Robert Lyon, senior vice-president and portfolio manager at AGF Investments Inc., has reduced holdings of base-metals stocks in the Canadian resources fund he manages.
"Sluggish global growth is negatively affecting the price of key industrial commodities such as copper, metallurgical coal and iron ore," says Lyon, who pays considerable attention to the macroeconomic picture shaping individual commodity prices. "Specifically, the slowdown in China and the European sovereign-debt crisis are putting downward pressure on base metals," he says.
By contrast, Lyon is enthusiastic about natural-gas producers and gold miners. He has added to his holdings in both industries. The North American price of natural gas is finally establishing a bottom, he says.
"This has been evident over the past few months and confirms the old adage that nothing cures low natural-gas prices like low natural-gas prices." The commodity recently traded at a spot price of US$3.60 per MMBtu (one million British thermal units), which is comfortably up from its low.
On the supply side, weak natural-gas prices have put a damper on the pace of drilling on both sides of the border, he says. "Natural-gas production is flat in the United States and slightly down in Canada."
Against this, "the U.S. demand for natural gas has risen sharply, as U.S. power generators swing from coal to natural gas to take advantage of the low gas prices." Also, the hot summer in both Canada and the United States fuelled demand for the commodity, he says. Finally, U.S. industrial demand for natural gas is strong, "as manufacturers take advantage of the low natural-gas price."
The oil price, at a recent US$87 per barrel of West Texas Intermediate crude, is far more expensive on an energy-equivalent basis than natural gas, says Lyon. "There is thus significant room for the natural-gas price to go higher."
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| Robert Lyon | |
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Bullion has held up well this year, says Lyon, buoyed on the macro front by central-bank easing and downward pressure on interest rates. Yet gold stocks have continued to lag the bullion price, he notes. "There has been a bounce in the stocks in last few months, but it is premature to claim a victory."
Lyon says that the disparity in the performance of bullion and the stocks is more the result of "the staggering growth in gold exchange-traded funds and its boost of the bullion price" than investor concerns about the operational challenges facing gold-mining companies. "Other mining companies and energy companies have their operational challenges too," he says. "But investors are not chasing those underlying commodities using ETFs to the extent that they are gold bullion.
"The AGF resource funds have only recently been given the ability to hold bullion directly," says Lyon. The funds have historically held gold indirectly through securities like Central Fund of Canada Ltd., which holds gold and silver bullion and the Royal Canadian Mint's gold-backed ETF alternative, which trades under the ticker MNT.
At AGF, Lyon is responsible for a team managing $1.4 billion in assets in a number of natural-resources funds and their clones, including AGF Canadian Resources Class and AGF Global Resources Class .
As well, Lyon co-manages AGF Precious Metals with Ani Markova. The AGF team combines a top-down approach with stock selection. The stock-selection style is growth at a reasonable price (GARP).
AGF Canadian Resources Class, which has 94 names, has a 45% weighting in energy producers and 10% in energy services for a total of 55%. Gold constitutes 23% and diversified metals and mining 17%.
As part of his strategy to ramp up his gold weighting, Lyon increased his holding in Osisko Mining Corp. OSK. The company's flagship asset is the Canadian Malartic gold mine located in northwestern Quebec. "The company is being re-rated by the Street to a producer from a developer, and there is still more upside."
He also added to smaller-cap Belo Sun Mining Corp. BSX, which is developing its Volta Grande gold project in Brazil. The updated resource estimates have been positive, says Lyon, and there will be a pre-feasibility study in the first quarter of 2013.
Of his energy holdings, Lyon has added to Painted Pony Petroleum Ltd. PPY. The company continues to develop its natural-gas asset in the Montney formation in northeastern B.C." Painted Pony, says Lyon, is also involved in the BC LNG Export Cooperative Group, which has indicated that its liquefied natural-gas export facility will be operational in 2014.
"Painted Pony is therefore part of the LNG solution." To Lyon, there is "considerable upside in the company's Montney asset, as only a small percentage of the company's resource there has been exploited." Painted Pony's oil interest in the Bakken field in Saskatchewan is producing "a good steady cash flow."
Trilogy Energy Corp. TET, which is one of the most active small players in the Duvernay shale gas/liquids play in Alberta, "has similar upside to Painted Pony," says Lyon. "Trilogy has one of the best land positions in the Duvernay play, and the liquids-rich gas enhances the economics of the undertaking." Lyon recently added Trilogy to his portfolio.
| Painted Petroleum Ltd. | Trilogy Energy Corp. |
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| Oct. 30 close | $10.88 | $27.23 | |
| 52-week high/low | $13.00-$6.20 | $39.43-$20.23 | |
| Market cap | $772.8 million | $3.2 billion | |
| Total % return 1Y* | 13.0% | 21.9% | |
| Total % return 3Y* | 22.9% | 51.3% | |
| Total % return 5Y* | 48.6% | 31.7% | |
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| **As of Oct. 30, 2012 Source: Morningstar |
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Top 10 holdings in AGF Canadian Resources Class include Tourmaline Oil Corp. TOU and Canadian Natural Resources Ltd. CNQ. Tourmaline "is still one of the fastest growing, lower-cost producers on the continent."
CNQ remains a "core holding," says Lyon. Its Horizon Oil Sands plant in northern Alberta has recovered from its shutdown early this year. The company could, he says, "surprise on the upside with its substantial natural-gas land positions in plays like the Montney." It has not pursued these aggressively because of the low natural-gas price, says Lyon.
In keeping with his concerns about the outlook for base-metals prices, Lyon has sold his holding in the Anglo-Swiss mining giant Xstrata PLC, a major copper, zinc, coal and nickel producer. He has also sold his holding in Cliff Natural Resources Inc. CLF. This company is a major global iron-ore producer and a significant producer of metallurgical coal.
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