The Summer Playlist

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Disclosure: The following represents my opinions only. I am long AOT, BIG, CDR, DMX, FM, FOM, K, KNT, LBC, MMA, PEAK, POET, SEI, SURG, TAO, TLG, TNZ, VLE, and VZLA (image credit to Tadas Mikuckis on Unsplash)

As time goes by, we all accumulate a catalog of songs that we like. Those songs that you either can’t hear enough of today, or couldn’t hear enough of at some point in the past. I don’t think stocks are all that different. What an investor decides to put in their market playlist will be driven by many of the same things that draw people to one song or another. Different songs just sound better in certain kinds of weather or seasons. The ones where you really know the lyrics will likely never be forgotten with a little coaxing. You will know those songs. Just like you get to know stocks over time.

And, just like music, stocks fall into different categories and sectors. Rock, R&B, Classical, Punk, Electronic, and Country are to music what Energy, Financials, Materials, Consumer Discretionary, Utilities, and Industrials are to stocks. Some people specialize in one, some people dabble a little in all of them, but at the end of the day everyone will get to know the sector or two that they take an interest in… and that’s where they’ll spend most of their time and energy.

For me, that’s always been Energy and Materials. I dabble in almost everything, but for this summer, I’m feeling good about the market prospects for resources as a whole. That’s partly based on the broad acceptance that I’m starting to see from big banks in metals like copper and gold. People still like uranium and the theme is strong there. Energy is cool again to value investors who can’t resist the free cash flow yields, dividends, and continual buybacks. Silver folks are happy. Generally speaking, resources feel as cool to the market as they have in a while. Couple that with the fact that the TSX Venture index has now made the golden cross that I had hoped for back in March and the stage may be set for a real resource bull market in the not-too-distant future. It always feels good when someone likes the same songs that you do, so when it feels like the market is really coming around to resources, it puts a little spring in the step of a guy like me.

Multiple resource themes seem to be coinciding at the same time. Gold is being driven by central banks and/or some mystery buyer soaking up gold like it’s going to be the next big thing. Silver typically runs with gold and is undervalued on a historical ratio basis, but the silver stocks always trade at a premium, so there’s that to consider. Copper is being driven by the electrify-everything theme, a tight supply situation, and the realization that we’re going to need some new mines. Uranium is finally getting recognized as a viable energy solution and relations with Russia, who supplies a big chunk of enriched uranium and nuclear fuel for U.S. reactors, are far from good — so much so that the U.S. is actively looking to onshore its uranium enrichment and fuel production capability. All of that on the backdrop of a sector where visible uranium mine supply just isn’t high enough to meet projected future demand. Energy stocks are (still) fundamentally cheap relative to the rest of the market and the startup of the long-awaited TMX pipeline has a lot of the Canadian oil-focussed energy names trading near 52-week highs, especially those with WCS (heavy oil) exposure. Special situations in the sector continue to interest me the most, but you know that’s just how I roll. Put it all together and that’s a lot of things all working at the same time — and that makes the resource pool party seem appealing to those who are looking to diversify from the endless rave that the tech sector has been throwing. Because sectors like energy and materials have such low weightings relative to historical averages, even a small rotation/rebalance into “hard assets” like some of those listed above can cause surprisingly strong moves for the underlying equities. To be clear, I don’t think I need a rising tide to win in the market, but it sure can make it easier… so here’s hoping that the resource-heavy TSX Venture index has its sights set a lot higher than 600 — retesting its 2021 high of ~1100 would be a good start.

With all of that in mind, as we head into summer, the playlist I’m going to listen to includes some old favourites and some new songs that I think could have a chance of catching on. As always, I just flag some of what I see and I can never cover it all, so let’s see what made the list.

