Hello and welcome to The Download. I'm your host, Dave Richardson, and I'm really excited about today. I got to spend the better part of last week with our guest today in London, in the UK. We got to listen to her talk about markets, and that's what we're going to share with you today and see some other portfolio managers and get their views from all around the world. And obviously lots of stuff is going on, but this particular portfolio manager was the star of the show, and not just around what she had to say about markets. Maybe this means nothing to investors. I think it actually does. I've seen ads run on this, that you want to have great people managing your money, not just really smart people who are great at managing money, but really good people. Sarah Neilson, who is the co-head of North American equities at RBC Global Asset Management, just charmed the life out of a bunch of people that went over on this conference and blew them away with her knowledge of the energy markets, which is, I think, what we're going to spend the bulk of our time talking. Sarah, with that, by the way, very sincere introduction, how are you doing today?

Great. Well, thank you. And it was a wonderful trip. Good to meet everybody, and I enjoyed it quite a bit. So thank you so much for that.

Well, you know, Sarah, before we even go into the broader discussion of markets, one of the things that we talked about just briefly on the side is you really liked hearing from the advisors who were there with us. And then part of that is the connection to the actual people who own the investment portfolios that you and your team manage. So what did you get out of that experience last week spending so much time with advisors?

Yeah, it was important to me really, and to hear what their conversations are like when they're talking to their client, what the questions are, what the emotions are, frankly, and bring that back and understand what our sales force faces and bring that into my team and understand and remind us that we are really focused on what the client end goal is. And that's where we spend all of our day trying to remove the emotion and get those results that they've been looking for. So, I think those conversations we have with the team, your teams and the teams on the ground, it really does help bring it home to us.

Yeah, and just to come back to part of the introduction. I think it is important. This is a personal view. I don't know if I can objectively measure it. I'm sure I could, but certainly subjectively. I think it's important for investment managers, as they're making decisions and putting together their overall strategies and mandates for the portfolios they're running, to be conscious of the end investor. That it is not your money that you're managing, Sarah. It is for you and your team, probably well over a million Canadians, probably even 2 million Canadians who are relying on you and your team to deliver results for them.

That's right. It's millions of Canadians' retirement savings. That's an important job that we have at our hands. So those discussions we had last week just reinforce how important that is. And we had a team meeting yesterday and discussed just that. Let's stay focused, even though the market is volatile, to say the least, on managing the risk on behalf of our clients.

Yeah, it's so important to have that sense of connection. And it's another data point. It's not the only one. If Molly in Moose Jaw thinks you should be buying more gold, that might not be what you do for the overall portfolio. But Molly's overall retirement goals and the ride that she's going to have getting there is something that you can think about within your investment process and make a difference for Canadians, which not only makes you a wonderful human being, but incredibly powerful.

I don't feel it most days but thank you.

Well, that's what makes you great, your humility, and that's what I love about the investment managers we have on here. Okay, so enough of a setup. We're going to talk about energy, which was the main reason and what I asked you to prepare for today. But maybe just before we get into energy, just an overall sense, because you're managing money for all of North America, you and your team. And so we've got the action going on in Iran. We've still got conflict in Russia, Ukraine. There are all kinds of stuff going on. As you step back right now at 10,000 feet, what are you thinking about the stock market overall and what do you think investors should be worried about or should be thinking about in terms of opportunities?

Like you said, you've got the geopolitical conflict themes still playing out in the background, both Russia, Ukraine, and now the Iranian conflict. But before that, earlier this year, we had the big debate about AI and software and will the AI take away all of the software opportunities and margins. And that played out in the stock market and swung flows extremely in the US market and even in the Canadian market. We started the year with 10% of Canadian market was tech, and now it's 5%. So quickly these things change. I find investors are debating a lot of big themes and trying to understand where opportunities are and things are moving so quickly. So when we think about earnings growth though, it's still expected to grow quite strongly, both in the US and in Canada. So we try to ground ourselves there. Okay, you've got a lot of things moving in the background, but what are consensus earnings expecting? And how do we think that could play out? Are they right or wrong? And what's the valuation on that? So if I take it to the Canadian market, analysts expect 15% earnings growth this year, even with what's gone on with gold and oil. And I think maybe it could even grow with some of the oil movements we've had in the last week. And financials are expected to be strong. Industrials, I think, are expected to recover as we get more confidence that some of the tariff issues that were weighing on economic outlook last year may not quite be as extreme as we thought, for sure. And then other aspects of the market, like consumer's been pretty strong. Utilities have been a bright light as power demand grows. So all of these pieces driving earnings growth, valuations are a little extended, both markets in US and Canada. So as long as we see this earnings growth come to pass, I think we'll see a nice solid result. But there's still a lot of risk. And when you've got a highly priced market and a lot of volatile commodities, especially in Canada, there's a lot of things to watch and a lot of movement that could happen below the surface. And we're monitoring that in real time.

