Pathfinder Small Cap Quarterly Report

Rob Ballard, CFA | Portfolio Manager

Mark Ouellette | Trader

Gary Sidhu, MBA | Analyst

Jared Fehr, P.Eng | Analyst

MARCH 31, 2023

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 9.4% in the first quarter of 2023. This compares to the TSX Venture Exchange return of 11.2%. Our annualized 10-year return is 16.7% compared to the TSX Venture Exchange’s return of -5.3% over the same period. The table below provides a performance summary.

Our top contributors for the quarter were Spectra7 Microsystems Inc (TSXv:SEV), Currency Exchange International (TSX:CXI) and Elevation Oncology Inc (NASDAQ:ELEV), while our main decliner was F-Star Therapeutics Inc. During the quarter, markets rebounded strongly with outperformance in beaten-up, interest rate sensitive sectors such as technology. However, there continues to be uncertainty around inflation, interest rates and the potential for a recession.  In March, the impact of rising interest rates finally worked its way into the economy after a year of increases, illustrated by the collapse of Silicon Valley Bank. While we follow these broader macro-economic events, our focus is on individual investment opportunities. The fears of a recession have kept prices low; we continue to take advantage by buying well-run companies that have the potential to provide significant returns from current prices.

Delcath Systems (NASDAQ:DCTH) is a biotech company that has developed a drug-device combo treatment, the Hepzato Kit, to treat metastatic ocular melanoma (MoM) that has metastasized to the liver.  It injects a chemotherapy drug into blood flowing to the liver to saturate the liver and kill cancerous cells.  The toxic blood is then cycled out of the body where it is filtered and returned. The Hepzato Kit is approved in Europe but not in the US. Delcath recently closed a $25 million financing that funds the company to the PDUFA date of August 14th, 2023 where the FDA will decide whether to approve the treatment. Delcath has a very low valuation compared to the market opportunity in MoM and a chance to expand through new indications. We believe the stock could perform strongly if Hepzato is approved.

Keeping the focus on biotech, one of our strongest performers this year was Elevation Oncology Inc (NASDAQ:ELEV).  We originally bought Elevation as part of our “negative enterprise value” strategy where we look to add positions in biotech companies that are valued at less than the cash in their bank account.  Elevation recently licensed a Phase 1 drug, EO-3021, an anti-Claudin 18.2 antibody-drug-conjugate (ADC).  Both ADCs and Claudin 18.2 have been topical, with Seagen (an ADC leader) being purchased by Pfizer and Astellas Pharma announcing phase 3 results for their Claudin 18.2 antibody. Negative enterprise value biotech stocks can often perform strongly over short periods of time due to their discounted valuations. This can come from positive news, a new buyer, or simply a random stock price movement; however, for long-term success, a biotech company needs drug approval.  Many of these “negative-EV” companies are quickly burning through their cash and will need to raise money to reach commercialization. A low-priced stock can become a double-edged sword as the implied dilution is excessive and limits potential returns.

We continue to evolve and adapt our biotech investment strategy. While having an affinity for low valuations, we have gained a greater appreciation for management teams who can access capital efficiently and spend it productively. We still plan to invest in deeply discounted companies, but going forward, will focus more on management quality in our evaluation process. Management teams that can sign attractive partnership deals are able to limit their share dilution by negotiating cash upfront, reduce spending by having partners run clinical trials, and accelerate development speed. On the capital allocation side, good management teams get more for their spending, go after attractive indications that require less capital, and quickly shut down programs that don’t show adequate potential.

Char Technologies (TSXv:YES) is an exciting clean energy company that is focused on High Temperature Pyrolysis (HTP), a process that involves combusting products without oxygen at high temperatures and pressures. With the correct feedstock and HTP process, the byproducts are commercial grade bio-coal and syngas. Bio-coal is environmentally friendly and carbon negative, so using bio-coal (replacing metallurgical coal in steelmaking) is especially attractive to Canadian steel companies who are under pressure to reduce greenhouse gas emissions.  With a rising carbon tax in Canada, steelmakers will need to stay competitive with their US counterparts and Char can provide a potential solution by generating carbon credits.  Their first large plant will come online in 2023, focusing on bio-coal production. In 2024 the plant will produce hydrogen that can be converted into renewable natural gas via methanation. Lastly, Char’s construction expenses will be largely financed through non-dilutive government investments instead of continuous share issuance, helping protect our equity position while the company pursues capex intensive growth projects.

Pathfinder Resource Fund

The Resource Fund had a net return of +16.1% in the first quarter of 2023. This compares to the benchmark which had a return of +4.3%. Since inception (July 16, 2018), the Resource Fund has returned +16.0% annualized versus the benchmark’s return of +7.3%. The table below provides a performance summary.