Copper

Back in March, I wished for a copper move through $4/pound and I got it soon after. Copper is $4.65 as I type this and, while maybe showing a little froth, has a lot going for it thematically. Essentially, the electrification and AI themes are intersecting with a lack of mine investment at a time where the finding, planning, permitting, and building of new mines takes even longer — and requires more capital — than it did before. Copper could be $6 tomorrow and no one could do anything about it. The physical market is tight, copper can’t be substituted most of the time, and $6 isn’t actually that expensive in the grand scheme of things. Sure you’d get a little more scrap coming in at $6/pound copper, but mine supply would just sit there and stare at you. So what’s the solution? I think that it’s a good ol’ copper bull market where the internet does its thing and just a portion of all those folks trading tech stocks discover the world of mining because the headlines will lead them there. Think about copper at $6 and the earnings that some of the big producers would be reporting. It would seem like money was falling from the sky, and yet, the mine supply would still take time to respond. Probably the best bet for a meaningful impact to the supply/demand equation would be the restart of Cobre Panama, but that’s unlikely to happen anytime soon, so what holds copper back once sentiment reaches the tipping point? I’m not sure. As a result, I like copper until I don’t. There are so few viable ways to play copper producers right now that the folks looking to capitalize on copper will have no choice but to move to smaller companies like the developers and explorecos. Things are going to be getting champagney in the copper producers’ office parties if copper hangs anywhere around here, never mind if it grinds or spikes higher. Some copper producers are already looking expensive-ish to me (e.g, Hudbay and Capstone) to the point where I think M&A starts looking more attractive to them as acquirers for the first time in a long time… but what do I know about expensive? It’s been a long time since anyone has seen a real bull market, including me, and you forget how kooky things can get when the party is on. I guess we’ll see, but the $4 breakout is still pretty fresh, so this $4+ copper world is the new normal… at least for a while.

My main copper exposure consists of Foran Mining (FOM.TO, last at $4.26), First Quantum (FM.TO last at $18.24), Hercules Silver (BIG.V, last at $0.82), Midnight Sun Mining (MMA.V, last at $0.23), Surge Copper (SURG.V, last at $0.14), Libero Copper (LBC.V, last at $0.42), and Sun Peak Metals (PEAK.V, last at $0.43).

Foran Mining is a premier asset in a premier jurisdiction with premier shareholders/backers and a premier mine life, including a very good outlook for resource expansion. Foran is looking like what you call a multi-generational asset, meaning that it will likely be around through a few mining cycles. I think that this advanced development project is the kind of asset that larger players with expensive paper will want to buy in the future, so I own it. It’s also the kind of asset where the NPV understates the asset’s potential, as anything beyond 10 years out is so heavily discounted. I’ve heard that real miners think Foran will be mining for 30-50+ years as the camp is drilled out — and who am I to argue with that in light of expansion/discovery indications from recent drilling?

First Quantum is a play on Cobre Panama mayyyybe coming back into focus — this time from a “hey, maybe there’s a deal to cut in order to get this mine started again” perspective. As a result of the inherent uncertainty associated with the Cobre Panama kerfuffle, FM is cheaper than its peers, but I’m okay with that. I think that Cobre Panama sentiment could improve now that centre-right (and pro-business) Mulino has won the recent presidential election there. FM is a big organization with good management… I think they can turn lemons into lemonade in Panama, but we’ll see. The market certainly isn’t betting heavily on it yet.

I don’t have anything new to say on Hercules other than the fact that the company has started a 20,000-metre drill program at their hopefully-blossoming copper porphyry discovery in Idaho. Recall that Barrick wrote a big cheque to Hercules in November (becoming BIG’s largest shareholder) and there has reportedly been much industry interest in what BIG is onto. They’ll drill on 200-metre centres moving to the north and west of where they drilled last season. One hit into the higher grade potassic core of this system and things will go absolutely bonkers. That hasn’t happened yet, but if it does, I think the market cap will be headed much higher. This is a high-risk, high-reward situation, but the stock has been treading water for a while now, so there’s not much speculation froth in it. The market cap is steep for something that’s still just “prospective”, but there’s a reason for that — the multi-billion-dollar dream prize potential — so there you go.

