Should you back a small cap into a joint venture? Current form says no
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At first glance, joint ventures would seem positive. JVs are not just collaboration, they’re two companies creating a new entity.
Theoretically, synergy of two companies’ skills and experience should lead to a common goal being achieved. But this has not been reflected in the market.
Nine of 11 ASX small caps that have entered joint ventures have suffered share price declines.
Yet for the other two, FBR (ASX: FBR) and Genetic Technologies (ASX: GTG) it was a make or break moment for the companies, proving the market actually wanted their product.
After Caterpillar walked away from their partnership in December, FBR finally sealed a deal with Brickworks (ASX: BKW) in May. The pair formed a new company, Fastbrick Australia, and FBR will provide the technology while Brickworks will supply the bricks.
While shares have fallen slightly, they are still ahead of where they were before the deal was signed.
The other positive performer is Genetic Technologies (ASX: GTG). After months of wanting to combine its blockchain and health capabilities, it found a partner last December.
It combined with Blockshine Technology Corporation to form Blockshine Health. Genetic Technologies had a 49 per cent stake in the JV, investing $250,000.
Genetic Technologies CEO Paul Kasian said the new entity, Blockchain Health, “will leverage off GTG’s Biotech experience as well as BTC’s extensive development capabilities in the blockchain space”.
While leveraging off different experiences sounds good in theory it evidently isn’t always so in practice. The remaining joint venture-forming small caps have been down since formation.
Southern Gold (ASX: SAU) has been held back by the harsh South Korean winter but began drilling in early April. Yet its joint venture did not stop the ASX enquiring about its cash flow problems after its most recent quarterly.
The company admitted it needed capital and was seeking to sell Australian assets as an option.
At first glance, Clean Teq (ASX: CLQ) appears to have gone well since it announced a JV last year. Earlier this year, it won a 20-year contract to construct and operate a water treatment plan in China, for a minimum of 9000 renminbi ($1882) per day.
But Clean Teq also operates a nickel-cobalt mine in New South Wales and in recent months these have been the worst performing minerals on global markets due to an oversupply.
Here’s a list of all JVs formed by ASX small cap companies in the last 12 months: