The FTSE AIM market has fallen in value by a third over the past five years, and 12% in 2023 alone.
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Of course, small caps are all about picking the winners — but in an environment where the market as a whole continues to slide, it can become disheartening — especially when otherwise excellent companies are dragged down by negative market sentiment.
However, the key thing to understand is this: the AIM market peak in September 2021 came just three months before the Bank of England started to increase the base rate — all the way from 0.1% to 5.25% at present. As rates rise, low-risk bonds, certain blue chip stocks, and savings accounts all become more attractive, while riskier small caps become unattractive.
To understand this in practice, consider that between 2009 and 2021, there were virtually no risk-free investing choices worth looking at. But now, you can get a 100% guaranteed 6.2% annual return on an NS&I growth bond.
This means that if you plan to invest £1,000 in an FTSE AIM company over the course of a year, the true cost of the investment is actually £1,062 — because you are also forgoing that guaranteed return. Or in other words, your investment has to rise to cover the cost of stamp duty, and then an additional 6.2%, to cover the risk premium.
Obviously, this has made investing in small caps unattractive on an individual basis, though this is only half of the equation as it becomes a self-fulfilling prophecy. With investment deserting the sector, share placements have to be done at deep discounts to attract investors — and investors know this, so stop investing, further worsening the cycle.
The alternative is taking on debt at unsustainable terms — many companies have done this, and many will sink as a result.
But despondency is where the best value can be found. Most analysts consider that rates have either peaked or come close to their peak. This means that the macroeconomic downward pressure on small caps is ending because they have now corrected to a fair risk premium.
And when the rate cuts come, AIM shares should in theory start to rise as the risk premium falls and financing becomes easier. Therefore, the market bottom may not be in, but it will be soon. And when you add in a catalyst or two, sparks can fly.
Small caps to watch
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Amaroq
I continually try to highlight AMRQ as an excellent opportunity. The gold miner has serious interests in Greenland gold mining, as well as a strong portfolio of critical minerals. The company is backed by serious players and recently upgraded its Icelandic listing to the Nasdaq Main Market.
At flagship Nalunaq, the plan is to deliver ore from a mining trial in Q1, before the first gold production no later than the end of H2 2024. Shares have risen by 40% year-to-date, and substantially since the company was first highlighted by ShareTalk.
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ECR Minerals
ECR has had a fairly unpleasant few years, but oversold companies are often where value can be found. It’s recently raised £580,000 through a direct subscription at 0.175p per share via a cocktail of high-net-worth individuals and institutional investors.
Managing Director Nick Tulloch and Chief Operations Officer Mike Whitlow have recently joined the board, and it has an ongoing strategic review of assets — such as core gold opportunities in Australia — today announcing extended Gold Prospectivity and a Niobium Bullseye Discovery at the Lolworth Project.
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Golden Metal Resources
GMET recently announced a significant 10km2 conductive zone at its recently acquired Kibby Basin lithium project in Nevada, USA. However, the focus is on the 100%-owned Pilot Mountain project, a 5,908-acre project located just 20km from Mina in Nevada, part of the world-famous Walker Lane Mineral Belt.
It’s the largest undeveloped Tungsten deposit on US soil — and the US Department of Defense is banning the import of the metal from China from 2026, even though the country represents 86% of global tungsten exports. CEO Oliver Friesen has a signed offtake letter of intent and is pursuing non-dilutive US government grant funding.
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Abingdon Health
ABDX released its saliva-based pregnancy test in June, and the product is now available inside 400 Superdrug shops, Superdrug.com, 298 Tesco shops and Tesco.com. The company estimates that 12.5 million pregnancy tests were performed in the UK in 2022, while the global pregnancy test kits market was valued at $1.7 billion in 2022 and is expected to reach $2.28 billion by 2028.
This is a product that could truly disrupt the pregnancy testing market, and shares are trading at a fair value.
