Crosscurrents

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Disclosure: The following represents my opinions only. I am long AAV.TO, AOI.TO ARX.TO, CRE.V, EOG.V, ITE.TO, GOT.V, LAC.TO, PNRL.V, SWN.US, TAO.V, TNZ.TO, CCO.TO, NXE.TO, DML.TO, GLO.TO, CVV.V, EFR.TO, U.UN.TO, and XYZ.V (Image credit to Christoffer Engstrom on Unsplash)

I’ve been quiet, but it hasn’t been because I suddenly lost interest in the market — I just haven’t had anything new to say since I battened down the hatches in early July, focussing on a narrower selection of companies that I felt could perform regardless of what “the market” did. Very little has changed in my outlook, or holdings for that matter, as the market gyrates between headlines. There are so many crosscurrents in the market right now that, for me, the day-to-day happenings are blending together into a kind of noise. Worries about inflation, central bank rates, recession, the bond market, energy prices, energy supply, food supply, Russia-Ukraine, climate goals, and China’s zero covid stance generally dominate the news. Of all of that, if there’s one thing that the market seems to be most fixated on, it’s the Fed… look no further than Wednesday’s market action for confirmation of that. I’m not sure that’s the most productive of fixations, because if it’s simply “rates up = stocks down” and vice-versa, then historical stock market performance must be a perfect reflection of the fed funds rate, right? Nope. Not even close. If it were only that easy. Coming out of the 2020 lows, the indexes were consistently bid because of TINA (There Is No Alternative (to equities)) thinking under the umbrella of negative-to-zero-yield bond market. Now, the bond market has started to price in higher interest rates, which directly impacts risk appetite, certain kinds of business activity, and funds flows (as known as “the tide”). As a result, I think we are in a stock (or sector) picker’s market. There’s always a party somewhere, but investors better know what they own and why they own it, because only the best stories (or sectors) can attract and hold attention when “the market” isn’t cool.

If the market is the ocean, with its ebbing and flowing tides, the stocks I’m favouring these days are the lakes and rivers that feed into it. They have lives of their own and are somewhat isolated from the tidal forces moving the large caps. Got lithium? Happy days. Gas or oil? Not too shabby. Uranium? All smiles. Every sector/stock has a story and I’ve just listed three sectors that have outperformed over the last month or two. In my universe, uranium and lithium both rank highly on the “favourites” list of the investment banks. Energy stocks remain cheap, which reflects a lack of market conviction in the staying power of these oil and gas prices, but I remain a bull on energy stocks given the value propositions that they represent. You can wish upon a star all you want, but the world needs more energy every year and, like it or not, something like three-fifths of that energy currently comes from hydrocarbons (that’s excluding coal). While the supermajors scale back, something has to fill the production void. I wouldn’t count on state-owned enterprises to grow production much, so where does the needed oil come from? I’m not sure, but I’d suggest that the responsibility has to at least partially fall on the shoulders of the mid-caps and the juniors, right? It’s something to ponder. Innovation and discovery are two great drivers of value and it’s where junior companies can really excel; regardless of which way the market tides are flowing.

I’m not sure that the names I’ll talk about below will include many new ones, but the passage of time has brought some names right to the forefront in terms of my level of interest. Most of what I own has the potential for positive catalysts in the short term, with what I think are reasonable risk-reward balances.

Lithium

Lithium gets to go first because it’s the hottest. Lithium carbonate prices continue to hit records and I’m holding two companies to play the sector. The first is Lithium Americas (LAC.TO, last at $36.68). LAC is well-covered and well-owned, and I own it for exposure to its first-class lithium operations in South America and its Thacker Pass lithium project in Nevada. As it stands today, LAC looks cheap based on its South American operations alone. Thacker Pass is at a bit of a “free call option” at this point and, as the largest lithium deposit in the United States, it could represent a windfall if given the go-ahead. There’s been some opposition to the project, but things seem to be leaning in LAC’s direction. It’s either approved, or the U.S. will loses a chance to begin countering China’s dominance over the EV supply chain — place your bets. I’m not trying to be a hero here, so I’d probably stop myself out of this if it fell much below its 50-day moving average, which is somewhere around $35.

My other lithium name is Critical Elements (CRE.V, last at $1.71). While it’s true that the company is still waiting for its provincial permits in Quebec, there has been a lot of chatter about “EV supply chain” projects in la belle province and CRE is, without question, the cheapest, most advanced, best-return hardrock project out there — with all of its boxes checked. If I was a betting man — which I am — I’d bet that little CRE makes its way onto the front page of a business section or two between now and Christmas. I say this because approvals can only take so long and management has had a lot of time to lay the groundwork for what comes after the permits are in hand. I’m pretty optimistic when it comes to CRE these days, even if I might be a touch nervous about the broader market.

Uranium

I’m not going to make the case for nuclear here. Oliver Stone just did that. Only an illogical or irrational person can argue against the benefits of nuclear power on an empirical basis, and that reality continues to express itself in countries like China, Japan, India, Turkey, Finland, Korea, and the United Kingdom to name a few (all are building and/or have recently commissioned new reactors). Even Germany has started to see the light. Recent events continue to highlight the vulnerability of U.S. uranium supply, as much of it is sourced from the downblending of “secondary supplies” (warheads being decommissioned) from, you guessed it, Russia. Recall that nearly 40% of U.S. uranium used in reactors comes from Russia and Kazakhstan. Hmmmm, maybe it’s just me, but that seems like an uncomfortable situation.

I fully believe that nuclear scale-up will be necessary to have any chance at decreasing global CO2 emissions and it feels like the market is starting to get that. In the uranium sector, I own Nexgen (NXE.TO, last at $5.25), Cameco, Sprott Physical Uranium Trust (U.UN, last at $15.20), Denison Mines (DML.TO last at $1.58), Global Atomic (GLO.TO , last at $3.67), Energy Fuels (EFR.TO, last at $8.03), and Canalaska (CVV.V, last at $0.495) in that order. Peruse them at your leisure, but in a sentence here’s a place to start:

Nexgen – Arrow is a world class deposit in the Athabasca Basin with ridiculous economics, and it is a “must-own” for any miner that is serious about mining uranium and making money doing it. Arrow is a King Maker deposit, full stop.

Cameco – It’s the “go to” name for generalists. It’s as simple as that.

Sprott Physical Uranium Trust – I figure that if I’m long uranium, I should probably own some actual uranium. Better yet, I’ll let the good folks at SPUT take care of the uranium for me, while I just own shares in it.

Denison Mines – Its Athabasca Basin deposits and processing capacity — with an emerging in-situ recovery angle — makes Denison the runner-up to Cameco when it comes to “go-to” uranium names. Arguably DML has more torque than CCO, and I love torque when I’m bullish.

Global Atomic – The next uranium deposit that I know of that is going into production. GLO has a great asset in Niger, and reminds me of Manta Resources last cycle, though that name was in Tanzania and close to a park if I recall. Mantra sold for over a billion dollars to the Russians which is probably a fair starting price if someone was going to take a run at GLO, which I think happens some day.

Energy Fuels – It’s the best pure-play on U.S. uranium and an evergreen champion for the U.S. industry. If uranium really gets going, the U.S. investors love EFR and I want that U.S. exposure, even if the assets aren’t as exciting as some others out there.

Canalaska – A tiny position for me at this point, but I’m going to perk up when they start drilling again this winter. CVV has about a $50 million market cap based largely on its highly prospective West McArthur project in the Athabasca Basin. CVV has some serious in-house expertise and its recent blind hit of 9m of 2.4% U308, hosted in basement rocks 100 metres below the unconformity has me paying attention. Naysayers will say that it’s too deep, but the reality is that it won’t matter if it’s big enough. CVV was either very lucky to hit on the blind target they drilled earlier this year or the target is very large. When the drills start up again with a proper directional drilling setup, CVV should produce some interesting results as they step-out from known basement-hosted mineralization towards where the mineralized structure intersects the overlying sandstone (a prime exploration target as well). The story is high risk, but could change quickly, so it’s best to be paying attention.

