Dennis Da Silva, senior portfolio manager at Middlefield Capital Corporation

Focus: Resource stocks

MARKET OUTLOOK:

We appear to be at an interesting juncture for metals and mining markets. Gold prices just had their worst month since November 2016 as the Fed brought forward projections for the first post-pandemic interest rate hikes into 2023 (versus no hikes previously), which appeared sooner than the market had anticipated. It remains to be seen whether inflation is ”transitory”, however the Fed has previously indicated a willingness to accept higher than targeted inflation for periods of time in the interest of supporting a broad and inclusive recovery in employment levels. With the U.S. 10 year around 1.5 per cent and no expectations of a rate hike in 2022, the key catalyst to watch for in terms of gold price will be if inflation remains sticky through the early part of 2022. The global economic recovery continues and metals demand remains strong. With this, supply bottlenecks are a reality in terms of both materials and logistics. Our view remains that current commodity prices are pretty good across the board, with industry free cash flow looking particularly robust. The demand tailwinds are largely priced into commodities so going forward it comes down to focusing on companies that are creating real value under range bound prices.

TOP PICKS:

Troilus Gold (TLG TSX) (June 2021, $1.26): A $170MM market gold exploration company with development-stage (former producer) assets in Québec. Inmet produced two million ounces from 1997-2010. Current resource of eight million ounces and one of the few large resources still in a junior’s hands for M&A. 2020 Preliminary Economic Assessment shows slightly smaller Malartic type mine but better grade and lower CAPEX intensity. Detour had a $600MM market cap with the same size of resource. Aggressive expansion/infill drilling on new zones for Q4/21 resource update and Preliminary Feasibility Study.

Osisko Development (ODV TSXV) (Feb 2021, $9.05): Late 2020 spinout from Osisko Royalties. Cariboo gold project in British Columbia and San Antonio gold project in Sonora, Mexico. Osisko Gold Royalties has a 75 per cent stake in ODV. The company is targeting near term production of 60-100k ounces starting in H2/2021 from two-year project in B.C. (60k) and Mexico brownfield (50-70k) in early 2022. Led by the former president of the company that Osisko Royalties acquired a few years ago to attain the B.C. assets, the chairman of Osisko Royalties and the COO who built the Malartic mine for the original Osisko Gold. Aggressive 200,000m two-year drill program at Cariboo to expand resource with a portion to be included in Feasibility Study later this year.

Topaz Energy (TPZ TSX) (June 2021,$16): IPO from Tourmaline completed in late 2020. Unique partnership with Tourmaline owning 50 per cent of this hybrid royalty/infrastructure company that has done most of its recent deals as a way to fund E&P acquisitions such as with Tourmaline and Tamarack Valley. Unique asset base (80 per cent gas) which is underscored by a stable income stream, pristine balance sheet, and exposure to a top tier asset portfolio in North America. This supports a combination of growth and low volatility income that is rare to find in energy today. Ideal M&A environment with rising prices. Revenue tied to some of the most active areas in the basin by companies with strong operational track records.

PAST PICKS: March 3, 2020

Osisko Mining (OSK TSX)

• Then: $3.36
• Now: $3.16
• Return:  -6%
• Total Return: -6%

Sabina Gold & Silver (SBB TSX)

• Then: $1.55
• Now: $1.76
• Return: +14%
• Total Return: +14%

Wallbridge Mining (WM TSX)

• Then: $0.79
• Now: $0.57
• Return: -28%
• Total Return: -28%

Total Return Average: -7%