Do Your Own Due Diligence.

(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 ATU.V, CRE.V, MAI.V, NLC.V, NRN.V, GILD, and TXP.TO)If I've used this title before, then I used it too soon, because THIS is March Madness. Unless you've been in a cave harvesting bat guano for the last two weeks, you'll know that volatility is off the charts and that the market is in coronavirus crisis mode. The U.S. indexes are down about 12-13% from their teflon-market-priced-for-perfection highs and all anyone can think about is coronavirus. When the market first really got wind of this virus, I was travelling in Mexico and I noticed that the market pretty much brushed it off in a couple/few days. At that point I wondered if the market was whistling past a graveyard and ended up getting stopped out of a lot of "non-core" positions soon after. Since then, things haven't improved much unless you've been shorting things, aside from gold, which although volatile, has been expressing its crisis-weathering properties, closing at a new 52-week high on Friday. Gold stocks have been even more volatile as liquidity concerns sent people selling everything initially, only to return in full force soon after. I'm torn on gold stocks at the moment, but still have a modest collection of them, alongside some long-tail calls on the GLD. I'm probably at 50% cash given the uncertainty out there and am keeping a very close eye on gold and the gold stocks.[urcr_restrict]Not much has survived the carnage. Touchstone (TXP.TO, last at $0.70) and Altura (ATU.V, last at $0.205) are my two sacred cows right now, alongside of a collection of small caps that all have their own unique stories. Touchstone was actually up 3 cents on Friday and probably falls into the category of "not really impacted by coronavirus" stocks. The company raised the cash that it needed to drill its Royston and Chinook prospects (this is why the "take the money" mantra of brokers is not entirely self serving, because you never know what's around the corner) and is testing the next zone in its Cascadura well this weekend, so results should be out very soon there. I see little reason to sell this one given that I've raised cash by getting stopped out of a lot of things that are more "market" driven as opposed to "catalyst" driven.As for Altura, the company reported its reserves on Thursday, which included an update on operations at Entice, where the company said it was production testing its first well. It sounds to me like they want to "see what it does", so to speak, over a longer period of time so that they know what they are dealing with in terms of potential economics. Altura is never promotional without reason, so in the meantime I take comfort in the fact that (1) they are doing a long-term production test (because you wouldn't keep testing for a month if it was 100% water) and (2) they have called it a "hydrocarbon accumulation". The real questions are to do with fluid rate and oil cut now, and it has been shown that oil rates in the Pekisko formation can trend higher in the early months, so I understand why they might like some more observation time before talking about it (link to an example of that from Pine Cliff here... not a totally comparable play, but also not that dissimilar). At the end of the day, water is an operating cost, so hopefully the well has a good oil cut at this location. If not, the deal ATU did earlier this year has provisions for a second well that could be drilled elsewhere in the 89-section land block. Basically it's wait and see. In the meantime, counting Entice at zero (for lack of information right now), ATU trades right at its PDP (proved developed producing) NPV10, at about one-third of its 1P NAV, and one-fifth of its 2P NAV. This is just the nature of the Canadian energy sector right now. I think that private equity will start to come in to rectify the absurd valuations in the oil and gas sector unless the market does, and I'm a patient guy when it comes holding this one as it is my only current exposure to Canadian oil and is extremely well managed. Altura's balance sheet and low cost structure means that it can hibernate somewhat during the bad times and then re-emerge with the climate is better. It's practically an oil storage project where you drill wells when you need/want them instead of keeping it above ground in tanks. Oil is going to get hit here, but the stocks are trading like they are all going to zero, which they are not (to be clear, some will go to zero... now is not a time to be in a debt-heavy story given that deep troughs make lenders nervous, sometimes at exactly the wrong time). The decline rate on U.S. shale plays is so great that any prolonged oil price weakness will have a profound impact on supply in a relatively short time period. Demand is another question, but that tends to snap back a lot sooner than supply.Although reduced, I'm still holding Neo Lithium (NLC.V, last at $0.72) and Critical Elements (CRE.V, last at $0.38) because the electrification theme is coming like a tidal wave and both companies appear to have quality (albeit very different) lithium projects. Northern Shield (NRN.V, last at $0.09)put out some encouraging early observations (thick intervals of veining and alteration) from its Shot Rock property in Nova Scotia during the chaos, which a few people seem to have noticed, but it's early days there with assays from the first holes still pending. It's hard to say where exactly they are in the system, but there are very clear indications that they are in an epithermal environment that they know has already produced samples up to 5 g/t Au at surface, with most being lower than that. It really comes down to the assays on the early holes and what the rock tells them about how high they are in the system, as these systems are zoned vertically. I've still got some Minera Alamos (MAI.V, last at $0.27) on the books as a pre-production gold story alongside of an eclectic handful of gold exploration target/existing deposit stories.A few words on the market of the last two weeks. Once the market clued in that coronavirus was indeed 'coming to a theatre near you' and went into panic mode, the Fed did an emergency rate cut of 0.5% and the U.S. 10-year yield promptly fell under 1%. Now the market seems to be pricing in an additional 0.5-0.75% of rate cuts in short order (the next FOMC meeting is scheduled for March 17-18). Listen, the fact that the 10-year yield is under 1% is telling you that the market is in distress. That's the biggest market in the world taking less than 1% on its money instead of risking it on the S&P, which has a dividend yield of 2% (i.e., why take the equity risk?). Yes, stocks are down 12% from their highs, but man, they were priced for perfection up there and I'd argue that if you look at a longer term chart of the indexes, it shows that there's a lot of air under valuations right now. Sure the coronavirus might fade away like SARS or the bird flu, but it also might not. The WHO does not have divine knowledge, but they are clearly concerned (especially in countries with weaker healthcare systems), which should at least give people some pause. Some folks have taken solace in the fact that the coronavirus appears to be most dangerous to older people with pre-existing health conditions, but that's little consolation for anyone who is in, or knows someone in, that cohort of the population. In countries with weaker healthcare systems, the potential for elders to succumb to this illness may be particularly disruptive. Maybe it doesn't spread as well in warm climates or during the summer, but who knows? Is a 12% market correction really pricing in something that could ripple around the world for a year? As for the Fed cut or cuts, I'm not sure what they will do to alter consumer and industry behaviour. They will buy valuable time for those carrying high debt loads during a time of uncertainty, but how do you fill the money hole that forms when cities shut down the way that Beijing and Shanghai did?China seems to have gotten a better handle on things now, but let's just say that I have a lot more faith in their ability to successfully execute a mass quarantine like that than I do in most other countries. Look at Italy. They've shut down schools, made "red zones" where travel in/out is prohibited/heavily restricted, and have sports games being played without fans. Is the market here ready for NHL and NBA games to be played without fans in the stands? Think about what this means for hotels, restaurants, drivers, you name it. Actual and effective quarantine and travel restrictions would have a significant short term (rolling?) impact on pretty much every aspect of life as we know it right now; and who really knows what that looks like globally? Does a 12% correction from the heavenly heights price all of that uncertainty in? I'm not sure, but I don't think so. Fear is still ramping up, and that's largely because this coronavirus is a "novel threat" and there's been research done that shows that humans respond much more strongly to novel threats (new viruses, terrorism, climate change) than they do to familiar ones (the flu, flying on airplanes, heart disease). It's human nature. Will it blow over? Yes, eventually. Will it suck? Yes, probably for a lot of people. How big will the impact be? I have no idea. If people can just wash their hands, not go to work sick, and generally be smart about trying not to catch or spread what they might think is "just a cold" we will be much better off. I've seen calls for Hong Kong-like action where the government simply mails a cheque to everyone to help them afford food, rent, and necessities if required to stay home due to illness and/or lost work, but how this plays out is really in the hands of the people, so to speak. In the near term, there are two trials that should wrap up soon on one of Gilead's antiviral drugs (Remdesivir) in "Asia", with results expected in April. Should Gilead's antiviral trials show that a therapeutic treatment is possible, I would think that would do a lot to assuage the fears of the market... but in the meantime there will just be progressively larger numbers of cases reported around the world for people to focus on. I think that governments are going to have to throw a lot of money at this (if people can't stay in quarantine without fear of not making rent, this isn't going to work); hence my close eye on gold and gold stocks because even in the worst times, the market still likes to rally around a winning trade.​For some perspective, I found this article to be a good read for anyone looking to calm their nerves. I had no idea that the Swine Flu (aka H1N1) is estimated to have infected some 61 million people, hospitalized 275,000 and killed nearly 12,500 people in the U.S. from 2009-2010. You only ever get a statistical estimate on something like that because you simply can't ever test everyone. Perception and reality are two separate things. While there is risk here, it is low, but it is being perceived to be high because it is novel. That's the impact that's more important than anything right now, because there are said to be only two factors that drive markets... fear and greed.Time will tell how this all plays out. Stay healthy, wash your hands (properly) often, and stay home if you're sick... because even if it's not coronavirus, no one wants your cold or flu right now![/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 ORO.V

Something a little different this time. I've been spending a lot of time on golds lately and have attached a summary on a company called New OroPeru (ORO.V, last at $0.95) below that can be downloaded in PDF format. The company released a corporate update today that really reinforces my views of this story. The company also produced a corporate presentation, which is the first I've ever seen from them (and I've been following this for six or seven years). [urcr_restrict]I've written this summary while gathering up information that was scattered across more than twenty years of project history, so I think that my understanding of the story is fairly unique to the market. This company has been completely off the radar for years.

Why should this illiquid relic from the past be dusted off and examined now? That's what I get into in the note below. In short, ORO's Tres Cruces project is more than three million ounces, trading at US$4/ounce of gold in the ground, 10 kilometres from a Barrick operation in Peru that is out of oxide ore; and Barrick has an option agreement on this asset (which includes an oxide gold cap) which expires at the end of this year. If that sounds interesting then read on...

View New OroPeru Note

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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 ATU.V)Altura Energy (ATU.V, last at $0.155) reported its full-year 2019 results last night, showing net income of $2.2 million ($0.02/share) and cash flow from operations of $13 million ($0.13/share) on average annual production of 1,742 boe/day. That's what Altura looks like in a "normal" world, but alas, nothing is normal about current times.​Altura provided an update on its waterflood pilot which showed that, at 200-metre interwell spacing (i.e., 8 wells per section), the injected water was showing up at the adjacent producing wells too soon (presumably by fracs that are overlapping between wells), which means that 200-metre spacing is too close. In addition to tinkering with the configuration of the injection well, I would think that Altura could take the equipment from the existing injection well and use it elsewhere in the field where they can test the waterflood response on 400-metre spacing (i.e., 4 wells per section). If I was building economic models at Altura right now, I might run three cases: 1) a 4-well per section plan with no waterflood, 2) a 4-well per section plan with waterflood (pilot project needed), or 3) an 8-well per section plan with no waterflood. Each plan would have its own recovery factor, but the only one that I currently consider is the 4-well per section plan with no waterflood (i.e., the current state of affairs), with is expected to yield a recovery factor of 8-10% on ATU's lands (which are estimated to contain ~480 million barrel of original oil in place).[urcr_restrict]There was also an update on the company's new Pekisko play at Entice. After being equipped with artificial lift on March 5th, the well produced 645 barrels of sweet 25-degree API oil, 6.5 million cubic feet of gas, and 4,500 barrels of water over the next eleven or twelve days (which represents 73% of the water used during the well completion). That equates to about 150 boepd with about 1/3 of that being oil. The well is now shut in to conserve any further testing costs until oil prices improve.​Even though ATU is at the low-end of the cost curve, I would expect them to manage themselves very conservatively during these insane times. Net debt at the end of 2019 was $0.6 million so ATU can hibernate for as long as needed. Two new wells have been drilled at Leduc Woodbend over the Q4-Q1 period, one of which has yet to be completed and tied-in. Altura's oil hedges have a mark-to-market value of around $3 million and net capex in Q1 was $7 million, with no further discretionary spending planned during the year. I would peg current net debt at around $2.5-3 million net of the value of the hedge book and Q1 cash flow, but that's a bit of a guess. All-in all, ATU is one of the least leveraged names in the energy patch. I expect them to hunker down and go into hibernation during this pricing trough in order to emerge on the other side much the same as they were before... a vessel that can take and deploy capital quickly into a big "tank" of oil in the ground at Leduc Woodbend.Trying times on all fronts these days, but I think Altura will survive to see the other side... and at this stage of the game that's as good as anyone can hope for in the energy sector. There's just remarkable carnage out there. Remarkable.[/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 CNC.V, FPX.V, and TLO.TO

Nickel Alert!

