Silver Linings

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The information contained herein is accurate to the best of the author’s knowledge, but the material and interpretations contained herein should be independently verified by any party using this information as part of any research, editorial, or decision making process. Any views expressed here represent the author’s opinion only, and as such readers should do their own research and come to their own conclusions if they are using the opinions contained herein as part of any larger due diligence process. The author may have long or short positions in the companies mentioned and may be buying or selling in the market depending on which way the wind is blowing at any given moment. Opinions are subject to change without notice. Prospective resources, predictions, comparisons, financial projections, and extrapolated metrics are, by their nature, subjective and interpretation dependent. The topics covered are highly speculative and involve a high degree of uncertainty and risk. Speculative companies can and do go to zero. By using this site, you agree that the author(s) and Hydra Capital is/are not responsible for any damages incurred by the use of the presented materials. Anyone reading these blog posts should know that they are the author’s thoughts and opinions, which are not to be confused with or construed as research reports.

Disclosure: The following represents my opinions only. I am long every stock in this post (Image credit to Sam Schooler on Unsplash)

Over the years, I’ve spent a lot of time, looking at a lot of companies, in a lot of jurisdictions, covering a broad swath of the commodity complex. Sometimes I feel a bit like an antique hunter who goes through the back shelves of thrift stores looking for hidden treasure… and when I think I may have found it, I’ll take it home, polish it up, and see if it’s the real deal. When the antique store is busy, it gets harder to find those treasures as more shoppers pore over the same shelves. When it’s quiet, quality finds can linger on the shelves for what seems like forever… but alas, a guy can only carry so much at a time.

You can probably see where I’m going with this analogy. We all know the market hasn’t been kind to most investors this year. Even the bullet-proof “60/40” crowd has had a religious experience in 2022. Market participation and willingness to speculate are both anemic, leaving the TSX Venture, arguably the ultimate measure of speculative appetite, down about 35% year to date. With that in mind, how well picked-over do you think the junior resource stocks are right now? From my perspective, there are so many interesting things in the bargain bin that I’m feeling about as hopeful as I was in May of 2020. Many junior stocks are right back to where they started their last runs, or below, some deservedly so; and some not so much. Based on my experience, the market’s ability to differentiate between well-founded speculation and wild-ass speculation is questionable at best, so when the juniors are in the dumps, I sharpen my focus to see what I think is being overlooked. To be sure, companies that do not deliver on their plans earn their declines, but those who do deliver — or just haven’t delivered “yet” — and have been punished anyway is where I’m focusing my energy.

The silver lining in bad markets is that they breed opportunity. Recognizing the opportunities is an art — not a science — and trust me, I haven’t perfected the process yet. The U.S. dollar appears to have peaked in the short term, and the Fed is probably going to start declaring victory soon as year-over-year price comparisons moderate thanks to the base effect. The world is generally 1) short on energy and energy investment, and 2) lacking the metals capacity to fuel the Green Transition; and portfolio managers are woefully light in their energy and commodity allocations. Companies, and countries, are starting to rethink their approaches to resource management and security of supply, be it in terms of materials or industrial capacity. So, while paying 20x revenue for a money-losing company isn’t probably going to be cool again any time soon, Goldman’s Jeff Currie might just be right about his “revenge of the old economy” call a while back. Energy and materials companies stand out as beacons of balance sheet strength and free cash flow at a time when companies like that are hard to come by and, if the Fed starts to moderate its tone, I think that hard assets could have a nice rally… and of course, if China starts getting competitive about “securing supply” of energy and materials, look out.

With that in mind, I’ve been deploying capital. The selection below covers a handful of special situations which I think are both interesting and timely.

Tag Oil (TAO.V, last at $0.43)

TAO will soon close its oversubscribed 40-cent financing, leaving it with around $35 million in cash and no debt. This quarter, the company plans to re-enter a vertical well to carry out a pilot frack and test program in its potential-company-maker Abu Roash F (ARF) play, which will aid in the design of the first “ARF” horizontal well early in the new year. A successful result on one or both of those wells would see the formal introduction of what could be dubbed the “Eagle Ford of Egypt”, to both the industry and the market. Given the people involved and the significant marketing program the company did after they landed the Badr oil field deal, I think that TAO already has the market’s attention; so now it’s just about delivering. TAO’s ARF play is one of the most exciting new plays that I am aware of globally and I’m certain that industry hawks will be paying attention; so drill baby, drill.

