains.

After a big build up during the week, all VUL shareholders must have been watching the market open very closely yesterday, alongside plenty of non-holders who just grabbed the popcorn to see what would happen after the short attack report had made it into mainstream media.

10am finally came and with everyone on the edge of their seats the market was about to open - the VUL bid and offer were loaded on each side when the market starting gun fired...

At 10:09:14 AM VUL opened and 565,508 shares of VUL traded at $12.08 (for $6.83M) on the opening match - the sellers at open were likely shareholders who had been scared by the short seller report.

So while the share price didn’t open at above the $13.50 required for our short squeeze theory to kick in, our assumption remained that the short sellers would cover on the first day the market opened after the short attack report was released where maximum fear and uncertainty was likely in the market, and we assume the short sellers quickly started buying up VUL stock to “cover” and lock in their “gains”.

So by our assumptions, at market open a chunk of the open short position could have been covered (ie: shorted shares bought back) at $12.08 for a profit of about $1.42 per share (IF the short sellers covered on the opening match).

Within 60 seconds of open a further $2.78M shares changed hands, with buyers kicking in to push the price up to $12.80 in the first minute - this fast price rise after open looked to have all the hallmarks of short covering during “peak fear”, but we don’t have access to the data to confirm it.

For the rest of the day VUL bounced between $12.50 and $13.20 and on record volume, the volume weighted average price for the day was $12.70 - so theoretically the short sellers could have covered and made a profit of around 75c per share if they covered gradually throughout the day.

So if 1,290,385 shorted VUL shares were covered on the day (assuming the short price was around the ~$13.50 we calculated) the short sellers could have made around $928k profit - not including the cost to commission the J capital report (which we understand costs about $200k) and the costs to create the short facility.

Our final observation was that on the closing match (between 4:00pm and 4:11pm) a total of $22M worth of VUL shares changed hands - this is more than the average daily trading volume of VUL .

While there was obviously a lot of selling, as always there were buyers on the other side of every sell, happy to buy at ~$12.70, and with a total of $115M traded during the day it seems VUL might now have some fresh new shareholder’s on the register at ~$12.70 who are ready to join us and other existing holders on the next leg of the VUL journey.

We will find out how much of the VUL short position was actually covered mid next week when the Friday 29th October “short position” numbers are released - You can see the current daily short positions on any ASX stock here - there is a 4 day delay in short positions being published.

It will be interesting to see how many VUL short positions were closed yesterday. VUL was in a strong upward trend on the back of their third offtake agreement, so we’ll be surprised if most of the short positions weren’t closed yesterday to mitigate the “risk” of VUL’s strong upward trend continuing, especially now that the short sellers "low hanging fruit" of easily scare-able shareholders have been shaken out and a solid new base formed at $12.70 on $115M volume.

So while the opening share price condition for the short squeeze we predicted was not met, we do think the short sellers were probably a little disappointed in the result that their short attack achieved, after VUL held up pretty well above $12.50, giving back just 7 days worth of recent gains.

So yesterday VUL weathered the “short attack” storm, and while short attacks can be frustrating for long term shareholders and a distraction for company management, they are unfortunately a part of what happens when a company shows some early success and increased profile like VUL has done over the last 12 months.

On the plus side, a short attack is a good test of the overall robustness of a company and VUL withstood the brunt of this attack, any VUL holders that were planning to sell probably did it yesterday, which means we will have a stronger register going forward.

Finally, a short attack report provides a good reminder and opportunity for shareholders to refresh their due diligence on the company. We continue to hold a long term position in VUL.

Aside from the VUL short attack, it was a very busy week last week:

We launched our first ever “pick of the year” on our Catalyst Hunter portfolio - US Helium exploration company Grand Gulf Energy (ASX:GGE) - Helium is a critical component in the manufacturing of semiconductors - a critical component in cars, phones, and electronics. There is a global semiconductor shortage with some analysts/media calling semiconductors “the new oil” as countries move to secure their own production and supply. - read the our full “pick of the year” report on GGE

We also covered progress from two of our gold exploration investments TMR and LCL - we think gold is next in line for a price run as inflation kicks up around the world.

CPH acquired a company on the cheap and PUR found SOMETHING but don’t know what it is yet...

📰 This week on Next Investors

Two weeks ago Tempus Resources (ASX:TMR) accidentally hit a chunk of visible gold - it was POTENTIALLY a whole new gold vein, results were sent to the lab to confirm and this week Bonanza grades were returned and a new vein was confirmed. TMR called it the Blue Vein.

Since the hit, six more holes have been drilled in the area and all the holes showed visible quartz (meaning potential for gold).

TMR doesn’t yet know how long this new vein extends for, but will continue to drill to discover its size and grade.

📰 Read our full analysis:TMR discovers a new gold vein - with bonanza grades. Now to start drilling it to see how big it is...

Over the last few weeks Los Cerros (ASX:LCL) has conducted electromagnetic experiments over the ground between its two known gold systems to test whether there is a GIANT gold system connecting the two in a nested porphyry.

