Do Your Own Due Diligence.

Disclosure: The following represents my opinions only. I am long TNZ. (image credit to David Clode on Unsplash)

On the back of an impressive move higher in Tenaz Energy (TNZ.TO, last at $13.06), I feel like I'd be remiss in not making some kind of comment about the fact that, last Thursday night, the company announced that it has arranged an offering of $140 million of senior unsecured notes (funded by institutional investors) that is scheduled to close later this week. Longs like me are cheering the move, as it serves to reinforce the M&A narrative -- namely the fact that it's unlikely that TNZ management is taking on $140 million in 12% notes unless they think they have a use of proceeds (i.e., another acquisition) lined up in the relatively near term. Also consider that these notes are unsecured, and serve to replace the $90 million NBF delayed-draw term loan that was to be used for the closing of the acquisition of the NAM/NOBV assets in the Dutch North Sea. Technically, this still leaves the door open to a new secured credit facility -- you know, like the one a bank might offer a company like TNZ in conjunction with a new acquisition.

Wishful thinking? Only sort of... I mean, everyone knows that the plan here is to grow through targeted, thoughtful, accretive acquisitions, right? Hence why the stock was up some 15% on Friday, obliterating all analyst price targets in the process. What's the right multiple for a company with 27.3 million shares out that could announce another accretive deal just about any time? How do you even handicap that? Should it trade at PDP NAV? 1P NAV? 2P NAV? Some kind of average industry multiple on an EV/CF basis? A premium multiple? You tell me. Why a company with that set up would trade at a discount has always mystified me though, so, to me, I saw Friday's move as a "Finally, the market is starting to get it" moment. Yay.[urcr_restrict]

Look, I had a conversation within the last two weeks with a well-known industry expert who just couldn't process how it was that TNZ was acquiring assets with definable, real, and tangible value under the terms that they were acquiring them from larger companies. The guy just couldn't grasp the concept of the fact that majors/supermajors in the energy sector have non-core assets that they are looking to divest of into a very shallow pool of qualified and capable buyers with strong financial backing. But think about it for a minute. If you are one of these larger companies and you want to sell assets, you can't just sell them to anyone. The buyer needs to have demonstrable experience and expertise in not only engaging with these large companies, but also in operating, managing, understanding, and integrating the assets and staff associated with these transactions... not to mention the job of identifying opportunities for upside (i.e,. additional value creation) in the assets through optimization and further development.

There is a veritable laundry list of core competencies that are required here, and with the industry largely focused on drilling resource plays in North America for the last 15 years, the teams capable of engaging in this activity in the international arena are becoming more rare by the year simply due to the direction that the industry has been heading. None of this changes the fact that these non-core assets still exist and need valid homes as asset portfolios are inevitably rationalized. Some might call these deals "table scraps" from the majors/supermajors and they'd be right in doing so. Everyone knows the saying, "One man's trash is another man's treasure". It applies in both business and the natural world -- and while it might seem that business and the natural world would have little in common, I'd argue that they both encourage the evolution of new forms of life/business due to changing conditions in their environments.

It is a well-known fact that this asset rationalization by majors/supermajors is happening out there. It is also a well-known fact that you can't just sell assets to anyone... otherwise companies would constantly be dumping non-core operations into the hands of fly-by-night companies that had little or no ability to operate/steward the assets through to the end of their lives (note: it would be a sh*t show and would come back to bite the sellers in their a**es). In evolution, this would be called a niche. Any organism that can adapt to and exploit this niche (i.e., eating table scraps from the majors) is well-positioned for success. Why doesn't everyone do it you ask? Well, why doesn't everyone play in the NHL? Or in the NBA? Or why don't dentists perform open heart surgery? Different skill sets folks. Different experience sets. The kinds of skills and experience that can take decades to accumulate and master. Relationships that take careers to build. And all of it executed by teams that can come together, under a coherent and cohesive vision, in order to execute this kind of M&A strategy for the benefit of shareholders; not in the name of doing deals for the sake of doing deals.

All of this is a long-winded way to say that TNZ has a distinct competitive advantage as it executes its acquire-optimize-exploit business model for the benefit of its shareholders. Management alignment is a beautiful thing -- and the tight share structure on TNZ offers significant upside to shareholders when accretive deals are captured. Is TNZ about to snag another deal? Well, last week's debt issuance and the subsequent market reaction would seem to suggest that's the case... and the business plan, by definition, virtually guarantees that's the case. It's just a matter of "when" not "if"... and when I think about that, it certainly doesn't put me in any kind of hurry to do anything other that sit back and watch this play out. $140 million is no small chunk of change folks, and it is a massive vote of confidence for longs who believe in the TNZ team and their business plan.

I'll end this note with a link to a short analogy struck by none other than Warren Buffett. I invoke his example here because of the fact that the confluence of factors seen in Tenaz -- the people, the competencies, the business environment, the share structure, the shareholders, the vision, and the culture -- is a rare thing to behold. In Buffett's analogy, TNZ is a punch in my punchcard... and with this unsecured note issue there's clearly a lot more story to be written as TNZ drives towards "intermediate/mid-cap" status. Will it be sooner than later? That's arguably not important, but in any case, I guess we'll see...

Happy hunting.

See Buffett's "punch card" comments here: https://youtu.be/j2em__lppHk

And, for those who haven't seen it, here's a link to an interview with TNZ CEO Tony Marino on Friday afternoon: https://www.bnnbloomberg.ca/video/shows/the-close/2024/11/08/what-tenaz-energys-140m-note-offering-could-mean-for-its-future-mas/

[/urcr_restrict]

Disclosure: The following represents my opinions only. I am long AOT, CDR, GOT, GTWO, GDXJ/JNUG, MMA, NEM/NGT, OGC, PTK/POET, TAO, TNZ, TUK, VZLA, WRLG.

Gold is through $2500/ounce, copper is still trying to decide if recession is on the menu, oil is just kind of bobbing up and down from the $75/barrel level, and North American natural gas is still in the low 2's, while European gas trades at multiples of that. A recent Bloomberg article highlighted that hedge funds are apparently the most bearish on commodities that they have been in thirteen years and everyone is looking for the Fed to cut rates in September. There was an initial start-of-the-Yen-carry-trade-unwind shock a few weeks ago, but the market seems to have moved on from that as the S&P has rallied back to within 1% of its recent highs. In the absence of anything pushing me in any new direction, I'm sticking to my knitting. I'm leaning towards gold over copper, I like the valuations in the energy sector relative to the rest of the market, and I continue to focus on names where I think I have an edge of some kind.

I've titled this post "Eye of the Tiger" not only because it's a great 80's song when you need a little motivational push, but also because tigers are both patient and focused when they're hunting... and they don't expose themselves to unwarranted risk as they wait for opportunity. Markets can be unpredictable, but by sticking to companies/projects that I know and like, I find it easier to ride out volatility when it shows up. It's late August and things are quiet, so here are a few words on some of my favourites that I get asked about most often.[urcr_restrict]

Tenaz Energy (TNZ.TO, last at $8.25)

What a difference a month can make. After announcing its transformative (and highly accretive) deal to acquire a key set of assets in the Dutch North Sea from NAM (an Exxon/Shell JV), Tenaz has become the best performing energy stock on the TSX in 2024 and one of the best performing stocks on the entire exchange. TNZ is a classic example of how great teams build great value for shareholders and I fully expect this trend to continue for the company. At the Enercom conference in Denver yesterday, Tony Marino presented the Tenaz story (link to it here) and highlighted the company's recent agreement to acquire ~11,000 boepd of production (99% gas) and associated infrastructure in the Dutch North Sea. The metrics of the deal are impressive and TNZ is still in the re-rating stage as the market digests what this deal means for the company. On closing, the pro forma after-tax NPV10 of Tenaz's assets will be $16/share on a PDP basis, $22.50/share on a 1P basis, and $34/share on a 2P basis... and that's assuming that Tenaz does nothing else corporately, and it doesn't include additional upside already identified by the company. Perhaps the most interesting thing to consider is Mr. Marino's line from the Enercom presentation, right around the 15-minute mark, where he says, "... I like our M&A pipeline that we have better than I have at any time in the three year history of the company, and we’re not going to stop just because we’re in the midst of the NOBV transition…" Hmmmmm. With a corporate goal of growing to 50-100,000 boepd through targeted, thoughtful, and accretive acquisitions, I think there's a lot of story yet to be written here. With only 27.2 million shares outstanding, Tenaz's tight capital structure means that shareholder leverage per share to accretive deals is remarkable. I'm of the opinion that there's nothing to do here but sit back and watch the team continue to execute. With this company, patience has always been my only requirement and I see no reason not to be patient some more.

