Sunday 19 December 2021

A Quick Q&A With Martin Kepman, CEO of Manganese X

I continue to hold a substantial position in Manganese X (MN.V) (MNXXF). MN has lagged other battery metals stocks, particularly in lithium and grapite. I consider Lithium Americas Corp. (LAC) (LAC.TO) to be the bellwether stock for the battery metals space. It has shot up to over $50 CAD recently and is currently valued at a $4.5 billion CAD market cap at Friday's close of $37.20. LAC has traded sub-$1 as recently as 2013, and sub-$4 as recently as March 2020. That illustrates the potential for these battery metals stocks, even as they start out as microcap penny stocks. Especially the ones like MN which have pulled back significantly from highs made earlier this year.

I believe that MN's lag in the industry is about to change. We are at the peak of tax loss selling season and things tend to turn around for beat up stocks that have potential in mid-December through February. Keep in mind what I have said before about MN as one of the handful of microcap manganese pureplays on the market. A run on the manganese sector only needs to be a small portion of the run on lithium in order for MN to do extremely well. In the meantime, the company has its individual set of opportunities and challenges in the near term. 

Martin Kepman, CEO of Manganese X (MN.V) (MNXXF) was recently featured in a video:

The production value is poor, but the content of the video is great. You can tell that he is enthusiastic about the near term prospects of MN. However, this interview hasn't sparked much buying as the stock price still rests slightly under $0.30, much closer to the $0.19 52-week low than the $1.04 52-week high. A part of me understands this as the market has been brutal for small caps while the large players boost the S&P 500. Another part of me takes a look at the performance of the lithium stocks as well as the price performance of manganese this year and knows it's only a matter of time before MN catches up. 

What I find with companies waiting on a PEA is that it can sometimes be a sell on news event. Especially if investors have been waiting on the PEA for a while. The issue is after the PEA is out there, what's next? With that in mind, I sent Martin some questions so I can get a feel for what's next for MN. He sent me an email back then we had a phone call. I will be posting my questions exactly how I asked them while I will be paraphrasing his answers. Before posting this, he will also have reviewed what I said just to make sure that I interpreted his answers correctly.

Q1: How will you go about commercializing the resource? I assume you won't be raising the capital under the MN umbrella all alone given how dilutive that can be. Do you plan to partner with a larger mining company?  Do you plan an offtake agreement with an EV producer? Do you plan to just get bought out or sell the property?

A1: Martin said that the company's first priority is to get a very positive PEA. There have been several inquiries for financing from some institutions but the company wants to wait. He pointed out that the company has about $4.75 million in cash so it's not in a bad spot financially and can pick and choose the right time and with who to do deals with in the future. He expressed frustration that while past deals got the company the strong cash balance, that came at the cost of dilution at lower prices which is what has negatively impacted the share price, in his opinion, unfairly low. His focus is on the smaller investor and wants the stock price substantially higher. He will be investigating all opportunities after the PEA, incuding non-dilutive ways to take the next step. He mentioned that the company has several European NDAs with some major cathode manufactures and North American suppliers in multiple industries (not necessarily electric vehicles) who are EXREMELY INTERESTED (in capitals his words) due to transportation costs, duties, tariffs and supply chain issues. They currently get their supply from China, and the cost of shipping a container is almost doubling the cost of the material itself right now. MN also has a great relationship with Quebec Gouvernment Investmente Quebec.

My opinion: It sounds like there is going to be great and immediate demand for manganese on North American soil to avoid these shipping and logistics costs. I wonder if MN will be able to get an offtake agreement or strategic investment from one of these North American companies, as their timelines might be more desperate and immediate to get something up and running compared to TSX financing timelines. To me, that would be the single biggest bullish event for the stock. A PEA could lead to a NPV of $5 billion and it won't move the needle much if people know that it's contingent on a massive financing and who knows how long that could take. On the flip side, a billion dollar NPV but with quick moves made in the financing and construction side of things would cause a stock to skyrocket.

Q2: You brought up the manganese purification process with Kemetco again. Is this process proprietary to MN? Can Kemetco use it on other similar resources independent of MN? Do MN and Kemetco have an ability to form a JV and sell this tech to other manganese mines? If so, what and where would be the market given the limited Manganese deposits in North America.

