While I haven't posted here for a while, I am still following this stock. Extreme share price movements invariably force you to reappraise your previous assessments of a stock holding, and as such I have probably been paying more attention to this stock now that it is in the doldrums than I was when the share price was on the up and up.
Over the past 12 months, the share price has seen highs up near the 1.50 mark, and more recently, lows around the 0.30 level, which is about where it is now. Needless to say, the 'market collective' has had a dramatic change of heart in relation to the growth potential of this stock within the space of 12 months.
By my reckoning, the re-balancing of the sentiment shift seems to have taken place in the week ending 27 September. According to the Shortman website, only 0.11% of the shares were shorted on the 23 of September, but by the 27th this had jumped to 0.27%. The number of shares shorted then continued to rise over the next month, hitting 1.67% on the 28/10/20, and it is roughly at that same level today.
A couple of events in that portentous September week probably tipped the balance. Firstly, at the start of that week there was the ill-conceived 'bonus shares' issue, which encouraged many holders to sell, and secondly and more significantly, at the end of the week, the stock was subject to some hostile commentary on the popular Livewire website. One or more of the major holders of this company at the time seems to have taken advantage of this negative publicity, hence the dramatic rise in short positions in the weeks after the 27th.
Maybe some of the hostility expressed by the fund managers on the Livewire segment was down to the 'green-eyed monster': fund managers are never going to like it when they overlook a stock that enjoys a nice run.
That said, I don't think there is any question that the substantial share disposals by the management early in September would have significantly influenced the rather acrid judgement of those fund managers last September.
It is reasonable to assume that the management of any company would have a better understanding of the day-to day company operations than almost anyone else, and so any significant sell off on the part of directors is going to be viewed as a red flag (conversely, perhaps the recent purchases on the part of Freedman and Zhang should be seen as a 'green light': small change for them so far, true to say, but there might be more on-market purchases on the way).
However, while the management of a company would undoubtedly have an intimate understanding of the company fundamentals, they might not necessarily have such a solid grasp on the oft Delphic macro undercurrents that can serve as drivers for future growth.
So far, demand for the products and services of this company has been underpinned by the tangible consequences of blue-green algae: the lost dollars resulting from tourists staying away from a polluted body of water, for example, or the adverse impact on the value of waterfront real-estate as a result of problematic algae.
Yet it is the intangible consequences of blue-green algae which could prove to be an equally significant tailwind for this company in the years ahead. One of these intangible consequences is an invisible gas, methane.
At the start of this year, a team of researchers published a paper in the journal Science Advances, in which they arrived at the conclusion that blue-green algae produces methane. The extract below is a summary of the findings of these researchers, taken from the Phys.org website-
An international team of researchers has found that cyanobacteria (blue-green algae) produce the greenhouse gas methane. In their paper published in the journal Science Advances, the group describes tests they carried out with blue-green algae in their lab and what they found.
Carbon dioxide is a greenhouse gas, and anthropogenic emissions are partly responsible for climate change. Less well known is that there are other greenhouse gases that also contribute to global warming. One of those gases is methane, which is released into the atmosphere in a variety of ways, some natural, some from human activities. Research over the past decade has shown that methane is approximately 60 times more efficient at trapping heat in the atmosphere than carbon dioxide, making it a major concern. In this new effort, the researchers studied blue-green algae to find out if it emits methane.
In 2011, a team of researchers found that methane levels near the surface in Lake Stechlin in Germany were abnormally high. They also found that that methane levels in the water tended to increase with blue-green algae blooms—after studying their work, the researchers with this new effort wondered if blue-green algae was the source.
To test the possibility, the researchers collected blue-green algae samples from several sources and cultured them in their lab. Each was tested using a mass spectrometer for several days. The team found that all of the samples—two soil, five freshwater and six marine—produced methane. They also carried out testing to ensure that the methane was not being produced by another source, such as accompanying methanogenic archaea.
The findings by the researchers show that not only does blue-green algae produce methane, but it does so in both dark and light conditions, and in both oxygen-rich and oxygen-poor environments. However, they note that the emission of methane was lower under dark conditions. They also note that it is not currently possible to estimate the amount of methane being produced by blue-green algae globally, but suggest it should be a topic of research.
The issue of rising global methane emissions has been something of an enigma for science over recent years. Since 2007, there has been an abrupt increase in the amount of methane recorded in the atmosphere, as is depicted below (the image below is taken from a 2019 report on the topic from a website called Undark, it is an interesting read, if rather lengthy).
Scientists are not entirely sure what is behind this jump in methane emissions: Is it a consequence of human activities, such as leaks from oil and gas operations, or could the cause be something else?.
I thought it was interesting to compare the above chart on methane concentrations to a chart from 'Google Trends', which depicts a graphical representation of the searches for the terms 'Cyanobacteria' and 'Heat Wave' over the period starting 2004 up until 2020-
Looking at the graphic above, it is curious to note that there was a sudden surge in Google searches for the terms 'Heat Wave' and 'Cyanobacteria' in 2006, which is probably a reflection of real-life concerns around these phenomena in that year. If so, perhaps the steep increase in heat-induced algal-blooms in 2006 may have been a cause of the rise in methane that was noted by scientists in 2007?.
Certainly, there does seem to have been a notable increase in searches for the terms 'Cyanobacteria' and 'Heat Waves' since around 2006.
Algae thrive in warm water, and given the evidence that decomposing algae are a source of methane, it is not hard to imagine that we might be starting to see a vicious feedback loop in action: global warming leads to more algae, which releases more of the greenhouse gas methane, which in turn results in more global warming and more algae.
Over the past two decades, many scientists have expressed concerns about the link between carbon emissions and the trend of rising temperatures worldwide. But as highlighted in the article above, methane is a far more problematic greenhouse gas, and many times more powerful than carbon dioxide on a unit mass basis.
To tackle global warming, it may be necessary for the nations of the world to take firm action to reduce blue-green algae, given the apparent link between cyanobacteria and methane emissions. Companies specialising in the field of HAB prevention could stand to benefit from a carbon pricing type of mechanism in future.
In summary, the link between cyanobacteria and methane emissions could prove to be a driver for the products and services for this company in future, and perhaps quite substantially so. On this assumption, the current market cap would surely not be reflective of the future growth potential of the company.
That said, I think the company may need to undergo some changes before the upside potential is fully reflected in the share price once more.
Over recent years, the head office of the company has been run a little like a family business. If you take a glance at the notes to the financial statements ('Full Year Statutory Accounts', 26/03/20), down on page 78 you can see that the company has been relying on a web of related parties to all sorts of admin work for them.
This type of arrangement would be fine for a junior mining company with a market cap of around $10 million or less, but for a company valued in the hundreds of millions of dollars, it looks odd and isn't really appropriate. I suspect that all these related party transactions wouldn't escape the notice of fund managers running the ruler over this company, and I doubt it would leave them with a favorable impression.
With this in mind, following on from the move to Melbourne, the management of this company should probably look into recruiting a few independent professionals to reduce their reliance on those related parties. Given the current elevated unemployment rate, there would surely be no shortage of experienced and skilled people looking for work right now.
I think this would help to increase the appeal of this company to institutional investors, which is probably necessary if the share price is to enjoy a sustained recovery.
(20min delay)