The results of the electromagnetic survey returned a giant purple, magnetic, conductive blob connecting LCL’s two gold systems - this blob might be gold... it might be copper... or it might be a bunch of worthless rocks.

The next step is for LCL to drill this colourful blob. With two drill rigs allocated to investigate, we are hoping that LCL will discover that gold exists between the two projects, leading to an increased resource size.

📰 Read the full article: LCL drone survey identifies giant magnetic blob

Pursuit Minerals (ASX:PUR) is using electromagnetic surveys to identify targets to drill and hopefully discover a nearby PGE-Ni-Cu system.

It turns out that PUR has hit mineralisation - lots of different metals were picked up in drilling - but it was something totally unexpected - a type of mineralised system that CAN’T usually be detected using VTEM and MLEM surveys - and from the reported drill results in the announcement it sounds like they have just clipped the edge of it.

While it wasn't the type of mineralised system PUR originally set out to find - it’s still a mineralised system, that warrants further exploration - we will be watching with interest to see what PUR’s technical team do next.

📰 Read the full article: PUR hit a significant “mineralising system” - now to find the core (and what it actually is...)

This week Creso Pharma’s (ASX:CPH) acquired a range of CBD products from ImpACTIVE that deliver anti-inflammatory relief to professional and amateur athletes suffering from chronic muscle and joint pain.

We like the terms of the deal because there is a low upfront cost to CPH with the bulk of the consideration paid to ImpACTIVE tied to sizeable sales targets.

We will be watching to see if ImpACTIVE can secure a distribution partnership with a major US retailer through the “RangeMe” online product discovery platform used by CVS and Walgreens (the biggest pharmacy chains in the US), and from there any sales that follow through.

We are also watching out for CPH to secure a North American CEO to bring their US growth strategy together and create a simple to follow narrative for investors ahead of a planned NASDAQ listing.

📰 Read the breakdown: CPH is targeting US growth through M&A - Seeking a CEO

🗣️ Quick takes on key portfolio company events this week:

Minbos Resources (ASX:MNB)

Yesterday MNB announced that the Minister of Agriculture affirmed its support for MNB’s proposed Green Ammonia project in Angola.

This provides an important pathway for land applications and leases. What we are closely monitoring is approvals from the Minister of Energy - who has already confirmed that 100MW of hydro-power is available for the project.

This is an exciting opportunity for MNB and we will provide a fuller update on the Green Ammonia project as developments progress.

Elixir Energy (ASX:EXR)

Earlier in the week EXR put out an operations update on their natural gas exploration activities in Mongolia.

Both appraisal wells Richairn-2S and Richcairn-3S interested coal as expected while two new wells are planned including an exploration well (Bag-1S) and a core-hole (Richcairn 4).

Exploration wells can be exciting because if they discover coal then it is suggestive of a larger subasin and gas resource, and core-holes are wells drilled to pull out a substance for the purposes of lab testing.

Another important milestone that EXR accomplished was the flow testing from Nomgon 6 well - which will provide valuable and extensive information to EXR’s pilot production testing program slated for 2022.

Vonex (ASX:VN8)

VN8 released its first quarterly activities report since its transformative $31M acquisition of MNF Group’s Direct Business, and the impact is already starting to filter down into key metrics. The junior telco delivered its best ever sales revenue quarter, up 47% year-on-year to $6.54m. Note that this is with the new acquisition only contributing to 7 weeks of the quarter, so we look forward to seeing what a full 12 weeks (one quarter) will look like in the next set of quarterly financials.

The other two VN8 metrics we like to track are also up significantly - Annual recurring revenue is now $32M, and PBX users (a proxy for revenue) is up 90% year-on year to over 80,000.

We note the pick-up in M&A activity in the telco sector of late - e.g. Aussie Broadband seeking to takeover Over The Wire for $342m, and Swoop raising over $41m to acquire Countrytell Holdings. We suspect that VN8 will be on the hunt for their next acquisition shortly, or else could be on the menu for a bigger fish.

Pantera Minerals (ASX:PFE)

Get to da choppa! This week the maiden iron ore (iron maiden?) drilling program at the Yampi Iron Ore project commenced, with the purpose-built heli-portable drill rig safely mobilised to the site.

Check out this video of the helicopter taking PFE’s drill rig to site.

An initial photo of the site already shows some promising outcrop (this is the rocks on the surface) - we’ll be watching closely for drilling updates from the company.

WhiteHawk (ASX:WHK)

WHK is a cybersecurity company based in the US with an online cybersecurity marketplace that allows businesses of all sizes to buy cybersecurity solutions from vendors - we have been invested in WHK for years now (before our portfolio model) and really like the story and management - they just take a really long time to deliver announcements.

WHK posted its quarterly report yesterday, showing plenty of activity with clients and “Proof of Concept” (PoC) deals either live or scoped out - these are small sales that hopefully lead to bigger ones once the customer sees value in what WHK are offering.