A2: Yes, the manganese purification process with Kemetco is definitely proprietary to MN. Kemetco can not use it on other similar resources independent of MN. There is the possibility of licencing out the technology. This technology can be used worldwide on either carbonate or oxide manganese. Martin reiterated the great relationship with Kemetco and spoke very highly of their professionalism, as well as with Wood, the developers of the PEA.

My opinion: It sounds like MN is setting itself up to be an extraction/processing technology play as well as a mining play with manganese. I think this would be a smart idea to promote both sides going forward as a unique investment opportunity. We see how American Manganese Inc. (AMY.V) is doing with its recycling/upcycling technology -  also working in conjunction with Kemetco - and Wenden Manganese stockpile. AMY currently is at a $140 million market cap, four times higher than MN. Imagine if MN could offer a technology aspect to producing battery metals as well as the metals itself.

Another interview held by Proactive took place with their analyst Christopher Ecclestone:

This interview was more about the Manganese industry in general, but MN was mentioned. This video is good for understanding the importance of high-purity Manganese as a cheaper replacement for Cobalt in the production of electric vehicle batteries, as well as undertstanding the basic uses of Manganese and its near-term market outlook. (Hint: it's quite bullish)

I look forward to the developments in 2022. The PEA will be the major event that hopefully is released in Q1, but that will be just the beginning.

Sunday 5 December 2021

The Medivolve Paradox: The Penny Stock That's Simultaneously Overhyped And Cheap?

There has been a lot of yapping about Medivolve Inc. (MEDV.NE) (COPRF) on all of the stock groups and chat boards lately. So I decided to take a look. There are generally two types of penny stocks. The undervalued gems that you have to find yourself and the hyped up ones that are spoon fed to you by pumpers.

MEDV seems like a weird combination of both. The latest Q3 results show $25 million in revenue and $7 million in net income. But the market cap is only $53 million at $0.135. Annualizing the net income and slapping a 10 P/E on it would justify a $280 million market cap or about a $0.70 stock price. This would kind of make sense if no one heard of this stock. I've seen Canadian juniors trade like this before. However, not in the way that MEDV is trading. 

For the two weeks since the financials were released, millions of shares have traded each day. The company is very IR friendly and going strong with the promotion right now. You can't turn your head in Canadian penny stock land without some jackass trying to stuff this stock down your throat. It's not undiscovered. There's something very strange going on. A stock is not simultaneously underhyped and overhyped. MEDV doesn't have a buying problem, which is what would normally plague an undervalued company. It has a SELLING problem. Despite millions of shares being bought, there are tons of sellers at these apparent "cheap" prices. These sellers would presumably know all about the Q3 financials and yet are selling anyways. Why?

Now I know the NPC-equivalent to penny stock traders would ape "SHORTS!!! SHORTS!!! SHORTS!!!" on this like mindless drones. I'm so sick of that stupid argument. Not every stock is manipulated and shorted, and those who do it are doing it for good reasons and are smart. They aren't interested in getting themselves into short squeeze situations. Let's just say this. Whether it's shorters or sellers, SOMEONE is very confident that MEDV is NOT significantly undervalued at a $53 million market cap despite initial apperances of a stock worth at least five times that amount. To the point where they are willing to dump/short millions of shares even as the hype train from retail shareholders is at full steam ahead.

A few minutes of looking at the financials and you'll see why this is. Shown below is MEDV's Q3 balance sheet


I have highlighted two line items in red. The amounts receivable and the accounts payable. In one quarter the company's accounts receivable blew up from $3.4 million at the end of June to $24.3 million at the end of September. Nearly the entire amount of their revenue is booked to IOUs, not received in cash. Cash generation is king in business. And by looking at the cash flow statement you can see how this supposedly profitable business is having a massive drain on the company's cash:


Despite the positive net income, there is an operating cash outflow of $8 million year-to-date. That has resulted in the company issuing $17 million worth of equity in dilutive private placements to pay off debts and keep the lights on.

This is accounting 101, a red flag you want to look out for. An exploding A/R balance is a sign that a company is not actually collecting on the revenues it's booking. It's *traditionally* a way for companies to commit fraud by overstating revenues. 

Now I say traditionally because MEDV is not necessarily doing this. Maybe MEDV will get that cash in the next quarter and the A/R balance will come down. But this is something that shareholders have to keep a close eye on in future financial reports. The longer and larger that A/R balance grows, the more dubious the revenues appear to be. For now it's too soon to tell one way or another, but presents a big risk that pumpers either don't have the will or the financial knowledge to properly explain to people. MEDV isn't undervalued. The market just has some reservations about its business model.