On Tesla's recent earnings call, here's a doozy of a quote from Elon Musk if you follow the nickel market:

"...well, I’d just like to re-emphasize, any mining companies out there, please mine more nickel. Okay. Wherever you are in the world, please mine more nickel and don’t wait for nickel to go back to some long — some high point that you experienced some five years ago, whatever. Go for efficiency, obviously environmentally friendly nickel mining at high volume. Tesla will give you a giant contract for a long period of time, if you mine nickel efficiently and in an environmentally sensitive way. So hopefully this message goes out to all mining companies. Please get nickel."

And just like that, all the nickel stocks popped. Most people don't even know what a nickel company is these days, never mind what their names/tickers are and whether or not their projects are of interest. As for more nickel coming without a big price spike... I'm sorry Elon, but that's not how the metals markets work. Mining is a boom and bust industry driven by price moves that result from years of chronic underinvestment. Those price moves incentivize new production. Yin and yang.

Because I'm such a nice guy, and am already long a basket of nickel stocks (because I think that one day all of the battery production will whip nickel prices higher), I thought I may as well flag a few names that pretty much define the Canadian nickel space as I know it, which might save some people a lot of time and effort if they care to play this theme. Personally, with chatter of a Tesla "Terafactory" out there, I think that the battery metals space may be set to heat up a little, so I have exposure through lithium and nickel. Here's my nickel list with a few sentences on each one:[urcr_restrict]

Canada Nickel (CNC.V, last at $1.29). Market cap ~$88 million.

Large, low-ish grade, bulk tonnage deposit in Ontario with drilling ongoing. Mostly nickel sulphide with some nickel-iron alloy (awaruite). Nickel recoveries appear to be better in higher grade material than lower grade material. A resource update is imminent here on their huge Crawford project. I guess timing is everything. The CEO, Mark Selby, was also the CEO of Royal Nickel and moved the Dumont project forward through to feasibility during his time there. Dumont is now controlled by the private equity firm Waterton. I would think Mr. Selby's experience with Dumont will save a lot of time and money for CNC.

FPX Nickel (FPX.V, last at $0.37). Market cap ~$60 million.

Large, low-grade, bulk tonnage deposit in British Columbia. Very low strip ratio. Low-looking grade, but the metallurgy is unique in that the nickel is bound in a naturally occurring nickel-iron alloy called awaruite. This is a highly magnetic mineral and easily recovered as a result. Because awaruite is not a sulphide mineral, the tailings produced by a mining/milling operation here would not be acid generating, which could tick a big box for Elon in terms of being environmentally friendly. FPX also notes that their waste rock absorbs CO2, meaning that the mine should get a double thumbs up from the environmental types. A new PEA is due on FPX's Baptiste deposit in Q3 or Q4 of this year. Cleveland Cliffs once had an option on this property and had earned a 60% interest after spending $22 million on advancing the project to PEA stage. The PEA was published in March 2013 and didn't show much of a project in terms of the economics, so Cliffs sold their interest back to FPX for US$4.75 million in 2015. Six years later, FPX has refined its metallurgical work/testing and is running a new PEA on the project. I've been aware of this one for about 10 years I think. It was once called First Point Minerals.

Giga Metals (GIGA.V, last at $0.24). Market cap ~$12 million.

Large, low-grade, bulk tonnage deposit in British Colombia. Nickel sulphide. Their PEA was delayed earlier this year because of COVID. I don't own it, but that's only because I can't own 'em all. Similar to FPX, they say that their waste rock captures CO2.

North American Nickel (NAN.TO, last at $0.10). Market cap ~$8 million.

​I only mention it because they have been exploring in Greenland for as long as I can remember with limited success. Nickel exploration is tough. They have an option on a piece of a nickel deal in Botswana that I know nothing about, so there you go.

Sherritt International (S.TO, last at $0.21). Market cap ~$85 million 

I only include this so that people know that I'm not ignorant of Sherritt. It's just not my cup of tea being a minority partner in someone else's nickel operation and I can get oil exposure in places other than Cuba.

Talon Metals (TLO.TO, last at $0.22). Market cap ~$115 million.

High-grade, small tonnage, underground mine potential in Minnesota. Partnered with Rio Tinto. About to start exploration drilling looking to expand on their massive sulphide resource. This is one of the most advanced, highest grade nickel sulphide projects that I'm aware of, and the market cap shows that. If nickel goes higher, it will take TLO with it.

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 MAI.V, BNAU.TO, NRN.V, PG.TO, ORO.V, NLC.V, CYP.V, LAC.TO, TLO.TO, FPX.V, CNC.V, EMN.V, MAXR.TO, TECK.B.TO, NTR.TO, AAV.TO, BIR.TO, CPG.TO, WCP.TO, CNQ.TO, YGR.TO, SDE.V, ATU.V, TOU.TO, TXP.TO, and CPI.TO

They usually refer to this time of year as the “summer doldrums”, when market interest and volumes dry up; but this isn’t your average year and this isn’t your average market. There is so much going on out there right now that it’s hard to even know where to start, but below I’ve touched on a decent handful of stories with the hopes of maybe shining a little light on some less-travelled corners of the market.

It’s good hunting season in the markets as overall global liquidity is outweighing economic fears. One thing that I’ll say that I’m hearing and seeing a lot of is a lot of pent up demand for products and services. Everything is on back-order, prices are firm or rising, many businesses are stretched to their limits, and just try to buy a sheet of plexiglass or a wood 2×12 right now… or maybe a home appliance. Backlogs are stacking up. All of that economic activity that just didn’t happen/isn’t happening in Q1/Q2/Q3 is going to mean that business are going to be running flat out to catch up and that’s going to last for a while. I’ll call it “deferred demand”. Whenever coronavirus fears officially fade into the background (novel threats only remain novel for so long), the consumer seems to be lining up to pull on industry in a major way. It’s going to be interesting to watch and should be good for a lot the “stuff stocks” that I’ve followed through the years. Remember gold, energy, fertilizer, natural gas, copper, nickel, uranium, and lithium (to name a few)? You know, those pesky materials and energy sectors? They’re baaaa-aack…[urcr_restrict]

I’ve been quiet because there’s been a lot going on. It goes without saying that pretty much anything gold-related has been good. Minera Alamos (MAI.V, last at $0.73) which has been a long time favourite is now up more than 600% from when it was a dime and the only magical ingredient needed to make money there was patience… and with the hopes of being a >100,000 ounce/year gold producer in a few year’s time, some more patience may even pay a little more. Same goes for Pure Gold (PGM.V last at $2.07), which still screens well on broker comp sheets and is trading at a healthy discount to NAV. For those who like Pure Gold, but think it may have run a little too far might like to look at the rebranded Rubicon Minerals that now goes as Battle North Gold (BNAU.TO, last at $2.04). BNAU has a pretty tight capital structure and is planning to deliver a feasibility study on its Bateman Gold project in Red Lake by the end of the year. One of the things that I like about BNAU is the fact that it has massive tax pools, sunk capital of nearly $800 million in infrastructure, and is a “turn around story” that hasn’t re-rated. For those who forget, Pure Gold was once a turn-around story and currently has 3.5x the market cap of Battle North… just saying.

Galway Metals (GWM.V, last at $1.68) and Northern Shield Resources (NRN.V, last at $0.155) have both caught my attention in eastern Canada, the former being in New Brunswick and the latter in Nova Scotia. GWM is well-advanced on what it calls a camp-scale discovery and enjoys the backing of Eric Sprott on its list of holders (he’s been busy lately), while NRN is waiting on assays from what could be “the” discovery hole at its Shot Rock gold project. GWM had some flashy visible gold in its Hole #65 at Clarence Stream for which assays came back this morning, while NRN reported some good looking rock in hole 20SR-11 over 15 metres, including 8 metres of multi-phase more-or-less massive quartz vein (assays pending). NRN’s gold mineralization is not expected to present as visible gold, but if the assays come back with significant gold over that most-heavily-veined 8-metre-thick (core thickness) interval it could mark a turning point for the project. In New Brunswick, think that GWM is hoping to join the billion-dollar explorer’s club (aren’t they all?), and the overall setting of the project might just lend itself to that. The mineralization appears to be adjacent to a large intrusion and zones that were previously independent seem to be linking up. There’s a good video with VP Exploration Michael Sutton linked here, which gives a good overview of the project. Drilling is ongoing and targets are plentiful, so GWM’s $20 million in cash should make for a steady stream of infill and exploration results out of Clarence Stream.

Premier Gold (PG.TO, last at $2.75) is a relatively new addition for me based on the prodding of a smart guy in our office who pointed to a sum-of-the-parts view that I found compelling. PG is contemplating the spin-out of its Nevada assets into a separate vehicle, which would be an attractive company in its own right. Hard Rock JV partner Centerra Gold turned down PG’s offer for its 50% of that project earlier this year, which should also provide some indication of what the value of that asset is at a minimum. PG has a clean balance sheet and trades around 0.6x consensus NAV.

