Pathfinder Small Cap Quarterly Report
September 30, 2020
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 14.0% in the first nine months of 2020. This compares to the TSX Venture Exchange which rose by 22.3%. Our annualized 7-year return is 17.7% compared to the TSX Venture Exchange’s return of -4.0% per year over the same period. The table below provides a performance summary:
During the quarter, we continued to generate strong returns from the clean-tech sector, with contribution coming from Aurora Solar Technologies Inc (TSXv:ACU), Nano One Technologies Corp (TSXv:NNO), and Exro Technologies Inc (TSXv:EXRO). Other notable positive contributors were Vitalhub Corp (TSXv:VHI) and Perimeter Medical Imaging AI Inc (TSXv:PINK). Because of a strong Venture market, there were few negative portfolio contributors. Large cap stocks continued their mystifying run and unlike the previous two years where the TSX Venture performed poorly on a relative basis, we have market exuberance in this space, initially led by gold stocks and now broadening to all sectors.
Electrification of transportation and push for renewable resources continues to be a lightning rod for investors and during the quarter, Nano One (our battery materials company) received funding from the BC government that will be used to scale up production activities with its industrial partners, like Pulead Technology. They also signed a joint development agreement (JDA) with a multi-billion-dollar Asian cathode material producer. While the dollar value and partner of the JDA remains unknown, the opportunity is exciting given the commercialisation potential.
Vitalhub (our healthcare IT company) began the quarter winning a significant tender with the UK’s National Health Service (NHS). The NHS will recommend hospitals use Vitalhub’s MCAP patient analytics software to help manage patients more effectively, something sorely needed during a pandemic. Vitalhub also made two acquisition during the quarter, buying “Transforming Systems” and “InTouch”, both of which offer products that can be directly integrated into the current MCAP offering. The acquisition of InTouch also provides exposure to the up and coming telehealth segment, allowing hospital patients to conduct bookings, pre-op assessments, and patient check-ins online.
Perimeter (our medical imaging company), one of our holdings that recently went public, is up over 50% and has been building out its team, adding a Chief Commercial Officer and a new board member. We anticipate strong commercial traction as the sales pipeline develops and surgeons are educated on the advantages of Perimeter’s OTIS 2.1 product. In the near term, we are waiting on results from a 400-patient study and watching closely for progress on commercialization efforts.
In previous quarterlies, we have referenced boom and bust cycles and related the analogy of ‘planting seeds’ in tough times and ‘harvesting’ in bountiful times to our stock market strategy. It is certainly an interesting time in the cycle – with the TSX Venture up 81% in the last 6 months, one may be tempted to conclude that it is harvest time. While we make decisions on individual analysis (What is the company worth? What is it priced at?), we would note that the 3-year return for the Venture is still negative and much of the 6-month gain is simply recouping losses from the first quarter. On the all-important company specifics, we are not yet seeing broad overvaluation in our investment universe, more so a frenzy in specific sub-sectors and themes. Honing into our portfolio, we see cheaply valued stocks combined with the underlying businesses these stocks represent hitting new milestones.
While our portfolio appears attractive and we have a full pipeline of ‘buy ideas’, some of the market behaviour is troublesome. Speculative activity is building and many of the ‘hot’ stocks on the Venture trade at valuations which are pricing in an unlikely degree of success. A few may outperform and justify their prices (and more), but on average we believe this group is likely to disappoint, leading to losses. We have recently observed market participants, previously uninterested in stocks with stagnant prices, trip over themselves to buy shares at 50% or even 100% higher prices absent any news that would suggest the company is worth more. Current market conditions are momentum driven with traders liking stocks more the higher they go (an absurd notion in our opinion). Our investment process is designed to take advantage of this inefficiency – with greater stock price dispersion based on momentum factors, we are presented with more opportunities to buy stocks for less than they are worth and sell them for more.
Pathfinder Resource Fund
The Resource Fund had a net return of 39.0% in the first nine months of 2020. This compares to the benchmark which declined by 0.6%. Since inception (July 16, 2018), the Resource Fund has an annualized return of 16.9% versus the benchmark annualized return of -2.5%.. The benchmark consists of 75% of the daily return of the S&P/TSX Capped Materials Index and 25% of the daily return of the S&P/TSX Capped Energy Index.
The third quarter continued to build on the momentum seen in the in the junior mining sector from the previous quarter. While the second quarter was a case of the rising tide lifting all stocks, our top performers this quarter all had positive exploration results (new discoveries or extension of their current deposits) which drove their prices higher. This is encouraging, as our holdings are creating value through operations in addition to benefiting from rising commodity prices. The exploration highlight for the quarter was Solaris Resources Inc (TSXv:SLS) drilling 1,010m of 0.71% CuEq (Copper equivalent), including 660m of 0.97% CuEq from surface, a truly world-class result.
Another one of our top performers was Pan Global Resources (TSXv:PGZ) up ~80% for the quarter. PGZ is focused on copper exploration in Spain exploring for volcanogenic massive sulphide deposits (VMS). VMS deposits are unique in the fact that they are polymetallic, containing multiple minerals (Cu, Au, Zn, Pb), and pack a lot of metal in a small area minimizing the mining footprint. Current drilling has identified two different mineralized horizons (upper and lower conductor plates) with the potential for additional stacked lenses, a feature not uncommon to VMS deposits. We continue to watch for ongoing results from the current program which is focused on expanding the footprint of mineralization now defined over ~600 m with an additional 4 km of untested ground.
This summer featured a strong gold tape with other commodities such as copper and silver also outperforming, leading to a significant inflow of capital in the mining sector for July and August (Figure 1).
Figure 1: Value of equity capital raises in the mining sector. Note the significant increase in financings from May 2020 to August 2020.
This ebb and flow is a good example of the cyclical nature of investment in the mining sector. We have seen capital and investor interest filter down from producers to explorers as the gold price has increased, and August appears to have marked a fever pitch (we eagerly await statistics from the rest of the year to see if this level of activity continues). On an annualized basis, we have exceeded the 2011 highs in number of financings, amount raised, and volume traded.
When capital is scarce, it only gets allocated to the best projects offering the highest rates of return, managed by top-notch operators. As capital availability increases, the marginal dollar raised goes towards projects and teams of lesser quality. A mining executive on the hunt for a deal will never have a shortage of exciting projects to drill (just ask your barber if you need a haircut), the limiting factor is access to capital. Now that there is ample capital available, we must be extra stringent in evaluating quality to ensure that the projects offer sufficient rates of return.
In our Resource Fund, we try to position ourselves into commodities prior to a change in sentiment and shift our holdings as valuations get ahead of themselves. For example, our primary focus when we formed the Resource Fund was precious metals, recognizing the fact that there was very little capital being spent to find new deposits. Now that capital availability for gold has increased, we are shifting towards copper and battery metals in anticipation of an increasing global focus on green energy and sustainability.
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 www.paml.ca for disclosures.
* All returns are time weighted and net of investment management fees. Returns from the Pathfinder Partners’ Fund are presented based on the Class C Master series except prior to its inception in July 2011 when the Class A Master series was used. Inception returns include the 10 months from inception in March 2011. Returns greater than one year are annualized. Returns from the Pathfinder Resource Fund are presented based on the Class C Master series since its inception in July 16, 2018. The S&P/TSX Venture Composite Index (C$), the S&P/TSX Venture Composite Index, the S&P/TSX Capped Materials Index and the S&P/TSX Capped Energy Index provide general information and should not be interpreted as a benchmark for your own portfolio return. Further details of the Partners’ Fund are available on request.
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