Trick or Treat

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Disclosure: The following represents my opinions only. I am long BIG, CDR, CRE, NSE, RDU, TAO, TNZ, VLE

Halloween is just around the corner and change is in the air. Market winds are swirling with bond yields, the dollar, and the Fed’s next moves all keeping the market on edge. 2023 has been a tough tape for a lot of investors, but like any market, if you’ve picked the right stocks/sectors, the potential for outperformance is always there. Now, as we head into the end of the year, I find myself seeing potential catalysts on half a dozen “special situations” that I follow. Hence the trick or treat title today. While I don’t know what’s coming any better than the next guy, at this point, I can at least identify some of the doors that I know I’m going to see opened in Q4 — and I’m talking about the doors of those houses that could be giving away full-size chocolate bars here — you know, the houses that get visited even if it’s raining (as in, the kind of stories that can attract attention in just about any market tape). My focus right now is on oil, natural gas, uranium, and gold. I have a junior copper exploration story that scratches my “this could be big” itch, but generally speaking, my base metals exposure is low until copper turns around, but I do like the copper/base metal valuations and the general lack of interest in them (things aren’t on sale when they’re popular). I don’t have any special insights on the macro situation out there. Bond yields are an issue, but the Fed knows that they’re an issue, so the fix is waiting in the wings (yield curve control?) should yields spike too high (on the other side of that fix, should it be needed, hard assets would be expected to rally). In the meantime, I suppose we all just bite our nails and see how the economy fares under the new normal (?) interest rate environment.

I continue to focus on situations that most would consider high risk, but with me, there’s always a story, right? I can never cover everything, but I’ll go through a list of companies that I think will have meaningful catalysts between now and the end of the year. All are special situations and, mostly by chance, a lot of them may have significant news before the year is out. Whether that news comes, or if it is good or bad, remains to be seen — but that’s the very nature of trick-or-treat…

Tenaz Energy (TNZ.TO, last at $3.97)

Tenaz’s performance has made it my biggest position by far, and I think it’s still just getting started, so it gets to go first. Speculation continues around when TNZ will do its next deal. There have been rumours that TNZ may be looking at additional assets in the Dutch North Sea, but I would be willing to bet that they have a couple/few parallel processes going at any time. At $4, the company trades at market cap of about $108 million and an EV/CF of multiple of around 1-1.5x depending on whether you want to use 2023 or 2024 numbers at this point. By all measures, TNZ remains remarkably cheap (link to a recent report from Cormark here), particularly given the strength of the team and soundness of the strategy here. I have little new to say, other than I have a lot of patience for TNZ. Both of Mr. Marino’s prior companies were multi-billion-dollar enterprises, so I think there’s a looooong way to go yet given the current market cap and the company’s respect for shareholders when it comes to dilution. I think that TNZ’s acquire-and-optimize M&A business model can work in almost any market tape, and Tenaz’s core competencies should serve shareholders well when it comes to capturing value from the rationalization of international assets by senior companies. I can’t guarantee that TNZ does another deal in Q4, but my gut says they will.

Tag Oil (TAO.V, last at $0.51)

TAO should be juuuust about finished drilling its first horizontal well in the Western Desert of Egypt by now, so I’d look out for an operational update from them at some point in the not-too-distant future. Recall that TAO is targeting an Eagle Ford analogue, in that the target formation (the Abu Roash F, or the ARF) is a carbonate source rock that is brittle and fracks very well. Technical details and market boredom aside, it’s getting close to show time here. The vertical frack completed earlier this year went off without a hitch, and now TAO will repeat that process with a multi-stage (20-30 stages?) in the T100 horizontal well. There’s no reason to think that this won’t work, but sometimes the market likes confirmation on these things — you know, just to be sure. In any case, I’m happy to have my bet down beforehand given what I’ve discussed here before. The market is primed for an initial production rate of anywhere from 1000 to 1500 bopd and I don’t see any reason why that won’t happen. I’m an optimist at heart, but I’m also betting real money here, which means I think it’ll work. The economics are going to be good if this works out… and prior guidance flow results should be out late next month if all goes according to plan. Stay tuned on this one.

