Dear Partners,

For the month of February, Caravel returned +2.43% compared to +3.48% for the benchmark (-0.76% for the S&P 500 & +7.72% for the SPTSX)¹. This brings year-to-date total net return to +4.47% for the fund and +4.66% for the benchmark, respectively.

The fund’s gains in February were driven by merger arbitrage (+1.8% gross), copper (+2.4% gross), gold (+1.7% gross), and shorts/hedges (+0.3% gross), the latter of which remained skewed towards major US market indices. Uranium (-1.3% gross) and non-resource equity long-short (-1.6%) were drags. Losses in the uranium book were predominantly due to a steep drawdown in District Metals (TSXV: DMX) after an article was published in the Swedish media claiming the mining method that would be used to develop the company’s flagship asset may need additional community-level approvals relative to market expectations. Based on our research, we believed the ~50% decline on the day of the news was an overreaction and added to our position around $0.40 per share. The stock has subsequently rebounded to $0.55 per share, and we have realized some trading profits in March on a portion of our position as we await positive catalysts to bring renewed credibility and confidence to the story.

The Asymptotic News Cycle

What a difference a month can make. In our December 2025 Letter, we tried to strike a cautiously optimistic tone on the year ahead while noting that being in the consensus made us uncomfortable. Based on many similar experiences in this business, we now consider the following to be an axiom: you never know what’s going to go bump in the night. 

Coming into 2026, investors were eagerly awaiting a cocktail of interest rate cuts and tax refunds in the US and wide-sweeping efforts to stimulate the lackluster Canadian economy. Shortly after we published our January 2026 Letter, the US began yet another war in the Middle East, which has rattled energy and financial markets. While we will discuss the implications for our fund below, first and foremost, we pray for a swift resolution to the conflict.

The Iran War

Besides the risk of a violent escalation such as a ground invasion involving US soldiers, which cannot be ruled out, the most acute threat to the global economy posed by the conflict is further damage to upstream energy assets and downstream supply chain targets, such as refineries and shipping routes. Despite the guiding principle that Trump is a populist and is sensitive to assets prices, it appears the US federal government is prepared to tolerate some substantial pain and further erosion of their approval ratings ahead of the upcoming midterm elections. We believe the US and Israel are facing a narrow window to produce a fulsome resolution to the conflict before longer-term damage is done in areas like inflation and corporate earnings. 

Over just the past few weeks visibility has swung from seemingly quite high to extremely low for market participants. This dynamic has reset measures of investor sentiment from extreme highs coming into 2026 to mixed at best currently.

Historically, it has often been true that the best time to add risk to one’s portfolio is during times of maximum uncertainty. For example, if you had the foresight and nerve to buy the S&P 500 at the COVID low (March 20^th, 2020, or six years to the day as I write), your total return has been about 212%, or ~21% annualized. For reference, that is nearly double the 50-year average and ~5x the annualized return that the index had produced over the 21^st century to that point. Of course, a great deal of optimism is required to abide by this strategy, akin to a leap of faith.

Caravel’s Response

March has thus far been a month where Caravel’s diversified strategies and perpetual hedging activities have been extremely valuable. Gains in our merger arbitrage, convertibles, and short book have offset losses in our gold, copper, and uranium holdings.

Gold

As I write, the price of gold is off -17% in March while the average gold stock is down -30%. ‘Leverage to the gold price’ is something that greatly benefits these stocks in a rising gold price environment like we have seen in the past two years, but of course leverage is a double-edged sword. As we have written in previous letters, we started taking profits in gold in Q4 of last year and had a relatively modest net allocation to these stocks coming into March. Still, the names we own have not been spared from the market turmoil. We believe the reversal in gold is most attributable to the repricing of probabilities for interest rate cuts, which for example have gone from 0.75% in expectation to ~0% (i.e. no cuts anticipated) for the US in 2026. This of course has been a direct response to inflationary shock of spiking energy prices since the end of February. We also saw an article earlier this month that was noteworthy. The article states that the National Bank of Poland was considering selling some of its gold holdings in order to fund its defense spending goals. This was a serious about-face from the NBP, which has been one of the most aggressive buyers of the yellow metal in recent years. We do not believe this is likely to occur, but the change in tone raised our eyebrows. To the extent that sentiment on gold was feverish as speculative capital tried to front-run global central bank purchases and forthcoming interest rate cuts, we are not overly surprised to see a selloff this violent. Still, at ~$4,500 per ounce, miners and developers have excellent opportunities to capitalize on the price gains of the past two years for this commodity, despite their sensitivity to energy input prices. We have covered shorts and added to our highest conviction names in response to the volatility in this space in March. Our net allocation has climbed from ~3% to ~5% of the portfolio.