On success, TAO’s short timeline to cash flow should become readily apparent, because operating within an existing oilfield offers significant advantages when it comes to getting new oil on stream quickly. TAO checks all the boxes for me — management quality, share structure, timing, balance sheet, project materiality/scale, and jurisdiction… I like it all. I can wait for years for a situation like TAO to arise, and while it’s not my only stock by a long shot, it’s definitely one of my favourites. Being a true penny stock, it’s important to understand that TAO comes with a fair amount of risk, but most will know that I’m willing to go pretty high up the risk curve if I think that the market’s level of perceived risk differs from my own — especially when I think multi-hundred percent upside is in play with a modest amount of patience and just a dash of luck.

Goliath Resources (GOT.V, last at $1.39)

I have checked for awareness of this name in about two dozen corners of the market and aside from Quinton Hennigh (Crescat Capital), a couple of junior mining circuit/conference types, and Eric Sprott, it would appear that no one is really following it. I don’t actually mean no one, but not many of my contacts could even tell me the ticker, let alone anything about the project. To me, that indicates that Goliath’s Golddigger project is still flying under the radar of the institutional community and popular brokerages. Just for fun, I interviewed myself on the name below. You get the first question…

You: So what? Lots of things fly under the radar. I’ve got a list as long as my arm of things that are “under the radar”, and I hate gold…

Me: Everyone hates or has very little exposure to gold right now. If gold was popular, GOT wouldn’t have a 1-handle on it. Now, on your list, how many wide-open, 6 to 8 million ounce “blue sky” gold deposits with tidewater access, located just south of Stewart, B.C. in the southern corner of the Golden Triangle, with clean metallurgy do you have?

You: Wait a minute, 6-8 million ounces? What’s the market cap?

Me: About $100 million.

You: So this is trading at less than $20/oz?

Me: Maybe. No mercury, no arsenic, 38% gold recovery on gravity alone, 98% overall, no cyanide required. Yours for less than $20 per napkin ounce.

You: What’s a napkin ounce?

Me: The kind of ounce that has been figured out on the back of a napkin, assuming fairly consistent grade and thickness.

You: How do you know it’s 6-8 million ounces?

Me: I don’t, but simple math says that much could be in play, and an initial resource estimate based on the past two-year’s drilling should be ready in the first half of next year. The company has drilled off a 1.6 square-kilometre “panel” and the aptly-named Surebet zone is present everywhere they drill. They hit 24 of 24 holes in the 2021 discovery season and they just completed a 26,000 metre program this summer which results are pending. Goliath hit on every hole (68 out of 68) that they drilled within that 1.6 square-kilometre area this year. Recent press releases suggest that average zone thickness has increased relative to last season, so I’ve assumed an 8-metre average thickness for the zone overall. The average grade from last year’s drilling was about 6 g/t Au equivalent. The specific gravity of the rock is around 2.9 tonnes per cubic metre. That’s potentially around 30 million tonnes of 6 g/t material contained in a sheet-like, shear-controlled zone of alteration and veining. The Surebet zone is remarkably predictable thus far, but grades do vary within it. It’s early days in terms of knowing what the deposit actually looks like. Tweak grade or thickness a little and you can move the numbers around, but it looks big regardless, and is still open to expansion. I expect that the deposit will have thicker and/or richer chutes within it, so assays will be important in order to see how grade distribution evolves.

You: Assays? When are they expected?

Me: I’m not sure. The company has guided to some time soon-ish. Assay data may come in batches, or all at once. I’d prefer batches, but if the grades are good, I don’t care how they do it.

You: You said Sprott is a holder? And Crescat?