Oil

Let’s just all agree that the market kind of jumped the gun when it predicted oil was “over”. It’s clear that we’re going to need to find more oil for some time to come, and someone is going to need to find it. The multiples are low, the free cash flow yields are high, and the discipline is remarkable in the sector. I’m not sure why the market doesn’t want to believe that higher energy prices might be here for a while, but with many companies trading with >25% free cash flow yields, my sense is that the bulls haven’t even arrived yet. Q4 will be telling as winter hits and the U.S. looks to start refilling the SPR.

Cardinal (CJ.TO, last at $7.47) gets to be first because it’s the easiest one to talk about. The monthly dividend is going to 6c (starting in October) and they’re already talking about increasing it further as CJ continues to pay down its debt at a rapid pace. With a mid-9% yield, an industry-leading annual decline rate of about 10%, scope 1 negative carbon emissions, and $1.4 billion in tax pools, CJ is an easy hold for me. They might even bump the dividend again in Q4 depending on the oil price. CJ’s drilling in new plays has yielded better results than expected, so this story could get a growth boost if that continues. CJ is my sleep-well-at-night-and-get-paid oil dividend stock and I like it a lot.

While I admire my own patience in waiting for Tenaz Energy (TNZ.TO, last at $1.69) to get a deal — hopefully by year-end — my other favourite minnow put out some very interesting news this week. On Tuesday, Tag Oil (TAO.V, last at $0.465) reported that it has secured the rights to develop the Abu Roash F horizon in the Badr oil field, located in Egypt’s Western Desert. The Abu Roash F (ARF) is the primary source rock for the oil found in much of this particular basin. It is a dolomitic limestone which management compares to the Eagleford in Texas in terms of rock properties. The Badr oil field consists of a series of stacked pay intervals divided into horizons using the alphabet. The “ARF” horizon is apparently what caught TAO’s eye some time ago. Armed with the analysis of existing data and decades of industry experience, management believes that the ARF is amenable to development using horizontal drilling and multi-stage fracture stimulation… potentially unlocking a significant oil resource in a field that already has all of the infrastructure (built by Shell) in place to produce it. Having infrastructure in place means that if TAO is successful, it can get oil onstream and start cash flowing very quickly from this asset, which is a big positive.

TAO’s plan isn’t a total science experiment. Over the years, a handful of historical vertical wells in the field were completed in the ARF zone (none were fracked), testing at rates that TAO characterizes as “considerable”. As a result of the tight nature of the ARF zone, these historic wells declined quickly, just as vertical completions in similar zones in North America did until industry figured out how to develop these kinds of reservoirs. Given the proven existence of mobile oil in the ARF, combined with reservoir properties that compare well with known resource plays here at home, I like TAO’s set up here quite a bit. Anyone who knows the oil industry and this team will recognize that the company could be onto something material with this play, but time will tell. I continue to add to TAO at these levels as I’m not fussed about the dimes when I think dollars are on the table.

To be sure, there are a lot of details yet to be flushed out for TAO (PSC terms, scale of the resource, timing of operations, potential well economics, and budget to name a few), but my trust in management’s ability means that I’ll just sit back and let them execute. In this market I’m not sure that shouting from the rooftops does much, but count me as shouting from the rooftops on this one. There’s a marketing roadshow starting next week and management will be out telling the story for the first time. I think that the theme of exporting North American knowledge abroad in order to squeeze more oil out of proven fields is very good one. Here’s hoping that Abby has a tiger by the tail again.

