“We’re Selling Oil Stocks Now” says Resource Fund Manager Adrian Day

Key Concepts

• Stagflation: An economic condition characterized by slow economic growth, high unemployment, and rising prices (inflation).
• Safe Haven Asset: An investment expected to retain or increase in value during periods of market turbulence (e.g., gold).
• Underinvestment Cycle: A period where capital expenditure in a sector (like oil or mining) is insufficient, leading to future supply deficits.
• Price-to-Free Cash Flow (P/FCF): A valuation metric used to determine if a company is generating enough cash to sustain operations and growth.
• All-In Sustaining Costs (AISC): A comprehensive metric used in the mining industry to represent the total cost of producing an ounce of gold or other metals.
• K-Shaped/I-Shaped Recovery: Economic models describing how different income brackets experience recovery differently; Day suggests an "I-shaped" model where the bottom 50% are struggling significantly.

1. Economic Outlook and Stagflation

Adrien Day argues that the current U.S. economy is experiencing "modest stagflation." He contends that official government statistics, particularly regarding employment and inflation, are misleading:

• Employment: Day claims the Bureau of Labor Statistics (BLS) consistently overstates job creation, noting that 1.2 million jobs previously reported were recently revised downward. He argues that if the "U6" unemployment rate (which includes discouraged workers and those underemployed) were used, the figures would be significantly higher.
• Inflation: He describes the Fed’s 2% inflation target as "arbitrary" and notes that cumulative inflation over the last five years is approximately 25%, far outpacing wage growth.
• Consumer Debt: Credit card defaults are reaching 20-year highs, signaling that the consumer is "maxed out" and that retail spending strength is masking underlying financial distress.

2. Gold as a Geopolitical Hedge

Day clarifies a common misconception regarding gold: it is not a reliable short-term hedge against specific geopolitical events.

• The "Rumor" Pattern: Gold often rises on anticipation of a conflict and experiences "sell-the-news" profit-taking once the event occurs. He cites the Russian invasion of Ukraine and the recent Iran tensions as examples where gold prices retreated shortly after the initial conflict began.
• Long-term Bullishness: Despite short-term volatility, Day remains "extremely bullish" on gold for the next 6–12 months, viewing it as a fundamental hedge against the broader economic decline and monetary instability.

3. The Oil Sector: Valuation and Strategy

While Day previously viewed oil as one of the most undervalued assets, he has recently shifted to selling rather than buying.

• Underinvestment vs. Dividends: Years of ESG-driven divestment and lack of bank lending led to extreme underinvestment. However, oil companies have recently focused on share buybacks and dividends, causing stock prices to rise significantly.
• Current Stance: He believes oil stocks are no longer "cheap" relative to their historical valuations, though he maintains that the commodity itself remains undervalued.

4. The Copper Supply-Demand Gap

Day presents a strong thesis for a long-term copper deficit, driven by structural supply constraints:

• Lead Times: He notes that even for "shovel-ready" projects, it takes at least five years to reach production.
• Demand Skepticism: Day is skeptical of current projections for EV and data center demand. He believes EV adoption will be slower than anticipated due to range anxiety and the necessity of owning a second "real" car. He also predicts that data center technology will become more efficient, reducing the projected massive demand for copper.
• The Price Arbiter: Regardless of demand fluctuations, he argues that current supply is insufficient. Therefore, the price of copper must rise to force efficiency, substitution, and recycling.

5. Investment Methodology and Case Study

Day emphasizes "right-sizing" portfolios based on individual client needs rather than just market sentiment.

• Valuation over Price: He warns against looking only at price, citing Oscar Wilde: "There are people who know the price of everything and the value of nothing." He prefers companies with strong free cash flow and manageable debt.
• Lara Exploration (Case Study): Day holds a 19.9% stake in Lara Exploration. He justifies this investment based on:
  • Management: A team with a proven track record (e.g., the Timok discovery).
  • Business Model: A royalty-based model combined with a significant copper discovery in a mining-friendly, low-conflict jurisdiction in Brazil.
  • Strategic Value: He expects the project to be acquired by a major miner within the next year, as it is a rare, viable asset in a supply-constrained market.

Synthesis and Conclusion

Adrien Day’s perspective is rooted in a long-term, value-oriented approach that prioritizes fundamental economic realities over government narratives. He views the current environment as one of structural stagflation, where commodities—specifically gold and copper—are essential holdings. His strategy involves trimming positions in large-cap miners that have become expensive while maintaining exposure to high-quality, undervalued assets and exploration companies with strong management and clear paths to production. He concludes that while the market is volatile, the underlying supply-demand imbalances in the resource sector will ultimately drive prices higher.