Ground Breakers: Activist short seller J Capital is LONG Firefinch, and the Fintwit community is not happy
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Activist short seller J Capital has changed track in a stunning bait and switch, releasing a long report praising Australian gold and lithium miner Firefinch (ASX:FFX).
J Capital burst into ASX investor consciousness last year with a report on lithium market darling Vulcan Energy (ASX:VUL) titled “God of Empty Promises”, which accused that company of painting an overly rosy picture of the case for its Zero Carbon geothermal lithium project in Germany’s Upper Rhine.
JCap and principal Tim Murray, once a candidate for the ALP in the blue ribbon seat of Wentworth, later issued an apology and promised it would no longer share the report in a settlement after Vulcan and its directors brought a claim of misleading and deceptive conduct before the Federal Court in Perth.
The radical departure from JCap’s strategy of issuing scathing research reports on stocks it is shorting did little to satiate the bloodlust of the Fintwit community, who were all hot and bothered after it announced last night on Twitter a new Australian company was in its sights.
$1.1 billion capped Firefinch owns the Morila gold mine and half of the Goulamina lithium project in Mali, the latter of which will be developed in a 50-50 joint venture between Chinese lithium giant Ganfeng and listed FFX spin out Leo Lithium.
JCap actually thinks FFX is undervalued, giving it a valuation of between $1.68-$2.28 billion at an upside of 70-130% it said was based on conservative estimates.
You can’t blame JCap’s coverage of Australian companies for seeming a little neutered.
It has faced complaints previously after unsuccessful swipes at Nearmap (ASX:NEA) and Wisetech (ASX:WTC) (now one of the ASX’s top large cap movers after profiting from last year’s shipping and logistics boom).
But its attempt to knock down Vulcan last year proved disastrous.
The US headquartered firm was less than happy with the Australian legal system, after issuing the apology letter and retracting its report.
Two jurisdictions we do not feel confident in defending our opinions are North Korea and Australia.
— J Capital (@JCap_Research) December 15, 2021
The Fintwit community lapped up the drama of the Vulcan report like a cat with a bowl of milk.
So you can imagine their displeasure at the bait and switch which sent the fireworks back to the shed just as they were ready to light the fuse.
After a long night of anticipation the outcome turned out to be less gratifying than the hit of schadenfreude the doom mongers of the Twittersphere were craving.
you guys just blue balled hundreds of traders
— Mark Nicolaidis (@SexyMoneyCap) March 23, 2022
Still, some made a splash of lemonade out of the whole deal.
Simple, but true.
Think of it as the difference between Cremorne and Bankstown. 😂
Same country, but different sociologically, economically, ethnically.
But the music is WAAAY better in Northern Mali than Bankstown – take that to the bank. https://t.co/c4x9JuW3jm
— EndoftheWorldasWeKnowIt (@Mike_y_San) March 23, 2022
*Breaking News* J Capital changes their name to Next Investors 😂
— Bhag Cap (@BhagCapital) March 23, 2022
— TwinTurboCelica (@TwinTurboCe1ica) March 23, 2022
That last one’s an interesting point. JCap’s view is hardly contrarian — Firefinch has been a market darling for well over a year.
It’s a casual 320% up over the past year and with a market cap of $1.1 billion is already in the S&P/ASX300 index, a major trigger for inclusion in ETFs and index funds.
FFX shares gained 4% this morning to hit five year highs of 93c before retreating to a small 0.5% gain. That was mild compared to other lithium stocks today like Sayona (ASX:SYA) and AVZ Minerals (ASX:AVZ), who rose 9.1% and 9.22% respectively on no news.
JCap’s reports are not technically written for the Australian market due to its US domiciled status. But you know, you can read between the lines.
Titled ‘White Gold in Timbuktu’, JCap says the political risk in Mali has scared investors away from investigating Firefinch’s value. A curious thing to say about a $1b capped company but we digress.
“We believe Firefinch’s under-appreciated lithium asset, Goulamina, alongside its operational gold mine, Morila, are significantly undervalued based on the current market capitalization,” JCap said.
“We view both the gold and the lithium project as de-risked as they are operational and fully funded respectively.”
JCap says the main catalyst for its value proposition is the upcoming listing of Leo Lithium via a distribution to Firefinch shareholders. It says the Goulamina lithium mine, one of the largest hard rock mines in the world to be developed in the next couple of years, is worth at least $1.4 billion, double the valuation currently implied by FFX’s market cap.
They say Morila is worth between $265-450m on “very conservative” production assumptions of 100,000ozpa over its life of mine and an upside target of 156,000oz.
Firefinch mined 46,000oz at Morila in its first full year of operations last year after picking up the mine at a US$29 million steal from Barrick and AngloGold in 2021.
It plans to hit a runrate of 200,000ozpa by 2024 after it restarts mining this year in the Morila Super Pit, displacing lower grade ore sources from tailings and satellite pits.
JCap also justified its unusually bullish position by noting FFX’s expansion plans at Morila were fully funded already. Similarly it views FFX as cheap compared to lithium peers Liontown Resources (ASX:LTR) and AVZ.
“The best lithium projects have large, high-grade resources, low production costs, firm offtake agreements, and funding in place. Firefinch has all of those things,” they wrote.
“Firefinch has secured a 100% offtake agreement and funding of the project from its joint-venture partner, Ganfeng, and yet Goulamina is valued in line with smaller, less-advanced projects.
“We believe it is incredibly cheap.” JCap said LTR is valued at 5x the market value of the Goulamina project share while AVZ and its Manono project in the DRC is at 3x on stock and 4.4x on project value.
“Manono is located in the DRC, which is a higher-risk country than Mali. The project is further from a port.”
They also think the political risk in Mali, despite a recent military coup, is not as high as it seems given the government’s reliance on mining to keep taxes coming through the door.
Resources stocks gained with the materials index up 1.26% after commodity prices climbed overnight.
Nickel continued its volatile run, this time closing at the 15% upward limit at US$32,380/t on the London Metals Exchange amid fears of short supplies and suggestions the LME could refuse nickel supplies from Russia.
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