Editors' note: In part three of our roundtable on investing in the resources sectors, the managers discuss their portfolios and some of their specific picks.
Our panellists:
Norman MacDonald, vice-president at Invesco Canada Ltd., who is responsible for Trimark Resources and Trimark Energy Class.
Scott Vali, vice-president and portfolio manager at Signature Global Advisors, a division of CI Investments Inc. Vali is responsible for CI Signature Canadian Resource and CI Signature Global Energy Class.
Robert Lyon, senior-vice president and portfolio manager at AGF Investments Inc., whose responsibilities include AGF Canadian Resources Class, AGF Precious Metals and AGF Global Resources Class.
Today's instalment concludes the roundtable series this week by Morningstar columnist Sonita Horvitch, who moderated the discussion.
Q: Let's discuss your portfolios and stock holdings further.
Lyon: AGF Canadian Resources Class has about 100 names and roughly 75% to 80% in Canadian-listed names. As discussed, my investment style is GARP (growth at a reasonable price).
Norm mentioned the Marcellus shale gas play. We have owned Southwestern Energy Co. SWN for a long time. It is involved in that play and others. The portfolio is roughly a third in large-caps, a third in mid-caps and a third small-caps. In the last two to three months, a lot of junior and mid-cap stocks became significantly undervalued and we increased our weighting there.
MacDonald: Trimark Resources, which has 40 to 45 names, has about 65% invested in Canadian-listed companies. I am a value manager and look for my investment thesis to play out over two to three years. I am willing to look at a stock that trades at a significant discount to net asset value.
One of my value themes has, for some time, been on the natural-gas side. I call it my Marcellus and Montney shale-gas strategy.
I don't shy away from issues with management. I've been patient with energy producer Nexen Inc. NXY, which is in the top 10 holdings in Trimark Resources. The recent resignation of chief executive Marvin Romanow reflects the long-time concern by shareholders that there was a need for a leadership change.
Other top-10 energy holdings include Progress Energy Resources Corp. PRQand Devon Energy Corp. DVN. They are both superior in their capital allocation compared to, say, EnCana Corp. ECA. Progress is a big weighting in the fund at 7%. It has low-cost natural-gas assets and a dominant position in the Montney play.
Vali: We own some.
MacDonald: Devon has a great balance sheet, a diversified asset base and trades at a significant discount to net asset value.
Vali: Devon is a major holding in Signature Canadian Resource. The company recently signed a joint-venture deal with China Petroleum Corp., which highlighted the value of some of its assets. Sinopec will be bearing the cost of drilling out and proving up some of its assets.
Lyon: Devon is almost debt-free and is buying back shares.
Vali: The stock is undervalued. It's been punished along with the other natural-gas producers, which is not necessarily warranted.
Q: Scott, your portfolio?
Vali: Signature Canadian Resource, which has 70 to 80 names, has about 55% in Canadian-listed companies. I am essentially a GARP manager. On market-capitalization focus, we probably differ from Bob in that we shy away from the more junior names.
One of my investment themes is seaborne thermal coal. Xstrata PLC, which is a top 10 holding in Signature Canadian Resource, is the largest producer of this commodity in the world.
Unconventional natural gas and energy services are important themes. Another is copper. This is our preferred base-metals play. It's where there is the tightest supply-demand outlook and offers the most value. The ability to produce copper at a low price is a challenge. Those companies with high-quality assets will benefit over the longer term. First Quantum Minerals Ltd. FM is in the portfolio. Xstrata is also a copper producer and plays to two of my investment themes. We also own Freeport-McMoRan Copper & Gold Inc FCX, which is in the top 10 holdings. FCX generates large amounts of free cash flow and is willing to give some of that back to shareholders.
Q: Other copper holdings in Signature Canadian Resource?
Vali: Inmet Mining Corp. IMN is another large holding. It had operational issues last year with one of its major projects in Spain and disappointed the market. But now, the project is running well. It also has good prospects in Panama.
Lyon: I own Inmet.
MacDonald: I also do.
Lyon: My biggest base-metals holding is First Quantum, it's in my top 10 in AGF Canadian Resources Class. I also own Freeport-McMoRan Copper & Gold.
MacDonald: A big position in Trimark Resources is Antofagasta PLC, which is a significant copper producer with assets in Chile. The stock has a dividend yield of 4% and the company has substantial cash on the balance sheet. The market has penalized the company historically for not having a growth profile, but it can grow its production over the next two to three years. Also, its cash position gives it flexibility.
Vali: I also own it.
Q: Gold stocks?
MacDonald: I am finding value opportunities in the gold sector, which represents 22% of Trimark Resources.
Lyon: AGF Canadian Resources Class also has about 22% in gold stocks.
Vali: I have 18% of Signature Canadian Resource in the gold sector. The biggest holding is Goldcorp Inc. G, a senior producer. It has a management team that is more disciplined than some of its rivals and it has one of the best internal growth profiles in the group. Of late, I have been adding to our gold positions, including in Goldcorp.
The fund also has a big position in Barrick Gold Corp. ABX. Its valuation today, relative to where it traded historically, is attractive.
| Barrick Gold Corp. | Goldcorp Inc. | ||
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| Jan. 19 close | $46.46 | $44.89 | |
| 52-week high/low | $55.36-$42.06 | $55.93-$38.99 | |
| Market cap | $46.8 billion | $36.2 billion | |
| Total % return 1Y* | -0.1% | 11.7% | |
| Total % return 3Y* | 5.0% | 12.0% | |
| Total % return 5Y* | 7.9% | 9.0% | |
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| *As of Jan. 19, 2012. All figures $US Source: Morningstar |
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In the third quarter of last year, I took the weight down in IAMGOLD Corp. IMG on concern about its ability to sell one of its assets in a timely manner. There is also acquisition risk in the stock, as IAMGOLD deploys some of the funds it has on its balance sheet.
Lyon: We also like Goldcorp, within the large-cap holdings. The stock is not as cheap as Barrick, which I also own.
I'll highlight a smaller-cap name, Belo Sun Mining Corp. BSX. It's in the early stages and you want a selection of stocks like this, as they can boost performance. Belo Sun has the Volta Grande Project in Brazil. Belo Sun has already discovered 3.5 million ounces. We think that it's going to be five million plus. Belo Sun is one of the larger holdings in our basket of juniors.
MacDonald: I am looking for a multiple expansion of the major gold producers and looking for distinct assets in the smaller-caps. On the large-cap side, my biggest gold position is Barrick. Its acquisition of Equinox Minerals Ltd. did not sit well with a lot of investors. But Barrick is trading at a price-earnings multiple of under 10 times and five times cash flow per share and has an 18% return on equity. It is a multiple-expansion call.
One of the bigger smaller-cap holdings in Trimark Resources is Torex Gold Resources Inc. TXG. Torex's risk is geography, not geology. The company is in Mexico.
In general, large-cap gold companies are having trouble growing and could acquire juniors with good-quality deposits. There is going to be further consolidation in this sector.
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| Robert Lyon, Norman MacDonald and Scott Vali | |
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Photos: paullawrencephotography.com