And then there’s New OroPeru (ORO.V, last at $2.39). The stock has performed well as some early-mover gold market participants recognized the potential in this lightly followed name, but I think it’s still cheap and it has a very tight capital structure with only 26 million shares out. ORO owns 100% of the Tres Cruces deposit in Peru, roughly 10 kilometres from Barrick’s idle Lagunas Norte operation. Tres Cruces is a 3.2 million ounce gold resource that remains open to expansion laterally and at depth, where the deposit has only been drilled to a depth of around 300-350 metres at most. Many holes bottomed in high grade mineralization at depth and observations from core suggest the potential for undrilled high-grade feeder zones at depth. Tres Cruces has an oxide cap that should be broken out from the global resource estimate for the first time in the not-too-distant future in an updated resource estimate. The oxide cap represents an early, low-capex, high-margin starter operation. For perspective, the oxide ounces could have margins in the US$1000/oz range at US$1600 gold, so I believe their potential value is significant. The fact that Lagunas Norte is out of oxide ore and just 10 kilometres away means that not a lot of imagination is required in terms of seeing how this might play out. At its current share price, ORO trades with a ~US$45 million market cap, which is only US$14/oz on the 3.2 million ounce total resource. I look at a lot of comp tables and projects, and ORO would plot amongst the cheapest of all of them on an EV/oz basis, and most of the comps aren’t 10 km from an idle mining operation that needs ore. Recall that Barrick has an option to acquire 70% of the Tres Cruces deposit by funding it through to production, after which ORO would own a 30% (carried) interest and a 2% NSR over the whole deposit. Pan American Silver owns 18.6% of ORO on a partially diluted basis and holds a 1.5% NSR on the project. The stock is illiquid, which keeps fast-money types away, but I’ve run this project by a lot of serious mining sector participants and feedback is consistently positive, so I’m very happy to watch this play out. Given that Barrick has until just December 31st of this year to make a decision, and with gold at $2000/oz, the timing for ORO couldn’t be better. If my downside case is that Barrick walks and lets ORO keep 100% of the deposit, I’m quite okay with that. The Tres Cruces 43-101 suggests that shipping a pyrite (gold) concentrate might be an option for the sulphide ounces given the project’s relative proximity to tidewater. If ORO is able to keep Tres Cruces on a 100% basis, I think there’s a very strong case for a standalone oxide heap leach project (think of something like STGO, or MAI) that piles up free cash flow during the years that sulphide development is being planned. That oxides-followed-by-sulphides is a standard play in the Mining 101 playbook and the geology of Tres Cruces appears to be very well-suited to it.

The battery metals are cool again and my elements of choice are lithium, nickel, and manganese. For lithium, I’m sticking with Neo Lithium (NLC.V, last at $0.75) and its massive, high quality “3Q” brine project in Argentina as my go-to name in the pre-development category. Honourable mentions to Plateau Energy Metals (PLU.V, last at $0.34), Critical Elements (CRE.V, last at $0.29), Cypress Development (CYP.V, last at $0.50, up on an Epstein Research note yesterday), and Lithium Americas (LAC.TO, last at $12.13). LAC is a common top pick in the lithium producer category, while the other three are all pre-development. For nickel, I’m sticking with Talon Metals (TLO.TO, last at $0.255), FPX Nickel (FPX.V, last at $0.485), and Canada Nickel (CNC.V, last at $1.80)… all are pre-development. FPX has me the most excited given its unique deposit characteristics and potential for short-circuiting the production process of nickel sulphate. FPX added a very good (ex-Vale) director yesterday and has a relatively stacked board for little nickel company that almost no one (except for those with long memories) had ever heard of before a few weeks ago. As for manganese (a lesser-discussed battery metal), there’s only one project that makes my list and that is Euro Manganese (EMN.V, last at $0.075). EMN is essentially a remediation project that would simultaneously clean up a historic tailings dump in the Czech Republic while producing manganese for the coming wave of European battery plants. It’s a tiny penny stock with a lot of shares outstanding, but the concept makes too much sense for me, so I’m long a small position in it to see what happens.

Taking a totally different tack, I’ve come to like Maxar Technologies (MAXR.TO, last at C$35.63) quite a bit. This is a space-technology play that trades a little under 9x EV/EBITDA, which I think is way too low of a multiple for the sector that this company is in, behind a moat as wide as Maxar’s. Maxar was the subject of a short report last year as its debt ballooned during a big capex cycle, but earlier this year, Maxar sold its MDA business for a billion dollars, putting it well within debt covenants and setting it on course to a higher orbit as its capex-spend cycle winds down and its cash flow growth takes off (which means that its balance sheet leverage (5x debt/EBITDA) would ease). Maxar is a leader in Earth imaging, space robotics, satellite construction, and data management/transformation. The company plans to launch its new Legion constellation of Earth observation satellites in H1 2021 (that’s part of what the capex/debt was for), which will have the ability to capture high-resolution images of the Earth with as many as fifteen overflights per day in some locations (most of the lower-48 in the U.S.). Earlier this year, MAXR acquired 100% ownership of Vricon, a 3-D data and analytics firm that dovetails big time into MAXR’s imaging capabilities. Vricon’s technology allows it to take satellite image data and generate a 3-D model overnight, which has a variety of defence and civilian applications, including 5G network planning (5G networks require more antennas as the signals do not penetrate buildings effectively, so a 3-D model of the terrain and buildings is key to network design ability). Autonomous driving, disaster response, and land use optimization are all disciplines that are enhanced through the use of accurate (and rapidly updatable) 3-D models. I listened to the MAXR Q2 conference call recently, and while the company has yet to lay out 2021 guidance, I got the sense that management is pretty confident about the path they are on. With the foundation now laid for years of growth, it seems to me that it’s time for MAXR to reap the fruits of its labour in the years ahead. I can’t really explain the low EV/EBITDA multiple that MAXR trades at relative to other tech companies. I view MAXR’s industry as a high-growth one, with MAXR uniquely positioned as a well-established sector leader that is about to hit a step-change in capability. One of the intriguing things about MAXR is that it is one of the most heavily shorted stocks on the TSX. Between the U.S and Canadian markets, there were some 9 million shares short as of the end of July. That means that nearly 1/6th of MAXR’s stock has been sold short. Personally, I think the short thesis here is broken and that the shorts are about to find out how hard it’s going to be to cover 9 million shares in a company that only has about 62 million shares outstanding. Because of that tight share structure, according to (admittedly bullish) analyst Tim James at TD, every point of multiple expansion on EV/EBITDA adds US$9/share to MAXR’s share price. So if MAXR traded to even 12x EV/EBITDA, that would be US$27/share higher, which is 100% higher than current levels. I’m putting this into the category of “things that make you go hmmmm” and am long a good chunk as a result. This does not mean that MAXR is a slam dunk. Any time you are launching satellites, there’s risk involved, but “hoping that something goes wrong” is hardly a strong short thesis, so I’ll take the other side of the short’s bet.

On the energy front, an improving gas outlook has buoyed my favourite gas name, Advantage Oil and Gas (AAV.TO, last at $2.14) recently, along with a broad swath of other gassy names. I own some Birchcliff (BIR.TO, last at $1.56) and Spartan Delta (SDE.V, last at $2.90) to round out my Canadian gas exposure and am cautiously adding some oil exposure as well. I’m still long Altura Energy (ATU.V, last at $0.175), which reminds me a lot of Rock Energy back in the day (that one had its hero and zero moments as well along the way, but always had a scalable, coherent resource) and have added some Whitecap (WCP.TO, last at $2.85), Crescent Point (CPG.TO, last at $2.69), and Tamarack Valley (TVE.TO, last at $1.07) to the mix. I’ve got a little bit of Yangarra (YGR.TO, last at $0.64) as a massive-discount-to-NAV play and am riding with the biggest bet on boring old Canadian Natural Resources (CNQ.TO, last at $26.77, with a 6.3% dividend yield). Tourmaline (TOU.TO, last at $17.63) is still an office favourite, with its Topaz spin-out set to happen by year-end, but for new money I’m looking for things that haven’t moved quite as much. I don’t own Arc Resources (ARX.TO, last at $6.63) right now, but that one is well-liked by many. All in all, after so much pain for so many years, only the strong have survived, so a lot of these companies are looking good in a world where the rotation from growth into value (with inflation in mind) is underway. Oil is probably more of an H2 2021 story, but it’s going to be quite a story, so I’ve added some exposure with the hopes of having the brains/guts to just ride it out.

With gas on my mind, I come back to Touchstone Exploration (TXP.TO, last at $1.22), which is being hailed as the largest onshore discovery in the history of Trinidad in local media. I’m not sure if that’s technically true, as I thought the nearby Carapal Ridge field from the early 2000’s was bigger, but I’m splitting hairs at this point. It’s a big discovery already based on Cascadura alone, and with Chinook drilling underway (it started drilling on August 13th) it’s going to be an interesting 4 to 6 weeks. Chinook-1 is supposed to take 38 days to drill and is targeting a fault block adjacent to Cascadura-1. CEO Paul Baay has referred to Chinook as a “broader” structure, which to me would indicate that I should expect less vertical column height but perhaps larger areal extent. The well is being drilled up-structure from an old Shell well from the 1950’s much like the old Shell well that set up the Cascadura-1 location, so that mitigates some risk, but hey, it’s still exploration. Immediately after Chinook, Cascadura Deep will be drilled from the same surface location as Cascadura-1, targeting a deeper untested thrust sheet in the same structure. The high-impact Royston gas target is in TXP’s sights in 2021 when the roads dry out, and that’s a pretty exciting looking target. In the near-term Chinook is what matters most, as does the Cascadura Deep well and the outcome of gas sales agreement negotiations for the anticipated Cascadura gas volumes. I’m sticking with my potential value matrix from back in May on this one and so far it’s served me well in terms of assessing what I think my risk-reward looks like. TXP is tough because if they miss Chinook, you just know the stock is going to get hit, but it’s arguably not yet priced for Cascadura so what’s a guy to do? Decisions, decisions.

Oh, and if you want my craziest international story, look no further than good ol’ Condor Petroleum (CPI.TO, last at $0.53), which is looking to land a deal in Uzbekistan. You read that right, Uzbekistan. You may be thinking, “Malcolm, why on Earth would I care about a gas play in Uzbekistan?” I hear you. It’s not for everyone. I like it because CPI holds 75% of its market cap in cash and I think that the scale of the Uzbek deal could be reminiscent of Hurricane Hydrocarbons/PetroKazakhstan for those with long memories. There are obviously big risks and uncertainties here, but the rewards are great enough, and the EV is low enough, that I’m willing to take a shot on Condor delivering. Gas pricing could/would probably be similar to that of Touchstone in Trinidad, and the fruit is very low hanging. This is basically a Soviet-era gas field revitalization project. Those who know how much meat was left on the bone in these old Soviet fields in the ‘stans will know that this might be worth considering. It’s a flier, but I like the long-tail risk-reward situation here, especially given the valuation.

On the large cap side, I’ve got Teck Resources (TECK.B, last at $15.56) in the boat as well as a healthy dose of Nutrien (NTR.TO, last at $51.43). These are just kind of rounding out my reflation/inflation trade exposure and both also play into the theme of rotating from growth into value. If I see Nutrien go through the C$52.50 level I’m going to buckle in for a while as that would signal a major breakout on the chart, and when “ag” stocks run, they really run. Teck constantly screens as trading at a healthy discount to NAV and has a modest single-digit P/E multiple that I don’t mind owning in an inflation minded world, with broad commodity exposure.

Broadly speaking, I’m not fighting the tape and am remaining observant of established and emerging trends. Gold, energy, copper, battery metals, base metals, and agriculture all have my attention, with gold probably being in the most established trend. As readers know, I do take microcap fliers along the way, but generally I see enough upside in less-risky pastures to feel like I can still hit it out of the park without taking on too many wild-ass exploration risks. Having said that, I’ve got plenty of exploration driven stories, but their relative sizes in my portfolio are modest, even when combined. Arguably I have too many names on the go right now (this might cover half of them), but at times like these, in markets like these, I don’t mind spreading the bets a little more broadly. That way, I figure I can capitalize on the last 15 years of reading and due diligence which has given me a pretty good idea of where the bones are buried in the the sectors and stories that I’ve followed. New names pop up on the radar from time to time, but I’m trying to keep the rainbow chasing to a minimum these days as I wait for the bets that I do have out there to pay off. In markets like this, the buying and the holding is easy. It’s always the selling that’s the hardest part when things are working.

