KeyStone’s Stock Talk Show, Episode 210.

Great to be back with you this week. We have a busy show – I will start out by reviewing Buffet’s comments on the Macro Environment over this weekend and I will let you know if it syncs with the comments we are hearing from the CEO’s of the 20+ public companies we have interviewed over the past 2-weeks. Aaron will review Apple’s results released over the past week and what the market appeared to like in the numbers and forecasts for 2023 and beyond. Brennan tackles a viewer question on two oil & gas producers – it’s Tamarack Valley Energy (TVE:TSX) vs. Pine Cliff Energy (PNE:TSX) in a no holds barred, drag em out and knock em down, old fashion bar brawl, something Brennan and his Saskatoon friends are all too familiar with. And last but certainly not least, Brett answers a viewer question in our YSOT segment on Champion Iron Ltd. (CIA:TSX), an Iron Ore producer which owns and operates the Bloom Lake Mining Complex, the stock is down 13% year to date, but it pays a 3.4% dividend and Brett let’s you know how the current fundamentals of the business stack up.

Is Buffet Calling For an Earnings Recession?

I was on a panel a week ago at an event in Las Vegas and was asked if I could name a couple things about the markets today that keeps me up at night. One of the items is the possibility that corporate earnings could go negative in 2023 – expectations half way through 2022 were for more significant growth in 2023 earnings but they have been taken down 13% since that time.

Here is a table on S&P Earnings over the past 5-years including current expectations from this year, one quarter in.

YEAR Earnings Growth
2023e 220.00 0.23%
2022 219.49 6.35%
2021 206.38 49.42%
2020 138.12 -14.92%
2019 162.35 9.44%
2018 148.34 19.14%


4 out of the last 5-years produced positive earning growth, the roughly 15% drop in 2020 due to COVID shutdowns is self explanatory, and the jump in 2021 as the economy reopened was off a very low base and juiced by stimulus spending and historically low interest rates. 2022 showed more modest growth and the expectations for 2023 are relatively flat at present.

In June of last year, expectations for growth in 2023 earnings were more positive – forecasts have been taken down 13% since that time to relatively flat expectations at present. But the potential for negative earnings growth as the economy weakens is real.

Despite this, the index is now up 7.7% year to date,

And up almost 17% from its October 12 closing low.

This comes against the possibility earnings growth could go negative in 2023.

Warren Buffett commented on the near-term general economic view he is getting from his conversations with key management of the businesses Berkshire owns or invests in over this past weekend.

Buffet stated, and I quote, “In the general economy, the feedback we get is that perhaps the majority of our businesses will actually report lower earnings this year than last year.”

He reflected on the widespread supply chain disruptions everyone has faced since the onset of the coronavirus pandemic.

He was quoted as saying, “It was an extraordinary period,” he said. “And that period has ended.“

During that period, however, many companies, including those under Berkshire’s umbrella, over-ordered and now sit on excess inventory that will have to be cleared out at unattractive prices.

So where does Buffet think the economic climate is today – and he is a great guy to ask as he is speaking directly to CEOs of diverse businesses under his umbrella including well-known brands include GEICO, BNSF Railway, Fruit of the Loom, Precision Castparts, Benjamin Moore, Duracell, and Dairy Queen.

At his annual shareholder meeting Buffet added that, “It is a different climate than it was six months ago, and a number of our managers were surprised. Some of them had too much inventory on order, and all of a sudden it got delivered, and people weren’t in the same frame of mind as earlier.”

I can pass along having interviewed 20+ management teams of public companies over the past couple of weeks, we eco his comments. There is caution in the C-suite which does not match the market rebound we have seen to start 2023.

For the consumer struggling with inflation, the prospect for lower prices is welcome –  it’s bad news for corporate profitability.

Buffet went on to comment that “We’ll start having sales at places where we didn’t need to have sales before.”

