Do Your Own Due Diligence.

Disclosure: The following represents my opinions only. I am long ATH.TO, ATU.V, BTE.TO, CJ.TO, CPG.TO, MEG.TO, TAO.TO, TGL.TO, WCP.TO, and YGR.TO (Image credit to Shaah Shahidh on Unsplash)

Wow, what a difference a couple of weeks can make. Any reservations that the oil market had with respect to the March 4th OPEC meeting were washed away with some of the most bullish OPEC posturing in a very long time. Knowing that a U.S. shale response will/should be a shadow of its former self, OPEC is intentionally tightening the physical market at a time when global oil demand continues to recover. And, as things stand, the market is powerless to do anything about it in the near term, as OPEC is the only one with any real spare capacity right now. Effectively, OPEC is deciding when to be the "relief valve" on oil prices, but my sense is that they are still aiming to sustain oil prices higher than $70 per barrel as they choose price over volume. Think about it... if you can sell 15% less product, but get a 25% higher price for the product you do sell, you're ahead of the game. As it stands today, I think that OPEC can now afford to experiment over 3-6-9 month periods to test/monitor the U.S. shale response. With the oil industry mantra now shifting from "growth-at-any-cost" to "pay-down-debt-and-return-capital-to-shareholders", it's going to be interesting watching it play out. Will producers stay disciplined? Or will they return to their "spend like a drunken sailor" ways? Stay tuned. In the meantime, get used to a rolling backwardation structure in the physical oil market, imposed by OPEC's current stance (backwardation acts as a deterrent for producers looking to hedge forward production, as future prices are lower than the near months).

If you haven't noticed, energy stocks continue to be on a tear, digging out of holes so deep that you never thought they'd see daylight again. This is despite the fact that I continue to see a lot of skepticism when it comes to the energy trade as memories of the past seven years are slow to fade. The crazy thing is, that even after the big moves many of the energy stocks have had, they are still really, really cheap as a group. Anyone that wants to hear the bull case needs to watch this video from Ninepoint's Eric Nuttall. Eric has been one of the only lighthouses in the dark for Canadian energy investors for a very long time and is being rewarded now for his years of staying on top of things. When a market turns, like oil just has, it's so critical to be able to identify and target opportunities quickly... and that can only be done by staying in a constant state of readiness. Well, Nuttall was born ready for oil bull markets and he has been generous with his Twitter posts, providing comparative valuation charts (like these) that might help newcomers focus their due diligence efforts. I always keep my energy seat warm, but Nuttall takes it to a truly professional level; and at times like these, he'll be a lightning rod for energy market interest and guidance. His assets under management already show this effect, having swelled from $26 million at the lows to over $300 million today as money looks to deploy in the sector. Perhaps the most important point that Eric makes in his video is that, despite their recent (excellent) performance, energy stocks are coming off of levels where they had no business being in the first place; and many are still nowhere near what might be considered "fair value" when weighed in the context of prior years. That's a view that I share, and it's really easy to see when you pull up 3-5-10 year charts on any energy stock or index.[urcr_restrict]

In a nutshell, I think that the energy sector is in the nascent stages of "rediscovery" by a market that still broadly believes that somehow civilization's relentless dependence on hydrocarbons is going to evaporate overnight. Fortunately, the free cash flow that energy companies are generating right now is undeniable, so that dependence is going to be brought back into stark focus by the balance sheets of these entities over the coming quarters and years. As the increased dividends, debt repayment, and share buybacks in the sector continue to pile up, it's sure to turn more heads and get people asking tough questions about why they're not participating, and why exactly it's "politically correct" to shun oil. If someone can explain to me why mining and refining a colossal amount of lithium, cobalt, nickel, copper, rare earths, aluminum, and other exotic elements is more "ESG friendly" than responsibly producing the very oil that's needed to power the Green Transition, then I'm open to hearing it, but so far I've heard nothing convincing. In the near term, there is literally no alternative to oil and gas. None. Not even close. Even just trying to eliminate coal fired power (I'm not even talking about gas) is an absolutely monumental task, never mind trying to do it while needing to generate more and more electricity to power the growing fleet of EVs in the future. I'm not saying it's not going to happen, but it is going to take some time. And during that time, I think the market will come around to the unique value proposition that energy stocks are presenting and that my willingness to be "early" will be rewarded with analyst re-ratings across the board.

By no means am I expecting energy stocks to go straight up, but if they do, that's fine by me. I have built a basket of names where I think I'm getting good value and leverage to a variety of outcomes. My oil net is pretty wide (this doesn't include my gassy names), but for those who want to browse the stable, here goes:

Athabasca Oil (ATH.TO, last at $0.59)

Several months ago, one of our partners suggested looking at Sherritt (S.TO, last at $0.58) as a way to play the move in nickel. I turned up my nose because it was just a little too stinky in terms of the exposure I was looking for... After passing on that idea, I watched Sherritt march relentlessly higher, the whole time mocking my aversion to wanting to go that deep into the idea cupboard. ATH now reminds me of Sherritt on that day -- ATH is so levered to the oil price that you're scared to own it, but if oil goes to $80-90-100 it'll knock your socks off with its free cash flow. Needless to say, I own some as a call option on oil, though it does have a gas kicker.

Altura Energy (ATU.V, last at $0.225)

I've owned this for a looooong time and haven't made any money on it... yet. With its large, low cost, scaleable resource at Leduc-Woodbend (400 mmbbls OOIP), this is a classic microcap value story run by one of the best teams I've come across. Conservative and methodical, management has kept debt and abandonment liabilities low, as well as costs. This is pretty far down market (the market cap is only about $25 million and production is around 1,000 boepd), but represents an interesting penny speculation on oil and the management team. ATU sells its oil at a small differential to WCS (Western Canadian Select) crude pricing, which is enjoying the same price strength as the rest of the oil complex. There's also a light oil play called Entice that ATU is evaluating, so you never know on that front.

Baytex Energy (BTE.TO, last at $1.48)

This is one of those plays that looked like it was going to drown in its own debt until recently, and all of a sudden BTE is being spoken of in the same breath as "impressive free cash flow" given its leverage to oil. The chart says it all. I remember thinking BTE was cheap at $4 not that many years ago.

Cardinal Energy (CJ.TO, last at $2.29)

I first put this back on the radar when Murray Edwards took on a piece of the company's debt and around 18% of the equity. As they say, follow the money. CJ has great leverage to oil and screens very well on Mr. Nuttall's twitter charts. Being a simple guy, I also like the fact that CJ still trades at a healthy discount to its end-of-the-world 2020 PDP NAV of $2.91/share. PDP NAV is typically the most conservative measure of an oil company's fair value, so the fact that CJ still trades at a 20% discount to its COVID-19 price deck is impressive. CJ's $1.4 billion in tax pools ($522 million of which are non-capital loss carry forwards) are nothing to sneeze at either. As I'm writing this, I'm thinking that CJ could be a target in the current M&A cycle.

Crescent Point Energy (CPG.TO, last at $5.70)

A sector bet, plain and simple. This one lives in the sweet spot of oil price torque. At these WTI prices, CPG prints money. I haven't checked the multiples on it recently, but that alone should tell you something about my level of concern in terms of where I think the sector is when it comes to valuations. I want broad exposure as I get my bearings in terms of what to really focus in on, so I have a little.

MEG Energy (MEG.TO, last at $7.54)

In two words; tax pools. With some $7.4 billion in tax pools ($5.1 billion of which are non-capital loss carry forwards) and producers out there looking to shield their looming energy windfalls, MEG gets more interesting by the day. Not only would a corporate buyer get a world class asset with massive oil leverage by taking MEG out, but they would also get those tax pools... which would make for some big tax savings to someone who is currently, or soon to be, cash taxable. This is one of the few times that the word "tax" seems cool.

Tag Oil (TAO.TO, last at $0.30)

Perhaps the Littlest (Toronto-listed) Engine that Could? Abby is still playing a game of Where in the World is Carmen Sandiego with the market, but at some point he's going to find a deal for TAO. The only thing that's changed in my view of TAO is that the oil market has become wayyyyyy better than I thought it could in this time period. In hot markets, when companies get new deals, people tend to notice. This is one of my penny hopefuls where I am looking for outsized returns if I'm patient. Abby's successful exits have all been in the multi-hundred millions of dollars, so I'm betting early on this one. TAO's cash value is around 18c/share and the team here is as good as any when it comes to international oil hunting. TAO consistently references its access to capital, which is music to a penny stock holder's ears. Tick tock goes the deal clock.

Transglobe Energy (TGL.TO, last at $2.06)

Transglobe reported some fairly meaningless 2020 numbers this morning. I don't want to just brush off an annual report, but with TGL the report is reallllly backwards looking. This is because of the PSC renegotiation that the company concluded in December, which sets TGL on a totally new course. Ratification of the new PSC terms is expected in Q2 2021, at which point the deal will be retroactive to February 1, 2020. That's going to create a big receivable on TGL's balance sheet from EGPC that will then be offset against the $15mm bonus payment due to EGPC as part of the agreement. The net impact will most likely come out as a net positive working capital adjustment for TGL and I imagine that it will require the restatement of the 2020 financials to reflect the retroactive nature of the deal. Clear as mud? In any case, one relevant thing that TGL did report this morning was that 2021 exit production is expected to be in the range of 10,300-10,700 bopd day in Egypt, with Canada exiting at 3,100-3,300 boepd under the announced 2021 budget. At the current level of $69 Brent and $65 WTI (hard to believe I'm even typing that), TGL will have netbacks of something like US$22/bbl in Egypt along with perhaps US$30/boe netbacks on its Canadian production (remember that Canada has a gas component). Try running those numbers. The Egyptian cash flow comes in at around US$85-90 million and Canada comes in at US$30 million. That's pushing a US$120 million cash flow run rate at current prices. At CDN$2.06, where TGL closed today, its market cap is CDN$150 million and it has positive working capital of about CDN$18 million, giving it an enterprise value of CDN$130-135 million. If you're still following me, that's an EV of CDN$130-135 million versus cash flow at exit rates and current prices of US$120 million (CDN$150 million). Not to toot my own horn, but I said that this is exactly what I hoped would happen four months ago. The oil price has moved higher and as a result TGL is still trading at less than 1x EV/CF on an exit 2021 run rate (usually analyst targets are based on 2022 numbers, which is why I'm focusing on exit rates). Yeah, sure Malcolm that's great, but what's the catalyst? Well, sometimes you don't need one. If TGL is generating US$120 million a year in cash flow, and G&A is $12 million, EGPC bonus/renegotiation payments are $10 million per year, and capex is US$30 million per year (this year capex is US$27.2 million), that leaves some US$70 million of annual excess cash flow in play. Hmmmm... there's a lot of margin for error here when it comes to getting to a very attractive free cash flow scenario backed by a stated corporate mission of reinstating share buybacks and dividends. Once the company gets the new PSC terms ratified, I would expect the company to do a mid-year reserves update that I think will be an eye-opener for the market, so maybe that's something to "look forward to" if boring gobs of free cash flow isn't enough. The TGL of today is not the same as the TGL of yesteryear and I think the market is starting to figure it out. With a little patience I still think there are dollars on the table here, but that's for the market to decide.

Whitecap Resources (WCP.TO, last at $6.12)

Not a lot to say here other than I like it as oil exposure. Consistently regarded as one of the best teams in the business, and one of the few companies offering CO2 sequestration, Whitecap should be on the radar of every "ESG" investor who realizes the insanity of the hypocrisy associated with being okay with lithium/metals mining and not okay with the oil needed to extract and process those metals... at least here they can check the "CO2 sequestration" box. All that aside, this is a go-to name for actual oil investors who just like to have a piece of an established and well-run oil company that's on a path of increasing dividends over time.