That was a lot of TAO, but there are two other junior exploration stories that I like given that both are imminently drilling on material oil prospects. They are i3 Energy (ITE.TO, last at $0.35) and Eco Atlantic Resources (EOG.V, last at $0.49). ITE is in the North Sea and its Serenity well (currently drilling, 75% ITE working interest) is fairly low-risk as far as exploration wells go. ITE is looking to prove a theory that a thin oil column encountered in a previous nearby well is in fact connected to a thicker oil column up dip. The company’s interpretation makes the drill target look pretty straightforward and, if successful, Serenity would represent a major discovery and growth wedge for the company. ITE even pays around a 5% yield from its existing ~20,000 boepd of North American production, so Serenity is a bit of a free call option. The other one, EOG, has no production, but it has a lot of exposure to emerging hydrocarbon fairways in offshore West Africa. In the near-term, EOG’s most relevant asset is its Block 2B exploration target in the nearshore of South Africa’s northwest coast. The company is about to spud the Gazania-1 well in order to test its theory that a down dip oil discovery extends substantially up dip, potentially holding some 300 million barrels of oil. EOG has a 50% interest in the well and it’s the kind of well that will attract attention if it hits, maybe even before. On success, I think either stock could see a step change in valuation, so I own them both in moderation. And yes, I still own some Africa Oil (AOI.TO, last at $2.53) as I think it’s just too cheap not to own.

Gas

My main gas names are Arc Resources (ARX.TO, last at $17.38), Advantage Energy (AAV.TO, last at $10.06) and Southwestern Energy (SWN.US, last at $6.78). I own ARX for value, quality, condensate exposure, and western Canadian gas exposure (ARX is well-positioned if Shell gives the nod to building out Phase 2 of its west coast LNG project). AAV, same old. We could see carbon capture news out of Entropy soon-ish, but in the meantime the company is cheap relative to peers, is buying back stock like crazy, and its debt is evaporating in real time. SWN is simply a way for me to play the U.S. LNG theme. SWN hasn’t had much respect for a long time, but it used to be well-liked. I bet a few more quarters of $8 nat gas would do wonders for SWN, especially as its horrible historic hedges continue to roll off.

Gold

I still own Anacortes Mining (XYZ.V, last at $0.56) as a play on a very nice gold resource in a very favourable region, but it’s not making me any money, nor is anything in the sector. One that I’ll flag here with results expected to start rolling in the next month or so is Goliath Resources (GOT.V, last at $1.27). GOT’s Golddigger property is just off the infamous Red Line in B.C.’s Golden Triangle and they have been doing a lot of drilling with descriptions of visual mineralization. Assays have been slow in coming, but last year’s results showed good grade consistency. Now GOT is showing real tonnage potential at its “can’t miss” Surebet discovery (I’m not sure that many, if any, holes have missed the zone, which bodes well for any future miner). Despite the stink on gold right now, the contrarian in me likes to have something like GOT in the mix.

Nickel

Premium Nickel (PNRL.V, last at $1.58) stumbled out of the gate, but so did the whole market. Since the business combination closed, I’ve seen more information about this asset package (the Selebi and Selkirk Mines, both in Botswana) and I like it a lot. This looks to be a world-class nickel sulphide asset already and the EM targets identified in borehole geophysical surveys of old holes could ultimately take the tonnage potential here into the high tens of millions of tonnes. There are some big step-out holes pending, so keep an eye out for those. If PNRL can prove that those EM plates correlate with unmined sulphide ore, it’ll be happy days. Remember that PNRL has infrastructure in place that would cost hundreds of millions of dollars to replace today and its deposits are fully permitted for mining… that’s a rarity.

I own more names, but this covers the ones that I think make for relatively easy digestion with a dash of spice. I think that most of these names have the potential to attract market attention even if the broader tape is a bit squirrelly, but I’ll see if that’s the case in due course. Good luck out there in what’s turned into a pretty tricky market.

Happy hunting.