My thinking these days is somewhere between “you never go broke taking a profit” and “the money is made in the waiting, not the buying or selling”. It’s been a long drought in the resource sector, but it would seem the rains have finally come.

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 every stock in this article.

I love days like this in the market, because they force people to think about what they own and why they own it. It’s easy to lose the plot when anyone that threw darts at the market over the summer likely did quite well, regardless of what they bought. To me, liquidity continues to be the number one driving factor in the market, with the Fed signalling that interest rates could be on hold for “years” (or at least until sustained inflation picks up). Low rates are forcing a massive rotation of debt into equity at a time when governments around the world are pumping (and will continue to pump) as much money as they can into their economies to offset the impacts of COVID-19. Meanwhile, the impact of COVID-19 on the markets has been to concentrate business in the hands of tech companies and select retailers/goods manufacturers who were able to capitalize on the opportunities created by public policy response (i.e., school closures, working from home, mall closures, and lockdowns). Working in the hotel or airline business? It feels like the world has ended. Got a bike shop? Wow, I bet you didn’t know that business could be so good. Patio heater sales? Through the roof. That goes for Sea-doos as well. And Harleys apparently. The impact of COVID-19 has been dramatically different across different income levels. While some struggle to make ends meet, others are wondering which Porsche to buy after they got long ZOOM or NFLX a few months ago. THAT’s the market that I see correcting today… a bunch of overvalued stocks that have become such a big component of the indexes that they have split the market into over valued and undervalued silos. At times like these, every investor has to check their market views in the context of what’s happening out there and react, or not react, accordingly.[urcr_restrict]

Personally, I’m not worried about when a stimulus package will come. I’m also not worried about some kind of widespread civil unrest in the U.S. on the back of U.S. election results, but that’s just me. I think that the simple truth is that, no matter who wins the election, stimulus will be close behind. Maybe it takes a month to get all of the votes counted, maybe it takes two months, but once the votes are cast (which they will be after next Tuesday) voting along party lines in the U.S. senate should fade as senators really start thinking about looking after their constituents. Think about it… if the votes are in and you’re a republican/democrat senator, whether or not you vote to approve a stimulus package has no bearing on the outcome of the election or the fate of your party… at that point, you will be more interested in plugging the holes in the leaking ship of your constituency with stimulus payments to those who need it most. What would be the sense is delaying another round of checks to citizens on the eve of the Christmas season? It would be economic suicide for the U.S. to do that ahead of the single biggest shopping event of the year. The is no gain to be had by denying U.S. citizens of the help they need today when the cost is literally the stroke of a pen and the entering of some zeros on a balance sheet. All of that aside, I guess my point is that governments will keep printing zeroes on their balance sheets until this COVID hysteria subsides and life gets back to normal. But then what?

There is massive pent up demand in the economy right now that simply hasn’t been able to be met because of the effects of COVID on supply chains and labour. Once normalcy returns, probably post-vaccine, that pent up demand is going to pull through the same straws that it always has, which means that there will be a lot more people standing on the buy side of a market where the selling pipe hasn’t gotten any bigger. You know what that creates? A scarcity/auction market. Those who want their goods and/or services first will inevitably pay more. To me, this would seem to be how inflation will manifest itself going forward. Imagine the bookings on airlines once COVID is in the rearview mirror. Capacity has been cut to the bone. As things open up, it will take time for everyone to staff up again from baggage handlers to front counter staff. Imagine hotels. “Sorry sir, that’s the only room available and I need an answer in the next 24 hours because we’re sold out at the moment”. Restaurants? They’ll be jammed. Weddings. Parties. Sports events. Concerts. Remember those? So does everyone else. They (myself included) long for that return to normal and will drink a long drink of it when it’s available.

Meanwhile there are policy and attitude shifts that are incredibly positive for certain sectors. Copper is probably my favourite multi-year theme. The whole green wave thing that’s sweeping through markets and industry is incredibly bullish for copper. An electric vehicle contains about 4x as much copper as a gas-powered car. Transportation demand (cars, trucks, trains, boats, planes) for copper is around 11% of total current copper consumption. Cars are the biggest part of that 11% and we’re talking about that multiplying that wedge by a factor of four over, say, the next 15 years, at a time when permitting large mines is getting harder and harder. Likewise, solar panels take 4-5 tonnes of copper per megawatt (MW) of installed capacity, or 4,000-5,000 tonnes per gigawatt (GW). The U.S. currently generates about 1.8% of its electricity from solar power, producing around 72 GW per year. Electricity production from natural gas and coal is currently more than 30 times that number (38.4% and 23.5% respectively). Perhaps 20 GW of new solar capacity was hoped for in 2020 before COVID hit. Just to replace coal alone, solar generation needs to grow by a factor of more an 1300%. While achievable, it’s going to take some time to make that transition. With the hopes (aka crazy high valuations) that are being pinned on solar and EV stories right now, I sure hope those folks are long copper too. And don’t even get me started on nickel, which is far more scarce than copper and equally valuable in the electrification theme due to the NMC chemistry that is set to dominate the lithium-ion battery space for the foreseeable future.

The investor apathy, and government policies, towards the existing energy sector has interesting implications as well. While we are currently swimming in oil due to decreased COVID demand, the capital investment flows in upstream projects has been abysmal for YEARS now. Meanwhile, banks are pulling back from the oil sector on ESG concerns, leaving even less capital for energy firms to work with to maintain production, pay down their debt, return capital to shareholders, and then maybe, just maybe, grow a little during periods of sustained strong pricing. Now, as much as everyone thinks we’re going to flip a switch and be an electric economy tomorrow, the reality is soooo far from that. About 1% of current normalized oil demand is offset by the entire EV car fleet. Let’s assume the global EV fleet DOUBLES in 2021, which it won’t. That would offset another 1% of oil demand. For perspective, the natural decline rate the world’s oil production as a whole is around 7% per year. To put it another way, global oil producers need to bring on 7 million barrels per day of capacity, every year, just to stand still. What’s your sense of how most global oil producers (I’m talking about huge companies here, not small cap outliers) are feeling right about now? Do you think that they’re thinking about increasing production a lot with oil at $38/barrel? No way. They can’t. And certainly not within the next two years unless oil prices went up $20-30 tomorrow. Starting to see the disconnect? The development pipeline of new large scale projects is largely empty. What happens ten years from now is anyone’s guess, but the cake is already baked for H2 2021 and 2022… oil is going to be in short supply and there’s nothing anyone can do about it unless oil prices are much higher. That’s a long way from now, but anyone paying attention should start to see the signs in the later half of next year if my view is correct… and just to be clear, my view simply echoes what much smarter and deeply-resourced energy analysts are saying on the topic, but their logic seems very sound to me. Based on similar logic in the North American gas market, I like natural gas a lot here, especially the Canadian producers. I am not alone in this view either, as many large and small investment banks have highlighted the vulnerability of the gas supply due to lack of drilling, low prices, steep declines, and limited access to capital.

In a nutshell, I remain unfazed today. I am sticking to my main stories and themes, which collectively are bullish energy, gold, and materials. I own too many names to talk about them all, but I’ll run through a “top ten” to give some sense of my thinking.

Nutrien (NTR.TO, last at $53.48)

I still like this one as a value play. Crop prices are screaming higher across the board and that’s good for farmers and what’s good for farmers is good for Nutrien. It’s big, it’s liquid, and it has a nice 4% dividend and a good outlook. I think it also has torque to a developing soft commodity cycle, so I’m long a big chunk of it.

Something a little different to keep an eye on is Verde Agritech (NPK.TO, last at $0.62). Perhaps the ultimate sleeper ESG play, this little company has a deposit in Brazil that is rich in glauconite and it has done field tests of its Super Greensand product, which is finely crushed to a consistency not unlike, ummm, sand. The stuff makes for healthier soils and waterways as it is a truly slow-release fertilizer, suitable for organic and conventional agriculture alike, where soil health is an increasing concern. Super Greensand also replenishes critical micronutrients in the soil, something that conventional fertilizers just can’t do. I’ve followed this for the better part of decade and will watch for the company’s results next month to get some sense of where this is heading. If this name catches the eye of the market or an established industry participant, things could get silly because the scale-up of this asset would spit out numbers that verge on ludicrous. I own a little, because the stock is horribly illiquid, and I’ll watch to see which way it seems the wind is blowing after they report next month.

Touchstone Exploration (TXP.TO, last at $1.65)

The Chinook discovery excitement has waned, but my view remains bullish. Cascadura Deep should start drilling any day and recent interviews with Paul Baay (available online via google searches) have indicated that the deepest pay interval at Chinook may correlate with the targeted trust sheet at Cascadura Deep, perhaps implying that the two could be connected. If that’s the case, you could start pushing 1 TCF of gas at Cascadura-Chinook alone. Right now I think that TXP is basically priced for Cascadura as is, with zero value for Chinook or any additional exploration upside (Cascadura Deep, Royston, or any of the other 20 or so remaining targets). I don’t mind carrying a nice chunk of this around as it bobs up and down. By the end of the year there should be a gas sales agreement in place and Cascadura Deep should be drilled. With Halloween on Saturday, Christmas is coming faster than you think, so I don’t want to get too cute with this. Could it go lower? Sure it could, but I can’t pick a bottom here and I see little correlation between the ultimate value of TXP’s project and the S&P index and when exactly a U.S. stimulus package is rolled out.

Tag Oil (TAO.V, last at $0.18)

I’ve posted recently on this and I have little more to say. The Australian assets have been sold, which will bring cash closer to 19 cents per share when the deal closes. It’s all about Abby and the team. They’re shopping at a great time, so I think my patience will be rewarded and I view my risk level as low given the cash backstop and quality of the board and management here.

Natural gas

Through listening to, and reading articles from, people much smarter than me on the natural gas macro picture, I’m of the view that either a normal or colder-than-normal winter could result in a very tradable move in the Canadian natural gas producers. My favourites are Advantage Oil and Gas (AAV.TO, last at $2.12), Birchcliff Energy (BIR.TO, last at $1.83), Tourmaline Oil (TOU.TO, last at $17.62), Arc Resources (ARX.TO, last at $6.52), and Spartan Delta (SDE.V, last at $2.87). They all appear fundamentally cheap to me (TOU and ARX are the only dividend payers currently, but all will generate significant free cash flow at strip pricing), with good (and improving) balance sheets. The first four are the easy ones as they are liquid, but discount shoppers might like the look of Spartan the most. It trades at around half the EV/DACF multiple of its peers despite having almost zero debt and high quality assets run by a proven team. Hmmmm.

