Research from Water Tower Research, Water Tower Research

Water Tower Research

Water Tower Research is a leading equity research firm that provides research on micro, small and mid cap companies.

Water Tower Research was founded by Wall Street veterans after witnessing a fundamental shift in the investment research industry with the result being a declining knowledge base among investors, a lack of awareness and a shrinking pool of fundamental research being conducted on companies across the small-cap and micro-cap spectrum. The same issues are now increasingly occurring in the mid-cap space. This sea change within the investment community is impacting not only the companies themselves but also current shareholders and potential investors. With significantly less active sell-side sponsorship by Wall Street, a substantial information gap has developed between companies and various constituents in the financial community. The net result is fewer channels for insight and information to flow between companies and investors.

Research from Water Tower Research

Equity Research Firm

Thematic (Sector/Industry)

Multiple Countries / Thematic (Sector/Industry)

<h3>KEY HIGHLIGHTS</h3>
<ul>
<li>WTR-CMI last week.&nbsp;The market gave back last week’s gains, with the S&amp;P 500 and the Russell 2000 losing 3.4% and 5.1%, respectively. Our WTR-CMI index lost 4.7% of its value, with all but one company (KOP: +1%) posting price declines. Lithium stocks led our index downward on stalled lithium prices and slowing momentum in EV growth. LAC’s price may also have reacted to&nbsp;a judge’s ruling&nbsp;in the Thacker Pass case.</li>
<li>Another week, another deal in ag.&nbsp;FMC announced&nbsp;a strategic collaboration&nbsp;with privately held Micropep Technologies to co-develop bioherbicide solutions to control herbicide-resistant weeds for corn and soybeans, where resistance to glyphosate and other broad spectrum herbicides is growing.</li>
<li>WWR’s initial assessment of Coosa mine.&nbsp;The company has completed the initial assessment for the Coosa graphite deposit in Alabama and filed its S-K 1300 Technical Report Summary on&nbsp;Form 8-K&nbsp;with the SEC, showing 754,000 short tons (st) of graphite material indicated and 2,998,000 st inferred, based on 87% recovery and ~3% concentration of graphite in the deposit, with the economics of extracting vanadium still to be determined.</li>
<li>November divergence.&nbsp;China&nbsp;was the outlier in November, with new vehicle registrations declining 9.2%, compared with 31% growth&nbsp;in Germany, 23.5% growth&nbsp;in the UK, a 14.7% improvement&nbsp;in Italy, and 9.7% growth Y/Y&nbsp;in the US, demonstrating the impact of China’s zero-COVID lockdown measures on the country’s economy.</li>
<li>Mixed bag of market indicators.&nbsp;While the overall&nbsp;construction market in the US&nbsp;is likely to remain steady in 2023, thanks to expected increases in infrastructure spending, higher construction costs as well as growing economic uncertainty do not bode well for 2024-25.</li>
</ul>
<h3>WTR-CMI WEEKLY PERFORMANCE</h3>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/315/771/original/image_28204332101671053185783.png?1671053187" class="editor-image img-responsive" data-smartkarma-image-id="315771"></figure>
<div class="content-remarks">
<p>Source: Y-Charts as of December 9 close</p>
</div>
<h2>Ag-Tech &amp; Bio-Ag</h2>
<p>Who owns farmland?&nbsp;Purchasing of US farmland by foreign entities, whether private investors or companies, has been in the news lately, especially regarding security concerns raised by government-affiliated Chinese entities buying (or attempting to buy) farmland in the US that is located conspicuously close to sensitive military installations, including our army and air force bases. While the total&nbsp;amount of American farmland owned by foreign entities, including China, is relatively small, it has been on the rise, with Chinese ownership specifically, increasing from zero to 1% over the past decade alone.</p>
<p>Potash players taking differing approaches.&nbsp;Last week, we highlighted Nutrien’s (NYSE: NTR) concerns over the potential shortfall of potash fertilizer in the wake of the continuing conflict in Ukraine and therefore continued sanctions on major potash producing nations—Russia and Belarus. However, it does not appear all western potash producers are on the same page when it comes to dealing with current conditions of high price-driven demand destruction, which resulted in the 2022 crop season ending with higher-than-anticipated fertilizer inventories due to the drop-off in late season demand, as farmers reduced or skipped fertilizer applications due to skyrocketing costs. Mosaic (NYSE: MOS), for example, is temporarily&nbsp;cutting production&nbsp;at its potash mine, to work off higher channel inventories ahead of next season’s prebuying, possibly in the hopes of stabilizing, if not reversing, recent price declines of fertilizers.</p>
<h2>Automotive &amp; Transportation</h2>
<p>More NGOs join the call to get out of China.&nbsp;COVID-induced production disruptions and ongoing lockdown policies of Chinese government continue to wreak havoc with the automotive supply chain. That, combined with growing awareness of the oversized role China plays in supply and logistics of industry-critical parts and components, is leading to growing calls for industries, including the automotive industry, to domesticate their supply chains and reduce dependence on China. Most recently,&nbsp;UAW highlighted&nbsp;the fact that many of the products used by the auto industry are manufactured in the Xinjiang region of China, likely with forced labor, adding another moral imperative for relocating the supply chain out of China. Given UAW’s weight in Democrat politics, we hope the call resonates with federal lawmakers and leads to something similar to Canada’s recent efforts to disentangle its industry from China, at least in the area of EVs and electrification in general.</p>
<h2>Energy &amp; Battery Technology</h2>
