Dennis da Silva, managing director and senior portfolio manager at Middlefield Group
Focus: Resource Stocks

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MARKET OUTLOOK

Canada’s GDP growth has outpaced other G-8 peers this year delivering 3.7 per cent and 4.5 per cent in the first and second quarter respectively, providing support for the Bank of Canada to increase interest rates twice in the third quarter by 25 basis points each time. Notwithstanding the positive economic momentum, Canadian equities underperformed their peers this year due to concerns over a housing correction and current NAFTA renegotiations. Looking forward, we remain bullish on equities due to fundamentals underpinning continued revenue and earnings growth.
With regards to the resource space, potential Fed tightening will keep a lid on gold prices while the marginal cost of supply near US$1,000/oz provides the floor. Gold equities are expected to provide relative outperformance versus gold bullion as the industry maintains the efficiency gains they worked to build over the last several years.  Strong PMI momentum and coordinated global growth will support ongoing cyclical asset buying. Base metals equities will benefit from declining inventory levels and the normalization of market expectations for global demand. We expect oil prices to gradually move higher through 2018, as global demand growth re-accelerated to levels not seen since 2015 leading to the number of days inventory for OECD and U.S. crude inventories declining towards the 5 year average. Growing natural gas exports, driven by LNG and Mexico demand, have helped tighten the balance in relative terms given small net production growth, keeping storage from reaching the highs seen over the past few years.     

TOP PICKS

Dennis da Silva's Top Picks

Dennis da Silva, managing director and senior portfolio manager, Middlefield Group discusses his Top Picks: Paramount Resources, Surge Energy and Atlantic Gold.

PARAMOUNT RESOURCES (POU.TO) - Nov 2016: $15.25 
An intermediate liquids rich gas producer. Out of the penalty box after a reset from selling core producing Montney asset late 2016 to Seven Generations then recently buying Apache Canada/Trilogy to end up at 90,000 boepd (50 per cent bigger) and delever the balance sheet from $1.3 billion to $480 million of debt. New version is a larger, more diversified company with a top tier balance sheet and more levers aside from the core Montney plays at Karr and Wapiti (Apache) plus the long term potential of Trilogy's Duvernay acreage. We bought when no one wanted the stock after disposition in late 2016 and have been well rewarded when the company achieved 30,000 boepd with original Karr asset (started at 10,000 boepd). Probably going to sell 20,000 boepd of non-core assets including royalties which will likely eliminate debt again.  

SURGE ENERGY (SGY.TO) - August: $2.15 
Junior Canadian oil producer that has made good progress over the downturn but not on most radar screens. Conservative spending with the company pulling back to one drilling rig for the second half of 2017 to maintain financial discipline with oil under US$50/bbl. Asset dispositions have re-focused the company around three core areas while cleaning up the balance sheet (down 60 per cent from the peak mid-2014), lowering the cost structure, and increasing margins. The dividend sustainability model is improving as evidenced by the recent dividend increase with almost 10 per cent production growth per share while spending less than cash flow and keeping debt to cash flow around 2 times. I see more guidance upside and/or potential dividend increase with payout ratio under 90 per cent.

ATLANTIC GOLD (AGB.V) - Sept 2016: $1.05 
A new junior gold producer emerging in Nova Scotia. Single open pit mine starts in October leading to gradual re-rating from developer valuation to producer. Commercial by year end but standard ramp-up risk. Current mine plan anticipates annualized production of 85,000 ounces over 8.5 years with total costs under US$600/oz. Project acquired/consolidated and put into production in an impressive three years. Unique fixed cost construction contract that was in line with feasibility study so no risk of overruns and it was done on schedule. We see big upside over the medium term as the company incorporates satellite deposits into mine plan which could more than double production and increase mine life. Regional exploration upside longer term. Remember, Alamos paid $900 million for Richmont while Atlantic has enterprise value of less than $300 million.

 

DISCLOSURE PERSONAL FAMILY  PORTFOLIO/FUND
POU  N N Y
SGY N N Y
AGB N N Y

PAST PICKS

Dennis da Silva's Past Picks

Dennis da Silva, managing director and senior portfolio manager, Middlefield Group discusses his Past Picks: Birchcliff Energy, Premier Gold Mines and Freehold Royalties.

BIRCHCLIFF ENERGY (BIR.TO) - June 2016 purchased at $6.25

  • Then: $9.28
  • Now: $6.02
  • Return: -35.12%
  • Total return: -34.36%

PREMIER GOLD MINES ( PG.TO) - November 2015 purchased at $2.90

  • Then: $4.97
  • Now: $3.74
  • Return: -24.74%
  • Total return: -24.74%

FREEHOLD ROYALTIES (FRU.TO) - May 2016 purchased at $11.55​

  • Then: $10.73
  • Now: $14.20
  • Return: 32.33%
  • Total return: 38.25%

TOTAL AVERAGE RETURN: -6.95%

 

DISCLOSURE PERSONAL  FAMILY PORTFOLIO/FUND
BIR.TO   N N Y
PG.TO N N Y
FRU N N Y

WEBSITE: www.middlefield.com