Golds

I’m light on exploration, but heavy on cheap producers and ounces in the gold sector. My favourite producers are Karora Resources (KRR.TO, last at $3.11), Alamos Gold (AGI.TO, last at $10.81), Premier Gold (last at $2.72), and Roxgold (last at $1.70). I own a little Iamgold (IMG.TO, last at $4.72) as well because it’s just too cheap on the comp sheets. All of these companies trade in the 0.5-0.8x P/NAV club and all have great balance sheets. AGI just reported a great quarter, and Premier is eventually going to split into two companies, a Nevada-focused story and a Canada-Mexico one. I think that’s a value creating event, but I have no idea on timing or firm confirmation that it will happen, though there’s been lots of talk about it. KRR is a crazy cheap (about 6x free cash flow) 100,000 oz/year producer in Australia that has a pile of development opportunities in front of it that might make it look more like a 200,000 oz/year producer in 5 years with a little luck with the drill bit. Changing gears to Africa, Roxgold has some “country risk” attached being in Burkina Faso, but the assets are good, and only getting better, so I think one day it will be taken out.

Little New Oroperu deserves its own paragraph in this section. So far, so good on this one as the Barrick earn-in deadline approaches. My view remains unchanged from earlier this year in that Lagunas Norte is worth a lot more with the Tres Cruces ore, full stop. ORO’s Tres Cruces would add high-margin oxide ore that could/would/should serve as the early production material for a Lagunas restart and would add “critical mass” scale to the sulphide resource, pushing it to over 7 million ounces on a combined basis without drilling a hole. For reference, assuming US$1000/oz margins on the oxides (which is arguably conservative), Tres Cruces represents US$400-500 million of cash flow (that’s with me assuming a 0.4-0.5 million ounce oxide resource) waiting to be picked up (truck, shovel, and haul road) while the sulphide development plan is put in place. This needs to get sorted out before this New Year’s Eve, so tick tock.

Copper, Nickel, and Lithium

The electrification/green energy trifecta. China is stockpiling copper, nickel is in need of serious expansion to keep up with battery demand, and lithium is the lynchpin that holds it all together. I think that almost anything copper related is good and the universe of (real) independent nickel companies is so small that you can count them on your hands. Lithium is a little easier to come by, but quality projects are not.

For me, my copper bets are First Quantum (FM.TO, last at $14.10), Copper Mountain (CMMC.TO, last at $1.00, Capstone (CS.TO, last at $1.59), Hudbay (HBM.TO, last at $5.85), and some of pure-explorer Pan Global Resources (PGZ.V, last at $0.59) in the hope that they are on the verge (edge) of something big in Spain. There seems to be an interesting situation developing with Surge Copper (SURG.V, last at $0.31), but I’m not totally clear on the plan there just yet, so I only mention it as something I’m watching to see what comes next (probably exploration drilling at Ootsa).

In nickel, I’m long FPX Nickel (FPX.V, last at $0.48), Talon Metals (TLO.TO, last at $0.30) and a little bit of Canada Nickel (CNC.TO, last at $1.88). FPX excites me the most because it is potentially the “greenest” source of nickel out there. I hope to hear more about that in the coming months and hope that by then people start paying attention to this unique, large, multi-decade, low-cost, project. Talon is drilling for massive sulphide expansions right now in Minnesota, so I’m selfishly wishing them luck as well. Meanwhile Canada Nickel has established itself as a large (400 million tonne to >1 billion tonne depending on how you slice it), low-ish grade sulphide project that should maintain market interest due to the relative lack of other projects with its scale.

Lithium consists of three names for me right now. Critical Elements (CRE.V, last $0.71), Neo Lithium (NLC.V, last at $0.93), and Lithium Americas (LAC.TO, last at $12.32). I currently own the first two and am looking to buy LAC back on further weakness if it materializes. CRE is a hardrock spodumene deposit with attractive-looking economics in Quebec that I think will benefit from the green energy push. In particular, I will be keeping an eye out for European players looking to secure lithium supply for the coming EV revolution. NLC is still my go-to best-in-class pre-development brine deposit in Argentina, which is apparently also viewed positively by CATL (they bought an equity stake in NLC recently), which happens to be one of the world’s largest leading battery manufacturers out of China. LAC is a widely held soon-to-be lithium producer with brine production in Argentina where it has a 51/49 JV with China’s Ganfeng Lithium as a partner. LAC also has a large clay-hosted lithium deposit (Thacker Pass) in Nevada where it is actively searching for a development partner. The scale of Thacker Pass is massive, so any hint of a JV on this project could send the stock flying.

Maxar Technologies (MAXR.TO, last at $35.06)

In the space sector, I’ve traded MAXR around and still like the trend and the “space” theme, so I remain long, but cautious. I like that the reported short interest is still stubbornly high, at around 8.3 million shares as of last report (that’s built-in buying). For a refresher, MAXR is a satellite builder and space robotics expert that is due to launch a new satellite constellation in 2021. That deployment will change MAXR’s market tone from one of high capex and leverage to one of free cash flow and new, higher margin operations. That sentiment shift is already underway, and with MAXR reporting on November 5th, the shorts better be hoping that something goes wrong here. A report I read from TD pointed out that because of MAXR’s tight capital structure, every point of EV/EBITDA expansion translates into a CAD$13/share price move. MAXR currently trades at around 9 or 10x EV/EBITDA, which I think is modest based on its competitive moat and decades-long established relationships with the U.S. government. I’ll respect the chart, but the stock has been good to me thus far.