Tag Oil (TAO.V, last at $0.33)

TAO's share price performance in 2024 has been disappointing, but I still carry the torch of optimism here. At last report, the T100 well was doing something like 400-500 bopd from the 300-metre horizontal leg in the ARF, which isn't really that bad, is it? Recall that the ARF is a regional source rock in this part of Egypt that has never been exploited with horizontal fracture-stimulated wells. In the absence of more information, I'm simply in a wait-and-see mode here. I can tell from the lack of chat-room chatter and low trading volumes that TAO isn't capturing the market's imagination much these days, but that's okay. Opening a new play can be challenging and TAO has paid its tuition on the T100 well, so I'm hopeful that the company will be more successful on its next well, hopefully drilling a full 1000-metre lateral next time. TAO has been unusually quiet, but I would expect some kind of update over the next month or so in terms of the company's plans and/or the performance of the T100 well. I'm long enough TAO that I can't really trade it, so I'm along for the ride wherever this one goes. This is one of my more speculative positions, but I do like an underdog and these days TAO is certainly that.

Condor Energies (CDR.TO, last at $1.99)

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 Q2 with around $20 million of revenue for the quarter. Initial low-cost plans to increase gas production have already yielded positive results and the company has a lot of running room to expand production with a modest capital spend. 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 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.

Midnight Sun Mining (MMA.V, last at $0.455)

No change in my view here, but it should be getting very close to showtime in terms of drilling on 1) the company's Dumbwa JV with KoBold and 2) the oxide drilling program on the lands just outside of First Quantum's Kansanshi mine gate. I don't have anything new to add relative to my last note on this one, so in the interest of not repeating myself, I'm just sticking with it. The copper price doesn't influence my thinking on this one much, as success on either drilling program has the potential to re-rate the stock higher in due course. MMA is lightly followed but I expect that at some point the potential synergies with First Quantum will become apparent to a broader audience. For now, I wait.

Vizsla Silver (VZLA.V, last at $2.75)

With golds acting well, a guy like me needs a little silver in the mix and VZLA is it. VZLA is like the pre-production Mexico version of Aya Gold and Silver (AYA.TO, last at $15.97). I say that because both companies have defined resources of about 300 million ounces of silver equivalent at comparable grades and thicknesses. VZLA appears to be an outlier in terms of how cheap it is relative to its silver peers and the recently released PEA did nothing to change that view for me. I can't say it better than the company said it, so I'm simply going to quote from the VZLA press release that discusses the results of the PEA, which I think says it all:

"An estimated after-tax NPV (5 per cent) of more than $1.1-billion (U.S.), an after-tax IRR of 85.7 per cent and a payback period of approximately nine months helps solidify Panuco as a world-class development project in the precious metals space," commented Michael Konnert, president and chief executive officer. "The PEA, based on conservative metals prices of $26 (U.S.) per ounce silver and $1,975 (U.S.) per oz gold, outlines a high-margin, underground silver primary mine with substantial silver-gold production of 162.1 million silver equivalent ounces over an initial 11-year mine life. Annually, the mine is projected to produce an average of 15.2 million silver equivalent ounces, providing exceptional free cash flow, particularly in the early years, allowing for a very rapid payback of the estimated low initial capex of $224-million (U.S.). It's important to note that this PEA represents only a snapshot of the potential value of Panuco, as we have only explored less than 30 per cent of the known targets in the district. Furthermore, ongoing drilling with two drill rigs continues to expand and convert high-grade veins in and around the proposed mine plan, enhancing the potential for improved economics in a feasibility study planned for the second half of 2025. Panuco benefits from excellent access to existing infrastructure, significant exploration upside potential to discover new mineralized centres and potentially new standalone projects hosting similar economics to that outlined in today's study. As such, it's becoming increasingly clear that Panuco will be a meaningful contributor to the silver industry for decades to come. I would like to thank everyone at Vizsla Silver, our stakeholders and community members for all the hard work over the years to reach this monumental milestone."

Golds

With gold making new all-time highs, I have to own gold. My sense is that the trade isn't crowded and with Newmont (NEM.US, last at $51.50, and NGT.TO, last at $70.00) not even close to its 5-year highs, I think there's an opportunity here. I'm keeping my bigger gold positions focused on more liquid names at the moment. GDXJ.US (last at $48.18), K92 Mining KNT.TO, last at $7.75), and NEM/NGT dominate my gold exposure, with small positions in GTWO (last at $1.50), OGC (last at $3.65), GOT (last at $1.30), WRLG (last at $0.77), and AOT (last at $0.55) rounding it out. At this stage, most people don't even know the relevant tickers in the gold space, so I'm not overthinking this. There's no bull market like a gold bull market, so here's hoping that this breakout is for real.

Technology

I have one real tech position and that's POET Technologies (PTK.V, last at $4.25, and POET.US, last at $3.12). I am no tech specialist, that's for sure, but POET has captured my imagination with their photonics platform. Photonics involves sending data around on chips with tiny lasers instead of tiny wires. More data, less energy usage, and smaller form factors are all benefits of photonics and apparently photonics is highly applicable to the artificial intelligence theme. Development deals with Foxconn Interconnect and Luxshare both raised my eyebrow and the share price, so I remain long just in case this is indeed one of the next-big-things in tech. Interest in POET has never been higher and I'm hopeful that this little company could have a big impact in terms of getting its photonics technology commercialized, which could translate into a big impact on its share price. We'll see.

Easter Egg

The easter egg of today's note is Tuktu Resources (TUK.V, last at $0.095). This is a microcap speculation on a potential new oil play in Alberta that is still very, very early days. An initial single frack and swab test showed encouraging results but a 30-day IP rate and some discussion of reservoir/pressure performance is needed. I mention it here as a total rank speculation, but for a dime, what else do you expect to get? The share structure isn't great with a lot of 5-cent stock and 7.5-cent warrants out there, but if the play is a success, I think this could multi-bag. I will qualify that by also saying that I'm a fan of saying, "The most I can lose is 100%", so keep that in mind because this could still go either way at this point.

That's probably enough for today... as always, thanks for the continued interest.

Happy hunting.[/urcr_restrict]

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:[urcr_restrict]

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.[/urcr_restrict]

Disclosure: The following represents my opinions only. I am long TNZ.

When I started writing this, I was going to talk about all kinds of stocks, but my overall tune hasn't really changed since May, aside from the fact that I sold my Hercules Silver (BIG.V, last at $0.59) and Troilus Gold (TLG.TO, last at $0.39) in a "nothing personal, just needed funds for other things and they weren't working" decision, but I still watch them closely. As a result, there's no point in me rehashing everything... as I still think the same about things, but am maybe liking gold a little more and am wary of copper, but expecting it to "hold up" based on market fundamentals, especially if recent U.S. dollar weakness becomes a trend over the coming months.

But today, it's allllll about Tenaz Energy (TNZ.TO, last at $5.74 -- not a typo ;)) and I'd be remiss in not being part of the Friday morning chorus. Look, things are going to get interesting here. TNZ has made a significant acquisition in the Dutch North Sea (offshore) and the market loves it... and for good reason. Production just went from ~2,800 boepd to 13,800 boepd (up ~390%). Corporate 2P reserves just went from 14.6 million boe to 68.2 million boe (up ~370%). Proforma run rate free cash flow is ~$150 million annually -- remember there are only about 27 million shares out here -- so that's more than $5 per share of run rate free cash flow (I'll get into a little more detail on that below, where I talk about how all this gets paid for). This is the definition of transformational... and how many shares were issued? Zero. You read that right. Tony Marino and his team have pulled this off with zero equity dilution, due in part to their friends at National Bank who have provided a $100 million debt facility should Tenaz decide to draw on it for the balance of the $246 million purchase price when the deal closes in mid-2025. As a result, the per share leverage is nothing short of epic.

