SUNDAY ROAST: The small caps that lit a fire under Stockhead's experts this week

Guy Le Page

RM Corporate Finance

Tanzanian nickel explorer Adavale Resources (ASX:ADD) came onto our Guy Le Page’s radar back in July of last year following a share placement at 2 cents.

He picked the Kabanga Jirani and Luhuma projects, which cover around 1,316km2 in the Kabanga-Musongati mafic-ultramafic belt as having good potential for Ni, Cu, Co, Cr and PGEs hosted in layered intrusions.

Significantly the six southernmost licences are adjacent to the world-class Kabanga Nickel Deposit (JORC Resources of 58Mt @ 2.62% Ni).

More recently, ADD farmed-in to two more licences contiguous to the southernmost licences.

ADD will need to get some assays back from drilling before we get too excited, however it’s off to a good start, Le Page says.

Obviously having disseminated semi-massive sulphides is a positive, however what proportion of these sulphides are nickel-bearing (e.g. pentlandite) as opposed to just iron-rich sulphides (e.g. pyrrhotite) remains to be seen.

The company has around 520 million shares on issue and a market capitalisation of $14 million at 2.7 cents per share.

There are just over 100m options exercisable at 3 cents expiring late September this year which are likely to keep a lid on the share price as well as another 78 million options exercisable at 3 cents expiring late in 2025.

MA Moelis

Broker MA Moelis has a Buy recommendation on Australian Vintage (ASX:AVG), with a target price of 60c (versus current price of 43c).

Australian Vintage owns a portfolio of brands including McGuigan Wines, Tempus Two, Nepenthe and Barossa Valley Wine Company, with significant vineyard holdings and leases across Southeastern Australia.

Moelis acknowledged that AVG has faced challenging industry conditions in FY23 due to an oversupply of Australian wine and a weakening consumer demand.

In the last trading update, AVG says its full-year FY23 revenue is forecast between $255–260m, compared to FY22 revenue of $260.1m.

AVG said it will cancel its final dividend, and will not pay any further capital back to shareholders until its net debt/EBITDA ratio fell below 2x.

“This will ensure the balance sheet remains in a strong position during a relatively uncertain operating environment,” said the note from Moelis.

Moelis also said the cost out initiatives announced by the company are positive for shareholders, as they will deliver a pre-tax earnings benefit of around $9m by FY25.

Looking out to FY24, Moelis anticipates that the lower-yielding 2023 industry vintage will alleviate some of the oversupplies of wine.

Euroz Hartleys

Broker Euroz Hartleys has a Buy recommendation on mining services stock, Vysarn (ASX:VYS), with a target price of 20c (versus current price of 14c).

In the last trading update, Vysarn upgraded its earnings guidance for FY23 – from $5.1m NPBT to between $6-$6.5m.

Vysarn says the upgrade is underpinned by the performance of its wholly owned subsidiary Pentium Hydro, and the remobilisation of part of its fleet to tier 1 clients (such as BHP, FMG, and Roy Hill) on long-dated better margin contracts.

As a result, Euroz believes the second half EBITDA of $7.5m reported by the company could be base case run rate earnings for FY24.

The broker also believes Vysarn is grouped with a bucket of mining services peers that are trading at generally deflated valuations.

Euroz also said that Vysarn’s management is quietly pulling together a unique range of services (consultancy, contractor and ownership), which could over time yield significant value to investors when executed as a combined group.

“We have therefore increased our price target to 20c a share, which reflects our view of FY24 free cash flow potential,” said Euroz.

Sam Catalano

Wilsons Advisory

A bargain at 56 cents when first nominated as a Wilsons’ top pick in early May, Leo Lithium (ASX:LLL) remains the firm’s favourite at double that price $1.12.

Catalano said LLL’s recently inked share placement, mine expansion and processing deal with Chinese entity Ganfeng Lithium (LLL’s existing JV partner in the Goulamina asset in Africa) is a key marker in the evolution of the lithium market’s geopolitical outlook.

He said if all goes to plan, some of the JV’s increased offtake will be diverted to their new downstream lithium processing plant in Europe, the shipping timeframe for which is seven days compared with seven weeks from Western Australia, for example.

LLL this week announced it has upgraded the MRE of Goulamina by an impressive 48.2%, as it works on becoming one of the largest spodumene mining operations in the world.

Wilsons has a 12-month target price of $1.75.

Catalano also reckons Atlantic Lithium (ASX:A11) is a relatively under-covered lithium development company, listed on the ASX and London’s AIM market. A11’s flagship Ewoyaa Project is located in the mining friendly jurisdiction of Ghana.

Piedmont Lithium (ASX:PLL) has an earn-in agreement with Atlantic, and is expected to fund the lion’s share of capex (which we estimate at US$160 million) for a 50% stake in Ewoyaa.

PLL hold 50% of the offtake for the life of the mine, but the other 50% of material remains uncommitted. Catalano said this represents a key trump card for A11, particularly given the project’s strategic location in Western Africa.

As for the March 2023 short-seller report levelling allegations of corruption at A11, Wilsons believes these allegations are unfounded, and views the share price weakness on the back of the report as a buying opportunity.

A11 only listed on the ASX in September 2022 and Catalano said it is still a relatively unknown and under-owned opportunity amongst the ASX-listed lithium developers.

Wilsons has a 12-month target price of $1.10 on A11.

And he’s found another potential sleeping giant. Ioneer (ASX:INR) is developing the unique Rhyolite Ridge Lithium-Boron project in Nevada, which has been caught up in a lengthy permitting process, and is also due a refresh of relatively old feasibility study numbers.

“Despite Rhyolite Ridge having potential as a best in class asset, the stock has perhaps been forgotten by some investors given it has been stuck in the permitting stage for quite some time,” he said.

INR recently announced a 168% increase to the unique and high quality siltstone-claystone resource.

Catalano said the presence of significant boron provides a key differentiating factor for the Rhyolite ridge deposit, and could make INR among the lowest cost – if not ‘the’ lowest cost – carbonate producers in the world.

Wilsons has a 12-month target price of 55 cents on INR.

The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.