Dennis da Silva, Managing Director and Senior Portfolio Manager, Middlefield Capital Corporation

FOCUS: Natural resource stocks

MARKET OUTLOOK:

Gold’s consolidation of more than US$2,000 per ounce continues as bullion has consistently remained above this psychological level since mid-December. A report by the World Gold Council suggests strong fundamental demand will continue to provide downside support from non-OECD (The Organisation for Economic Co-operation and Development) central banks on the back of reserve diversification and ongoing elevated geopolitical tensions. The start of the U.S. Federal Reserve easing will likely drive the next leg of upside, which traditionally has triggered increased ETF demand.

In energy markets, we expect extended OPEC+ cuts to provide ongoing support for oil markets that face the headwinds of demand and incremental production growth from the U.S. In Canada, MEG Energy during its fourth quarter conference call revealed that Trans Mountain on Feb. 29 called for oil to fill the line in April and May. In our view, this signals that Trans Mountain has a high degree of confidence in its targeted second-quarter 2024 start-up timeline. The much-needed spare export capacity will undoubtedly tighten the Western Canadian Select differential.

With the earnings season seeing capex cuts and lower production guidance chipping away at one of the main clouds hanging over natural gas, perhaps the floor for natural gas is firming a bit. Looking back over the last 25 years on a seasonal basis, March tends to be the month where NYMEX gas prices start to improve and continue through the summer months. If you take only the years where NYMEX is less than US$3/Mcf, NYMEX generally increases 40 per cent after that point into winter.

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TOP PICKS:

Headwater Exploration (HWX TSX)

Small cap oil producer with the hottest play in Canada, Clearwater heavy oil. Rare combo of ultra growth, attractive dividend and excess cash for dividend increases or land acquisitions. Growing 50 per cent by 2028 and 10-15 per cent in 2024 alone, while getting 6 per cent yield, expanding inventory (10+ years) and maintaining zero debt for land acquisitions or shareholder returns.

Tourmaline Oil (TOU TSX)

Largest gas producer in Canada (500k, 25 per cent liquids). CEO of the year. Deeply oversold and good time to buy as in historically does well from March until September. Top tier for execution, management, strategic vision, and high-quality assets. The best gas marketing program among peers, California, and LNG deals, which helps offset periods of weak Canadian prices.  Over the next five years,  they could return 40 per cent of market capitalization through base/special dividends and grow production over 30 per cent under forward prices.

Capstone Copper (CS TSX)

Top junior copper pure play due to growth profile and inflection point in H2 2024. Unhedged. Major shareholder Orion has slowly sold (24 per cent proforma) but stock keeps re-rating even after a recent secondary and $375 million bought deal at $6.30. Current growth is fully permitted and funded with free cashflow in 2024/25. Cheap to peer group due to growth execution risk and geopolitical risk of Chile (taxes and 60 per cent of NAV).     

PAST PICKS: NOVEMBER 15, 2023

Meg Energy (MEG TSX)

Then: $26.74
Now: $29.29
Return: 9 per cent
Total Return: 9 per cent

Teck Resources (TECK.B TSX)

Then: $48.72
Now: $53.67
Return: 10 per cent
Total Return: 10 per cent

Denison Mines (DML TSX)

Then: $2.29
Now: $2.59
Return: 13 per cent
Total Return: 13 per cent

Total Return Average: 11 per cent