Manager takes a shine to gold stocksManager takes a shine to gold stocks
ERIC SPROTT thinks the yellow metal will continue to climb, SHIRLEY WON writes
By SHIRLEY WON
Friday, May 17, 2002 – Print Edition, Page B13
Fund manager Eric Sprott sees glitter in gold stocks, predicting that they will continue to climb in what he expects will be a prolonged bear market.
"I have no difficulty imagining gold getting to between $500 [U.S.] and $1,000 an ounce in two to four years," says the president of Toronto-based Sprott Asset Management Inc.
Gold, which averaged $271 an ounce in 2001, closed yesterday at $309.80.
His call stems from his belief that a bear market began in March, 2000, after the bubble burst following the financial mania in technology stocks.
"Valuations are still excessive," and too many companies, which took on huge amounts of debt, cannot conceive of repaying those debts in the present environment, Mr. Sprott argues. "We've had all sorts of instances of it -- Global Crossing, Teleglobe, WorldCom and Enron."
He expects a surging gold price because its industry typically outperforms in bear markets as investors look for alternative investments, and because he expects a shortage of the yellow metal. "We've had five years of hardly any exploration," he says.
Mr. Sprott, who runs Sprott Canadian Equity Fund, has 30 per cent in the gold sector and more than 30 per cent in cash. Stocks and income trusts he recently bought or added to existing positions include:
High River Gold Mines Ltd. (HRG-TSX): The Toronto-based gold miner, which closed yesterday at 1.80 (Canadian), hit a 52-week low of 36 cents last July and a 52-week high of $2.09 on May 7. Richmont Mines Inc. (RIC-TSX): The Montreal-based gold miner, which closed yesterday at $5, hit a 52-week low of $1.26 last August and a 52-week high of $6.10 on May 10. NovaGold Resources Inc. (NRI-TSX): The Los Gatos, Calif.-based gold explorer, which closed yesterday at $3.90, hit a 52-week low of 36 cents last July and a 52-week high of $2.09 on May 7. Sprott Asset's funds and accounts hold close to a 30-per-cent stake in High River and more than 15 per cent in Richmont. NovaGold is not yet a miner, but it has a large ore body in Alaska with potential to be a significant mine, Mr. Sprott says. The upside will have to come from a rising gold price, he adds.
Hurricane Hydrocarbons Ltd. (HHL.A-TSX): The Calgary-based company, which explores and produces oil in Kazakhstan, closed yesterday at $24. Its stock hit a 52-week low of $7.50 last September and a 52-week high of $25.70 on March 25. Mr. Sprott says Hurricane's stock is cheap because of the perceived political risk in Kazakhstan. Its stock trades at less than five times an estimated 2003 profit of $4.90 a share. However, he likes Hurricane, which is expected to produce 135,000 barrels of oil this year, not because of its earnings outlook but its potential to boost reserves. The first two wells of its exploration program have found an estimated minimum of 60 million barrels of recoverable reserves, and two of 12 other prospects will be drilled this year, he says. At its annual meeting, the company suggested these pools should have reserves of between 50 million and 500 million barrels each if they are successful, he says.
Energy Savings Income Fund (SIF.UN-TSX): The Toronto-based income trust closed yesterday at $29. Energy Savings hit a 52-week low of $10.45 a year ago and a 52-week high of $30 on May 7 -- up from $18.45 when Mr. Sprott mentioned it on Jan. 2. Mr. Sprott sees more upside in this marketer of natural gas -- and more recently, electricity -- in Ontario. The fund also recently agreed to buy Suncor Energy Inc.'s gas sales unit and boost its customer base. He likes Energy Savings because of an expected growing yield. One brokerage report estimates that the fund, which has a yield of more than 6 per cent, will have a distribution of $2.46 per unit for fiscal 2003 and $3.24 for 2004, he adds.
Among stocks mentioned on Jan. 2, Mr. Sprott has trimmed his positions in the following holdings after a runup. Bennett Environmental Inc. (BEV-TSX), a provider of treatment for contaminated soil, last closed at $9.39 and surged 174 per cent to a 52-week high of $25.70 on March 25. It ended yesterday at $29.95.Fitness products distributor Direct Focus Inc. (DFXI-Nasdaq), which then closed at $31.20 (U.S.), jumped 47 per cent to a 52-week high of $45.89 on May 2. It ended yesterday at $41.32. Gold producer Goldcorp Inc. (G-TSX), which then closed at $19.30 (Canadian), climbed 58 per cent to a 52-week high of $30.50 on Monday. It finished yesterday at $28.15.
Best Bets outlines what money managers are buying and selling.
swon@globeandmail.ca