(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)
Volatility is currently off the charts, and the market is officially in coronavirus crisis mode, with U.S. indexes down roughly 12-13% from their recent highs. This level of uncertainty has led me to move to approximately 50% cash.
Gold and Cash: The Crisis Response
While liquidity concerns initially caused panic selling across all sectors, including gold, the yellow metal has since expressed its crisis-weathering properties, closing recently at a new 52-week high.
- Gold Stocks: Have been highly volatile, initially sold off for liquidity, but soon saw a strong return.
- Strategy: I retain a modest collection of gold stocks and long-tail calls on the GLD, while keeping a very close eye on the sector.
My "Sacred Cows" and Core Holdings
Very few positions have survived the recent carnage unscathed. My core holdings right now are primarily catalyst-driven stories:
Oil & Gas: Catalyst-Driven & Value Plays
CompanyTicker (Last Price)Key Thesis/UpdateTouchstone ExplorationTXP.TO ($0.70)Catalyst-Driven: Stock remains resilient and was up recently. The company secured cash for the Royston and Chinook drilling prospects. Testing the next zone in the Cascadura well is imminent. Little reason to sell this catalyst-driven story.Altura EnergyATU.V ($0.205)Deep Value/Long-Term Play: Recently reported reserves. Production testing underway on the first well at Entice, which the company called a "hydrocarbon accumulation." Testing is long-term, suggesting encouraging early results (not 100% water). Valuation (counting Entice at zero): Trades right at its PDP (Proved Developed Producing) NPV10, about 1/3 of its 1P NAV, and 1/5 of its 2P NAV. Low-cost structure and strong balance sheet allow it to "hibernate" through bad times.
Note on ATU: Private equity is expected to enter the Canadian oil and gas sector to rectify the "absurd valuations." The U.S. shale decline rate means prolonged oil price weakness will have a profound impact on supply, which tends to snap back slower than demand.
Battery Metals & Exploration
- Neo Lithium (NLC.V, last at $0.72) & Critical Elements (CRE.V, last at $0.38):
- Still holding positions due to the conviction in the long-term electrification theme.
- Both companies are seen as having quality (though very different) lithium projects.
- Northern Shield (NRN.V, last at $0.09):
- Released encouraging early observations from the Shot Rock property (Nova Scotia) during the market chaos (thick intervals of veining and alteration).
- Assays from the first holes are pending. The focus is on the assays and the vertical zoning to determine their position within the epithermal system. Surface samples previously yielded up to 5 g/t Au.
- Minera Alamos (MAI.V, last at $0.27):
- Retained as a pre-production gold story.
Macroeconomic Concerns: Pricing in Uncertainty
The market's panic has been triggered by the global spread of the coronavirus.
Fed Action and Yields
- The Fed made an emergency rate cut of 0.5%, and the market is pricing in an additional 0.5-0.75% cut soon.
- The U.S. 10-year yield falling under 1% is a massive signal of market distress, as investors prefer a tiny return in "the biggest market in the world" over the equity risk (even with the S&P's 2% dividend yield).
The Uncertainty Factor
- While stocks are down $\sim 12\%$ from highs, they were "priced for perfection," suggesting there is still "a lot of air under valuations."
- Disruption: Actual quarantine and travel restrictions (e.g., in China, Italy) have a significant short-term, rolling impact on hotels, restaurants, and many aspects of life.
- Is a 12% correction pricing in global uncertainty that could ripple for a year? The author believes no.
Behavioral Response
- Humans respond much more strongly to novel threats (new viruses, terrorism) than to familiar ones (the flu, heart disease). This "novel threat" perception is driving the current fear.
- Perspective: The 2009-2010 Swine Flu (H1N1) infected an estimated 61 million people in the U.S. and killed nearly 12,500, but the perception of risk was much lower because it was familiar.
- Solution/Therapy: Governments may need to provide financial support for people forced to quarantine. The market's fear could be assuaged by successful therapeutic treatment trials. Two trials for Gilead's (GILD) antiviral drug Remdesivir in Asia are expected to report results in April.
Conclusion: Fear and greed drive markets. The current environment is dominated by fear. Governments throwing money at the problem reinforces the bullish case for gold and gold stocks, even amidst the broader crisis. The key advice is to stay healthy, wash hands properly, and stay home if sick.
Happy Hunting,
Malcolm Shaw
