Gold, Oil, and Everything Else: Part II

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Disclosure: The following represents my opinions only. I am long XYZ.V and TNZ.V (Image credit to Pixabay)

I cut my last note short when I saw that Russia had attacked Ukraine late one evening, so if that was the “before” note, think of this as the “after”. As I type this, a barrel of WTI is going for $125 and gold is at $2015/oz. Copper is acting “weird”, having spiked to $5 yesterday morning, only to close down 5% from its highs (maybe on jitters about economic growth?). The London Metals Exchange (LME) traders saw a nickel spike that would make any other metal blush as it rose some 70% yesterday, only to be halted today at a price that is up over 100% from two trading days before. Things are so screwy that the LME doesn’t even know what to do about settling the recent trades in nickel. Palladium is up something like 40% since Russia’s offensive in Ukraine began. If that’s not enough for you, rest assured that the performance of fertilizer and grains have been equally mind-blowing. Quite literally, it’s nothing short of commodity mayhem out there… and no one knows how or when it can get back to “normal”.

After being regarded as a sideshow for the better part of a decade, commodities are now looking like “the only game in town”. Going into this, they were under-owned as an asset class, and now “inflation ETFs” and commodity ETFs have popped up to help funnel capital into the sector. Oh how times have changed. The Russia-Ukraine situation has highlighted that security of supply of energy and basic raw materials cannot be taken for granted in a world that has undoubtedly changed… if not by covid, then certainly by Russia’s offensive in Ukraine. To quote a metals analyst in Sydney, “... with the uncertainty of war, it’s hard to talk about a commodity being over-valued.” I’d say that about sums it up. In times of scarcity, or even perceived scarcity, a commodity is worth what you can pay for it. In nickel’s case, at least one trader got caught with a massive short position at a time when the market was realizing that Russian nickel (~5% of global production) might be off the table for Western buyers for quite some time. It gets worse (or better, depending on your point of view) when you consider that Russia supplies nearly 20% of global battery-grade nickel. Meanwhile oil is a market in search of the price where demand destruction sets in… it has risen $3 in the time since I started writing this (gold has risen $20/oz in that time). There are calls to ban Russian oil imports, and Russia is threatening to shut off gas to Europe. AlI can say is, “Here we go… buckle up.”

I have no idea how or when this ends, but if you own “stuff stocks” right now, especially gold and energy, it’s like someone turned on a firehose and is spraying money at you. Those of you who have been in weed and tech over over the last several years know exactly what this feels like… for dopes like me who are always heavy in commodities, it was a long drought; until it wasn’t. This is when the commodity market is its most exciting and most dangerous, so at this point, all I can say is that if you’ve been reading my musings over the last two years, you are likely doing just fine in the market. Keep in mind that nothing about what is happening is “typical”. These are unique times and most investors have a hard time pivoting to commodities because people only reallllly think about them when the sh*t hits the fan… and in this case, all of the sh*t is hitting in pretty much all sectors all at the same time.

As anyone who reads this will know, I’m a big fan of placing my bets based on some combination of asset quality, strategic value, management prowess, timing, and fundamental value… or something like that. I play in the mainstream, but have always found that my biggest gains have been made in the stories where I dig down, follow the company over very long time periods, and then lean into the table when I think the odds look good. That typically happens when new/existing information and my expectations for future news flow suggest that there’s a good chance the market will come in behind me; once they see what I see. I’m going to assume that a wall of money coming into commodities and gold is a given at this point. With that in mind, here are a couple of lesser-known stories that I think are worthy of attention… one in oil and one gold.

Anacortes Mining (XYZ.V, last at $1.50)