<p>Critical materials industry investments continue apace.&nbsp;Sigma Lithium (NASDAQ: SGML) announced results of an&nbsp;economic study&nbsp;that increased its mineral reserves by 63% and tripled net present value (NPV) of its resource to $15.3 billion, as well as a successful round of debt financing that raised $100 million the company will use to develop its resource and build out its production infrastructure, potentially positioning the company as one of the largest integrated (mine to battery materials) lithium suppliers in the world. Meanwhile, in an effort to avoid confrontations similar to the ones being experienced by LAC in connection with its Nevada lithium mine, Arizona Lithium (OTC: AZFAF) has&nbsp;entered into an alliance&nbsp;with Navajo Nation, a Native American mining services firm, to help develop its flagship Big Sandy lithium project in Arizona, which may smooth the path toward development of the resource, helping to localize lithium production in the US. Growing efforts to reduce the EV industry’s dependence on China have resulted in the Canadian federal government’s recent&nbsp;unveiling of its Critical Minerals Strategy, which seeks to encourage and help fund development of mineral resources in the country, especially those critical to the ongoing energy transformation in an effort to create a North American hub for critical battery materials production as our northern neighbor seeks to keep up with the US government’s initiatives included in the Inflation Reduction Act.</p>
<p>It’s not just lithium.&nbsp;Speaking of investments to ensure adequate supply of battery materials required to meet expected demand from EV and renewable energy growth,&nbsp;BMW is investing in an American start-up Jetty Resources, whose proprietary technology allows for the extraction of copper from secondary sources, including waste materials, to extract copper while generating significantly less CO2 in the process, making for a more environmentally sustainable metal production. The industry’s growing awareness that not just lithium and cobalt, but other metals, like copper and nickel (not to mention graphite) are nearing an inflection point where battery demand will account for majority of metal use and the possibility of supply shortages if the EV-driven growth in demand continues at projected pace. Speaking of the nickel market, the recent Benchmark Mineral Intelligence Conference in LA saw&nbsp;nickel players comment&nbsp;on the difficulty the industry is encountering in developing sufficiently robust domestic (or at least non-Chinese and non-Indonesian) production capacity and supply chain. In this context, the efforts by TMC the metals company (NASDAQ: TMC) to develop what may turn out to be one of the largest, albeit unconventional, nickel resources in the world appear even more critical to the future of electrification, especially considering the lower CO2 impact TMC’s resource development is projected to have. The issues of&nbsp;emissions in the production of batteries&nbsp;and rational consumption of rare metals are gaining increased attention from the industry, government agencies, and investors, which may further benefit companies capable of providing metals whose prosecution is advantaged from the ESG perspective, which we see as a positive for TMC.</p>
<p>The best cure for high prices.&nbsp;2022 saw an unprecedented increase in demand and therefore the price of battery metals, particularly lithium, nickel, and cobalt. While customers (cell and battery manufacturers) had to grit their teeth and bear the burden of skyrocketing metal costs, market forces appear to be doing what market forces do—adjust demand to meet available supply at a given price. Consequently, as 2022 is coming to an end, we’ve seen the market react to the&nbsp;first ever increase in battery pack prices, driven primarily by lithium costs. As expert analysis predicted EVs reaching price parity with ICE vehicles when battery costs decline to $100/kWh, the increase in battery costs seen in 2022 has pushed off the timetable for that achievement from 2024 to 2026. Furthermore, higher lithium and therefore battery costs are making it more difficult for&nbsp;“entry level” EVs to gain a foothold in the market, which may slow EV sales in emerging economies, as well as raise barriers to entry for new EV consumers in developed regions. The results of these trends are the slowing growth of EV adoption, expected in 4Q22, and signs of inventory build in lithium materials for battery production,&nbsp;as flagged by China’s BYD. It is therefore not surprising that the lithium market has taken a bit of a break from its unrelenting upward march through 2022. While&nbsp;lithium prices are likely to stay elevated, at least through 2023-24, until additional capacity is brought online globally, the metal price may have reached a new plateau for the time being, which may take the wind out of the valuation levels of some of the lithium producers, particularly companies still in the development stage.</p>
<h2>Rating &amp; Price Target Changes</h2>
<p>CTVA –&nbsp;RBC raised its price target (PT) to $79 from $78 and reiterated its Outperform rating.</p>
<p>VVV –&nbsp;RBC initiated coverage of the stock with an Outperform rating and $39 PT.</p>
<h2>Recent Reports &amp; Future Events</h2>
<p>Westwater Resources, Inc. (WWR) – Fireside Chat: VP of Sales &amp; Marketing Jay Wago, December 13, 2022, at 11:30 am EST</p>
<p>TMC the metals company (TMC) – Management Series Report – Collecting Nodules and Scientific Data as Regulation Timeline Nears</p>
<p>TMC the metals company, Inc. (TMC) – Initiation of Coverage – Tapping Untapped Resource to Address Unmet Need</p>
<p>Westwater Resources, Inc. (WWR) – Company Update Report – Steady Progress Deserves a Closer Look</p>
<h3>DISCLOSURES</h3>
<div></div>
<p>Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.<br><br>WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.<br><br>Dmitry Silversteyn, who is the writer of this report, covers the BioEconomy and Chemicals &amp; Materials Technology sectors for WTR. Mr. Silversteyn and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.<br><br>Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.<br><br>In certain instances, including this report, WTR will write research covering non-clients. Readers should assume that WTR may seek to turn these non-paying companies into paying clients. Likewise, WTR may seek to transform these non-clients into paying clients of it or of its affiliate, which provides services such as presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services of WTR or an affiliate might offer to clients.<br><br>The manner of WTR’s potential research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly written compliance guidelines.<br><br>The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors or agents shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.<br><br>All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.</p>