That’s a lot of ground to cover, so thanks for reading. It’s a jungle out there, so 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 AAV, PONY, AMC, ACU, AZM, CAD, CANX, CD, CS, MIN, NLC, and ORS.)Three weeks into January and there’s no lack of things to look at in the market. Gold, oil, and copper are all hanging in just fine, but I’m keeping my eye on the DXY as usual. A lot of stocks have had great moves, and some not-so-great, but I definitely get a feel of optimism in the gold and resource sectors based on a broad cross-section of the market that I follow. Junior stories are moving, stocks are responding to drill results, and the market seems to be starting to think about upside more than downside; likely driven in part by calls from the mountain tops of market gurus and investment banks for increased exposure to the energy and materials sectors. I can’t vouch for the validity of macro calls like that, but I can watch the key charts and get a sense of what’s working and what’s not through continuous observation and reading. The TSX Venture index itself has come out of a multi-year low and is up about 12% from its November basement-like lows. Some junior copper stocks are getting attention (I'd feel a lot better if copper could get through $3), the shine has come off gas a little recently (but the value argument still holds water), oils are acting reasonably for a change, and it’s hit or miss with golds. Generally speaking, it feels like there’s money to be made out there as long as stories are delivering. Miss a step, or two, and the market has no qualms about leaving what was once hot on the side of the road in a heap and moving to the next name, as there’s no lack of opportunity out there. To that end, here are a few words on a few names that have had both good and bad starts to 2020.[urcr_restrict]Advantage Oil and Gas (AAV.TO, last at $2.34)Painted Pony (PONY.TO, last at $0.69)Arc Resources (ARX.TO, last at $7.73)In staying true to my 2020 pledge of being more nimble, I was stopped out of half of my AAV and all of my ARX, but have kept my full PONY position because I want to see what the company’s 2019 reserves values look like and what the market does with that information. Western Canadian gas is a very boring thing to own, but once West Coast LNG is a reality, which is a multi-year view, it will make a big difference to a market that is currently subject to “end-of-pipe” restrictions. I will let the charts determine my staying power here. AAV is a very low cost producer with an improving liquids:gas ratio and balance sheet, so I remain a fan, but will respect the chart.Arizona Metals (AMC.V, last at $0.55)Drilling is underway on this “new to the market” copper-gold VMS deposit in, ummmm, Arizona. The company is currently raising an extra $2 million to ensure that they can keep rolling should they like what they see in terms of delineation and exploration drilling results. First results are expected “during Q1”. The company’s press release sums up the nature of the deposit, exploration targets, and the drilling plan quite well. This is a project that I think will really benefit if copper can get its groove back, so here’s hoping that higher copper prices coincide with drill results.Aurora Solar (ACU.V, last at $0.12)Another quarter, another big sale into a Chinese solar panel manufacturer; apparently "the largest solar cell manufacturer in the world”. This time it was for 14 DM measurement systems that will help increase efficiency in the customer’s solar cell manufacturing operations. I’m often tempted to sell the stock, given the nice move its had and the fact that market interest in microcap technology stories can be so fleeting, but ACU’s in-house expertise and experience with regards to optimizing solar cell production and manufacturing efficiency just seems so “on trend” with what’s going on in the world right now that I’m still long. ACU also discussed a new optimization service it is looking to roll-out called “Insight” in its last press release. The proposition is that by analyzing new and existing data within a solar cell manufacturing plant, ACU can point to precisely where cell quality or efficiency is being impacted during the manufacturing process. The product offering is about to start testing at its second trial site, so I will watch for further developments on this front, as this is a path to the holy grail of recurring revenue that tech companies, and investors, are always looking for...Azimut Exploration (AZM.V, last at $1.48)I missed the initial news on this stock because I was away from the screen the morning of the announcement, but I’ve followed AZM for years, as have many people. Known to be a highly competent technical team that is capable of both grassroots prospect generation and actually moving those projects forward to fruition (often via JVs to larger companies), AZM announced some eye-catching results from its Elmer Gold project last week. The holes showed multiple near-surface mineralized vein sets in drill core within a shear zone at the Patwon Prospect, one of several targets identified along a multi-kilometre trend that is deemed to be prospective. The actually area drilled was quite small, so size and continuity are big question marks here, but the general feeling out there is that the system is expected to have scale to it. Having been recently burned by discovery stories that I expected to have scale to them, I’m taking more of a wait-and-see approach this time by taking just a partial position given my relatively limited knowledge of the target. There is some additional IP survey work ongoing on the project right now (these sulphide-walled veins should show up well on IP) and I expect the company will want to raise money soon for an expanded drill program. I don’t think money will be a problem, as this team will likely have all of the backing it needs from people who are very serious about gold exploration. Time will tell, but I’m flagging it as something to take seriously given the reputation of the company and its statement suggesting the significance of the discovery as laid out in the press release. I’ve got a ticket on this ride, so I’ll see where it goes. Hopefully follow up drilling can live up to the high bar that’s been set.Colonial Coal (CAD.V, last at $0.31)There are 22 million CAD warrants with a 30 cent strike that expire on February 3, 2020, which is sure to keep a lid on the price until that date passes. After that, it’s up to powers much bigger than me. For those who want to know my thesis here, here are a handful of links that pretty much connect the dots as I see them.First a bit on CAD’s new director:https://www.globenewswire.com/news-release/2019/11/19/1949654/0/en/Colonial-Coal-Announces-the-Appointment-of-Partha-S-Bhattacharyya-to-Its-Board-of-Directors.htmlhttp://www.forbesindia.com/article/person-of-the-year-10/partha-bhattacharya-the-man-who-changed-coal-indias-image/20392/1And then some background on the landscape in India: https://www.google.ca/amp/s/www.thehindubusinessline.com/economy/india-to-become-largest-importer-of-coking-coal-by-2025-says-fitch-solutions/article29297781.ece/amp/ https://m.economictimes.com/industry/indl-goods/svs/metals-mining/coal-india-ltd-plans-binding-bids-for-coking-coal-assets/articleshow/71801378.cms Canex Metals (CANX.V, last at $0.185)Well the magnetic survey is in and the Gold Range property has been doubled in size to a little over 1000 hectares in order to cover more of what appears to be prospective ground. Sure enough, the magnetic survey shows mag lows corresponding the mapped trace of some of the mineralized zones at the Gold Range property, and now the results of a soil and surface sampling program are pending. It’s all building towards a maiden drill program that probably isn’t too far off, and I get the impression that the modest capital needs for initial drill testing won’t be hard to find in this market if the data keeps pointing towards there being a system of scale here. Cantex Mine Development (CD.V, last at $0.66)On January 6th, Cantex underwhelmed the market with its update on the winter drilling program at North Rackla; an update in which I think people really wanted to see some assays. Instead, they got to hear about just how nasty the weather is in the Yukon mountains in the winter, that geophysics wasn’t helping much in targeting, and were given a “watch this space” notice in the form of a map with three apparently noteworthy pads marked between 880 to 1000 metres ENE of the discovery pad (Pad 6). I don’t think the market is putting much stock in the claims that “these are the pads to watch”, but I guess time will tell. What’s clear is that 1) North Rackla has been more of a treasure hunt than I bargained for, and 2) they have a lot to learn about the structural elements and shape of the system that they are dealing with up there. To that end, expert consultants are being pulled into the fold, but that’s little consolation for a stock that’s down to 1/10th of what it was trading at last summer. In the mining business, you’re only as good as you’re last drill hole when it comes to the market, and at this stage Cantex is in need of some real results that show that the mineralization around Pad 6 was not a fluke. Hitting good grade and thickness around a kilometre away would likely do that, but I hope there’s a rush on those assays because market interest is waning fast, along with the hope of this being something big.Cronos Group (CRON.TO, last at $11.27)The stock is up nearly two dollars in as many weeks as some optimism returns to the weed sector. I might be overtrading it, but was stopped out of my CRON recently when it pulled back below $11. I will keep an eye on this one, especially if it starts making new highs.Capstone Mining (CS.TO, last at $0.90)Last week Capstone announced some drill results that show cause for optimism for the future of the company’s Cozamin mine in Mexico. Specifically, step-out drilling in new areas to the northwest are showing high grades, which bodes well for resource expansion in that direction. The stock continues to perform well, so I continue to be a happy owner. Generally speaking the copper/base metal group has been an okay place to be. The copper chart still looks constructive to me and as long as that’s the case, I’m happy to own a basket of base metals with relatively tight stops in place.Excelsior Mining (MIN.TO, last at $1.13)So far so good at the Gunnison project. Let’s see some numbers and continued operational updates as this ISR copper project ramps up. If Phase 1 goes well, the market will be more willing to give credit for the Phase 2 and Phase 3 expansions, which could bode well for MIN's share price in light of the "full project" NPV.Neo Lithium (NLC.V, last at $0.73)Notable only in the sense that the stock has moved up nearly 50% in short order after some optimism returned to the lithium sector as Tesla continues its world domination and China looks to keep pushing the EV theme. This is the best brine project in the hands of a junior that I am aware of and NLC has always felt that the 3Q project would attract a partner. 2020 seems as good a year as any for that.Orestone Mining (ORS.V, last at $0.11)I get more intrigued by ORS the more I look at it, so I should probably stop looking at it. I’ve yet to meet management, but ORS put out a press release the other day that went into a little more detail on its Resguardo copper-gold target in Chile. I’ll simply quote from the press release, which I think covers the bases well:“Two low angle regional extensional faults, the Fraga and Huella del Guanco, have been mapped across the IP anomaly area (see maps here). Where these faults intersect northwest trending fracture-fault zones, moderate to strong silica- kaolin-sericite alteration and minor copper oxides are present. Additional faulting, alteration and minor copper oxides are also mapped along the east west trending, shallow dipping sediment-volcanic contact parallel to the Fraga fault zone. The Fraga fault has also emplaced younger Tertiary age intrusive over the altered sediments.The presence of moderate to strong silica-kaolin-sericite hydrothermal alteration and minor copper oxides at the contact between the regional extensional Fraga fault and northwest trending fracture zones is thought to be related to a buried copper - gold manto or porphyry system which may be related to an IP anomaly at a depth of 200 m below surface.“At Resguardo we are very encouraged that exploration continues to validate our target model – a large manto or porphyry system. I cannot overemphasize the importance of fluid leakage to surface causing the alteration at the fault intersections above and in close proximity to the IP anomaly. The chargeability anomaly has been outlined over a strike length of 1400 metres, a width of 500-800 metres, at a depth of 200 metres. There is a central core of greater than 20 mv/V over a strike length of 1100 metres and width of 300-600 metres. This exploration program moves the Company one step closer to drilling this very large, exciting target”, stated David Hottman, CEO of Orestone Mining Corp.”Translation: This is a big prospect, in a good location with known shallow past production, and geological and geophysical data pointing towards a very valid drill target underneath. With a $3 million market cap, I like the cost of entry very much, but as always, it’s a roll of the dice with exploration targets. ORS will probably need to do a small financing to make sure it can fund Resguardo through to a proper drill test, but the program isn't expected to cost a lot and it should be easy for them to get money given the target that's in play.Sun Metals (SUNM, last at $0.115)SUNM is now back to less than where it all began in terms of price, but its higher share count means that the market cap is in the $15 million range, which is fair for a “slightly used good exploration target”, which about sums up the market view here. The company put out an update this morning on the balance of its 2019 drilling program and informed investors that the “winter drill program” was over and would be picked up later in the year. That’s not what people signed up for, myself included, so folks are hitting the exits. I’d expected drilling all winter at Stardust after all of the winter camp discussions, but it would seem to be that SUNM has some thinking to do about where to go next with the drill, which kind of puts things in a near-term limbo. Limbo is not a good place to be when your market cap depends on the market’s confidence in the program and geological model. My initial thesis on SUNM was that there was no way that they drilled their best hole on their first hole (Hole #421) into this new zone, but so far, that’s exactly what it looks like. The results today extended the 421 Zone further to the south and suggest that it may be open in that direction, but there’s no sign of the “guts” of anything just yet. It’s been disappointing to say the least, and the most frustrating part is that the system itself has all the right ingredients. The ingredient that is most relevant right now however is “time” and right now, waiting around for 5-6 months to see what plan and follow-up drilling SUNM comes back with isn’t palatable to a lot of people in a market that is presenting so many opportunities. As with Cantex, when the cards change, so does the market's willingness to bet on them. ****************************************************************That’s a lot of words for just a handful of short blurbs, but there’s a lot of information out there and no lack of ideas as the market moves forward. Time and time again, the one thing that I stress to friends is the need for diversification when it comes to this sector. In junior resource stocks, the volatility of success or failure can be either euphoria-inducing or gut-wrenching, but two keys to maintaining sanity are 1) always being able to live to fight another day, and 2) continuing to generate and evaluate new ideas. Working on being able to compare and evaluate those new ideas in the context of existing ideas and past experiences eventually leads to a more coherent view of a much bigger market picture... and that's a process that doesn't stop with any given drill result from any given company; and it is every bit as much of the prize in the long term.Happy hunting.[/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 ATU.V, BU.TO, CAD.V, CD.V, CANX.V, NLC.V, ORS.V and TXP.TO)

There is no lack of action in the market these days. Last week, the market swooned and took commodities with it as fears of the novel coronavirus spread across the globe. Oil is back in the low $50 range, with some estimates pegging demand destruction in China at some 3 million barrels per day while this virtual shut-in lasts. Copper shed 25 cents in a heartbeat, one of the biggest downward moves in recent memory. Gold rallied nicely, but the equities aren't overreacting to gold price moves in either direction so I get the sense that there still isn't any herd-like behaviour in the sector. The last two days has been a different story, with the indexes and materials sectors having a good day after many bad ones. What will tomorrow bring? I have no idea. I was stopped out of a lot of things on the swoon, as I am keeping stops tight on most things, so now I'm waiting to see volatility to mellow out a bit and perhaps see some trends reassert themselves.[urcr_restrict]

I noticed that the CEO of Touchstone (TXP.TO, last at $0.51), Paul Baay, was talking up his company's exploration success in Trinidad again at an energy conference down there, which is linked in this video. Just after the 3-minute mark, he goes into his view on bringing on "two" discoveries while indicating that he thinks little TXP might become the biggest onshore producer in Trinidad in 2021. Now, that's kind of like saying you're going to be the biggest minnow in the pond, but it is somewhat indicative of the level of growth that he is expecting (it's suggestive of something >10,000 boepd). I found the reference to getting production on from "two" discoveries to be quite interesting, because that would imply that the second discovery is indeed a discovery (testing of that well should be ongoing right about now). It's all just reading tea leaves at this point, but I've been adding stock based on the thesis that Coho and Cascadura are worth quite a bit more than the 30 cents per share the stock has gone up since they were announced (on 160.7 million shares, that's about C$50 million). I might be right, or I might not, but knowing that Coho-1 is "in the bag" and is expected to be tied in later this year lets me sleep a little better while I wait to hear more about the Cascadura test results, forward program, and potential size estimates.

I've also been thinking a lot about (and adding to) Neo Lithium (NLC.V, last at $0.75) lately. In seeing the Great Tesla Short Squeeze of 2020 (what a chart) and the fact that I think it's really starting to dawn on people that the EV revolution is real and inevitable, I just have to think that quality lithium deposits are going to be desirable assets for quite some time. To drive the point home, everyone that I know who drives a Tesla says they will never buy a car that takes gasoline again if they can help it; full stop. People aren't going to buy electric cars to save the planet, they're going to buy them because they offer better driving and ownership experiences. They have insane torque/speed off the line, nimble driving control, never make you stand outside in the cold at the gas station playing a game of 20 Questions before you even get to pumping your gas, don't pump out toxic gases into city air, are app-controlled, and require basically no maintenance in comparison. I have chosen to focus on NLC because its 3Q deposit is huge, has very low impurities, should be a low-cost operation (in terms of both capex and opex), and comes at a big discount to the NPV of the project. At some point, I strongly believe that something is going to happen with this deposit as battery suppliers look to secure access to lithium that is under their control for the foreseeable future. In the meantime, I can wait, but 2020 kind of feels like the year for this one. We'll see. I have a secondary holding in Critical Elements (CRE.V, last at $0.345) as well, but am bigger in NLC at the moment.

Today, I invoke the great wisdom of Chumbawamba for two reasons. First, this overall market just doesn't want to roll over and die just yet (it gets knocked down, but it gets up again...), but generally speaking I'm thinking more defensively than I have for some time. Second, despite getting kicked in the proverbial nuts on some names last year, there are always bright spots and new green shoots presented by the market and I'm seeing lots of opportunity out there. For a speculator like me, getting back up after getting knocked down is an old habit, and I always remind myself that diversification is what makes that possible.