Copper

Although copper had not run as hard as gold coming into 2026 (one of the reasons we preferred it), it is more exposed to economic growth and as such has had similarly poor performance in March in response to rapidly repriced odds of a recession in 2026 since hostilities began. We have not met the selloff with as much buying as we have in gold as we are awaiting better visibility on a resolution to the conflict before pressing our bets in this space. Our net allocation is ~5%. 

As a quick aside, our performance in March within our copper book has been aided significantly by our investment in Arizona Sonoran Copper (TSX: ASCU).

We wrote in our March 2025 Letter:

We view Hudbay Minerals’ (TSX: HBM) $20 million investment into ASCU in January 2025 as a significant milestone. It both validates the potential of the project from a ‘big brother’ and (partially) alleviates investor concern about future financing. Against the backdrop of the US administration’s view on critical minerals supply and permitting, and having received validation from HBM, we view ASCU’s valuation of ~0.4x consensus NAV as too low for a project of its scale, economics, and zip code. We re-initiated a position around $1.80 per share, or 27% below its 2021 IPO price. We look forward to updating you on the company as they further derisk their assets in the future.

Here’s the update as promised:

On March 2^nd, 2026, Hudbay announces it would acquire the rest of ASCU’s outstanding shares for $9.35 per share in stock. We exited our position that day at $8.75 per share, as the spread was not compelling enough for us to keep ASCU in the merger arbitrage book (HBM shares were down meaningfully on the day of announcement as arbitrageurs stepped in). This was good for a +385% return from our initial buy price over a 1-year holding period, substantially outperforming the commodity, which was up ~30% over the same timeframe. We highlight this as just the latest example of our playbook in the materials sector. In this case, we were able to identify an important inflection point for ASCU as they were able to bring ‘big brother’ HBM into the tent at a critical time. Farewell ASCU, it was a pleasure. We have redeployed this cash into Gunnison Copper (TSX: GCU), which to us looks much like ASCU did in early 2025. Stay tuned on this one.

Uranium

We believe the conflict in Iran only strengthens the long-term thesis for Uranium as it is just the most recent in a series of events underscoring the value of energy independence globally. However, in times of market stress correlations tend to converge, and both the commodity and related equities are feeling the effects of the deleveraging occurring so far in March. We have covered shorts in this sector and sold puts on names we favour to establish entry points lower down, while collecting healthy premiums in exchange, with single stock implied volatility trading between 80-100%. This allows us to collect 10-15% of a company’s share price in cash while committing to buy it at a significant discount over the next 2-3 months. Our largest position in this space continues to be Iso Energy (TSX: ISO), which we have added to at what we believe are bargain prices in the $13-14 per share range in recent days. Our net exposure to this sector is ~7%.

Overall, our approach can reasonably be described as cautious. We have not tried to pick the bottom and have resisted being whipsawed by conflicting and often hyperbolic headlines. If we were to get a proper flush in stocks, for example an S&P print in the low 6,000 range, we would likely get tactically more aggressive. We believe in the durability of our approach in all market environments and hope to provide a positive update on our performance next week.

We thank you for your continued support,

Jack and Glen

Managing Partners, Caravel Capital

 ^{Benchmark = 50/50 weighting of S&P 500 & SPTSX Composite Indices}