Stock Talk Podcast Episode 195 Show Notes

KeyStone’s Stock Talk Show, Episode 195.

Great to be back with you this week on what has started out as a positive year for stocks on the heels of the death march that was 2022.  We will start with a brief discussion on Canadian housing prices in 2022 which the Canadian Real Estate Association reported this past week produced the biggest peak-to-trough falloff since the group started compiling the data in 2005. I will start by answering a client question in our YSOT segment on, as stock that will be very familiar to clients as it has been a recommendation for just under 2 years in our Canadian Growth or Small-Cap Coverage. Geodrill Limited (GEO:TSX), a profitable, dividend paying drilling company with a large presence in West Africa and an emerging presence in Latin America. The company, which primarily drills for gold has seen its share price surge to start 2023 and is now up over 100% since our recommendation. I will let you know what is driving the stock. Aaron will answer a viewer question on Hut 8 Mining Corp. (HUT: TSX), a digital currency (bitcoin) mining and related technology solutions and infrastructure, business which has also seen its share price surge in 2023, but is still down approximately 70% over the past year. Aaron let’s you know if Hut is an opportunity or just experiencing a dead-cat-bounce. Last and definitely least, in our YSOT segment Brennan answers a viewer question on Graphene Manufacturing Group (GMG:TSX-V), an Australian based company involved in the production of graphene used primarily in paints, coolants, and lubricants targeting to improve energy efficiency and additionally in next-generation battery technology. The viewer asks if Graphene is a smart way to benefit from the surge in demand around new battery technology. Brett will close out our show by exploring the intriguing topic of Behavioural Finance which is essentially the marriage of Economics and Psychology.

I welcome my cohosts – Aaron, and the Killer B’s – Brennan and Brett.

Canadian housing prices in 2022 and going forward.

This past week, the Canadian Real Estate Association reported that 2022 produced the biggest peak-to-trough falloff (13.2%) since the group started compiling the data in 2005. Last year also saw the biggest price decline for a calendar year since records began, with a 7.5% drop overall.

The rational behind the decline include:

A record number of buyers used floating-rate debt for purchases during Canada’s pandemic-era real estate boom, and those borrowers may come under increasing strain as rates have increased and mortgage costs remain relatively high. Pair this with a recession and commensurate job losses would make it harder for people to keep up with loan payments and stay in their homes. Now this is a worst case scenario, but most forecasters continue to ratchet up their expectations for Canadian housing declines.

Desjardins recently increased their expectations for a 25% decrease in Canadian housing prices from the 15% it has previously predicted.    Desjardins predicts New Brunswick, Nova Scotia and P.E.I. will bear the brunt of a sharply correcting market with prices falling by 29, 27 and 25 per cent, respectively, from the peak in February 2022, having risen 71, 67 and 62 per cent from December 2019 to February 2022.

“We continue to believe that provinces that saw the biggest price gains during the pandemic are most likely to see the largest price corrections,” the economists wrote. Not the boldest of predictions I will say. In B.C. and Ontario, Canada’s housing juggernauts, where “the correction … has been more abrupt than elsewhere,” Desjardins estimates that prices will fall 22 and 24 per cent, respectively, from the peak. From December 2019 to February 2022, they rose 43 per cent and 58 per cent on an average basis.

Now, forecasts are for idiots and we can already see that the initial forecasts from Desjardins have been adjusted only several months later, so we should take these crystal ball predictions with a grain of salt, but the trajectory continues to be weakness in real estate prices – good for Brennan, but not for the economy generally.

Introduction

Geodrill Limited (GEO:TSX)

Your Stock Our Take

Geodrill Limited (GEO:TSX)

Recommendation: February 2021, Recommendation Price: $1.60

Price: $3.18 – stock is up 102% since our recommendation in 2021 and has implemented a solid dividend.

Market Cap: $163.83 Million

Yield: 2.02%

Company Description: Established in 1998, GeoDrill is a mineral exploration drilling services company to mining companies (primarily gold related) in West Africa, Zambia, and Peru. It offers reverse circulation, core, air-core, deep directional, reverse circulation grade control, water borehole, underground, mine blast hole, and horizontal drilling services. The company’s current fleet size as at Q3 2022 is 75 rigs (unchanged QoQ) and additional rigs are being manufactured. GeoDrill continues to expand globally, having signed its first ever contract in Chile this past quarter, as well as two new contracts in Egypt. The company’s client mix is made up of senior mining, intermediate and junior exploration companies.

