(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, BU.TO, TGL.TO, SDX.V, POE.V, AU.V, HI.V, and LAC.TO).
Sometimes being a resource investor can make a person ask a lot of questions like, "Why didn't I just buy Google, Apple, Amazon, Facebook, Tesla, and maybe some Shopify?" Or maybe something like, "Why the hell do I invest in these f*#%ing junior resource companies?" Or perhaps a just a simple series of expletives will do. Over the past few/several months, Condor Petroleum has been roughly cut in half, Burcon has gone from "hopeful" to "hateful" status, Canada Zinc has seen a 30% haircut, Ikkuma has shed about 25%, Valeura is down around 20%, and even little Highland Copper is down around 30%. Only a few things were spared. Advantage Oil and Gas is up small, Pan Orient is more or less flat despite being delayed until late June at Ayu-1, SDX Energy is up around 30%, Aurion continues to trade on a wire in the $1.75 range, and well, that's about it. In a lot of these names, not much has actually changed, but when the market tailwinds turn into headwinds it often feels like absolutely nothing is working and the smell of money is replaced by the stench of despair. At times like this lessons are learned about risk tolerance, position sizing, "real" investment horizons, and one's own psychology. When it comes to small cap stocks, volatility is the norm... and when it comes to small cap resource stocks, that volatility can feel like a real roller coaster -- because it is. The key is whether or not the subject companies have teams and balance sheets that will let them live long enough to be bailed out by the rising tide of a resource market tailwind or by the merits of their projects.
I don't write about all the names that I follow or own, but for the benefit of those who do read these notes I thought I'd give my 2 cents on what has been discussed here before. The "good" and "bad and ugly" classifications are more to have some fun with than anything else, but perhaps useful for those who are looking at a list of names that is splattered with red ink.
It can sometimes be very difficult to accept the fact that when it comes to small cap companies, the volatility swings can be enormous. Let's face it; if you're buying a stock because you think it has 100-500% upside, you're playing it early. When you look back at a stock that has "worked out", sometimes years down the road, the giant swings that you feel in those early days look like insignificant wiggles on a re-scaled chart. Swing for the fences and you're going to have a few strikes, but it's a long game and you have to play accordingly and/or be very, very nimble.
You know what's always good? Advantage Oil and Gas (AAV.TO). The company continues to define the gold standard in Montney gas development and is living proof that money can be made from dry gas if the rock is good enough and you can keep your costs down. I've said it before and I'll say it again... I wish all companies were as straightforward as AAV. Ride it to Dividendland in 2018-2019.
I'm going to put Transglobe Energy (TGL.TO) in the good bucket too. Even though the stock hasn't really performed that well over the last couple/few months, it actually has done better than a lot of energy companies over the same period and I think that this is a name where things could change quickly once South Alamein results start coming in. From the conference call today, it sounds like the Boraq-5 well will spud this weekend and it will be a 3-4 week drill. That'll be followed by a re-entry and test of the Boraq-2 discovery well that previously tested 1,600 bopd from 2 zones years ago. It's light oil, close to infrastructure, and has an $80 million cost recovery pool associated with it that will really give the company some juicy cash flow out of the gate once it starts producing (likely late 2017 or early 2018). Based on management's guidance today, TGL's concessions in the Eastern Desert will keep churning out production with excellent metrics for a while yet, but it seems that the future is in the Western Desert for the company's Egyptian operations. There are two exploration concessions in the Western Desert (NW Sitra and South Ghazalat) that sound like they could turn out some big targets that might even attract some partners who may want to farm-in to TGL's 100% interest there.
I'm also putting Aurion Resources (AU.V) in this group. While it is clearly very speculative ($100 million market cap with no resource and no cash flow), there are good reasons why it holds onto the market cap that it does. It has a very clean share structure and is well held by very experienced investors who really know when it's time to put your bet on the table ahead of drilling. While I don't expect the first drill hole will hit "the motherlode" (though I can always hope for that), the company has plenty of cash and will start with shallow cheap holes at Risti sometime in late July or August. The expectations for Aurion are high and that's not because Mike Basha is some kind of genius promoter. The expectations are high because the data is just that good. I have met with some of the smartest and most educated people I have ever met in the space and they think this has a real shot at being one of those "once in a decade" discoveries. Aurion has the potential to be the talk of the town this summer/fall if things start to click with the drill bit, so while it's risky to bet on Risti at this early stage I don't get the impression that Aurion is going to offer up any sweetheart entry points before the drills turn. All I can say is that if the company starts hitting good grades over good widths, this probably won't just be a double... this will be one to ride to Multibaggerland. And if they miss, well, the market may give a little leeway for a while, but clearly there will be some downside, so it's important to size bets accordingly. The company has $8-9 million in cash and drilling will be fast and cheap.
