Disclosure: The following represents my opinions only. I am long AOT, CDR, EQX, GOT, GTWO, HSTR, KNT, LBC, MMA, MOG, NEM/NGT, PTK/POET, TAO, TNZ, TUK, VIO, and VZLA (image courtesy of Pixabay)
Two months have gone by since the last time I wrote and overall I’d say that oils are weaker, golds are stronger, coppers bounced but aren’t sure what to do next, and uraniums are enjoying a resurgence thanks to a combination of good headlines and fundamentals. Overall, there’s not a lot to say… the S&P keeps making new highs, market breadth seems good, and for now, companies doing good things and getting good results are being bought. China is trying to stimulate without bringing out the bazooka, the Middle East is a tinderbox, Ukraine continues its battle, the Fed(s) is/are easing, and the chatter of a BRIC alt-dollar currency (backed at least partially by gold) surfaces from time to time. The copper/metal-intensive “green” push continues to provide a backstop for a more or less fully functioning resource market (i.e., not looking frothy yet). Meanwhile, Canada LNG is keeping folks more or less sanguine overall on Canadian gas producers, despite the low western Canadian natural gas prices. Oh and did I mention that gold hit another record high today and yet, the market roar is more like a mew? Interesting times. Overall, the indexes are saying that environment out there is permissive to making money in the market. They always say that markets climb a wall of worry, and there’s plenty to worry about if you want to… and yet, new highs on the indexes persist… so the climb continues. In my bag, I try to carry names that I think represent special situations (think “alpha” ideas) that can perform in just about any reasonable market tape. In four words, steady as she goes would sum up my overall stance. Some company specific comments follow:
Tenaz Energy (TNZ.TO, last at $9.18)
Tenaz continues to be my biggest holding… in fact, I haven’t sold a share. I’m no Roaring Kitty (probably a good thing), but I have extreme patience and fervent belief when it comes to Tenaz. First things first… the stock is up a dollar since NBF cleared a market logjam at the $8 level a week ago… yay… insert golf clap here… BUT I want to point out that a $1 move in TNZ represents just $27 million in market cap, which represents less than a 0.2x bump in the proforma annualized cash flow multiple. So if I’m spitballing, at $8, TNZ was trading at around 1.5x EV/CF (proforma) and now it’s trading at around 1.7x. Kind of puts things into perspective, doesn’t it? The tight share structure means there’s a lot of per-share torque to value here, which is why I have to chuckle when I see bids stacked in penny or nickel/dime increments. With 27 million shares out, dimes and quarters are insignificant in terms of the valuation here… hard to fathom, but objectively true in the context of what’s on the table.
Recall that the after-tax NPV10 of TNZ’s (proforma) PDP reserves (proven-developed-producing… i.e., the most conservative measure of asset value) is about $16/share. Now remember that almost nothing out there trades below PDP, especially companies run by management teams who are proven value creators. Then consider that the after-tax NPV10 of TNZ’s 1P (PDP+proven) reserves is about $22.50/share. With numbers like that, I don’t even need to talk about the 2P NPV10AT (okay, it’s $34/share) — and remember that those NPVs are net of liabilities and obligations. My point is that while TNZ has moved up a dollar, it has a long way to go just to get to PDP value and shareholders still get a free call option on TNZ doing more deals, which is a veritable certainty in light of the business plan and the team executing it. (Note: While TNZ still has to pay for the NOBV (NAM) acquisition from cash flows that are derived from these reserves, it’s completely reasonable to assume that TNZ will at least replace those reserves and their corresponding value soon after closing with minimal capital at the outset. As a result, I’m using a “static” view of PDP NPV10AT for the purposes of this forward-looking discussion.)
I’ve talked at length in the past about TNZ’s competitive advantage in the international arena when it comes to acquiring non-core assets from much larger companies through proprietary deal channels, so I don’t need to revisit that, but the embedded option value here is very real. So far TNZ has done one material deal in its quest to grow to 50,000-100,000 boepd through targeted and thoughtful acquisitions, and you just know that the next one they capture will also be highly accretive — because that’s just how TNZ works. To me, that means that my do-nothing scenario sees TNZ gravitate towards its PDP NPV10AT by say, mid-next year (when the NAM deal closes) with a high probability of another deal being announced somewhere along the way… you know, the kind of deal that will gap the stock higher and make me talk about an even higher PDP NPV10AT number.
