Editor's note: In today's third and final instalment of this week's Morningstar roundtable on resources investing, the managers compare and contrast their portfolio strategies. Our panellists are Benoit Gervais, vice-president, investments, at Toronto-based Mackenzie Financial Corp., who co-manages a number of resource funds with Fred Sturm including Mackenzie Universal World Resource Class 
; Robert Lyon, senior vice-president and portfolio manager at Toronto-based AGF Investments Inc., who oversees all of AGF's resources funds including AGF Global Resources Class; and Norman MacDonald, vice-president at Invesco Trimark Ltd., who manages Trimark Resources. They spoke with Morningstar columnist Sonita Horvitch.
Q: Can we talk about iron ore?
Lyon: We have a significant weighting in Canada's Consolidated Thompson Iron Mines Ltd. CLM, which has a growing asset base in Quebec. We have owned it for a long time.
Gervais: We own it. We also have several other juniors in West Africa, which is the next area of growth for iron ore. The Chinese are likely to build the infrastructure there.
Lyon: In contrast to copper, there is a lot of iron ore in the world. It is the logistical and infrastructure challenges that are curtailing supply.
Gervais: We should talk about paper producers. Demand in India and China for packaging and newsprint and other paper products is going up. We are invested in Canada's Sino-Forest Corp. TRE, which has commercial forest plantations in China. We also own Suzano Papel e Celulose SA in, Brazil. These are major holdings in Mackenzie Universal Canadian Resource and are volume-growth stories. We have 8% in paper and products stocks in this fund.
Lyon: We do not have paper stocks.
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| Benoit Gervais: We have several juniors in West Africa, which is the next area of growth for iron ore. | |
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MacDonald: We have a 10% weighting in Trimark Resources in paper and forest products. I own Canexus Income Fund CUS.UN, which makes chemicals for the pulp and paper industry. In forest products, I own Plum Creek Timber Co. PCL, which is the largest U.S. private-timberland owner.
Q: Uranium?
MacDonald: It is a 2011 or 2012 story.
Lyon: You could get a surprise here as you did with the takeover bid for Potash Corp. of Saskatchewan POT. The secular story for uranium is good, but it has not yet translated into the commodity price and the stocks. In contrast to Potash, Cameco Corp. CCO has had some serious problems.
Q: Time to discuss your portfolio strategy. We will start with Bob.
Lyon: I manage $1.4 billion in resource portfolios. AGF Canadian Resources has $500 million and 85 names. Foreign content is about 25%. I look for the best value and growth opportunities. We have about 30% of the fund in gold. We have not been taking money out of gold. My biggest gold holding is Eldorado Gold Corp. ELD. I have been selling down my holding in Red Back Mining Inc. RBI into the bid. We added Great Basin Gold Ltd. GBG, which has mining assets in the Carlin Trend in Nevada and in the Witwatersrand area of South Africa.
Gervais: I own it.
Lyon: In the energy sector, we recently added to a junior producer, Angle Energy Inc. NGL. Its asset base has transitioned to one where there are repeatable drilling opportunities in its main area in Harmattan, Alta. Our largest energy holding is Calgary-based Tourmaline Oil Corp. We can have up to 10% in private companies. This company was founded in the fall of 2008, during the depth of the financial crisis by Mike Rose, who was able to assemble a fantastic collection of natural-gas properties in the Alberta Foothills at low prices. Rose has an excellent track record of buying and selling energy companies.
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| Norman MacDonald: I have been taking some money off the table in gold by reducing individual names like Detour Gold Corp. | |
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Gervais: We also own Tourmaline.
Lyon: It is likely to come public in the next six or nine months. In AGF Canadian Resources, good core long-term holdings are Bonavista Energy Trust Ltd. BNP.UN and Canadian Natural Resources Ltd. CNQ.
Q: Turning to Norm, how much do you manage in Trimark Resources?