So are you trying to take advantage of these big short-term moves or because of the amount of uncertainty, are you largely sitting back saying, the backdrop, as you suggested, good earnings growth, good consumer— are you sitting back and just saying, I'll just have a little bit of everything, I'll stay diversified, and let's see how it plays out? Or again, are you going to take advantage of those short-term moves?

Yeah, well, I think it's a bit of both, frankly. I think our portfolios largely have high-quality companies as the base and at the core of the market. And then we are looking for those opportunities. The stock market overshoots often when bad news happens or good news happens. And those are times for us to get active and take advantage of things. So we spend a lot of time understanding the scenario analysis for each of the companies we invest in. What could be the bear case? What could be the bull case? And so when we see that play out very quickly in the market in these times, we could take advantage. We see a stock reach its bear case, but we still see a long-term opportunity. And the fundamentals haven't eroded, just the flows and the valuation have been hit for a variety of reasons. That's a good time for us to dig in and possibly increase our position. So it's dynamic, Dave. We're constantly looking at all the names, and this volatility can be really fun and get us some good compounding opportunities.

Well, this is one of those times again where an active manager can really add some alpha into a portfolio. And that alpha is the performance above market. Because again, you've got different parts of the market moving in big, big swings. And you can take advantage of that. Whereas an index is just buying proportion of that stock. So, is there anything you've done over the last month, say, that's been a particular highlight for you and the team?

We've added some smaller-cap energy names early on in the year, and that has worked out quite well as we played through this. And we're not looking for extremely juniors necessarily, but some mid-cap names that I think were forgotten for a while that have a lot of opportunity ahead of them and driving their costs down, getting their balance sheets in the right place, and we can position the portfolio. And the commodity was expected to be somewhat weak, so as we recover from that, that would be a great place to generate alpha. And even on the pipelines, we've added some names there that have really great growth prospects as natural gas demand grows across North America to feed a lot of this power demand that everyone's excited for. And even in golds, we've been adding to some large-cap gold names into the portfolio that we see where maybe had more risk on them. And we think that there's some changes in the company makeup that could provide valuation upside that's not discounted at this point. So positioning on those names has been good. And then lightening up on some other, maybe some higher-valued grocers, for example, where you see the competition ramping up in that space.

The thing I walked away and loved about your presentation was it was more of a discussion, a back and forth, lots of questions and answers, but how active you can be within the portfolio. You're looking for those opportunities and you act and play defense as well at the right times.

That's right. And we spend a lot of time also in Canada specifically, and increasingly in the US, talking to the management teams of the companies that we're invested in and meeting with the boards as well. And so we get a lot of sense for what's on their worry list and opportunity list through those conversations. And that helps us really round out how we think about the fundamental opportunity of the company and can help us really have a well-rounded view of upside or downside and act accordingly on behalf of the clients.

Yeah, what was another thing I walked away with from your discussion is you're able to get that access when you need it. And that's a huge value add for you and the team, being able to see somebody at X energy company or X gold company or X grocery store chain, you can get that discussion when you need it.

Yeah, we're very grateful for those relationships we have. And again, it goes to that scale and our huge client base that we're very grateful for. It helps us open some doors and discuss with these teams. And, you know, we've been cultivating these relationships for years, and I think it really does benefit our approach.

So that would be particularly the case in where we're going to focus the next part of the discussion, and that is on antimony. You've got great relationships in antimony. We were having a little discussion about my love for antimony, which goes back to my grade 10 chemistry days back in Beaconsfield, Quebec. But no, we're going to talk energy because that's what people are really thinking about. I guess the only thing you could sit back and say right now, again, with all the experience you have in that sector, just the last few days have been just wow.

