<![CDATA[Hydra Capital Partners Inc. - HYDRA BLOG]]>Tue, 17 Oct 2017 17:27:05 -0700Weebly<![CDATA[Valeura Gives a Shot in the Arm to the Faithful]]>Tue, 17 Oct 2017 19:14:19 GMThttp://hydracapital.ca/hydra-blog/valeura-gives-a-shot-in-the-arm-to-the-faithfulBy: Malcolm Shaw

(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 VLE.TO)

Valeura Energy (VLE.TO, last at C$0.58) released an update this afternoon on the progress of its BCGA (basin-centred gas accumulation) play in Western Turkey. The program is being funded by Statoil to the tune of US$36 million, which would earn Statoil a 50% interest in Valeura's 100%-owned Banarli license. For those who need a reminder, the prize here is likely in the multi-TCF range (Valeura has commissioned a resource study for later this year to quantify the potential for the first time). And not only is the prize large, it is also in one of the premier gas markets in the world (Turkey imports 99% of its ever-growing gas requirements) and is on the doorstep of Europe.

​Valeura expects to commence a $10 million well completion operation in November with the aim of evaluating multiple zones within the overpressured section of the wellbore. Four production tests with two frack stages per test will be carried out with the goal of establishing reservoir properties and quantifying flow capability. The company has previously called gas shows in the objective interval "encouraging" and the gas saturation "pervasive" (see press release from July 24, 2017). To be sure, I've seen a lot of plays with descriptors like these turn out to be nothing in the end, but that doesn't stop me from defining just what the optionality looks like in the event of success...

Valuera mentioned that 200,000 acres of its 500,000 acre Banarli block may be prospective for this BCGA play, which is roughly 300 sections of land for those used to North American plays. For perspective, a good rule of thumb for domestic Montney OGIP (original gas in place) estimates is 1 BCF/section per metre of pay. Valeura drilled 1,200 metres of overpressured section in the Yamalik-1 well and if I assume a net-to-gross of 25% through the overpressured interval, that would leave me with 300 metres of "net pay" (those are big quotation marks as this is a very, very hypothetical discussion), or about 300 BCF OGIP per section. If you start doing the 'sections times OGIP per section' math (and use something like a 20% recovery factor), you will start losing track of the zeros and begin to see why a company as big as Statoil is interested in this project. I'm not going to even type the number as it verges on ludicrous, but it is a very material prize if it's there.

So what is that option worth? What is the market valuing it at? With just over 73 million shares out, Valeura has a market cap of around C$40 million. The company has no debt and I'm going to guess it has around $5-7 million in cash today. That leaves me with a $35 million EV. The company's current gas production is about 1,000 boepd, which should spin off something like $7 million a year in gross cash flow. If I stick a 3x multiple on that, the shallow gas "as is" is worth $20 million (but who knows what the new 3D will turn up in terms of new shallow targets). I'll value the future spending commitments of Statoil at zero in this discussion. Boil it all down and it looks to me like the market is pricing this BCGA option at about $15 million.

Now, I've seen a lot of early stage exploration stories over the years, but I'm pretty sure that every time I've seen an oil and gas Supermajor spending this kind of money on a junior company's behalf (to earn into a project with company-maker potential) the market typically values these options far in excess of $15 million. I've referenced cases here before where similar European Big Gas stories have attained market caps in the $500 million to $1 billion range in the past. By no means am I saying that VLE is going to get there before results, but Valeura does look to be a very cheap option on a very large prize with a known and somewhat predictable timeline for results. Assuming the testing program starts at the end of November and runs for 60 days, VLE investors should see results in late January or perhaps mid-February of next year. 

I have no idea how far and wide the speculative appeal of Valeura's situation will spread ahead of test results from the Yamalik-1 well, but it should be an easy hold for anyone long stock at this point and wondering why they didn't sell it before at $1.25. For people new to the story, I would think that the risk-reward looks pretty attractive at this level so I would expect that Valeura has already made its lows for the year unless someone gets very motivated to do some tax-loss selling. It's been years getting to this point and if you're reading this, you are one of a very small group of people who are aware of Valeura and what they're chasing in the Thrace. Sometimes being early is the hardest (and riskiest) part, but the reward is big enough that I don't mind the wait, or the risk.
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<![CDATA[Transglobe Energy's Cheshire Grin Shows in Q3 Update]]>Mon, 16 Oct 2017 14:03:11 GMThttp://hydracapital.ca/hydra-blog/transglobe-energys-cheshire-grin-shows-in-q3-updateBy: Malcolm Shaw

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

Today Transglobe Energy (TGL.TO, last at C$2.00) announced a third-quarter operational update that gave a few clues as to the company's next leg of growth. With the concessions in the Eastern Desert more or less delineated (look for low-risk development wells starting in Q4), Transglobe is starting to get active on its next development area in the Western Desert at South Alamein. The historic Boraq-2 discovery was opened up and flowed from one of two zones at a rate of 1,140 barrels per day of 35-degree light oil over a short test. The purpose of the test was to confirm the historic results and ". . . to re-establish oil production prior to filing a development plan for the Boraq area." Testing on the recently-drilled Boraq-5 where two zones have log-indicated oil pay is set to start soon and be completed by mid-November. Should test results support the decision, Transglobe has indicated that South Alamein can be brought on-stream relatively quickly once a 20-year development lease has been granted. Nothing was said about the South Ghazalat and NW Sitra exploration concessions (also in the Western Desert), but prior guidance has been to look for exploration wells on those concessions in 2018... and those could be some sizeable targets.

