Dennis da Silva, managing director and senior portfolio manager at Middlefield Capital Corporation

Focus: Canadian resource sector
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MARKET OUTLOOK
We remain encouraged by improving global PMIs, with a positive skew toward developed economies over emerging economies.  

We anticipate tightening global oil balances as the impact of OPEC supply cuts work their way through the global system. An early end to the spring refinery turnaround season will lead to tighter U.S. crude balances in the current quarter. Canadian energy equities have been impacted by concerns around a potential U.S. border adjustment tax, which has created an exceptional value proposition for energy investors.

The most recent rate hike has yielded a now-familiar trading pattern, with the gold price declining and rebounding around the announcement. On a net basis, we expect renewed gold interest as the market focuses on the risks associated with the new U.S. administration agenda, ranging from magnitude, timing and effectiveness of the changes.

TOP PICKS

TORC OIL & GAS (TOG.TO) – Purchased June 2015 at $8.68
A premium intermediate dividend and growth oil producer. Management has a conservative, underpromise approach. They achieve value creation through a consistent and disciplined approach to acquisitions and organic development. Despite their track record, the stock's recent underperformance has caused it to trade below historical valuation and oil-weighted peers. The company has a rare combination of balance sheet, asset quality, low-cost structure, efficiencies, high netbacks and a low decline rate. Canada Pension Plan ownership provides a financial lever for future acquisitions. Currently producing 20,000 boepd but can grow between five to 10 per cent per share using strip oil prices.

KIRKLAND LAKE GOLD (KL.TO) – Purchased May 2016 at $8
CEO Tony Makuch was very successful re-building Lakeshore, which was acquired by Tahoe in 2016. Trades at a discount of 20 to 25 per cent to peers. Late 2016 merger with Newmarket creates a $2.4 billion market cap intermediate producing 525,000 ounces per annum in Ontario and Australia. Market surprised by new jurisdiction but main assets are underground, in safe jurisdictions with significant exploration upside. Ontario mine with some of the highest grades in the world, and 2017 is a transition year as deeper, higher-grade throughput benefits start to be felt.

KELT EXPLORATION (KEL.TO) – Purchased in Dec 2016 at $6.73
Premier management team (big insider ownership) accumulated a huge liquids-rich Montney land base of over 600,000 acres. The asset base comprises a strong multi-zone inventory and infrastructure control, coupled with a low cost of capital and top-tier balance sheet. Currently producing 20,000 boepd (60 per cent gas) and moving into harvest/development mode in 2017 to increase land value by growing production, de-risking inventory and improving efficiencies like peers. They are the beneficiary of Chicago pricing (40 per cent non-Aeco) arrangements.
 

PAST PICKS: MAY 31, 2016

TORC OIL & GAS (TOG.TO)

• Then: $8.16
• Now: $6.82
• Return: -16.42%
• TR: -14.19%

SEVEN GENERATIONS (VII.TO)

• Then: $26.40
• Now: $25.24
• Return: -4.37%
• TR: -4.37%

TAHOE RESOURCES (THO.TO)

• Then: $15.66
• Now: $10.64
• Return: -32.05%
• TR: -30.80%

TOTAL RETURN AVERAGES: -16.45%