On the news front, Canex (CANX.V, last at $0.22) has had a very nice move on the back of additional sampling results and geophysics at its Gold Range project, offering lots of opportunity for the sell-half-at-a-double crowd. More trenching and soil sampling is planned as the footprint of known gold occurrences increases, which ultimately will lead to drilling later this year. Cantex (CD.V, last at $0.73) reported some results from around a kilometre away from the last high-grade hits, but there we also lots of holes that were not as interesting. It's become a real treasure hunt now in terms of trying to track down mineralization in an area with faulting and minimal geophysics of any value. Cudney has been selling stock and voicing his general desire for better governance and management practices, which is probably weighing on it, but the real problem is that they don't know what they're dealing with just yet. Altura Energy (ATU.V, last at $0.31) is almost certainly working on their first well at Entice right now, not that anyone cares. If it works out, the market just might care though, because energy companies are generally in great shape these days and wouldn't mind adding assets that can generate big reserves and high netbacks, which is what I think Entice could offer. There's no sense in putting the cart before the horse though until some test results are on the table. As it is, the stock is silly cheap, but that's not unique to Altura, so I'll just wait. And then there's tiny little Orestone (ORS.V, last at $0.135). Orestone has a market cap of around $4 million and the more I think about it, the more I like it as a lottery ticket. I'm keeping my position small here as exploration is a high-risk proposition, but my thinking here is that even a small bet can pay off large given that there are 28 million shares out (43 million F/D). There was a company called Far West Mining that made a discovery (called Santo Domingo) in 2005-2006 that would arguably be of comparable size and value to what ORS is targeting at Resguardo. Far West went to a $175 million market cap shortly after discovery and was eventually bought for $725 million in 2011. I guess my point is that a stock can only go to zero, and in this case, success (which for me would be anything in the 0.5 g/t Au and 0.5% Cu range over 200+ metres in thickness) could mean a multi-multi-bagger, so I've made a smallish bet on that basis. ORS also likely needs some money for drilling, which I don't think they will have trouble finding given the quality of the target, but that's certainly a risk. Colonial Coal (CAD.V, last at $0.465) has had a big move off its warrant-induced lows (the warrants are all expired now) and could be set for much higher prices if my thesis regarding India's desire for met coal is right. I'm still waiting for some IP results/interpretation and more drilling from Azimut (AZM.V, last at $1.35) so nothing doing there. And old flame of mine, Burcon NutraScience (BU.TO last at $1.85) has had Nestle come to the table as a product development partner for the company's novel plant-based proteins. Burcon is a nutrascience company that specializes in the development of plant-based protein isolates used in food and beverage applications. The scale of this market is baffling, and current sustainability and “health” trends suggest that consumers are gravitating towards plant-based products in increasing numbers. The real challenge with using plant proteins in food applications is that it is very difficult to use a plant protein that doesn’t affect the taste, colour, or texture of the product in which it is being used. This is Burcon’s sweet spot of expertise, which is likely why they have attracted Nestle as a partner in product development and commercialization. A long time ago, in a market much the same as this one, Burcon used to trade with a $300 million market cap on the basis of its novel protein offerings and a partnership with Archer Daniels Midland on a line of soy-based protein products called CLARISOY. Market interest faded as ADM’s roll-out was much slower than hoped and Burcon drifted into obscurity until May of last year when Burcon entered into a JV agreement with Merit to get a plant built for the the production of its pea and canola derived protein lines. I'm not sure what this is worth, but the Nestle announcement certainly feels more like the beginning of something, as opposed to the end, so aside from keeping a somewhat prudent stop on this in the context of the broader market, I'm interested to see where it goes as it's right "on trend" with the sustainability push in the market.

That's a lot of writing for what was supposed to be a short note, but I think you get the point... there lots going on out there if you're looking. And, I'm certainly not a Chumbawamba fan, but today I just couldn't help it.

https://youtu.be/2H5uWRjFsGc

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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

With nothing but time on my hands these days, I've had a lot of time to think about a lot of stories; some new, some old. I got to Touchstone Exploration last night (TXP.TO, TXP.L, last at C$0.55) and realized that I really hadn't appreciated just how asymmetric the risk-reward has become, based on some fairly simple math.

Here's the punchline in one image that shows the impact to my view of value based on a range of outcomes for Chinook and Cascadura Deep, which I expect will be the next two wells into TXP's Ortoire block. What follows below just explains the rationale. All numbers in my scenario analysis table would reflect gas volumes net to TXP's net interest:

My math journey starts with Aventura in 2004, when it was bought by BG Group for C$228 million. Aventura had a similar discovery onshore Trinidad to what Touchstone has drilled at Cascadura (just to the west of TXP's lands) and it had the well on long-term production test when BG made its bid. Digging through past filings, Aventura's net 2P reserves at the time were 300 BCF, meaning that BG paid C$0.76/mcf for the 2P reserves. The natural gas price in Trinidad at the time was US$1.10/mcf and the CAD/US fx rates were similar to what they are today so I'm not going to worry about forex changes.[urcr_restrict]

Today, the gas price onshore Trinidad is in the US$3.00/mcf range, so clearly gas molecules are worth more now than they were in 2004... let's call it 150% more. So in a takeout, if gas was valued at C$0.76/mcf in 2004 when the gas price was US$1.10, I'd feel comfortable saying it was worth C$1.50/mcf today (i.e., the 2004 price plus 100%). Maybe a little less, maybe a little more, but that's what I'm going to run with...

It's important to note that Trinidad is currently short 400-500 million cubic feet per day of natural gas supply and has industrial customers running plants well below capacity as a result (for example, Nutrien (NTR.TO, last at $48.42), recently shut down/scaled back ammonia production due to lower ammonia demand and lack of natural gas feedstock).

So what does TXP have on its hands "today" at Cascadura? Well for one, they do not have any 2P reserves, but that's because the work hasn't been done yet. I'm thinking about hockey today, so I'll just say that when it comes to the market, you want to be skating towards where the puck is going, not where it is currently. So where is TXP going? What's the size of Cascadura as it stands today? I've run math on that before based on assumed areal extent and reported pay interval thicknesses, which I've laid out in at least one earlier post, and my current view is that Cascadura is likely to fall in the 200-300 BCF recoverable range as a start. Recall that TXP is an 80% interest holder here (Heritage, the state oil company, is the 20% partner), so TXP's net gas in the 200-300 BCF case is 160 BCF to 240 BCF. The middle of that range is 200 BCF (net), so that's what I'm going to run with here. That defines the leap of faith that I'm taking here and it's important to know that it is an assumption, but assumptions are necessary in speculation... and I think that my assumption is based in reality given the information that's been made available. Soon enough, I won't have to guess at all, as TXP is expected to get some kind of initial gas volume estimate prepared after it pulls the Cascadura-1ST downhole pressure recorders and integrates that data with the geophysics (Cascadura is covered by 3D seismic). Bottom line, for now, I'm running with 200 BCF net to TXP as a base case at Cascadura here (i.e., "Cascadura as is" in the above table) and then looking at what else is in the hopper in terms of upside.

If I'm running with C$1.50/mcf in the ground for gas (as detailed above), TXP's 200 BCF (my assumption) at Cascadura could be worth $300 million. That's $1.65/share. The stock is trading at $0.55; and that's just on what I think is already "in the bag" at Cascadura. To be clear, TXP still needs to get Cascadura tied in, but the gas will require minimal processing (no H2S) and it's only a 3-kilometre tie-in to a main gas pipeline with capacity, so I don't expect a lot more capital (i.e., dilution) for TXP to get to the stage where Aventura was when BG made its bid.

So in my mind, $1.65 is really my "base case" right now. Sure Cascadura might be a little bigger or a little smaller, but this is all just educated guessing anyway, so I think it's as good place to start as any.

What about Chinook? Well, for those who are really keen, here's a link to an old TXP presentation that shows a map of the Chinook fault block (aka "Balata West South") relative to the Cascadura fault block (aka "Balata West North"). Keep in mind that these are old maps and that they were made back when TXP thought that these were oil targets. The maps also grossly simplify the structural situation. If you saw a cross-section through this area, it would be complex, with stacking of thrust sheets in some places, including the Cascadura-Chinook area. My point is that maps like that are just gross approximations of the lay of the land, but they do illustrate that Chinook, all else being equal, appears to be bigger than Cascadura in terms of area. That jives with prior sound bites from past company interviews and forms the basis of my next layer of "option value".

Let's say Chinook is just comparable in size to Cascadura (i.e., not bigger, which it seems to be). That would mean that success at Chinook could add another 200 BCF (net) to the project. Those molecules would be just as valuable as the first ones, as more scale simply means a higher production rate plateau here. That's another $1.65 on the table. What if Chinook is half the size? What if it's 50 BCF bigger? 100 BCF bigger? There are lot of permutations. All this would be incremental to my $1.65 "base case". It could also be zero (i.e., they could drill a dry well), so there's that, but in my view I'm not even close to paying anything for the option anyway.

And then there's what I'll call Cascadura "Deep", which is really not that deep (~2000 feet deeper I believe), but it would be a separate accumulation from what was drilled and tested in the Cascadura discovery well, which had to stop short of the "deep" target due to high-pressure gas wanting to rush out of the hole that they thought was going to be an oil well. I think there's a very strong case for TXP's next well after Chinook to be a dual-purpose well at Cascadura. If another well was drilled at Cascadura, targeting the lowermost thrust sheet, it could also drill through the uphole reservoirs that have already been tested. If engineered properly, not only could another Cascadura well evaluate the deeper thrust sheet, but it could also be used as a second production well in the known uphole zones when the project comes onstream in 2021. Stifel GMP have hinted at this possibility in a recent research note and I do like the idea, so I  guess we'll see.

If I assume that Cascadura Deep is the same areal extent but half the thickness it could still add somewhere on the order of 100-200 net BCF to the picture given that more gas can be jammed into pore spaces at the higher pressures encountered at depth. That adds further to the "free option value" pile. Again, I pay nothing for this upside exposure based on my current view of the project.

So, to sum it up. My base case is that TXP already has a $1.65/share discovery on its hands that the market just hasn't appreciated yet given the early stage of the discovery.  If Chinook hits, I figure that adds another ~$0.50-2.00 per share of value. If Cascadura Deep hits, it could add another ~$0.50-2.00 per share. If you make goal posts out of all of that (see the table above), the range of potential outcomes that I see ranges from $1.65 to $5.85 per share, and that's for a stock trading at C$0.55 as I type this.

I started this note by talking about the asymmetry of the risk-reward here and I think I've laid that out as clearly as I can. I haven't even discussed the "biggest" target of them all, Royston, but I don't think that's necessary. If either of Cascadura Deep or Chinook hit, I'm piling significant upside on something that I think is already undervalued by nearly 200% and I don't think I'm stretching on the gas price or my volume assumptions at Cascadura.

My current best guess is that drilling should start up in July, and will start with the Chinook well. Trinidad was very lightly touched by COVID-19 and may apply restrictions to incoming workers, but is likely to "open up" in the near term for oilfield activity (as an imported contractor, I could think of worse fates than quarantining in Trinidad for two weeks before starting a job, as long as the quarantining was done in a suitably comfortable place!).

Does the market really appreciate what's on the table here? With the stock up just 15 cents from its 40-cent March-puke-out lows, I'd say that it doesn't. Not by a long shot.

Time will tell.

