Pathfinder Small Cap Quarterly Report

Rob Ballard, CFA | Portfolio Manger

Mark Ouellette | Trader

Gary Sidhu, MBA | Analyst

Jared Fehr, P.Eng | Analyst

MARCH 31, 2022

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 a net return of -3.3% in the first quarter of 2022.  This compares to the TSX Venture Exchange which had a return of –5.0%.  Our annualized 7-year return is 18.5% compared to the TSX Venture Exchange’s return of 3.6% per year over the same period.  The table below provides a performance summary.

Our top contributors for the quarter were Currency Exchange International Corp (TSX:CXI) which contributed +2.4% to gross returns, Itafos Inc (TSXv:IFOS) at +2.2%, and Orca Gold Inc (TSX:ORG) at 0.8%.  Our main detractors were Next Hydrogen Corp (TSXv:NXH) at -1.3%, Neoleukin Therapeutics Inc (NASDAQ:NLTX) at -1.2% and Aurora Solar Technologies (TSXv:ACU)  at -1.0%.

The first quarter was weak for equities with the exception of commodities, which outperformed all other sectors.  We used this opportunity in the Partners’ Fund to take profit from our resource focused companies to deploy capital into our favorite stocks that were overly punished in the pullback, with a particular focus on the much-troubled biotech sector, which has fallen over 50% from its 2021 high as measured by the SPDR.

Biotech ETF (XBI:US).  There are currently over 150 biotech companies that have a market cap of less than their most recent reported net cash balance.  While biotech stocks have historically had boom-bust cycles, this valuation disparity rarely occurs and we believe that biotech stocks represent an attractive hunting ground for new opportunities, especially those at a price less than the cash in their bank account.

Neoleukin Therapeutics Inc (NLTX:US) is a biotech company that develops de-novo (from scratch, synthetic) proteins that can activate or inhibit the immune system.  Their flagship drug is NL-201 which targets Interleukin-2 (IL-2) and Interleukin-15 (IL-15) receptors.  IL-2 is a crowded space in immuno-oncology research due to the immune system activation and therefore cancer treatment potential, and failed trials in this space can impact all other IL-2 companies.  Neoleukin’s last raise was US$76M at $15.25/share and yet now they trade at $1.88/share as of March 31, 2022.  The company is funded to end of Phase I results (and likely for a full Phase II) and we think this is a great opportunity to get involved in one of the best drugs surrounding IL-2, especially with management having bought on the open market at prices >$6/share.  One of the big reasons for the recent downward pressure is the failed Phase III trial from Nektar Therapeutics who was developing an IL-2 pro-drug that failed to increase immune response (due to the nature of the proteins structure, a concern we think Neoleukin has solved by taking a de-novo approach).  This is easily a billion-dollar market if it proves successful.

Another exciting stock that we’ve discussed before is Immunoprecise Antibodies Ltd (TSXv:IPA) who is currently running their “monoclonal antibody cocktail” trial that will be used as a therapeutic to treat COVID (think DayQuil but for COVID).  They have enough cash to fund Phase I/II, and we should see pre-clinical top line results of efficacy and toxicity in Q2 2022, and Investigative New Drug (IND) application to the FDA in Q2/Q3.  Preliminary results are extremely promising, showing no loss of efficacy regardless of the COVID variant – Immunoprecise does this by having the antibodies bind to the COVID virus in locations (known as “epitopes”) that have had little to no mutations so far, unlike the spike protein binding locations that vaccines target.

Currency Exchange International was up from $13 to $18 a share on strong quarterly results with record revenues of $12.5M and a return to profitability after the company suffered from reduced travel and COVID shutdowns at their retail locations.  The company took advantage of this tough period by reducing corporate overhead and finding partners to operate their retail locations and take on staffing and rent expenses.  This has set the company up for improved profitability going forward.  Banknotes continues to gain market share after a large competitor left the space and in payments, the focus is on B2B sales via software integrations to make foreign transactions easier which is a market that has great upside potential.

Major themes so far this year have revolved around the Ukraine/Russian war, inflation, and rising interest rates.  Sanctions on Russia have exacerbated an already tight commodity market and driven price increases and inflation.  This has led to rising interest rates in developed markets for the first time in over 30 years. We believe great opportunities come about in situations where investors have knee-jerk reactions to macro events.  As smaller, less-traded companies get swept up in the commotion we continue to try and find the best of these impacted companies, initiate positions, and hope to see them outperform over time.