Now here's the beautiful thing... Tenaz is using a beautiful deal structure where the NOBV acquisition has an effective date of January 1, 2024, but the closing date is in mid-2025. That means that the free cash flow that NOBV (the entity that is TNZ buying) is generating accumulates to TNZ's account and will be transferred to the NOBV sellers (NAM, Exxon and Shell) on closing as payment for the assets, covering the majority of the price (~$200 million) of the deal. Significant hedges have been entered into for 46% of 2024 thru 2026 production at an average gas price of about $17/mcf. Mr. Marino and his team have not been idle while they've been quiet. This is a wonderfully structured deal and that's why the stock responded the way that it did on Thursday, and why I think that's likely to continue.[urcr_restrict]

The production being acquired is 99% gas, and this deal makes TNZ the second-largest operator in the Dutch North Sea. Most of the assets are operated, which is always nice -- and has always been a stated corporate goal -- as it will allow TNZ to employ best practices when it comes to field optimization, development, and exploration. There is a contingent earn-out consideration of a maximum of $180 million that will be paid from free cash flows after closing, but with the inventory and running room on these assets, that's not going to be material in the eyes of the market -- TNZ's growth trajectory is undeniable now and its eventual re-rate into the double digits is highly likely in my opinion. Today was just day 1 of that re-rate... and it's happening in a stock with a beautiful share structure and a sticky shareholder base that believes in what management is doing. Nothing happens overnight. People need to hear the story, Tony needs to talk about the deal, do interviews, present at conferences. Everywhere he goes, jaws will drop. This is a Masterclass in deal-making.

Price target upgrades are a certainty. If I was still an analyst, I'd be giddy to come in Friday morning and talk to the sales desk about this deal that TNZ just put together. It's that good. To repeat, Tenaz is buying 11,000 boepd of production (99% gas) in the offshore Dutch North Sea, the majority of which is operated, with abundant low-hanging optimization/recompletion inventory, infill drilling inventory, and exploration prospect inventory, all covered by 3D seismic that is in the final stages of processing (think: "running room"). It comes with onshore infrastructure, pipeline interests, existing staff, everything. It's the full meal deal -- and they are doing it with zero equity dilution. This is what execution looks like and is exactly what you get when you have A+ management that knows how to engage with, negotiate with, and navigate deals with majors who are rationalizing their asset portfolios in foreign jurisdictions. You can read about the full details of the deal at your leisure. It has clearly taken some time to put this deal together and boy is it a doozy.

Forget about what you knew about TNZ's asset base before this deal, because this is the definition of transformative. On a proforma corporate basis, after-tax 1P (proven) NPV10 is about $22.50 per share ($609 million) and after-tax 2P (proven plus probable) NPV10 is about $34/share ($930 million). Heck, PDP (proven developed producing) after-tax NPV10 is around $16/share (~$450 million). Those are also not typos... and they do not account for an exploration inventory of some 80 leads and prospects and an asset-wide 3D seismic survey that hasn't even been processed yet.

For those who remember Valerua Energy's (VLE.TO, last at $4.16) deal in December of 2022, this one is just as transformative... and have a look at how VLE performed after day 1 of its deal announcement. Translation: I think it's still early days here. Remember that TNZ has just 27 million shares out, which is why the per share leverage is so impressive -- even after Thursday's 56% move in the stock, TNZ's market cap is still just $155 million at its closing price of $5.74. That's a $155 million market cap for a fully-funded ~14,000 boepd producer, with a ~10% base decline rate on the new assets. That's barely over $10,000 per flowing boe... which is very, very, cheap. Like I said. This is like an IPO... forget what you knew on Wednesday about TNZ -- except the fact that the company has an A+ board and management team with a corporate goal of growing to 50,000+ boepd through targeted, thoughtful, accretive acquisitions designed to increase reserves and cash flow per share... and I think they'll do just that if given time.

Without a doubt, this deal shows the path that TNZ is on. Stepping back and looking at the forest for a minute, I'd wager that a 50,000 boepd producer would be worth $1.5-2 billion in the market some day in the future (you pick the share count, as your guess is as good as mine). Of course, I can't tell you when that'll happen, but TNZ just went from 3,000 boepd to 14,000 boepd in one deal so place your bets. What I will say though is that when you're rolling a snowball, it starts small, but as it gains size, it grows even faster. I don't think that's an unreasonable expectation here, but time will tell. One thing I've learned here is that my patience with TNZ was/is well-deserved -- and this deal only increases my resolve to see this team continue to execute on their business plan. M&A is a wonderful strategy when it is carried out in an arena where management has a distinct competitive advantage driven by their experience and expertise -- with a laser-sharp focus on things like return on capital, return of capital, and value per share -- and there's nothing that precludes TNZ from doing additional M&A deals between now and closing.

There will be a lot more story to be written here when it comes to TNZ's inevitable growth, but for today I think this note captures my first thoughts on this deal. The TNZ team has put together a beautiful deal here and it won't be their last. Congrats to all shareholders and to the Tenaz management team/staff on a job well done. And, as always, thanks to all of those who take the time to read these notes and learn about the companies that I follow. It's always more fun winning alongside of others who share your views, especially when the value creation is undeniable. This is what "alpha" investing is all about. Giddy up.

Happy Hunting.

******UPDATE (July 22, 2024)******

I had a chance to seek clarification on one of the deal aspects with respect to the contingent earn-out consideration and was pleasantly surprised. As the NOBV deal was structured so as to encourage investment, any capex that TNZ spends after closing through to 2027 goes towards offsetting the contingent earn-out liability in those years. In other words, for every dollar of capex that TNZ spends in those early years, they will offset a dollar that they would have to pay in contingent earn-out payments. The net effect is that TNZ gets to invest with 50-cent dollars after closing in 2025, and 50-cent dollars in 2026, and 75-cent dollars in 2027... and after 2027, 100% of the incremental cash flow derived from any investments in those prior years will be net to TNZ. It's a beautiful thing. Most companies want to reinvest in their assets to grow value anyways. TNZ gets to do that while building incremental cash flows with 50-cent dollars. Great teams make great deals.

[/urcr_restrict]

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.[urcr_restrict]

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 Kazhiba 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.

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Disclosure: The following represents my opinions only. I am long AOT, AYA, BIG, CDR, CGC, CRE, CVV, FPC, GOT, K, KRR, LBC, OGC, OSK, PEAK, NGD, NSE, RDU, RPX, RUP, TAO, TLG, TNZ, VLE (image credit to Kouji Tsuru on Unsplash)

If there's one sector that is the story of the month, it has to be gold. Unless you've been living in a cave, you'll know that gold is currently trading at an all-time high after obliterating resistance around the $2080 level. Generally speaking -- and for quite some time -- central banks have been buying gold, ETFs have been selling gold, and gold stocks have been grossly underperforming the metal itself. Belief in the gold breakout appears to be muted and, after so many prior head-fakes, my sense is that the market has yet to buy into the idea that gold is anything but a curiosity that is owned by "gold bugs" and old guys. Most investors have little or no exposure to gold and have been caught flat-footed by the strength of the price move, but their concentration in the top market performers (e.g., Nvidia) means that not participating in gold hasn't hurt their performance one bit. At this stage, most investors out there don't even know what the tickers of relevance are in the gold sector, let alone anything about the individual names and valuations, so it's still early days. Meanwhile, bitcoin is also making new highs as I type this. Hmmmm. A quick look at the DXY shows that that U.S. dollar has rolled over recently as the chorus calling for Fed rate cuts, combined with what looks to be an unending upwards spiral in U.S. debt levels, sets the scene for a rally in things that are priced in U.S. dollars, like commodities, and arguably bitcoin.[urcr_restrict]

General investor exposure to commodities and gold remains low -- which is always nice to see when something breaks out -- and I don't think that many investors were positioned for this move. Thinking back to late 2020/early 2021, when energy started moving up from the pandemic lows, it took a long time for folks to really buy into the sector, but when they did, boy did they pile in. Granted, my crystal ball isn't any better than the next guy's, but here's hoping that this is a similar situation -- where disbelief slowly fades and the gold sector has a long-awaited day in the sun. I do take some comfort in the the fact that even though a lot of gold stocks have rallied nicely off their recent lows, many are still trading at historically attractive P/NAV multiples, free cash flow yields, and cash flow multiples (all on price decks lower than where gold is today). While I agree that some the charts might be/seem overbought in the short term, look at the longer term charts and consider that gold has never been this high. Sometimes stepping back a little is important to get better perspective. Heck, U.S. mega-gold player Newmont is still barely off its 5-year low, so no signs of froth there...