We note with interest that one PoC sale of US$100k was made with a “Global Social Media Company” - sounds like it went well with a comprehensive programme to begin in December 2021. We wonder who this “global social media” company could be, it does sound promising.

WHK also scoped out three PoCs of value ranging between US$125-275k - two with US Government and one with a US based industrial.

WHK being a cybersecurity company, is forced to be pretty tight lipped about who its clients are for confidentiality reasons.

Given it's already in the second year of a Department of Homeland Security sub contractor deal to Guidehouse (formerly PWC Federal) for US$1.5 to US$1.8M fiscal year 2021, we are hoping that the calibre of clients and the size of WHK’s bigger deals once landed will put WHK in a solid position.

In what was a relatively quiet quarter, WHK still pulled in US$880k in revenue, and only had a net burn of US$176k, which left it with US$1.86M at quarter’s end.

WHK invoiced US$1.2M in the quarter, and said it expected to collect US$526k in receivables in October 2021 alone.

WHK is one of our favourite investments with the most potential. We would like to see them shore up the balance sheet a bit more, and would much prefer this come from some big contract wins.

Dimerix (ASX:DXB)

Our 2021 Biotech Pick of the Year DXB provided a quarterly activities update. It was a monster quarter from DXB, with $24M in funding and TWO Phase III clinical trials commencing - one on FSGS (a rare kidney disease) and the other on COVID-19.

What also caught our eye was that DXB has over 400 patients recruited into their 2ND Phase III COVID-19 study, on COVID patients in ICU.

We hadn’t seen an update on this program since we first invested in the company back in August, so it was pleasing to see that the program is tracking well. We expect results from this before Christmas.

You can also read more about DXB on our biotech portfolio finfeed.com - subscribe there for additional DXB coverage. We are also looking to add more biotech stocks to our Finfeed portfolio very soon.

Advanced Human Imaging (ASX:AHI)

It’s crunch time for AHI, they will need to complete their NASDAQ listing and the associated US$15M in capital raising to fund their next stage of development very soon.

AHI has filed its Form F-1 statement with the SEC, which you can read in full here. Keep an eye out for updates to AHI’s NASDAQ page as it gets closer to its planned listing.

We were disappointed that the company made no announcement about the Tinjoy revenue since we first flagged its importance - we’ll be watching closely over the next month to see if AHI can deliver both the NASDAQ listing, funding and Tinjoy revenues.

OneView Healthcare (ASX:ONE)

ONE provides digital tools for patients, families and caregivers to improve the care experience, typically in hospitals or other points of care.

In their quarterly released this week, ONE reported that they are going hard on their USA push (which we like) with the CEO spending the entire quarter in the US meeting with hospitals.

ONE also reported that delays of cash receipts from customers and upfront costs to purchase tablets for new customers was the reason for a higher than average burn rate this quarter, which we expect to normalise next quarter.

In our other portfolios 🧬 🦉 🏹

🏹 Catalyst Hunter

This week Catalyst Hunter announced its 2021 Pick of the Year... Grand Gulf Energy (ASX:GGE).

GGE is Catalyst Hunter’s biggest ever investment, and will be tracking it closely over the coming months.

GGE recently acquired a helium exploration and development project based in Utah in the US.

It is one of the very few helium plays listed on the ASX and we think that the helium market will be buoyant up to at least mid 2025.

We like the economics of the project, as well as the straightforward pathway to helium exploration and development in the USA. Helium is a key part of the manufacturing process for semiconductors.

GGE plans to drill its first helium well in March 2022. As with most drilling, we expect a share price run up in the lead up to drill results as investors speculate on a positive result.

📰 Read the full report: Announcing our 2021 Pick of the Year

Latin Resource (ASX:LRS) has pitched its “lithium exploration tent” in the highly prospective Bananal Valley in eastern Brazil.

This week it confirmed two high grade lithium from initial outcropping sampling - 2.71% Li2O and 1.45% Li2O.

LRS has ambitious goals - in the recent investor presentation, it stated that it wants to develop a lithium JORC resource in the next 12 months.

We think LRS will need to shore up its balance sheet before it drills any lithium targets it finds - and we don't think this will happen until 2022.

So in the meantime we sit tight and wait to see what kind of targets LRS might be able to find during current exploration.

📰 Read the full story: Great Time to Look for Lithium - LRS Building Lithium Footprint in Brazil

🌎 Mainstream Media:

China’s Deep Ocean Dives May Not Be Quite What They Seem (Bloomberg)

All manner of industries are piling into the hydrogen rush (The Economist)

PM, Nationals agree to historic net zero deal (AFR)

The Big Squeeze (SBS On Demand)

EVs Have Lithium Booming — And This Time, There Is No Bust in Sight (Bloomberg)

Australia needs to talk about nuclear: Finkel (AFR)

Everything you need to know about VMS deposits (Mining.com)

Switzerland will be the next country to legalise recreational cannabis (Pondering Pot)

Have a great weekend,

Next Investors