Disclosure: The following represents my opinions only. I am long AAV, AOI, ARX, BTE, CDR, CJ, CRE, CVE, DML, FWZ, GMIN, NICU, NSE, NXE, STGO, TAO, TNZ, TOU, U.UN, UEC, VLE, and WDO.
People talk about the summer doldrums; a time when most money managers are on vacation or thinking about vacation. Phones on trading desks ring less, fewer people respond to emails and texts promptly, if at all, and stocks tend to trade on lighter volumes. Some years the doldrums analogy rings true in terms of listless stock performance, but not this summer; this summer it seems like there’s a bit of market magic in the air. Optimism is a powerful thing, and with inflation cooling, the market is hopeful that the Fed is more of less at the end of its hiking cycle. As a result, tech/growth stocks have recovered much of their prior mojo, though the market does seem to be more conscious now of how companies are actually performing financially before taking them higher (or pounding them lower). Meanwhile, oil has a pulse and the energy sector is a top performer over the last month or so. WTI is back above $80/barrel and the Canadian energy stocks that I follow had a very good July. The energy sector as a whole looks cheap and with OPEC+ keeping the pressure on in terms of managing supply, it’ll be interesting to see how the balance of the year plays out as global demand continues its unrelenting march higher. Copper stocks seem to be hanging in better than the metal itself and I’ll happily add exposure if/when I see copper through $4, but for now I’m in no rush to add any copper (I’ve got my list ready though). China’s economy remains a wildcard, but at this point I feel like China is more likely to positively surprise than negatively surprise, simply because expectations are already so low, but we’ll see. After a big battery-metals rush, the interest in lithium and nickel has waned, so those stocks are generally drifty; but the renewed interest in uranium shows that resource investors are still responsive to good themes. Gold and silver have been moody and I’ll take my cues from the gold price chart. If gold can hold above $1900, the sector looks pretty cheap, but for now, few people care about anything but the best stories, so it’s survival of the fittest out there.
Regular readers will know that I cast a large net when looking for ideas, but I do winnow it down to my real favourites when it comes to what I own. When planting a garden, you want a little variety in there, because it never all comes into season at the same time, right? So when I put together a basket of stocks, I try to think like a gardener. Some large cap, some small-to-mid cap, and some microcap seeds that may or may not ever turn into anything… and all I can hope for is a generally permissive market, because not even the best gardener can grow much in a true market winter. For now though, things are generally placid market-wise. Despite interest rates moving to the 5% range from zero, the market seems to be taking things in stride and now there’s a sense of “what-happens-next” in the air. Generally speaking, my sense is that commodities and energy exposure is still low relative to historical norms and interest is lukewarm, but tentatively improving. For copper to maintain its trend of higher lows since last July, it really shouldn’t break below the low-$3.60’s on its current pullback, so we’ll see how that goes. Overall, my bias is towards energy right now, primarily because of the value that I see in the sector. Despite their “the-world’s-gotta-have-it” status, energy stocks are lightly owned for a lot of non-fundamental reasons, but their valuations, yields, and cash-generating abilities seem very attractive to me when I put on my value investor hat. As always, I have a healthy dose of early-stage stories in the mix, but I’m pretty selective these days in terms of what I’m willing to let into the garden.
Tenaz Energy (TNZ.TO, last at $3.72)
Tenaz has gone from being one my worst performers to one of my best, and all I needed to do was wait. Nothing has changed in my view here since my last post on TNZ, but the chart says that the market is catching on. In terms of positive surprises, TNZ recently reported its Q2 results, which included contingent and prospective resource assessments on its Dutch North Sea blocks that show years of development and exploration potential. In terms of development potential, the Rembrandt and Vermeer oil discoveries (operated by Wintershall) and two gas discoveries in blocks operated by Neptune Energy were estimated to represent around 4.3 million boe of potential (mid-case, unrisked) with an after-tax NPV10 of $86 million net to TNZ’s interests. That’s not mind-blowing, but that upside comes for free as a shareholder — and with the stock still only valued at just over 1x EV/CF, I’ll take it.