As I've said before, I think that very little is priced into the stock for South Alamein development or for any of the exploration upside at South Ghazalat and NW Sitra concessions. South Alamein also has the potential to yield additional exploration discoveries on a number of mapped structures around the Boraq discovery. The real kicker in a South Alamein development scenario is the $80 million cost pool that Transglobe has on that concession. That cost pool would further enhance what I believe will be a very robust economic case for Boraq development. The market will surely look forward to Boraq-5 test results (mid-November) and any indication of the timing of any development program, so stay tuned.

In Canada, the company completed three new horizontal wells with more than double the stages and proppant used by the prior owner. Translgobe says that the initial rates from those wells are "very encouraging", but the company is waiting for 30 and 60-day rates before saying much more about the results. The theory is that new drilling and completion methods have the potential to increase the production rates and ultimate recoveries on the Harmattan asset. With well costs coming in at CDN$2.2 million per well, relative to initial estimates of $2.7 million, it would seem that Transglobe is on track to make believers of those who doubted the acquisition late in 2016. Results from the new Harmattan wells should be out sometime in Q4 2017.

With both WTI and Brent oil prices on the move lately, Transglobe is well positioned not only to ride the wave of any commodity price move but also to deliver value creation through the drill bit in both Egypt and Canada. TGL's stock is up over 50% since its September gift-like lows, but at $2, I still think the company is grossly undervalued and I look forward to additional updates over the next couple of months which should set the stage for 2018 and beyond. Today's update isn't an Earth-mover, but it should serve as a reminder that Transglobe's quiet nature doesn't mean that there isn't a lot more to the story than the valuation would indicate.


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<![CDATA[Got Zinc? CZX Delivers a "Massive" 58 Metre Thick SEDEX Intersection]]>Tue, 03 Oct 2017 20:38:41 GMThttp://hydracapital.ca/hydra-blog/got-zinc-czx-delivers-a-massive-58-metre-thick-sedex-intersectionBy: Malcolm Shaw

(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 CZX.V)

After market close today, Canada Zinc Metals (CZX.V, last at C$0.32) released additional results from this summer's definition/metallurgical drill program at the Cardiac Creek deposit in British Columbia. To use the company's own description, hole A-17-137 intersected a "massive envelope of mineralization" measuring 57.8 metres of 11.8% zinc-plus-lead plus 19 g/t silver. Included within this interval was 15.4 metres grading 22.6% zinc-plus-lead and 36 g/t silver. You can read the full press release linked here. I had expected good results from this hole based on visual descriptions, but the true thickness of the intercept is impressive. To help illustrate the scale of a hole like this, it may be useful to picture a 20-storey building's worth of high grade lead-zinc mineralization... and that's just the thickness.

I've included figures below from the press release. Essentially, they show the 1.2 kilometre long surface projection of the deposit (left), the orientation of the mineralization (steeply dipping), and the nearly 800 metre down-dip extent of the mineralization (right):
Cardiac Creek is among the largest undeveloped zinc projects in the hands of a junior and its scale is somewhat humbling. Over numerous drill programs, mineralization has been traced along a strike length of roughly 1200 metres, some 800 metres down dip, and the deposit is still open at depth. True thicknesses generally range from 10 metres to as much as 50+ metres. This high-grade, lens-shaped deposit is not only large in terms of tonnage and contained pounds (roughly 4.7 billion pounds of zinc... 3.5 billion lbs indicated and 1.2 billion lbs inferred), but its mineralization is generally predictable and laterally continuous. SEDEX deposits can be wonderful things to mine in light of their predictability and continuity and Cardiac Creek is oriented in a way that means that gravity can do a lot of the work during extraction (i.e., drift into the deposit from the side and mine upwards).

With zinc prices at 10-year highs, it's hard to imagine a better time for CZX to finally shine. I suspect there would be cost synergies in developing CZX's Cardiac Creek alongside of the nearby Cirque deposit (owned by Teck and Korea Zinc), but I'll leave that speculation alone for now. What I will say is that if I'm a large company that's serious about expanding my zinc asset development pipeline, Cardiac Creek has to already be on my radar... today's drill holes just put an exclamation point on that.

With an updated resource estimate expected in Q2 2018, metallurgical test results in Q1 2018, and a (first-ever) PEA in Q2 2018, CZX holders have a busy calendar in front of them. Additional drill results are still pending over the next few/several weeks, but with results like those released today, I suspect a few heads will turn CZX's way. Investment bank analysts will no doubt start to sharpen their pencils on this little company with a deposit that is too big not to know about. In a market that is looking for ways to get leverage to a predicted looming zinc shortage CZX seems like a logical bet to me, but as always, time will tell.
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<![CDATA[Transglobe Trades at an EV of Under $5k Per Flowing Barrel]]>Mon, 18 Sep 2017 19:02:10 GMThttp://hydracapital.ca/hydra-blog/transglobe-trades-at-an-ev-of-under-5k-per-flowing-barrelBy: Malcolm Shaw

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

I've highlighted Transglobe Energy (TGL.TO, last at C$1.38) here before -- last time I did the stock could be had for around two bucks. On Friday, I watched in awe as a sell program at Goldman took the stock down over 10% on the day on high volume, followed by some decent-sized MOC (market on close) trades. Today, I see that Transglobe has traded even more volume than Friday, a big chunk of which was through Canaccord, and the stock is up around 6% on the day at the time of writing. I typically won't highlight price or volume moves on a stock unless they are news related, but the trading action in Translglobe made me re-evalute my position as it's one of my worst performers this year that I still own. When I looked through the corporate presentation, I was shocked by many of the metrics, but one in particular stood out... TGL's "enterprise value per flowing barrel" (a.k.a., EV/boepd).