In the near-term, we see the potential for earnings expectations to be revised lower. After the early 2000s recession, quarterly EPS estimates were cut five consecutive quarters in a row by an average 12% ahead of each earnings season. Estimates were slashed six straight quarters by an average of 20% following the global financial crisis more than a decade ago. Meanwhile, estimates for the second half of this year still call for growth and have really only seen “just a paper cut,” in many respect from analysts.

For Q3 2023 and Q4 2023, analysts are projecting earnings growth of 1.6% and 8.5%, respectively.

Long-term vs. Short-Term.

If we do see surprises to the downside, in terms of corporate earnings in the second half of 2023, it can provide you with opportunities.

Many market participants look near-term – the market reacts (often in an irrational manner near-term) to news on a daily basis. You can use this to your advantage. We are doing this right now. Building a book of 5-10 names that we want to invest in long-term. While they may face short-term earnings pressure, the long-term prospects are strong. These are businesses with solid track records, strong management teams, good balance sheets and growth paths ahead of them.

If, as we expect it will be the case in some of these names, the market overeacts to what is likely to be a near-term overall market shortfall, then we will take advantage of the declines and buy great businesses over the next year as the come “on-sale” with a holding period of 3-5 years plus and when we look back 5 years from now, be happy we purchased these strong businesses with a long-term view when others were selling with their short-term market view.

Finally, I close with a long-term chart on the S&P 500 over 150 years and we see the long-term earnings growth trajectory – something we expect to continue with significant opportunities along the way.


Tamarack Valley Energy (TVE:TSX) vs. Pine Cliff Energy (PNE:TSX)

Slide 1

YSOT – Came in from Trevor via email. And he asked for us to choose between one or the other to reveiew between Tamarack Valley Energy (TVE:TSX) vs. Pine Cliff Energy (PNE:TSX)

but I thought that I would just go ahead and compare the two businesses.

Pinecliff is the orange line here, and Tamarack valley is the blue line. But first, lets look into Tamarack.

Slide 2


Price: $3.64

Market Cap: $2.025 Billion

Forward Dividend Yield: 4.1%

Tamarack is an oil and gas exploration and production company focused primarily on Charlie Lake, Clearwater, Cardium and Enhanced Oil Recovery plays in Alberta. With production at about 50% Heavy Oil, 25% Light Oil, and Gas and NGL’s making about 25%.

And the company initiated a dividend in January 2022.

Slide 3

Looking at Tamarack’s financials which were reported in March of 2023.

  • Revenue for Q4 2022 was up 74% primarily due to an increase in production.
  • Adj. Funds Flow per share was up 16% (also because of production increases)
  • EPS was down 74%.
  • TTM Payout Ratio of 15%.
  • Net Debt of $1.356 Billion.
  • Net debt to Adj. Funds Flow of 1.8x.

Now moving on to Pine Cliff.

Slide 4


Price: $1.30

Market Cap: $456.2 Million

Forward Dividend Yield: 10.0%

Pine Cliff is engaged in the acquisition, exploration, development and production of natural gas and oil in the Western Canadian Sedimentary Basin. The company primarily produces Natural Gas which is expected to be 85% of production in 2023.

And the company initiated a dividend in June of 2022, so just a few months after Tamarack.

Slide 5

Looking at Pine Cliff’s financials which were reported in May 2nd 2023.

  • Revenue Q1 2023 was down 18% primarily due to a reduction in the price of natural gas.
  • Adj. Funds Flow per share and EPS were down 33% and 80%, respectively.
  • TTM Payout Ratio of 36%.
  • Net Cash of $58.1 Million.

Slide 6

Now this wouldn’t be a KeyStone video if we didn’t warn listeners of the risk that volatile commodity prices can bring to a company. And if we look at this chart, we can see that both of these companies are highly correlated to the price of energy, with Pinecliff as the orange line Tamarack valley is the dark blue line and the light blue is West Texas Crude Oil Futures.

Slide 7

I think this is difficult to compare the two because they really aren’t direct comparables but I thought I would highlight both of them side by side anyways.