Our top contributors for the quarter were Itafos Inc (TSXv:IFOS) which contributed +4.5% to gross returns, Fox River Resources Corporation (CSE:FOX) which added 2.8%, and Calibre Mining Corp (TSX:CXB) which added +2.2%. The main detractor was Pan Global Resources Inc (TSXv:PGZ) at -1.3%.

During the quarter we were active on the research front, attending three investment conferences and travelling to Nicaragua and Jamaica to visit mining projects. We continued our recent shift away from defensive stocks towards earlier stage opportunities, particularly in the precious metals sector. At recent conferences we noted a distinct hype around critical metals and apathy towards gold. We took this as a contrary indicator, continuing to add to our precious metals holdings amidst the weakening of the US dollar.

Recently, securing domestic supply of critical minerals has been an overriding theme throughout the sector. Last year, the US announced the Inflation Reduction Act (IRA), which will direct over $400 billion in new spending towards reducing carbon emissions through clean energy incentives and securing battery metals supply. Similarly, the Canadian Government announced a critical metals strategy that would help facilitate Canada towards becoming a global supplier of critical metals. This announcement was supported by up to $3.8 billion in federal funding towards this initiative. The first steps were taken in February 2023 with $344 million capital allociated for deployment.

As North American governments spend billions to incentivize onshore manufacturing and domestic production of batteries, it is clear that there is an opportunity to invest in domestic sources of the required raw materials. Most of the value in a battery comes from the anode, consisting mainly of graphite, and the cathode, whose material is battery specific. There are currently two dominant cathode variants being produced – LFP (lithium iron phosphate) and NMC (nickel manganese cobalt). We are looking to invest in all these minerals and so far, have made investments in North American deposits containing nickel, graphite, lithium and phosphate as part of our overall portfolio.

Over the last year, we have seen LFP batteries begin gaining market share over NMC. Many of the recently announced “Gigafactories” in North America will manufacture LFP batteries, requiring purified phosphoric acid, produced from phosphate rock. As battery production increases, there is the risk of tighter supply as phosphoric acid is redirected from agriculture usage towards batteries. We have seen a similar scenario play out in the ‘food versus fuel’ controversy, where agricultural land is being used for biofuel production instead of food production. Using food for fuel is ethically dubious, yet over the last decade, 40% of corn produced in the US has been used to make ethanol, driving up corn prices. A shift towards electrification could have similar consequences on global food production as phosphate supply is diverted. We believe phosphate represents a compelling opportunity and think it could be a ‘wild card’ commodity whose demand from batteries is unappreciated by the broader investment community.

Last quarter we touched on the deterioration of soil due to deficiencies in nutrients. Fertilizers, including phosphate, are an essential nutrient for all living things and vital for food production. Phosphorus, which is obtained from phosphate rock, is considered a finite resource with no known substitute. As countries shift towards protecting domestic supplies, sources of phosphate ore are becoming strategically important. It’s estimated that ~90% of the world’s phosphate reserves are controlled by just five countries with Morocco holding over 70%. In comparison, 75% of global oil reserves are controlled by twelve countries, highlighting the strategic nature of phosphorus. In response, countries have introduced export tariffs or quotas to protect domestic supply thereby putting pressure on importing countries, such as the US.

In North America there are only a handful of companies that produce phosphate fertilizer, one of them being Itafos Inc (TSXv:IFOS). Itafos offers investors a discounted play on a vertically integrated phosphate producer located in a tier one jurisdiction. We believe the IRA will have direct impact on Itafos as phosphate demand rises due to shifting battery chemistries, geopolitical tensions and fertilizer shortages. Itafos’s location in southern Idaho offers the company a competitive shipping advantage compared to other producers, positioning Itafos to fulfill the growing demand for phosphate in the west. Based on 2023 guidance, we believe Itafos is attractively valued at an EV/EBITDA of 2-2.5x and offers significant upside, underpinned by a key upcoming catalyst around the extension of their Conda mine life. The current mine life is through mid-2026 but an extension would push that to 2037, exposing Itafos to a prolonged commodity cycle and increasing the importance of domiciled production and supply. The company has also announced a strategic review and based on the compelling outlook of phosphate, should offer investors added value.

We have discussed electrification as a key driver for the current and upcoming cycle previously; however, recent government initiatives globally and locally reinforce this theme. We are in consensus with the fundamentals driving interest in critical and base metals but would also like to acknowledge the opportunity in the fertilizer space which we believe is overlooked. As these themes unfold, we will continue to leverage our relationships and technical capabilities to navigate volatility and manage risk. Thank you to all investors for your continued trust and support !

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.

Changes in Leverage. We are increasing the asset ceiling to 2.0 times the market value of equity for Pathfinder International Fund and Pathfinder Real Fund to be consistent with Pathfinder Partners’ Fund and Pathfinder Resource Fund.

*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.