Yangarra Resources (YGR.TO, last at $1.34)

This is a bit of a dark horse. Left for dead in the 30-60 cent range in 2020 (those prices were just variations of "zero"), I've tracked YGR for years as I've always been a fan of CEO Jim Evaskevich, his high share ownership, and his ability to manage the operation like you'd think an owner would. Yangarra caught my eye last summer again as offering good value (massive discount to NAV at the time) and since then I've learned that the company has spent the last few years getting its house in very good order. Jim has been diligently working on creating a very low-cost, largely self-sufficient, operation while focussing on his highly economic bioturbated Cardium play. Like some other companies, the debt was looking a little daunting for a while there, but at these prices, YGR prints money and would plot at the lower end of Mr. Nuttall's charts. I think this is a small cap to watch in this environment and I own a decent piece. YGR was once a market darling and it has never been a better looking operation, so maybe it can regain its premier status over the coming quarters and years. YGR's 2020 (aka COVID-19 year) PDP NAV is $1.37/share, so the stock offers good value on that basis. When things get interesting is when you look at the 1P NAV of $9.40/share. YGR is printing money right now and I think that the market is slow to recognize how much torque it has to energy prices given its tight capital structure. With only 85 million shares out, the share price move from 60 cents to $1.34 doesn't mean much in terms of market cap, and is a pittance relative to how much YGR's cash flow and outlook has changed in recent months.

Well, that more or less covers my oil basket at the moment, so here's hoping that my continued faith in "old school" energy and simple math is rewarded. It'll also give me something to read in six months or a year to see what I was thinking today. My view on oil is decidedly bullish... even at $55-60 oil, I think these stocks look cheap, so I'm long with what what I feel are healthy margins of error. Based on empirical metrics, I don't think the market isn't even close to properly valuing these companies, but that's usually the case when I buy something out of favour. Now it's just about the waiting... and so far the charts are making it pretty easy.

Happy hunting.

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Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long ORO.V and PRYM.V (Image credit to Thomas Kinto on Unsplash)

I'm short on time this morning, but I just finished reading through a resource update from New Oroperu (ORO.V, last at $2.32) that I've been looking forward to for some time... and it was a good read. Last June, the company had mentioned that it was breaking out the oxide component of its Tres Cruces gold resource as a way to quantify what the "starter pit" of this deposit looks like. The starter pit was to encompass resource ounces that can be recovered with a simple heap leach operation (like the one that Barrick was running at its nearby Lagunas Norte mine (7 to 8 miles away) before it was put on care and maintenance for lack of oxide ore that it could process). At this point, it's important to understand that quality oxide gold deposits are sought after by miners because of their low-capex, low op-cost, and relative simplicity. You blast/dig, haul, crush, and spread the crushed ore on a leach pad; that's it in a nutshell. The required equipment is both simple and inexpensive, and operating margins can be very high. Coming back to New Oroperu, with the numbers released this morning, whether these leachable ounces at Tres Cruces 1) go through Lagunas Norte as part of a greater "Lagunas Reboot" plan, or 2) are developed as a stand-alone development, is not what's on my mind today -- that'll sort itself out over time. What is on my mind is the potential value of the ounces on the table in the shallow, high-grade, leachable ore. Those leachable ounces are like pouring jet fuel on wood if you're trying to start a fire (i.e., build a mine). Look no further than the history of Alacer Gold (ASR.TO, recent merged with SSR Mining) to see how oxide ounces can jumpstart a much bigger operation if desired... or Orla Mining (OLA.TO, last at $5.52)... or Prime Mining (PRYM.V, last at $2.50). As a friend of mine likes to say, "Just sayin'..."[urcr_restrict]

So what are the numbers? New Oroperu reported a resource of 9,636,000 tonnes grading 1.37 g/t Au (425,000 ounces) in leachable oxides. It also reported a leachable-sulphide "bonus" of 5,707,000 tonnes grading 1.12 g/t Au (205,000 ounces). That adds up to 630,000 ounces of leachable gold resource (that's already getting up there in the comp tables)... and the grades are impressive. When it comes to oxide development projects, Tres Cruces would be considered "high-grade"; but don't just take my word for it, flip to slide 19 of this Prime Mining presentation to see how New Oroperu stacks up on their grade chart for existing oxide deposits (hint: only one other operation on their chart would have better grade). That grade translates to US$70-80/tonne of rock based on a US$1600-1800/oz gold price. Operating costs (mining + processing) on the heap-leachable resource should be in the realm of $10/tonne. If I use the expected 80-85% recovery factor for the oxides (and 65% for leachable sulphide), the operating margin should ballpark in the range of US$50-60/tonne. If you run the numbers, it's easy to see how operating costs could come in well below US$500 per ounce, so I'm going to stick with my prior ball-parked US$1000/oz operating margin estimate, which makes the math really, really easy.

At this point I can basically make a ledger of the deposit as I see it. On the credit side, undiscounted, I think the gold ounces represent something like US$480 million of operating margin (i.e, US$1000/oz margins on recovered ounces) at US$1500 gold. This is due to the low-cost nature of oxide gold production noted above. On the debit side, I'm going to take a stab and say that, as a standalone, capex for a 4,000-5,000 tonne/day heap leach operation might come in in the US$50-75 million range. That's a real guess and depends on a variety of factors (e.g., new vs used equipment, pre-strip capex, plant sizing/production rate, etc), but I'll use the high end for this math and then round it to US$80mm just to make the numbers easy. That leaves roughly US$400 million of undiscounted operating margin on the table, net of capex, at US$1500 gold. Keep in mind that as of Friday's close, ORO's market cap was just CDN$60 million. Hmmmm... That's a huge pile of cash trading for cheap and a rare animal in a market that's been picked over for assets like this for the better part of two decades.

Tres Cruces has been forgotten on the shelf like an antique gold lamp in a pawn shop, but this resource update should look like a flare in the night sky to those paying attention. Whether the leachable ounces go through the existing operation at Lagunas or a stand-alone operation at Tres Cruces is essentially a trade-off study between 1) higher operating costs and minimal capex (if ore is trucked to Lagunas), and 2) lower operating costs, but full capex (if developed as a standalone). To summarize, from Barrick's viewpoint (or whoever buys Lagunas), Tres Cruces looks like a very-low-capex, high-margin satellite deposit. Through the eyes of a standalone developer, Tres Cruces looks like a low-capex, high-margin standalone project. Either scenario looks pretty good to me. I'm not sure when or if the market will see what I do, but I spend a lot of time looking at gold developers and producers and ORO stands out to me as having the potential triple-threat of low production costs, low capex, and optionality.

I'm running out of time, but wanted to touch on the optionality here. Everything I've discussed here is based solely on the oxide and leachable sulphide ounces, but there's a huge refractory sulphide resource below that (~1.8-1.9 million ounces), some of which is very high grade. The Tres Cruces deposit is open to depth with virtually untested feeder zones that could add to the resource even further over time. I think the bigger question for ORO, or whoever might acquire it, is not whether or not the initial heap leach project would be a good one, but what to do with the free cash flow that it would spin off. If you were to reinvest the free cash flow from a future heap leach operation into the development of facilities needed to process and recover the underlying sulphides (e.g., Alacer Gold or Orla Mining, noted above), a much larger resource could be unlocked at Tres Cruces and/or Lagunas Norte. That's some big optionality. In the "Lagunas Reboot" scenario, I see Tres Cruces oxides as being the key to unlocking another 20 years of production there. Additionally, ORO's Tres Cruces 43-101 report suggests that the project's close proximity to highways and tidewater could make shipping a pyrite-gold concentrate offsite for processing viable. Decisions, decisions... i.e., optionality.

I'm not sure how this all ultimately plays out, but the pieces are all there on the table for anyone who looks; and there's a big pile of cash waiting there to be picked up. Now with ORO having quantified the leachable component of its deposit, I think that those pieces are going to fall into place for people/corporates looking at this situation and I think that's going to bode well for my holdings in ORO. New Oroperu has been buried in obscurity for well over a decade and today's resource update shed the first new light on the project in a very long time... and Tres Cruces shined back. Anyone who looks at ORO and knows mining will see what I see here... and I think that the shine from this resource update is bright enough to precipitate some action. Tres Cruces is a choice deposit and ORO trades at a market cap that is a fraction of just about any peer comparison you could come up with, so I think something's gotta give...

Happy hunting.

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Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long TGL.TO

I flagged Transglobe Energy (TGL.TO, last at $1.14) recently and was wary about posting my numbers because (a) I’m just a guy with a calculator, and (b) I didn’t want to look like an idiot if I was way off base. After having listened to Transglobe’s webcast presentation today on their newly renegotiated “Petroglobe” deal in Egypt, I’m comfortable enough to post the numbers as they come straight from the horse’s mouth. In a word, TGL’s newly renegotiated production sharing contract is truly “transformational”. It’s a win for TGL, it’s a win for EGPC, it’s a win for Egypt. By restructuring the fiscal terms of its contract and blending three prior contracts into one, a whole new world has opened up for TGL in its Eastern Desert concessions. I’m only echoing CEO Randy Neely’s sentiments by pointing out that while TGL has no doubt had a nice move up off its lows, I believe there appears to be a long way to go before this new deal is priced into the stock…[urcr_restrict]

I’m a simple guy, so I’m going to post some simple math here. TGL has 72.5 million shares outstanding and positive working capital of CDN$17 million as of its Q3 report (which is still the case). That gives it a market cap of CDN$83 million at its current CDN$1.15 share price. Taking off the positive working capital, the enterprise value (EV) today is about CDN$66 million.

Cash flow is easy. Under the prior contracts, TGL was getting a netback of ~US$6/bbl at the current US$50 Brent price. Now they are getting a netback of ~US$14/bbl, period (i.e., netbacks just went up 125% and it’s all increased margin to TGL). If I call current production 11,000 bopd, that’s about 4 million barrels a year of production. So to boil it all down, what was annual cash flow of US$24 million goes to US$56 million on the back of this deal. That’s CDN$70 million for those like me who deal in Canuck bucks.

Remember that EV of CDN$66 million? That makes TGL’s EV/CF multiple, on current production and current prices, 0.9x. Just for reference, if something trades at 2x EV/CF it’s generally considered “dirt cheap”, which means that TGL currently trades at “half of dirt cheap” by my math.

Now I don’t know about anyone else, but my personal view is that production under this new deal is going to increase significantly and that oil is going to at least $60 by the end of next year. So, if I have a little patience, it’s not at all crazy to think that in 2022, TGL might be doing something like 13,000 bopd in Egypt with a US$18/bbl netback. That would generate US$85 million (CDN$110 million) in cash flow, which would leave TGL with significant free cash flow, even after its US$10 million/year capital spend commitment and $10 million/year (both for 5 years) bonus payments to EGPC (note that the first $15mm bonus payment will be more than offset by the retroactive nature of the deal once the deal is ratified by parliament in H1 2021). I believe that’s a “when” not an “if” given TGL’s long presence in Egypt, its strong relationships with the government and regulatory bodies there, and the amount of time and care taken by both sides in crafting this landmark deal. My “modest” (?) growth case above would have TGL trading at 0.6x EV/CF by the end of next year if the stock is still CDN$1.14. For that reason, I strongly suspect that the share price will change to my benefit over the coming quarters. If TGL can even get to a 2x forward EV/CF multiple, I think I’m going to be looking at a CDN$3 stock by this time next year, maybe a lot sooner depending on how fast the market picks up on it… and at that price, TGL would still look cheap given its growth rate and free cash flow potential. At 3x EV/CF the stock would be worth some $4.50/share and almost nothing trades with a 3x multiple out there any more unless there is something very wrong with it… and from what I can see there is absolutely nothing wrong with TGL…

So, yes, Virginia there is a Santa Claus… and this year Santa has put a nice chunk of TGL in my portfolio while tax loss sellers and people without calculators allow me to relieve them of stock at bargain levels. Maybe next year I’ll open it up and see how it has done, but in the meantime I can wait. For completeness, I should point out that I haven’t even discussed the company’s Canadian oil assets in this note, because I don’t have to in order to make my “dirt cheap” case… but that’s not because they don’t have value. I’ll just consider them a free stocking stuffer to look at later…

Happy hunting.