Midnight Sun Mining is a new one that I noticed when they announced a JV with KoBold Metals, an innovative privately-backed explorer with some serious mental and financial firepower behind them (you can look up KoBold at your leisure). KoBold is farming-in (spending $15mm to earn 75%) on MMA’s Dumbwa target, which is hoped to have a billion-tonne copper deposit hiding somewhere within its JV boundaries. Aside from that target, there are a handful of other exploration areas that MMA keeps 100% of, but the real cherry on top with MMA is the near-surface copper oxide mineralization next door to First Quantum’s Kansanshi mine, which juuuust happens to be out of oxide ore. The plan/idea/hope is to dig up and truck near-surface copper oxide mineralization from MMA’s Kazhiba Dome property straight over to FM’s existing operation just ~7 kilometres away. FM is motived to run oxides at Kansanshi because the company continuously generates sulphuric acid as a byproduct of ongoing sulphide mining operations and it needs to neutralize that acid somehow. Historically, they’ve done that by spraying the sulphuric acid on oxide heap-leach pads, making money and lowering costs at the same time. But alas, FM is out of oxides at Kansanshi and Midnight Sun is right there at the doorstep with some impressive hits (e.g., 14m of 5.7% Cu, 24 metres of 3.15% Cu, and 8 metres of 5.1% Cu) at and near-surface. MMA will soon close an upsized financing and, in about a month or so, should start a rapid-fire shallow RC drilling program to feel out an oxide resource. Between oxide drilling at Kazhabi and exploration drilling at Dumbwa, MMA should be newsy through the summer and well into the fall. The prospect of a very short path to production, potential substantial cash flows relative to its $25mm market cap, and Big Exploration potential all in one package was too appealing for me to pass up. Zambia is one of the best mining jurisdictions in Africa, so I’m taking a shot here on a name that almost no one has heard about, but that’s regularly travelled territory for me, so let’s see what happens.

Sun Peak is now drilling in Ethiopia and could arguably announce a discovery at any time. Their targets are compelling, and there are lots of targets, so I think the odds are good here, but this is as speculative as it gets. I’m a big fan of the CEO here and how he has handled getting back to this point (drilling) so I’ll just see how this one plays out.

Looking back, the story on Surge Copper hasn’t changed much since about three-and-a-half years ago when people last cared about copper stocks. Surge has a large copper deposit on the doorstep of the nearby, and currently idled, Huckleberry Mine (owned by Imperial Metals, III.TO, last at $2.62). The common-sense investor in me says that the two shall become one and everyone can be happy… i.e., make a deal to sell Huckleberry to Surge (say, for a healthy amount of stock and maybe some deferred payments, or a convertible bond, or a mixture of all of the above), and then move the Huckleberry restart forward as a combined project. The economics of doing so are ridiculously good and I’m certain that the concept of this 1+1=5 situation will not be lost on people with more influence to make it happen than me. I think that such a combination is a way to short-circuit the path to production that would be a big win for common sense and efficiency. The market is dying for near-term copper production stories and there are so few. Surge could turn into quite a market success story/wealth generator if this deal could be put together, so fingers crossed. I also get the Berg deposit call option within Surge… and that is a billion-tonne deposit believe it or not. Sure there’s lots of work yet to do at Berg, and yes, the idea that Surge’s Oosta deposit would go through Huckleberry is little more than a dream at this stage, but when I want copper torque, very few things have more torque than this. With a 14-15 cent stock price and tiny market cap, Surge is a “no guts, no glory” situation… but I’ve kept the bet size small and will watch how this goes. If the market discovers Surge in a strong copper tape, I think that it’s the kind of thing that could re-rate quickly. We’ll see.

If Libero Copper can ever get drilling, it’s going to be a sight to behold with the capital structure being what it is. There is some PP stock coming free trading in about a month (largely an insider round) and some more PP stock coming free trading in early-mid July, but that’s not really a factor for me. What I care about is seeing LBC drill, because when they do, they will produce some impressive hits. LBC is cheap and could be volatile, but I think it’ll be an easy 5-10+ bagger if they are able to drill this while copper is still hot. Read my March note if you want more detail on the company’s project in Colombia. The idea here is that Frank Giustra didn’t get involved if he didn’t think that LBC was going to be able to move this project forward. Another “we’ll see”.

