Oil, Gold, and Everything Else

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I’ve tried writing this update many times over the last few weeks, but I just kept coming back to the title of my last note: “If it ain’t broke, don’t fix it”. The energy sector continues to work as a theme while the world questions just what kind of risk premium can be put on the gotta-have-it commodities. Inflation is on everyone’s lips, and the developments in Ukraine have put the Fed in a bit of a quandary. If inflation is running hot because of global shortages in energy and materials (assuming that’s what’s going on in those markets), then would “aggressive” Fed rate hikes have any impact on the prices of the commodities that are driving the underlying inflation? To do that, you’d have to increase supply (Fed can’t do that) or decrease demand for commodities (only way to do that is to cause a recession). While the Fed can remove liquidity from the system, it can’t do anything about where the remaining liquidity chooses to hide. I don’t know about you, but my screen clearly showed “gold and energy” as the two shelters in the storm today, and that’s becoming a recurring theme. And while energy has been a pleasant place to be for a while, gold has actually started to shine a little more as of late. I think that’s because managers are starting to think about where to hide as the tech stocks with no earnings (or trading at crazy earnings multiples) continue their declines in the face of some I-sure-hope-this-inflation-doesn’t-stick-around numbers. Likewise, managers who are long the traditional 60-40 debt-equity portfolio split are probably starting to think about hiving off some of that negative-real-yield debt in exchange for a few percentage points of gold in the portfolio — you know, just in case.

I was reminded today that the paper market for crude oil is many multiples of the actual physical market. Given what we’ve seen happen with the cryptocurrency mania, “meme stocks”, and tech-stock frenzy, is it crazy to think that traders might get a little overzealous with crude in this environment, while the producers cheer them on? For those who don’t remember, in 2008, when oil hit $147 a barrel, there was no actual physical shortage of crude. OPEC was tight on spare capacity, but it was by no means exhausted. That was around the time that they added an extra digit to the price signs at gasoline stations. In 2022 dollars, $147 probably translates into something like $200 today. Let that sink in a little. Don’t get me wrong, it all ended horribly, but inflation is a b*tch and it’s stickier than you think… and maybe a little more punctuated. We all know prices keep going up, but rarely does it smack you in the face. Given that the price of my weekly salmon salad (in a food court) just went up $3, consider myself smacked in the face. That salmon salad is never getting cheaper. Just like that extra digit never left the sign of the gas stations. So where is the new normal for crude? I have no idea. Will it be volatile? Likely. There are a lot of moving parts right now, but if I ignore the noise and think about which sectors are showing consistently and dramatically improving financial outlooks, it’s energy; with an honourable mention to gold.

Some quick thoughts today on what comes to mind:

The story-of-the-day prize goes to Africa Oil (AOI.TO, last at $2.68) as Upstream Online published a story of a (technically unconfirmed) massive oil find at the Venus-1 exploration well in offshore Namibia. A lot of hyperbole was used in the article with regards to the scale of the “discovery” (again, unconfirmed) and I like hyperbole when it involves something that I own. AOI owns 30.9% of privately-owned Impact Oil and Gas, and Impact owns 20% of the offshore Namibia discovery in question. The other partners are Total, Qatar Energy, and Namcor (the Namibian NOC). If confirmed, this could be a highly material discovery and Impact’s 20% interest would be worth a tidy sum to AOI. Before this news hit, I felt that AOI was worth something close to $3/share with a fair degree of comfort. If you want to guess that a world-class offshore oil find is worth US$10 billion, Impact’s piece would be worth some US$2B, which would be ~CDN$750 million net to AOI. That’s about $1.50 per share. Add it to the $3 that I thought AOI was worth before, and I see a $4-handle coming to a theatre near me if this discovery is for real. At that level, I still think I’m getting Kenya for free and the rest of AOI’s exploreco holdings for free. Good times. I love seeing a big discovery, so here’s hoping it’s officially confirmed as “huge” in the coming days/weeks. **Update Feb 24th: The discovery was confirmed by AOI this morning and you can read about it here**