KEY HIGHLIGHTS

WTR-CMI last week.&nbsp;The market gave back last week’s gains, with the S&amp;P 500 and the Russell 2000 losing 3.4% and 5.1%, respectively. Our WTR-CMI index lost 4.7% of its value, with all but one company (KOP: +1%) posting price declines. Lithium stocks led our index downward on stalled lithium prices and slowing momentum in EV growth. LAC’s price may also have reacted to&nbsp;a judge’s ruling&nbsp;in the Thacker Pass case.
Another week, another deal in ag.&nbsp;FMC announced&nbsp;a strategic collaboration&nbsp;with privately held Micropep Technologies to co-develop bioherbicide solutions to control herbicide-resistant weeds for corn and soybeans, where resistance to glyphosate and other broad spectrum herbicides is growing.
WWR’s initial assessment of Coosa mine.&nbsp;The company has completed the initial assessment for the Coosa graphite deposit in Alabama and filed its S-K 1300 Technical Report Summary on&nbsp;Form 8-K&nbsp;with the SEC, showing 754,000 short tons (st) of graphite material indicated and 2,998,000 st inferred, based on 87% recovery and ~3% concentration of graphite in the deposit, with the economics of extracting vanadium still to be determined.
November divergence.&nbsp;China&nbsp;was the outlier in November, with new vehicle registrations declining 9.2%, compared with 31% growth&nbsp;in Germany, 23.5% growth&nbsp;in the UK, a 14.7% improvement&nbsp;in Italy, and 9.7% growth Y/Y&nbsp;in the US, demonstrating the impact of China’s zero-COVID lockdown measures on the country’s economy.
Mixed bag of market indicators.&nbsp;While the overall&nbsp;construction market in the US&nbsp;is likely to remain steady in 2023, thanks to expected increases in infrastructure spending, higher construction costs as well as growing economic uncertainty do not bode well for 2024-25.