MacDonald: $500 million and there are 38 names. The foreign content is 26%. I have 20% in gold. Lately, I have been taking some money off the table in gold by reducing individual names. An example is Detour Gold Corp. DGC.
Lyon: I own the stock. The company has a project at Detour Lake north of Timmins, Ont.
MacDonald: I bought Detour when it was $17 and the stock has run to $32. There is some execution risk as the asset goes from an exploration play to a producing mine. Detour remains a big weight in the portfolio, just under 4%. At the same time as reducing the gold weighting, I have been adding to natural-gas names, such as U.S.-based Devon Energy Corp. DVN, which is a 2% weighting.
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| Robert Lyon: The secular story for uranium is good, but Cameco Corp. has had some serious problems. | |
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Lyon: I own Devon Energy in AGF Global Resources with about a 1.5% weighting.
MacDonald: Devon is a good-quality company that was lucky in that it sold its Gulf of Mexico assets to BP. Devon has decided to stick to its knitting of onshore natural-gas production, balanced with a good portfolio of SAGD (steam-assisted gravity drainage) growth in Western Canada.
Q: Norm, what is your biggest holding in Trimark Resources?
MacDonald: Cenovus Energy Inc. CVE, which is about 5% of the fund. Over the next 10 years, the company can grow production by 6% to 8% per annum. It has good assets (oil-sands operations in Western Canada) and a good management team. It is being weighed down in the short-term by the ownership of refineries in the United States as part of its joint venture with ConocoPhillips. Refining margins in North America are extremely weak. The stock is a little expensive. It trades at nine to 10 times 2011 cash flow per share, based on an oil price of US$75 oil.
| Bonavista Energy Trust | Canadian Natural Resources Ltd. |
Nexen Inc. | ||
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| Sept.16 close | $23.39 | $34.29 | $20.60 | |
| 52-week high/low | $19.86-$25.70 | $31.97-$40.08 | $18.33-$27.31 | |
| Market cap | $3.1 billion | $37.4 billion | $10.8 billion | |
| Total % return 1Y* | 19.6 | -6.4 | -18.8 | |
| Total % return 3Y* | 3.3 | -3.6 | -12.2 | |
| Total % return 5Y* | -2.5 | 5.5 | -5.8 | |
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| *As of Sept. 16,2010 Source: Morningstar |
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Lyon: I own Cenovus in the global fund. It is more of an asset-value stock.
Macdonald: Nexen Inc. NXY is another big energy weighting.
Lyon: I gave up on Nexen.
MacDonald: The stock has been a major disappointment.
Gervais: I am not a believer. Nexen has lousy North Sea assets. The offshore business is a tough business. Management appears to lack foresight.
Lyon: Norm is a value manager and you can argue that it is a value stock.
MacDonald: My biggest question now is whether it is a value stock or a value trap? Benoit's criticisms are reflected in the stock price.
Q: Benoit, your strategy in Mackenzie Universal Canadian Resource?
Gervais: In all, we have $8 billion in the different Mackenzie Universal resource funds. The Canadian fund has assets of $1.6 billion and 100 names, with the top names very concentrated. Our style is GARP, growth at a reasonable price, with a tilt toward quality. In stock selection, we look for commodities that have bottlenecks within their industries or companies that have growth. It is even better if they have both. Take First Quantum Minerals Ltd. FM, which, as we discussed, is one of the top holdings in the Canadian fund. This company has both levers going for it.
About 50% of the Canadian fund is in foreign holdings. We have only a modest holding in gold stocks of less than 10%, which has not been enough. We had 15% at the beginning of the gold rally and reduced that. We have been adding more copper, some chemical companies and a packaging company. These are economically sensitive stocks. Investors will find out that the world economy is all right, there will be no double dip, and that the demand for these commodities will be robust.
Additional coverage of the Morningstar resources roundtable:
- Part 1 - Cures for the energy malaise
- Part 2 - Golds that gleam
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Photos by: www.paullawrencephotography.com