(March 11, 2021: this note has been updated to reflect the author's 2022 production view in light of a since-published capital program from the company, but the math is still based on a $60 Brent price.)

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Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long every stock in this post. (Image credit to Karan Mandre on Unsplash)

Sometimes you really have to wonder if the universe has a sense of humour. 2021 was the Year of the Metal Rat in the Chinese zodiac and, as the story goes, the rat came to be the first sign in the zodiac by winning a race set up by the emperor amongst all of the animals. The rat -- being opportunistic, resourceful, imaginative, and quick-witted -- hitched a ride on the back of the ox across a river and then jumped off the back of the ox to cross the finish line first. If you didn't have your wits about you in 2020, it was easy to get whipsawed, but opportunities were plentiful if you were quick.

The fact that the ox -- dependable, unyielding, methodical, and conservative -- follows the rat, seems appropriate given my feelings about 2021. If a person managed to have some rat-like characteristics in 2020, there was surely money to be made, and I'm feeling that 2021 could be rewarding simply by being ox-like and staying the course. For me, that course consists of a healthy dose of energy and materials, aka "rocks, trees, and dirt". Energy and materials companies have both been out of favour for a long time, more or less in survival mode, but are now getting visibility on generating significant free cash flow as commodity prices across the board recover. This is the natural order of things when it comes to commodities. The boom years make you forget all about the busts. I've made my case for things like oil, gas, copper, and nickel in the recent past and see no reason to change my views, other than the fact that I might add uranium to that list. Nothing goes straight up, but I feel good about the underlying combination of macro trends and historic underinvestment in energy and materials, pretty much across the board. Being an ox next year will mean being conservative and committed to the hunt for value, with a healthy dose of determination when it comes to trying to ride a resource bull market without getting shaken out. With the large US investment houses only recently calling for a commodity bull cycle, the money has only started trickling in as most funds (and banks) have decimated their resource expertise over the last few years. I haven't heard about any new mining or energy investment funds opening up yet and, if I'm right, the coming years will see plenty of those funds during the scramble for materials as the effects of the Great Restart ripple through the market. As Frank in our office likes to say, "I'm trying to stay focused on the destination, and not worry too much the journey". That's a very hard thing to do, but if any conjured animal spirit can do it, it's the Metal Ox.[urcr_restrict]

Being an ox isn't going to mean that I'm going to don my blinders and ignore risks. In fact, an ox is less likely to devote much time or energy to wild speculation and is drawn more towards paths to value. The long term trend in copper is undeniably bullish in light of the electrification theme and aging existing mines. Same goes for nickel for the same reasons. Oil and gas companies, while out of fashion, do remain the lifeblood of modern civilization... and while they might be "the new tobacco", they are going to continue to supply the products demanded of them by the market for decades to come.

Uranium equities are showing signs of life, which may be foreshadowing a coming (and long overdue) move in the physical market. As an aside, current uranium prices are a joke relative to what it costs to bring new supply on... and demand keeps rising. It's a completely unsustainable situation globally, and every so often the dam bursts when utilities scramble to secure supply for long-term contracts. Utilities like to try to negotiate hard over uranium prices, but given how minuscule the cost of fuel is in the grand scheme of a nuclear power plant, they don't have a leg to stand on. It takes a long time to bring on new uranium supply and when you need it, you'll pay what you have to in order to get it.

All in all, I'm trying to balance a basket of producers, developers, and exploration stories in the resource sector with emphasis on the first two. I see plenty of value out there in the resource sector at current commodity price levels, never mind where I think those prices are going, which makes me feel optimistic about the year(s) ahead.

Energy

As I close out 2020, Touchstone Exploration (TXP.TO, last at $2.06) has been a wonderful performer. When the sh*t fully hit the fan in March and April, TXP was one of the names that I really stuck to... and once the smoke started to clear in May, the stock never looked back. With the stock up over 400% from its lows, prudence has me reducing my position in TXP as I look to diversify some of those dollars into other stories. To be clear, I love TXP. After running some cash flow numbers based on an assumed project plateau of 200 mmcf/d and a TCF of gas in hand, I land around CDN$75mm of after-tax cash annual flow net to TXP, most of which would be free cash flow -- outside of a few exploration wells a year and G&A expenses. TXP's current enterprise value is about CDN$400mm and I think a dividend yield of 10% (assuming TXP pays out $60mm a year in dividends once at plateau rate) would put TXP at an EV of CDN$600mm. At a 5% dividend yield, TXP could look at an EV of as much as $1.2B. All of that is putting the cart a little before the horse as this stage though (my assumptions far exceed current "known" capacity and volumes), so I don't mind taking some chips off the table to see what takes shape with the remainder. Among other things, TransGlobe Energy (TGL.TO, last at $1.10) has been a beneficiary of my TXP dollars recently as I look for stocks with clean balance sheets and good leverage to oil prices. I wrote a note on TGL recently and had the chance to catch up with management in the past week. Everything is as I thought it was. Even after the recent price move, I think that Transglobe may be the cheapest oil stock in the market, period. Usually that is for a good reason, but that is no longer the case for TGL. The new "Petroglobe" deal, which consolidates three PSCs (production sharing contracts) into one, extends the term significantly, and improves netbacks significantly, is truly a game changer. The consolidated contract will have a new 15+5 year term (a significant extension) and the netbacks on the barrels produced during that term are far more valuable than they were under the old contracts. Because of those two changes to the PSC, a larger portion of the ~600 million barrels of the original oil in place (OOIP) is now economically recoverable, adding some 60-80 million barrels of potential on top of the pre-existing ~26 million barrels of reserves. TGL has only 72.5 million shares out, giving it a market cap of CDN$80 million, with ~CDN$17 in positive working capital (i.e., a CDN$63 million EV). At 11,000 bopd (i.e., stabilizing production in 2021 before shifting to growth in 2022 and beyond), Egypt alone should cash flow ~CDN$70 million at $50 Brent (Brent is currently at $50.75). That puts TGL at less than 1x EV/CF. If I imagine a $60 Brent world in 2022 and assume modest production growth of 20-30%, I see TGL getting close to CDN$120 million in annualized cash flow. Historical capex in Egypt has run around US$30 million per year (call it CDN$40mm), which leaves me to conclude that (sometime in 2021) the market will have visibility on TGL generating free cash flow on the order of "multiple tens" of millions a year, depending on how much capital they want to spend. If I peg that "multiple tens" of free cash flow at CDN$40 million in 2022, I don't think it's crazy to imagine TGL trading at a 10-20% free cash flow yield (cash that would be available for dividends, something that TGL would like to reinstate), which would imply a share price in the CDN$3-6 range. I'm not sure when the market figures it out, but I have faith that it will, and spreading my TXP winnings into something that I feel as comfortable with as I did with TXP at 40c (after the Cascadura discovery) feels good to me. TGL's "Cascadura moment" was the renegotiation of its Eastern Desert PSCs, and while it didn't involve the drilling of a single well, the impact of the deal is equally material in my eyes. TGL should see its new deal ratified in H1 2021, which might be the "ah ha" moment for the market, but I see little risk on that ratification given TGL's long and respectful working relationship with EGPC and the government. Keep in mind that I simply "ignore" TGL's Canadian assets in my discussion above, but they are not a zero. If I can base my case on Egypt alone and get Canada for free, all the better. In time, I think the market comes around on this... in the meantime I can wait.

On the domestic side, I'm keeping it simple with names like Tourmaline (TOU.TO, last at $16.99), Birchcliff (BIR.TO, last at $1.84), Advantage (AAV.TO, last at $1.77), and MEG Energy (MEG.TO, last at $4.30). I own the first three for their natural gas leverage while keeping an eye on the weather (January is going to be important for the "seasonal" gas trade). MEG is by far my most leveraged oil name (aka highest balance sheet risk), but MEG has significant tax pools and a concentrated asset base that could make it an attractive take-out target next year. I still own my Altura (ATU.V, last at $0.12) as a bet on a quality oil asset with high torque to the oil price run by a very conservative, capable, and highly vested management team and have a nice chunk of Tag Oil (TAO.V, last at $0.215), which has been creeping higher as of late as it hunts for a deal in the Middle East/North Africa region. I'm thinking of adding other Canadian energy exposure, but am staying a little cautious for now in case oil decides to dip before it rips.

Uranium

Although the uranium price hasn't moved much yet, a look at any uranium equity chart will tell you that the market is anticipating a price move, and usually the market gets what it wants, so I've got one foot in the water there (i.e., more than a toe). My biggest bet, representing the best undeveloped uranium deposit on the planet, is on Nexgen (NXE.TO, last at $3.46), with other positions in names like Denison (DML.TO, last at $0.73) Encore Uranium (EU.V, last at $0.85), Azarga (AZZ.TO, last at $0.265) , Global Atomic (GLO.TO, last at $1.06), International Consolidated Uranium (CUR.V, last at $1.32), and Uranium Royalty Corp (URC.TO, last at $1.22), with a dash of out-of-the-money calls on Cameco (CCO.TO, last at $17.13) for mid-2021. In aggregate, I'm probably 5-7% uranium on any given day. I'm not going to get into all of the reasons why I think nuclear is a critical part of the world's energy future for the next 50 years, but anyone that looks at the numbers involved, in terms of the joules of energy that modern society needs to function, will see that there is just no way we're doing that with windmills, solar panels, and batteries... especially where the sun doesn't shine enough and the wind doesn't blow. Just for perspective, in Canada, electricity only represents about 20% of the total number of joules of energy that the country uses in a given year. Refined petroleum products provide about 40%, with natural gas providing about 35%. How are you going to get the electrons to power cars, devices, and machinery if you don't want to burn hydrocarbons to do it and/or have massive redundancy in the system? We are talking about tackling an amount of energy use that is nearly four times the scale of the current electric end-use demand. Of the renewables, hydroelectric provides great base load power and the only other carbon-free base load power source ("niche" geothermal aside) outside of that is nuclear. You can poke around at the state of the industry and the power it provides, here: https://www.world-nuclear.org/information-library/current-and-future-generation/nuclear-power-in-the-world-today.aspx. The nuclear folks are pretty realistic about the state of the energy market. Maybe public opinion mighty finally come around as well. Even without western public opinion onside, there are nearly 100 new reactors planned around the world, mostly in Asia, so nuclear will be around for a long time. For the right here and right now, I'm keeping an eye on the uranium spot price and for news of financial players entering the market.

Base Metals

I don't have much new to say about base metals. By now, copper and nickel should be two of the most well-known ways to play the electrification theme, but so far I'm only reading about copper and almost no one is talking about nickel. That's interesting because nickel is at a 52-week high and looks set to test its 5-year high of ~$8/lb, which I think it will leave in the dust. High-quality nickel projects are far more difficult to find than copper and projections I've seen talk about needing to increase nickel supply by some 50% over the next ten years to meet demand from electrification, and that's a tall order for nickel. Honourable mentions to the rare earths, lithium, manganese, metallurgical coal, and zinc, but there's only so much a guy can write about and it's all part of the same theme of new demand catching up with underinvestment.

I've got some Teck Resources (TECK.B.TO, last at $22.87) given its status as the "go-to" name for generalist managers looking for metals/materials exposure, and my biggest copper bet is on Copper Mountain (CMMC.TO, last at $1.80) for its leverage to copper (and gold) and cheap valuation relative to its NAV. I could drone on about CMMC for some time, but to me it represents exactly what I want in a copper producer right now and I think it comes at an attractive valuation. I probably own half a dozen other smaller coppers, but this is getting long already, so I'll just give honourable mentions to Dore Copper (DCMC.V, last at $0.91) and Foran Mining (FOM.V, last at $0.68) as potential "rebirth" stories that I like.

