Hidden Gems: How to use market volatility to find 'leveraged' opportunities

Volatile equity markets and quarterly reporting season creates an opportunity to uncover significantly undervalued companies using two simple metrics – Cash and market capitalisation.

One of the most effective tools for spotting potential bargains is Enterprise Value (EV), which measures the total value of a company's operations and assets. EV is calculated by taking a company's market cap, adding its total debt and subtracting its cash and cash equivalents.

Why does EV matter?

Unlike market cap alone, which only measures equity value, EV offers a fuller picture by factoring in debt and cash. During market selloffs or periods of volatility, stock prices can plummet, sometimes driving EV to unusually low levels — or even negative in rare cases. A negative EV occurs when a company’s cash exceeds the sum of its market cap, signaling that its operations and assets are effectively valued at less than zero, and also zero growth. This can happen to companies holding large cash reserves or those with minimal tangible assets, such as certain tech firms or explorers.

Spotlight: Mount Hope Mining

Quarterly reporting season brings dozens of microcap companies into focus as they release their cash flow reports. One such company, Mount Hope Mining, recently reported its March 2025 quarterly results, revealing a dip into near-zero EV territory. Here are the key figures:

• Cash: $4.52 million as of March 31, 2025

• Recent Dip: Shares fell 13.5% to 12.5 cents on April 2, equating to a market cap of ~$5.1 million

• Current Share Price: Rebounded to 15 cents, or a market cap of ~$6.1 million

At its lowest point, Mount Hope’s EV was just ~$600,000 — a relatively low valuation. But what does Mount Hope do, and is it worth more than this figure?

A Gold and Copper Exploration Play

The Mount Hope Project is the company's flagship exploration initiative, spanning 175 square kilometers across four granted exploration tenements in the southern Cobar Basin, New South Wales. The project is strategically located near producing base metal and gold mines operated by companies like Aurelia Metals, Metals Acquisition, and Aeris Resources, as well as recent discoveries like Peel Mining’s Mallee Bull and Australia Gold and Copper’s Achilles.

Mount Hope has identified five key exploration prospects, with four advanced zones ready for near-term phased exploration. In the March quarter, Mount Hope advanced its efforts through:

• A ground gravity survey, with data under review by Southern Geoscience Consultants for 3D targeting

• Soil survey results confirming high-grade lead, copper, and silver anomalies

• Reprocessing of historical and open-file aeromagnetic datasets

As an early-stage exploration company, it’s understandable that the market assigns minimal value to Mount Hope’s projects. However, these activities are paving the way for a maiden drill program. A few high-grade drill results could quickly add millions to the company’s market cap.

The Pros and Cons

Low EV companies often come with a built-in “floor” provided by their cash reserves. If a company holds $5 million in cash, it’s hard to argue it’s worth less than that. Additionally, a strong cash position reduces the likelihood of dilutive capital raises, lowering financial risk.

However, there are downsides. Many low EV companies are unprofitable, gradually depleting their cash reserves. Without exploration success or operational progress, that $5 million cash balance won’t stay intact for long. Furthermore, low EV stocks are typically microcaps, which can be illiquid. Buying even a modest $1,000 position could move the share price, and acquiring a larger stake may be challenging due to limited daily trading volume or available sellers.

The Bottom Line

In the end, low EV presents investors with a lot of leverage as a little success can quickly add value to a company that's valued at near zero.

While the risks of illiquidity and cash burn are real, the potential for outsized returns from a successful drill result or material announcement makes these plays compelling for high risk-tolerant investors. As quarterly reports roll in, keeping an eye out for cash balances.