Me: Yep, Eric Sprott bought GOT at 55 cents last February before GOT had drilled a single hole into the Surebet zone. Crescat owns 20% of GOT. Insiders own 10% and are essentially “unknown” as far as Bay Street is concerned. Quinton Hennigh is the biggest champion of the stock by a mile and his most recent video is worth watching if you want to learn about the project from someone who knows it better than anyone. The video link is indexed to start where the Goliath discussion starts. (

You: Thanks, this does sound interesting.

Me: Only thank me if it works out. Good luck with your research.

Critical Elements Lithium (CRE.V, last at $1.83)

If this isn’t the next lithium mine in Canada, something has seriously gone off the rails. While CRE is still waiting for its provincial permit — having received the Federal one about a year ago — there is optimism in the air that the wheels of bureaucracy continue to grind ahead. The hold up appears to be with either the COMEX committee, or the Provincial Administrator to whom that committee makes its recommendations. In any case, the minutes of the most recent meeting are to be published on November 4th. While the minutes will not include the contents of the committee’s recommendation, they should indicate whether or not a recommendation to the Provincial Administrator was made. Clear as mud? Good. There’s not much more to say here. This is a highly economic lithium project, of good scale, in a great jurisdiction, that should be very a appealing investment/offtake target for automakers who are literally scrambling for supply. Canaccord recently launched coverage on CRE and Beacon Securities has been vocal and active on the name, so those are a couple of places to go for those wanting to learn more about it. Most targets on CRE are in the $4 range, but lithium-price optimists can get much higher numbers. Once the permits are in hand, CRE should rock.

NG Energy International (GASX.V, last at $0.93)

It’s been 16 years since a company named Pacific Stratus drilled its La Creciente-1 gas discovery well in Colombia. The well hit 642 feet of gas shows within the Cienaga de Oro sandstone and tested at a rate of 29 million cubic feet per day. I remember that story well, as it was one of the first stories I covered as an analyst. Well, fast forward to last week and I hadn’t seen anything like that in Colombia since — that is until GASX put out a release outlining 680 feet of potential gas pay in the Cienaga de Oro sandstones with an additional 103 feet of potential gas pay in the shallower Porquero formation in its Brujo-1 exploration well. That’s quite a gas column by anyone’s standards. Flow testing at Brujo is happening right now, followed shortly after by the drilling of the next well in the exploration program, Hechicero-1. Earlier this year, GASX drilled the shallower Magico discovery in the same formation within the same trend of structures. Having success at Magico (shallow) and Brujo (almost twice as deep) de-risks the remainder of this cluster of prospects for me. In total, prospective resources in the >1 TCF range could eventually be discussed. GASX recently took on some share dilution when it punched out a convertible debenture on the back of the Brujo discovery news, but it did so to ensure continuous news flow and drilling activity. As a newcomer to the story I don’t mind that because it got me a good entry around 90 cents. GASX owns 72% of the SN-9 block, which is “across the road” from Canacol’s producing block. I’m not sure how this all plays out, but a large onshore gas discovery, adjacent to a gas transportation corridor, in a country that’s trying to pivot to gas as a power source, seems like a tempting morsel for a more established producer once the exploration phase is complete. For now, the cycle of drilling and testing should keep the wires busy on GASX.

Eco Atlantic (EOG.V, last at $0.60)

EOG is almost certainly at or near total depth at its 50%-owned Gazania-1 in the nearshore of NW South Africa and the stock closed up 15% on high volume today. Hmmmm. The pre-drill dream target size was estimated at some 300 million barrels, but I’m not sure if that’s in place or recoverable. It’s a nice target from a technical standpoint, located up dip of a well with live, light oil indications a little deeper in the basin. For now, it’s sufficient to say that this is a big well that will be highly material to EOG if it is successful. I’m riding a small position, but could add on success if I like what I read and the market is slow to react. News must be imminent here either way. Ever play red-or-black in roulette? This is it.

Cardinal Energy (CJ.TO, last at $9.26)

CJ is starting to get up to the levels where I sold it earlier this year, but its imminent debt-free status and massive free cash flow, paired with very low production declines, make me think that the dividend could go a little higher still. CJ will report its Q3 results in November. I don’t expect to see much that I don’t like in that report, so I’ll stick around this time and see what the quarter brings. CJ is just such a clean story for those who like yield.