Meanwhile, everyone (including me) is watching for a move through the $4.00/pound level in copper before they get too excited, but with copper at $3.90-ish, I've started to dabble a little. India's economy is rocking, China may yet pull out some old-fashioned stimulus, and copper supply-demand fundamentals remain healthy; especially if the "energy transition" train keeps rolling. A weaker U.S. dollar is generally good for commodities as a whole -- and copper is always front and centre in the sector -- so it shouldn't be ignored at a time like this, but a 4-handle would bolster my confidence a lot.

To make sweeping generalizations about a few other things: 1) oil seems just fine while oil stocks are generally cheap relative to just about any other sector, 2) natural gas stocks are doing much better than the underlying commodity as investors latch to the idea that U.S. and Canadian natural gas prices will be buoyed by LNG demand later this year, 3) uranium is seeing some profit-taking, but the structural supply-demand picture remains bullish, 4) lithium is still in the doghouse and might get a bounce before what could be a nasty tax-loss selling season later this year unless things really turn around (a lot of lithium money has evaporated over the last 6-9 months), 5) nickel seems stuck in a rut due to new Indonesian supply, 6) zinc is moving with copper, and 7) silver is riding shotgun with gold, with many "silver bugs" believing that silver will outperform gold if the precious metals train is indeed leaving the station.

As someone who spends most of his time invested in commodities, I try not to complicate things too much. A look at a long-term chart of the TSX Venture index makes me see just how far it has to go if this is the start of a broadly synchronous commodity move -- a couple more weeks of action like we've been having will see the Venture index chart make a "golden cross" (where the 50-day moving average crosses above the 200-day moving average) which could foretell the beginning of the next real leg up in Commodity Land. For now, colour me as "cautiously optimistic", although the very fact that I'm typing this article could be taken as an indicator that things might need to consolidate a bit before moving higher. Prior to the current nascent move, money has hardly been falling from the sky in the commodity stocks for quite a while now, so I'm willing to believe that a broad-based commodity move at this point could have some legs to it. I'm certainly feeling the most optimistic that I have for quite some time, so my apologies if I've jinxed everything by writing this down. As usual, I'll comment on some old names and a few new ones below, while generally remaining patient with a "be right and sit tight" attitude.

Tenaz Energy (TNZ.TO, last at $3.62)

Everyone knows that I'm a broken record when it comes to Tenaz. The company's disciplined M&A strategy virtually guarantees that TNZ will move up the ranks in terms of market cap and investor interest levels -- and energy prices have been stable enough for long enough that the climate seems right for deal-making. When I used to work on the buy-side, I would dream of seeing a company with A+ management in the smallest vehicle I could find. With TNZ's share count at less than 27 million shares and a market cap of less than $100 million, led by a team used to managing companies with market caps in the "billions", I think I've found just the ticket -- all I have to do is wait.

Tag Oil (TAO.V, last at $0.475)

After a wobble, TAO has moved up 40% since I commented on its operational delays about two months ago. Since that time, the company announced that it successfully drilled through (and ran casing over) the overlying Abu Roash E section and was starting the horizontal section of the well within the targeted Abu Roash F formation. By the time all is said and done, TAO (and the market) will have learned a lot from the BED4-T100 well, as it is the company's first horizontal well into the ARF oil play. Once drilling, completion, and testing are wrapped up, I suspect that TAO will send its current rig away and come back with a better Swiss Army knife for opening the ARF oilcan. I'd expect test results in early April on the BED4-T100 well and I will be focussed on things like "productivity per horizontal metre" and "productivity per frac stage" as those are the things that will let me compare the result to similar plays in other jurisdictions. Echelon Capital Markets launched coverage on TAO at the end of February with a $1.10 target price and a "speculative buy" rating, based on a 1,000 bopd IP rate and a 20-well development case. I think that's as good a place as any to start, but TAO management has mentioned in prior presentations that they believe they could ultimately have 60-80+ locations in the area evaluated by RPS Energy, so I view the Echelon report as conservative. Overall, I'd like to see TAO to drill two more ARF wells in 2024 and with quick timelines to cash flow, additional dilution should be minimal from here on out. Success in the ARF on the Badr concession could see TAO secure more acreage in Egypt, which is hungry for investment these days, so here's hoping.

New Stratus Energy (NSE.V, last at $0.63)

I had the chance to meet with The Most Interesting Man Alive (aka Jose Francisco Arata) last week during the PDAC convention and it was a real pleasure to catch up with him. Overall, my impression is that the current Venezuelan deal is a good starter kit/trial balloon for NSE and could open up additional potential deals in the country in due course. It sounds like NSE expects to add projects in one or two additional jurisdictions in the not-too-distant future and is generally being groomed as "the next Latin American energy champion". Time will tell. At this stage, NSE is lightly followed, so as additional projects come into the company, I think there will be time for the market to warm up to the story. As it stands today, NSE is a bit of a call option on what Mr. Arata and his team are able to assemble by tapping their extensive connections in the region.

Condor Energies (CDR.TO, last at $2.28)

Condor has been flying higher for the first two-and-a-half months of this year thanks to the successful closing of its gas field management contract in Uzbekistan and progress on its LNG initiatives in Kazakhstan. The company is keeping the terms of its Uzbek deal quiet for now, but it assumed operatorship of 8 gas fields on March 1st and aims to increase production there using simple production optimization technologies. I'll be watching for Q1 financials in May to see what the first month revenues look like there and the Q2 financials this summer should be even more telling. In Kazakhstan, the company was awarded a natural gas allocation from the government that will supply its modular LNG roll-out in the country. The basic premise in Kazakhstan is that diesel is expensive and natural gas is cheap, so there's a natural incentive for industrial users to convert from diesel to natural gas if they can. To that end, Condor is targeting locomotives, long-haul trucks, mining fleets, marine vessels, busses, and agricultural machinery as end users for its LNG. Condor will buy the natural gas from the Kazakh government at local prices, condense the gas, and supply it to users at a cost that is cheaper than diesel. This story is too weird for most, but Condor is a central Asian specialist and I think it's worth following given its niche in an area of increasing economic activity and importance. I don't have a price target in mind yet given that things are still pretty fresh, but my sense is that it's still early days on this one.

Valeura Energy (VLE.TO, last at $3.78)

On an EV/CF basis, VLE remains as one of the cheapest international names that I follow. The market continues to have a hard time believing that VLE is as cheap as it looks, but the company's recent reserves report shows that the initial premise of field-life extension through near-field/infield drilling and reserves growth seems to be holding up. Some folks don't like the fact that VLE's PDP NPV is negative, but the 1P and 2P reserves look healthy enough. One thing that I don't know yet is how much future development capital is assumed for the 1P and 2P reserves cases, so I'll keep an eye out for that when the reserves report is filed. What I do know is that the acquired assets have already allowed VLE to fully pay off its debt and accumulate US$150 million in cash as of the end of 2023. Not too shabby. VLE pegs its YE2023 2P after-tax NPV10 at around C$7.50 per share and the stock trades at about half of that price, which seems reasonable in the context of the sector valuations. VLE is the poster child for the kind of equity value creation that can happen when the right asset finds the right home, and I think of it often when I think about my TNZ position -- especially when I consider that TNZ has roughly one-quarter the number of outstanding shares, giving it even more per-share torque.

