Investor Webinar 5 April 2023: Cyclopharm (ASX:CYC), using a Stop Loss and why we’re looking at Rare Earths now

 

In this Investor Webinar:

 

– Cyclopharm (ASX:CYC), one of our favourite stocks, should be getting FDA approval soon!

– How using a Stop Loss can save your bacon.

– Rare earths are out of favour at the moment. That’s our cue to start looking at them.

 

See full transcription below.

Disclosure: Pitt Street Research/Stocks Down Under directors own shares in Cyclopharm.

 

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Transcription

 

Marc: Hello and welcome to Stocks Down Under. This is our weekly investor webinar. Good morning, Stuart.

Stuart: Good morning.

Marc: We’ve got a lot to talk about including a stock that we really like. You’ll kick off with that one, which is Cyclopharm. Then we’ll also have a look at trading…I wouldn’t say strategies, but things you can do to keep your portfolio a bit safe in uncertain times, stop losses to be specific. We’ll talk about that. And also, rare earths, they’ve taken it on a chin, Stuart, recently. So, yeah, you’ll talk us through which stocks right now could be interesting once the rebound comes. Right?

Stuart: Right.

Marc: So, let’s kick it over Cyclopharm, because that’s the stock that we’ve really liked for a long time. And they had some major news recently.

Stuart: Yeah. So, Cyclopharm (ASX: CYC), Potential payday in 2023. Now, I actually adapted the PowerPoint you’re looking at here from a previous slide, Potential Payday in 2022. The payday is coming. Let me explain what’s going on with Cyclopharm.

So what does Cyclopharm do? Radiopharmaceutical company. Radiopharmaceuticals are simply radioactive materials you use as though they were drugs for either diagnostic or for therapeutic purposes. This company has a pretty good business in radiopharmaceuticals, did $21 million in calendar 2022 revenue. The Marcet cap is $170 million, and we think it can go a lot higher because of Cyclopharm’s lead product, which is called Technegas. Technegas, it’s a gas that once the patient breathes in a small amount of the gas, it enables the lungs of that patient to be imaged in a very quick and efficient manner in a way that’s quite safe for the patient. It’s the standard of care in most jurisdictions around the world for imaging pulmonary embolisms, for example. The one place it’s not legal at the moment is the U.S. Marcet. It’s approved just about everywhere else.

The company’s been seeking U.S. approval for Technegas. It got knocked back about a little under two years ago. It’s now refiled, which we’ll talk about in a moment. We talk about that in a CEO interview, with James McBrayer, who runs this company, that’s on our website at stocksdownunder.com. And the interview was done on the 4th of April, 2023.

So, FDA approval of Technegas is coming soon. The company filed for approval of this some years ago and got back from the agency what’s called a complete response letter. It’s called a complete response because it’s the agency’s final say on why they will not approve a particular drug or medical device. If I could summarize the issues that the FDA had, they were concerned about understanding the safety profile of the product a little better, and the way in which it’s been made. In order to satisfy the agency’s concerns, Cyclopharm first had to go back and have a meeting with the relevant officials at the FDA, then take away their feedback, come back with the relevant paperwork, to answer those questions, and then refile. If you were to print out that paperwork and manually transmit it, it would be thousands and thousands of pages. So it’s a big job, filing or refiling for FDA approval of a product.

As I say, they got the, complete response letter in June, 2021, and they just refiled in the last, week or so. So that’s telling you that these things are onerous, but it mostly had to do with…not necessarily… It had nothing to do with the product was safer or efficacious. Basically, the agency just needed to understand more about it.

Now that, the refiling has happened, you’re in a position where the agency give themselves up to six months to review the documents, and then come back with a yes or no. We believe it’ll be a yes. Ordinarily, when products get before the FDA, there’s an 80 or 90% chance that the agency will say yes. They don’t say yes every time. I’ve seen products that have got, three complete response letters before a product got approved on the fourth attempt. So it’s not a laydown [inaudible 00:04:31] that they’ll approve it this time… Please let me say that again. This is not a laydown [inaudible 00:04:32] that they’ll get at this time, but I believe that the extra two years’ worth of work they’ve done increases the chances that the agency will say yes. And if they say yes, it’s a reasonable bet, in turn, that there’s a big rerating coming for Cyclopharm stock.