For nickel, it's still FPX Nickel (FPX.V, last at $0.68) and Talon Metals (TLO.TO, last at $0.38) rounding out my top two, followed not far behind by SPC Nickel and Magna Mining, both of which should be trading in Q1 2021. I have some Palladium One (PDM.TO, last at $0.245) which is a Ni-PGE combo story depending on the project/area. It's hard to get nickel exposure, so my nickel stocks are all quite specualtive... TLO is the largest by market cap which counts for something on its own and it does have the kind of high grade nickel that the market likes to see. FPX is still really, really, interesting to me. A multi-decadal asset with ~$3/lb nickel production costs... nickel which, as the story goes, would not need to be smelted in order to get to a battery-ready product.

Silver and Gold

Silver is interesting because it has a dual "precious/industrial" personality. Silver is used in solar panel production, so enough said there about the market's potential excitability on the metal, but it also trades along with gold as a store of value. On silver, Gatos Silver (GATO.TO, last at $12.22) recently caught my eye as a new kid on the block and I like the smell of it, but would like to get it cheaper if I can. In gold, Premier Gold (last at $3.14) and New OroPeru are really my two main names, with a dash of Karora Resources (KRR.TO, last at $3.96) on the side because of 1) its attractive multiples, 2) its recent reserve update, and 3) recent drill results at Spargo's Reward. Premier is currently the beneficiary of Equinox's attention from an M&A perspective, and I like the Nevada spinco here quite a bit, so I'm sticking around. I made the New OroPeru (ORO.V, last at $2.99) case earlier this year (and a couple of times afterwards) and I still like this one a lot. As a bolt-on or a standalone, the Tres Cruces project is one of the cheapest gold resources (3.2mm ozs M+I+I) that I am aware of in the market today given its quality. The deposit has a low-strip oxide cap that will be a veritable windfall (say, USD$1000+/ounce margins on 300,000-400,000 ounces... both guesstimates on my part) for whoever develops it, without even considering the underlying ~3 million ounces of sulphides that are open to depth. I say "whoever develops it" because I just can't see a deposit of this scale and this quality, with as much exploration potential as it has at depth, sitting out there for long. M&A is starting to tick up in the golds and ORO is like an antique lamp sitting on the shelf, forgotten by all but the most elephant-minded shoppers. Barrick has a role to play in how this all resolves through its Lagunas Norte mine, which was rumoured to be for sale as per an article in the Mining Journal in early November, so I guess we'll see what transpires. With a little polish, ORO could shine some more.

Dividend Payers

In a market like this, it's easy to forget about value, but I do try to keep some industry bellwether names around like Enbridge (ENB.TO, last at $41.13) and Nutrien (NTR.TO, last at $61.16). I get paid to wait, and these are huge, well-established companies with a history of dividend growth so I like owning them if we're going into a broad-based old-fashioned commodity bull. TECK.B falls into this category as well, but it just happens to also be the market's go-to "materials" stock. I'd like to think I will one day own some CNQ, but I guess TOU is my CNQ these days and I have no lack of energy exposure.

Bitcoin

Yep, I broke down and bought some of Canada's newest bitcoin ETF QBTC.TO (last at $38.52) a few weeks ago and am just sitting on it. They say bitcoin is "millennial gold", so I figure I have to have a little in case its goes crazy and I'll leave it at that. It's a tiny weighting, but it's there... just in case bitcoin goes to Tulip Town... again.

Crazy Tech Ideas

Being a geologist puts me at a certain disadvantage when it comes to evaluating tech stories, but it doesn't stop me from trying. Maxar Technologies (MAXR.TO, last at $43.88), while bumpy, has been good to me and I still like the space theme so I still like it. Few companies have the technical capabilities (space robotics, earth observation, satellite construction, space propulsion, and space infrastructure) and relationships like Maxar, and the space biz is expected to grow significantly over the coming decade. Maxar specifically should transition to being a free-cash-flow-generator in H2 2021/H1 2022. It trades around 9-10x EV/EBITDA.

Poet Technologies (PTK.V, last at $0.71) is a semiconductor/chip stock that I've followed for at least a decade. They've been working in a field called photonics, which is basically using teeeeeny-tiny lasers on chips to send information around in a computer. PTK's technology allows for very high data transfer speeds, at a lower cost, and by using less power than the current industry standard for the particular component that PTK has developed, called an interposer. This has far-reaching applications in data centres and communications applications, but I've heard that story before. The thing that really gets me with PTK is that this team has been through this development and commercialization process several times in the past and this time, they have a JV with one of the largest chip manufacturers in the world (Xiamen Sanan) to commercialize the technology. I mention it today because the stock is moving on volume and I respect charts when it comes to breakouts.

The last one is a company called Versus Sytems (VS.C, last at $15.62). Having seen what's been going on in the online advertising space, Versus looks to me to be the right story that was just waiting for the right time. I met with the Versus team a couple of years ago and was really impressed by the team and technology, but the market never really cared. Versus is rewards-points-meets-real-world-prizes that players/participants play for. This e-advertising sector is all the rage as consumer spending and entertainment habits change and companies want to get into those channels without generating negative goodwill... and playing for prizes by choice is more likely to generate positive goodwill, if anything. Coming out of the gate, Versus has a multi-year alliance agreement with Sparx Technology to integrate the Versus real-world-prize platform into Sparx's existing fan/viewer engagement platform (Sparx is a firm that counts the NBA, NHL, MLB, NBC, ABC, Disney, and CNN as its clients). VS is a crazy stock as it has been rolled back 16 for 1 recently and is getting ready to "go to the show" with a full NASDAQ listing imminently. Let's see what the U.S. market thinks of it once it's live and trading there. Recent performance in, and focus on, the sector has me optimistic about the prospects for VS going forward, but I'm rolling the dice here.

I could go on, but if you're read this far, you've already attained ox-like abilities in your endurance, so thank you. That about does it for 2020... all the best in the New Year and, as always, happy hunting.

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Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long TXP.TO, POE.V, and TGL.TO

At some point, I'll write a longer note on my broader market thoughts, but generally speaking they haven't changed. I like materials (especially copper and nickel) and energy in pretty much all forms, with a shot of gold on the side in select stories where I think there's value. The U.S. dollar index is under pressure and the reflation trade appears to be "on". The market is full of liquidity these days and it's looking through to the other side of COVID and it's liking what it sees. Pent up demand, massive inventory restocking, infrastructure investment, and stimulative fiscal and monetary policies globally all bode well for materials and energy. It could be quite a party once the COVID cuffs come off. For those who would still poo-poo oil, my thinking on that sector is coming around to being quite bullish given the massive disconnect between energy stock valuations and the actual outlook for oil supply/demand in 2021 and beyond. If you haven't noticed, the energy world has changed... and this time when prices are ripping higher as the world goes on a post-COVID party boat cruise, the big energy companies will be much slower to respond with supply. Things like dividends and debt repayment are now more important than production growth. Capital will be more constrained and cautious... and there's less of it to go around because right now cash flows are still depressed. The psychological impact of what energy companies have just gone through will leave a mark on any oilman and that will keep capital budgets conservative for a while. Eventually, the whisky might start flowing and we drown ourselves in oil again, but first the boom. Anyone who's been around oil for a while knows that the oil market is defined by boom and bust cycles, and we just went through a big bust. Like yin and yang, the boom will follow. EV's? Yes, I know, they're coming; but not in high enough numbers, and not soon enough in the emerging market economies that are going to rip higher on the back of a lower USD and higher commodity prices (never mind in the developed nations as economic activity ramps back up). For perspective, and I've said this before, the global EV fleet (every EV made to date) currently displaces around 1 million barrels per day of oil demand... that's out of a market that is 100 times that size and has grown pretty much every year outside of ones like the one we just had. If the global EV fleet doubled next year (which it won't, it might go up 50%), you might offset another 1 million barrels per day of demand, with no account for the existing natural demand growth in emerging economies. Given the current supply imbalance (we are cutting through OECD inventories at a good clip now), it's looking like the world will be "obviously" behind the curve on oil production by mid-2021. The market is always looking ahead though... and if they are already ripping the cruise lines, Vegas, and airlines, how long do you think it will be until they start ripping oil again? Oil is dead? No, not yet... it'll have one more chance to remind the world of its critical importance to our society. At least that's my two cents on the topic...[urcr_restrict]

First off, Touchstone (TXP.TO, last at $2.20) released results from its Cascadura Deep well, logging a total of 1,315 feet of pay across several zones within the Cascadura structure, including some new ones. Due the abundant high-pressure gas up-hole, the company just didn't have the horsepower to drill to the targeted total depth, but when you have to stop drilling a hole because you've got too much gas pay to deal with, that's technically not much of a problem from my vantage point. Bottom line, some more molecules were added today with much thicker pay in the well relative to the discovery well. The result doesn't change my view much and I actually trimmed some stock today, simply from a portfolio management standpoint, as this has become a giant position for me after ringing the bell on it in May. I think that no matter what happens from here on out, TXP is on a path that ends with it either (a) being bought, or (b) generating free cash flow like crazy once the Cascadura-Chinook field is on stream. At this point I really just don't have the information required to even ballpark where TXP sits in terms in terms of resource potential but Cascadura seems to be heading towards the higher end of the reserve report range and Chinook seems to be on the same general spectrum (i.e., "hundreds" of BCF) in terms of size potential. Chinook should be tested soon (testing is expected to start later this month) with results perhaps in late December or January, by my best guess. I'm still waiting for a gas sales agreement with NGC and to see Coho on stream, but all in good time I suppose. Royston will still be hanging out there as the next Big Target for H1 2021 (Q1?) to keep the market's speculative juices flowing and remember that Cascadura Deep is still on the table, including the potential relationship of that deepest target to the gas pay found in the lowermost zone at Chinook (which would add even more scale). Overall, it sure seems like TXP is going to get to a TCF at Ortoire, so it's all going to come down to commercial terms and optimal production rates to determine what it's worth, so I really want to see those commercial terms just as much as more gas molecules at this stage... though the molecules are most welcome anytime.

Coming back to oil, I recently found myself looking for cheap oil and ending up doing some dumpster-diving with Pan Orient Energy (POE.V, last at $0.72) in Thailand and TransGlobe Energy (TGL.TO, last at $0.83) in Egypt. Both companies showed up as being absurdly cheap and I guess I was in the mood to relieve some tax loss sellers (I presume), of their stock. A win-win for all involved, right? Christmas really is the most wonderful time of year, in more ways than one.

My thesis on POE is very simple. After blowing its brains out drilling exploration wells in Indonesia (which cost me some money personally), POE has just been chipping away at its onshore oil pools in Thailand. The market cap is circa $38 million and the company has $30 million in positive working capital, meaning the market is valuing its assets at $8 million. What are the assets? A 50.01% interest in a small oil field currently doing 1,800 bopd net to POE with net 2P reserves in the 1.8 million barrel range. The net after-tax NPV5 and NPV10 of those 2P barrels is $49 and $44 million respectively. The net 3P NAV (~3.8 mmbls) has an NPVAT5-10 range of $94 million and $79 million respectively. Remember that these assets are currently valued at $8 million. Also consider that those reserves volumes and values were determined (a) before POE established that it had an active water drive in its L53-DD oil field (which helps recovery factors and thus oil reserves) and (b) before POE renegotiated its sales contracts, significantly decreasing (nearly eliminating) the company's realized discount to Brent on its oil sales. Add in the water injection that POE says will save $2.4mm/yr in operating costs and I think POE's NAV is going to go up in early February, after which I think there's a good chance that POE looks to sell the asset and re-invent itself. POE has consistently sold assets in Thailand at values far in excess of what might be possible in Western Canada and I think that's important to remember. Even if POE could get to 0.5x NAV, and assuming that I should be thinking more about something closer to their 3P 2019 numbers than their 2P, then I could see a pretty easy 50-75% of upside in POE before I have to think about its valuation again. I realize that's not that exciting, but I'm okay with that. I think my risk-reward is highly skewed and I'll see what happens. By February, maybe oil will be cool again. It's a small position for me, but I like the bet.

