Education Piece: Understanding how this microcap cap rallied 67% in 8 minutes

Dalaroo Metals (ASX: DAL) – It's a WA-based battery metals explorer that you've probably never heard of but its price action on Friday might serve as an important case study about enterprise value, cash at the bank and the power of speed.

Shares in the micro-cap explorer opened a 3.1 cents and rallied to a brief peak of 5.2 cents by 10:08 am AEDT. This would've been a trough-to-peak gain of 67.7%.

Dalaroo Metals At a Glance

• Market cap: $2.4 million as of 30 November 2023

• Cash: ~$514,000 as of 30 September 2023

• Project #1: Lyons River Project in WA. This is an early-stage lithium project located near Delta Lithium's Yinetharra Project

• Project #2: View Hill and 32 Mile Well prospects located in the Gascoyne region of WA. Another early-stage project that recently identified anomalies with peak values of 1,043 ppm Total Rare Earth Oxides

• Project #3: The Namban Project is located 90 km north of Chalice Mining's world-class Julimar Project. The company recently completed a drilling program to test large geochemical anomalies.

Delta Lithium Acquires Lyons River

Dalaroo executed a binding agreement to sell lithium mineral rights at the Lyons River Project to Delta Lithium (ASX: DLI) on Friday. The key terms of the agreement include:

• Total consideration: $1,000,000

• Consideration breakdown: $500,000 in cash and $500,000 in Delta Lithium shares

• Other details: Dalaroo will "still retain ownership of the Lyons River Project tenure and hold rights to all other metals and minerals apart from the Lithium Minerals."

• Exploration spend: Delta Lithium must spend a minimum of 50% of the annual statutory expenditure requirements on the Lyons River Project tenements (at the date of the sale agreement, this was $280,000 per annum)

• Management commentary: "The divestment of the Lithium Minerals Rights will allow Dalaroo to focus on the gold potential at the Lyons River Project in a rising gold price environment that is above US$2,000."

Why is this a big deal

The cash: Dalaroo had a market cap of just $2.4 million with $514,000 cash in the bank. It's now received another $1 million (so combined cash and Delta Lithium shares worth $1.5 million). This means the company has an enterprise value of just ~$900,000.

Leverage: Given the above, Dalaroo is now a cashed-up micro-cap with a lot of optionality. It can spend that cash on acquiring new projects, accelerating current exploration efforts etc.

It's only lithium rights: What's interesting about this deal is that Delta Lithium has only purchased the lithium rights. They haven't bought the project outright. Dalaroo retains rights to all other metals and minerals apart from lithium. What if the project becomes prospective for something else?

Focus on gold: Gold is trading within arms reach of all-time highs thanks to recent tailwinds such as peak Fed, rising rate cut expectations and falling bond yields. As the above quote suggests, the company is not shifting its focus to the gold potential at Lyons River.

Current gold prospects: On 9 November, the Goodbody gold prospect at Lyons River reported high-grade rock-chip gold assays of up to 6.25 g/t in an overall 6 km strike length.

The price action

Shares in Dalaroo Metals opened 6.9% higher as the market opened to 3.1 cents.

It hit a peak of 5.2 cents at 10:08 am before drifting sideways around the high 4-cent mark till around 10:50 am.

Why did the stock rally so much so quickly? Here are a few possible reasons:

• It's a little-known stock: The market might not have been able to price in the above news and factors

• Liquidity: Dalaroo is an illiquid stock with a thin tape. Once the price gets going, it may run out of sellers (or there's a substantial spread between the bid and offer)

• Beaten up: The stock was down around 66% since June

Dalaroo intraday price chart from 10:00 am to 10:50 am AEDT on 1 December 2023 (Source: TradingView)