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What Happened?

In today's news



Commentary: “just buy low and sell high” - why many do the opposite. It’s currently hard to raise cash, deal terms are getting juicy. Why do one or two random stocks do really well during a negative market. Which of our Portfolio companies have a big news event coming up in the next two months.


Countless boom-bust cycles have occurred in the markets.

In hindsight, it’s easy to understand the wisdom in the age-old saying:

“Buy when everyone is fearful and sell when everyone is greedy.”

Sounds about as easy as “honey, why don’t you just buy low and sell high?”

But when push comes to shove it never seems to play out that way…

It always feels easy to invest in a stock during good times, when everything in the market is going up.

When fear and panic set into a market, investors make up every excuse NOT to buy.

Likely because it feels like share prices will just fall further.

During a bad patch in the market, this thought process builds momentum, and we get to a point where everyone is selling, and no one wants to buy shares…

And more buyers than sellers = share prices go down.

Then one day, in the blink of an eye when most of the sellers are out and on the sidelines… things change.

A company delivers good news, macro uncertainty is resolved and the market outlook isn’t so negative anymore.

Out of nowhere, market sentiment suddenly becomes positive and investors are back in the market buying shares again.

And small cap share prices bolt upwards on small volumes, from low bases.

…and yet another market cycle goes by where everyone just happily does the opposite of “buy when everyone is fearful and sell when everyone is greedy.”

Here is a chart showing what most people do:


After experiencing market cycle after market cycle, why does it always end up like this?

It has a lot to do with human psychology but that is a discussion for another day…

When the market is fearful, raising cash gets harder.

Many people are reluctant to buy any shares on market in anticipation of a deeply discounted raise around the corner (probably with free oppies too).

Small cap stocks are generally pre-revenue and need to continuously raise capital to fund their business plans.

Especially in resource exploration, which makes up a large part of our portfolio.

A small cap stock usually has a few thousand investors on its cap table, each with their own set of personal financial circumstances, tax bills, life expenses etc...

And each with the option to hit the “sell button” at any time they want.

In a market like this, investors look to sell for any number of personal reasons that are often nothing to do with the company itself.

The high-risk high-reward proposition of small cap stocks doesn't change during market cycles.

Small cap stocks have always been companies that require new capital, and when they deliver on their goals, can deliver investors outsized returns.

The retreat in capital from these companies during down times does mean that the companies become “price takers” for new funding rounds.

Whereas companies in the past may have been able to set the terms for a capital raise, investors all of a sudden have more bargaining power and want ever bigger discounts to part ways with their cash.

A recent example we saw was the Panoramic Resources raise which was for $40M at 5c.

The day before the capital raise Panoramic was trading at 9.2c per share, so the raise was done at a ~45% discount to the last traded price.

We also saw a convertible note this week for a private company that was offering a 50% discount on the eventual IPO price and 20% interest paid on the note.

We have also seen a few “one option for every one share subscribed” deals in the last couple of weeks.

Everyone (except existing shareholders) loves a 1 for 1 oppie.

Steep discounts and free options are a way to encourage skittish investors to part with their carefully held cash in the current negative market climate.

Good times for anyone who is sitting on cash.

It's not all gloom and doom, though…

We think the current negative market sentiment helps shine the spotlight on stronger companies.

Companies with strong projects, management teams and the potential to deliver investors strong returns manage to lock away capital raises at small discounts AND sometimes even premiums to their share prices.

While most of the investor community sits on the sidelines, the big, patient strategic investors are coming in and buying into companies directly via strategic placements.

We have seen a few of the companies in our portfolios get these type raises done recently:

Latin Resources (ASX: LRS) - raised $37.1M at 10.5c per share, at the time it was at a 4.5% discount for a large sum of cash. Now ~3 months later, it is trading at almost 3 times the capital raise price.
Tyranna Resources (ASX: TYX) - raised $14.5M at ($10M at project level and $4.5M in TYX shares at 2.5c - via an agreement with Sinomine, at the time this was equivalent to its share price of 2.5c. The $14.5M was the first tranche of a deal worth up to $31M.
Kuniko (ASX: KNI) - raised $7.8M at 46.7c - at a price equal to its 30 day VWAP at the time. Major carmaker Stellantis took a 19.99% stake in KNI in order to secure an offtake.
Evolution Energy Minerals (ASX: EV1) - raised $4.9M at 22c - a 7% premium to its last traded price. EV1 secured this amount via a placement to BTR New Material Group the world’s leading and dominant battery anode producer.
European Metals Holdings (ASX:EMH) - secured a €6M ($10.2M) strategic investment from the European Bank of Reconstruction and Development (EBRD) at 80.3c a share, representing a ~2.5% premium to its last traded price at the time.
What does all of this tell us?

While it can get eerie at times in a negative sentiment market, the smart money out there is always looking for a home in high quality companies.

The only difference in a market now is that the capital will go to far fewer homes.

As a result, the companies with high quality management teams and strong fundamentals will have more capital and less competition to deliver on their strategy.

What are we doing in this market?
At a very high level, this type of market forces Investors like us to be more diligent when screening new Investment opportunities.

We have been Investing in small cap stocks for 20 years, and the depressing periods in markets can disappear before investors get the chance to get meaningful positions in companies at these types of very low valuations.

As a result we are looking to make at least 5-6 more Investments before the end of the calendar year.


This isn't a hard and fast number but we are seeing a lot of companies on our watchlist move down to share prices which now look attractive to us.

Be on the lookout for our new Investments over the coming months.

Also reply to this email to let us know of any small cap companies out there that you think are undervalued or have been oversold in the current bad market conditions.

What to look forward to in the next few months
Share prices go UP when there are more buyers than sellers.

With most share prices well off their highs, usually we observe it doesn’t take much new buying to give the shares a little pop.

The obvious catalyst that can encourage more buying is exceptional announcements from a company.

We touched on four different reasons a share price might go up in a previous weekend email here: Why do small cap share prices go up?

Over our Portfolio of small cap investments there are a number of companies with potentially company making catalysts on the horizon.

A “share price catalyst” is an expected event for a company that could move the share price in a significant way (up OR down), depending on the outcome

One way to think about a potential share price catalyst is as a “known unknown”.

Given the state of the market, we think expectations are generally low.

This means that companies that hit results that fit into our “bull case” scenario will hopefully be rewarded with an increase in share price.


However, it is important to know that the outcomes of these somewhat binary events carry a high risk of failure, and not all companies will be successful.