Gold

Gold stocks feel to me today like energy stocks felt to me in early 2021. While some gold stocks are finally making 52-week highs, many are not and most have yet to break through their 2021 highs. This is despite the fact that gold hasn’t been this high in nominal terms, ever. Responses to results from companies like Agnico Eagle, Newmont, and Kinross all show what’s in store here. Higher cash flows, higher earnings, analyst target price upgrades, positive momentum, quant model interest, index rebalance/inclusions and higher highs would seem to be in order unless gold really falls out of bed, but any real time spent over $2000 per ounce is some good time indeed. For once, margins for gold producers are rising faster than their costs, so real money is starting to be made in the sector. The market didn’t believe the move in oil in early 2021 and it doesn’t seem to believe the move in gold here, yet. The big banks are all onboard with gold now and that draws incremental interest. And in the gold sector, because it’s so small relative to the rest of the market, it doesn’t take much incremental funds flow to really move the stocks. There’s been quite a bit of volatility in gold lately and it doesn’t seem to phase the stocks much — I take that as a good sign.

This note is already too long, so I’ll just keep the golds really brief with a few names and tickers. I like Troilus (TLG.TO, last at $0.66), Ascot Resources (AOT.TO, last at $0.71), K92 Mining (KNT.TO, last at $8.02), and Kinross (K.TO, last at $10.38). Vizsla (VZLA.V, last at $2.04) is my only silver at the moment after I swapped my Aya Gold and Silver into it relatively recently. I basically like all the same golds as I mentioned last time, with the exception of Red Pine (RPX.V, last at $0.09) which is now dead to me after it reported irregularities in its assay reporting.

Troilus is a large (>10 million ounces AuEq), brownfield development project that should release a feasibility study any day now. It’s just the right kind of project for a strong gold tape and has a lot of leverage to the gold price with a decent copper kicker. Enough said.

Ascot Resources is the new kid (producer) on the block and looks to me like it’s 50-100% undervalued relative to peers depending on how the ramp-up goes. There is ongoing exploration as well, so AOT can still surprise with the drill bit.

K92 Mining is in PNG, which isn’t everyone’s cup of tea, but it has a virtually unmatched growth profile amongst the producers, ramping up some 400,000 ounces a year of gold production over the next couple of years. Exploration and expansion drilling continues to impress and the chart looks good. Steady as she goes.

I include Kinross to illustrate what happens when a company has good leverage to a rising gold tape and is a mainstream name. Kinross really starts to mint money at these gold prices and its debt looks set to melt away rapidly if these prices are sustained, so the market likes the name. Maybe a little hot in the near term, but this is the kind of name that should see dip buying, all else being equal.

I’ll mention Vizsla Silver here because its Panuco project (in Sinaloa, Mexico) feels like the cheapest, big, high-grade silver resource that I can wrap my arms around in the junior sector at over 300 million ounces in all categories running 430-510 g/t AgEq (or about 4.3 million ounces running ~6-7 g/t AuEq). Rightly or wrongly, I swapped some of my Aya Gold and Silver (AYA.TO, last at $14.85) into VZLA and I’ll see how it goes. VZLA is still trading for less than it was back in late 2021/early 2022 when it had defined a resource that was just a fraction of the one released earlier this year.

Energy

Tenaz Energy (TNZ.TO, last at $3.95)

No change in my view here. Every day that goes by without a deal is a day closer to the day that there is a deal… full stop. With TNZ’s share count at ~27 million shares and a market cap of around $100 million, led by a team used to managing companies with market caps in the “billions”, I know that patience is the only requirement here. I have no doubt about that. For existing holders like me, there’s really nothing to do, but for new money, I still think TNZ represents a highly compelling risk-reward scenario that can perform regardless of what the broader tape is doing. TNZ is a wolf in sheep’s clothing and I continue to believe that it will surprise everyone one day. The best part is that after the “next” deal, the probability of more deals increases. Tenaz’s snowball has barely started rolling, but with its sights set on being a 50-100,000 boepd producer in due course, there is a lot of story to be written here… i.e., it’s still very, very early days for patient money.

