How permitting has stymied investment and what could change
Gervais describes Canada’s permitting process for resource extraction projects over the past decade as “horrendous,” with permits taking seven, ten, or twelve years and requiring approvals from countless stakeholders. There was never certainty, he says, that once a project obtained a permit it would not be renegotiated down the road. He contrasts that process with Australia, where permits typically take 18 months despite the country’s many similarities with Canada.
Permitting speed matters, Gervais says, because the decision to invest in a resource extraction project is fraught with risk. Even if permitting can be expedited, the construction of the project can take years, and all of that time and capital is resting on the extraction of a commodity with inherently volatile pricing. In addition to speedier permitting, Gervais wants to see faster depreciation so these projects can begin to return capital faster and become a platform for the next investment.
For investors looking at the resource sector, Gervais says that the political consensus around natural resource extraction is already beginning to change how energy companies are being valued. A large number of energy companies, especially in exploration and production, were being valued on a “blow-down” basis, which uses only the potential earnings of existing reserves to price a company’s stock. However, a smoother permitting process should result in more investment in further exploration and production, making these companies valued as going concerns. Gervais explains that as investors see these companies as able to invest in the extraction of new reserves, their earnings multiples will expand. He says that we’ve already seen multiple expansion in a number of mineral and energy extraction companies as investors revise how they value these names.
Capturing resource upside in retail portfolios
Gervais believes that the investment case for Canadian energy and resource extraction goes beyond just a moment of patriotism and a focus on Canada’s competitive advantage. He says that a host of global macro forces should also be supportive for commodity and natural resource prices. That includes the energy-intensive rise of artificial intelligence, global reshoring, and heightened geopolitical tensions that make Canada a preferred partner, especially in markets like Europe. He notes that Canada is rarely the cheapest producer of many natural resources, but that our relative stability and friendliness when compared with other major producers of resources like natural gas or critical minerals make us a competitive player.
There are still preconditions that need to be met for the long-term investment case in resources to make sense. Gervais explains that advisors need to be confident in a healthy market for Canadian resources, and that economic growth in the G7 should be a good indicator of that market. The ongoing AI buildout is another underlying driver of both GDP growth and energy consumption, as is electrification. In looking at investable opportunities, Gervais says that advisors should look for projects and themes that harvest today’s high prices for commodities while investing in new assets.