At its current price, TGL trades at an EV/boepd of US$4,750 (TGL also trades in the U.S. under the symbol TGA and reports its financials in USD). That's less than $5,000 per flowing barrel! Transglobe's current enterprise value is US$76 million and the company expects to produce an average of between 15,500 and 16,500 boepd this year. For those not familiar with energy sector metrics, EV/flowing barrel (i.e., EV/boepd) is probably one of the fastest ways to size up a company with a single number. As long as the reserve life and production profile are reasonable (which they are for TGL, which has an 8.6 year 2P RLI... maybe a little low, but there's good potential for reserve adds from the 2017 drill program) and you know what commodity (and what kind of margins) you're dealing with, EV/flowing barrel is a metric that will quickly identify whether a particular company may be "cheap" or "expensive". If you haven't already guessed, TGL screens as being very, very cheap (I can make the same argument on EV/DACF and EV/NAV as well). 

For context, back in 2003 when I was still working in the oil industry, we used to benchmark at around $20,000/flowing barrel as a "fair" price to pay for acquiring production. Back then, the oil price was $25-30/barrel... soooooooo, TGL now trades at around a quarter of that 2003 benchmark level. I fully appreciate the fact that oil is out of favour right now, but TGL has entered silly-season at these prices and I think the volume that's traded over the last two days is a classic "flush out" low. That's when the last marginal seller of any size pukes out their stock in a given name thereby clearing the way for the market to properly value the company in question. You often see "relief rallies" following flush-out lows as the company is revalued to something more rational. TGL makes good money at $50 oil and the company states that it is cash flow positive down into the low-$40 range, which is about par for the course in its peer group. The peers however, trade with valuations anywhere from 4-10x the price on an EV/boepd basis, so I think there's a lot of room for price appreciation/revaluation.

Look, I have no idea when or if people will ever come back to the energy sector, but I doubled down on my TGL position at the $1.35 level because it's just too damn cheap here for me to ignore. I know that lots of energy stocks are cheap, but I challenge anyone to find me a company with a longer track record and as much potential upside (particularly via TGL's exploration concessions in the Western Desert) that trades as cheaply at TGL does right now. TGL has no debt problems, no receivable issues, no looming boogeymen that I am aware of, and yet it trades like a penny stock with the plague. Ross Clarkson was recently interviewed by U.K.-based Proactive Investors (link to it here) and while the platform may be promotional, Ross is far from it. Ross is one of the nicest CEO's I've ever met and he is fully invested in this company. This is not a fly-by-night oil operation... the company has been in business for over 20 years and I've witnessed the stock trading as high as C$20/share. I used to think TGL was cheap at C$6, but I didn't start buying it until the low-to-mid C$2 level. Now here it sits at gift-like levels that I think will yield a big return for me if I can exercise a little patience.

Even though the bottoming process can sometimes take a while, I'm pounding the table on TGL here. It's way, way, way too cheap at these levels and should be heading into a good news cycle of development wells, testing at South Alamein (Ross says within 2 weeks in the interview linked above), followed by "Big E" exploration potential in 2018. Timing entry points can be tough, but I think TGL is making it easy here for me. In time, I pretty sure I'm going to look back at these prices as a journey to Oversoldsville, and at least I'll have some stock to show for it as a souvenir.

Happy hunting.


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<![CDATA[Aurion Site Visit Report: An Embarrassment of Riches]]>Fri, 15 Sep 2017 11:35:12 GMThttp://hydracapital.ca/hydra-blog/aurion-site-visit-report-an-embarrassment-of-richesBy: Malcolm Shaw

(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 AU.V)

Yesterday Aurion Resources (AU.V, last at $3.11) reported that drilling has started on its Aamurusko prospect, the most advanced exploration target within the company's 100%-owned Risti Project in Finland's Central Lapland Greenstone Belt. The company also detailed sample results from two other promising target areas named "K2" and "Notches" with visible gold noted in samples from both locales. The stock promptly hit a new 52-week high as investors continued to digest the scale and potential of the land package that Aurion has put together over the past few years. Aurion has assembled a truly district-scale land position in what is a grossly under-explored region and the story is only just beginning from an exploration perspective. Yesterday's news follows a recent $16 million investment by industry giant Kinross Gold Corp (which takes Kinross to a 9.98% equity stake) that has boosted Aurion's treasury to around $23 million... that's going to pay for a lot of drilling. Twenty-one holes totalling 3,400 metres of drilling are planned in the Phase 1 program (all at Aamurusko), but that can (and likely will) change quickly as the program progresses. The company should be able to complete a hole every 2-3 days and I would expect results sometime in mid-late October or early November. A map detailing some of the prospect locations is shown below:
I recently had the opportunity to tour some of the prospect areas in and around Aurion's Risti project in Northern Finland and I can say, without hesitation, that I was humbled by the potential that I saw and the quality of the work that is being done. In many ways, Aurion is re-writing the book on the Central Lapland Greenstone Belt by leveraging nearly 100 years of learnings from other world-class mining districts like the (highly analogous) Timmins camp in Ontario. It's almost like Aurion has time-travelled back to the earliest days of the Timmins camp armed with knowledge of what's yet to be discovered. New exploration models and ideas have given Aurion a remarkable ability to generate large, high quality exploration targets through simple surface prospecting in areas that have been overlooked for decades because of outdated thinking. My impression is that Finland is about to get a lot more attention from the gold community as a result of what Aurion has already accomplished and the story is only just beginning...