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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, ORO.V, ORS.V, CHE.UN.TO, NTR.TO, TECK.B.TO, YGR.TO, ENB.TO, SDE.TO, ARX.TO, and ATU.V

I’ve been quiet lately, but it’s not for lack of interest in the market. Quite the opposite in fact. Largely though, I haven’t changed my tune. I still very much like Touchstone Exploration (TXP.TO, last at $0.86) for its onshore gas discovery in Trinidad and I’m seeing market interest really pick up there. In addition to recognizing the predictable nature of its cash flow from gas, the market is starting to come around to the range of possibilities for what this could be worth. My sense is that the market is a little wary of getting too bullish ahead of Chinook drilling results, but I don’t think we’re there yet. With Cascadura-1ST downhole pressure data pending and a resource estimate on Cascadura about a month later, longs should get a decent handle of what the “backstop” looks like on TXP before Chinook reaches total depth, but make no mistake, a lot rides on Chinook. If Chinook misses, the market will likely assume that Cascadura is a one-off and speculators will hit the exits en masse for a few days/weeks before the Cascadura Deep target comes into focus. If Chinook hits though, the stock could go parabolic as market sentiment swings to something resembling “these guys can’t miss”. It’s sure to be interesting and the days/weeks going into Chinook results could be a tense moment depending on where the share price is at the time. Personally, I think the story is well backstopped at current levels, but there’s no accounting for sentiment and this market isn’t exactly even-keeled in that department. Chinook is an alluring target because it is just a mile south of Cascadura, but it is in a different fault block and thus is an independent structure. In faulted areas like this, you are relying on the faults sealing, or your target reservoir being faulted against something impermeable to make a trap for the hydrocarbons… and all of this assumes that your geological/geophysical interpretation is accurate, which is tough to do in a complexly faulted area (never mind the actual drilling!). There is encouragement from an old Shell well that produced some oil from what are interpreted as the sought-after Herrera sands, down-dip of the Chinook-1 target, but in the same structure. In that sense, Chinook resembles Cascadura; Cascadura-1ST had also had an old Shell well in a down-dip location (in the same fault block) with hydrocarbon indications and that sure turned out okay so far. It’ll be interesting to see what the market does with TXP over the next few months. The speculative value in names like this can range from “zero” to “quite a lot”. Because there are no official resource estimates for Cascadura yet, there is an inherent speculation in the name already, but I don’t think the market is stretching too much yet on valuation based on my view of what’s on the table.[urcr_restrict]

To the Canadian oil front... Altura Energy (ATU.V, last at $0.18). I still own it. Their netbacks on oil (70% of their production mix) at current price levels are around C$20/bbl and wells are now being brought back on stream. That won’t happen overnight, but that oil isn’t going anywhere and ATU is still funded for a well at Leduc-Woodbend and another exploration well at Entice as a result of a deal they cut last year to basically sell 1/6th of the company’s assets for C$10mm. It’s a call option on oil with one of the best management teams I’ve ever come across in a junior. I hope oil goes for a run, because these guys deserve to be rewarded for their patience and fiscal prudence. There appears to be some 40-80 million barrels of recoverable oil on the table at Leduc-Woodbend and that’s nothing to sneeze at given where it is located. You can get to any well site in the oil field and the coffee you bought at the Tim’s in Leduc will still be piping hot. This hasn’t been a great holding for me, but I haven’t seen this one in a good oil tape yet, so I’m hopeful that the ticking time bomb of oil-sector underinvestment moves prices to levels no one thought possible. I guess we’ll see if that happens. I bought some Yangarra (YGR.TO, last at $0.68) recently to get a little more Canadian E&P exposure. I like the CEO here a lot (real operator, real focus on costs, long lots of stock, bought stock recently, knows how to get deals done) and the stock is stupidly cheap relative to its NAV. YGR trades at about 30% of its most recently published PDP NAV (that’s only its wells that are drilled and on stream), but it trades at just 7% of its 1P NAV. Seven percent of 1P… hmmmmm. YGR’s 2P NAV is $17 per share. This is a stock that currently struggles to hold onto a 70c share price. I know that NAV’s can be inflated by assuming high future development capital, but the discount to its 1P NAV is the highest I think I’ve ever seen in a company unless it was going bankrupt. Given that I think the energy market is coming out of a trough, not going into one, I don’t mind owning something as beaten up as this one. The balance sheet isn’t “great” (~2x D/CF) but it’s not that bad either, and this really is a cheap option for me. The stock has seldom been cheaper and, well, I like to try to buy low and sell high. I also find myself holding a recent chunk of Spartan Delta (SDE.TO, last at $3.20), the fourth iteration of the Spartan franchise that has a self-stated goal of being a roll-up vehicle that optimizes costs and free cash flow. Sounds good to me. It’s a new story, so it’s early, but this is Bellatrix reborn without all of the debt and commercial contracts that sunk that story and it’s being led by a team that’s done well for investors in the past… a few times.

New Oroperu (ORO.V, last at $1.80) has been my favourite diamond-in-the-rough find. People ask me how I find these things. My answer: a long memory. When I first came across this story 6 or 7 years ago, I knew it wasn’t going anywhere any time fast, but I marked it in my mental calendar and watched gold in the meantime. Now, with the wind the sails of the gold sector, Barrick’s option agreement expiry date of December 31, 2020 is fast approaching and the market knows it. Even with its recent move, New Oroperu has a market capitalization of just $44 million; one of the blessings of having such a tight share structure. When I look at the Tres Cruces project relative to other opportunities out there, and I especially when I see recent deals like the Artemis deal for Blackwater, I get the sense that ORO holders are going to do just fine in 2020. This is basically a Teranga-Massawa deal in reverse (in that deal, Barrick had the deposit, but not the facilities) so I look forward to seeing it play out. The new corporate presentation on the company’s website (the first I’ve ever seen from them) is a very good run through the project and highlights why Tres Cruces is sure to get attention from a number of angles. The oxide cap has produced some very impressive intercepts at show depths with low strip ratios which really juices the economics here. Meanwhile the total resource of 2.6 million M+I ounces (plus 0.6 million ounces inferred) is open to expansion laterally and at depth. The potential for high-grade feeders at depth has already been realized in a number of past drill holes and most drilling on the deposit is limited to 300 metres or less. As a standalone story, this would still screen as one of the cheapest gold projects out there. In the windfall scenario, where Barrick simply walks away, a low-cost oxide heap leach project could likely be built for US$60-80 million, which is a pittance to the cash flow it would produce (I’m running with US$1000/oz operating margins on the oxide ounces). Right now I’m looking forward to seeing a resource estimate that breaks out the oxides separately for the first time, because that’s going to give me a very good idea of the minimum NPV of the project, or even more simply, what Tres Cruces is worth to Barrick if they run the oxides through their plant at Lagunas Norte. Barrick has reported that it has been recently drilling within the greater Lagunas Norte area, presumably looking to see if a more broad-scale project can meet its internal materiality hurdles (a higher bar for Barrick than most). It’s interesting to note that the Tres Cruces deposit even shows up in some of Barrick’s LN technical reports. This is a 1+1=3 scenario all day long and it’s been a long time coming. There are a lot of ways that this can play out and the company seems to be getting its ducks in a row before the show. My base case value here, based on 50% of the NPV10 of the 2% NSR and just US$50/oz for ORO's 30%-carried-interest ounces, is around C$100 million... and in this gold tape that may just prove to be overly conservative. 

And then there’s tiny Orestone (ORS.V, last at $0.125). The exact opposite of a value buy. It is a pure speculation on a shoestring exploration drilling program that should start soon, after having raised the funds in May. I look at a lot of exploration targets, and this one is so simple that even I can understand it. In a nutshell, Orestone’s Resguardo project is in a copper/gold belt in Chile that has produced many monster deposits. Historically, there were high-grade (1-7% Cu + 0.5 g/t Au) copper oxides mined from a shallow mine that followed brecciated, high-energy rocks down to around 100 metres depth, at which point the mineralization ran out. A couple of holes were drilled from upslope to test under the mine workings but found that the mineralization was not connected to anything, which is always interesting, because high-grade copper in breccaited/high-energy rocks doesn’t fall from the sky. It comes from below or laterally, or maybe a bit of both. I’ve read that at least one hole drilled under the old workings did intersect manto-like copper mineralization, but nothing that enthused those who drilled it at the time, who were not looking to solve a geological puzzle. At some point around the same time, a few IP lines were run near the mine and a potential IP anomaly to the west was flagged and recommended for further follow up. Soon after, the project was then left idle for years as sector interest faded. After that, Orestone was the next to roll up its sleeves on the project. The first thing they did was run some more IP lines over the old “lead” while doing a bit of field work at surface. The IP survey revealed a high-chargability anomaly that is just west of the old mine workings, and there are copper oxides leaking out of fractures at surface in moderately-to-strongly altered rocks above the IP anomaly. It’s exactly the kind of target that needs to be drilled, especially when 1) the technical set up is so similar to that of the Candelaria discovery and 2) the project is at the intersection of two regional scale structural trends. It’s a cheap shot at something that could be huge, but the risk is also exceptionally high, so the only way to manage the risk is with bet size. When I look at the range of market caps that other companies command based on prospects not nearly as advanced as Resguardo — and remember that Resguardo can be drill tested for something in the range of CDN$300,000 starting in a few weeks’ time — at least I know I’m not overpaying for what is a “good shot” at the exploration lottery. As they say, roll them dice.

When it comes to bigger, more stable companies that pay dividends, I’ve been liking the look of the Nutrien (NTR.TO, last at $49.27) chart lately (recall that’s the relatively new combination of Potash Corp and Agrium) and am waiting for the stock to break though the C$52 level, at which point I think it would probably be heading a lot higher as part of the reflation trade. Teck Resources (TECK.B, last at $14.11), Chemtrade Logistics (CHE.UN.TO, last at $5.88), Enbrdige (ENB.TO, last at $42.13), and Arc Resources (ARX.TO, last at $5.13) are all interesting to me as well. Chemtrade has only had a 5-handle one other time over the 18-19 years that I’ve been following it. I told myself that the next time it got down there that I would buy stock, so I did. Chemtrade deals with waste streams (it has energy sector exposure) and boring industrial chemicals/precursor chemicals that are essential to daily life… products that most people never even think about and that no one else wants to get involved in. Generally speaking, I’m positively biased towards energy, but that’s not a one-quarter view, that’s more of a 1-2 year view, owing in large part to the fact that I think sector underinvestment over the last five years, combined with what has just happened to the sector, is going to come home to roost in the not-too-distant future. I’m all for the electric vehicle trade and have exposure to that sector, but there are a billion cars on the road right now, and I don’t think that there’s any way the world can make enough electric cars over the next two years to make a meaningful dent in automotive demand before we realize that we’re way behind in terms of what’s necessary to make the transition from oil to electric more orderly from a commodity price perspective. It’s nice to talk about the shift to EV’s but the move is in its infancy. Plenty of time for another oil squeeze or two...

I’ll end this note with a clip from a man who was so eloquent and tactful in his commentary many decades ago, that he playfully highlights the absurdity of discrimination both then and now. I think that the reason that the clip elicits such a gut-busting reaction from the audience and interviewer is because Ali’s short stories and quips highlight what is self-evident to anyone with even an ounce of introspection when it comes to racial discrimination.

https://youtu.be/7eXdt1eGgCA

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