What is Driving the Share Price?

• Recent Financials – A Strong Q3 2022:
• Revenue rose 29% to $35.2 million.
• EBITDA was $9.3 million or 26% of revenue, a 96% increase compared to Q3-2021.
• Net income of $3.6 million or $0.08 per share, a 100% increase.
• Generated Return on Capital Employed (ROCE) of 26% and Return on Equity (ROE) of 18%;.
• Ended the quarter with net cash (excluding right of use liabilities) of $5.7 million.

1. Surge in the price of gold: From its lows in early November in the range of US$1,630, gold has risen 17% to US$1,907 – that is a significant rise in less than 3-months and bodes well for capital inflows into the sector in 2023. The more money that is raised in the sector, the more money goes into drilling and a company like GeoDrill can continue to benefit.

Our Take:

While the stock is up over 100% since our recommendation, from a valuation basis, GeoDrill currently trades at 4.5 times expected 2022 adjusted cash flow and 7.5 times expected 2022 EPS. Part of the clients question on GeoDrill asked if we could give a quick comparison of what price a company like GeoDrill may be acquired at if that were to occur. In terms of acquisition equivalents there is not an exact comparison, but Major Drilling (MDI:TSX) acquired McKay Drilling PTY Limited, a leading specialty drilling contractor based in Perth, Australia for an amount up to A$80 million, or approximately C$75 million in 2021. This was approximately 4.7 times EBITDA. GeoDrill will have more than double the EBITDA of McKay this year, so it likely deserves a higher multiple. GeoDrill currently trades at 4 times 2022 expected EBITDA. We would not buy GeoDrill or any company strictly on the basis of the business as a takeover target as this is poor strategy. What we do know is that GEO is likely to post a record year in 2022 and given the gold pricing environment and contracts in hand, the company is positioned for growth once again in 2023. This have driven the share price over the past year and the current execution is strong. We will fully update clients on the stock over the next week.

YSOT

Question from Allen – I know there is a lot of work underway on new battery technology. I was surprised to hear about all the various elements that are under consideration. One development underway has caught my attention and that is the Graphene Manufacturing Group (GMG:TSX-V). Could your staff look at this stock?

Graphene Manufacturing Group (GMG:TSX-V)

Price: $2.38

Market Cap: $194.7M

Description:

Graphene Manufacturing Group is an Australian based company involved in the production of graphene used primarily in paints, coolants, and lubricants targeting to improve energy efficiency and additionally in next-generation battery technology. It’s clean-technology solutions and energy storage products are enabled by Graphene manufactured in-house via a proprietary production process which essentially decomposes natural gas into its elements, and produces high quality, low cost, scalable, tuneable, and low/no contaminant graphene.

(SLIDE 2)

Segments:

• In the energy savings segment, GMG has focused on:
  • THERMAL-XR®, a graphene enhanced HVAC-R coating (or energy-saving paint).
  • G Lubricant, a graphene enhanced lubricant additive that seeks to reduce fuel consumption and carbon emissions by reducing internal friction in engines.
    • A formalised trial is being developed jointly with Rio Tinto to build the business case for adoption of G Lubricant into Rio Tinto mining operations. Research is ongoing and there is no fixed end date.
  • G Coolant, a graphene enhanced engine coolant that seeks to improve the thermal efficiency of engines.
• In the energy storage segment, GMG and the University of Queensland (in Australia) are working collaboratively with financial support from the Australian Government to progress further R&D and commercialization of graphene aluminium-ion batteries (G+AI Batteries) including a coin cell and pouch cell battery.
  • GMG can now develop and test its own in coin cell and pouch cell graphene aluminium-ion batteries in-house.
  • The company is working on a strategic roadmap to the commercial development of G+AI Batteries.

Operational Updates:

On December 12, 2022 – GMG provided an update on its ongoing investment in its Battery Development Centre (BDC). The GMG Board has approved an additional $AU600,000 in capital expenditure, to accelerate the progress of semi-automatic pouch cell prototype production in the BDC for customer trials and Graphene Aluminium Ion (G+AI) Battery cell development. The additional equipment is expected to be operational in Q2 2023.