In terms of geography,
once you get off the plane in Kittila (a 90-minute flight from Helsinki), you could very well convince yourself that you were in northern Ontario somewhere around Thunder Bay. Topography is generally flat with open pine and birch (largely managed) forests that make for relatively easy walking with good visibility. You could drive to all of the sites we visited in a Honda Civic if you wanted to, and access is year-round (drilling can also take place year-round). Despite being north of the Arctic Circle, it doesn't feel like you're on the moon when you're up there. We were never farther than about 45 minutes from two of the two largest towns in the area and there is excellent access to labour, power, water, and all the logistical support you would need to actually build and operate a mine. The first stop on the World Cup ski tour is actually very nearby and as a result there are some great accommodations in the area as well. The project areas we visited are easily accessed by a combination of paved highways and high-quality logging roads. In short, access and infrastructure are excellent.

Here's a panoramic of the terrain within the Aamurusko area, with Exploration Manager Mathias Forss (centre) schooling a couple of Haywood attendees as chairman David Lotan (grey jacket) looks on:
When we got out of the vans on the first day in the field, the area looks generally unremarkable, but as you start to head into the woods, it's not long before you notice the abundance of angular boulders in the area. There are so many boulders in fact that you really have to watch your footing to avoid rolling an ankle in places. Closer inspection reveals that many of the boulders exhibit iron-oxide staining, quartz veining, and that some of them are actually just blocks of quartz vein material. Aurion has diligently recorded and marked the locations of all of the quartz boulders sampled in the area and has by no means sampled them all, but you quickly get an appreciation for just how much vein material there is at surface. Look a little closer at some of the quartz boulders or whack one with a rock hammer and you're going to start to get gold fever. The is visible gold ("VG") all over the place. If you pick up a quartz boulder and don't see VG after whacking it with a hammer a few times, you can toss it and go to the next quartz boulder which may be 10, 20, or 30 feet away... or perhaps even closer buried under some moss and blueberries. It was an embarrassment of riches in many ways. Most attendees remarked that they had never seen this much VG at surface. CEO Mike Basha and technical advisor Eugene Flood took turns highlighting textural features, mineralization, and context at sample sites throughout the project.

Below, CEO Mike Basha (centre, left image) shows where we've been and where we're going and technical advisor Eugene Flood (on right, right image) points out key textural features in one of many quartz boulder samples:
As the day went on, the group climbed some subtle topography towards the "discovery boulders", the giant quartz blocks with abundant VG that initially defined the Aamurusko target area. The boulders are huge and some have been hand dug to a depth of 3-4 feet to see just how far down they go. The images below give an appreciation for size, angularity, and abundant VG in these quartz blocks and when you're standing beside one of them you certainly don't get the impression that they've moved very far. Below, Mathias Forss stands in a hole next to one of the discovery boulders while a few other people stand on top:
And here's a close-up of the surface of one of the other discovery boulders nearby showing the coarse visible gold (below). The gold could be seen not just on this surface, but around the corner of this block as well, giving a sense of its pervasiveness of gold mineralization throughout the boulder. Some of the initial drill holes are being targeted not far from this quartz block. These large blocks, as well as many of the other quartz boulders in the area exhibited classic "crack and seal" and extensional textures, which are both strong evidence of multiple mineralizing pulses coursing through the Aamurusko area. These textures not only speak towards the mineralizing events that have led to the gold deposition in the Aamurusko area, but also to the potentially/likely significant strike and depth extent of the system. When the field observations are combined with the predicted structural model, geophysical data, and analogous settings in say, Timmins, it's not hard to see why there is so much excitement surrounding the Aurion story. Aurion has assembled a highly coherent database of information that all points to a significant, large-scale, gold mineralizing event covering a huge area (or areas) and the company has only just scratched the surface of the potential that's on the table.
My time is running a bit short this morning, so I'm going to wrap this note up here, but hopefully this brief summary has been helpful to those following (or new to) the Aurion story. With drilling now underway, it won't be long before drill core starts filling core boxes and samples are sent for assays... and given that this gold and these boulders didn't fall out of the sky, I like Aurion's odds of making a discovery with the drill bit. I'll end the note with a picture of yours truly holding a piece of a beautifully textured quartz vein with some very coarse VG in it that I found literally "laying around" in one of the prospect areas. They say that even a blind squirrel trips over a nut once in a while, but if I can find VG like that while casually strolling through the forest, I like Aurion's odds with the drill bit very much indeed. This is still a very speculative venture to be sure, but as I mentioned in my last note, there are informed speculations and uninformed ones and this one seems to be firmly in the camp of the former. If you believe in letting the rocks do the talking, Aamurusko is shouting from the rooftops at the top of its lungs, but, as always, time (i.e., drilling) will tell. Stay tuned.
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<![CDATA[CZX Drill Results Start to Roll In: 28.7 Metres of 10.4% Zinc-Lead Kicks Things Off]]>Fri, 15 Sep 2017 02:00:31 GMThttp://hydracapital.ca/hydra-blog/czx-drill-results-start-to-roll-in-287-metres-of-104-zinc-lead-kicks-things-offBy: Malcolm Shaw

(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 CZX.V)

Tonight Canada Zinc Metals (CZX.V, last at $0.305) started to report assays from its recently completed drill program at the Akie Project in British Columbia. The highlight hole was 28.7 metres of 10.4% lead-zinc and that is true width. This is a high-grade, laterally continuous, generally predictable SEDEX deposit with big tonnage. It feels like it's about time the market woke up to this name, but I suppose we'll see tomorrow when the stock opens for trading and in the weeks following as additional pending assay results start to roll in. Read a little more on what's to come near the end of this note...