In all honesty, I like the set-up and risk-reward on TNZ as much or more today than I did back when the stock was $3.50… because back then, TNZ was too small and illiquid for all but the most adventurous investors. Now, with the market cap sitting around $250 million and daily dollar-value traded rising nicely, the audience that will listen is getting bigger and will only continue to grow as TNZ continues to execute. One day, I think that TNZ will take its investors all the way to Dividendtown, and when they do, shareholders will have “made it” and been witness to the birth of a new “smidcap” international energy company with an enviable corporate culture and record of value creation. Enjoy.
TAG Oil (TAO.V, last at $0.265)
While I talk about stocks starting with “t”, TAO comes to mind. Fitting that it should come after TNZ as TAO is a good reminder of why you need several horses in the race at any given time. TAO has been a poor performer, but TNZ more than makes up for it in my books, so I’m staying objective. TAO just announced a deal that they expect to close within 4-6 weeks that will see them take their Abu Roash F (ARF) exposure from 26,000 acres to over 500,000 acres while adding some conventional workover/recompletion opportunities that can ramp production up to a level sufficient to cover corporate burn and provide some free cash flow as well. I like the deal, and I like TAO’s nascent plan to drill low-cost vertical wells into naturally fractured corridors within the ARF that can be imaged on seismic. Those vertical wells could have some impressive initial rates and quick paybacks and they’ll give TAO some time to set up for a second horizontal well into the ARF in Q2 2025. They say that if you don’t have patience that the market will teach you patience… and TAO is an exercise in that for me. At these levels, no one is making money and there’s no froth in the stock, so as a holder I’m inclined to do nothing. TAO could probably use some dough, so if I’m a broker, I’m all over this one now… and the theme of buying international juniors when they are cheap with long-tail upside and then letting them execute has been a successful strategy in a lot of names in recent memory… so I like TAO’s odds of eventually seeing brighter days as the recently-announced acquisition closes and activity ramps up.
Operationally, the BED4-T100 well was reported as producing 200 barrels of fluid per day (apparently with 35 percent frack water), 130 barrels of which is oil. Remember that’s from less than 1/3 of the horizontal length that TAO would’ve liked to have drilled (they drilled 308m of a targeted 1000m hz leg), so I’m not going to sweat it too much. TAO says that they’ve validated the play, and they have a lot more data than I do, so I’m going to give them some rope. 2025 will be pivotal for TAO and I expect another spec cycle to play out here like the one that happened going into the first well. Should the second ARF horizontal well fare better than the first, TAO could wake up in a hurry, at which point its 500,000 acre ARF position would look like a prime candidate for a JV with a much larger company. Time will tell.
Tuktu Resources (TUK.V, last at $0.08)
I briefly mentioned TUK a little while back and since that time, the company reported some very encouraging early test data from its vertical recompletion of a Mississippian zone in a newly acquired exploration play in Alberta. The well produced over 400 bopd (IP30) from a single frack in a bypassed zone in a vertical well, placing it in a very elite group of high-performing vertical wells. As of last report, the well had yet to show signs of depletion, which bodes well, and the GOR (gas oil ratio) of the light-sweet oil was very low… which may mean that the oil pool also has good potential for an eventual waterflood, with a corresponding high recovery factor. The scale of the play is unknown, but the company will shed more light on that as the story develops. Keep in mind that this is an emerging opportunity and the goal posts are wide here. Based on my understanding of the Mississippian in general, it’s on the list of horizons where I would look for a material bypassed/missed oil field, but this could also be a one-off. I personally doubt it’s a one-off, so I’m long the stock and will be cheering from the bleachers as they develop the play. The next event could be a new vertical or a new horizontal well… I’m not sure. They’re light on cash and have a rollback approved, but this is a story that I think is going to be worth following regardless of what the oil price is doing.
