(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.TO, ABM.V, BU.TO, CPI.TO, LAC.TO, PE.V, POE.V, PLU.V, SDX.V, and VLE.TO).
Waking Up from the August Hangover
With what has to be one of the craziest months in years behind us now, I thought I'd do a quick re-group on some of the names discussed here in the recent past. Any time the market does somersaults like this (and those were Olympic-style somersaults), I find it's always a worthwhile exercise to look through the noise at the underlying fundamentals. There are some pretty stupid things happening in the Canadian small cap sector, and especially the Canadian small cap resource sector...
AAV - Same old, same old. Industry leading cost structure, great visibility on future production and reserve growth, good balance sheet, and self-funding. It's on autopilot for me through to 2017 at least.
ABM - To butcher some Bob Dylan lyrics, "The sand here, my friend, is blowing in the wind... the sand here is blowing in the wind". This company has a lot of work to do to regain any kind of market profile, but the need for a domestic frac sand source with logistics like those of Firebag seems pretty clear to me in the long term.
BU - I really think that Burcon is a sleeper stock that could have a big 12-month period coming up. Nothing new here from my initial note, but the stock continues to trip along the bottom of its multi-year trading range.
CPI - Remember Kazakhstan? Remember oil? Remember how people used to care about finding oil in places like Kazakhstan? This little company should be reaching total depth on the KN-501 exploration well this month. Should the well prove to be successful, I think Condor might fly a little… even in this brutal crude oil tape. The target could be 50 million barrels or more and CPI has a 100% interest in the block with numerous follow-up targets. If it misses, well, it basically trades at cash right now...
FOM - No matter how good the asset may be, it's copper and zinc, both of which are 4-letter words in the market these days given the headlines out of China. Meanwhile, insiders have been buying. Enough said.
LAC - Lithium Americas and POSCO have executed a heads-of-agreement with respect to establishing a JV company to develop LAC's monster lithium resource in Argentina. The HOA is non-exclusive and non-binding, but is a step along the long road of cooperation. The LAC/WLC merger also got shareholder approval and is expected to close sometime this fall.
PE - Though it hasn't been discussed here before, I'll also quickly flag Pure Energy Minerals (PE on the TSX Venture) as a name to watch in the lithium space alongside of Lithium Americas (LAC on the TSX). Pure Energy is a deal that well-known investor Bob Cross has a big stake in, and the company has been making some waves as a long-shot play in the ongoing lithium race. Pure has published a large initial inferred resource (816,000 metric tonnes lithium carbonate equivalent) in a brine reservoir in Nevada that has a great postal code, which may make it an attractive potential lithium source for anyone looking to produce a large number of lithium ion batteries in the state. Pure's project is directly adjacent to Rockwood's (now Albemarle's) operation and the company's management team seems to be proactive about evaluating next-generation lithium production technology as they look to monetize their resource. Pure Energy's stock chart is apparently unaware of the current turmoil in the markets, having more than doubled since mid-July.
POE - Pan Orient got as low as C$1.05 in the market mayhem… that was about a 30% discount to cash value. The company has been active on its normal course issuer bid and should be spudding the Akeh-1 exploration well any day now. Given the optionality in POE's portfolio and the minimal projected cash burn over the next 12 months relative to its cash hoard, I find it ridiculous that it still trades at about a 20% discount to cash + working capital. POE's activity on its NCIB, coupled with the insider buying during the recent pullback, would suggest that the company tends to agree.
SDX - Sea Dragon has posted an updated presentation on its website regarding the proposed merger with Madison Petrogas and, in addition to my back-of-the-envelope math a couple of weeks ago suggesting around 100% upside on a cash flow basis, SDX's corporate materials would seem to indicate that it trades at around 0.2x its pro-forma NAV at the moment.
VLE - Valeura traded briefly under 1x EV/CF last month. This is for a company with no debt, about $10mm of cash, and a little over 1,000 boepd of production that saw $46/boe netbacks in the most recent quarter. Keep an eye out for Banarli drilling between now and year end… if things start to click for VLE with the drill bit, things are going to change in a hurry. I still can't believe how cheap this company is… but then again, it's lightly followed and it is too small for most funds to care about. I guess I'll just have to wait for it to 5-bag for anyone to care...
PLU - Plateau is up nicely off its lows as sellers go on strike and the U sector shows signs of life. The next big thing to watch for here is an updated PEA on the Macusani Plateau project, which may be one of the lowest cost prospective uranium projects on the planet. With only 40 million shares out and over half of that pretty tightly held, PLU could go berserk if the sector gets a bid to it.