Ted Whitehead, vice-president and senior portfolio manager at Toronto-based MFC Global Investment Management, has been selectively buying Canadian junior gold stocks.
"The juniors have more upside than senior gold companies as they are defining or developing new resources, sometimes with the expertise and/or backing of the large global players," he says.
Gold stocks currently represent 13% ofManulife Growth Opportunities 
, which Whitehead and his team manage. There is a seasonality to the performance of the gold sub-sector, says Whitehead, who is a long-time proponent of gold stocks. "They tend to do well in December and January and I might consider doing a little trimming in the new year."
Whitehead is decidedly bullish on gold. "It appears to be establishing a floor of US$1,000 per ounce as it has been trading above this level for some time." Factors that will drive the gold price higher, he says, include prospects of continuing weakness in the U.S. dollar, a possible resurgence in inflation, and the ongoing enthusiasm among investors for bullion.
In all, Whitehead is responsible for $1.1 billion at MFC Global Investment Management, an asset-management subsidiary of Manulife Financial Corp. To make his stock picks, he uses proprietary quantitative models and fundamental analysis.
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| Ted Whitehead | |
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Manulife Growth Opportunities currently has 85 mostly mid-cap names, and is benchmarked against the BMO Small Cap Blended (Weighted) Total Return Index. The mandate requires the fund to hold at least 40% in small caps, as defined by the BMO Small Cap threshold, which currently imposes a market-cap ceiling of $1.3 billion.
Using this definition, Whitehead's portfolio currently has 45% in small caps. At the beginning of the year, he says, the fund was more tilted toward big caps. They then represented 10% of the portfolio, the maximum permitted by this mandate. "This emphasis was appropriate given the weakness in the equity market globally," Whitehead says.
This year, Whitehead has been steadily taking money out of his big-cap holdings and focusing more on small caps, which, he notes, have outperformed big caps over the past 11 months.
"This outperformance by small caps will likely continue," he says, "as it usually lasts for two and a half to three years during the recovery phase of an economic cycle."
| Index | Gold stocks weighting |
Gold stocks YTD return* |
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| BMO Small Cap Blended (Weighted) | 15.4% | 77.0% | |
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| S&P/TSX Composite Index | 10.7% | 0.5% | |
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| * To Oct. 31, 2009 Source: MFC Global Investment Management |
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In selecting gold stocks, Whitehead says that his preference is for companies operating in mining-friendly regions of the world. "This is certainly evident in my strategy for investing in juniors."
Whitehead recently added Rubicon Minerals Corp. ( RMX), a gold exploration company focused on North America, to the portfolio. The company, which has a market capitalization of $848 million, controls more than 65,000 acres in the Red Lake district of Ontario, 380,800 acres in Alaska and 225,000 acres in Nevada.
Rubicon is currently drilling at its Phoenix Project in the Red Lake district, says Whitehead, and start-up is expected around 2012. "The company is well financed. It has raised equity of $75 million in a bought deal in which we participated."
Although Rubicon's stock has had a big run since the beginning of the year, Whitehead says it still trades at a reasonable valuation. Robert McEwen, former chairman and CEO of Goldcorp ( G), owns 23.8% of the issued shares of Rubicon. "The company could well be a takeover target," Whitehead says.
A smaller-cap gold holding, which he believes could also be a takeover target, is Victoria Gold Corp. ( VIT). It has a market capitalization of $129 million. Whitehead says the company is "focused on advancing two core projects." They are the Cove Project in Nevada and the Eagle Gold Project in the Yukon.
Both projects are close to properties owned by senior Canadian producers, says Whitehead. For example, in the Yukon, the Eagle Gold Project is near to Kinross Gold Corp.'s Fort Knox Project. Kinross ( K) has a major stake in Victoria. This junior's stock, despite its stellar performance year-to-date, is undervalued, says Whitehead, and trades at a discount to its peers.
Turning to energy, the largest holding in the fund is Pacific Rubiales Energy Corp. ( PRE), at 2.65% at the end of September. This oil and gas producer, with a market capitalization of $3 billion, has a mix of exploration and production assets in Colombia and Peru.
Whitehead says Colombia restructured its energy sector some time ago to encourage investment in the industry. "This has been successful, and the industry is delivering steady production growth."
The current production of Pacific Rubiales is from seven fields in Colombia, two of which account for more than 80% of the total. Whitehead says the company recently announced that it was increasing its 2010 capital budget to $853 million from $394 million, so as to double its production next year.
Another energy holding that also has considerable interests in Colombia and Peru, and which Whitehead says offers "solid" production growth, is Petrominerales Ltd. ( PMG). It has a market capitalization of $1.6 billion. Petrominerales is one of the largest landholders in Colombia. Its flagship asset is the Corcel Field in the Llanos Basin, which has seen a significant production increase since its discovery in 2007. "The company is well funded and has high returns on capital employed," Whitehead says.
A stock that has done well, but that Whitehead has sold because of his belief that it has limited upside potential, is SXC Health Solutions Corp. ( SXC). This provider of pharmacy-benefit management services and health-care IT solutions has a market capitalization of $1.6 billion. "It is a good company, but the valuation is rich," Whitehead says.
He says the stock trades at enterprise value (equity plus debt) to EBITDA (earnings before interest, taxation, depreciation and amortization) of 14 times based on 2010 estimates, "which represents a premium to its peers."