Back in November, I had suggested CZX as a way to get exposure to a very large zinc resource at a very attractive price, and in a very good jurisdiction. Well, since then, zinc is hitting the radar of all serious mining investors as the metal has rallied 40% over the last twelve months and yet CZX can actually be had for less than the price it was when I mentioned it 10 months ago. So what gives?

First of all, CZX suffers from a massive identity crisis as it is perpetually confused with Canadian Zinc Corp (CZN.V). Most people I talk to have never heard of CZX, but almost all are aware of CZN. I know that seems like a ridiculous situation, but it's actually true. I've talked to many industry contacts who had never heard of the company before I asked them about it, but were quite familiar with CZN.

Second, CZX hasn't exactly been active with the drill bit in recent years. Despite having drilled 65,000 metres over the life of the project, only 10,000 metres have been drilled at the flagship Cardiac Creek deposit since 2012. That's not a lot of news flow and investors have short attention spans and limited bandwidth... after all, there are a lot of companies to follow out there and lack of news is a real buzz killer.

Third, there isn't a single broker covering CZX at the moment (that's a hint-hint to all you investment bankers out there looking to get involved in a huge zinc deposit in B.C. next door to Teck). That seems insane to me... this is a 27.7 million tonne (19.6 million tonnes indicated, plus 8.1 million tonnes inferred) zinc-dominated SEDEX deposit (8-10% Zn+Pb with a 5:1 to 6:1 Zn-Pb ratio)... but you won't know that unless you make it to slide 17 (!) of the corporate slide deck. Slide seventeen!! One of the largest undeveloped zinc assets in the hands of a junior company and CZX doesn't highlight that point until two-thirds of the way through their corporate presentation. Well, at least I can say that they are not promotional!

The Cardiac Creek deposit is located within a district scale exploration land package (part of which is optioned to Teck and Korea Zinc) in British Columbia. Sure there's still some metallurgical work to do (early work was encouraging, to quote from the June 2016 43-101 report  "
Metallurgical studies to date, although preliminary in nature, indicate that the deposit is amenable to standard extraction methods used at similar deposits.") and the company won't have its first PEA completed until mid-2018, but this is 4.7 billion pounds of zinc trading at a market cap of C$50 million (with no debt and over $5 million in cash). Oh, and as of last September, Chinese giant Tongling Nonferrous Metals Group owned 32% of the stock. That's a decent vote of confidence and pretty much a blocking position for Tongling, but given Tongling's history of buying assets they like, you'd think that a deposit of this size has to be on their list of zinc targets to consider. By any comparison, CZX screens as being dirt cheap.

Look, I could go on all day about how cheap this big little zinc company that no one has ever heard of is, but for now I'll leave you with this link to tonight's press release confirming additional high grade mineralization with many assays yet to come. And one of the holes yet to come should be a zinger if my instincts are right. Back in late July CZX reported that, and I quote (the emphasis is mine): 


"Drill hole A-17-137 intersected a massive 109.20 metres (core length) of the Cardiac Creek zone from a depth of 466.80 metres to 556.00 metres. The mineralization displays a distinct increase in sphalerite [a zinc-rich mineral] and the mottle-textured quartz-carbonate-sphalerite-galena-rich [a lead-rich mineral] bands become the dominant texture throughout the zone. In addition to the Cardiac Creek zone, a 5.54-metre section of massive sulphide was intersected in the footwall of the deposit from 559.42 metres to 564.96 metres, which consists primarily of fined-grained, brassy pyrite that has been crosscut by carbonate-quartz veining that is host to abundant creamy red-pink sphalerite and local galena."

I think I want to be around when that hole comes out... because even though it's not true width, it should be the kind of hole that puts CZX on the radar of a much larger audience who will start asking why they've never heard of this nearly-5-billion pound zinc asset before. My thinking is that CZX should have a short ride to the 60-70c range, at which point institutional money will start to come in, as long as the zinc price continues to cooperate of course. There are very few zinc assets of this size, grade, and quality that I'm aware of and with district scale exploration potential on the adjoining properties... and to top it all off, I think there's a good chance I can get a spinco out of this along the way if Cardiac Creek is eventually groomed for sale or is outright sold.

Happy hunting.
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<![CDATA[Pan Orient Has A Little Oil, but Is It Enough?]]>Mon, 28 Aug 2017 13:18:57 GMThttp://hydracapital.ca/hydra-blog/pan-orient-has-a-little-oil-but-is-it-enoughBy: Malcolm Shaw

(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 POE.V)

In the oil exploration game, it's other never as simple as you might want it to be. Pan Orient Energy (last at C$1.81) released a drilling update on the much anticipated AYU-1X well and it would appear that the 'anticipation' is going to last a little longer as results were encouraging, but don't appear to be a clear-cut success. Preliminary analysis suggests that the well found "5.5 metres of high porosity net oil pay at the top of good quality reservoir in the Batu Raja limestone", which was the primary target interval in the well. That interpretation is supported by wireline logs, pressure data, and oil samples, so that's about as much confirmation as you're ever going to get without a flow test. Pan Orient went on to say that, "significant indications of hydrocarbons in the form of oil shows and high gas readings in well-developed sands of Gumai age were also found". That might mean that Pan Orient is close to something of interest in the secondary Gumai-age target interval, or it  might mean that oil has simply swept through the structure at that level.