Tenaz Energy (TNZ.V, last at $1.57)

Sellers continue to lean on the TNZ quote. Honestly, I’m not sure where these people come from, but I’m going to be very clear here — TNZ is trading way, way below its fair value. In December of 2019, when oil was only $50/barrel, Tenaz (which was then named Altura) sold a 12.5% interest in its Leduc-Woodbend asset for $7 million to a private entity. With oil at $88 now, where I come from, that means that the other 7/8ths of the Leduc Woodbend is worth no less than $50 million today, full stop. That also happens to be about the same as the estimated NAV of TNZ’s 1P reserves for those who like second opinions. TNZ has no debt and about $20 million of cash, so that brings the real, tangible, fully defensible value up to $70 million. There are 28.5 million shares outstanding for TNZ, meaning that anyone selling TNZ below about $2.45/share is clinically impatient. Look, I’m well aware of the fact that waiting around on TNZ for years not making any money isn’t for everyone, but it’s that or blow it out at mind-blowingly stupid levels into a thin market as the company (hopefully) stands on the threshold of finding an accretive acquisition target (backed by its banking syndicate)… take your pick. From these levels, the stock could go up 50% just to get to what might be considered fair value, with nothing priced in for what Tony Marino and his team bring to the table in terms of clout and capability. Think about that for a minute — fifty percent. Debt is non-existent and the production base has a nice, predictable, low-cost structure with plenty of spare infrastructure capacity. From my perspective, TNZ looks a lot like a heavily discounted call option that never expires, trading with one of the best risk-reward balances that I can think of, but hey, that’s just me. For anyone who cares about fundamental value and has the patience to stick around for a couple of quarters, I think TNZ is a serious small cap contender for the “why-didn’t-I-buy-that-stock-when-it-was-in-the-dumps” award. Recall that TNZ hopes to be a 100,000 boepd company within the next five years through an acquire-and-exploit business model. One day TNZ will land a deal… I just can’t tell you when.

Advantage Energy (AAV.TO, last at $10.11)

AAV continues to buy back stock and pay down debt as it makes its way to becoming a free cash flow cow… and while I may have come for the gas business, I’m staying for the carbon capture. Entropy provided an update recently that they ran the industry standard CO2 solvent in their carbon mousetrap at Glacier for long enough to get to steady-state operating conditions at which point they measured a heat-duty of 3.3 GJ per tonne of CO2. If that means nothing to you, don’t worry, I’ve got you covered. Current industry standard carbon capture heat-duty ranges from 3 to 5 GJ per tonne of CO2, with some “hoping” to get below 3 GJ per tonne of CO2. A lower number is better as it means less energy is needed to capture the CO2. Got it? Good. Now Entropy will put its super carbon capture juice into its Glacier plant, get it to steady state operating conditions, and see what happens. Ideally, Entropy will come back with a heat duty that is below 3 GJ per tonne. In the meantime, AAV will continue to buy its own stock back as its finely-tuned gas business sails the seas of free cash flow. AAV’s Entropy subsidiary has obvious and massive political tailwinds that could take the stock a lot higher than conventional E&P analysts might expect. It all depends on who comes to dinner after the Entropy23 results come back, so stay tuned.

As always, this is just a sample of what bubbled to the surface today. I still like uranium (see my September 2022 note), I still like nickel ((PNRL.V, last at $1.60) and NICU.V, last at $0.325) in particular), and I have my eye on some rare-earth stocks (MP.US, last at $31.49 is the easiest) just in case China decides to use the rare-earth-element lever to pressure the U.S. over its recently imposed semiconductor sanctions. My copper exposure is low right now, but coppers are on the shopping list if I can only figure out the “when”… they’re all cheap enough if copper is over $3.50.

Overall, for whatever reason, I’m feeling more optimistic now than I have for a while. I think that feeling is going to last for as long as my stocks don’t start taking out their most recent lows. 2022 has been a tough year across the board, but success is not unachievable in a bad tape; it just takes a different perspective… just like a silver lining.

Happy hunting.