My favourite analogy right now for TNZ is that it’s like a bee flying right between the eyes of most institutions. Because of its small market cap and modest liquidity, most institutions simply can’t own it (or don’t see it) because it doesn’t meet their size/liquidity hurdles. No matter how much they might want to invest in an international roll-up strategy being executed by one of the most experienced and competent teams in the industry, many institutions simply can’t. I’ve seen it dozens if not hundreds of times. Institutions that wouldn’t even look at a given stock at $1 will gladly buy the same stock at $5 once the story has evolved further. There’s nothing wrong with that, but it’s something that I think about when it comes to TNZ and my level of patience with it. With this team, and with this share structure (there are only 27.5 million shares outstanding), I think that my odds of eventually seeing $10+ are very good if I just give it time, so that’s what I’m going to continue to do.
While I’m waiting for “the next deal”, TNZ has exposure to two themes that I really like right now, namely 1) a WCS spread that is expected to be far more well-behaved going forward once the TMX pipeline comes onstream, and 2) exposure to the European energy market where pricing and scarcity are both in TNZ’s favour. Sometimes my favourite positions are the ones that I really don’t have to think too much about, and for me, TNZ is firmly in that camp.
Tag Oil (TAO.V, last at $0.57)
Tag should spud its first horizontal well in the Abu Roash F play any day now. The company has achieved all of its objectives from the single-frack vertical test carried out earlier this year, proving that the ARF responds well to fracture stimulation and that productivity (and recovery) can be increased using the same modern completion methods that are employed on known resource plays in North America. The horizontal well result expected in Q4 should represent an inflection point in the TAO story and the market should have that information in hand somewhere between Halloween and U.S. Thanksgiving. It’s important to remember that the ARF is a resource play in the truest sense of the word. There is no risk that the oil is there — the ARF is the source rock for most of the oil in the basin that Tag is operating in — TAO’s only job is to extract it economically using horizontal wells with modern completions technology that are standard practice in resource plays here at home. I’ve run through this one in detail before (and recently here on Streetwise), so there’s no need to revisit it again. While I wait for the horizontal well test, TAO says it’s always looking for additional assets, so maybe I’ll be pleasantly surprised along the way. TAO just raised $11 million in a well-subscribed financing at the beginning of the month, which has likely put some pressure on the stock (the deal was priced at 58 cents), but there is no change to my thesis here. Once the first horizontal well result is in hand, and assuming that they like what they see, TAO is expected to have an active 2024, which could include as many as four horizontal development wells. For me, it’s just a matter of waiting for this one to bloom.
New Stratus Energy (NSE.V, last at $0.55)
I mentioned this one for the first time nearly two years ago and it’s been an interesting ride ever since. After a false start in Ecuador, Jose Francisco Arata’s NSE has just signed a MOU in Venezuela of all places. That might seem odd, but many of the South American energy specialists like Mr. Arata actually came out of PDVSA ages ago. Well, with Chevron now ramping up its Venezuelan production to around 150,000 bopd for export to the U.S. Gulf Coast on the back of a U.S. policy adjustment, it seems the window might be opening in this massively prospective market. Granted, Venezuela might not exactly be on everyone’s list of places they’d like to invest, but NSE’s ~$65 million market cap only exceeds its positive working capital position (~$50 million) by about ~$15 million, so it’s not an expensive call option for wild speculators like me. Few details have been disclosed with respect to the resources or production levels associated with the assets that are the subject of the MOU, but additional information is expected to be laid out if/when a definitive agreement is signed. What I suspect is that neither the resources, nor the production will be trivial — because you don’t go to Venezuela for small potatoes. Recent discussion in the company’s MD&A says that NSE is also evaluating other assets/jurisdictions in the broader region which might add another leg to the stool. I think that NSE’s healthy balance sheet, combined with management’s experience in the region, could make this one into the next emerging Latin American energy story, so stay tuned.