Hercules Silver (BIG.V, last at $0.81)

No change here. Spring is rapidly approaching, so BIG will probably start talking about its upcoming drill targets in the not-too-distant future. This is a copper exploration story worth watching... or at least that's the read-through from Barrick's $23 million investment at $1.10/share in November of last year. The mineralizing system is undoubtedly large here. Now BIG is going to be drilling for grade -- and it should make for a very interesting 2024 for this story. The stock has drifted on lack of news and catalysts, but that'll be the case until it isn't, so stay tuned.

Critical Elements (CRE.TO, last at $0.66)

In a word... BOOOOOOOO! Like the Leafs, CRE still can't get it done. I'm not sure what happens here, but I like the project and can't help but think that someone dropped the ball here along the way given how good the numbers look on this project. I have a tiny position that I don't even look at because it depresses me too much to think of what could've been, but I refuse to sell it because I know that as soon as I do, something is bound to happen with it. I can't decide who dropped the ball more here... the Quebec permitting bureaucracy taking its sweet time, or management possibly getting "too cute" before getting an off-taker tied in to the project. I'm not even sure what lesson I've learned here, and CRE may yet have more to teach me, but on this day, I just wish I'd never heard of it. That's probably a good sign.

Libero Copper (LBC.V, last at $0.65)

Libero caught my eye one day in January as a 2.5c stock that was doing a 1.5c financing and a 1 for 10 rollback of its ~175 million share count. It traded up to 3.5-4c in the following weeks which was quite unusual for something about to be rolled back and financed at a big discount to where it was trading. Then, on February 15th, came the key piece of information; Frank Giustra had bought 19.2% of the company on a partially diluted basis in the 1.5c financing (15c post-rollback). Sixteen hours later, a second financing was announced at 25c -- it was sold before it was even announced. Hmmmm. From those two events, it was pretty clear to me that Mr. Giustra has a plan for LBC, even if I didn't know what it was. Four directors resigned and were replaced by a 25-year geologist that has overlap with Frank in West Red Lake Gold Mines. Once the financings settle, LBC will have 48 million shares outstanding (and 31 million warrants) for a market cap of $29 million as of Friday's close (with ~$6mm in cash). So why care about LBC? Well, back in April 2022, the company drilled over 1200 metres of 0.58% copper-equivalent (this is a copper-molybdenum porphyry) from surface including 595 metres of 0.77% CuEq starting at a depth of 7 metres at its Mocoa project in Colombia. The discovery wasn't new... an inferred resource of over 600 million tonnes of 0.45% CuEq has already been identified, but subsequent work by LBC has shown that that the known Mocoa deposit is part of a larger cluster of deposits with multiple additional untested targets that also outcrop at surface. In short, Mocoa has billion-tonne-potential, which is what you want to see if you ever want to get taken seriously by the big industry players. I'm new to LBC, but it would appear that there was some local opposition to the project, at least in part due to the fact that the project was being modelled as an open pit, but LBC seems to be leaning towards an underground block-cave mine now and there have been some favourable changes at the local government level. Mix in the fact that Mr. Giustra has plenty of experience and contacts in Colombia and I think this starts to look like a very interesting speculation. Until the two aforementioned financings come free-trading in June-to-July of this year the total float for LBC is just 17.5 million shares, which could make for some interesting trading. Given that LBC already has a massive porphyry on its hands, and is looking to make it even bigger, I think that the ~$30 million cost of entry starts looking pretty attractive as a speculator relative to other known stories in the sector. It's not a huge position for me, but if it goes, it could really go, especially if copper can get through $4 with a tailwind. Even from these levels, I think this could 5-10+ bag with a little time and a little interest. My bet here is that Mr. Giustra's presence makes my odds a little better. We'll see.

Sun Peak Metals (PEAK.V, last at $0.50)

This is a weird one. Sun Peak is run by Greg Davis, formerly of Nevsun and Sunridge... both of which were in Eritrea, which most people can't put on a map. For some background, Nevsun's Bisha VMS discovery was taken into production and ultimately sold to Zijin Mining for $1.86 billion in 2019 and Sunridge's 60% interest in the Asmara project was sold to a different Chinese company a few years prior for around $100 million. After having senior management positions at both Nevsun and Sunridge, now Mr. Davis is in the CEO role at Sun Peak. PEAK's Shire project has been on hold for three years, after fighting in the Tigray region of Ethiopia ground progress there to a halt. With the Tigray region back in peacetime, Sun Peak says that they are gearing up for drilling later this year. The reason I'm interested is that Sun Peak's targets really, really rhyme with what Nevsun had at Bisha... large gossanous outcrops with coincident electromagnetic, geochemical, and gravity anomalies which are highly suggestive of the presence of VMS deposits. This is way up there on the "political risk" curve, but these targets are the kind that can generate interest even if they're in what is perceived as a frontier/risky region. PEAK has around 88 million shares outstanding and a market cap of $44 million, so this speculation doesn't come free, but there is a fairly devoted audience waiting for results from this project, so if PEAK is successful with the drill bit, broader attention should follow. This has been on ice for three years, but soon enough it'll be time to drill it, so I want to be paying attention when it happens. I own a little stock, at a price a little lower than here, but this is one that I like as an exploration "punt" that could end up looking more like a touchdown if PEAK comes up with the goods.

Atex Resources (ATX.V, last at $1.27)

This is getting long, so I'll keep ATX short. Atex is a Pierre Lassonde-backed Chilean copper porphyry discovery that could have billion-tonne potential. Its most recent hole, ATXD16A, suggests that the higher-grade early porphyry (EP) phase of the deposit may be more extensive/continuous than previously thought, with holes ATXD26 and ATXD17B (both pending) testing an area that would reinforce the interpretation of a NNW-trending EP corridor. Given Mr. Lassonde's involvement and the credibility that it brings, I have a little ATX on the books as I watch for a copper breakout through $4. When it comes to copper, there aren't a lot of quality investment targets out there, so I think that money will find ATX pretty quickly if copper comes back into market focus. Dare to dream.

Gold

I said my piece on gold above, so I'll make this simple with some names and some bullet points. The names are in no particular order, but I flag them because I think they are all interesting, cheap, or both:

Kinross Gold (K.TO, last at $7.25): The cheapest of the big gold producers. Constantly rumoured as a takeout target. This is a go-to beta gold name.

Falco Resources (FPC.V, last at $0.28) & Troilus Gold (TLG.TO, last at $0.55): Falco and Troilus consistently screen as some of the cheapest ounces out there, and both projects are advanced to the point where they are not just pipe dreams. Troilus should have an updated economic study soon and its ~11 million ounce total (brownfield) resource should attract attention if the gold move is for real. Both FPC and TLG have mineable grades and could be of interest to larger players who don't mind things that are boring and predictable. Both are in Quebec.

Oceanagold (OGC.TO, last a $2.75): It's cheap on the comp sheets, so I own a little.

New Gold (NGD.TO, last at $2.03): Also cheap on the comp sheets. Kind if reminds me of the "Baytex Energy" of gold stocks. Lots of torque to a rising gold price.

Aya Gold and Silver (AYA.TO, last at $10.32): Morocco. Silver. Huge resource and high grade. How huge? Stick around and find out as a resource estimate is due any time now. Widely recognized as a premier silver story.

Goliath Resources (GOT.V, last at $0.80): Goliath has produced some amazing hits, but gets little respect for them. The company also needs money. I think that once this gets a financing out of the way, it could have a nice run if it releases the kind of hits it has been getting into a permissive gold tape.

Ascot Resources, (AOT.TO, last at $0.68): Never heard of it? I'm not surprised. You might be surprised to know that this will be Canada's next gold producer though, with a first gold pour over the next month or two. AOT is cheap relative to its small-cap producer/developer peers and has good backing. The stock acts well, which is always nice. Start-up risks come with the territory here, but AOT is arguably strategic in the Golden Triangle as one of the actually-built projects.