Wild. I was thinking about it like we're watching geopolitical risk be priced into the oil quote in real time, minute by minute. And it's not something you see every day. So hard to chase. And I wouldn't want to be one who had to. I feel like we're well positioned to weather some of this volatility and given the names that we own, but it's been wild to watch. And it's a lot of debate happening in the market. Again, thinking in scenarios, it really helps us take the emotion out, but also helps us understand why the price of oil is where it is. So we think about, what's the bull case? I don't call it a bull case because it's a terrible case, but like the high case for oil is $150, let's say, should we have disruption from the Strait of Hormuz, which has 20% of the world's oil flowing through it. If that extends for months, you have to get the oil price to a place where your demand destruction kicks in, and that doesn't happen overnight. And supply response happens, that again takes months. And so that's high price. That's not good for anyone. It's not good for economies. It's not good for markets. And I don't even think the oil prices will price in a full high end like that. And then on the bear case, we could go back to where we were at the beginning of the year, and that's $60 oil. So those are very wide outcomes. And so we're constantly trying to understand what the probabilities of those are. And I think the market is too. And you can kind of back into what the probability of it being 150 is. It’s not high right now, especially after Trump indicated he thinks the war is close to over. Whatever that looks like, we'll see. And the oil price erased $35 in one day on that comment. So that was real time. We were $120 Brent US, and then we were $88 by the end of the day. So big changes happening in the market, and it's important to really just ground that in those scenarios, understand what the market's reflecting, and then look at your companies and think, how would they fare if it is the bull or the bear case in that sense, and how you're positioned in the portfolio.

And so important, as you've mentioned several times and I talk about a lot on this podcast. And by the way, if you like, the podcast, please follow us wherever you get your podcasts and subscribe on YouTube because you get to see Sarah's smiling face with the sun in the background in Toronto. I'm not in Toronto, I'm in Vancouver. This is the first time I've ever seen it snowing in Vancouver. I'm here on a snowy day in early March in Vancouver. So you got the good draw on that. But this whole idea about emotions is so critical because one of the things that we've seen, and you mentioned it, one tweet, one comment from the president drops the price of oil $35 a barrel. Let's not minimize that. That is a massive move. That is an unprecedented move in the course of just a few hours. This is not the first time over the last 15 months or 14 months now, for 13 and a half months. We could get it down to the day. I think there are some people counting that way. That we've seen, just snap your finger, massive moves in market off a tweet or a comment. I parked my car beside a bull in the Azores when I was over in Portugal one time, and the bull rammed my car. And the message out of it was basically, don't park beside a bull. Now, fortunately or unfortunately for Canada, probably more of a risky scenario right now, is we do live beside that bull, and you never know when that bull is going to rear up and smash into you if you're the car. And Canada would be the car in this analogy. But these aren't just little moves. These are big moves. And so keeping your head as things are moving around is so important. And wow, here again, we were at $120 oil overnight from Sunday to Monday. And then we're sitting here as we speak right around $80 a barrel. It was actually under $80 at one point today. So it's incredible. And so you as an investment manager, and as you say, these companies that are involved in this business of extracting oil and natural gas and producing the fuel that goes into our vehicles, they've got to keep their heads too. And that's a big part of the way that you think about investing in the space.

For sure. And I think they will unless we get extreme prices that are calling for some sort of supply response, which I don't think anyone in the world wants right now. I think you could see most of the world is siding with trying to accelerate opening the flow of this 20% of the oil that's blocked right now. It's better for all economies and worlds and people. But in the meantime, companies in Canada are very well positioned to make free cash anywhere above $50 per barrel, some of them even lower. And if they get a windfall of this magnitude. If we were to see oil prices stay in the $75 per barrel range, that's almost a 40% uplift in some cases on cash flow estimates from where we would have stood at the beginning of the year when people were pricing in $60. That's a big change. That's billions of dollars. And I think what that does is it fortifies balance sheets because what these kinds of episodes remind commodity investors and companies is it's volatile. And so having that fortress balance sheet, and that benefits equity holders. A lower debt accrues value to equity holders and returning more cash to shareholders through dividends. We've already seen increasing dividends, and buybacks have been a major part of shareholder returns, and I think we'll see that. We may see some incremental growth out of Canadian companies over the next coming years if we get more infrastructure built. But in the meantime, I think it's a great positive for Canadian shareholders of these companies. There will be more cash returned if we see these prices hang in.

Yeah, and one of the things we were talking about just before we started recording was the whole idea that perhaps the trend for oil is down and was coming into the year, however, you have an incident like this happen and it has a lasting effect. I discounted this. This was something I think that listeners will really get some benefit out of.

Yeah, well, it reminds the world how vulnerable the oil market is when 20% of the world's oil goes through a 20-kilometer strait. And we always known that, but it had never really been closed for any extended period of time. And now it's closed for threat of attack but also lack of insurance to be able to safely transport through this. And all of the world's spare capacity for oil sits also in that Middle Eastern region, largely in Saudi. So that's a high-risk proposition. And these kinds of episodes do remind everyone that that is where the oil sits. So maybe we'll see an extended geopolitical premium in the crude price for some time. And I would argue ahead of this episode that happened on February 28th, oil prices were already up 20% year to date, even though we were in an oversupplied situation. So we were pricing in some geopolitical risk, and I expect that to continue for some time. Interestingly, Canadian energy stocks were up 22% before this even happened, and now they're flat on this week. So I think it wasn't necessarily a shock to markets that there would be geopolitical unrest in the region. We just didn't expect it to be this extreme. And now it's a large question of duration. How long? Is it today or is it 2 months from now? Those are very different outcomes.