Condor Energies (CDR.TO, last at $1.27)
I have suffered many times over the years as a Condor shareholder (this used to be CPI.TO). Fortunately 2023 is not one of those times, not by a long shot. CDR started the year around 40 cents and closed at $1.27 on Friday after hitting an intraday high of $1.87 about a week ago. Talk about volatile. It’s the best performing energy stock in the market YTD and yet almost no one has ever heard of it. That’s not without good reason. Condor had been dead for years — which means that everyone who ever wanted to sell it had years to do so — but back in May the company signed a Heads of Agreement (aka a MOU) with the Uzbek government and national energy company with regards to taking over operatorship of eight natural gas fields and two adjacent exploration blocks, with the aim of boosting reserves and production. The stock never looked back. Most people can’t put Uzbekistan on a map, but the country is in dire need of domestic natural gas and its fields are essentially leftovers from Soviet-era development with little regard for modernization. Condor’s CEO Don Streu is ex-Chevron and has never been one to think small, so I’m cautiously optimistic that he’s onto something significant here. Very little detail has been released in terms of what the assets are or what the upside is, but I don’t think Don would bother if it wasn’t significant. The company has also set its sights on lithium from brine in Kazakhstan similar to other direct-lithium-extraction plays here in North America. I’m not sure if CDR is too late to catch the lithium train, but the Kazakh wells could be prolific brine producers so I guess we’ll see. Lastly, CDR has aims to become an LNG player in Kazakhstan and Uzbekistan where swapping diesel for natural gas (for trucking fuel, as an example) in local markets has significant economic and environmental benefits. To that end, CEO Don Streu will be presenting his views on localized LNG at the World Petroleum Congress in Calgary next month. CDR is a strange animal, but right now I’m most interested in seeing CDR finalize the Uzbek gas deal. At that point, more detail should be available in terms of the size of the prize there and what the economics might look like. Maybe then I’ll be able wave my arms around about potential valuations, but right now I’m just flagging the best performing energy stock of 2023 that no one’s never heard of as something to keep an eye on.
Africa Oil (AOI.TO, last at $3.15)
I still own AOI. It’s a great way to play Brent oil prices and the company spits out a lot of free cash (and will spit out more as its Prime subsidiary reaches its debt targets). AOI has additional potential at its offshore Nigerian assets, but what I’m really there for is the exposure to Total’s Venus oil discovery, offshore Namibia. One of Total’s partners in that discovery is a very happy junior explorer called Impact Oil and Gas, which holds a 20% interest in what could be one of the largest offshore oil finds in recent memory if you believe the industry papers (and an 18.9% interest in an adjacent block). AOI owns 31.1% of Impact, giving it an indirect 6.2% interest in the Venus discovery where an appraisal drilling and testing program is currently underway (AOI also has an indirect 5.9% interest through its Impact ownership in an adjacent block where an exploration well, Nara-1X, is currently drilling). I’m not sure what the market thinks it is pricing in for Venus and the associated upside at this point, but my thinking here is that AOI is going to get a nice lift when Total starts saying more nice things about Venus. At that point I’ll re-evaluate, but for now, I like this as a way to play Brent oil with a free call option on M&A and discovery, with a fortress balance sheet to boot.
Valeura Energy (VLE.TO, last at $2.52)
It has been a while since I’ve said much about VLE, but with its most recent offshore Thailand acquisition now closed and integrated, things seem to be settling in quite nicely. Operating costs are lower, projected capex is lower, and production guidance is unchanged at 20,000-22,300 bopd. Net cash is over $100 million and cash flow is running at around $70 million per quarter, making VLE one of the cheapest energy stocks on the board by most of the metrics that people follow. The game that VLE is playing is one of cost management and field life extension. Every year the VLE can add reserves and extend the lives of its oil fields creates a lot of shareholder value and now that’s the play here. I bought a little VLE back after the recent Q2 report and we’ll see how it goes. Assuming that energy sentiment picks up, when people get around to looking at comp sheets, VLE is going to stand out as dirt cheap. It’s all about how the company manages and invests its substantial cash flow stream relative to its abandonment liabilities. On that front, drilling at the Manora oil field (originally scheduled for end-of-life in 2025) has found additional oil that could extend the field life there. In four words: so far, so good.
Canadian Energy
I mentioned above that I like the moderating effect that the TMX pipeline is likely to have on the WCS differential, which has obvious implications for WCS producers. I didn’t need a long time to come up with Cardinal Energy (CJ.TO, last at $7.17), Baytex (BTE.TO, last at $5.59), Cenovus (CVE.TO, last at $26.60), and Athabasca Oil (ATH.TO, last at $3.75) as companies with good WCS exposure and I won’t say a lot about them here. CJ still has a somewhat baffling yield that hovers right around 10% despite offering nothing but encouraging signs from new wells it is drilling in the Rex and Clearwater. I love getting paid 10% to hold CJ, especially when I’m feeling positive about the direction of the oil price. BTE consistently shows up as having big torque to oil prices and its new acquisition, which was initially hated by the street, doesn’t seem to be so bad after all, maybe even good. CVE is big and liquid, so I own it as pseudo cash and will gladly hold it as long as it doesn’t break below its 200-day moving average. All but CJ are technically overbought or close to overbought based on their relative strength indicators (RSI), which I take as a sign of money rushing to get positioned. I don’t expect these stories to go straight up, but will be happy if they do.