Gold is now up over $70/oz today as I type this and XYZ is down fifteen cents after releasing the first-ever economic assessment on the Tres Cruces gold deposit in Peru. I have followed this asset for 7 or 8 years now and it is a beauty. The after-tax NPV5 of the oxide gold resource came in at about CAD$210 million (US$166 million), with a 2-year payback and a 33% IRR at $1700 gold. The project is in a very pro-mining region in Peru, adjacent to a paved highway that is three hours from a deepwater port and only about 12 kilometres from the idle Lagunas Norte operation. The 630,000 ounces of oxides and leachable sulphides included in today’s PEA are just the cap of this ~2.5 million ounce gold deposit which is wide open at depth. The oxides represent a high-grade, low-cost, high-margin, quick-payback cherry on top of the Tres Cruces sundae, if you will. I think the market is missing two big things about Tres Cruces. For one, its proximity to Lagunas Norte — which is sitting idle and could process the Tres Cruces oxide ore — means that Tres Cruces represents a very low-cost satellite development from Boroo’s perspective (Boroo (private) bought Lagunas from Barrick in early 2021). To mine Tres Cruces, Boroo wouldn’t need even need to build a plant… just strip the deposit and build a haul road 12 kilometres to Lagunas. That’s a perspective to seriously consider when looking at this project and what it’s worth (anything you take off of capex goes straight to taking the NPV higher). Second, Tres Cruces has significant exploration (and expansion) potential at depth. Tres Cruces is practically untouched by drilling below 300 metres and hasn’t been drilled since 2008. Several key holes in the deposit bottomed in mineralization and there are proven high-grade feeders at depth that have never been targeted.

When CEO Jim Currie says that he see’s the potential for 5-10 million ounces here, he isn’t kidding. This is a fully preserved epithermal system and the current resource only represents the upper reaches of the mineralized volume. It’s worth noting that the same rock unit that hosts the Lagunas Norte deposit to the northeast, also runs underneath Tres Cruces — where it could very well host bonanza-grade feeders at depth. Investors won’t have to wait long to find out as drilling is expected to start in a month or so. That drilling will be a combination of infill and expansion, with a focus on seeing just how deep the Tres Cruces mineralization runs. It will make for some impressive holes. If you’re reading this, you know more about this story than 99.9% of the market. FYI, almost no one reads my notes. I don’t do Twitter, I don’t do Facebook, and I only send my notes to people who have asked to be included on my mailing list. I know XYZ is under the radar and gets no respect right now, but it baffles me that the stock is under $2 today given the attributes of this asset. It tells me that the shareholder base is mostly retail, unsophisticated, and unable to recognize a good asset when it smacks them in the face. Note that the project’s proximity to the deepwater port at Trujillo (3 hours away by paved highway) means that the sulphide resource could be developed by shipping a gold-pyrite concentrate to anywhere in the world for processing. That option was briefly mentioned in the company’s most recent 43-101 report and isn’t something people think about a lot, but it is real… and it opens up all kinds of optionality when it comes to development of the broader resource and/or plans of would-be strategic buyers. XYZ has only 42.3 million shares out and I think the asset will ultimately compare with that of Prime Mining (PRYM.V, last at $4.05) which has a market cap of $450 million. Drilling starts next month. You do the math. Almost everyone has been caught without much, if any, gold exposure in their portfolios at this point. I have great optimism when it comes to gold right now.

Tenaz Energy (TNZ.V, last at $2.60)

I mentioned this recently, but I keep hearing grumbling from people who wish TNZ would hurry up and get a deal done already. All I’ll say to that is that patience is a virtue. TNZ is probably one of the best fundamental risk-reward situations that I can think of in the energy sector right now. Literally the only requirement is patience. TNZ has ~$1/share in cash, no debt, minimal abandonment liabilities, an A+ management team, access to capital, ~1200 boepd of low-cost, self-funding production, and 2P reserves in the 10 million barrel range. My best guess for the NPV10 of its 2P reserves is around $80 million. The market cap is currently abut $70 million (making the enterprise value just $45 million), which means that the assets are on sale, the team comes for free, and I get a free call on them growing this to 50,000-100,000 boepd. That’s right… that’s their plan. This minnow wants to grow up to be the size of a small whale through acquisition and if there’s one thing that I’m certain of, it’s that when this team pulls the trigger on a deal, it will be a good one. I expect that day will also be a good day in the market for TNZ holders. Even a single point of multiple expansion relative to what TNZ pays for the asset(s), whenever they are bought, should represent at least the entire market cap of TNZ right now. Now that’s just my read of the cards, but I’ve studied the table for a while and feel confident enough about the risk-reward that I’ve made TNZ one of my largest holdings. My average cost is about $2.50 and I’ve owned this for years.

To me, anyone latching on to TNZ or XYZ today would resemble one of those guys in the casino that stands off to the side of the blackjack table, waiting for the deck to get heavy with tens before leaning in and placing a well-timed bet. Sometimes the odds are just in your favour. It’s not always easy to recognize when that’s the case, but I think the setup and overall market backdrop are presenting some very favourable opportunities in selected small caps; and if there’s one thing that I’ve leaned from past commodity booms, it’s that the buyers always come down market eventually. Always.

Happy hunting.