Yeah, and that is such a big point, that idea of a risk premium. And so what does that mean? Well, I might do all the analysis and look at the fundamentals and say that oil should sit at $65 a barrel. But just in my recent memory here is, uh-oh, wait a minute, we can see things flying around in the air in areas of narrow straits in the ocean, and seawaters are cut off. And you know what, maybe I better take that extra risk into account. And that just keeps the price at maybe $65, but it just sits at $75. And all that time that it's sitting at $75, our Canadian producers are sitting there with their cost base that's not moving and just churning away and generating an extra $10 a barrel on everything they spit out.

Yep, exactly. And not spending additional CapEx at this time. And yeah, it's a really good situation. And they have in some cases 40 years of reserves that don't decline at a very fast pace. So that's free cash flow to the bottom line for these companies. And they're in a safe jurisdiction. And I think that spotlight could turn even brighter on the Canadian resource base after an episode like we are going through right now.

Yeah, exactly. You want it, if you're relying on oil, which we all do for the things that we do, or I'm a business relying on oil, then I look at Canada and go, wow, that's a pretty safe and comfortable place. I can't remember the last time that we had an armed conflict in Western Canada. It happened a long, long time ago. And so, it's a pretty stable resource. And then that was another point that you brought up last week is just the duration of that resource, that it's a little bit different than other parts of the world.

Yes, exactly. It's a long-dated resource and it doesn't decline very fast. So every year, might decline 10% for an oil sands operation, if that, a mine less, whereas an unconventional shale well will decline at 50%. So that means you have to replace that 50% plus to grow the next year or just to stay flat. And that's CapEx that's continuing on a treadmill. And so the Canadian producers don't have that same maintenance capital requirement. They have other maintenance capital pulls, but not to the same degree. So that again leads to more free cash flow to the shareholders.

And CapEx is short for capital expenditure. It's the cool way to say it. By the way, I used that term a lot with the kids as they were growing up. That dad and mom only have a certain amount of capacity for CapEx here in the household. And so we have to manage that accordingly. So overall, you came into the year, I'm assuming, overweight in the energy sector in Canada and the US. And you've sort of held that position or what does that look like over the last 2 months?

Yeah, we grew it a little bit, like I mentioned at the beginning of the year, to be opportunistic on a few names. And we haven't made many trades over this last week, frankly. I feel very comfortable with the companies we own weathering the storm and then benefiting also from this free cash flow wind. And when you own companies that you have confidence in the management teams to use that cash to generate value, I feel fine having that position in them. And we haven't added a whole lot either because it's a really uncertain time. So still a little overweight and comfortable with it.

Okay. So that's the energy sector, which I know you know as well as anybody. And so you and the team are following that closely and we'll get you on in the not-too-distant future to come back and see where some of this plays out as this geopolitical tension either increases or subsides, hopefully subsides, just from a human standpoint as well. But maybe we'll finish off with a very quick discussion about antimony. No, no, no. I know what Canadians, when I'm out and I'm having dinner with some investors this evening, one of the things they're going to talk about is gold and silver. And you shared some thoughts on that last week. One of the things I was surprised about is, you had an initial reaction on gold on the military action in Iran. It kind of spiked up a bit, but then it settled down, actually came down quite a bit. And now that oil has settled back, gold seems to be picking up a little ground. Were you surprised by that, or is that typical because of the impact that oil has across the broader economy? Is that the way you thought it might play out with gold?

Well, I was a little surprised, to be honest, because I think we went into this conflict again with gold over $5,000 per ounce, also reflecting some safe haven status in a world that seemed pretty risky in terms of some of the moves we've been seeing. And as well reflecting de-dollarization and central banks adding more to gold and less to the US Treasuries than they have in the past. And that's been a nice benefit for gold prices. When this conflict happened, gold sold off, like you mentioned. I was a little surprised because it seemed like the time you'd be adding to safe havens. But I think many people were already there and what happened next was, well, if oil prices are high and we have conflict and higher inflation, maybe the interest rates will have to not be lowered as fast as maybe some had expected in the markets and maybe they'll have to go up. I mean, these are very quick things to be reflected in the market in one day. And so some of that uncertainty came out of gold and maybe gold I think was a little bit overheated already in terms of just a lot of flows had gone there. So there was some degrossing or reduction of everyone's position in the overall market on just the uncertainty. And then as well, we saw US dollar actually became the safe haven for the last week. And that took away a little bit of shine from gold, pardon the pun, or don't. And then yesterday things did another turn like we talked about, and gold is now still up a little bit today and the stocks are reflecting a little bit more comfort in this $5,000 price staying around for a little longer. So these moves are hard. There's a lot of different crosscurrents and different players in the market, in gold specifically, and the commodities, not just fundamental owners. So a lot of changes can happen really quickly, but at the end of the day, I feel like gold prices in this level, as long as we do see this continuous support by central banks to own just more gold in their portfolios, it likely should continue to be supported. That said, if we have a massive inflationary swing and interest rates are expected to go up, that will definitely take some of that gold premium out.