Tag Oil (TAO.V, last at $0.61)

TAO should be getting ready to release test results from its first horizontal well in the Abu Roash F (ARF) oil play in Egypt’s Western Desert any day now. My understanding is that the company will truck oil during the initial testing phase as it evaluates what size of pipeline it wants to run from the well. The street seems to be looking at the 1,000 bopd level as the “over-under” line when test results are reported. I think that the company is likely to end up producing the well at a rate that will maximize its ultimate recovery while also maximizing its NPV. We’ll see what they say about that. Given the pressures and natural fracturing encountered in the well, I’m hoping that TAO will see far less initial decline than some might expect from an unconventional oil well (i.e., a flatter production curve in the initial months/years if they choke it back). Now, while some might view this well test as a kind of “endpoint” of the story, I see it as exactly the opposite. A successful well test here will really just mark the beginning of the TAO Badr development project… because after all, if TAO can drill and complete one well in the ARF, the company can do scores more on the acreage already evaluated by RPS Energy. Recall that the unrisked after-tax NPV10 of a 20-well development case was pegged at US$423 million (~CDN$550 million) and management thinks they have multiples of that initial 20-well RPS inventory on lands with good data. Tick tock.

Condor Energies (CDR.TO, last at $1.86)

Condor has been hovering around $2 for some time now and the market will look for hints of just what CDR is onto in Uzbekistan. Gas volumes have never been disclosed for that gas field revitalization project and Q1 results could include the first month of production (March). Otherwise, Q2 results will show a full quarter of Uzbek production. I would just reiterate my prior comments on the Kazakhstan initiatives, so nothing to add there from my end.

Valeura Energy (VLE.TO, last at $5.10)

Two words… Golf clap. VLE is great example of a competent and connected management team bringing a company back from virtual oblivion. It’s a poster-child for how I see TNZ playing out, which gives me the warm and fuzzies.

Sintana Energy (SEI.V, last at $0.97)

I mention Santana because it was nearly two years ago that I mentioned it at a dime. It has been a 10-bagger since then on the back of an impressive discovery and well test by its partner (Galp). It just goes to show that if you can be patient with some of these things, ridiculous returns are there to be had. Chevron is going to get active soon in the area on another block where SEI has an interest and Woodside can’t be far behind on yet another. The market cap might seem unreal for a 5% carried interest in a pre-development emerging discovery, but this looks like a very big discovery and is unlikely to be the last. Little SEI ended up in a pretty choice neighbourhood. Congrats to the team and all the holders.

Uranium

Probably the most interesting thing I have to say in uranium is that little District Metals (DMX.V, last at $0.43) could be hearing something in the near-term about the direction that the lifting of the uranium mining ban might be taking in Sweden. If Sweden starts talking about allowing uranium mining, DMX could re-rate quickly as the owner of a billion-pound uranium deposit there. To be clear, you’d never mine it all, but saying you’ve got a billion pounds of uranium sure does have a nice ring to it and that fact could make for some wild promotion depending on what the market does with it.

Well, you never get to all of the songs that you want to, and a playlist can only be so long, so I’ll leave it there. One bonus track that I’ll mention before I wrap this up is POET Technologies (PTK.V, last at $3.09 and POET.US, last at $2.23), which deals in photonics — using tiny lasers in circuitry to transmit data instead of pushing electrons through tiny wires. POET has a product called a transceiver, which is the port with the little flashing lights that you plug an ethernet cable into if you’re ever done that before. POET’s transceivers transmit 10x the data, using one-tenth of the power, and generating one-tenth of the heat relative to a transceiver that isn’t powered by photonics. With all that I’m reading about AI, data centre trends, and the associated power consumption, a little mousetrap like POET’s might be perfectly positioned. Next time you look at a photo of a rack of servers, look at all the cables connecting everything… all of those cables are plugging into transceivers. It’s a real long shot, but the company recently raised $20 million in the blink of an eye, and this was a company that just couldn’t get it lit before. Something seems to have changed this time and I’m long and interested. They say volume precedes price and volume has never been higher. Hmmmm.

Thanks for reading this far if you’ve made it. This ended up being a lot longer than I thought it would, but with the TSX Venture index threatening to really break out I guess I’m feeling chatty. I’m definitely looking forward to seeing what the summer brings, but if I had one overarching mantra right now it would probably be, “Be right and sit tight”…

Happy hunting.