Wow, TGL was a bit of a windfall this morning, even if it it did close on its ass (i.e., near the lows of the day for those not familiar with that lingo). I've followed TGL for a long time. It's a well-established operator in Egypt and the proverbial Rodney Dangerfield of international oil stocks. The company is conservatively managed and operates very professionally given its size. It had just started paying a dividend before COVID hit. I've witnessed TGL go into the ditch and rise to life many times since I've followed it, but today something happened that I believe truly changed everything for the company. TGL has only 72.5 million shares outstanding and no less than 24.4 million of them traded hands today. That's insane. Why the sudden interest? In two words. Contract renegotiation. TGL has talked for YEARS about the hope that one day it could consolidate its Eastern Desert oil concessions into one new concession agreement with better fiscal terms and financial incentives for more intensive development... and today they got it. Before today, TGL's reserves were truncated/hampered by project life and economics that were prohibitive to TGL investing in enhanced recovery schemes (like waterflooding and horizontal drilling in existing fields). There are huge volumes of oil in place (OOIP) on TGL's lands, so increasing the recovery factor on those barrels yields big volumes of reserve potential without having to go looking for it. To that end, TGL flagged some 59 million barrels of contingent resources that it will now consider for potential development under its new concession agreement. Of those 59 million barrels that this new agreement puts into play, the company has already technically matured 20.5 million barrels to development-pending status, which I believe should translate into their reserves once the new concession agreement is ratified. Keep in mind that brownfield development/modernization is a huge push in Egypt right now, so this is a win-win for all involved. Also keep in mind that TGL's Egyptian reserves in these concessions before today was 26.3 million barrels; so calling this deal transformational would not be an overstatement of its significance. You know what else is transformational? The fiscal terms. The estimated impact on netbacks is significant. At $40, $50, and $60 Brent, corporate netbacks are set to increase by US$5-7, US$7-9, and US$9-11 per barrel respectively. That's on top of prior netbacks of US$2.50, US$6.10, and US$8.30 per barrel at those same price levels, resulting in "new" netbacks of US$7.50-9.50, US$13.10-15.10, and US$17.30-$19.30 per barrel at $40-50-60 Brent (Brent is currently over $48/barrel, with some bold forecasters calling for $60 in H2 2021). Those netback numbers sure seem better, right? Oh, and this deal is retroactive to February 2020, which means that TGL should (may?) be able to offset the $15mm upfront bonus payment, at least partially, through higher netbacks on the oil it has already sold over the last 9 months (that's an interpretation on my part, though not integral to the case I'm making here). In the following 5 years, TGL is to pay the Egyptian government $10 million per year as part of the contract renegotiation. It's an elegant way of letting both players split the much bigger pie that results as a product of the new deal. At current production rates, the cash-flow impact of those bonus payments is about $2.50/barrel, but I expect production rates to go up by at least 30% in the next year, so that $2.50/barrel probably drops to less than $2/barrel in short order. When you stack it all up, it looks like a very good deal and my bet is that it'll show up big-time in the updated reserves values when they come. So what's it worth? TGL has 72.5 million shares out and an enterprise value (EV) of about CDN$42 million (US$32 million) at its closing price today, so I'm simply going to say that I think it's worth quite a bit more. I've ignored the company's Canadian assets, which are not worth zero by a long shot (especially South Harmattan), because I just don't have the time to dissect them right here and right now. If I assume Egyptian volumes increase to 14,500 bopd, which I don't think is even remotely a stretch, and run it at $60 oil, I get little giddy with the numbers, but they're too preliminary to print. I may be missing something in my cursory review, but on the back of today's news, TGL now looks like one of the cheapest oil stocks that I've come across in recent memory (and I thought it was cheap before the news). Keep in mind that my view is very preliminary here, but I'm trying to get a handle on this so that I can prepare-to-compare my thinking with what the analysts say about it tomorrow; or perhaps I should say, analyst. Charlie Sharp at Canaccord U.K. is the only one covering the story that I know of, so I hope to see a note out of him tomorrow, or early next week, once he's had a chance to run this through a proper model.

That's a long note for something that was supposed to be quick. Happy hunting.

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(Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long TXP.TO)

While the market whips around like a firehose with no one holding the nozzle, I've been trying to balance defensive moves (reducing non-core positions and staying cash-heavy) with sound judgment (when a stampede is coming, you best be jumping up into the closest tree). Playing defence at a time like this is important to avoid capital destruction from "beta" names, but so is patience when it comes to getting paid for being right on "alpha" calls, which brings me to Touchstone Exploration's (TXP.TO, last at $0.63) news today.[urcr_restrict]

I'm short on time, so for anyone that hasn't been following along, just click the "blog" tab along the top of the page and scroll back through a few months of posts to get up to speed. In a nutshell, the second zone tested in the Cascadura-1 gas-condensate discovery maxed out the testing equipment (as did the test from last month in the lower zone); flowing at an average rate of 28.1 mmcf/d and 783 barrels/day of associated condensate (55-degree API) over the final 24 hours of a 49-hour testing period. Flowing pressure was 3,578 psi through at 40/64" choke at an estimated 13% drawdown, which is as "beast-like" as the first test. Overall, the well is expected to be capable of initial production rates between 40-50 mmcf/d of gas and 1,100-1,400 barrels per day of liquids (7,750 to 9,700 boepd). At this stage of the game, the Cascadura test results put the discovery right on par with Aventura's discovery of the nearby Carapal Ridge gas field in 2001.

Recall that TXP has an 80% interest in this discovery and are partnered with Heritage, which is the reborn version of PetroTrin, the state-owned oil company in Trinidad and Tobago. Also recall that Trinidad is short close to 400 mmcf/d of gas onshore for industrial users, so this discovery comes at a good time for all involved. Heritage has apparently been making overtures toward being able to help with getting facilities planned, approved, funded, and built, (presumably in exchange for some kind of offtake for the gas molecules?) and I think all of that can happen relatively quickly given that the discovery is just 3 kilometres from pipe in a gas-starved market.

In this coronavirus-obsessed whipsaw market, I can't say what the market does with this news, but the news could hardly be better, so I could care less about what happens in the next hour, day, week, or month. In Indiana Jones-like style, Touchstone raised the cash it needs to complete the balance of its exploration program just before the market window closed in February and it now expects to spud the Chinook-1 prospect, one kilometre south of the Cascadura-1 well in mid-Q2. Chinook-1 is targeting the same sands in a (separate) fault block adjacent to the one that hosts the Cascadura discovery.

I can't predict what this market will do in any minute of any day right now, but I have little doubt that TXP has discovered something of value, close to infrastructure, in a market that desperately needs its product. The rest is just details. Additional exploration success at the Chinook or Royston prospects will only add more fuel to the fire, but as it stands, TXP is on track to impress based on Cascadura alone. Folks who are interested should study the history of Aventura Energy, because there's a reason why they say that history repeats... and in the video below, CEO Paul Baay is already talking "hundreds of BCF", which should be quantified a little further once test results and pressure data are married with geophysics in a month or two. In any other market I think the stock would already be trading at twice the price, which is where the patience part comes into play...

Happy hunting.

https://youtu.be/rZAXHl5FuPw

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Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long TXP.TO

It's Christmas in July today as Touchstone Exploration (TXP.TO, last at $0.96) reported its maiden Cascadura reserves estimate overnight... and it did not disappoint. In fact, the reserves numbers beat every estimate I have seen in any TXP reports to date, including my own, which are usually realistic-but-optimistic, so it's a solid beat all around. The stock is up 17% in London on over 1.5 million shares traded as I type this; about an hour before the North American markets open.

I don't have a lot of time this morning and I've made some straw-man estimates before on what I believe the range of outcomes for TXP could be in a variety of scenarios, depending on what happens with the upcoming Chinook and Cascadura Deep wells (link to it here). What I will point out is that my prior valuation assumptions were based on 200 BCF of net 2P reserves for Cascadura, which turned out to be 234 BCF (plus 6 mmbbls of associated liquids). I don't think anyone really believed my estimates/assumptions when I posted them, but it's nice to see some confirmation from a quality firm like GLJ, and I think that today's reserve report should serve to set a foundation under the stock as the company heads into drilling again over the next "few weeks". [urcr_restrict]

Even if I was to use the industry rule-of-thumb of "a buck an M" (i.e., $1/mcf of gas) valuation on Cascadura, I would get to about C$1.25/share (using 183 million shares out) on the 2P estimate. That's assigning zero value for the Coho discovery, zero value for the company's oil assets, and zero for any exploration upside. Enough said.

One final point that I always like to talk about when it comes to TXP is the tiny "future development capital" (aka FDC) associated with this reserves estimate. Again, focusing on the 2P (Best Estimate) case, the FDC for Cascadura is only $15.8 million. What that means is that if you put another $15.8 million into drilling development wells (recall that TXP is just 3km from pipe and that it appears that NGC will pay the tie-in costs), you get out a net before tax NPV10 of $519 million. Undiscounted, the net 2P before tax cash flow is $970 million. This is from an incremental investment of less than $16 million. Now, the tax rate in Trinidad is high, so before tax numbers aren't what you want to hang your hat on, but I think I've illustrated my point. This is a situation where very little capital needs to go into the ground to unlock a huge cash flow stream. This is the "wall of cash" that CEO Paul Baay keeps referring to in his interviews. If you've ever wanted to understand the concept of free cash flow, TXP is a pretty good example. The cash set to come at them literally dwarfs the capital requirements needed to get it out of the ground and to market. I think that's a very important distinction when it comes to understanding Touchstone. Holders of a stock like Canacol Energy (CNE.TO, last at $3.76) in Colombia will remember how long, and how much money, it took to get that company's gas onstream... TXP has the potential to be like CNE on super-fast-forward. I like the set-up here a lot.

I'm out of time, so I'll just quote a couple of lines from the TXP press release below. It's a good day for TXP holders and a good day for Cascadura. Here's hoping for more of those ahead.

https://www.touchstoneexploration.com/wp-content/uploads/2020/07/July-20-2020-06-30-2020-Cascadura-Reserves-TSX-FINAL.pdf

Cascadura Reserves Report Highlights

Gross Discovered Petroleum Initially-in-Place ("DPIIP") is estimated to be between 571.5 Bcf of natural gas in the High Estimate and 241.2 Bcf in the Low Estimate, with a Best Estimate of 398.5 Bcf. Company working interest 3P reserves of 73,190 Mboe (85% recovery of High Estimate DPIIP), 2P reserves of 45,030 Mboe (75% recovery of Best Estimate DPIIP), and 1P reserves of 23,622 Mboe (65% recovery of the Low Estimate DPIIP). Net peak production is estimated to be 22,600 boe/d in the 3P forecast, 15,108 boe/d in the 2P forecast, and 10,266 boe/d in the 1P forecast. Estimated before tax 3P 10% discounted net present value of future net revenues ("NPV10") of $802.9 million, 2P NPV10 of $519.2 million, and 1P NPV10 of $287.7 million. Net future development costs associated with the development of the Cascadura Assessment Area is estimated at $11.6 million for 1P reserves and $15.8 million for both 2P and 3P reserves. 