Yeah, but the general view though is that the US dollar weakness is going to continue. That's another help for gold overall.

Yes

And so, in terms of the way that you invest, are you focused primarily on the companies, or are you buying the actual commodity, and do you change that over time? How do you and the team attack gold for the most part?

Yeah, for the large Canadian portfolios, it's looking at individual companies. Not just looking for gold price leverage, though that's important when you're adding a gold company to your portfolio, you want leverage to the price, but you also want a good quality management team you trust to be able to take the capital and the free cash flow they're generating. Like these $5,000 gold prices mean that gold companies are earning on average over $1,500 per ounce in margins and free cash that flows to the bottom line. So you want that to be invested with a company that you trust that they are going to do something smart with that free cash. We've seen big dividend increases out of gold companies we hadn't seen in a long time. Buybacks have increased. M&A. We're seeing some moves in mergers and acquisitions where companies are putting together bigger platforms and scale again drives costs lower over time and can benefit the shareholders. We're looking for usually larger cap, but some mid-cap companies that have good management teams and great assets in safe jurisdictions. We're not ones to necessarily go and add very risky jurisdictions because often those can destroy value quickly.

Yeah. And this is another lesson in terms of risky jurisdictions and wanting to stay safer. But one of the other comments, and we'll maybe finish off with this, and again, this goes to management, as you went through the COVID slump in oil, and then the rebound coming out and prices spiking with the Russian invasion of Ukraine, and then settling back down, there was a lot of talk, and you see it in the stocks, and you see what was returned to shareholders in just more better management within the oil patch, particularly among the senior producers. There was a reputation that they like to run boom and bust when things were going well. Boom, boom, boom, it was great. They're spending money and investing. And then that would hit them real hard when the price dropped. And you made a similar comment about the miners. So it's gold and silver miners and that you're seeing a different kind of discipline through this cycle.

Totally. You're seeing lack of chasing growth, to your point, and recognition that if you have stable operations and you focus on the costs of those operations as a start, you can improve your margins. And we've seen that across the board in the big large-cap Canadian companies. They've focused on their margins. They've focused on an efficient use of capital. So for every incremental growth barrel they're looking for, sometimes it's not going and building a brand new mine. It's looking at the existing asset footprint and can we debottleneck something to get incremental production. And that's way more capital efficient than building a new operation in many cases. So they've really refocused on that and then said, okay, this free cash flow, we're going to not blow it, for lack of a better word. We're going to return it to shareholders. And the share counts have gone down 5% on average in the last few years. And they have committed to doing that increasingly. Like, most of them are at 75 or 100% of free cash flow will be given back to shareholders through dividends and buybacks. Those are big commitments.

Yeah. And because there's so much energy and mining in the Canadian market, it's good to hear that that discipline's in place because that's better for the overall market in Canada. That feeds into financial companies and the consumer because these are big interests in the Canadian economy.

Yeah, much more stable wedge though still subject to commodity price swings. They're definitely better off and with lower debt overall. Like they used to go lever up and then lever down and blow up like you said, and that is not the case anymore. Everyone runs at close to 1x debt to EBITDA, which is quite low really, but it does insulate them from some of these large swings and provide them opportunities to be nimble. And we do trust management teams to do things, whether it be grow or buy assets when the market gives them that opportunity. And so you pick your management teams that are good at executing that as well.

Well, I know the other reason why you're able to get that access is because it's so pleasant to talk to you. So the leadership of those companies must be happy to have the conversation with you. And again, that just leads to better results for you and the unit holders of your portfolio. Sarah, we better get you back. We've held you for half an hour here, and we better get you back to the trading desk. But I can't thank you enough for the time last week because I learned so much from you just in the time we got to spend together and from your presentations to the group and for taking the time to come on the podcast again today. And hopefully we'll have you back more frequently.

Great. Well, thanks for having me. This has been fun.