Archer Materials Limited

Sale of Licences on EL5815 and EL5920: Archer Materials Limited (ASX: AXE) is engaged in the development and commercialisation of an A1 Biochip™ lab-on-a-chip technology (“A1 Biochip”) and a CQ® quantum computing qubit processor chip (“CQ chip”). It also explores suitable avenues to divest its mineral exploration projects. As of 16 March 2021, the market capitalisation of the company stood at ~$232.71 million. On 15 March 2021, AXE notified an update on the sale of EL 5815 and EL 5920- mineral exploration licences to Baudin Minerals Pty Limited (BMPL). Through these tenements, AXE sold the Jamieson Tank manganese project, Kelly Tank kaolin project, and several targets of gold and copper. BMPL has completed the due diligence on the project, has received a Notice to Proceed and paid $100k to AXE as the conditions to be met for the deal execution. The two companies have also extended the previously decided cut-off date from 30 June 2021 to 31 August 2021. They have also amended the cut-off date extension periods to 31 October 2021 and 31 December 2021.

Update on Patent Portfolio Progress: The company has submitted “IPAs” (International Patent Applications) related to its “CQ chip” (a CQ quantum computing processor chip) in six jurisdictions- USA, China, Australia, Korea, Japan, and Europe. In the US, China and Australia, AXE has just taken initial steps and had recently received its first patent grant from Japan. In Korean and Japan, AXE has advanced in significant examination procedures.

A Look at AXE’s Half-Yearly Results: AXE recorded a revenue income of $1.25 million from continuing operations during 1H21 vs $132k in 1H2019. This increase was primarily due to the gain on the sale of AXE’s Leigh Creek Magnesia Project. For 1H21, AXE incurred a loss of $6.41 million due to an impairment charge on AXE’s exploration assets and loss in its share investments in Volatus Capital Corp. During 1H21, AXE discovered halloysite through its exploration activities and laboratory analysis at the prospect areas at the Eyre Peninsula Halloysite-Kaolin Project. For its Campoona Graphite project, AXE received approval from the South Australian Government of the Program for Environment Protection and Rehabilitation (“PEPR”) during 1H21. This approval is an essential step for pilot-testing and processing of a 60 tonnes bulk sample of graphite and graphene materials for production. On 9 December 2020, AXE announced a partnership with Max Kelsen to co-develop quantum algorithms and commercialise its CQ chip. AXE held a cash and cash equivalents balance of $6.93 million as of 31 December 2021.

1H21 P&L Highlights (Source: Company Reports)

Key Risks: The company is exposed to the risk of new technology disruptions/obsolescence in the industry, changes in the demand of user industries, inability to meet the client specified samples/quality. It also faces the threat of COVID-19 restrictions and lockdowns, causing project delays. 

Outlook: The company looks forward to closing the sale transaction of EL5815 and EL5920 with BMPL. PEPR approval permits the collection of graphite samples in bulk and avenues for collaborations with the industry manufacturers and end-users in the lithium-ion battery supply chain.

Stock Recommendation: The stock of AXE gave a positive return of 100.97% in the past three months and a positive return of 71.07% in the past six months. The stock is currently trading towards its 52-weeks’ high level of $1.24. The stock of AXE has a support level of ~$0.969 and a resistance level of ~$1.106. On a TTM basis, the stock is trading at a price to book value multiple of ~12.5x higher than the industry (Basic Materials) median of ~2.9x, thus seems overvalued. Considering the high trading levels, significant returns in the past one month and three months, and valuation on a TTM basis, we suggest investors to wait for better entry levels, and give an ‘Expensive’ rating on the stock at the current market price of $1.035, up by 0.485% on 16^th March 2021.

Fremont Petroleum Corporation Limited

Acquisition of 100% of Magnum Hunter Production Inc: Fremont Petroleum Corporation Limited (ASX: FPL) is engaged in producing and developing oil and gas projects. It operates the Pathfinder project (100%) in Colorado and a Joint Venture (50% each) project in Kentucky. FPL is entitled to receive 100% of the revenue from oil sales until repayment of its capital contribution. As of 16 March 2021, the market capitalisation of the company stood at ~$18.71 million. On 9 March 2021, FPL announced its decision to acquire MHPI after the completion of a due diligence process and a competitive bid. FPL gets the immediate operatorship and revenue stream of the ~1,300 long-life natural gas wells in Virginia, Kentucky, and Tennessee with this acquisition. The acquisition is estimated at US$425,000 consideration and anticipated to be closed by March-end. MHPI has a vast customer base and 13 off-take contracts currently with utilities, corporate and government customers. Its leases have significant upside, and FPL will get a chance to ramp up production.

December 2020 Quarter (Q2FY21) Results: During Q2FY21, FPL produced 9,932 barrels of oil. It sold 7,367 barrels of oil in Q2FY21 compared to 2,673 barrels in Q1FY21 at its Pathfinder Project. FPL hired a local contractor to conduct work on 12 of its wells to boost production. The project has come under the regulatory scanner and release of gas is currently contained from the oil wells. At its Kentucky project, FPL undertook improvements on the most prospective producing wells. It produced 1,260 barrels, sold 638 barrels, and was left with 850 barrels of inventory as of 31 December 2020. However, due to the joint nature of the project, its numbers are not reflected in the financials. In October 2020, FPL implemented the Asset Purchase Agreement with Trey Exploration (TE), Inc. for the acquisition of TE’s portfolio of oil leases. FPL has paid US$1 million and will pay US$0.9 million more by May 2021 to close the deal.

