The macro rules the micro.
That is one of the guiding bromides for my firm, Excelsior Capital Partners. A quick check of Bloomberg's excellent U.S. rates and bonds page shows that the yield on the 10-Year U.S. Treasury, at 4.02% as of this writing, is 2.14 percentage points higher than it was this time last year. That is contractionary, and higher-duration assets tend to feel the pain the most. While the Nasdaq has fallen 12.5% in the past year, the little guys, the Russell 2000, have fallen only 6% in that time period.
So, the stock markets are telling you it is not a great time to be running an emerging company, but it is far from a fire sale moment in small stocks. Good management teams can operate during periods of slowing economic growth and accelerating cost of funds. I like to talk to those management teams, whether at industry conferences like Chris Lahiji's excellent LD Micro Index, or in person, to gauge not only the macro, but also the micro prospects for these emerging companies. When the tide rises ... it helps to have done your homework in advance.
As I'm traveling and managing portfolios this week, I had the chance to talk to C-Suite executives from three separate emerging companies.
I spoke the other day with Marc Fogassa, CEO, and Brian Bernier, head of business development, from Atlas Lithium (ATLX) . ATLX is an emerging mining play with a lithium-rich prospect in the Minas Gerais region of Brazil.
Atlas' core play in Minas, codenamed "Anitta" after the Brazilian pop singer, is rich with pegmatite. This is the rock that contains spodumene -- a mineral that contains lithium aluminum inosilicate. So-called "hard-rock" lithium will be, in my opinion, vital to produce the amount of lithium that will be needed to supply cathode material for the batteries that will power electric vehicles as the world's transportation fleet electrifies. Extraction of lithium from brines, usually in Chile and Argentina, is a very slow, water-intensive process. Hard-rock lithium has to be part of the solution, and Atlas's deposits can help that supply deficit.
It is early days for Atlas. Marc noted to me that the company expects its pre-feasibility study to be completed in 1H23, with the definitive feasibility study by year-end and a preliminary economic analysis in 2024. In the interim, Atlas has signed an agreement with Japanese mining giant Mitsui to participate in the Anitta lithium project, and Atlas also has interest in gold and iron ore plays in Brazil, as well.
ATLX shares have risen 35% this week, so clearly Marc and Brian and their IR advisors at MZ Group are effectively spreading the Atlas Lithium story. That move, though, has only pushed ATLX through a $100 million market cap mark, which is a fraction of that accorded to other emerging lithium plays like Piedmont Lithium, and Atlas' Brazilian neighbor, Sigma Lithium.
Earlier in the week I spoke with Akshay Jagdale, CFO of Real Good Food (RGF) . I first met with Akshay and RGF's executive chairman, Bryan Freeman, at LD Micro last fall. RGF offers a range of healthy frozen foods that are high in protein, low in carbohydrates and gluten-free. RGF has freezer space at retail giants Costco (COST) , Walmart (WMT) , Target (TGT) , Publix and many others, and the main concern among investors seems to be profitability. RGF produced negative earnings before interest, taxes, depreciation, and amortization
on a unadjusted basis in the last period it reported, third quarter 2022.
Akshay noted to me that with prices for both chicken and cheese having fallen dramatically recently, RGF management expects a 10 percentage point increase in margins as 2023 evolves, solely due to those lower commodity costs. So, that should solve the profitability questions, and with RGF's existing guidance showing revenues of at least $200 million 2023 vs. guidance of $157 million for 2022 and $87 million for 2021, top-line growth was never in question at RGF.
Finally, my week began with a chat with Dean Rojas and his team at HNR Acquisition Corp. (HNRA) . As a special purpose acquisition company, HNRA is in a part of the market that has largely been abandoned by investors. However, as Dean noted to me, "we are the rare SPAC that makes money."
As my firm, Excelsior Capital partners maintains its bullish outlook on crude pricing and you-would-have-to-tear-them-out-of-my-hands philosophy on holdings of integrated majors like Exxon (XOM) and Chevron (CVX) , I believe it is time to revisit some emerging hydrocarbon plays.
With 13,700 contiguous, 100%-owned acres in an already developed field in New Mexico owned by its acquisition target, Pogo LLC, HNRA is exactly that. HNRA will use waterflooding, a tertiary recovery method, to drain those existing NM fields of their remaining hydrocarbons. With a projected production mix of 85% oil and 15% natural gas, that is a high-return, low-risk way to extract energy.
While the Fed yammers away about "volatile food and energy prices," the simple fact, as I noted in my column earlier this week, is that crude oil prices have not been volatile at all for the past 6 months, as the commodities markets have recovered from the shock of Putin's invasion of Ukraine. It is a nice, stable backdrop against which HNRA can continue its "de-SPAC-ing" process, with a current deadline of May 15 by which that transaction must occur.
So, keep an eye on ATLX, RGF and HNRA.
(Please note that due to factors including low market capitalization and/or insufficient public float, we consider these stocks to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.)
