Safe Harbor Assets Are On Sale In Canada

by: Jonathan Yates

With the Canadian Dollar, or "Loonie," falling in value, safe harbor assets such as gold, silver and oil are now on sale. As detailed in a previous article on Seeking Alpha, "Is the Canadian Energy Sector the New Safe Haven Asset," oil and natural gas firms operating in Canada ranging in size from prominent blue chips such a Suncor Energy (NYSE:SU) and Canadian Natural Resources (NYSE:CNQ) to promising small caps such as Octagon 88 (OTCPK:OCTX), and Americas Petrogas (APEOF) are becoming more desired by investors due to the economic security and political security of North America. Now that the Loonie is trading around 94.20 cents US dollar, close to its three-year low of 93.93 cents US dollar from June 30, 2010 and predicted to fall even more in 2014 by Goldman Sachs, these and other Canadian natural resource companies are selling at a discount.

When a currency falls in value, assets priced in those units become cheaper. If the currency declines by 25% against another, then buyers using the other now have a one-quarter discount. For a country with an economy that needs to export to grow, that is a good thing. For investors looking to buy assets priced in a declining currency like the Loonie at present, it is even better.

The Loonie is falling due to weak prices for commodities such as oil and gold.

There is certainly no shortage of foreign investors looking to buy Canadian natural resource assets, though. According to a Wall Street Journal article, the Chinese have spent over $44 billion on energy assets in North America since 2008. Canadian gold and silver stocks could also be attracting foreign investors as the prices are low.

Combined with the weak Loonie, that makes for bargain buys in the sector. Goldcorp (NYSE:GG), the largest gold company in the world, is off by more than 40% for 2013. The second largest, Barrick Gold (NYSE:ABX), has fallen more than 50% for 2013. That is the story throughout the entire sector as the exchange traded fund for gold, SPDR Gold Shares (NYSEARCA:GLD), is down more than 27%.

So what is the play for investors?

Undervalued small caps like Octagon 88 and Americas Petrogas have the most appeal for a variety of factors. Overall, the demand for energy will increase by one-third by 2035, according to a recent report from the International Energy Agency. There is no economic reason for the demand of gold to rise since there is basically no industrial usage for The Yellow Metal.

Americas Petrogas reported rising production and net revenue for the most recent quarter. Octagon 88 is moving towards production, with $30 million in milestone-based financing recently secured. That is an impressive amount for a company with a market cap of around $150 million. That Octagon 88 was able to borrow money and the rising production and net revenue for Americas Petrogas are both bullish indicators for small caps.

Each of those provides a due diligence function for investors. For Octagon 88, it shows that a lender is willing to extend credit. Americas Petrogas has proven that it is not only pumping, but selling crude from its holdings.

The size of these small caps also makes each more appealing to foreign investors. Canada is starting to limit what can be purchased by buyers from abroad. The $15 billion acquisiton of Nexen by CNOOC (CEO) of China and the $5 billion buy of Progress Energy Resources by Petronas of Malaysia resulted in size restrictions by Ottawa.

Therefore foreign investing in Octagon 88, Americas Petrogas, or other small caps operating in the Canadian oil and natural gas sector will have a better chance of being welcomed. The repulse of CNOOC when it tried to buy America's Unocal is a reminder to foreign investors that government approval is best secured early. Selling cheap in a land with rich natural resources, small cap oil and gas firms such as Octagon 88, Americas Petrogas, and others are the most appealing to investors looking to benefit from a Canadian Dollar losing value.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.