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LifeSafe
At 35p, LifeSafe shares may be appealing to value investors, after the company got a much-needed placing out of the way, raising £1.2 million in August. Its StaySafe All-in-1 fire extinguisher can extinguish virtually any fire, including lithium-ion battery fires — and the product is popular, with revenue in the first four months to 30 April rising by 200% to £2.1 million.
Interim results are due tomorrow, which should make for good reading after the company launches the flagship in 850 Screwfix shops and online.
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Tekcapital
Tekcapital holds shares in four portfolio companies, but the crown jewel remains its 97% ownership of MicroSalt, which has developed a patented process to produce salt crystals with the same flavour and half the sodium content of normal table salt.
The portfolio company already has many partnerships in place and looks to launch an IPO in the near future — with ongoing conversations to develop further partnerships with major snack food players.
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OptiBiotix
Perhaps viewed as the other half of the same coin, OPTI has developed SweetBiotix — a patented sugar substitute which is classed as a dietary fibre and is attached to several health benefits.
The company signed a significant manufacturing agreement with a US partner in September 2020, guaranteeing annual milestones and royalties on sales with blue chip companies including Kellogg’s, Nestle, and Coca-Cola.
Most recently, OPTI has agreed to launch several of its products with Boots in Q1 2024, with a shop launch potentially happening in May 2024.
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Premier African Minerals
PREM investors have seen highs of 1p+ and lows below 0.3p per share over the past few months. Tough negotiations between the company and offtake partner Canmax have resulted in a tight, though achievable, timeline to deliver spodumene concentrate — and the necessary upgrades to get the plant producing are well underway.
With the first delivery due in Q4, investors are hoping that the days of volatility are over — though any lithium investor who has followed the ASX companies know that first sales are just the start.
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Kodal Minerals
KOD investors may be starting to feel like Fry’s dog Seymour out of Futurama. The >$100 million agreement with Hainan to finance the development of Bougouni in Mali was initially agreed in January — and nine months later, despite a goodwill of $3.5 million — the deal is yet to be finalised.
However, ongoing positive communications, confirmation that new Malian laws will not affect the project, positive on-the-ground developments over the year, and a DMS plant design close to completion mean that this deal will almost certainly go through eventually.
KOD has until Friday to finalise the deal or agree a new extension has to be agreed — investors will wait.
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Blencowe
BRES has finally completed its 100T bulk sample testing, underlining a high-quality graphite product from flagship Orom-Cross. The company has accordingly been awarded a $5 million grant from the US Development Finance Corporation — the first pre-production graphite project to receive this support.
With the DFC set to co-fund the DFS and be a lead partner to take the project into production, BRES is now looking significantly de-risked. The share price is up by 18% year-to-date, and yet, this is a small increase when you consider the improved fundamentals.
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Tertiary Minerals
TYM and Arc Minerals are perhaps best to be treated as an investment pair. Though very different in size and prospects, both are hunting for copper in Zambia.
ARCM’s JV with Anglo-American may soon yield investor fruit. Meanwhile, TYM today announced a detailed, non-binding term sheet for an earn-in and JV with a ‘well-resourced mineral exploration and mining company’ third party, worth up to $6 million to explore the Konkola West Project. While this project is 250km from ARCM’s claims, given that TYM also has an economic interest in the Mukai project close to the ARCM claims, a betting man would name Anglo as the partner.
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Avacta
Avacta’s flagship AVA6000 continues to go from strength to strength, though the real turning point could well be hard data from the Phase 1A clinical trials. The treatment is designed to deliver higher doses of chemotherapy, but without side effects — and where many others have failed, early results look extremely promising.
Having said this, short-term financing needs to be looked at, with CEO Alastair Smith favouring non-dilutive terms.
The bottom line
Long-term investing in the small-cap market — and particularly in AIM shares — is about timing the bottom. These 12 companies would be valued much higher in a looser monetary environment, and all 12 could see decent share price rises into Q4 as sentiment improves, or as a catalyst gets lit.
Time to buy the dip?
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This article has been prepared for information purposes only by Charles Archer. It does not constitute advice, and no party accepts any liability for either accuracy or for investment decisions made using the information provided. Further, it is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.
