June 2020 Newsletter

Dear Investors,

Covid-19 cases continue to increase globally and the share market is taking a breather after running hard from the March low. Throughout this period we have sold nothing and bought Australian supermarket Coles Group Ltd (ASX: COL) and nickel miner IGO Ltd (ASX: IGO). The virus caught us by surprise, but regardless we would not have sold shares during the downturn – the impacts of COVID-19 were uncertain, and as it turns out, the market has bounced back almost as fast as it fell. We have never owned airline or tourism and leisure shares, so no permanent harm (so far at least) was done to our portfolio. We aim for shares with low debt levels which helps when a downturn occurs and means these companies have less chance of going bankrupt than those with high debt to equity ratios.

We think prospects for Australia (the lucky country) are promising in the long term. Once the pandemic has passed population growth is expected to continue and there are plentiful natural resources. In the long-term airline travel is expected to become increasingly accessible to the growing global middle class which will likely lead to growth in the tourism sector. Australia is often ranked near the top of lists of the best countries to do business in, and its proximity to Asia provides a geographical advantage from a trade perspective.
Recent ASX companies with multiple director trades in the last 30 days:

Metrics from left to right are; market capitalisation in millions, the number of director buys in the last 30 days, the number of director buys and sells in the last six months, the % of the stock sold short, the Price/Earnings per share, Dividend Yield, Price/Sales, Debt/Equity and the six and three month % price change.
Recent NZX companies with multiple director trades in the last 30 days:
We have been looking at nickel plays recently for exposure to the growing electric vehicle market. Nickel is a key component in lithium-ion batteries used in such vehicles. Nickel is also used in steel and any infrastructure spending by governments post-Covid-19 should provide tailwinds to the already upwardly trending price.

IGO Ltd (ASX: IGO) (formerly Independence Group) is a diversified miner that owns 100% of the Nova nickel-copper-cobalt operation and has a 30% interest in the Tropicana Gold Mine joint venture.

IGO is a profitable, dividend paying, diversified miner that is trending up.
  • In June, the company announced it had executed a $7m agreement with Matsa to earn a 70% interest in the Symons Hill nickel project. Also in June IGO executed a $32m farm-in and joint venture term sheet with Metals-X in relation to Metals-X ‘s Paterson Exploration project which has copper-cobalt prospects.
  • 3Q FY20 highlights include group revenue of A$188m, underlying EBITDA of A$76m and net cash of A$407m. An interim dividend of A$0.06 per share paid.
  • Dividends have increased over the last three years and earnings per share for the last four years.
  • There has been recent director buying in the company (see below) with the last two buys particularly well timed, occurring a couple of days before the low on March 23.
  • IGO also owns 2.25% of the Andrew Forrest-backed nickel play Mincor Resources (ASX: MCR).
Recent director trading in IGO shares:
Western Areas Ltd (ASX: WSA) has two nickel mines - the Cosmos Nickel operation and the 100% owned Forrestinaia nickel mine.

On the 23rd of June, WSA announced highly encouraging results from the first diamond drill hole at the Sahara prospect within the Western Gawler Project in South Australia, which sent the share price up 16%. The drilling hole intersected over 200M of nickel and copper bearing sulphides bearing mineralisation.

WSA’s growth strategy has seen it acquire a 19.9% stake in Panoramic Resources via the company’s participation as a sub underwriter to the retail entitlement offer component of Panoramic’s capital raising. The investment provides WSA with exposure to the future restart of the promising Savannah Project, which has a significant nickel sulphide resource that also includes valuable copper and cobalt by-products.
  • Western Areas dividend has been increasing since 2016.
  • The company had cash in the bank of A$181m at the end of the March quarter and no debt.
  • Operating cashflow was A$22.5m for the quarter.
  • WSA has Australias highest grade nickel mines and is Australia’s second largest independent sulphide nickel miner.
  • WSA has exploration interests in Canada through shares in Grid Metals and exposure to lithium via an exploration joint venture with Wesfarmers Chemicals Energy and Fertilizers. The board remains focused on nickel and new nickel discoveries.
  • A 1 cent per share fully franked dividend was paid in April.
  • One director bought $18,000 worth of shares in March.
Recent director trades in miners with nickel projects:
Evolution Mining (ASX: EVN) has sold off its Cracow gold mine for A$125 million. The sale was conducted in keeping with Evolution’s strategy to hold six to eight mines with an average life of at least ten years. Evolution completed its acquisition of the Red Lake gold mine in April for US$375 million.