The well reached a total depth at 1,140 metres in granitic basement an August 21st, which was about 400 meters shy of the projected total depth as indicated on the drill curve in the company's corporate presentation. To me, that suggests that the structural interpretation was off by a fair bit, as the well was TD'd before the projected top of the Batu Raja (which was pre-drill estimated to be at 1,200m depth). It's unclear what implications that may have for the greater structural complex.

Based on the results of the AYU-1X well, the partners have elected to drill a sidetrack (ELOK-1X) to a subsurface location about 700 metres south where they aim to evaluate a possible thick wedge of Lower Talang Akar sandstones that are on-lapping the AYU-1X high and thus could be oil charged. The well is expected to take 30 days to drill.

So what does it all mean? For one, the presence of oil in highly porous Batu Raja limestone is a very good thing. It means that the development of reservoir in the Batu Raja interval has been proven and that oil has migrated into it. However, 5.5 metres of porous limestone may or may not cut it in the jungles of Indonesia. I ran some quick math on 5.5 metres of oil pay assuming 25% porosity, 75% oil saturation, and 30% recovery and I can end up in the ballpark of 3-5 mmbbls recoverable per square mile. That may or may not work, depending on a number of factors, including development costs and the prevalence of porous Batu Raja limestone in the area. It also remains to be seen where thicker Batu Raja oil pay might be found, if anywhere, in the greater structural complex. In a nutshell, I would say that more information is needed via updated mapping and/or additional drilling.

However, if the Lower Talang Akar sands are found to be both thick and oil-charged in the ELOK-1X sidetrack, the odds of commercial success are likely going to look a lot better. Just 30 more days of waiting... 
here's hoping they find a nice thick section of oil-charged Lower Talang Akar sands.

In the meantime, investors are left on edge again, waiting for more data. I have sold some of my stock this morning (for a small gain relative to my most recent purchase price of $1.60) in order to reduce my risk as the hopes of a thick Batu Raja oil hit on the first well is off the table, but I'm definitely keeping one foot in the door should the ELOK-1X sidetrack come up with the goods. In light of the oil pay encountered in the Batu Raja limestone, I would imagine that the partners will also be trying to find thicker Batu Raja reservoir in a structurally favourable position... surely that will be one of the topics at the upcoming partner meeting.

Stay tuned.
 
UPDATE: After having a chance to catch up with the Company since my initial writing, I am intrigued by the Gumai potential in the greater structural complex. The AYU-1X well was drilled outside of mapped maximum closure at the Gumai level, but there is a very large (up to ~100 square kilometres), pancake-like Gumai closure mapped up-dip. If the oil shows encountered in this interval within the AYU-1X well are an indicator of up-dip oil charge in the mapped Gumai closure, then Pan Orient may have bagged its white whale at last. The only "problem" is that in order to get that answer a new well will have to be drilled to the north from a new pad, which would likely be in another 9-12 months... and these days investors have short attention spans.


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<![CDATA[Valeura Sell-Off Stacks the Odds in Longs' Favour]]>Tue, 15 Aug 2017 13:09:28 GMThttp://hydracapital.ca/hydra-blog/valeura-sell-off-stacks-the-odds-in-longs-favourBy: Malcolm Shaw

(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 VLE.TO)

Usually market action alone isn't enough to prompt me to write on a note on an individual stock, but Valeura Energy's (VLE.TO, last $0.55) recent trading has me raising an eyebrow. A lot of different elements define share price direction for periods of time, and as we all know... stocks go up and stocks go down. I once asked a veteran Bay Street trader what his view was on what determined general market and individual stock direction. His answer was, "It's simple, stocks go down when there are more sellers than buyers. Stocks go up when there are more buyers than sellers." While the simplicity of his answer seemed a bit silly at the time, there's a pure wisdom to it that can't be ignored. You might think you have the best stock in the world, but if you're the only one that's buying it, you probably won't be happy with the share price performance. Similarly, when a feeding frenzy is on in a particular stock it can feel like money is falling out of the sky as buyers outbid each other day after day.

There are a number of things that go into determining the buyer-seller balance and one of the most important things is short-term sentiment... and when it comes to small cap stocks, press releases are one of the key drivers of sentiment.  Press releases provide a point-in-time sample of a company's progress. They provide something for analysts and investors to chew on, evaluate, and maybe even act on. The same news can sometimes be perceived as "bad", "good", or "neutral" by different investors depending on a number of factors specific to each investor. In Valeura's case, an interesting situation has developed whereby short-term disappointment from the company's side-show shallow drilling program has taken centre stage while the "main act" deep, basin centred gas accumulation (BCGA) play is waiting patiently in the wings. If anything, the deep gas play has never appeared to be more promising, and yet investors appear to be selling the stock because of a disappointing set of shallow gas results.

Now, first things first, I'm not going to be a VLE apologist. The most recently reported shallow gas results leave much to be desired. Even the company used the dreaded words "production additions . . . are below expectations". As a result, VLE management is going to hit the pause button on the shallow gas program, probably have a heart-to-heart with the technical team, re-evalaute the prospect portfolio and hopefully come back to the program in 3 months or so with a better success rate. Generally shallow gas drilling success rates with 3D seismic should be in the 60-70% range, but lately Valeura has been making the shallow program look a lot more difficult than the market thinks it should be. Some investors are clearly fed up and have sold the stock down to levels not seen since late 2015. I'd like to say I can't blame them, but after thinking on it a bit, I think the sellers are missing the bigger picture. Enter the BCGA...