New Stratus Energy (NSE.V, last at $0.77)

Talk about being in the right place at the right time. NSE signed a MOU for a deal in Venezuela a while back, and lo-and-behold the U.S. is now starting to warm up to the prospect of Venezuelan oil in exchange for “fair elections”. I guess we’ll see. If NSE can firm up its Venezuelan deal by year-end, the market might be quite receptive to it, as it would be one of the only ways to play Venezuelan oil, especially in the junior sector. I have a lot of time for CEO Jose Francisco Arata and his experience in the region. NSE flys under most radars, but between the hopes of the Venezuelan deal and whatever else they are working on in the region, NSE has been a good performer this year (that is, after its implosion late in 2022 when it shut down its Ecuadorean operations after failing to reach an extension agreement with the government there). I believe NSE has around 55-60 cents per share in net positive working capital at this point, so while it’s not the “free call” it once was, it’s still a relatively cheap LatAm call option on riding shotgun with one of the most connected and interesting industry players in Latin America — Mr. Arata.

Condor Energies (CDR.TO, last at $1.40)

Back in May, Condor signed a MOU with the government of Uzbekistan covering a number of gas fields within the country. Well, it’s been five months and winter is coming, so I’m guessing that if anything is going to happen on that front it’s going to be before year-end — such that CDR can start ramping up gas production in time for winter (gas is sorely needed in the country). Details on the deal are still sparse, but management appreciates big-scale projects, so I look forward to seeing some numbers when/if a firm deal is signed. CDR has spent years laying the groundwork for this project, so I hope it comes together for them. Condor also remains focused on LNG in Kazakhstan where it is seeking to capitalize on an arbitrage between LNG and diesel fuel costs when it comes to use in industrial equipment like mining fleets, for example. And then there’s the Kazakh lithium-from-brine potential, to which I pay little attention, but I’m happy to go along with as long as it doesn’t take much capital. CDR is wayyyyy under most radars, so it could have a long way to go if the company is successful in converting its ideas into cash flow. Recall that one of the largest holders here is the Eurasia Group of Osisko fame, so if things start to click, there’s a group with some bandwidth that owns around 1/3 of the stock.

Valeura Energy (VLE.TO, last at $3.16)

I’m not necessarily expecting news on VLE, but I wanted to add a few lines on it after having a chance to meet up with management last week. In a nutshell, things are going really well. The recently announced Wassana expansion appears to be material, and it looks like there are plenty of targets to keep Nong Yao and Jasmine as going concerns for longer than a snapshot reserves report might suggest (considering prospects/satellites/exploration potential). VLE is carving out a niche as a SE Asia specialist and it’s really settling in in terms of operations. In my meeting, I learned that VLE has created a team wholly dedicated to re-imagining, re-tooling, re-thinking and/or re-using existing infrastructure on its fields and within the region to minimize development and abandonment costs. I think that having this kind of competence in-house is going to serve VLE very well as the company seeks to develop oil where others have already found it. VLE plays on the same theme as TNZ in terms of giving international assets good homes while other companies rationalize their asset portfolios… and it trades as cheap or cheaper than almost anything in the group. Kudos to Sean Guest and his team here for pulling a Godzilla-sized rabbit out of the hat.

Hercules Silver (BIG.V, last at $0.80)