Meantime, they’ve got an existing business, as I say, yeah, well, it’s at $20,000,000 in revenue. Company just took control of its distribution businesses in a few key jurisdictions. So it’s able to grow that business without relying on third parties to distribute the product. And the gross margins for Technegas are generally about 75%, so it’s a good business. We won’t find out how they’re doing at that level until August. But, this… Technegas and other Cyclopharm products remain popular with the user base in most countries around the world. So it’s reasonable to think that there’s gonna be a decent growth rate coming up in August of next year. But in the meantime, you’ve got that big uplift where approval in the U.S. Marcet can not just double the Marcet opportunity, but potentially increase it five times. Reason for that is, the company’s seeking approval for the use of Technegas in diagnosis of pulmonary embolism, but there are plenty of other indications that can come beyond that. And, James McBrayer and I talk about some of those in our video interview.

So we commend that video interview, James interviews very well. There’s another interview on our website which we did a couple of years back to compare as well. Plus, there’s some research that our friends at Pitt Street Research have done.

So, plenty of ways to familiarize yourself with this business, but let me summarize. Superior product in Technegas used everywhere except the U.S. Multiple users for that product. Existing business is strong, and this company’s got $20 million in cash and no debt. So no reason to worry that it’s going out of business anytime soon.

Marc: All right. And I saw this morning, they just published a new investor presentation on the ASX platform, which basically explains the process that they’re now going through. So, if you’re interested in this one, have a look at that presentation. I think it is really good. So that was Cyclopharm.

Then, this is something on how to use stop losses, a new quick presentation. Because we get a lot of questions from subscribers about this sort of stuff and so we figured we’d talk about it and also, in an example, show how it actually can save your bacon. Because, sometimes, you know, when you buy stock, you’re bullish on it, and then it starts to trend down and you think, “It’s gonna turn around, it’s gonna turn around. We’ll get better.” But then a couple of weeks later, a couple of months later, you see that it’s down 40, 50%, or even more. And it comes to a point where you say, “Well, there’s no point in selling it now because I’ve made such a big loss already, and it potentially could trend down further.”

So the simplest way to avoid all that is to just include a stop loss in your trading strategy for a particular stock. It will protect your downside while it keeps you’re upside open. It takes the emotions out of your sell decision. Because sometimes, yeah, I think when things trend down, you’re like, like I said earlier, you know, “This is gonna bounce back really soon.”

Stuart: And Marc, both of us have been guilty of that, and we’re investment professionals. So, yeah, it’s a sin that, afflicts all of us in the investment community.

Marc: Absolutely. I dare to say every investor at some point in their investment journey has made that mistake. And if you haven’t, you’re out of this world. Maybe Warren Buffet has never done that, I dunno.

Stuart: Look, Dr. Spock on Star Trek, if he was a trader, he would not have this problem, but he’s about… And he’s not human either. I understand he’s Vulcan, is that right?

Marc: Exactly. Yeah.

Stuart: Right.

Marc: So for us, mortals, stop loss is very helpful. On average, it will improve the performance of your entire portfolio, because if you can cut losses but let your winners run, on average that will do wonders for your performance.

So, an example, for stocks under Concierge, one of our early stocks, last year in May, 2022, was Sandfire Resources, based on our bullishness on copper at the time. So we got in at 5.15, expecting the stock to go into the high sixes, sort of 6.70 was our target at that time. And you can see in the chart there, initially it went up, which was good in the first couple of weeks, but then something happened in China where all of a sudden the perceived demand for copper was less, and the copper price started to plunge. So at some point it hit our stop loss.