In any of these future MEDV shareholder webinars, the absolute first question that management should address is the accounts receivable balance and receivables turnover. Because if those things are going out of control in the wrong direction, it doesn't matter how high the revenue growth or how much profitability has been generated by booking accounting revenues. The revenues need to be considered extremely low quality until collected in cash, given the circumstances. 

There is one line in the financial report from a couple of weeks ago that may seem just fine and great to many new investors, but is a huge, huge no-no for me: 

"Transitioned from a cash pay business model to Insurance Reimbursements increasing daily gross revenue and revenue per patient compared to the legacy cash-based business model used since the Company's inception"

This is one of the WORST and trickiest business models you can undertake as a small company. Instead of getting the cash upfront, MEDV is now performing the services, booking the revenues, then will go after insurance companies for the cash. Sure a company can increase business and pricing by going after an insurance reimbursement model. Just like your local Walmart could probably increase its revenues temporarily if it invited everyone in to grab what they could and charge their insurance for it. The challenge is NOT garnering the revenues for goods and services here. The challenge is getting insurers to pay for it. Clients are more than happy to come in and receive health care services if they think they won't be paying any out-of-pcoket expenses. 

However, MEDV is this little no name company and insurance companies are some of the biggest and strongest institutions in the world. What if the insurance companies say "no, we don't think your claims are valid. We won't pay out these bills". What's its recourse? Sue them? The insurance companies have a far bigger and better legal team, and all the politicians with their SuperPAC donations will be on their side not MEDV's. 

If the insurance companies deem these expenses non-reimbursable AFTER the services have been performed, MEDV will have no recourse. The expenses will have been spent to perform those services and earn those revenues, but no cash is actually coming in. The company would have to book reversals to the revenue and instead of big net income, it's big net loss numbers. 

When looking at the second number I highlighted in red on the balance sheet, accounts payable, one will realize the potential financial suicide would happen swift and hard. The A/P line has exploded to over $20 million. The expenses that have occurred in order to provide the services that generated the revenue are piling up as bills. Those bills belong to creditors that will come knocking on the door hard if they think MEDV is struggling to turn its revenue IOUs into cash. They'll have to move quick like buzzards on a recently dead carcass. What happens then? Bankruptcy and the stock is worthless.

Now I'm not saying this will happen with certainty. Maybe MEDV will collect on the reimbursements sent to the insurance companies just fine. But until the company demonstrates that it can, this is a BIG risk to the investment thesis here. That's why MEDV appears so "cheap". 

There are basically two extreme outcomes right now and maybe a third middle of the road one. The positive outcome will be MEDV collecting on the vast majority of revenues in cash over the next couple of quarters. Let's say 80% or more. The company proves that its business model is robust and follows up Q3 with a couple more similar quarters as well as vastly improved balance sheets and cash flow statements reflective of that successful cash collection. The stock price gradually moves up over those several months to something in the $0.50-$1.00 range, or maybe higher if more revenue growth is proven and forecasted. 

The negative outcome is MEDV failing to collect on the reimbursements and has to write off a lot of its revenue. Creditors see that the company is in trouble. Perhaps the OSC investigates and the stock is halted as financials have to be restated. Bankruptcy would be a very real outcome in this situation and it would happen fast.

The third scenario is kind of a middle ground. The business isn't a complete bust, but reimbursements are hard to come by. The company has to write off revenues but not to the point where it's unprofitable and creditors pick away at the bones. The retail trader's dream of an easy 10-bagger is smashed, but they don't lose all their money either. This scenario likely results in the stock staying pretty rangebound, let's say $0.05 to $0.25. 

Those are the three scenarios. I'm pretty neutral on the stock given the risks and potential rewards. What I see right now is a stock that is being heavily dumped by sellers and picked up by mostly less experienced buyers who are inept at analyzing financial statements. Some of the sellers could also be equally inexperienced and financially inept, but it's guaranteed that not all of them are. So I think the advantage is skewed to the sellers right now. 

I am not buying, but I will keep an eye on this stock. If the company proves it can collect cash on audited financial statements (not future promises made on webinars that are protected by forward looking statement clauses), I will consider a long position. Even having to pay $0.25 post audited financials presumably due in March/April would leave a lot of upside if this business model is, in fact, robust. But avoiding a buy now also avoids a ton of downside risk that is clearly being ignored by the pumpers as they push this "too good to be true" easy 5 to 10 bagger scenario.