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Bargain-hunting gets tougher in resources sectors

Invesco Trimark's Norman MacDonald likes Silver Wheaton's niche, and gives Barrick Gold a vote of confidence.

Sonita Horvitch 13 January, 2010 | 7:00PM
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Norman MacDonald, vice-president and portfolio manager at Toronto-based Invesco Trimark Ltd., says it is tough to find value opportunities among base and precious metals stocks.

On base metals, MacDonald says copper, zinc and nickel had such a substantial rally in 2009 that "there is a question mark about the sustainability of these high prices, even though China is a significant buyer of these commodities." Gold stocks have been performing exceptionally well for some time, says MacDonald, and there is a need to be selective.

MacDonald managesTrimark Canadian Resources, which had $507 million in assets at the end of December. A value manager, his discipline is to buy companies with good assets and good management at a substantial discount to his estimated value of the business.

This estimate, he says, includes an assumption about the relevant commodity price. "I establish a price that I consider will be sustainable over the longer term." This portfolio has an average of 40 names.

At the end of December, the fund had 37% in oil and gas producers, 13% in oil services companies, 14% in gold stocks and 15% in base metals stocks. The foreign content of the fund at year-end was 26%.

A niche player in the mining sector that MacDonald has added to the portfolio is Silver Wheaton Corp. ( SLW). It is, he says, the largest silver "streaming" company in the world. Established in 2004, the company has entered into silver purchase agreements with mining companies such as Goldcorp Inc. ( G) and Barrick Gold Corp. ( ABX).

Norman MacDonald

These agreements enable Silver Wheaton, in exchange for an upfront payment, to purchase all or a portion of the expected silver production from a new mine "at a low fixed cost" for a pre-determined period or for the life of the mine. "This allows Silver Wheaton to participate in the expected higher silver prices as well as the production growth from the mine."

Silver Wheaton is, in a way, acting as a financier to those mining companies, which see their silver production as a by-product, says MacDonald. The stock is not that cheap, he says, "But Silver Wheaton's agreements are in respect of high quality, long-life mines that are geographically diversified and have good production-growth prospects."

In the gold sector, MacDonald has sold his holdings in both Goldcorp and Agnico-Eagle Ltd. ( AEM). The valuations on these two stocks are high by historical standards for these two companies, he says, and high relative to their peers.

MacDonald has instead added "substantially" to his holding in Barrick Gold, which is the largest gold position in the portfolio. The stock is decidedly out of favour, he says, despite the fact that Barrick has eliminated the hedge agreements on its production. MacDonald says that he has "much confidence" in Barrick's CEO Aaron Regent, who has been in this job one year and has a track record in the mining industry.

Turning to energy, MacDonald says he is finding more value in natural gas producers than oil producers and there is generally better value to be had in natural gas producers south of the border than in their Canadian counterparts.

A Canadian natural gas producer that MacDonald considers to be "extremely well managed" and that he has added to is Bonavista Energy Trust ( BNP.UN), which has been increasing its focus on natural gas. It represented 3.5% of the portfolio at the end of December.

Last summer, this mid-sized oil and gas royalty trust bought long-life natural gas properties in Central Alberta from EnCana Corp. for approximately $698 million in cash. Bonavista financed this acquisition with both bank debt and a bought-deal equity offering in which MacDonald participated.

Bonavista's valuation is a little higher than comparable exploration and production companies, says MacDonald. But, he adds, the trust has a superior management team than many of its rivals, good quality assets and an excellent production growth profile. Senior managers Keith MacPhail and Ronald Poelzer have "a clear strategy for creating unitholder value."

A U.S. natural gas producer that he has been adding to is Goodrich Petroleum Corp. ( GDP), which now represents 3% of the portfolio. This company, says MacDonald, is involved in the Haynesville Shale natural gas play located in Northwest Louisiana and Eastern Texas and extending into Arkansas.

This play could emerge as one of the biggest natural gas finds in the United States, and the "major companies are clamouring to get a footing in it," says MacDonald. Goodrich (market capitalization US$1.2 billion) could indeed be a takeover target. "But I am focusing on Goodrich's success in its drilling program in East Texas and the stock is reasonably priced relative to the company's net asset value."

The largest energy holding, and the largest holding in Trimark Canadian Resources at 4.5% of the fund, is Nexen Inc. ( NXY). "This stock has been disappointing and is decidedly out of favour," MacDonald says.

Nexen is developing its assets in areas like Nigeria and the North Sea. "These projects will not have incremental production volumes until after 2011, but the capital is being spent currently." Also, the company has had challenges with its Long Lake Project in Northeast Alberta. Nexen has raised its stake in Long Lake to 65% from 50% when it bought a15% stake from its partner, OPTI Canada Inc. ( OPC) at a favourable price. "There was pressure on OPTI to sell."

Nexen's stock, says MacDonald, is trading at a "significant discount to the company's net asset value and to its peers." Although Nexen has a collection of good assets, "its strategy for building shareholder value remains unclear."

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Sonita Horvitch

Sonita Horvitch  

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