The Valeura's game-changer BCGA play has never been more advanced. Statoil, the 11th largest oil company in the world, has funded the drilling of the first (4200 metre) deep well into the BCGA cell where gas shows were noted throughout the target interval. These gas shows were seen completely outside of structural closure, which is a positive indicator for the potential presence of a BCGA. The well encountered 1,300 metres of overpressured section with a 0.79 psi/ft pressure gradient, which means it is nearly 100% overpressured. That overpressure means that if gas can be liberated from these rocks it will have a lot of energy behind it, which may translate into high flow rates. An extensive multi-stage fracking and testing program is being designed that will commence late in Q3 2017 and I'm sure that the completion program will evaluate a couple/few different completion methods.

This is exactly what long-term VLE investors have been waiting for... shallow gas or no shallow gas, for the next 4-6 months the sentiment behind VLE will likely be driven by speculation on the deep gas results. The prize is enormous and the speculation sound. You don't speculate to get 10-20% returns, you speculate to try to make 500%+ returns.

As a result, VLE can probably best be viewed as a call option at this point. There is clearly some terminal value in the company and its infrastructure and VLE currently trades at around its 1P after-tax NPV10 and less than half of its 2P after-tax NPV10. And the call option has a good length on it... Statoil is currently proceeding with Phase 2 of its earn-in (a US$10mm, 500 square km 3D survey) and will have to either pay VLE US$5mm or drill a second well in Phase 3 (and I suspect that Statoil isn't just being nice by shooting the Phase 2 3D survey). That means that the dream of a big payoff is alive through mid-2018 at least. In terms of the size of the potential payoff, history has shown that the BCGA play could be worth anywhere between zero and a billion dollars. That might seem like a ridiculous range, but it is probably about right. Both Falcon Oil and Gas and BNK Petroleum reached the $500mm-$1B market cap club when sentiment was at their backs in BCGA plays in Hungary and Poland, respectively. If VLE gets a good flow rate out of the BCGA with Statoil as its partner, it would be hard to argue that VLE would not be going to at least to the hundreds-of-millions market cap range. Heck, even at a $200 million market cap, VLE would be up around 400% from current levels. So, from 55 cents, I figure that I can lose mayyyybe 50% or ultimately make up to 500-1000%. That means that the market is implying a something like a 5-10% chance of success for the BCGA. If VLE was $1 right now, I might not be sounding the alarm, but at 55 cents? Hmmmm...


Now, I'm by no means saying that this BCGA is without risk, because it's still a high risk venture any time you are trying to prove up a new play, but Valeura is literally on the doorstep now. This is what people who own the stock "should be" playing for... It's been a very long road to get to this point and yet investors are showing the most disinterest in nearly two years. Worse yet, this disinterest seems to stem from a lack of success on the shallow-gas program, while the data on the deep gas has never looked better. And to top it all off, when VLE gets a hold of a brand-new 3D survey over the rest of the Banarli licence, the shallow gas program could end up with a new breath of life of its own as fresh targets are identified in an area with very little current seismic coverage.

My long-winded point is that, as a speculation, Valeura has entered very interesting share price territory. As a long, I'm sure as heck not going to sell now because of a shallow gas program funk when I think that multi-dollars-per-share are on the table from the deep play. In hindsight, the time to sell some stock was after Statoil farmed in and the share price was in the $1.25-1.50 range, but back then it seemed like the shallow gas program would bridge the gap through to BCGA results. Live and learn perhaps, but throw in the towel now? No way, not me. I suppose one could make the case to wait and "buy the news" if VLE's first well result is good, but I have no idea what the price will be by then and I'm already long the stock, so that option is moot for me. Does new money chase VLE right now? Probably not, but in a few months when BCGA results are closer anything is possible.  Two things I've learned over the years are that 1) timelines are seldom what you think they are and 2) buzzing from high-impact story to high-impact story like a well-timed bee is pretty much impossible. I like the VLE bet today as much as I ever have, so the case to own it is as strong as ever for me.

At the end of the day, I think it's also important not to forget the fact that Turkey is a country of 80 million people that imports 99% of its gas. It is also has the highest rate of energy demand growth among OECD countries over the last 15 years. Those are two undercurrents that I think will ensure that VLE will always have a market for whatever gas it can find and that the price for that gas is likely to be much better than most other gas markets out there.

All that VLE needs to do now is prove that they have the goods, because speculative interest can only take you so far. Right now VLE investors are hanging their heads low, but things are almost sure to perk up once deep test results approach. Time will tell.


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<![CDATA[Transglobe Gets to TD at Boraq-5]]>Mon, 14 Aug 2017 11:31:07 GMThttp://hydracapital.ca/hydra-blog/transglobe-gets-to-td-at-boraq-5By: Malcolm Shaw

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

This morning Transglobe Energy (TGL.TO, last at C$1.52) reported Q2 2017 results. Corporate production is hanging in around 16,500 boepd, which is well within the range of management guidance for the year. I had to do a double-take when I noticed how cheap TGL has become... with a ~C$140 million enterprise value, the company trades at less than $10,000/flowing boe, which is one of the lowest valuations I've seen in quite some time (TGL has only 72 million shares outstanding and has cash, receivables, and inventories totalling USD$83 million. Long-term debt is ~USD$85 million and payables are ~USD$25 million). In terms of operations, TGL seems to be chugging along just fine, with three development leases/permits pending at NW Gharib (expected to be granted in Q3 2017) and the first appraisal well completed at Boraq-5 in the South Alamein concession.  