Valeura Energy (VLE.TO) has announced that the drilling of the first deep well with Statoil is "imminent" which means that we might see some preliminary data mid-summer, likely with a lengthy (60-90 days?) testing program to follow. The shallow drill program is also slated to resume late this month with 6 wells planned and contingency for "several" follow up locations if results warrant it. Working capital surplus is C$7.5 million with an additional C$4.2 million to come in once Turkish approvals are granted for the transfer of an additional 10% of the deep rights in the TBNG JV lands. That's a little shy of my previous $15 million estimate, but I think my valuation argument from earlier this year still holds water. VLE is off the radar of most people and one fund even blew out a position over the last couple of months on a portfolio manager change. To me, VLE still looks like a good speculation given the size of the prize and the cost of entry.
While SDX Energy (SDX.V) isn't as cheap as it once was and it did miss on the deep oil target at the first South Disouq well, I'd still say that it's in the good books. I'm being a bit picky because the primary target was the up-hole gas target that did find 65 feet of gas pay. The company has mentioned that the gas discovery might be in the 320 BCF range (100%, Pmean, basis) in prior presentation materials/interviews, but I'd like to see that verified by an independent third party now that the well has been drilled... I'd also like to see a flow test too, but that probably isn't that far off now. With a C$185 million market cap, SDX looks to be trading around its core NAV excluding any value for the SD-1X Abu Madi gas discovery, so the story is still compelling. Perhaps what's equally compelling is the company's overall corporate strategy of rolling up smaller players/orphan asset packages in the Middle East/North Africa (MENA) region. As a consolidator with decent share currency and what appears to be reasonable backing out of the U.K., SDX may be able to deal its way up the food (and value) chain. The next event for SDX is test results from SD-1X, which, if successful may result in cash flow "within months" if the corporate presentation guidance is accurate.
And don't forget Highland Copper (HI on the TSX Venture). Even though this stock is 6-7c off its most recent highs (which feels like a lot when you're talking about a penny stock), the company is cashed up and has a very impressive list of holders including Osisko Gold Royalties, Orion Mine Finance, and Greenstone Resources II LP. This has the potential to be a sizeable Tier 1 (i.e., low cost) copper producer in Michigan. Owning a name like this can be frustrating at times given the volatility, but that volatility swings both ways and if copper can ever break above that $2.75/lb resistance level, I think that the pennies made or lost at these levels will seem insignificant in hindsight. I think this might be my only copper holding at the moment and I'll be sticking with it at least until the G Mining feasibility study is completed late this year or early next.
Put Lithium Americas (LAC.TO) as an honorary mention on the good list too. After first being mentioned here last year, the story has morphed into what is arguably the "go to" junior lithium developer/hopeful producer and has just one last hurdle to clear on its path to being fully financed. No need for novel processing techniques here any more to distinguish the story... just show Mr. Market the money. Arguably, the last hurdle that LAC needs to clear before a re-rate is Chinese regulatory approval for the funding package from Gangfeng... once that clears, LAC could see a nice pop. Investors are often nervous when it comes to Chinese approvals for foreign investment, but China's commitment to electric vehicles is for real and I would be very surprised if this deal wasn't approved by the powers that be. The only question is when. Could be 2 weeks, could be 2 months, could be longer. I can wait.
The Bad and the Ugly
The "good" list sure seemed long, but I've actually had to struggle to find candidates for the "bad and ugly" list and I would point out that sometimes when things look their worst is exactly when you want to be buying them. Keeping that in mind, Condor Petroleum, Burcon Nutrascience, U.S. Oil Sands, Ikkuma Resources, Foran Mining, Pan Orient Energy, and Canada Zinc are all bad or ugly in some way these days.
Starting with Condor Petroleum (CPI.TO), this name has been a big disappointment lately. The company is in a renewed legal fight over its "big E" exploration concession in Kazakhstan and who knows what the court system is like over there. There are some huge targets at stake, so you have to wonder a bit about what exactly is driving the legal challenges that Condor is facing. On top of that, news flow from development drilling and testing at Poyraz Ridge has been taking longer than the market expected and I think that results to date have left outsiders wondering just what the initial production rate of this field is going to be when it comes on in mid-2017. Condor is well capitalized and has actually moved very quickly in Turkey so this is not a question of management's ability to execute on the business plan... it may just be a matter of communication, or tricky geology, or both. There is a very attractive exploration target called Yakamoz that is defined by 2D seismic to the north of Poyraz in another thrust-related structure. That target is going to be a turning point for CPI. With a $47 million market cap and perhaps $10 million in "extra" cash, CPI is probably at a decent level to speculate on here and trades at around 50% of its 2P NPV10 after-tax. So while this has been ugly, it's probably not a bad bet at these levels.