The other theme I like is just plain old Canadian natural gas. As Shell’s LNG Canada gets closer to start-up, industry hawks are looking for a final-investment-decision (FID) for the Phase 2 expansion sometime in the next year or so. In the push for electrification, natural gas is going to play an increasing role in meeting and balancing energy needs globally and Western Canadian gas is ideally located for Asian markets. Once there’s a relief valve on the west coast to take Canadian gas out of the country without sending it south, it should be good for natural gas prices out west… my thinking isn’t much more complex that that. For gas producers, I’m focussed on what I think are the best of the best, which for me includes Arc Resources (ARX.TO, last at $20.81), Tourmaline Oil (TOU.TO, last at $69.72), and good old Advantage Energy (AAV.TO, last at $9.33). ARX is the most overbought of the three names, but that’s probably because it’s also a favourite due to its significant condensate exposure. Value players really seem to like ARX — I just wish they’d let it dip sometime so I can add to my position in it.
Copper
My favourite copper producers are still Capstone (CS.TO, last at $6.29) and Hudbay (HBM.TO, last at $7.23). For developers I lean towards Arizona Sonoran (ASCU.TO, last at $1.69) (big, U.S. asset, brownfields) and Foran Mining (FOM.TO, last at $3.95) (gold-plated backers with decades upon decades of mining operations ahead of it). There is no lack of ways to play copper, nor is there a need for an explanation of why copper is going to be so important going forward. I used to see headlines about how “copper is the new oil”, but I don’t see those any more. That’s a good sign, because it means that interest is muted, but it also means that copper stocks are in the what-have-you-done-for-me-lately camp. I’m okay with that. I’ll go shopping in Copperland when Dr. Copper gives me the thumbs up by moving back up to the $3.90’s. For now, I’m light on copper just in case people get more depressed about China before they get more optimistic.
Fireweed Metals (FWZ.V, last at $1.59)
No one talks about zinc, but it’s as important as any metal out there. Zinc is never that exciting, but any time you get a world-class zinc deposit, someone is always interested. Since I first mentioned FWZ, the story has only improved. Recall that FWZ picked up some gold-plated backers in the Lundins, Larry Childress, and Teck Resources in November 2022. Since then, FWZ’s early drilling at its Boundary deposit (within the Macmillan Pass project) is suggestive of the presence of one continuous deposit cored by a feeder zone. Many assays from holes with massive sulphide mineralization are pending, and with 5 rigs going, many more are sure to come. The Macmillan Pass project is already big, but it’s going to get to Huge with that much drilling. FWZ is loaded with cash and just topped up with a flow-through raise at $1.92 per share. At some point I think the company will spin-out its one-of-a-kind Tungsten deposit (Mactung) into a separate company and that’s an interesting asset on its own. And I guess because good things come in threes, FWZ has been the beneficiary of “bonus” market interest on the back of Snowline Gold’s (SGD.V, last at $5.87) drilling success at its intrusion-related-gold project called Rogue in the Yukon. It seems that FWZ’s western claims at Macmillan Pass are in the fairway that is prospective for intrusion-related gold targets, so hey, you never know. After a long time of being Rodney Dangerfield, CEO Brandon Macdonald is finally getting recognized for the unique and world-class deposits he has lassoed in Canada’s can-do Territory. It’s great to see. This one is up on a stick, but as long as the market remains permissive, the trend should be higher. Once FWZ starts reporting drill results on a semi-continuous basis, you can be sure that more eyeballs will turn this way given the pedigree of those behind it.
Uranium
I’ve ranted on uranium before (most recently here), so I won’t make the case again. Turmoil in Niger, a key uranium supplier to France in particular, has put a bit of a fire under the uranium market, as has a renewed interest in nuclear power as reality starts to set in on global governments in terms of how its adoption is critical to actually meeting future emissions targets. To that end, right here on Ontario, the government wants to expand the Bruce Power nuclear facility by 4.8 GW, which would make it one of the largest nuclear power facilities in the world. Wind and solar are great, but they are intermittent, and baseload power is what the grid really needs. Ontario has the benefit of experience when it comes to the pitfalls of deploying renewable power, so it’s nice to see that its government has internalized the importance of nuclear power — and isn’t afraid to say it.
