Commodity producers to consider for your portfolio

Taking a closer look at Teck, Methanex and First Quantum.

Ashley Redmond 9 October, 2012 | 1:00PM
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Ashley Redmond: I'm here with Kirk, who is writing a new monthly stock column for Morningstar.ca.

Kirk, thanks so much for joining me.

Kirk Paulus: Happy to be here.

Redmond: So, this is your debut article -- although I use that term loosely because you have written for us before. So, with this article, you talk about three companies: Teck Resources, Methanex Corp. and First Quantum. So, Kirk, why these three companies?

Paulus: Well, when I was looking through stock screens, what I was looking for was just a central theme on resource stocks. What you see a lot of in the news these days is a focus on gold, oil -- kind of the more flashy commodities -- while some of the more basics like copper, zinc, metallurgical coal, they all kind of go to the wayside. However, if recovery does start to take hold or I should say a stronger recovery starts to take hold, you're going to see some major gains on these commodities.

In particular with quantitative easing 3 (QE3) starting in the States and as well as some possible stimulus happening in China, it's a good time in the market right now to be taking a look at firms involved in more basic materials.

Redmond: Makes sense. So, let's talk about Teck Resources.

Paulus: Teck Resources, they are a pretty large company in Canada. They are about $18 billion of – if memory serves – market cap, and they're focused on metallurgical coal, zinc and copper. In particular, I was drawn to their metallurgical coal business in China. They actually recently became a net importer of metallurgical coal. And as a key input in steel – if they continue to grow their infrastructure and economy you're going to see a lot overseas demand for – which would just absolutely benefit Teck.

In addition, zinc and copper markets are very cyclical as well as I previously stated, and it should be an upturn in those segments and we will also see a lot of upside.

Redmond: And next up is Methanex Corporation, which is incidentally a producer of methanol, and I believe the largest global producer.

Kirk Paulus: Yeah, in Canada we do have the largest methanol producer with Methanex and methanol itself is a pure form of alcohol – not the kind you want to be going to the bar and having for a drink – but they do use it for formaldehyde, which is used very intensively in lot of industrial processes. So, obviously, if you start to see a pick-up in industrial activity, Methanex is going to benefit quite a bit just from increased demand.

One thing to watch out for with the firm was a recent announcement that their Chilean operations – they're going to be moving them to Louisiana. The reasoning behind this was a problem with the feedstock of natural gas, which they use to make the methanol. And moving the plant up to Louisiana is going to be about a $500 million venture, so it's going to be very important for the company’s future – how well they manage to perform this.

Redmond: Yeah, it's a big investment.

Paulus: Oh, yeah.

Redmond: So, next up is First Quantum.

Paulus: First Quantum, a little bit of a different profile than the other two, this firm is involved very heavily in the African copper belt. Recently, you may have read in the news – I think it was about six months ago or so – that they had their rather large mine in Congo expropriated by the government. Later they did sell it for about $700 million, but obviously it kind of shows the political risk that goes along with these projects. There is high return, but high risk – that’s how it goes.

What I liked about this company was; A, its involved in copper, which is very cyclical, if economy goes up they're going to benefit enormously and secondly, was their purchase of some nickel mines in Finland and Australia– particularly the Australian property which was originally owned by BHP. They dumped about $2.2 billion into it and it was a bit of a disaster for them. What First Quantum believes they can do is go in, take over this project and using their experience in Africa, hopefully, be able to operationally turn this thing around. If they're successful on these two projects, they will become one of the – if not the largest, but a serious player in the global nickel market, so, very good signs for the firm.

Redmond: Great. Thanks so much Kirk.

Paulus: You're welcome.

Redmond: To check out Kirk’s article go to morningstar.ca.

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Ashley Redmond

Ashley Redmond  Ashley Redmond is a Vancouver-based freelance writer.

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