Condor Energies (CDR.TO, last at $2.23)
Condor is one of my weirdest stories, but it has also been one of my best performers as I’ve been long good size since before the company finalized its gas production enhancement deal in Uzbekistan. The company reported production of 10,000 boepd of gas in Q3 with around $20 million of revenue for the quarter. Initial low-cost plans to increase gas production have already yielded (very) positive results and the company has a lot of running room to expand production with a modest capital spend. Additionally, the success already being demonstrated sets the stage for CDR to take on additional fields for optimization. This is a unique situation given the extent of the low-hanging fruit in these state-owned fields.
Meanwhile, on the LNG front CDR is emerging as a regional player in Kazakh domestic LNG, which is a highly attractive diesel substitute in the country. CDR received a second feedgas allocation from the government of Kazakhstan to support its LNG initiatives and the company plans to expand on that over time. For now Condor’s focus is on supplying LNG to the soon-to-be-upgraded Kazakh locomotive fleet, which is a nice piece of business for a player like CDR. This one isn’t for everyone, but if you like Central Asian energy investing, you need to know Condor.
For those that are paying attention, you’ll notice that my commentary on Condor is mostly a copy-and-paste of my comments from my last note. That’s a good thing, because it’s a good, simple story. CDR is finally catching flight and could continue to do quite well as an energy player in Central Asia that is seeing the fruits of well over a decade of focussed attention. Condor’s first incarnation was as a wildcat exploration company… I like this incarnation a lot better.
Midnight Sun Mining (MMA.V, last at $0.37)
After a little license “hiccup” that was quickly resolved, MMA is cheaper but the story remains the same. MMA is lightly followed but I expect that at some point the potential synergies with First Quantum will become apparent to a broader audience. Recall that First Quantum’s Kansanshi mine in Zambia is out of oxides and is currently mining a large copper sulphide ore body. As a byproduct of its sulphide operation, First Quantum is producing sulphuric acid, which historically was sprayed onto a copper oxide heap leach in order to neutralize it and produce more copper at the same time… an exercise in efficiency. Without oxides, First Quantum is generating sulphuric acid that it now has to incur a cost to dispose of… i.e., before, the sulphuric acid had economic value (it could be used to extract copper from the copper oxides), but now that same acid is a liability. It’s an untenable situation for an efficient operator like First Quantum, and they are fully aware that MMA is right on their doorstep with several million tonnes of high-grade copper oxides… and potentially multiples of that. MMA should be drilling any day, if not already, and this program will happen quickly given that the holes will be shallow. After it’s drilled out, someone is going to model a low-cost blast-shovel-and-truck operation and they’re going to get NAV numbers far in excess of the current share price… or at least that’s what I think, which is why I’m long.
Vizsla Silver (VZLA.V, last at $3.08)
No change here. Big silver (300 million ounces at 400-500 g/t AgEq) in Mexico with some very attractive preliminary economics and a cheaper-than-its-peers valuation. I still like it and I’m still long.
Golds
I’m all over the place in the golds and own too many names to talk about in any detail, but for people looking to build watchlists of things to check out, I’m always willing to name a few. I still own Newmont (NGT.TO, last at $79.54, and NEM.US, last at $57.61) as my big, boring name. Next up are K92 Mining (KNT.TO, last at $9.50) and Equinox Mining (EQX.TO, last at $7.91). KNT has a superior (and internally funded) growth and cost structure relative to just about anything in the sector and is currently active with over 10 drills as it continues to grow reserves at its Kainantu project in Papua New Guinea. I think this one is a take-out target because it trades at a big discount to peers and larger companies who might want to take a run at it. In the same vein of focusing on good stories trading at lower multiples, EQX has a somewhat diversified Americas-based asset portfolio and is also much cheaper than other companies of its scale, so I’m looking for a re-rate as its big Greenstone Mine ramps up. I’ve got a decent chunk of Heliostar (HSTR.V, last at $0.69) thanks to a friend that pointed it out last year and the story could/should get newsy here as they drill some resource expansion holes at their high-grade Ana Paula project and move their mining plans forward. HSTR recently bought some old mines that they think have some life left in them, and the company plans to join the 150,000-200,000-ounce-per-year club in 3 years-ish. The stock has been performing well and HSTR has the added bonus of being in Mexico, where sentiment got more positive