So looking at growth going into the 2023 fiscal year, Tamarack is guiding toward better production growth…. Whereas Pine Cliff expects annual average production to remain flat or even come in slightly lower for 2022.. So my thought here is that if energy prices do continue to come down, at least Tamarack may still post revenue and maybe even earnings growth for the year… depending on how the increase In production and change in energy prices balance out.

Now Pine Cliff does pay a better dividend yield of 10%, albeit at the expense of a higher payout ratio.

Pine Cliff trades at a lower valuation of 2.6x EV/AFFO, but this is expected given its smaller size and less growth anticipated into 2023.

Looking at the balance sheet, Pine Cliff’s is superior with a net cash position, compared to Tamarack’s net debt position. But I don’t think that Tamarack’s balance sheet is by any means “overlevered”, but it is something to monitor.

Ultimately, IMO it is really a toss-up between the two…. And might come down to a growth vs. dividend income investment case. As if I was looking for income, I would likely go with Pine Cliff due to the higher yield and cash rich balance sheet. But it just has limited production growth anticipated into 2023 which could be a concern.

YSOT Champion Iron Ltd. CIA:TSX


Champion Iron symbol CIA on the TSX currently trades at a price of $6.00 and a market cap of $2.95 Billion being down 13% year to date. The company pays a dividend yield of 3.4%.

Champion Iron is an Iron Ore producer which owns and operates the Bloom Lake Mining Complex, located on the south end of the Labrador Trough, approximately 13 km north of Fermont, Québec. Bloom Lake is an open pit Iron ore operation with a mine life of 20 years and a concentrator that primarily sources energy from renewable hydroelectric power.

2) Q4 Preliminary Release

The company has released preliminary data for its Q4 2023, ending March 31st 2023, the company produced 3.1 wet metric tons off 66.1% iron concentrate for the quarter a 41% year over year increase. This is on the back of Champion ramping up its phase II expansion project ,  which the infrastructure was also completed during the quarter. Once fully utilized the company expects a capacity of 15 million tons of ore per year.

The company also reported a $79.0 cash cost per dry metric ton compared to $60.0 in the prior year.  Cash cost was higher during the quarter due to higher fixed costs from Bloom Lake’s production expansion and inflationary pressures compared to the prior year.

Further, the company is looking to increase the grade of its iron ore concentrate to 69% through its Direct reduction pellet feed or DRPF project. As of right now, the company has budgeted an additional $52 million after positive findings from its feasibility study. The higher grade concentrate allows for the usage in electronic arc furnaces over gas furnaces which have lower carbon output. The increased grade in ore concentrate attracts a premium over the current 66%.

The project is expected to cost $470.7 million and take 30 months for construction.

The company also reported a cash and equivalents position of $327.1 million, which with debt staying at the same level as the prior quarter would result in a net debt & leases position of $192 million, once the full results are released the net debt position will likely be lower as some will have been paid off, but will still be a net debt position.

3) Iron Ore price


The biggest question for Champion, as well as any iron mining operation, is the price of iron. For fiscal Q4 we saw higher index iron prices in the range of 110 to 130 throughout the quarter compared to 90 to 110 in the past quarter. But have since seen a fall off in prices to the low 100s.

4) Valuation

Using the trailing twelve months figures from fiscal Q3, Champion has an EV to EBITDA of 6.7 times. The Ebitda is going to drop year over year once the 4th quarter is released as it laps difficult comparables from high iron prices, but the cash position will improve offsetting, likely resulting in a very similar EV/EBITDA around 7, assuming the stock price stays relatively similar. This valuation is higher than recent as the company is still coming off high comparables, but is not absurd, and is reasonable given the near-term growth.

5) Conclusion

In summary, the company has had its margins contract over the past couple of years as iron ore prices have dropped and costs inflated, but has had tremendous production growth and will see further near-term production growth in the near future, with adding an additional value with the DRPF project by late 2025, and a reasonably strong balance sheet given the significant capex. If one were to want exposure to the iron market Champion could be a reasonable choice.




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