In terms of names, nothing new there. My uranium basket consists of Nexgen (NXE.TO, last at $6.63), Denison (DML.TO, last at $1.85), Sprott Physical Uranium Trust (U.UN.TO last at $18.13), and Uranium Energy Corp (UEC.US, last at $3.82) in that order. All are Canadian listed except for UEC which is probably the go to name for U.S. retail investors. I don’t need to make it complicated, I just want to own some uranium as the interest grows, with stops in place maybe 10% lower. The charts are all very constructive, with Cameco knocking on 20-year highs. Meanwhile, interest in uranium is maybe at a low murmur, so these stories could have further to go yet.
G Mining (GMIN.V, last at $1.35)
G Mining has been on my list for a while now and I’ve just never felt like I needed to sell it. One look at the chart will tell you why. I don’t have a lot of gold exposure at the moment, just some Steppe Gold (STGO.TO, last at $0.76) from its acquisition of Anacortes Mining, a little Wesdome (WDO.TO, last at $7.56), and some GMIN. GMIN is working in Brazil, and is one of a handful of new, fully financed projects coming into production in the next year or so (H2 2024). A little over 50% of the stock is owned by La Mancha, Franco Nevada, and Eldorado, with insiders (including CEO Louis-Pierre Gignac) owning another 8%. The rest of the shareholder register is no less impressive, as when G Mining was formed, it had very high quality backers who are likely to take a very long view in a company led by someone with a reputation as good as that of Mr. Gignac. I mention GMIN only to flag it for those looking for something a little different in the golds. It’s not particularly cheap or expensive, but it feels to me like one of those companies that will either grow into something much bigger (think management quality) or be sold — I’m good with either.
Cronos Group (CRON.TO, last at C$2.35)
Weed has been a terrible, terrible place to be for quite some time. So why am I talking about Cronos Group? Because it is trading at a discount to its cash value — and it’s not a little bit of cash — CRON has current assets less liabilities of roughly US$900 million. Its market cap is currently US$660 million. That implies that CRON is trading at around a 35% discount to its massive cash value. The company reported its Q2 results last week and said that it is almost done burning money and it actually expects its weed business to be cash flow positive next year… so I guess we’ll see about that. In early July, CRON said that it had been approached by suitors looking to do a transaction with the company. That’s not surprising with nearly USD$1B on the balance sheet. So for me, CRON is a bit of a “pre-arb” on a big pile of cash, that trades at way less than cash value. Maybe it turns into something else, maybe it starts buying other weed companies, who knows. What I do know is that CRON is grossly overcapitalized. Altria Group owns around 40% of CRON’s stock and has board representation, so I think this is a reasonable bet on something good happening given the discount to cash at which it trades. Time will tell.
Critical Elements Lithium Corp (CRE.V, last at $1.65)
Critical is an enigma, and not in a good way. Despite having all key permits, in one of the best jurisdictions for mining, with good ESG chops, CRE still languishes on the shelf of projects that “should be” getting financed and put into production. I like the project and the valuation, but time is ticking here and I hope that my faith in management’s ability to bring project financing across the line is not misplaced. Lithium is relatively easy to find, but having a project this advanced with strong economics is far more rare. I still own it, but less than I once did. I fear that CRE may have missed a prime window of market interest, but the value is compelling enough that I’m not giving up on it.
Magna Mining (NICU, last at $0.66)
This is a classic case of investor apathy. Despite putting out some hot economics at the end of July, NICU is still in the doghouse and it’s not because there’s something wrong with the project. NICU probably represents the fastest potential path to new domestic nickel production that I can think of — granted, the market cap is still $100 million, so it’s not ridiculously cheap, but for anyone who actually cares about nickel, NICU is a rare animal. With a mill permit in hand and a team that knows Sudbury nickel as well as anyone does, NICU is a quality speculation in junior nickel. That doesn’t mean that the stock is going up tomorrow, but it’s the kind of name that I’ll stick with even though it hasn’t done me any favours lately. It’s not a huge position for me, but it’s one that I would add to if/when interest in nickel starts to pick up again.
That’s a lot of ground covered, so I’ll saw this one off here. As always, thanks to those who read this far for your time and interest. Hopefully you’ve found a little bit of your own summertime magic this season…
Happy hunting.