Turing to Burcon Nutrascience (BU.TO), the stock has completely broken down as far as the chart is concerned, which makes it ugly. Is it bad? Probably not, but my sense is that someone knows that the ADM Clarisoy revenues aren't going to come as fast as Burcon holders, myself included, would like them to. That's pure conjecture on my part, but as far as a stock goes, Burcon is ugly right now. This might mean that it's the perfect time to buy for those who have more patience than I do, but Burcon reached a stop-loss level for me recently and as a result I own fewer shares now than I used to. It's not that I don't think Clarisoy is going to come through eventually, it's that I can't bring myself to look at a full position for another year (?) with so many other things with more definitive catalysts out there.
There's nothing new on U.S. Oil Sands (USO.V) other than the fact that the company is in the process of commissioning their 2,000 bopd pilot plant at the PR Spring project in Utah. The company trades well below book value and I'm not sure that there's a single shareholder that's making money on this name right now. So while USO is ugly, it might not actually be that bad for new money looking for a highly leveraged way to play oil. If USO's orange-based-solvent extraction process works, the stock could get a massive re-rate. Even just thinking about it now makes me want to refresh on the name to see if there's an opportunity here or if it's better to just leave well enough alone.
Ikkuma Resources (IKM.V), often fondly referred to as "the ick" or "icky" by long time holders, is waiting on test results from the third well into its Foothills Cardium oil play. I would expect that test result sometime this quarter. The stock trades below PDP NAV and the third well is widely expected to be the best yet, but when I look at IKM's balance sheet I wonder if the company isn't going to have to do a financing pretty much right away on the back of well results. That's not necessarily a bad thing, but it just might limit the "immediate" upside on the back of any good well test. None of this is to say that longer-term players can't extract a big win here, but for now at least it would seem that there's going to be an opportunity to own the stock close to there levels for a while... unless someone buys them out at somewhere close to PDP NAV and pockets the Foothills oil play for free. The stock has been a dog after a brief moment in the sun some months ago, but every dog has its day...
Foran Mining (FOM.V) is gearing up for its infill drilling program at Bigstone this summer. The company is low on cash and failed to reach target depth on the most exciting exploration prospect in its portfolio earlier this year. While the Bigstone drilling is sure to generate some great results, I'm still miffed that they didn't plan well enough this winter to actually test the McIlvenna Bay look-alike target (the company was pushed out by weather before reaching the target). That's just bad planning in my eyes. Again, none of this really condemns my initial thesis on FOM (camp-scale Cu-Zn potential that can save Flin Flon's aging bacon), but the lack of money may be a problem in the near-term and copper and zinc are juuuust barely holding onto key support levels, which means FOM runs the risk of becoming noise if the base metals really break down. If that happens, it could present an excellent chance to sidle up next to industry legend Pierre Lassonde with a low entry cost.
Pan Orient Energy (POE.V) delayed the spud of the Ayu-1 well again, this time until late June. Pan Orient ends up in the "bad" list just because I'm starting to lose track of the delays on this well. Having said that, it's a great target and what's a couple more months when some people (myself included) have waited for years to see this drilled. As far as lottery tickets go POE is pretty interesting with around $0.90/share in cash, 200-250 bopd of production in Thailand, and an attractive-looking SAGD asset in Alberta. With only 59 million shares out, POE offers epic leverage to an oil discovery of any size with the Ayu-1 well. I've heard it said that if this target wasn't previously in a park/reserve, it would have been drilled decades ago. There's probably a real (i.e., after the smoke clears) $0.50 in downside from the $1.50 level if Ayu-1 is anything other than an oil/condensate discovery, but the good news is that Repsol is paying the vast majority of the anticipated well costs. The upside numbers on the target are what get people excited with the 100%-interest total in all horizons being over 800 mmbbls in the "High Estimate" case and 250 mmbbls in the "Mean" case. Of course POE will "only" own 49% of that, but the numbers are still baffling. Even more baffling is the belief or hope that I'm willing to have on a target like this having seen sooooo many fail over the years.
Last but not least is Canada Zinc (CZX.V). This has got to be Rodney Dangerfield of zinc stocks right now. Here's a company with one of the largest undeveloped VMS zinc deposits out there (19.6 million tonnes indicated at 9.8% Zn+Pb, plus 8.1 million tonnes inferred at 7.9% Zn+Pb), next door to Teck Resources, in a great jurisdiction, with good access, an exploration partnership with Korea Zinc & Teck, and a major Chinese shareholder in Tongling Nonferrous Metals Group (hmmm, that may be the problem... a holder with a blocking position?). The company has around $9-10 million in cash (pre-2017 exploration program spend) and is gearing up for a two-rig drilling program at its Akie property. With a $40 million market cap, CZX isn't free, but it does consistently screen as one of the cheapest (if not the cheapest) "enterprise value per pound" (EV/lb) names in the zinc space and the zinc market fundamentals still look good. So even though CZX might be ugly on the chart and unable to draw the market's eye at the moment, perhaps some drill holes this summer will remind the market that ugly ducklings can turn into beautiful swans if given time.