For those looking to play around the edges, Sintana Energy (SEI.V, last at $0.195) is the closest to the action and appears to have a 20% carried interest in PEL 90, which sits directly to the north/northeast of blocks where the Venus-1 and Graff-1 wells were drilled (Graff-1 is also rumoured to be a separate discovery by Shell in the block immediately east of block where Venus-1 was drilled). Close doesn’t mean SEI is anywhere close to drilling a discovery of their own, but they are the closest, smallest way to try to get “exposure” if this is an emerging area-play hotspot like offshore Guyana. SEI also has a 25% carried interest in a high-impact onshore Colombian asset where little SEI is partnered with none other than ExxonMobil. That asset (block VMM-37) could become relevant in due course. I own some of this one and have subscribed on the most recent private placement at 15 cents.

While I’m talking about AOI, I may as well mention Eco Atlantic (EOG.V, last at $0.63) here. My interest in EOG is not for its offshore Namibian exposure (their blocks are pretty far from the action), but rather for EOG’s offshore northwest South Africa exploration target on Block 2B. You can dig into that one at your leisure if you’re interested, as their well won’t drill until the back-half of 2022. It’s a “re-drill” of a past discovery of unknown size. New seismic interpretations suggest significant up-dip potential from a historic shallow-water offshore discovery well. I mention this because I think it’s always good to bookmark these things for revisiting a little later in the year. I own a few as a marker position.

I’ve rotated my Yangarra (YGR.TO, last at $1.76) into Cardinal Energy (CJ.TO, last at $5.23) in recent weeks as I got to know Cardinal better. CJ offers me exactly what I was looking for from YGR, but I think it gets to Dividendtown sooner, and CJ provides amazing visibility on what that journey looks like. I still very much like YGR and its CEO Jim Evaskevich, but CJ’s lowest-in-industry base decline rate means that there’s more free cash flow available to pay me a fat, juicy, monthly dividend. By CJ’s projections, that dividend looks like it’ll be 5 cents per month to start, which means CJ would have an effective yield of 11.4% if it’s still at this price in a few months when the dividend is likely to start. The two biggest holders of CJ are Murray Edwards and Eric Nuttall, which is some very good company to have when you’re investing for value. CJ is unhedged, so I’m going to make hay with them while the sun is shining. As a point of reference, at an 8% yield, CJ would be a $7.50 stock, so I think my risk-reward is favourable on this one.

Nothing new on Tag Oil (TAO.V, last at $0.42) and Tenaz Energy (TNZ.V, last at $2.38), but I will say that they remain top positions for me as I wait for them to get deals. TNZ is pretty much bullet-proof given its cash balance, minimal debt, and underlying asset value at Leduc Woodbend. TAO still has the market entranced with the idea of a Rally Energy or Kuwait Energy redux… and if you knew either of those stories you would know why I’m willing to be so patient with Abby and team at TAO. Enough said.

Gold. The tape says it all. Gold is up $20 as a write this and even the bulls are barely long gold. I have all kinds of gold exposure. I like Osisko Mining (OSK.TO, last at $4.02) at these levels given its 100% ownership of the big, and high-grade, Windfall deposit. OSK’s share price got hit when its would-be partner, Northern Star, apparently didn’t offer JV terms that were to OSK’s liking. Nothing has changed about the deposit… and deposits like Windfall, in jurisdictions like Quebec, are a rare breed. I own some Barrick (ABX.TO, last at $29.11) as well, simply because it’s a liquid, large-cap, beta go-to gold name. Likewise for Agnico Eagle (AEM.TO, last at $69.83).

I’d be remiss if I didn’t mention Anacortes Mining (XYZ.V, last at $1.35) here. Anacortes should deliver a PEA on the Tres Cruces oxides in the next couple of weeks. I expect that to show a low-cost, high margin, quick payback operation. It’ll be old news to me, but I have to remember that “the market” has never realllllly looked at this story. In April, when Anacortes plans to start drilling, what do you think happens when they start pulling intercepts pushing 200 metres or more of 2-3 grams per tonne gold starting at just tens of metres from surface? I think the main issue with XYZ is market exposure, not the deposit. The deposit is excellent, Peru is open for business, and the project is in a very pro-mining region of Peru. Readers of my notes will know that I like some things that can be pretty far off the beaten track, but XYZ has everything going for it so I remain optimistic that once news flow picks up, things could change quickly for this one.