James Shipka, Chief Operating Officer, commented:
"GLJ's independent evaluation of the Cascadura-1ST1 production test results and the subsequent reserves evaluation of the Cascadura Assessment Area confirms the tremendous potential of the Ortoire exploration block. The Cascadura Reserves Report combines both the pressure and flow testing of the Cascadura-1ST1 well with the 3D seismic data which covers the entirety of the Cascadura structure as we now understand it. The team is currently working hard to design the facilities and infrastructure required to bring the Cascadura gas and liquids to market as quickly as possible, and with GLJ estimating there is in excess of 500 Bcf of discovered natural gas in place in the Cascadura area, it is evident that we have a clear pathway to a multi-year development program."

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(Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long every stock in this post, except for FCX, BHP, RIO, and PHO.TO)​With 2019 and its lessons fading into the fog of market history, I think there’s reason to be optimistic on materials, energy, and gold going into 2020. I say that based on a nascent coordinated move higher in oil, copper, and gold on the charts, combined with the fact that many of the big investment banks are calling for the same. Oil is comfortably over $60, continuing its move higher in the face of “prevailing wisdom” (last night's geopolitical events don't hurt the case either), and all of a sudden Canadian energy names are becoming more popular as the market starts to look for defensible value within a relatively expensive broader market. Likewise for the miners. Copper is showing signs of life for the first time in a long time, which has taken copper-bellwether Freeport (FCX.US) up over 50% from its October lows (BHP, RIO, and TECK are all up ~20% over the same period). And then there’s that gold quote. Gold has definitively moved up through the psychologically important US$1500 level again, and it’s notable that the yellow metal held in as well as it did in the face of a relatively strong dollar during most of 2019. I get the sense that gold exposure is still minimal for the broader investing public since there is no sense of urgency out there when it comes to the golds. Increased interest, yes, but no real sense of committed bullishness. That’s a good thing, because if this gold move is for real, it could have a long way to go.[urcr_restrict]Now, I am by no means suited to making macro calls on anything, but that doesn’t stop me from making some general observations as I rummage through the far-from-popular Canadian resource market. For one, when you spend as much time watching the market as I do, you realize that supply, demand, and inventories are factors in all commodity markets, but they are not everything. Given that commodities are generally priced in U.S. dollars, a strong USD tends to push the prices of commodities down, while a weak dollar tends to send them higher. The dollar is like the tide in the ocean, it moves the prices of all things, typically with a non-disruptive rhythm; but when the tide comes in or goes out, you can’t help but notice. Certain things can and do swim against that tide, driven by factors like acute supply and demand issues, or unexpected disruption, or discovery, but things are definitely “easier” when the tide is going with you. To that end, I always keep an eye on the U.S. dollar index (aka, the DXY), the same way a farmer might watch the horizon to see if he can get any clues as to today’s or tomorrow’s weather. Now, the DXY topped out at just over 99 in the second half of September and has been trending lower since, breaking chart support and falling below 97 for the first time since July. At least part of the reason for the DXY weakness is the fact that the Fed has said it is on hold with respect to interest rates until it sees sustained evidence of inflation in the economy, which is pretty much a green light for commodities to rally. When I see that, in conjunction with coordinated upwards moves in gold, copper, and oil, it makes me think that much brighter days could be around the corner. It’s the end of the holiday season and markets are thin, so I’m not reading too much into things yet, but I’m intrigued. Oil. No one likes it. Almost no one owns it. The world is awash in the stuff and we won’t need it in ten years because everything is going electric. That about sums up consensus thinking over the last four years or so, and it’s been the right call for those who have avoided the sector. But just because sentiment shifted so far to one end of the spectrum with respect to energy stocks doesn’t mean it’s rational or warranted. What people don’t talk much about these days is that oil demand is on track to be in the range of (a record high) 101.5 million barrels per day in 2020, up over a million barrels per day from 2019 levels. Forecasts from various agencies average out to a generally balanced market in 2020 with some predicting supply deficit in the second half of the year. OECD inventories are around the middle of their historical range and U.S. inventories are around their long-term average. Keeping in mind that U.S. shale has been the key driver of global production growth for years now, adding some 4 million barrels per day of supply over the last three years alone, it seems that the winds of change are blowing. Attitudes towards the energy sector have soured, and U.S. shale drillers have had the capital taps turned off, with many facing bankruptcy, and the whole oil sector is undergoing a transformation. Instead of being driven by “growth for the sake of growth”, energy companies are now being driven (at the demand of their shareholders) by things like free cash flow sustainability, dividend payments, debt repayment, share buybacks, and positive returns on capital employed. To that end, these companies are becoming more like “real” businesses, positioning themselves to convert reserves into cash in their shareholder’s pockets first, and only then looking at growth capital programs. The sheer scale of U.S. shale production means that the capital required just to stand still (in the face of a huge production wedge with very high natural decline rates) is enormous, so further oil supply growth from U.S. sources is being questioned by industry insiders and observers. Meanwhile, geopolitical tensions in the Middle East are now significantly elevated and any prolonged supply shock would ripple quickly through the market. On the flip side, there have been huge production losses from Venezuela and Iran in recent years, and if those barrels start looking like they are going to come back to the market any time soon, that could put pressure on prices; but for now, the bias sure does seem to be to the upside, especially in light of recent events. Investors like Peter Lynch and Sam Zell have already pointed to the energy sector as offering good value, and more are joining the chorus as these companies come out of multi-year throughs. Together, I think that all of that makes for an interesting backdrop; certainly not the doom and gloom that’s been the narrative for the last several years. Sure, EVs are going to phase out the internal combustion engine eventually, but with around a billion cars in the world right now, there’s lots of time for oil to remind the market about just how important it is to, well, everything.On copper, I’m a bull until the chart tells me I shouldn’t be (a sustained break below $2.50/lb would have me wondering). For anyone who’s a believer in a green energy future and the electrification of the auto fleet, it’s going to take a veritable mountain of copper to get there. At the very least, I hope that all of the folks that think that the oil market is going to evaporate in the next 20 years are long copper. It takes a lot of copper to build and wire windmills, solar panels, electric cars, and the associated charging and transmission infrastructure, and most of the worlds largest copper mines are tired. New supply will come, but the companies that would bring it online will need to make some money first — these big projects aren’t cheap and take a long time to permit and build. Here’s hoping for a weak-dollar tailwind, but outside of that, perception of a melting trade war could boost sentiment towards the red metal further, or keep it tepid a little longer if the “phase one deal” comes into question. I’ve got my eye on $3.10/lb (just over its 200 day moving average) as a level that would confirm copper's recent apparent breakout and have positioned for that with half-positions across a number of names. Recent events in the Middle East are likely to keep me holding tight stops on my coppers in the near-term in case the market gets jittery about the impact of higher energy prices on the economy, but overall I like the red metal.As for gold, at $1500/oz a lot of the gold companies out there are already generating good cash flow and earnings and the Fed’s stance gives gold pretty much has free rein to float higher. Meanwhile, central bank buying and umpteen trillion dollars of negatively-yielding sovereign debt both appear to be supportive of gold overall, and the dollar is obviously a factor here. Right now, the gold chart is looking good, so here’s hoping that it continues.With that all said, here are a few words on a lot of things; some old and some new. I have cast a very wide net for 2020, so these comments will be generally short and sweet. I'm not trying to overwhelm anyone with this insanely long post, but I want people to get a sense of just how many stories I follow. These paragraphs are just sound bites for those who are interested in seeing some of the names that I spend time on...Advantage Oil and Gas (AAV.TO, last at $2.63)Painted Pony (PONY.TO, last at $0.77)Arc Resources (ARX.TO, last at $8.15)I mentioned these a while back, and this has been a good trio to own over the last couple of months. A update to the way that the gas system in Western Canada is balanced has pulled AECO out of the dark hole that it was in and has provided some confidence that Montney producers will actually be able to get paid for the gas they produce. Condensate has become a hot topic as of late on the back of its high demand as diluent in the west, which bodes well for gas companies with associated condensate production. The Coastal GasLink pipeline and associated LNG export plans from the west coast have served to bolster confidence for long-term thinkers, as has the fact that Montney has been flagged as one of the best hydrocarbon plays in North America. I’m up handily from my buys on all three names and will ride them as long as the trend remains my friend, with stop losses set about 10% below current prices. As they say, the trend is your friend until it ends.Arizona Metals (AMC.V, last at $0.50)This is a relatively recently minted copper “exploration” story in Arizona that I bought a position in on a 40 cent financing that was done in 2019. I added to the position in the market afterwards and look forward to getting some initial drill results in Q1 2020. I use the word exploration in quotation marks because this deposit was given a good poke by Exxon (yes, that Exxon) dog’s years ago and has passed through so many hands over the years that it faded into obscurity through the decades. The current management team did a good job to track the asset down and capture it, and now they are about to start drilling. The deposit doesn’t have a 43-101 compliant resource, but it is a large-looking copper-rich VMS deposit with two “sister” targets located in close proximity to the west of the deposit that Exxon drilled. I like the market cap and the capital structure, and my sense is that the shareholder base will be supportive of seeing the stock trade to higher levels given what’s on the table in terms of potential tonnage and grade. Drilling should be starting soon if it hasn’t already and I think this story could generate hits that will garner attention should copper hang in or grind higher.Athabasca Oil (ATH.TO, last at $0.62)In a word… leverage. ATH consistently screens as one of the cheapest oil stocks out there, depending of course on what price deck you use. As I looked around for what had the most torque to a rising oil price, ATH really stood out for me in terms of its free cash flow yield and discount to its December 31, 2018 reserves value. I think that when ATH updates its reserves values in Q1 2020, the market might do a double take if oil is still looking good. As a result, I’m long stock on this name that used to trade at levels wayyyyyy north of where it is now. It can be a long climb out of the basement and anyone who pulls up a 5+ year chart on ATH will see just how beaten up it is. The balance sheet seems manageable to me and I’m willing to ride this as long as I’m feeling good about oil. Even with its recent move higher, ATH still trades at just half of its last reported PDP reserve value.Altura Energy (ATU.V, last at $0.355)I’ve said a lot on this name in the past, so I won’t say a lot more. Management, management, management. This under-followed oil story just keeps adding production and reserves and will drill the first horizontal well into its new (and potentially Big Deal) Entice play in Alberta in Q1 2020. I have dreams of this growing into a much bigger story over a long time period, which is why management quality is so important to me here. Darren Gee (Peyto) and Brian Lavergne (Storm) are on the board, and the management team also brings qualities from Vermillion and Renaissance to the table. These are high quality people with high quality assets. Leduc Woodbend is already a ~500 million boe (OOIP) piece of business, so scale is not a problem. This story should also have good torque to the oil price, but the real alpha is in 1) the results from the LW waterflood (where I expect to see a pressure response from the first injector in Q4 2020), and 2) proving that Entice is more than just a play concept. I’m insanely patient with this story and it’s one the the cleanest juniors I’ve ever come across. The company hasn’t issued a share since its debut, and given the quality of the recent $10 million deal that management put together to get Entice funded, I think that this “reserves and production growth per share story” is right on track. For anyone serious out there about energy investing, ATU is the kind of story that I can see people rallying behind given that management is unlikely to do anything but prudently and effectively deploy the capital it has available to it in order to grow per-share value for its shareholders. Simple, right?Aurion Resources (AU.V, last at $2.03)Aurion is starting to get a little more market traction lately, rising over $2 recently. Aurion has captured broad market support, added a great new board member in Kerry Sparkes, and continues to deliver intrigue at its Risti project. Well-funded and target-rich, Aurion offers a rare large scale “company maker” exploration opportunity. The market cap is getting up there in terms of exploration stories, but hopes are high at Launi and Aamurusko, so I’m happy to hold some as I wait for that “eureka” moment. It may never come, but this is a district-scale play with plenty of high-grade gold in rocks at surface covering a major fertile regional-scale structure called the Sirkka Shear Zone. There are a lot of eyes on this now, so I think that the stock will move on results if the company has continued success with the drills.Aurora Solar (ACU.V, last at $0.075)I will say very little about this one. I’ve followed it for years. Aurora Solar makes tools that improve the efficiency/quality of output in solar panel production lines. That’s a pretty thin margin business, so ACU’s technology is critical to maximizing profitability. ACU’s tools are used to evaluate furnace performance and resulting cell quality in real time, which represents a new paradigm in solar cell manufacturing. My biggest question here is “how many of these units can they sell”, but their last quarter was their best ever and sales are ramping up big time in China, so I’ll stick around and see if that momentum can continue. It’s likely that revenues will be lumpy, which I’m not a big fan of, but maybe there are some even bigger “lumps” coming down the pipe in terms of revenue in 2020 that might get the market to pay attention, or attract a suitor who could buy this business and bolt it on to their own. I’ve followed Photon Control (PHO.TO) for years and if I was an investment banker I’d be pitching ACU to the PHO board all day long as an acquisition target. ACU is cheap and has good in-furnace sensor technology, so you never know.Colonial Coal (CAD.V, last at $0.375)Coal is hardly in favour. Metallurgical coal however, is simply a necessary component of the steel industry. Colonial has a big met coal project in B.C. that has been pretty much forgotten by the market. Fortunately for Colonial, industry participants who know that met coal is still worth something are paying attention. This is perhaps most clearly evidenced by the recent director addition. I’ll leave it at that. Anyone who looks into the new director (hint: he’s a big deal in the Indian coal scene) may get the sense that this is a story worth following. There is some near-term warrant overhang, but once those warrants are out of the way, things could get interesting as there is speculation that India might come knocking for some met coal in a good jurisdiction in H1 2020. I guess we will see, but this trades at a fraction of its potential NPV so I’ve got some in the boat and count it as my only exposure to met coal. Canex Metals (CANX.V, last at $0.155)This has one of the smallest market caps out of everything I’m holding at the moment. CANX’s Gold Range property in Arizona is the focus here, which has all the elements of a good treasure hunt. Attention was first brought to the area by a group of metal detector enthusiasts who made an exciting “strike” when they found a palm-sized chunk of gold-specimen-worthy quartz vein material just below the surface. Subsequent work revealed adits from Old Timers in the late 1800’s and early 1900’s that were hand-mining quartz veins hosted in metamorphic igneous rocks. Those veins have thus far been found exposed at surface in various areas over a strike length of nearly three kilometres. Some surface trenching has revealed additional veins that span a 10-30 metre-wide corridor that appears to have some relationship to the structural fabric in the area. Vein orientations have been found to be variable with some sets orthogonal (at right angles to) others. There’s one high-grade area called the Pit zone that represents an old pit that some real estate businessmen from California scratched at with an excavator quite some time ago, but there’s