Drill, dig, and develop

Three companies poised to benefit from Trump’s plans

The re-election of Donald Trump as U.S. president has injected uncertainty on a number of fronts. His habit of firing off policy changes via social media is once again keeping investors and governments on their toes.

He isn’t wasting any time. Last month he shocked everyone by announcing on his Truth Social platform that he will impose 25% tariffs on all goods from Canada and Mexico entering the U.S. on his first day in office. His reasons? Concern about illegal immigration and illicit drugs.

The reaction was immediate. The Canadian dollar hit a four-year low against the U.S. dollar, and the Mexican peso fell to its 2022 level. The TSX went to a deep dive when trading began the following morning, although it recovered as the day went on and ended the week higher. The House of Commons staged an emergency debate. Prime Minister Trudeau called an urgent virtual meeting with provincial premiers to work on a unified response plan.

The panicky initial reaction may have been overdone; I’ll explain why in a moment.

Drill, dig, and develop

First let’s consider the broad outlines of the incoming administration’s policies. For the most part, they are clear. They effectively consist of a major reduction in government regulations and corporate taxes. The former will be supervised by Elon Musk as the head of the new Department of Government Efficiency (DOGE). The reduction in corporate taxes will supposedly be funded by the imposition of 20% tariffs on manufactured goods from Europe and Asia, and a 60% tariff on Chinese goods.

Mr. Trump has also vowed to roll back federal restrictions on the exploitation of natural resources, confirming his skepticism about the effects of climate change. He claims that much of the Biden administration’s Inflation Reduction Act has led to what he’s described as a “green boondoggle,” with enormous resources inefficiently directed to green energy projects such as wind power, solar, and batteries.

Of course, Mr. Musk’s strong support for the Trump campaign has seemingly led to some change in the incoming administration’s views on the benefits of electric vehicles, although the US$7,500 federal grant to encourage purchases of EVs is due to be removed.

One sector that seems likely to be protected from the winds of change blowing through Washington is natural resources. These include conventional oil and gas, where Mr. Trump has said his motto will be “Drill, baby, drill,” as well as strategic metals and minerals, including those required for the continuing green energy transition, regardless of whether individual policies are altered or dropped. Mr. Trump has made clear his concern about foreign countries’ control of most of the output of vital raw materials, and the importance of the U.S. developing its own resources, or at least those controlled by its close allies.

Tariffs as a negotiating tool

In that context, it’s worth stepping back for a moment to analyze the tariff announcement. As is often the case with Mr. Trump, such statements should be regarded as the opening round in negotiations. They’re designed to threaten dire consequences if his wishes are not met.

The evidence from his first administration (2017-21) was that while some tariffs were imposed, notably on China and Europe, the actual amount and range of these tariffs was well below what had been initially discussed. This was partially because retaliatory tariffs on U.S. exports were imposed by Europe, aimed at industries in states which had supported Mr. Trump. These led to layoffs and higher costs. Mr. Trump also used the threat to prod European leaders into spending more on defence, rather than enjoying a free ride on the U.S. military shield via NATO. That move also achieved some success.

Similarly, having described the 1988 North American Free Trade Agreement (NAFTA) as an awful treaty, Mr. Trump ended up negotiating the U.S.-Mexico-Canada Agreement (USMCA) in 2018. It retained the vast majority of NAFTA’s provisions, although areas such as Canada’ dairy support framework remain an annoyance.

There is a close relationship between the U.S. and Canadian economies. This is especially true in the all-important auto sector, where components for vehicles cross the border half a dozen times in the course of assembly and where the autoworkers’ support for Mr. Trump helped him win the swing states of Michigan and Wisconsin. As a result, it’s hard to see tariffs being imposed on a large proportion of Canadian manufactured goods exported to the U.S.

Furthermore, given the effect of inflation on the average worker’s income over the last few years, the results from tariffs pushing up the price of many of the items consumers purchase would seem counterproductive. Trump’s candidate for Treasury Secretary, Scott Bessent, is an experienced hedge fund executive and a successful stock trader who understands financial markets and is a student of financial history. In articles written by him while campaigning for the Treasury job, Mr. Bessent put forward his view that the threat of tariffs would cause other countries to reduce their trade barriers, in other words, using escalation to de-escalate. The threat of losing the all-important U.S. market would, in this view, be sufficient to obtain concessions.