And usually what we do with the stop loss, and this is sort of…some people just sell immediately, other people take three days to see if it actually bounces back above that level. That’s debatable. You can do that, you know, it’s up to you if you wanna do that. So at that point our stop loss was hit. It stayed around that level for a couple of days, and then it went down further. So we sold immediately, and we got away with a limited 5.2% loss on Sandfire Resources because of our stop loss that we implemented. And as you can see in the chart, there have been at least four instances where the share price has gone lower than that, bottomed out around 3.20, I think 3.25, in October last year. At that point, if we’d stuck with Sandfire, we would’ve made a 37% loss on that particular trade.

So in this case, it helped save our bacon. We’ve had two other stocks in Concierge where our stop loss was triggered, and it’s helped us on average for the entire portfolio, which is now I think nine or…sorry, I should say all of the trades on average, which is 9 or 10 of them now, to limit that loss. And as a result, we’ve outperformed the broader S&P by more than 26% point since last year. So I think it really helps improve the average performance of your portfolio by cutting the losers, no matter how painful it actually can be at that time.

So what you need to do, if you want to use stop losses, check to see if your trading platform enables it, or, you know, allows you to do that. So, for instance, CommSec, the platform has it. And if you don’t know how to use it in the platform, just give ’em a call because they will explain it to you. So give you provider a call. If it’s other than CommSec, we don’t know about all these platforms whether or not they have it, but CommSec certainly does. And like I said, it can save you from incurring big trading losses, and then as a consequence, on average, across your entire portfolio, it can actually improve the performance quite a lot. So that’s why we use stop losses. And like you said, Stuart, we’ve been guilty of sticking with certain stocks for too long in the past, but stop losses can definitely solve that problem.

Stuart: Right.

Marc: All right. Then finally, another sector of the Marcet that we’ve always followed quite closely. I remember, Stuart, a couple of years ago, we talked about it a lot, and it’s done well since then. More recently, this entire sector, rare earths has come down quite a bit. So talk us through why that is and what we should be keeping an eye out for.

Stuart: Right. So, Marc, as, you know, I have a contrarian streak in me. I like to go to the investor conferences for the resources sector and talk about what…and look with the companies at what kind of projects they’re investing in. And, for the last year or so, every second mineral explorer wants to have a rare earths project in its portfolio. So rare earths have been all the rage. No surprises then that the price of rare earths, which we’ll be talking about in a moment have come down and this sector has been out of favor. Let me talk about what rare earths are, and then I’ll talk about why you should be watching, right now.

Okay. So if you paid attention in chemistry at school… Now, Marc, you were always a diligent student. So, you probably understand this chart better than I do. That’s the periodic table. And, if you break out the lanthanides, which is the sort of foldout section on column three there, that’s the rare earths. They’re not actually all that rare in the earth’s surface, and they’ve been known about for a long time. Rare earths were actually identified as such in the 19th century by some various chemists in Northern Europe. But it’s rare for them to occur in economic quantities in the ground. That’s where we get the rareness from. And they’ve got funny names like praseodymium or neodymium, for example, or cerium, or samarium, or gadolinium, for example, terbium. They’re the ones that you don’t actually have to deal with every day in science class, but they’re important enough to know about because of the applications that are showing up in the 21st-century economy. Let me talk about several of those.

So, you want to build a wind turbine, you need a permanent magnet in that turbine to be able to turn it around, neodymium and praseodymium go into that. Same deal with the kind of permanent magnets that would go into electric fields, not just hybrids, but the fully electric ones. Your smartphone has probably got some samarium in it, or terbium in some way. Energy-efficient light bulbs need that sort of stuff. Anything that’s 21st century is going to need rare earth minerals. And that turns out to include a lot of the sophisticated military equipment that countries need to defend their interests at the moment.

And here’s the extra rub, if you click to the next slide, everyone has been worried witless about rare earths because China owns so much of them. The legendary Deng Xiaoping said back in 1992, “Saudi Arabia has oil, we have rare earths.” So at its peak, something like, 90 to 95% of the world’s output of rare earths was coming from mines and refineries in China. That pretty much gave that country a hammerlock over some pretty important metals that have become more important over time. And this chart documents how that monopoly is diminishing. But my argument is it’s not diminished yet, because it’s only been in the last few years that countries other than China have realized that it’s probably a mistake to allow China to have that much control over key commodities.