I shudder to even type about this one. I say that because BIG is the kind of thing that you don’t want to look at directly in the eye because it might gore you. The stock was up 27% yesterday alone, which is 27% higher than it was when I started writing this note, so there you go (I expect volatility in this story to frustrate trader-types). While the company might be called Hercules Silver, the parabolic stock chart is being driven by a copper porphyry discovery beneath a 5.5km-long trend of silver mineralization hosted in an overlying rhyolite (the extrusive equivalent of granite). There’s a lot of geology talk to explain what may be going on here, but basically, the Hercules property appears to host what could be a significant blind copper porphyry discovery in an area that has been overlooked for decades. Assays have only been reported for one hole so far, but that hole returned 185m of 0.84% copper, including a sub-interval of 45m of nearly 2% copper within a supergene-enriched zone below an unconformity at the base of the silver-hosting rhyolite (an unconformity is a once-exposed surface that represents a significant gap in geologic time, where, in this case, the near-surface copper mineralization was concentrated by weathering a very long time ago). Based on a combination of 1) management body language in interviews, 2) the descriptions given thus far in terms of what the company has encountered in subsequent holes, and 3) the fact that management says that the company has already signed CAs with bigger players on the project, it seems that this copper discovery could live up to the company’s ticker — BIG. One hole doesn’t make a deposit, but the signs are there that this could be a big one. The anatomy of copper porphyry deposits is very well-understood, so vectoring towards the potassic core, where the real copper goodies (long hits of even better grade) would be expected to be, should be doable. Drill results are expected come every few weeks and a very telling IP survey, covering the entirety of the porphyry target for the first time, should be ready in 8 to 9 weeks.

A whopping 79 million shares representing nearly $40 million in dollar value have traded since the discovery was announced, which is nothing short of remarkable. Hercules has 187 million shares out and a market cap of $150 million here, so this is clearly riding the happy part of the Lassonde curve right now. Honestly, I don’t know where this could go — think “hero or zero”. I’ve asked around the street to see if anyone I know is following it, and I only found one person that knew it. I haven’t noticed any broker notes on it, no analyst notes, nothing. That says something to me in terms of what stage this is at… If/when the company reports longer hits confirming continuity of the deposit, the frenzy is likely to continue as people like me wonder, “What if this is truly BIG?” I mention this one as something to at least put on the radar, because I think it’s worth knowing where the action is in the casino that is the junior mining market. I don’t expect every hole to be better than the last, but the first one was stopped short — and subsequent ones went much deeper — and apparently confirmed continuity of the mineralization to significantly greater depths. People will look to compare the potential — and I stress that it’s just potential at this stage — of Hercules to a lot of well-known discoveries that either have (or had) market valuations of a billion dollars plus, so that’s my dream target for now. There’s a lot more information to come on this one and I’m fairly certain that they didn’t drill their best hole into this blind target on the first hole, so stay tuned.

Critical Elements (CRE.TO, last at $1.56)

Nothing new here. CRE is one of the most advanced lithium development projects in the market (with some blossoming exploration upside), in one of the best jurisdictions, with one of the lowest P/NAV valuations with respect to what the project would be worth once it’s built. It may be wishful thinking, but I’m hoping for some kind of financing package for this one by year-end. I may be an eternal optimist, but CRE has tried my patience more than most. The only reason I stick with it is that it just makes too much darn sense.

Radius Gold (RDU.V, last at $0.185)

This is much more of an exploration flier. Most recently my attention to Radius was drawn by its Tropico project in in the Fresnillo mining district in Zacatecas, Mexico. Radius has discovered an epithermal system with promising geochemistry and rock textures at Tropico and its proximity to the world’s largest silver mining camp means that it’s worth paying attention to what RDU starts pulling out of the ground when they get down to 300-500 metres depth, where high-grade mineralization might typically be expected if it’s there. As of the time of me writing this, only shallow holes have been drilled, but the rock textures erase any question about whether or not this is an epithermal system. Not all epithermal systems host economic mineralization mind you, but pathfinder geochemistry in the surface sinter and gold in the shallow breccias may be suggestive of a fertile system at depth. I’m paying attention to this one because one hole could change things quickly at Tropico, but there are no guarantees. Fortunately, RDU isn’t a one-trick pony. Amalia (Mexico), Plata Verde (Mexico), Holly (Guatemala), and Motagua (Guatemala) are all worthy of attention, but alas I can only focus on one thing at a time.

That’s a decent collection of trick-or-treat stories, so good luck out there and happy hunting.