Pathfinder Small Cap Quarterly Report

Rob Ballard, CFA | Portfolio Manger

Mark Ouellette | Trader

Gary Sidhu, MBA | Analyst

Jared Fehr, P.Eng | Analyst

DECEMBER 31, 2021

The Pathfinder Small Cap mandates invest in high-torque, early-stage companies that have the potential to generate superior returns.

Pathfinder Partners’ Fund

The Partners’ Fund had an net return of 19.6% in 2021.  This compares to the TSX Venture Exchange’s rise of 7.3%.  Our annualized 7-year return is 20.9% compared to the TSX Venture Exchange’s return of 4.4% per year over the same period.  The table below provides a performance summary:

Our performance for the year was driven by Sigma Lithium Corporation (TSXv:SGMA) which contributed 4.8% to gross returns, Voxtur Analytics Corp (TSXv:VXTR) which added 4.4% to gross returns, and Nanalysis Scientific Corp (TSXv:NSCI) which added 2.9% to gross returns. Our main detractors were Delcath Systems Inc (NASDAQ:DCTH) at -1.7% and Aurora Solar Technologies Inc at -1.1%.

2021 was a transition year for the Partners’ Fund.  We took profits on long-held stocks that had performed well, but whose valuations had risen significantly – so much so that we couldn’t forecast adequate returns from continued ownership.  We did a lot of selling throughout the first quarter, a lot of waiting during the middle half of the year, and finally in the last few months we started to find the next generation of buying opportunities that will drive returns in future years.

Despite strong headline numbers for major North American indices – both the TSX and the S&P 500 were up over 20% – 2021 contained a lot of turbulence with some of the best performing trends from the previous year having a sharp reversal. In the US, stock market darlings of 2020 exemplified by themes like ‘SAAS’, ‘Green Energy’, ‘Telehealth’ and ‘Biotech’ struggled. In Canada, there was a similar shift in market leadership as Oil and Gas went from the worst to the best performing sector and Clean Technology & Renewable Energy went from performing strongly in 2020 to the worst sector in 2021.  According to the Investor Insights newsletter put out by the TSX, the 26 Oil & Gas issuers with a market cap of over $1 billion had an average share price performance of 178%, while the 10 companies representing Clean Technology declined by an average of 22% in 2021.  This is a stark reversal from the year before where the $1+ billion Oil and Gas companies declined by an average of 30% and the Clean Technology stocks rose by 84% on average.

This leadership rotation adds to volatility and creates potential drawdowns but is well-suited to our investment process.  At the risk of repeating our previous quarters’ thoughts, our process of reducing position sizes when the valuation of a company exceeds our estimate has allowed us to protect against downside.  For example, many of our best performers in 2020 came from the ‘Clean Technology & Renewable Energy’ sector, which had a terrible year in 2021.  Had we not actively managed our portfolio, performance would have suffered – a look back at 2020 fund performance shows that our top 5 portfolio contributors had an average share price decline of 42% in 2021.  The impact of those avoided losses is further magnified when considering the positive performance of new investments made with the sale proceeds.

Going forward, the overheated valuations from Q1 are still being unwound, and just as stocks overshot on the upside, we expect they may do the same on the downside now that the bloom is off the rose. We are in a strong position to take advantage of any dislocations in the market and are busy investigating new ideas in the biotech sector and from newly public companies that are trading at huge discounts to their recent financing levels. Concerns regarding inflation and a rising cost of capital are being factored into our decision making as we focus on companies we think can become profitable near-term or remain funded long-enough to see them through the next few years.

In terms of company-specific updates, we had some positive developments in our portfolio this quarter.  We had one of our smaller investments come to fruition – in October the private company PMML went public as Rivalry (TSXv:RVLY) via IPO, and with it saw our investment return over 10x on listing at $3.30/share.  Rivalry is a sports betting company that targets the younger demographic by focusing on Esports as its main offering.

Perimeter Medical (TSXv:PINK) was up 54% on the year, and in Q4 received FDA approval to enter clinical validation trials of their AI-enabled imaging technology.  This is significant since if they’re successful they will be able to market their imaging equipment and software as a better standard of care for patients undergoing breast cancer surgery and will reduce surgeon re-operation rates.  In December, Perimeter announced a $43 million financing that will help fund their expansion into treating other forms of cancer, which we think signals that they are sure they will receive FDA approval.

Vitalhub (TSXv:VHI) rose 15.8% in 2021 and had a solid year operationally with revenues up 107% to $6.6M in their latest quarter, along with margin improvements as the company scales the technology picked up through acquisitions.  Healthcare & Telehealth in general has underperformed, but Vitalhub’s disciplined acquisition strategy that pursues services they can directly integrate and cross-sell to existing clients has continued to add value, and we think this will continue.  We are pleased that the stock has held in relative to the declines seen in peers and are hopeful this great performance continues once sentiment on the sector becomes more positive.

Microbix (TSX:MBX) had an outstanding year with their share price rising 95%.  The development of Viral Transport Medium (VTM) products and contract from the Ontario government (renewed in Jan 2022 with plans to scale) puts Microbix on track to grow revenues significantly, with additional upside if they are able to recover sales in their non-COVID related QAPs (Quality Assessment Products). VTM products are high margin and quick to manufacture, so we are expecting a very strong 2022 regardless of what happens regarding COVID variants.

We’ve protected capital and repositioned the portfolio over the last year.  We have a well-diversified portfolio with cash on standby, knowing that anything can happen. Deployment of capital has been slower as we’ve become more selective due to the current environment, but we are anticipating a capital-deployment cycle as opportunities continue to show up.  This is where we can add real value by discovering and investing in companies with great ideas and management teams at attractive valuations.  Thank you for your continued trust and support!