The Boraq-5 well sounds like it was a bit of a rodeo for Transglobe. Faults and caving caused numerous drilling difficulties as the company searched for Abu Roash channel sands. Eventually the Boraq-5 well found 6 feet of Abu Roash "E" channel sands and 19 feet of Abu Roash "G" formation and was cased as a potential oil well. Drilling challenges in a new area are not uncommon and I'm sure that TGL staff and drillers have already learned a lot about how to target and drill future wells with less difficulty. For now, all eyes will be on the Boraq-2 and Boraq-5 testing program slated for September/October once the work-over/completions rig arrives. Depending on test results, production from South Alamein could be established as soon as late 2017 or early 2018 and, by my math, there is nothing priced into the stock for the South Alamein concession.

The company continues to mature its leads in its 100%-owned NW Sitra and South Ghazalat concessions. Both concessions have the potential to turn up material prospects and should not be overlooked, as they may come into the 2018 drilling program. These represent another totally free look for shareholders in my view.

TGL is holding a conference call today at 9:00 AM Mountain Time (11:00 AM Eastern Time) and is accessible to all interested parties by dialing 416-340-2216 or toll free at 1-800-377-0758. The webcast may be accessed at http://www.gowebcasting.com/8557.

All in all, while the market remains in an oil funk, I will happily remain a TGL shareholder while waiting for that funk to lift. At these prices the TGL risk-reward seems skewed wildly in my favour as I pay only a fraction of the company's 2P reserve value and capture significant free optionality from the company's concessions in the Western Desert.

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<![CDATA[If You Trip Over a Gold Deposit in the Forest, Does It Make a Sound?]]>Tue, 01 Aug 2017 12:52:40 GMThttp://hydracapital.ca/hydra-blog/if-you-trip-over-a-gold-deposit-in-the-forest-does-it-make-a-soundBy: Malcolm Shaw

(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 AU.V)

This morning Aurion Resources (AU.V, last $1.81) reported the initial batch of assay results (453 additional samples) from its 2017 sampling program at the Aamurusko gold prospect (view the maps and photos that go along with the press release here). The rocks continue to impress, with these additional results bringing the total number of reported samples to 632, with an average grade of just under 27 g/t gold. The grades of the angular quartz blocks sampled ranged from nil to 2,520 g/t (81 ounces per tonne) gold. The results suggest that this batch of samples carried a lower average grade than the last (though they did raise the bar in the highest-grade category), but that's really splitting hairs when you look at the remarkable amount of mineralized quartz block material that's being found at surface.

Aurion geologists are practically tripping over quartz vein blocks. Assays are still pending for hundreds of samples. It's hard to describe how rare that is... it's hard enough to find mineralized boulders in the field numbering in the dozens, but Aurion is finding them by the hundreds. I've asked people before, "What does a gold mine look like if you trip over it in a forest?". I think that it could look a lot like Aamurusko. Lots of mineralized material at surface, big angular quartz blocks that show little evidence of transport, and grades that suggest a strong mineralizing event (events?), all within a broader geological context that is highly favourable for the generation of a gold deposit, or deposits. Once additional geophysical surveys are completed to refine drill targets, the only thing to do is, well, drill... drill... drill.

Recently I had pointed out a map that showed sample locations for the summer program with the the hopes that the assays would confirm that Aurion has a veritable "field" of gold-bearing angular quartz boulders at Aamurusko and it would appear that my hopes have been realized. Aurion has now traced the Aamurusko "zone" over an area measuring 1.4 km long by 2.5 km wide and the prospect remains open to the southwest, west, and east with "several" discrete quartz vein block trends identified. Today's sample results should serve as a good reminder to investors of the fact that Aurion is in Gold Country and that the question is not "Is there a gold deposit here?", but rather, "How many deposits are there?" and "How big are they?".

The company states that field staff have been "indiscriminately" (i.e., randomly) sampling quartz vein material to avoid sampling bias/high-grading and, based on the company's summaries of grade-by-samples, I would argue that the results to date support that claim (they seem to reflect a log-normal distribution, which is often how natural populations can be characterized). Aurion is reporting an average sample grade of 27 g/t gold across 632 samples, and w
hile the statistician in me knows that averages can be distorted by very high grade samples, the geologist in me feels that it's the sheer volume of mineralized material that is worthy of more attention. In some ways, the boulders could be viewed as a "sample of a bulk sample" of the top of a deposit that appears to be very, very, nearby.

I have to highlight that Aurion is still highly speculative at this stage. No matter how much you like an exploration target, it's the drill that has the final say in the end. However, in distinguishing between "wild ass" speculation and "informed" speculation, I'll borrow a little example from the gambling world. If you're playing blackjack and you're counting cards, that's what I would call "informed speculating". You recognize that you are playing a game of chance, but your knowledge of the deck can give you increased certainty of predicting any given outcome. A "wild ass" speculation is when a drunk guy staggers up to the table in the middle of a game, sits down, and puts down a $1000 chip on the next hand with no regard for whether or not the bet is "well-timed". I think that any "informed speculator" would be hard pressed to suggest that there is not going to be a gold discovery at Aamurusko when the drills turn, and that's at least half the battle in my eyes. Meanwhile, the geology suggests that the deposit could have serious size (and grade) potential. To continue with the blackjack analogy, I think Aurion investors are looking at a 5-6, the dealer is showing a 6, and the deck is heavy with tens. The question is not whether or not you take a card, it's whether or not you double down...
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