Robert Lyon, senior vice-president and portfolio manager at Toronto-based AGF Funds Inc., says that while Canadian gold stocks have moved up sharply from their trough in mid-April, their current valuations do not reflect the recent bullion price of US$1,000-plus per ounce.
A specialist in resource stocks, Lyon says: "I had been expecting a recovery in the bullion price from its low in November 2008 of US$712 per ounce, and this recovery is now under way."
Of late, gold has consistently traded above the "psychological" US$1,000-per-ounce level and "this could indicate that the commodity is establishing a new and higher base." The gold price, he says, could well climb above $1,500 over the longer haul.
The main reasons for the resurgence in investor demand for bullion, Lyon says, are "the weak U.S. dollar and concerns about the re-emergence of inflation, given substantial increases in government spending to tackle the recession."
Of supply, he notes that mine production has continued to decline since 2001. While gold at US$1,000 "will entice some production increase, it is unlikely that this will be sufficient to reverse the production decline."
At AGF, Lyon is responsible for managing $1.3 billion in assets in a number of resource funds includingAGF Canadian Resources and its clones. These funds have assets totalling about $450 million. AGF Canadian Resources is fully invested with "only" 2% in cash. It currently holds 150 names including a "substantial" number of mid-caps and juniors. Lyon has been steadily reducing the number of holdings.
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Lyon's discipline is to combine a top-down approach with stock selection. On the macroeconomic front it is important, he says, to assess those economic factors that tend to drive commodity prices overall.
In addition, he further "drills down" to the fundamentals for each commodity. There are a number of "unique factors" shaping individual commodity prices, he says. "Take the oil price, for example, where OPEC (the Organization of Petroleum Exporting Countries) manages supply." His commodity analysis helps determine the weightings in the portfolio of different resource industries.
In stock selection, Lyon looks for the best value and growth opportunities within each industry. "In an ideal world, you have a good company trading at a good price and this combines with a good commodity price outlook."
At the end of August, AGF Canadian Resources had 22% in gold stocks, 23% in a range of base metal stocks, and 43% in the energy sector, the three largest weightings in the portfolio.
The fund's biggest gold holding is Kinross Gold Corp. ( K/TSX), one of Canada's major precious metals producers with operations in North America and internationally. The company is expected to produce some 2.4 million ounces of gold this year, Lyon notes.
"Kinross's production costs have been declining, and this trend is expected to continue over the remainder of the year," Lyon says. In addition, the bullion price is rising, resulting in higher profit margins. Furthermore, Kinross's production is increasing due to both internal growth and "savvy acquisitions."
A junior gold company that has assets in Quebec "with considerable promise," Lyon says, is Osisko Mining Corp. ( OSK/TSX). Adding weight to his analysis, he says, is the announcement in early August by senior producer Goldcorp ( G/TSX) that it had been acquiring stock in Osisko, and had accumulated a 13% stake. "This is signalling that Osisko's potential is such that it could prove to be material even to a major producer like Goldcorp."
Turning to base metals stocks, Lyon notes that many senior Canadian companies have been taken over by large global players. "So it is necessary to consider both mid- and small-caps."
A mid-cap Canadian copper/uranium company that he thinks offers good value at present is Equinox Minerals Ltd. ( EQN/TSX), which is focused on operating its 100% owned Lumwana Copper Project in Zambia. "Equinox has experienced a few hiccups during the start-up of this project." As a result, "the stock is trading at a 30% discount to its peers."
An early-stage iron-ore company that has "good potential" is Consolidated Thompson Iron Mines Ltd. ( CLM/TSX). It has "excellent assets" in Quebec including its Bloom Lake property, Lyons says. The company has entered into a "strategic alliance" to develop this property with Wuhan Iron and Steel (Group) Corp. of China, which has also acquired 19.99% of Consolidated Thompson's outstanding shares.
Lyon's biggest energy weighting and largest holding in AGF Canadian Resources is Canadian Natural Resources Ltd. ( CNQ/TSX), "which has a long-term track record as a low-cost producer." He was "an aggressive buyer" of this stock in March and, from a small position, it now represents 3.7% of the fund.
CNQ's Horizon oil sands project is coming on stream and will provide significant cash flow for many years, Lyon says. Furthermore, he adds, CNQ has "an excellent unconventional gas land base in Western Canada and the stock valuation is not giving it credit for this."
When it comes to energy juniors, a new addition to the fund is Glamis Resources Ltd. ( GLM.A/TSX-V). "It is a start-up and acquisition story," Lyon says. "What you are buying is the excellent track record of its new management -- under the leadership of Paul Colborne as chairman and Trent Yanko as CEO."
An "underappreciated junior" that Lyon likes, given its multi-year success in growing production and reserves, is Breaker Energy Ltd. ( WAV/TSX).
Lyon has sold a long-standing holding in Savanna Energy Services Corp. ( SVY/TSX), which provides contract drilling and well servicing. "Given the nature of its rigs, it is not well placed to benefit from the shift in Canada toward deeper and horizontal drilling applications."
