Miner underground
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Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re talking about natural resources with Dylan Fricker, vice president and portfolio manager with Mackenzie Investments. We talked about energy and mining in the current moment, and we asked for a general rundown on the state of Canadian natural resource equities.

Dylan Fricker (DF): I’ll go commodity by commodity, just to make this a bit more targeted, because I think there are some nuances. On the oil side, what we saw post the tariff announcements from the White House is a pretty significant deterioration in the outlook for oil pricing. And that’s a function primarily of the impact to large consumers such as China, and the emerging Eastern markets. The futures market moved pretty quickly to say that the outlook for oil is probably going to deteriorate. The Government of Canada, under Trudeau, did build TMX. It actually doubled the capacity to the West Coast, and that should allow those pricing differentials to stay tighter than they have been and provide more capital into the balance sheets of those oil sands producers.

On the gas side, you know, gas is still pretty oversupplied in North America, but it’s getting better. And the reason it’s getting better is we have built a lot of off-take via LNG in the last few years — this is in the U.S.; obviously, Canada’s LNG project will start this year, which will help — and it is very seasonal, so we’re in a seasonally weak period. Longer term, though, it’s pretty hard to argue that gas won’t be important in the energy-transition picture. So I think that’s a positive thing, and Canada has some of the best gas assets in the world. And obviously we have LNG Canada starting up here in 2025 which will help to remove some of the volatility in Canadian gas pricing. Less volatility typically means that investors are willing to pay more for those equities. So I think that’s a good story as it relates to Canada.

And then the third part of the energy picture, I would say, is uranium. We also have some of the highest-quality uranium assets in the world. And we actually have pretty good experience as a country in terms of uranium consulting, engineering and that sort of thing. I do think that uranium is going to have to be part of the clean-energy picture in the coming 20 or 30 years. The problem with nuclear is those plants are extremely expensive, and you have to take an extremely long-term view to get an IRR of any kind that makes any sense. Investors in the nuclear space often will price these equities very aggressively upfront, and then over time the reality can often be a bit more nuanced than what they priced in upfront. And the reason for that is the sector is just so small. It’s a very small part of the equity picture. But I would say that would be a tailwind to Canada in the coming decades.

Geological resources

DF: If we shift over to metals, we don’t have a tremendous amount of mining assets in Canada. We have some copper in B.C. We have some gold, obviously, in the north, in Ontario, in Quebec. As it relates to the TSX, we obviously have a lot more representation, but it’s just that some of those assets are in foreign jurisdictions.

Lithium is probably an area where I’d be careful. Lithium seems to be very well supplied, if not oversupplied. And the battery tech is changing quickly. It’s not inconceivable that in a few years, lithium batteries are kind of like lead acid batteries today. They’re obsolete or on their way out. You might not want to put your net worth into a lithium mine. It could turn out a lot different than you might think.

Silver is a bit of a funny one. Obviously, it does have a history as a monetary metal. It does have some applications as an industrial metal. So it’s a bit of a hybrid. There’s not a lot of larger-cap silver equities to pick from. One of the large equities is [Vancouver-based] Pan American Silver, and Pan American Silver has done well, because the silver price has done well. But silver is a tiny, tiny market. It’s good because when silver goes up, it often goes up a lot, very quickly. So if you’re nimble, you can make a lot of money. But the opposite is also true. When things correct, it can correct equally as violently on the downside.

And then the last one, of course, is gold. The reason gold is doing well, is obviously a lot of countries that are being impacted by trade action are moving to diversify their holdings away from the dollar. And so they’re buying gold as a diversification move. And I think that’s legit. Like, that’s real buying. The only thing I’d say is that I’ve also seen when central banks go the other way. And it’s hard to predict when or why they might do that. Perhaps the change in administration in the U.S. might cause that. Gold isn’t exactly cheap anymore. It’s gone up a lot. In spot pricing terms, a lot of these gold stocks actually generate real free cash flow, which means they’re not spending every dime they make. So there’s actually excess at the end of the day. Iamgold [Toronto-based Iamgold Corporation] started the [Côté Gold Project] Côté Mine in Ontario, and that’s going to be a fairly large gold mine worth keeping an eye on. And then Artemis Gold in [Vancouver] B.C., just started the Blackwater Project [in central B.C.]. So that’ll start producing commercial gold right about now. So a couple of startups that are coming into production. Again, we’ll see how that impacts those regional economies.

And finally, what’s the bottom line on investing in Canadian natural resource equities.

DF: I do think that resource nationalism is an issue. Be careful about where you’re putting your investment dollars, because sometimes the country in question is almost as important as the assets in question. You know, the other thing is, I always tell people to try and stay reasonably diversified. It’s tempting when one sector is doing extremely well to get overinvested. But I’ve also seen the downside case, when that one sector becomes not so well performing and people have regret. And they forgot to take profits or sell when they should have. It’s important to make sure that you understand the risk involved in these things and keep a reasonable amount of diversification in Canada, just in case you have the wrong call on a particular sector.

Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Dylan Fricker of Mackenzie Investments. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.

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