Karora Resources (KRR.TO, last at $4.75): A well-run small-cap gold producer trading at a modest valuation with low political risk. What else can a guy want in a rising gold tape?

Osisko Mining (OSK.TO, last at $2.79): High grade underground ounces in Quebec. OSK owns 50% of the project through a JV with Goldfields and the project is financed through to production. This is nearly 8 million ounces of high-grade gold (8-11 g/t) and it's open to depth. It's not excessively cheap but the good ones never are.

Rupert Resources (RUP.TO, last at $3.60): Finland. 4 million ounces of high-grade open pittable gold (2.2 g/t) that any company would love to have. RUP is a clear take-out target in a rising gold tape.

Red Pine Exploration (RPX.V, last at $0.17): It's small now, but geos like to compare RPX's potential at the Wawa Gold Project to the Island Gold Mine of Alamos. Alamos seems to like it too, as it is the company's largest shareholder, owning 19.4% of the company. RPX has recently found itself without a CEO, so I'm bargain hunting here.

Canadian Gold Corp (CGC.V, last at $0.14): 40% owned by Rob McEwan, this is a microcap with an old high-grade gold asset (the Tartan Mine near Flin Flon, Manitoba) that could expand to depth the way that a lot of good high-grade deposits do. It's early days and the company is lightly capitalized, so I'd expect another financing followed by more expansion drilling to depth. At 14c, you get what you pay for, but in a strong gold tape, I think that a name like this could move up pretty easily.

Radius Gold (RDU.V, last at $0.12): While Tropico may not have worked out in early January, RDU is going to start drilling Plata Verde in Mexico (silver) and they continue to poke around in Guatemala in an area with loads of high-grade gold in boulders at surface. RDU is tiny, but a real hit on either of these projects could send the stock flying. It's a cheapie with a chance.

Uranium

I have nothing to add on uranium today except for flagging little CanAlaska Uranium...

CanAlaska Uranium (CVV.V, last at $0.75)

CVV had a truly impressive, albeit deep, hit of 16.8m of 13.75% eU3O8 recently on its West McArthur JV with Cameco, where CVV owns an 83.35% interest. That is quite a hole folks, and it won't be the last, so CVV is officially on the map of junior explorers with deposits of interest. The results are based on gamma probe readings, hence the "e"U3O8 qualifier, but chemical assays will come back in 6-8 weeks. In the meantime, CVV is sure to drill more around that hole, so stay tuned. You don't get grades like that unless the mineralizing system was long-lived and typically things that are long-lived have some scale to them. Hmmmm.

That's more than enough to think about and it's getting late, so I'll leave it here. I know that I throw a lot of things into the mix at times like these -- that's because I think that when it's "on" it doesn't hurt to have a deep stable of names to draw on for ideas. Given that it feels like spring might be coming a little early this year to the commodity sector, stay sharp, read lots, and good luck out there. At this stage, if there's one thing that will really embolden me, it'll be seeing a golden cross on the TSX Venture index in conjunction with a move above the 640 level. If we see that, commodity investors will probably already feeling pretty darn good and they may just be getting going... dare to dream.

Happy hunting.

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Disclosure: The following represents my opinions only. I am long AAV, AOT, AYA, BIG, CDR, CRE, GOT, IAU, OGC, NGD, NPR, NSE, NXE, RDU, TAO, TNZ, U.UN, and VGCX (image credit to Aron Visuals on Unsplash)

It's been a couple of months since I put out a Trick or Treat basket of seven stocks that I thought would have catalysts by the end of 2023. Only one came to any kind of conclusion before the end of the year -- and that title goes to Radius Gold (RDU.V, last at $0.125) which unfortunately learned that its Tropico target wasn't as straightforward as hoped. Of the balance, two have seen news this week, and four remain "pending". So much for things happening "on time" or "as expected". A quick run-through is in order. A common theme that seems to keep coming up is patience. Typically, I don't think of my speculations as requiring patience, but lately, they've needed just that. My rationale in saying that is based on my belief that just because something doesn't happen on time doesn't mean it isn't going to happen -- assuming of course that the company in question is still on a path that is objectively the same as it was when the speculation began... because there's always a story...

Tenaz Energy (TNZ.TO, last at $3.59)[urcr_restrict]

No change in my view here. Tenaz remains one of the best risk-rewards that I've seen in recent memory. Currently trading at around 1.5x EV/CF, this $100 million market cap company has about half of its market cap in cash and is actively hunting for/negotiating on deals in the international energy arena, where management has a distinct competitive advantage. The only knocks I hear on TNZ are that the market cap is too small and the stock is too illiquid for most institutions. The management team is stacked. The board is stacked. The capital structure and balance sheet are pristine. Discipline and respect for shareholder value with respect to the M&A strategy are sacrosanct. The only requirement? Patience. TNZ has frustrated more than a few investors over the last two years as they wait for something meaty to chew on in the M&A department, and yet even its small bites made TNZ one of the best performing stocks on the entire TSX in 2023. Not bad for a minnow that is "too small". I'm of the opinion that TNZ represents a type of arbitrage that I'm constantly looking for... the "embedded re-rate". As it stands today TNZ is objectively too small for most institutions... their mandates dictate that no matter how much many money managers might like management and/or the story, they actually aren't allowed to own it under the rules of their funds. This will be the case until it isn't, and a M&A strategy virtually guarantees that TNZ will grow into a company that a much broader audience will be willing and able to invest in. No deal yet, but as I said... patience.

Tag Oil (TAO.V, last at $0.35)

Speaking of patience, TAO is doing its best to test the patience of just about everyone. I'm going to start with a little geology lesson here. The Abu Roash "E" (abbreviated ARE), is the rock formation that sits above TAO's Abu Roash "F" (ARF) target horizon. As TAO turns the drill to "land" the wellbore horizontally in the ARF, part of that turn occurs within the overlying ARE formation, which means that TAO is going through that formation at an angle. That's all well and good, but TAO has now learned that if you have "open hole" (i.e., when a formation isn't yet cemented behind casing and is still open to the drill string and circulating drilling fluid), the shales in the ARE are prone to what is called caving. Because the ARE is composed of alternating (interbedded) layers of shale and limestone of variable thickness, if the formation is open for an extended period, the shales within the ARE begin to "slough" which means they "erode" much more than the interbedded limestones. If you have a top-side (surface) issue with the rig, which TAO had, it means that the wellbore is left with fluid circulating in the hole while the top-side issue is sorted out. At that point, more time equals more sloughing of the shales in the ARE, which makes for a very irregularly shaped wellbore through the ARE section (imagine resistant limestone "ledges" interbedded with sections of shale that are "washed out" perhaps several feet into the formation). Aside from being very difficult to slide anything (like drill pipe or casing) through that now-ragged interval in the hole, eventually some of those limestone ledges can even break off and wedge into the side of the drill pipe. Sounds like fun, right? So the solution? Well, first off, don't have a mechanical issue with the rig at surface that makes you shut down drilling... hence the pause for repairs. Second, don't leave the ARE open any longer than you need to, as more time equals more sloughing of shales; so get it drilled and behind casing before you start the final section of the well into the ARF. Third, go through the ARE at a slightly steeper angle and make sure the drill is rotating through the zone as opposed to sliding through it (you can Google that and see the difference between rotating and sliding during directional drilling if you're interested). And finally, maybe switch to an oil-based drilling fluid when drilling through the ARE, as shales can have clays in them that "swell" (i.e., absorb water and expand like the pages in a wet book) when they are exposed to the water in a water-based drilling fluid, which leads to an increase in hole sloughing/instability. Remember that TAO drilled the build section through the ARE without incident in the first leg of the well, but lost that leg when they twisted off a bit in the horizontal section, so it's not like the ARE can't be drilled through successfully. TAO will now enter the ARE at a slightly steeper angle, case it behind pipe once they are through it, and then proceed to land the horizontal leg of the T-100 well within the ARF.