The giveaway for me that this was gonna be important was when I read that if you need an F-35 fighter jet, turns out that vital components are made out of material coming from China. The last thing Uncle Sam wants is have to go and ask its potential future adversary for some rare earths to actually get military material to fly. So everywhere you look, Western powers are trying to encourage rare earth infrastructure that doesn’t rely in any way on China. And China is formidable in terms of the knowledge base that that country is invested in, streets ahead of the rest of the world. Now, Western chemists and engineers have to catch up.

There on this particular slide is the chart of Lynas, the leading rear earths company traded on ASX, code is LYC. They own the Mount Weld mine in Western Australia. They also do some downstream processing at a plant in Kuantan, in Malaysia. They’re building a refinery in Kalgoorlie, and they’ve also got plans to build some capacity in, I think, the U.S. State of Texas. So this is an important company.

As you can see there, up until about a year ago, the stock was riding high based on market interest in rare earths, combination of rising prices and the realization that this company had something that the rest of the world was needing a lot of. But things have gone off the boil in the last 12 months, and that tells you that rare earths are going out of favor. Pretty soon if you bring up rare earths at a barbecue, people are gonna be looking to change the subject. That’s when I get interested because, at some point, people are gonna wanna pay attention to some of these rare earths players. And, so I’d look to see, as Lynas’s bellwhether, maybe trending back to the levels you see more on the left hand side of that chart, at which point rare earths become very interesting indeed.

Marc: So, two questions here. Why did the interest in rare earth come down? So why is, in this case, Lynas’s share price coming down? And second, what could trigger a move all the way back to the levels that we see there at the start of the chart?

Stuart: Right. So, part of it is prices. You can actually check the price of various rare earths traded in China and elsewhere. And the price has been coming back, so that’s been part of the action. And also, there’s also supply and demand, you know, as new projects come on stream, you know, there’s a little more rear earth’s capacity around. So it’s the old supply-demand factor. A lot of commodities have been going backwards because of the unusual inventory positions that resulted from China’s lockdown, for example. So that’s part of it.

Why would you wait? Well, you know, price trends have a way of building on themselves. So once prices get back to the levels we saw maybe two, three years ago, at that point no one will be interested, but the existing producers will probably be trading at very inexpensive levels.

Well, that pretty much replicates our thesis. Rare earths are very important if you live in the 21st century. They go in and outta favor, and they’re coming outta favor now. But the thing that will not change is that public policy is favoring new projects. So you come up with some decent rear earths infrastructure, and you can build it from scratch with the help of… Well, that doesn’t involve any of the existing players in China. You’re in the… The taxpayer stands ready to help, basically.

So stocks to watch, I mentioned Lynas before. Iluka, the mineral sands minor is building a rear earths refinery at a place called Eneabba in Western Australia. Then there’s three emerging producers, Arafura Rear Earths gets their Nolans project up and running this year. Hastings at Yangibana in Western Australia, that’s now looking for project financing. And then there’s Peak, which owns one of the largest project globally over in Tanzania. Tanzania has come back onto the radar screen of international investors in the last couple of years. And it’s fair to say that it won’t be hard to fund a project of the size of that company. So three companies to keep on your radar screen, obviously, Lynas at the right price is probably worth paying attention to, and Iluka is a good beneficiary as well.

Marc: All right. Just let us know, Stuart, when the bell rings to get in and we’ll all jump onboard. Because that’s always the trick, right, with this sort of stuff. When is the turn coming? But, yeah, to all our viewers, if and when we see that, we’ll try to alert you to that as well. So that brings us to the end for this week’s webinar. Thank you, Stuart, and thank you, everyone, for watching. And we’ll see you next week.

Stuart: Stay bullish.