Speaking of things changing quickly, Verde Agritech (NPK.TO, last at $6.33) has been an absolute rockstar as of late. The stock is through $6 and isn’t showing any signs of letting up. When I first mentioned this in October of 2020, the stock was trading for 1/10th of what it trades at now. I mention this one on the heels of XYZ because when I first mentioned NPK, I specifically flagged how it was illiquid and no one cared on it (sound familiar?). Witness the NPK chart to see how things can change once the pieces start falling into place. Food for thought. NPK is trading as a fertilizer proxy with a killer-app “regen ag” kicker angle. This stock could see double-digits or better by the time all is said and done if they keep up their operational and market momentum. Bravo to the CEO, Cristiano Veloso, for keeping the share structure so tight after all of these years.

I still love Advantage (AAV.TO last at $6.61) and look forward to their upcoming financials in the hopes of hearing more about Entropy, the world’s better carbon-capture-at-source mousetrap. National Bank put out a great sum-of-the-parts analysis on AAV today and highlighted their $11 price target on the stock. I’m not going to argue with them. The stock looks like it just bounced off its 200-day moving average, so I’ll keep an eye on that price as a support level going forward.

Back to gold, North Peak (NPR.V, last at $3.12) is one of my other favourite under-the-radar gold stories. It has performed exceptionally well share-price-wise and is currently drilling at its Black Horse project in Nevada. The drilling is targeting previously “scout drilled” high-grade bulk tonnage oxides (~1.2 g/t) and high-grade crosscutting structures (up to 42 g/t). A little bit of success could really move this one given the scale of the project and the fact that it has only 21 million shares outstanding (will be ~24 million post the recent financing). This is a Brian Hinchcliffe vehicle, and given his success with Kirkland Lake and Rupert Resources (RUP.TO, last at $5.40), I’m willing to ride shotgun as the geos figure out what Black Horse has to offer.

I still like uranium, same names as always.

For copper, between Bell Copper (BCU.V, last at $0.53) and BCM Resources (B.V, last at $0.25) I have two monster-hunting exploration stories in Arizona and Utah respectively. Both companies are hunting absolutely massive blind copper porphyry targets and I mention them here because the early data has confirmed the geological model for both stories. Grade and tonnage are big unknowns here, but both companies are led by technical teams will as much experience as you can have when it comes to searching for, and discovering, these kinds of deposits. These are very high risk stories, but either one could multi-bag if successful.

I’m running out of energy and I feel like I’ve barely scratched the surface with this note, which should give you some sense of how many names I’m following right now. One last story that really deserves mentioning is North American Nickel (NAN.V, last at $0.58). NAN has signed a LOI with privately-held Premium Nickel that would see the Botswana nickel assets — Selkirk, Selebi, and Selebi North — consolidated under the NAN banner after a concurrent $20 million financing by Premium Nickel is completed. The asset package represents the potential for something on the order of 25-100 million tonnes of high-grade nickel-copper-PGE sulphide mineralization at Selebi alone. That’s absolutely world class. Drilling will be underway shortly and the most immediate catalyst would be the extension of mineralization in a geophysical target area beneath the old mine workings. The Selebi mine never shut down for lack of ore and NAN is determined to figure out what was left behind. If you’re serious about nickel, you need to be aware of NAN, full stop. Oh, and CATL (yes, that CATL) is one of NAN’s biggest shareholders. That can’t hurt. NAN’s stock is halted until the Premium Nickel deal is completed, but I think it’s one to watch if nickel hangs in here.

Wow, as I type this, I’m reading that Russia has launched missiles into Ukraine. Gold, guns, and oil would seem to be in high demand tomorrow morning in the market. Russia is a big commodities producer (including nickel, ahem, NAN) and the developing situation could be far-reaching in the commodity complex. For example, the U.S. gets 38% of its uranium for its reactor fleet from Russia and Kazakhstan. Hmmmm.

As they say, stay tuned.