So third time's a charm right? Should be. I guess we'll see. You pay your tuition the first time you do something and TAO is certainly paying its tuition here. The good news is that by knowing what not to do, you avoid making those mistakes in the future. The other good news is that TAO has more than enough money for this well, even with its likely $3-ish million in cost overruns, plus another well afterwards (after this well is completed, TAO expects to have CDN$13-14 million in the bank.

I'm going to finish with an analogy here. For anyone who's ever built a house or done a major renovation, I can assure you that during the build/reno processes a variety of "issues" will arise depending on your level of preparedness. Some issues are unforeseeable, some are created by lack of foresight/oversight, some cost time, some cost money, and some cost time and money. This inevitably causes stress between everyone involved during the process, but one day, after all the nonsense, the house is completed, down to the switch plates and outlet covers. Then, when you have your first dinner party, the guests will marvel at the newness and novelty of the house and not one of them will know what a pain in the ass it was to get it to that point. You'll know -- because you lived it -- but to anyone else, the final product is all that matters. That encapsulates my thinking on TAO here. For the stock to take a 25% haircut from a tax-loss-selling-depressed level on an issue that might burn a few million bucks (all-in) and cause a month or two of delay seems juuuuust a bit harsh to me. If you don't think the Hz can ever be drilled, then maybe it's valid, but given what I know about why TAO has had the issues that it has, I see little reason to panic. People entering TAO now can make the same bet I made some three years ago and they only have to wait 1-2 months for the same result that I do. Hmmmmm... sucks to be me, but for bottom-fishers, this would seem to be an attractive opportunity for speculation. If/when TAO finishes this well and gets it tested, its newness will be all that matters... and the flow rate. TAO is down, but not out, and I think sentiment is near maximum pessimism at the moment. Could there be more unforeseeable delays or malfunctions? Sure, it's possible... I can't rule that out... but given the explanations and remedies proposed, I don't have any reason to doubt that this well will get drilled and tested. Management thinks we might see results in early March. Hopefully good things come to those who wait, and if you've read this long-winded comment on TAO you have already exercised a certain degree of patience, so thanks for making it this far...

Remember that TAO is essentially making the mold for its unconventional resource "widget factory" at Badr, where the oil is on pipe and under a great fiscal contract. The well design considerations and operational procedures gleaned from the T-100 well will drive the development of an initial 20-well program with a USD$423 million unrisked post-tax NPV. Management has previously stated that the initial 20-well project could be expanded to as many as 40-60+ locations in the evaluated areas. To really illustrate the discount that I think exists here, TAO's market cap is currently CDN$64 million and it'll have $14 million in cash after this well, so call it an enterprise value of CDN$50mm. According to the energy consultants at RPS Energy, the unrisked after-tax NPV10 of the Badr ARF project, on the 20-well case, is CDN$565mm. That means that the market is valuing TAO's Badr project at less than 10% of what I'll call its "potential upside". In reality, nothing trades to its NPV these days, but getting to half of the NPV would be a 5-bagger, and you would be surprised how fast sentiment can shift where you're looking at 4-digit flow rates -- which is exactly what RPS predicts. RPS gives this project a 90% chance of development and the market is suggesting something more like a 10-20% chance at best. Something's gotta give, and the T-100 well is it. Once the T-100 well is drilled, fracked, and tested, things are going to get interesting real quick. In the mid-case success case, for every dollar of capex that TAO invests in wells, it will generate three dollars in net present value. And that's not pie-in-the-sky NPV... that's oil, on pipe all the way to the coast, flowing sweet cash flow into TAO's jeans. Dreaming aside, let's see TAO get the T-100 well landed and cased. Just another 6-8 weeks...

New Stratus Energy (NSE.V, last at $0.72)

NSE missed my year-end deadline by a few days, but did announce a formal, closed deal on an asset in Venezuela. The release was light on economic detail, but the scale of the opportunity is in the range of 10-40 million barrels on a risked 100%-interest basis. NSE owns 50% of GoldPillar International, a private BVI company that owns 40% of the Petrolera Vencupet JV alongside 60%-partner PDVSA. Importantly, NSE, through its ownership in GoldPillar, will receive additional revenue in the form of service fees, financing fees, and oil trading fees in addition to sales revenue from the oil itself. There are the standard risks that come with operating in Venezuela in terms of sanctions, along side other risks including, but not limited to, well data quality/existence, existing wellbore conditions, and staffing requirements. Given the jurisdiction we're dealing with here, I don't want to sugar coat this one too much, but it is certainly the smallest way to play the Venezuelan oil sector that I'm familiar with. The deal is financed from cash on hand and a facility to be arranged by GoldPillar, so NSE is on its way it would seem. Best of luck to them. The company has also made noise in a prior press release about a deal in Mexico, so I guess we'll see about that. NSE is an odd one, and the market is still trying to figure out whether or not it likes NSE... and so am I!

Condor Energies (CDR.TO, last at $1.60)

Nothing but crickets and an encouraging stock chart here. I have nothing to add, but will watch for CDR to progress on its initiatives in Uzbekistan and/or Kazakhstan. This story is lightly followed and not broadly owned. I'm hopeful that it can become one of those obscure companies that grows up quickly, and I think the Uzbek deal is my best shot at that, so here's hoping.

Valeura Energy (VLE.TO, last at $2.75)

VLE remains as cheap as anything in the international sector that I follow. It has good leverage to the oil price and remains on the hunt for acquisitions in SE Asia. The market is having a hard time believing that VLE is as cheap as it looks, but a few quarters of delivery could go a long way to convincing those who might be sitting on the fence here.

Hercules Silver (BIG.V, last at $0.81)

See? I told you. Don't look it in the eye or it'll gore you. While exuberance ran high with BIG, the first batch of results did not, and while there was technically nothing wrong with its most recent assays, the lack of sizzle made the stock fizzle to the tune of about 40%. That's not surprising given that a virtual rocket ride to the moon that holders were wanting to witness. I don't even watch baseball, but when Aaron Judge steps up to the plate, you expect to see a homer. When he slaps a base hit into shallow left field, there's a collective disappointment in the crowd even if it isn't technically warranted. That's what happened with BIG's most recent batch of assays from its Hercules project. While the results undoubtedly confirm the presence of a large copper-porphyry system, none of the reported holes carried enough grade to keep the market entertained. It's worth noting that all of the assayed holes thus far have been within what is called the phyllic alteration zone, which is an outer shell typically cored by a higher-grade potassic alternation zone/core more central to the heat source which was driving this mineralizing system. No maps of the new IP survey were shared, likely for competitive reasons, but BIG confirmed that there's multi-square kilometre IP anomaly at the Hercules project. Additional geophysical and geochemical work will aid BIG in vectoring towards the potassic core in the upcoming spring program and BIG's balance sheet (thanks to Uncle Barrick) is robust enough to carry out a significant drill campaign. I read or heard somewhere that if you don't have patience, the market will teach you patience, and BIG is yet another example of that. I didn't like getting kicked in the teeth right out of the gate in 2024 on this one, but Barrick's involvement tells me I should give it some rope until at least another drill program is complete.

Critical Elements (CRE.TO, last at $0.89)

Still no deal, and lithium prices are in the tank. Sector sentiment is weak and so is CRE. Management missed a beautiful window of opportunity here (at least partly due to a protracted permitting period in Quebec), and I view this as a salvage operation now. Show me CRE... show me and the market why we should continue to care... because it's been a really, really, really long time coming for a project with such good financial and technical characteristics.

Gold and Uranium

This note is already long, but gold and uranium take up the balance of my bandwidth right now, with natural gas percolating in the back of my mind (I still own Advantage Energy, AAV.TO, last at $8.56) and an eye on copper (I'd like to see copper through $4 though). When it comes to gold, it's been bouncing off all-time highs while many stocks are still not that much off multi-year lows. I have broad, low-commitment exposure to gold through names like I-80 Gold (IAU.TO, last at $2.14), Oceanagold (OGC.TO, last a $2.50), New Gold (NGD.TO, last at $1.88), Aya Gold and Silver (AYA.TO, last at $10.35), Victoria Gold (VGCX.TO, last at $6.53), Goliath Resources (GOT.V, last at $0.80), North Peak (NPR.V, last at $1.63), and Ascot Resources, (AOT.TO, last at $0.54). That's too many to discuss, but they've all been selected with the idea that I think all are either under-appreciated, undervalued, or both, in one way or another. And lastly, with spot uranium prices hitting new 12-year highs, I'm keeping it really simple with holdings in the Sprott Physical Uranium Trust (U.UN.TO, last at $27.77) and Nexgen Energy (NXE.TO, last at $9.05) at the moment, but I would chase other names that I've mentioned previously if uranium prices go to Tuliptown.