WTR-CMI WEEKLY PERFORMANCE


Source: Y-Charts as of December 9 close

Ag-Tech &amp; Bio-Ag
Who owns farmland?&nbsp;Purchasing of US farmland by foreign entities, whether private investors or companies, has been in the news lately, especially regarding security concerns raised by government-affiliated Chinese entities buying (or attempting to buy) farmland in the US that is located conspicuously close to sensitive military installations, including our army and air force bases. While the total&nbsp;amount of American farmland owned by foreign entities, including China, is relatively small, it has been on the rise, with Chinese ownership specifically, increasing from zero to 1% over the past decade alone.
Potash players taking differing approaches.&nbsp;Last week, we highlighted Nutrien’s (NYSE: NTR) concerns over the potential shortfall of potash fertilizer in the wake of the continuing conflict in Ukraine and therefore continued sanctions on major potash producing nations—Russia and Belarus. However, it does not appear all western potash producers are on the same page when it comes to dealing with current conditions of high price-driven demand destruction, which resulted in the 2022 crop season ending with higher-than-anticipated fertilizer inventories due to the drop-off in late season demand, as farmers reduced or skipped fertilizer applications due to skyrocketing costs. Mosaic (NYSE: MOS), for example, is temporarily&nbsp;cutting production&nbsp;at its potash mine, to work off higher channel inventories ahead of next season’s prebuying, possibly in the hopes of stabilizing, if not reversing, recent price declines of fertilizers.
Automotive &amp; Transportation
More NGOs join the call to get out of China.&nbsp;COVID-induced production disruptions and ongoing lockdown policies of Chinese government continue to wreak havoc with the automotive supply chain. That, combined with growing awareness of the oversized role China plays in supply and logistics of industry-critical parts and components, is leading to growing calls for industries, including the automotive industry, to domesticate their supply chains and reduce dependence on China. Most recently,&nbsp;UAW highlighted&nbsp;the fact that many of the products used by the auto industry are manufactured in the Xinjiang region of China, likely with forced labor, adding another moral imperative for relocating the supply chain out of China. Given UAW’s weight in Democrat politics, we hope the call resonates with federal lawmakers and leads to something similar to Canada’s recent efforts to disentangle its industry from China, at least in the area of EVs and electrification in general.
Energy &amp; Battery Technology
Critical materials industry investments continue apace.&nbsp;Sigma Lithium (NASDAQ: SGML) announced results of an&nbsp;economic study&nbsp;that increased its mineral reserves by 63% and tripled net present value (NPV) of its resource to $15.3 billion, as well as a successful round of debt financing that raised $100 million the company will use to develop its resource and build out its production infrastructure, potentially positioning the company as one of the largest integrated (mine to battery materials) lithium suppliers in the world. Meanwhile, in an effort to avoid confrontations similar to the ones being experienced by LAC in connection with its Nevada lithium mine, Arizona Lithium (OTC: AZFAF) has&nbsp;entered into an alliance&nbsp;with Navajo Nation, a Native American mining services firm, to help develop its flagship Big Sandy lithium project in Arizona, which may smooth the path toward development of the resource, helping to localize lithium production in the US. Growing efforts to reduce the EV industry’s dependence on China have resulted in the Canadian federal government’s recent&nbsp;unveiling of its Critical Minerals Strategy, which seeks to encourage and help fund development of mineral resources in the country, especially those critical to the ongoing energy transformation in an effort to create a North American hub for critical battery materials production as our northern neighbor seeks to keep up with the US government’s initiatives included in the Inflation Reduction Act.