The company also raised another $1.8 million by the issue of 600 million shares at $0.003 for its working capital needs during December 2020. One free option will be issued for every two shares and is subject to the shareholder approval. It earned cash receipts of A$76k during Q2FY21 and held a cash and cash equivalent balance of A$1.63 million as of 31 December 2020.

Cash Flows from Operating Activities, Q2FY21 (Source: Company Reports)

Key Risks: The company runs the risk of deriving synergy from the acquisition post-transaction. It faces the risk of increasing gas and NGL production and sales over time, volatility in the gas prices and users’ demand for its products.

Outlook: FPL will close the deal with MHPI by the end of March 2021. It immediately aims to undertake a 3-months work program to increase gas and natural gas liquid (NGL) by ~20% and fund it from its cash flows. At the Kentucky project, FPL is planning work on the other leases/ wells unused/in shutting down for an extended period to undertake more comprehensive well work as need be. At Pathfinder, FPL is considering various short-term/long-run options to continue gas distribution in the field. Given the new regulations, existing gas cannot be released from the wells due to high pressure.

Stock Recommendation: The stock of FPL gave a positive return of 33.33% in the past three months. The stock is currently trading at a 52-weeks’ average price level of $0.002-$0.006. The stock of FPL has a support level of ~$0.002 and a resistance level of ~$0.011. On a TTM basis, the stock is trading at a price to book value multiple of ~2.8x, higher than the industry median of ~1.0x. Considering the company’s low current ratio, negative ROE, negative bottom-line, and valuation on a TTM basis, we give an ‘Avoid’ rating on the stock at the current market price of $0.004 on 16 March 2021.

Consolidated Zinc Limited

Commissioning of Plomosas Plant commenced: Consolidated Zinc Limited (ASX: CZL) is a miner, explorer, and developer of 100% owned zinc project Plomosas with operating mines at Chihuahua in Mexico. As of 16 March 2021, the market capitalisation of the company stood at ~$12.34 million. The company announced the commissioning of a crushing circuit at its Plomosas plant on 10 March 2021. The company expects that the increased cashflow from running the Plomosas and Aldama plants during Q2 2021 will allow it to accelerate the expansion of the Plomosas plant to 200 tonnes per day during 2021.

Raise of $2.550 million to Fund Plomosas Plant: On 15 February 2021, CZL confirmed receipt of firm commitments from investors to raise $2.55 million capital. It undertook a placement of 63.75 million ordinary shares at $0.04 (at a 7% discount) to use the funds raised for its working capital needs.

December 2020 Quarter (Q4FY20) Highlights: The company started expansion and refurbishment at the Plomosas plant in October 2020. It started purchasing of key equipment items, recruited Plant and Maintenance Manager, commissioned a dry crushing circuit, and started civil works. During Q4FY20, CZL mined 10,801 tonnes of ore, processed 6,842 tonnes of ore, and sold 476 tonnes of payable zinc, 217 tonnes of lead and 196 oz of silver. It produced zinc at a C1 cash cost of $1.02/lb for the Q4FY20. With the inclusion of Q4FY20 numbers, total ore processed for FY20 stood at 29,527 tonnes and C1 Cash cost per payable zinc sold stood at $1.03/lb.

The company sold 1,125 tonnes of zinc concentrate and 432 tonnes of lead concentrate during Q4FY20. It sold payable zinc at a C1 cash cost of $1.05/lb. CZL completed a gold exploration fieldwork and received some assays results. In October, CZL completed a completely underwritten non-renounceable pro-rata entitlement issue for raising $2.03 million for the plant refurbishment and the tailing storage facility. During Q4FY20, CZL redeemed all issued convertible notes to the tune of $1.12 million with accrued interest. During December 2020, CZL consolidated its shares on a 15:1 basis as authorised in its general meeting of the shareholders. The company received cash receipts of US$1.468 million during Q4FY20. It held a cash and cash equivalents balance of US$716k.

Q4FY20 & FY20 Production Statistics, Highlights (Source: Company Reports)

Key Risks: The company is exposed to the risk of raising adequate capital to fund growth and meet working capital requirements as it scales up production. It faces the threat of the ongoing pandemic, travel restrictions and business closures mandated by the governments. 

Outlook: The company plans to reduce its stockpiles and operate both plants by Q2FY21 to increase revenue. It is also targeting to complete on-site processing at the Plomosas plant by Q2FY21.

Stock Recommendation: The stock of CZL gave a negative return of 29.99% in the past three months and a negative return of 38.75% in the past six months. The stock is currently trading towards its 52-weeks’ low level of $0.0274. The stock of CZL has a support level of ~$0.025 and a resistance level of ~$0.073. On a TTM basis, the stock is trading at a price to book value multiple of ~24.2x, higher than the industry (Metals & Mining) median of ~2.9x, thus seems overvalued. Considering the low market capitalisation, negative bottom line, low cash position, and valuation on a TTM basis, we give an ‘Avoid’ rating on the stock at the current market price of $0.042 on 16 March 2021.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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