Tough start to the year for me with TAO and BIG, but if there's one thing that the market has taught me over the years, it's that sometimes patience is both warranted and required... because hindsight (shoulda/woulda/coulda) gets you nowhere if the path ahead still seems intact and worth following.

Happy hunting.

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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...[urcr_restrict]

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.

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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.[urcr_restrict]

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.

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Disclosure: The following represents my opinions only. I am long TAO.V (Image credit to NASA)

In outer space, a star is born when a giant cloud of gas and dust collapses under its own gravity. Eventually enough matter, heat, and pressure builds up in the centre of a collapsing disc that hydrogen fusion begins, after which the newly-born star blows away the remaining dust, perhaps to become a point of light in someone's night sky. If you think about it, that's not totally unlike the process of a micro/small cap company making the transition from the market fringe to the mainstream. Once in a while, years of relationships, data, persistence, and a touch of serendipity coalesce to make a new story worthy of broader market attention; and I think that's what I'm witnessing today with Tag Oil's (TAO.V, last at $0.75) update from its first frack within the Abu Roash F (ARF) formation in Egypt's Western Desert.

TAO's proof-of-concept BED 1-7 well has delivered a choked-back stabilized production rate of 140 bopd, a rate which the company's engineers believe will allow for maximum oil recovery under optimal flowing conditions (at 140 bopd there is a significant fluid column above the ESP). To be clear, TAO could've pulled harder on this well if they wanted to, but the BED 1-7 well test is about getting real flow data that can actually be extrapolated to the upcoming horizontal well. The fact that the well is stable at 140 bopd after a month of production suggests that the ARF is indeed acting like its American cousin; the venerable Eagle Ford shale. That is some good company. The Eagle Ford is one of the most profitable oil plays in North America and remains the focus of many of the leading companies in the industry. Heck, even Berkshire's Charlie Munger grudgingly appreciates the economics of the Eagle Ford. For reference, if you did a single vertical frack in the oil-prone region of the Eagle Ford shale, you might expect an initial production rate similar to what TAO just reported today (in Canada's Montney, you might get 50-100 bopd). In other words, the test rate reported today from the single frack at the BED 1-7 well is more than enough to extrapolate some eye-catching flow rates in the 15-20 stage horizontal well that will soon follow -- which is exactly why I'm willing to bet that TAO will shine even brighter in the months and years ahead.[urcr_restrict]

As of Friday's close, TAO's market cap was about US$88 million. When RPS Energy did its resource report on the Abu Roash F formation within TAO's Badr concession back in November -- where TAO has a 100% operated interest -- the firm calculated an unrisked after-tax NPV10 of US$423 million based on 20 well locations (with an impressive NPV to capex ratio of 4:1). In recent presentations, TAO management has said that they believe there are at least 40-60 well locations already on the table at Badr (i.e., 2-3x what is in the RPS report), with the potential for even more locations on unevaluated lands where there is less data. Re-read the prior two sentences and let them sink in a bit -- the RPS report is just a starting point. RPS modelled a horizontal well as recovering around 1.5 million barrels (unrisked, mid-case), which implies development costs of about US$4-5/barrel (remember that the capex here is just drilling and completion costs, plus a small incremental cost for tie-in to existing infrastructure). Opex is modelled to be around US$6/barrel over the life of the project -- this is low cost oil. TAO's fiscal terms at Badr are attractive given its early-mover status in the ARF play and, as a result, after-tax netbacks are expected to be strong, coming in at around US$30-35/barrel at US$70-75 Brent (Brent crude is US$76.60 right now). Wells would be expected to pay out in months at current oil prices. Bottom line, the ARF looks really good on paper... and the first-month of flow data from the BED 1-7 test, which is the first frack ever in this horizon, means that the RPS report -- and the economic analysis within it -- isn't just a fantasy. Drilling of the first horizontal well is expected to start in late July (TAO announced that a rig has been secured) with results in September or October, and if the horizontal delivers as expected, I think that's when the broader market will really take notice of the story. Right now, you have to be looking in the right place at the right time to notice TAO, but drop a four-digit flow rate on the newswire, with 40-60+ locations in inventory, and sunglasses will be in order. If it's not already clear from what I've said above, I think TAO can multi-bag from here with a little patience.

To me, this is the definition of an inflection point in a junior resource development story. Like gravity, the data is all pulling towards a single conclusion -- that horizontal wells in TAO's Abu Roash F should be highly economic. With 15-20 fracks planned in TAO's first horizontal (maybe a little more or less depending on the prevalence of natural fractures along the horizontal leg), TAO is setting up for "ignition" when that well test hits the wire. It's easy for the market to ignore a company reporting a circa 150 bopd flow rate in an international play it has never heard of; but if TAO reports a flow rate in the low thousands of barrels per day (maybe 1200-2000+ bopd?) I think the market will wake up in a hurry. The modelled short payouts and ample spare transportation capacity (about 15,000 bopd) mean that the project would be expected to become self-funding quite quickly, and, while there's the standard operational risk for future wells, the path forward is not hard to imagine here.

In short, TAO's Badr oil project is in the process of transitioning from proof-of-concept to actual development; within a rich source rock that is both frackable and areally extensive, just like the unconventional plays that we know so well here in North America. Markets go up and markets go down -- and so do oil prices -- but for me, this is an event-driven "alpha" situation. History has taught me that when a company like TAO is creating/unlocking value that wasn't there before -- in this case by deploying North American unconventional development technology in a new target formation abroad -- that company can substantially outperform both its peers and the market. I saw exactly that with Mr. Badwi's Rally Energy through the years 2005 to 2007. Back then, Rally had identified the old, overlooked Issaran heavy oilfield in Egypt as a candidate for enhanced oil recovery using cyclic-steam stimulation (CSS) and the company's early tests showed that its plan to deploy the technology in the field was working. I watched Rally's reported 2P reserves go from 11 million barrels, to 45 million barrels, and to 92 million barrels in the years 2005, 2006, and 2007 respectively. Oil swung wildly over that time period, but the Rally chart pretty much went up and to the right until the company was bought in September of 2007 for ~CDN$900 million (Rally was valued at just CDN$100 million in July 2005, when Mr. Badwi was brought in as CEO). As they say; history seldom repeats, but often rhymes... and TAO's proof-of-concept in terms of fracking the ARF sure smells a lot like the early days of Rally's CSS deployment at Issaran, so here's hoping. RPS estimates that TAO's mid-case unrisked contingent oil resource at Badr is around 34 million barrels recoverable; and remember that's based on 20 wells. Should that well count expand to 40-60+ the scale of the Badr project matches that of Rally, and that's without considering any future acreage additions in the play... hmmmmm.

I've seen lesser companies, with lesser prospects, in far tougher jurisdictions (often with no infrastructure in place), trade for multiples of what TAO is trading at today. That makes me optimistic about what's in store for TAO's valuation as the company continues to execute on its plans at Badr. The theme of exporting North American unconventional resource development expertise overseas is both logical and appealing, and Egypt's long history of hydrocarbon production makes it an ideal jurisdiction for a company like TAO to put an opportunity like this together. The ARF has shown that it fracks well, the early flow data is supportive, the modelled economics are impressive, and there's no doubt that the oil is there. With all of that on the table, I think that TAO should start to attract a broader audience now. For those who do take the time to look through my telescope at this one, I don't think it's at all a stretch to say that TAO's future is looking bright here; and while star formation is a process that doesn't happen overnight, once it starts, it's certainly something to behold...

Happy hunting.

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