Energy and raw material revival

Whether this ends up being the eventual outcome, energy and raw materials for U.S. industry will remain very important. It’s dubious that tariffs will be imposed on these commodities. While the removal of the thicket of restrictions on exploiting oil and gas and mineral reserves in the U.S. will lead to an increase in U.S. domestic output, exports of Canadian oil and gas will remain important. In fact, Mr. Trump has talked about reversing Joe Biden’s cancellation of the long-delayed Keystone XL pipeline to the U.S. Gulf Coast. Also, having access to long life supplies of strategic metals such as copper, cobalt, nickel, uranium, lithium, and manganese from an ally located next door remains an attractive proposition.

So which companies stand to benefit from the changing geo-political picture? Here are three that despite their strong performance over the last year, still look attractive, assuming Mr. Trump is not going to enact policies that would cripple Canada’s resource sector.

Canadian Natural Resources Ltd. (TSX: CNQ) is one of the largest North American energy exploration and production companies, with long-established Alberta-based entrepreneur Murray Edwards as a major shareholder. CNQ owns well-diversified production facilities in Western Canada, the U.K. North Sea, and offshore Africa. The shares took a hit after Donald Trump’s tariff announcement, falling to a low of $46.02. They have made a modest recovery since.

For the nine months ended Sept. 30, CNQ produced 1.327 million barrels of oil equivalent per day (boe/d), a 1.9% increase on the same period in 2023. Net earnings were $4.97 billion ($2.33 per share). Adjusted earnings of $5.43 billion ($2.55 per share) were down 9% from 2023 on lower oil prices. Cash flow from operating activities was up 32%, to $9.95 billion, while cash flows used in investing activities were $3.68 billion and capital expenditures rose slightly to $4.1 billion.

Cameco Corp. (TSX: CCO). Saskatoon based Cameco is one of the world’s largest uranium producers, with mines at McArthur and Cigar Lake in Saskatchewan and refineries in Ontario. As governments and investors have become more favourably inclined in recent years towards non-carbon emitting baseload power sources such as nuclear energy, Cameco’s fortunes have revived. Having produced 32 million lbs. of uranium in 2023, Cameco is on course to produce 37 million lbs. this year.

Reflecting the strong move in the uranium price, Cameco’s share price rose sharply to hit $75 in June before selling off to bottom at $50 in September on concerns about economic growth. Subsequently, helped by strong operating figures, it has risen back to over $80 and is up by 31% in the last year.

For the third quarter to Sept. 30, Cameco reported revenues of $721 million, up 21% on higher production. For the nine months to the end of September, Cameco had revenues of $1.95 billion, up 12%. Adjusted EBITDA was $992 million, up 94% from $511 million. Cash generated from operations was $376 million. Cameco has commitments requiring delivery of 29 million lbs. of uranium annually from 2024 to 2028.

First Quantum Minerals Ltd. (TSX: FM) is one of the largest copper miners in the world, with forecast production of 415,000 tonnes in 2024 from its Kansanshi and Sentinel mines in Zambia. This was despite the electricity shortage caused by widespread drought in Zambia. Its enormous Cobre Panama mine in Panama, responsible for a third of its output in 2023, has been shut down since November 2023, after the Panama Supreme Court ruled its 20-year concession, was illegal. But the new Panamanian government has begun a review of the suspension.

First Quantum reported revenues for the three months ended Sept. 30 of $1.27 billion, flat from the previous quarter and down from $2 billion in 2023, which included production from Cobre Panama. Net earnings were $108 million ($0.13 per share) and adjusted earnings were $119 million ($0.14 per share), up from a loss of $46 million in the second quarter. EBITDA was $520 million, up from $336 million, and cash flow from operations was $260 million. Net debt was unchanged at $5.6 billion.

The stocks are suitable for aggressive, growth-oriented investors with a high risk tolerance, as prices can be volatile. Check with your financial advisor before investing to ensure they align with your financial objectives and risk-tolerance level.

Gavin Graham is a veteran financial analyst, money manager, formerly Chief Investment Officer of BMO Financial, and a specialist in international investing, with over 35 years’ experience in global investment management.

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The commentaries contained herein are provided as a general source of information, and should not be considered as investment advice or an offer or solicitations to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication, however, accuracy cannot be guaranteed. Investors are expected to obtain professional investment advice.

The views expressed in this post are those of the author. Equity investments are subject to risk, including risk of loss. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

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