after worries over an open-pit mining ban receded in recent weeks. Since my last note, Ascot Resources (AOT.TO, last at $0.185) got kicked in the teeth as its ramp up at the Premier mine in B.C. hit some hurdles, meaning that it will need to seek additional financing. AOT is a sitting duck for a takeout here. The company is trading wayyyyyy below book value on an operation that’s band-new. The infrastructure is strategic to the region and AOT’s equity trades at pennies on the dollar relative to its NAV. For a larger player to take this on and plug the financing hole would be noooooo problem. Kind of like when Alamos bought Argonaut earlier this year when it also ran into ramp-up “issues”. Things should come to a head soon, or the lenders will extend their repayment date/terms… either way something’s gotta give. G2 Goldfields (GTWO.TO, last at $2.14) has a high-grade gold project in Guyana with plenty of satellite/expansion potential that people like, including AngloGold Ashanti, who keeps buying stock. Vior (VIO.V, last at $0.205) was suggested to me by an old friend a while back and it has been a good performer. It has 264 million shares out, which is high, but it also has $20 million in cash and a $50 million market cap, leaving an enterprise value of $30 million for a project with some serious scale and potential. VIO will drill 60,000 metres in its ongoing program, which will give the market a decent taste of what the past-producing Belleterre gold project in Quebec has to offer. Osisko is a big holder/backer here which I like, because that’s a serious group. Historically, the Belleterre mine produced some 750,000 ounces from ore that graded 10.7 g/t Au, from shallow mining depths. The bet is that there’s more ore at depth and there’s good technical reason to believe that’s the case. I’ve seen this kind of story before and sometimes it can go quite well, so with 60,000 metres of drilling currently underway and fully funded, this is the kind of “exploration” story I want in a gold tape like this. Oh, and I still own Goliath (GOT.V, last at $1.28). I’d expect assays to start flowing out of GOT soon and there has been a lot of reported visible gold in drill holes from the now-completed 2024 drill program, so there’s a good chance some splashy numbers will be reported when they start to come out. The gold tape couldn’t be any better, so if GOT has the goods the market might finally respond to this one. We’ll see.
Technology
I still have one real tech position and that’s POET Technologies (PTK.V, last at $5.60, and POET.US, last at US$4.04). I am no tech specialist, that’s for sure, but POET feels like a company in the right place, at the right time, with the right product in this age of emerging AI themes and the giant data centres that will make it all happen. I did sell a little on the recent spike to US$5, but I want to own some of this for when/if commercial orders start rolling in.
Trick or Treat
Congrats on making it this far, because this is a long one. The Halloween candy of today’s note is Mogotes Metals (MOG.V, last at $0.155). This is a microcap speculation on the Vicuna district in Argentina. The Vicuna district is where Filo Mining (FIL.TO, last at $32.72) has made one of the best, largest, copper discoveries in recent memory at Filo del Sol; with NGEX Minerals’ (NGEX.TO, last at $11.84) Lunahuasi Project showing that FIL’s deposit doesn’t occur in isolation. FIL is being bought by BHP and Lundin Mining for over $4 billion, NGEX has a market cap of over $2 billion, and little MOG is trying to ride on both of their coattails with a $30 million market cap. MOG is a classic “close-ology” play with a collection of targets that may or may not work out at its Filo Sur project. This really is a trick-or-treat situation (think “hero or zero”) and not a big position for me, but it’s the kind of name that I want to keep an eye on… just in case. MOG should start drilling again soon, and will be looking to find some fire to go with the smoke that it found in its initial holes that were reported earlier this year. This is as high risk as it gets, so beware.
Oh, and a quick footnote that I almost forgot… Libero Copper (LBC.V, last at $0.30) has started resource expansion drilling on its Macoa Project in Colombia. Recall that Frank Giustra bought into LBC earlier this year which is when the company really started focussing on getting active again at Macoa. The goal will be to grow Macoa’s copper-molybdenum porphyry resource towards the one-billion-tonne mark, and there’s enough supportive data to think that it just might get there. The market cap of LBC is peanuts at 30c, so I fully expect this one to move higher as folks get wind of what/where LBC is drilling, but right now, most people have never heard of this potential multi-bagger.
This has run long enough, so I’ll cut it off here. With the U.S. election looming, who knows what the next month will bring, but for now, the market feels permissive when it comes to making money on good stories/companies that are executing — so good luck out there, and happy hunting.