On December 1st, 2022 – GMG closed a $5.7M Bought Deal at an issue price of $2.75. The company intends to use the net proceeds of the Offering for growth initiatives, working capital and general corporate purposes.

On October 11, 2022 – GMG provided the latest progress and performance update on its Graphene Aluminium-Ion Battery technology being developed by GMG and the University of Queensland and the GMG battery grade graphene production quality program.

In the medium term, GMG remains focused on transitioning from R&D to commercialisation of graphene aluminium-ion batteries (G+AI) Batteries. Furthermore, GMG will continue to invest in new product development and graphene enhanced lubricants.

Recent Financials (Q1 2023) all in Australian Dollars:

• Revenue was up substantially from a low base to $230K.
• Adj. EBITDA was a loss of $(2.6)M compared to a loss of $(1.5)M in Q1 2022.
• While Adj. EPS was a loss of $(3.63) per share compared to a loss of $(2.18) per share for Q1 2022.
• Balance sheet had $8.4M, with no debt. (But this does not include the most recent equity raise of $5.7M).

Conclusion:

For us, Graphene Manufacturing Group is just too early for an investment. There is potential, but in my opinion the company hasn’t moved from a concept to a business yet. Again there remains potential, but it is definitely speculative potential at this point in time considering the lack of revenue, profitability, and the need for additional R&D to prove out its G-Lubricant abd Graphine Aluminum-Ion Battery.

What is Behavioural Finance

Behavioural Finance is the marriage of Economics and Psychology. Effectively it tries to explain why people make financial decisions and why they can appear irrational. Most traditional models you would learn about in school assume a person is rational, and behavioural finance tries to fill the gap.

We all know humans aren’t perfect, so we all are subject to behavioural biases besides Aaron, but I’m not sure he is human even. So, if you can recognize your own biases, you can limit there impact on your investing choices.

Let’s get into a few of the more interesting concepts and biases.

Herd Mentality

Herd mentality is a bias where you follow the herd and act like others around you. A recent example of this was the early 2020 meme stock frenzy where person after person, many of whom had no experience or knowledge of the company or investing in general, piled into stocks like Gamestop simply because it was the popular thing to do, or what the herd was doing. Another example is the dot com bubble, where any company with dot com in the name was being bought irrationally.

A good way to avoid this is simply thinking through the reasoning why you are investing, is it because the value is low or is it just the new hot stock on the market?

Loss Aversion

Next up, Loss Inversion.

Loss Aversion is when people irrationally avoid potential losses potential losses when the potential gains are the same or more significant than potential losses. So, when making an investment decision a person will opt for a less than optimal investment if the risk is lower. This occurs because losing is more painful than winning feels good. For example, if you make a $100 bet, you’ll feel pretty good when you win, but you’ll feel devastated if you lose.

Anchoring 

Another bias is Anchoring Bias. This is when you anchor yourself to a certain value, normally the first piece of information or pre-existing knowledge.  Stores commonly take advantage of this, let’s say you are looking to buy a stock and when you first heard about it, it was during an IPO and listed for $100 a share, and now months later it’s $20, so it must be on sale, right? Even if the stock has fundamentally changed during this time or was purely overpriced initially, we will naturally associate it being underpriced without more research. You’ll even see this in professional analysts who assign a high price target for a stock and are irrationally keeping the target high when they are given new information. A way to get this bias in check is to examine your pre-existing assumptions, why do you believe the stock is underpriced, why is it valued at a multiple, and so on.

Overconfidence

The last bias I will go through is Overconfidence. Investors always like to think they’re the best, but obviously, we all can’t be. Being overconfident can lead investors to make riskier investments because they know it will work. When someone is overconfident they often underestimate the risks associated with an investment and ignore negative or negative information about the investment. Someone who is overconfident will commonly trade more and try to time the market or go all in on a singular stock because it is the perfect pick.

Conclusion

These are only some of the cognitive biases that apply to investing, there are many more. But, perhaps overall the best way to reduce the negative impact of behavioural biases is to be and which ones you are susceptible to.