It’s not just lithium.&nbsp;Speaking of investments to ensure adequate supply of battery materials required to meet expected demand from EV and renewable energy growth,&nbsp;BMW is investing in an American start-up Jetty Resources, whose proprietary technology allows for the extraction of copper from secondary sources, including waste materials, to extract copper while generating significantly less CO2 in the process, making for a more environmentally sustainable metal production. The industry’s growing awareness that not just lithium and cobalt, but other metals, like copper and nickel (not to mention graphite) are nearing an inflection point where battery demand will account for majority of metal use and the possibility of supply shortages if the EV-driven growth in demand continues at projected pace. Speaking of the nickel market, the recent Benchmark Mineral Intelligence Conference in LA saw&nbsp;nickel players comment&nbsp;on the difficulty the industry is encountering in developing sufficiently robust domestic (or at least non-Chinese and non-Indonesian) production capacity and supply chain. In this context, the efforts by TMC the metals company (NASDAQ: TMC) to develop what may turn out to be one of the largest, albeit unconventional, nickel resources in the world appear even more critical to the future of electrification, especially considering the lower CO2 impact TMC’s resource development is projected to have. The issues of&nbsp;emissions in the production of batteries&nbsp;and rational consumption of rare metals are gaining increased attention from the industry, government agencies, and investors, which may further benefit companies capable of providing metals whose prosecution is advantaged from the ESG perspective, which we see as a positive for TMC.
The best cure for high prices.&nbsp;2022 saw an unprecedented increase in demand and therefore the price of battery metals, particularly lithium, nickel, and cobalt. While customers (cell and battery manufacturers) had to grit their teeth and bear the burden of skyrocketing metal costs, market forces appear to be doing what market forces do—adjust demand to meet available supply at a given price. Consequently, as 2022 is coming to an end, we’ve seen the market react to the&nbsp;first ever increase in battery pack prices, driven primarily by lithium costs. As expert analysis predicted EVs reaching price parity with ICE vehicles when battery costs decline to $100/kWh, the increase in battery costs seen in 2022 has pushed off the timetable for that achievement from 2024 to 2026. Furthermore, higher lithium and therefore battery costs are making it more difficult for&nbsp;“entry level” EVs to gain a foothold in the market, which may slow EV sales in emerging economies, as well as raise barriers to entry for new EV consumers in developed regions. The results of these trends are the slowing growth of EV adoption, expected in 4Q22, and signs of inventory build in lithium materials for battery production,&nbsp;as flagged by China’s BYD. It is therefore not surprising that the lithium market has taken a bit of a break from its unrelenting upward march through 2022. While&nbsp;lithium prices are likely to stay elevated, at least through 2023-24, until additional capacity is brought online globally, the metal price may have reached a new plateau for the time being, which may take the wind out of the valuation levels of some of the lithium producers, particularly companies still in the development stage.
Rating &amp; Price Target Changes
CTVA –&nbsp;RBC raised its price target (PT) to $79 from $78 and reiterated its Outperform rating.
VVV –&nbsp;RBC initiated coverage of the stock with an Outperform rating and $39 PT.
Recent Reports &amp; Future Events
Westwater Resources, Inc. (WWR) – Fireside Chat: VP of Sales &amp; Marketing Jay Wago, December 13, 2022, at 11:30 am EST
TMC the metals company (TMC) – Management Series Report – Collecting Nodules and Scientific Data as Regulation Timeline Nears
TMC the metals company, Inc. (TMC) – Initiation of Coverage – Tapping Untapped Resource to Address Unmet Need
Westwater Resources, Inc. (WWR) – Company Update Report – Steady Progress Deserves a Closer Look
DISCLOSURES

Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.  WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.  Dmitry Silversteyn, who is the writer of this report, covers the BioEconomy and Chemicals &amp; Materials Technology sectors for WTR. Mr. Silversteyn and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.  Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.  In certain instances, including this report, WTR will write research covering non-clients. Readers should assume that WTR may seek to turn these non-paying companies into paying clients. Likewise, WTR may seek to transform these non-clients into paying clients of it or of its affiliate, which provides services such as presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services of WTR or an affiliate might offer to clients.  The manner of WTR’s potential research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly written compliance guidelines.  The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors or agents shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.  All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.

Compass Minerals International, Inc (CMP US)

Mat-Chem Notes For the Week Ended December 9, 2022