Pathfinder Resource Fund

The Resource Fund had a net return of 23.7% in 2021.  This compares to the benchmark, which had a return of 19.8% for the year.  Since inception (July 16, 2018), the Resource Fund has returned 24.2% annualized versus the benchmark of 5.3%.

Our top performers for the year were Sigma Lithium Corporation (TSXv:SGMA) which contributed 6.6% to gross returns and Pan Global Resources Inc (TSXv:PGZ) which added 3.3% to gross returns. Our main detractors were Orca Gold Inc (TSX:ORG) at -2.9% and GR Silver Mining Ltd (TSXv:GRSL) at -2.0%.

2021 was a mixed year in terms of performance for the commodity sector which saw the energy commodities (Coal, Crude Oil, and Natural Gas) outperform. After strong returns in 2020 for precious metals, 2021 was less positive while copper remained buoyant throughout the year matching 2020 performance numbers. We remain bullish on base metals (namely copper) and maintain conviction in our thesis that the red metal will outperform due to a tightening market. Supply disruptions and geo-political developments in LatAm countries (responsible for ~50% of production) combined with already low inventories underpin our thesis.

Despite rising inflationary pressures, precious metals underperformed. We have taken the opportunity to add to positions in our core holdings such as Calibre Mining Corp (TSX:CXB)  that offer quality producing assets with organic growth potential and strong balance sheets. While the portfolio has been primarily dominated by metals, early last year we diversified further into other sectors like agriculture and uranium.  On the agriculture side, we are focused on fertilizer producers and developers like Itafos Inc (TSX:IFOS). Crop prices have been increasing and this typically leads to increased fertilizer use by farmers who seek the highest yields in years where prices for their product are high.  However, currently due to US tariffs on phosphate imports (from Morocco and Russia) and export bans (from China), there is significant supply pressure, especially in North America.  As a result, we believe phosphate prices will remain strong even after last year’s strong performance.

Calibre is a junior gold producer in Nicaragua focused on increasing production through organic growth and optimization while leveraging their hub and spoke operating strategy to utilize excess production capacity at CXB’s Libertad Mill. CXB is guiding at Au production between 180,000 – 190,000 oz at an AISC (all-in sustaining cost) of $1,100-$1,200 for 2022. This guidance does not incorporate Calibre’s recent acquisition of the Fiore’s Pan Gold Mine in Nevada which could add an additional 50,000 oz of Au by 2023. Calibre is backed by the former Newmarket management team which previously employed the same strategy in 2015 later selling the company for ~$1 billion in late 2016. We believe there is a significant opportunity for CXB to further optimize their hub and spoke model, increase production through discovery and leverage the 50% of excess production capacity at La Libertad allowing them to increase production at incremental costs. CXB offers a unique opportunity to own a producer with high quality assets that is trading at ~4-5x EV/EBITDA and offers considerable upside in the near term.

Itafos is a pure play phosphate producer with production in the US. The company specializes in vertically integrated operations from which they produce and sell specialty fertilizers and products. The company has assembled a portfolio of strategic assets leveraged to increasing demand. Their Conda project represents close to 7% of the US phosphate market and is located west of the Mississippi River allowing them preferred access to this agricultural region.  Itafos has taken advantage and seized unique opportunities by acquiring distressed assets during downturns that have been turned around and are set to benefit from a tightening market.

Pathfinder Asset Management Ltd. | Equally Invested™
1450-1066 W. Hastings Street, Vancouver, BC V6E 3X1
E | T 604 682 7312 |
Sources: Pathfinder Asset Management Limited

National Instrument 31-103 requires registered firms to disclose information that a reasonable investor would expect to know, including any material conflicts with the firm or its representatives. Doug Johnson and/or Pathfinder Asset Management Limited are an insider of companies periodically mentioned in this report. Please visit for full disclosures.

*All returns are time weighted and net of investment management fees. Returns from the Pathfinder Partners’ Fund and Partners’ Real Return Plus Fund are presented based on the masters series of each fund. The Pathfinder Core: Equity Portfolio and The Pathfinder Core: High Income Portfolio are live accounts. These are actual accounts owned by the Pathfinder Chairman (Equity) and client (High Income) which contain no legacy positions, cash flows or other Pathfinder investment mandates or products. Monthly inception dates for each fund and portfolio are as follows: Pathfinder Core: Equity Portfolio (January 2011), Pathfinder Core: High Income Portfolio (October 2012) Partners’ Fund (April 2011), Partners’ Real Return Plus Fund (April, 2013), and Partners’ Core Plus Fund (November 2014).

Pathfinder Asset Management Limited (PAML) and its affiliates may collectively beneficially own in excess of 10% of one or more classes of the issued and outstanding equity securities mentioned in this newsletter. This publication is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author has taken all usual and reasonable precautions to determine that the information contained in this publication has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze such information are based on approved practices and principles in the investment industry. However, the market forces underlying investment value are subject to sudden and dramatic changes and data availability varies from one moment to the next. Consequently, neither the author nor PAML can make any warranty as to the accuracy or completeness of information, analysis or views contained in this publication or their usefulness or suitability in any particular circumstance. You should not undertake any investment or portfolio assessment or other transaction on the basis of this publication, but should first consult your portfolio manager, who can assess all relevant particulars of any proposed investment or transaction. PAML and the author accept no liability of any kind whatsoever or any damages or losses incurred by you as a result of reliance upon or use of this publication.