FY20 guidance for gold production is expected to be around 725,000 ounces at All-In Sustaining Costs (AISC) of A$940-A$990/oz excluding Red Lake. This is among the lowest AISC of ASX gold miners.

CEO Jake Klein is well regarded in the industry and we think he should be able to continue to grow the company.
FBR Ltd (ASX: FBR) recently announced that its second model bricklaying robot has achieved a peak laying speed of over 200 bricks per hour, which is 300% faster than the rate the first model achieved in February 2019. The company also revealed the robot can now build curved walls.

Brickworks and FBR discontinued their joint venture due to current uncertainty around the impacts of Covid-19 on the housing market. They may re-engage in the future.

While the robot’s improvements are significant achievements, hopefully the company can now focus on generating some revenue. Talking to small cap investors, many have lost patience with the lack of revenues generated by FBR and have sold their stakes. In retrospect we probably bought too early as this technology (large truck mounted robots) will take time to develop and commercialise. Nonetheless a small position in new technology companies, while generally risky, can potentially provide outsized returns if the technology is successfully commercialised.

This would be one to watch in current market conditions and awaiting further developments.
Exilir Energy Ltd (ASX: EXR) is a natural gas producer with its main operations near the Mongolia/China boarder, 410 kilometres from China’s main transmission pipeline. The Chinese government is set to increase gas usage as it moves to cleaner energy sources than coal. Renewables are still not advanced enough to provide all the energy needs of the country.

On 12 June EXR announced it had signed a Memorandum of Understanding (MOU) with Mongolia’s MT Group to develop a small-scale LNG plant to supply fuel to the South Gobi coal trucking fleet. This large trucking fleet currently burns diesel, which could economically be replaced by cleaner and cheaper gas fueled vehicles.

Source; Exilir trading update

Natural gas use is growing alongside the global population and improving living standards. Natural gas emits between 45-55% fewer greenhouse gas emissions than coal when used to generate electricity. The coal to gas trend is expected to keep growing with global demand for liquid natural gas increasing by 12.5% in 2019.
Coles Group Ltd (ASX: COL) has rallied since we purchased in early June, which experienced investors know does not always happen after a share purchase! We should have watched more closely after it was spun-off from Wesfarmers, but as mentioned in the previous newsletter, we tend to focus on small caps. It was interesting to see a Melbourne teenager posting a mini-tour of a new local store on TikTok. The video showcased millennial-focused features such as dog-treat, macaron, pasta, and candy bars, and garnered around 600,000 views with many positive comments.
Credit Corp Group Limited (ASX: CCP) is Australia’s largest debt collector.

The company had three directors buying shares in June for $27K, $30k and $90K. Credit Corp raised $155m via a share purchase plan in April and is well capitalised to ride out weakness in the economy. The price is a long way from its February high, although the economic situation is far from certain going forward, so will keep watching.

Director trades in CCP and other debt related companies in the last 30 days:
Last month I talked about Tyro Payments Ltd (ASX: TYR) and positive responses from retailers. One café owner also raved about payment provider Square. The main point was it was easy to use. I think one often overlooked yet integral part of any software platform is its ease of use. Simplicity is key. The fewer steps to complete any task the better. It is similar to customer service, which is crucial for any business but is not always the focus. Square is a US company listed on the New York Stock Exchange, and could be one to watch.
Businesses with exceptional customer service and/or software that is easy to use should be given further investigation.
Please note the information contained in this newsletter does not constitute financial advice. Information relating to any securities mentioned is not a buy or sell recommendation. You should always conduct your own investigations and make up your own mind regarding any course of action you may wish to take. The information presented has been obtained from original and published sources believed to be reliable, but its accuracy cannot be guaranteed. The entire contents are copyright. Reproduction in whole or part is strictly forbidden without the approval of the author. This information is not financial advice and does not take into account your personal situation and we accept no responsibility for any claim, loss or damage as a result of the information in this newsletter or our website.

Sharp Investor owns ASX listed stocks: ACR, ARL, ALQ, CDX, CDXO, CGO, CYP, DHG, EVN, EXR, FBR, FID, FRI, GGG, GOR, IGO, IRI, MGX, MNY, OZL, PRO, SBM, SFL, SRG, SXE
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