In the past few weeks, Canada’s business pages have been dominated by news of China National Offshore Oil Co. (CNOOC’s) $15.1 billion bid for Nexen Inc. (TSX: T.NXY, Stock Forum) (NYSE: NXY, Stock Forum) and the $5.5 billion takeover bid for Progress Energy Resources Corp. (TSX: T.PRQ, Stock Forum) by Petronas, the Malaysian state-owned oil and gas company.
Although unrelated to the resource sector, Lowe’s Cos. Inc.’s (NYSE: LOW, Stock Forum) $1.8 billion offer for Rona Inc. (TSX: T.RON, Stock Forum) has also been getting a lot of attention.
A vice-president, investments with Stone Asset Management in Toronto, Giordano says recent activity has been driven by the fact that equity prices have lagged behind the value of underlying commodities, and he expects to see more M&A activity in the coming months.
From the standpoint of 25 years in the Canadian investment industry, Giordano sees various reasons for the discrepancy between equity and commodity values.
“Mining companies have disappointed from a production standpoint and many are experiencing cost pressures that relate to the challenges associated with putting mines into production.
Barrick Gold Corp. (TSX: T.ABX, Stock Forum) (NYSE: ABX, Stock Forum), the world’s leading gold producer, is a prime example, he says. It has warned of a potential 60% escalation in costs at its Pascua-Lama project in the Andes Mountains, between Chile and Argentina. Production there is expected to start a year later than expected.
In the oil and gas sector, investors don’t believe in these high oil prices, Giordano says. So equities are discounting an average price of US$80 per barrel at a time when oil is trading at US$87.
“If that continues, some of the major companies will start making acquisitions,’’ he said.
In the oil sector, he said potential targets included companies like Painted Pony Petroleum Ltd. (TSX: V.PPY, Stock Forum), Arc Resources Ltd. (TSX: T.ARX, Stock Forum) and even Talisman Energy Inc. (TSX: T.TLM, Stock Forum), all of which have assets in the Montney formation, which straddles B.C. and Alberta.
Aside from the Iamgold Corp. (TSX: T.IMG, Stock Forum) (NYSE: IAG, Stock Forum) takeover of Trelawney Mining and Exploration Inc. (which was announced in late April) it has been relatively quiet on the mining sector M&A front.
But as equity values continue to languish, Giordano said companies such as Kirkland Lake Gold Inc. (TSX: T.KGI, Stock Forum), or Osisko Mining Corp. (TSX: T.OSK, Stock Forum) could wind up as targets for majors with deep pockets, such as Goldcorp Inc. (TSX: T.G, Stock Forum) (NSYE: GG, Stock Forum) and Barrick Gold.
A chartered accountant by training, Giordano says he was bitten by the stock picking bug when he was working as a summer student with TD Waterhouse in 1987. “That is where I really got excited about investing and saw the opportunity to lose money, but more importantly to make money.’’
After a spell doing back office work at the company formerly known as Gordon Capital, The Toronto native says he got his first investment experience while working with Lawrence & Co. under the direction of the late Bay Street legend Jack Lawrence and Ravi Sood.
From there he went to Pinetree Capital Ltd. (TSX: T.PNP, Stock Forum) before winding up at Stone where he is a portfolio manager, responsible for resource assets worth about $150 million.
Giordano thinks the best opportunities right now in the natural resources field are in gas and junior gold mining. “We think there is opportunity there while others are shying away from it,’’ he said.
On the gas side, a good example, is Guide Exploration Ltd. (TSX: T.GO, Stock Forum), a company with assets in the Peace River region of Alberta which are currently producing about 15,000 barrels per day. “Roughly 43% of that is oil or liquids,’’ he said. “The rest is natural gas.’’ “We think this company could earn cash flows of 86 cents per share, yet it is only trading at 2.2 times cash flow.’’
Giordano says companies like that have been beaten up. “We think they can be worth a lot more.’’
On the mining side, he said Sabina Gold & Silver Corp. (TSX: T.SBB, Stock Forum) is one to watch. “They are in the Nunavut area with the Black River Gold Project that they are “advancing nicely.” They also have a silver royalty from the Hackett River silver-zinc mine which is being developed by Xstrata Zinc Canada. In Giordano’s opinion, Sabina benefits from strong management, excellent assets, and a strong balance sheet, with about $140 million in cash.
Meanwhile, for investors seeking defensive stocks to mitigate against stock market gyrations, Giordano is recommending that investors take a look at Inter Pipeline Fund (TSX: T.IPL.UN, Stock Forum) and Gibson Energy Inc. (TSX: T.GEI, Stock Forum).
Inter Pipeline is a diversified company engaged in the transportation, extraction and storage of natural gas liquids. It has assets in Canada, the United Kingdom, Europe and Ireland. He says the company benefits from long term contracts with predictable cash flow. It also pays a $1.05 dividend that is well supported by cash flow.
Gibson Energy, he says, is a diversified midstream company engaged in helping companies to get oil from the well head to the refinery, either by pipeline or truck transportation. Its U.S. affiliate is the largest independent for-hire crude oil transportation and logistics business in the U.S.
Gibson and Inter Pipeline are currently on Stone’s buy list. Stone also owns shares in both companies.