Pathfinder Resource Fund

The Resource Fund had a net return of 16.8% in the first quarter of 2022.  This compares to the benchmark which was up by 24.1%.  Since inception (July 16, 2018), the Resource Fund has returned 24.2% annualized versus the benchmark of 5.3%. The table below provides a performance summary.

Performance this quarter was driven by two main themes, fertilizers and uranium.  For fertilizers, Itafos Inc (TSXv:IFOS) added 8.8% while Fox River Resources Corp (CSE:FOX) added 1.05%. On the Uranium side, Sprott Physical Uranium Trust (TSX:U.UN) added 1.8% and Cameco Corporation (TSX:CCO) added 0.9% to gross portfolio returns. Other notable names were Orca Gold (TSXv:ORG) returning 1.7% (acquired by Perseus Mining) and our longtime favourite Altius Minerals Corp (TSX:ALS) which contributed 1.4% to the portfolio for the quarter.

Commodity prices rose throughout the quarter and the tightness in many markets was further compounded by the Russia-Ukraine war. A broad range of commodities such as uranium, lithium, nickel, and even palladium saw wild price swings amidst supply chain issues, rising input costs, and threats of sanctions. One of the sectors that has been acutely affected where we have a position is fertilizers, specifically phosphate.

There are three main types of fertilizers: nitrogen (an input into ammonia and urea), potassium (an input into potash), and phosphate. Phosphate is the least discussed fertilizer and our preferred investment in the Resource Fund, partially because it has been overlooked and performed so poorly over the last decade.  These low prices have led to production shutdowns and a shortage, particularly in North America where there are only 4 companies that produce phosphate fertilizer. We previously highlighted that US tariffs on phosphate imports (from Morocco) and export bans (from China) were causing significant supply pressure.  This has been exacerbated by sanctions against Russia, a significant phosphate producer and the world’s largest exporter of ammonia (an important input into phosphate fertilizer). Upward pressure on phosphate prices contributed significantly to gross portfolio returns during the quarter and we maintain our conviction on the sector going forward.

Fox River is a Canadian domiciled, under the radar, phosphate project located in Ontario. FOX is focused on supplying North American fertilizer markets via construction of a vertically integrated facility that would utilize phosphate from their wholly owned Martison project. Combining readily-accessible sulphuric acid with phosphate rock from their deposit allows FOX to create a variety of phosphate fertilizer end products sorely required by farmers in the region. Recent studies point to very low, almost critical phosphate levels in the majority of fields in Western Canada and the US. This demand coupled with the lack of phosphate producers/exploration companies in Canada highlights the importance of domestic production and the attractiveness of Fox River. The company is set to table a preliminary economic assessment (PEA) which we believe will be a major catalyst for FOX and hopefully underscore the importance of the project. This sector typically flies under the radar; however, the macro-outlook and recent events have brought it to the forefront with Fox River poised to be a leader in the industry.

Another sector that is seeing significant tailwinds as countries push for cleaner energy to curb greenhouse gas emissions is Uranium, which is at 10-year highs in terms of spot price. As large funds like Yellow Cake PLC (YCA:LON) and Sprott Physical Uranium Trust (TSX:U.UN) purchase supply on the spot market, there is potential for a ‘short squeeze’ as liquidity dries up and nuclear utilities seek to secure long-term supply. Russia and Kazakhstan (widely viewed as a Russian vassal) are large players in both mining and processing uranium and the invasion has raised questions about security of supply and counterparty risk in long-term supply contracts from these countries.

Recently, the rally in uranium has had investors scrambling for investment ideas. Although there are many junior exploration uranium companies, we are exposed to the space via larger companies. Typically we focus on smaller cap exploration/development companies, but uranium is a uniquely difficult commodity to develop a mine for due to regulatory constraints.  It is not uncommon for an exploration project to take many years to reach production.  Historically we have observed that producers are the first to benefit from the initial turn up in a sector, and given this production difficulty we have elected to start with larger companies while we search for smaller opportunities. Cameco is one of the largest global uranium mining companies producing close to 15% of global supply. This is a way to play the nuclear power industry which has positive long-term fundamentals as countries shift towards cleaner energy. Cameco has operations all over the world, however, the main projects are Cigar Lake and McArthur/Key Lake in Saskatchewan. On the back of recent earnings, CCO has announced the restart of McArthur and increased their production guidance for the coming years.  They are strategically positioned for growth through a number of their operations which have been operating under capacity but are poised to go back into production.

As you can see from recent results, we have been dynamic in adjusting the portfolio to the current environment while remaining well diversified.  We are constantly trying to evolve and capitalize on new opportunities.  Some areas that we are currently investigating for the future include steel, tin, water and electricity.

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.