Canadian Equities: Riding Out the Storm in Energy and Mining

Amid escalating U.S. trade threats and a fragile global growth outlook, Canadian equities are proving their mettle. While headlines fixate on tariff battles and geopolitical noise, the TSX's energy and mining sectors have carved out pockets of resilience, fueled by strong fundamentals, undervalued stocks, and the prospect of accommodative monetary policy. For contrarian investors, this volatile backdrop presents a rare opportunity to overweight cyclical sectors before a potential recovery.

The Macro Backdrop: Trade Tensions vs. BoC Resolve

The Bank of Canada (BoC) has navigated a tightrope in June 2025, maintaining its overnight rate at 2.75% despite U.S. tariff hikes that pushed Canadian steel and aluminum exports into a 50% tariff zone. While the BoC remains wary of inflation—core measures edged to 2.3%—its cautious stance reflects recognition of the economy's dual forces: subdued domestic demand and sector-specific pressures from trade wars.

Crucially, markets anticipate a rate cut by year-end, with TD Economics forecasting a potential drop to 2% by December. This pivot is critical for energy and mining firms, which rely on cheap debt to fund exploration and capital projects. The BoC's flexibility contrasts sharply with the Federal Reserve's inflation hawkishness, creating an asymmetric advantage for Canadian cyclicals.

Sector Spotlight: Energy and Mining Outperform

The TSX's energy and mining sectors are defying headwinds through operational discipline and commodity-price tailwinds.

Energy Sector:
Despite crude prices hovering near $75/barrel (down from April peaks), select players are thriving. Take Tamarack Valley Energy (TVE): its stock trades at 31% below fair value, yet it boasts a 340% year-over-year earnings surge. While regulatory penalties and declining long-term forecasts pose risks, its aggressive share buybacks ($145M repurchased) signal confidence. The sector's valuation discount is stark——making it ripe for contrarian bets.

Meanwhile, broader energy indices face short-term volatility due to geopolitical risks. The TSX Energy Index fell 3% in early June as fears of a U.S. oil tariff loomed, yet this pullback has created entry points for investors willing to look past noise.

Mining Sector:
Here, the story is clearer. New Gold (NGD) has surged 140% YTD, driven by robust free cash flow ($25M in Q1) and debt refinancing at favorable rates. Its Rainy River and New Afton mines are cash cows, while the C-Zone project promises 15% production growth by 2026. —the correlation is striking, and gold's safe-haven appeal is a tailwind.

In silver, Santacruz Silver Mining (SCZ) turned profitable in 2024, with net income surging to $164M. Trading at 78% below fair value, its 17.7x EBIT coverage ratio suggests it can weather Latin American operational hurdles.

Contrarian Play: Exploit the Disconnect

The key insight is this: TSX fundamentals are stronger than headlines suggest. While U.S. tariffs on steel/aluminum have hurt trade-sensitive sectors, energy and mining firms are adapting. For instance:
- Magellan Aerospace (MAL) secured $200M in Pratt & Whitney/GE contracts, insulating it from near-term tariff impacts.
- New Gold's debt-to-equity ratio dropped to 0.6x in 2025, below its 1.2x five-year average, signaling financial resilience.

Investors should ignore the noise and focus on three pillars:
1. Valuation discounts: Many TSX energy/mining stocks trade at 30-80% below fair value.
2. Commodity exposure: Gold and copper prices are supported by global growth fears and green energy demand.
3. BoC easing: Lower rates will reduce financing costs for capital-intensive firms.

Risks and the Case for Caution

No bet is without risk. The BoC could delay rate cuts if core inflation spikes, while U.S.-Canada trade talks could sour. Tamarack Valley's regulatory penalties and Santacruz's Latin American operations also pose execution risks.

Yet the rewards outweigh these concerns. A 2025 scenario where U.S. GDP growth slows to 1.6% (as the OECD forecasts) would likely accelerate BoC easing, boosting TSX cyclicals. Even a modest 5% rate cut could unlock 10-15% returns for energy/mining stocks.

Investment Thesis: Overweight Cyclicals Now

For contrarians, the time is ripe to overweight energy and mining. Key picks include:
- New Gold (NGD): Buy dips below CA$1.80 for long-term exposure to gold and production growth.
- Santacruz Silver (SCZ): A speculative play at CA$0.50, but with a CA$2.20 fair value.
- Tamarack Valley (TVE): Short-term dips below CA$1.50 offer entry points, despite its regulatory overhang.

Avoid purely trade-exposed names like steel producers; focus instead on firms with commodity exposure and balance sheet strength.

Final Verdict

The U.S.-Canada trade war has created a paradox: geopolitical fear is masking fundamental strength. Canadian energy and mining stocks are undervalued, operationally robust, and poised to benefit from BoC easing. For investors with a 12-18 month horizon, this is a textbook contrarian opportunity. As the old adage goes: “Be fearful when others are greedy, and greedy when others are fearful.” In 2025, the TSX's cyclical sectors offer the latter.