never been any methodical modern-day exploration that can put it in any kind of real geological context. I met with CEO Shane Ebert last year and he has a very methodical plan to define and test drill targets within the context of the broader structural/geological model as he works the property. It seems like the system could have some scale to it, but it’s very early days; hence the tiny market cap and implied sky-high risk level. Last I recall, CANX was going to fly a (cost-effective) aeromagnetic drone survey to better define the important structures in the project area. There may be more grab/soil samples coming as well, but that’s neither here nor there at this point. There is high grade (>1 oz/t Au) gold in veins at surface that were once mined by people with pick-axes and the system has some scale to it, so let the exploration begin. CANX holders might be lucky enough to see a drill program start in Q1 of this year, but I suppose that will depend on whether or not the aeromag survey shows anything of potential interest. I suspect it will, so I’ll be keeping a close watch on this one and own some stock. The tiny market cap means that even small bets can make for big returns, but I suppose I could say the same thing about a slot machine in Vegas. I don’t say that to take away at all from the quality of the target(s), or the highly skilled work that Dr. Ebert is doing down there, but at this stage it is what it is — a grassroots target clearly worthy of some exploration work.Cantex Mine Development (CD.V, last at $1.18)After a fall from grace on the back of getting hit by the truth stick, there are some signs of optimism in the air for little Cantex. Fipke has been buying stock in the open market and there is still a lot of drill core with assays pending from the marathon summer/fall program that was recently completed. I still very much like the overall geological picture here but this has become much more of a “hunt” than I had initially hoped for, so I’m pulling in my horns until I have a better idea on the nature/distribution of the mineralization. It shouldn’t take too long to get the next set of assays out of North Rackla, so fingers crossed that they find more of the good stuff. If they do, and it’s far enough away from pads 4, 5, and 6; that could rekindle the hopes of Chuck and Chad having a tiger by the tail up there. The jury is out on this one so risk is high if they don’t deliver as there’s no lack of exploration excitement out there in the market right now, and money can be fickle.Copper Mountain (CMMC.TO, last at $0.75)Capstone Mining (CS.TO, last at $0.77)These are part of my copper basket. Both are producers, both are cheap on NAV and projected earnings/cash flow metrics. I don’t have a lot to say on them other than the fact that if copper goes higher, these stocks should obviously benefit. Both have moved up off their lows and I’ll stick with them as long as the charts look friendly.Cronos Group (CRON.TO, last at $9.30)This is an oddball one for me. For one, it’s weed, which I completely missed the boat on the first time around, but now the story is trading close to a 52-week low despite the fact that it has about $2 billion in cash sitting around. $2 billion could go a long way given how decimated the sector is. Here’s hoping CRON does smart things with that money. Given that Altria basically controls the company through its board representation and equity ownership, I like this as a speculation given that the Altria Group knows how to market and sell things that people like to smoke. The market cap is $3.5 billion, so it doesn’t exactly trade at cash, but just try raising $2 billion for a weed company right now and you’ll see why a war chest like this could pick up some real deals if it starts getting acquisitive. Surely they have their preferred targets already identified. I guess we’ll see. Generally speaking, weed stocks are pretty much in the gutter at the moment so it’s a buyer’s market and CRON has some serious cash to throw around.First Quantum (FM.TO, last at $12.75)Copper again. High Chinese ownership. Cobre Panama is one of the only large-scale new copper projects that consistently comes up in big-bank research as being an attractive acquisition target. I’ve got a tight stop on this one, but I like this as a place to park some money while I think of other, crazier ideas.Lundin Gold (LUG.TO, last at $8.63)Two words. Lundin. Gold.Gold X Mining (GLDX.V, last at $2.53)This is the renamed Sandspring Resources. This is a 7.4 million ounce gold resource (measured + indicated) in Guyana trading for about $10/ounce in the ground. I met with management recently and like the torque and scale that this company offers, so I own some as part of my gold basket. The project sings at anything over $1400/oz gold. Frank Giustra is a big holder/supporter as is Gran Colombia (GCM.TO, last at $5.59). It doesn’t take a rocket scientist to know that Toroparu is the kind of asset that will likely transact this cycle if gold can stay over $1500, so I’m happy to own some at these prices because who knows how high gold can go if a real bull market develops. Sandspring once had a $350 million market cap. That would be $8-10/share for GLDX. A guy can always hope.Minera Alamos (MAI.V, last at $0.305)I wish all of my stocks were MAI last year. Steadily "up and to the right” describes the stock chart in 2019. They’ve now financed Santana which should be in production in 2020 and La Fotuna isn’t far behind. "Low capex and quick payback” characterizes both projects well and these are real mine builders with the support of real mine builders (Osisko). It’s in Mexico and neither project looks that sexy at first glance, but there appears to be significant resource expansion potential on both projects, so little MAI may not look so little in a year or two. The market cap is through $100 million now, but I think there’s probably a relatively low stress double still on the table, even if the gold price just treads water here. Exploration success and/or a move higher in the gold price could take my hopes higher, but for now I’m happy that I own a piece of this in my basket of golds. It’s been a great performer. Right now, I’m waiting for news from a La Fortuna financing package and some near-mine exploration results to see what kind of add-on potential might be in play.Excelsior Mining (MIN.TO, last at $1.03)This is an in-situ leach recovery project in Arizona. ISR mining is when they inject (through injection wells) an acidic fluid into a target copper-rich horizon. The fluid dissolves the copper, which is then stripped from the recovered solution at surface (from production wells) before being re-injected. It’s a very low-disturbance way to mine, but start-up performance is always a question mark until you’re up and running. Excelsior is injecting already and expects first copper production this quarter, so let’s see how it goes. The project is envisioned to come in three stages, representing 25-75-125 million pounds per year of production at costs (AISC) in the $1.30/lb range. The low costs make for a nice looking economic model. At U.S. US$2.75/lb copper, the NPV of the full project is something like US$730 million, but that assumes that all three phases are built out, so getting to a “full project” NAV per share should include some allowance for dilution. MIN trades around 25% of the Gunnison Project’s NPV, so the stock is cheap, but first I think the market will want to see how Gunnison performs before assigning much value to the Phase 2 and Phase 3 expansions. It’s permitted, it’s operating, has a supportive large shareholder base, and has executed well to get to this point, so it’s in my copper basket. I will probably add to it if Gunnison is tracking well, but that’ll take a little while to find out.Murchison Minerals (MUR.V, last at $0.13)I’ve asked a lot of people if they’ve ever heard of Murchison Minerals, but almost no one has. I feel like it might have had ads on BNN years back that planted the company name in my subconscious, but generally speaking, this is not well followed at all. Well not by anyone except Rob McEwan and Rob Cudney apparently, both of whom are significant shareholders here. The market cap is tiny and the risk high, but little MUR is hoping that it has a new VMS camp on its hands near the community of Brabant Lake in Saskatchewan. The project is adjacent to the Provincial Highway 102 and the grid power line that runs to La Ronge, so access and infrastructure are excellent. The area has proven VMS stratigraphy as evidenced by the ~10 million tonne zinc-heavy Brabant-McKenzie deposit, but the real play here is that three weeks from now drills will be spinning on a program that will test some 12 targets in the greater area that all have good geophysical signatures +/- surface showings. If MUR can show that Brabant-McKenzie isn’t a one-off, this could start to get some traction, particularly if I’m right about the attitudes towards mining stocks improving. The stock is concentrated in a few hands, so there won’t be that much cheap stock to mop up if things get rolling here. Let the drilling begin.NGEX Minerals (NGEX.V, last at $0.45)Josemaria Resources (JOSE.TO, last at $0.76)In as few words as possible: Lundin. Copper. Gold. Both are Big bulk tonnage copper-gold deposits. NGEX is in Chile, while JOSE is in Argentina. NGEX may have synergies with the nearby Caserones mine, which is currently in need of some re-imagination. JOSE is more likely a standalone project. I'm a big fan of the Lundin organization when it comes to its expertise and capability in the resource markets.Neo Lithium (NLC.V, last at $0.50)Critical Elements (CRE.V, last at $0.37)I’m a believer in the long term growth of electric cars, so I’m a believer in high-quality lithium projects and the fact that the world is going to need a lot more of them to meet the needs of future battery demand. Now, there are a lot of lithium stories out there, but I’ve distilled it down to these two. I like NLC for the scale, grade, and chemistry of its 3Q lithium project in Argentina. I also like the NLC has lots of cash ($30 million as of September 30, 2019) relative to its market cap ($60 million), and trades at just a fraction of its potential NPV as laid out in its PEA. NLC has some of the lowest impurities in its brine of any project out there and it’s BIG, so I’m long. As for CRE, I first heard that story when it was about this price just before the lithium craze a few years back. It was clear to me that management was connected to the right kinds of people in Europe to potentially capitalize on the needs of auto manufacturers who are based there. CRE’s project looks good to me, though it is hard-rock, which has buried many a company in the past. On paper, CRE looks really interesting, so I suspect that someone with a suitable amount of optimism would want to partner on a project like this, and that’s the play for me. I’m hopeful that the stock has put in its lows now that the 2019 tax-loss season is behind us. Time will tell. Bring on the EV revolution any time Mr. Market.Northern Shield Resources (NRN.V, last at $0.09)I mentioned this last October and still own and like it. Drilling is just around the corner at the Shot Rock epithermal gold project in Nova Scotia, and The Root & Cellar epithermal project in Newfoundland probably won’t be too far behind. Shot Rock is ready to drill and NRN wants to run an areomag survey at Root & Cellar to better define the controlling structure/structures with regards to mineralization before drilling. I could write a lot about NRN, but really for me this is a management bet that intersects with geology. I’ve known CEO Ian Bliss for 15 years and like his grassroots model-driven approach to “Big-E” exploration. He’s yet to latch into that career-defining discovery, but that has nothing to do with his abilities or tenacity. Eric Coffin of HRA Advisories follows the story (and has for some time) which means that NRN gets reasonable play on the conference circuit, which in turn translates into broader market support. That’s a good thing, because NRN has some 250 million shares out, which is getting up there. Still, if NRN has success at either project this year, it could be one of those stories that makes a run at the $100 million market cap club or better, so I’m happy to own some going into drilling. These small stories take some work to get comfortable with, but the projects stand up to scrutiny. No one worth their salt in the exploration business would suggest that these projects aren’t worthy. I can say that with some confidence because Ian is probably one of the hardest working exploration geo/CEOs that I know and he always consults far and wide on projects in order to build his understanding of new targets. Here’s hoping that it’s his turn for a hit, because both of these projects are unique in that they are epithermal targets in areas where you wouldn’t ordinarily look for them. That means that some real goodies could have been overlooked.​NuLegacy Gold (NUG.V, last at $0.08)Go big or go home exploration in the Nevada Cortez Trend for Carlin-style gold. Drilling is ongoing. If they hit, the market will care and everyone will know why... because the hope is that this is 'the next Goldrush'. It's always nice to dream. This is another good slot machine pull for me.Orestone Mining (ORS.V, last at $0.075)This cheapest-market-cap-company-that-I-follow has an interesting copper target in Chile that is underneath past mining at shallow depths. They will need money (I think), but I want a few in the copper bucket in case they hit when they do drill.​OneSoft Solutions (OSS.V, last at $0.60)Pipeline integrity is not optional. OSS has the solution. Tick-tock until energy industry insurers raise the bar or start offering incentives for those companies who deploy this best-in-class next-generation pipeline integrity management software. Microsoft believes it, Phillips66 believes it, WorleyParsons believes it. Eventually I think the market will too.Steppe Gold (STGO.TO, last at $0.90)It’s in Mongolia, but it is dirt, dirt, dirt, cheap gold production with significant expansion potential. Have a look. Dirt. Cheap. Perhaps a quarter or two of successful production will help melt the ice on this one.Sun Metals (SUNM.V, last at $0.225)I still hold a candle for this one. Good system, good team, enough money to get to them closer to the guts of this system they are in. The rocks show complex multiphase mineralization capable of generating very high grades. The geological environment is right and the only question is tonnage. SUNM is still searching for that thing that sets it alight again, but they are in the right hunting ground. Here's hoping they spear something worthy of appreciation, because this would be a great place for a mine.Vermillion Energy (VET.TO, last at $21.25)The yield is stupidly high at around 13%. So many people suggest that VET might cut its dividend, while its cash flow and financials suggest otherwise. VET has been a good company for a long time. A few other companies have figured out the model of sustainable dividend payments, but VET has been sculpted over years, and years, and years into its current form. There are some concerns about long-term LNG prices impacting VET’s European gas margins, but people forget that being willing to hedge (which VET does a lot of) a year or two out mitigates price pressure to some degree and that VET is broadly diversified. The world needs more energy every year. Part of that will have to be natural gas and oil. I’m not concerned. And oil prices, well, VET has no trouble there now, so if you like the sector you get paid like a prince to hold VET. Checked the Brent price lately?TransGlobe Energy (TGL.TO, last at $1.85)TransGlobe is cheap oil and will soon be drilling an appraisal to its relatively recent light oil discovery in the Western Desert where there are a number of potential follow-up locations. It’s cheap on every metric you can think of and now it even pays a small dividend. I still think the Canadian asset purchase was ill-timed and a poor use of capital, but that’s water under the bridge. Now it’s about a possible extension on the Eastern Desert licenses, which could be a windfall in terms of bringing reserves into play that were beyond the initial scope of the contract. TGL is dirt cheap oil, so I own it. It’ll be a trade for me, but at these levels I like it. I'll keep an eye on geopolitics though for any signs of trouble. Trevali Mining (TV.TO, last at $0.235)I used to think the stock was cheap at $1. The stock is less than 25 cents now. Same company, same share count, improving outlook. I feel a little bit dirty owning it, but I do because I’m a sucker for value when it’s trading not far off of what really looks like its lowest lows. TV has pretty good liquidity too, which is nice for what is a trading position for me.*************Okay, so that list might cover half of what I own and maybe 1/10th of what I track, but I’m starting to go cross-eyed and I think I’ve probably covered more ground than anyone wants to read at this point. I tend to focus in on stories from time to time as they develop, by my point in the short novel that I seem to have written here is that I cast a very, very, very wide net, which really reduces my overall risk to any single story. Friends often ask me what I like, but they often want to hear just one or two tickers. That’s a tall ask with so much going on out there and if we are going into the kind of market that I think we’re going into, I want to start with a wide field of stories that I can winnow down as the real winners emerge. I mentioned the idea of a “rising tide” at the beginning of this note/novel and that kind of market requires consistent capital inflows, but given what gold, oil, and copper have been doing I think I’m in a good place, and can remain nimble if required. I collect these names over periods much longer than most casual market participants would be able to maintain interest in them or the market, but when the market becomes as much of hobby as it does work, the names that rise and fall over the years are just pages in a very long book. Finding names like this takes work, but is relatively easy; the hard part is knowing which bets to press and which to reduce along the way (if anyone figures that one out, please let me know). In the meantime, I think there’s a lot of interesting stuff going on out there in Resource Land and it’s been a while since I’ve seen this kind of broad optimism. That optimism is especially nice to see because it comes at a time when very few people have any appreciable exposure to gold, energy, and materials after years of gorging on large caps and weed stocks...Happy hunting in 2020, the Year of the Metal Rat in the Chinese Zodiac. Auspicious perhaps? Here's hoping.[/urcr_restrict]

(Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long TXP.TO)

Well that didn't take too long. This morning, ​Touchstone Exploration (TXP.TO, last at $0.67) announced test results from the lowermost (first) zone of its Cascadura-1 well, onshore Trinidad. To use the CEO's words from the interview linked below, the well is 'a beast'. The well confirms a "significant" (to quote the press release) gas-condensate discovery, testing at an average rate of 27.1 mmcf/d and 660 barrels of 54-degree API liquids over a roughly 24 hour testing period. Flowing pressure was 3,350 psi on a 40/64" choke, indicating an 18% drawdown (read a little about well testing here). Further to that end, the well apparently maxed out the testing equipment and it is believed that the tested zone might actually be able to be brought on stream at a rate comparable to the test rate. That's quite a test, and is over 162 feet of pay, with another 450 feet of pay yet to be tested higher up in the well. The flare is quite a sight and the company was kind enough to put an image of it on its Twitter feed today.[urcr_restrict]

In the interview linked at the bottom of this post, Mr. Baay points out that some patience will be required on behalf of shareholders in terms of getting Cascadura on stream because the company essentially needs to drill its Chinook and Royston prospects (in the same block) before it knows what kind of pipeline capacity and facilities it will need to develop the greater area. That doesn't take away from his enthusiasm though, which shows through pretty clearly in this morning's interview. At one point he reminds viewers of the fact that the Cascadura-1 well didn't even actually reach its (deeper) primary target. I imagine that Mr. Baay feels a bit like he is trying to drink from a firehose right now. Brokers will be all over him to take capital to accelerate the program, shareholders are probably making a few inbound phone calls for a change, and I would imagine that Paul had a lot to talk about with industry players at the energy conference in Trinidad this week. In time, things will come into focus, but right now it's a bit of a whirlwind in progress.

Next steps involve shutting in the Cascadura-1 well for a two-week pressure build up (that information will give reservoir engineers some sense of the "size of the tank" in terms of volumetrics), followed by completion and testing of the 450 feet of pay identified in higher zones. I'm not sure if that will be oil pay or gas pay, but at this point that's kind of splitting hairs for me. Cascadura has gone from a 'prospect' to a 'discovery' and now the real questions are those that have to do with size and value. I've run some back-of-the-envelope math and am getting around 40 BCF of recoverable gas per 50 metres of pay per square kilometre. So, if Cascadura covers one square mile (which is 2.5 square kilometres) this lower zone might have something in the order of 100 BCF recoverable, or 80 BCF net to TXP's 80% working interest. I honestly have no idea of the size of the structure, so I'll likely just wait and apply my rule of thumb as more data is made available. The value? I'm really not sure. The pre-drill prospective resource estimate was based on Cascadura being an oil target, and I'm not sure what the pre-drill pay thickness was assumed to be. What I did find is an old slide deck that shows some numbers for the Royston target (which is modelled as gas) that suggests of an NPV of about $2 per thousand cubic feet (mcf). How the engineers came up with that NPV is a question that involves infrastructure and processing facilities that may or may not fit with the current view of the future development plan -- which is a work in progress on its own -- but at least it's probably in the ballpark.

The stock seems to be acting "maturely" here, which is nice to see. As much as I'd love to see it all play out in a day, it'll probably be another four weeks or so before the upper zone is tested and there are a lot of questions to be answered in terms of facility and pipeline design, capital requirements, commercial agreements, financing for acceleration of the program, the list goes on. First things first though. Finish testing Cascadura, then move on to drill the Royston and Chinook targets later this year. As is pointed out in the interview below, it's all going to take some time, but there seems to be a real project developing here that will turn Touchstone into a very different company over the next year. Despite all the good vibes I have, I did sell about 1/5th of my stock today given past lessons learned, but I like the outlook here overall and am glad that something in the energy sector is working for a change.

https://youtu.be/jbeJ5egrBHs

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(Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long TXP.)

Touchstone Exploration (TXP.TO, last at $0.47)

I've casually followed Touchstone for years and have never really cared to own it until recently. It has always seemed "cheap" based on its cash flow and reserves from onshore oil production in Trinidad, but there was never anything to get me interested. A while back, the company announced a gas discovery at its Coho prospect which eventually yielded test data suggesting that the Coho-1 well was capable of producing at an initial rate of 10-12 mmcf/d. I found that intriguing, but it didn't pull me over the fence.[urcr_restrict]

Then, during the week before Christmas last year, TXP delivered a present to its shareholders when it announced that it had encountered 1,037 feet of oil pay in its Cascadura-1 exploration well. A headline citing a thousand feet of oil pay is sure to turn heads and it certainly caught my attention. Testing was pending, but it seemed that TXP had an oil discovery on its hands. Fast forward to yesterday and TXP announced that it would need to move in different equipment for testing because it had encountered high volumes and pressures of gas. Yes gas. It's odd that they thought it was oil pay to start with if it is indeed a gas discovery, but I've seen that happen before. That gas may or may not come with condensate, but that's why you need to test wells in this business. I haven't done volumetrics on the target, nor is there really enough information to do so, but this will be a well to watch if the CEO's interview from yesterday isn't just a puff piece (see below). He seems to be suggesting that this could be quite material for the company, but the proof will be in the test results. Given the market cap and the fact that Coho-1 (the "known" discovery) can be tied in and monetized quickly, I would argue this falls into the skewed risk-reward category as the market cap really hasn't moved up enough to price in a material discovery since this all began. I guess time will tell, but in the meantime, have a watch of this video and see what you think. I'm not sure what to make of it, so I'm long a modest position on a somewhat blind bet. The wait won't be too long as test results are expected in early February. Roll them dice.

https://youtu.be/dFkfb1QuaLk

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