NR - Commodity stocks may offer historic buying opportunity Commodity stocks may offer historic buying opportunity
by: Jonathan Ratner
Manager: Irwin Michael, ABC Funds
, I.A. Michael Investment Counsel
Fund: ABC Fundamental Value Fund
Description: Concentrated portfolio of North American equities, with a focus on out-of-favour companies
AUM: $515-million
Performance: 1-year: 31.14%; 3-year: 9.31%; 5-year: 15.17%; 10-year: 7.4% (net of fees, as of Oct. 31, 2013)
MER: 2%
The I.A. Michael Investment Counsel team believes the current environment may eventually be viewed as an historic buying opportunity for commodity stocks, particularly in Canada.
“The two cheapest sectors we’ve come across remain oil and gas — both producers and service companies — and mining,” said Irwin Michael, president and portfolio manager of ABC Funds. “We’re very selective when it comes to gold and base metals producers, but we’re still buying.”
Most of the cheap stocks being added to the flagship ABC Fundamental Value Fund are being found in Canada.
“There has been a big cleansing process going on with commodity producers in general, especially gold equities,” senior analyst Dana Merber said. “A lot of producers have been punished for previously allocating capital to projects that can’t make money at current gold prices. So it may be an area with some good value right now.”
However, he stressed the importance of picking stocks that trade at a significant discount to their net asset value.
“When investing in resource stocks, there is an added layer of complexity due to the volatility of commodity prices,” Merber said. “We can protect ourselves by purchasing stocks well below NAV, which provides us with a buffer against short-term commodity price movements.”
Two recent sales temporarily increased the fund’s cash position, but Michael wants to deploy that cash as soon as possible.
“Since we’re quite optimistic for the balance of this year and into 2014, we are working hard to put that money to work,” he said. “But it’s becoming a little more difficult to find undervalued names, so we have to dig a little deeper.”
BUY
Twin Butte Energy Ltd. (TBE/TSX)
The position: Recently added to existing position
Why do you like it? This medium and heavy oil producer has a very stable and low-risk business model. Merber pegs its net asset value at roughly $3 a share and the stock currently offers a dividend yield of about 8.5%. “We like their recently completed acquisition of Black Shire Energy since it was accretive to both cash flow and NAV,” he said.
Michael calls the deal a “transformational” one. “More importantly, it enhances the sustainability of the company’s dividend model,” he added.
Biggest risk: Widening spreads between heavy and light oil, although the company has a hedging program in place.
Trevali Mining Corp. (TV/TSX)
The position: Recent addition
Why do you like it? This zinc-focused base metals producer has assets in politically safe jurisdictions such as Peru, where production began in August, and New Brunswick, where production is due to begin in 2014.
“It has a large, high-quality resource base, and trades at about 40% of NAV,” Merber said. “It also has a long-term strategic relationship with Glencore Xstrata PLC, which is also a significant shareholder of the company.”
Biggest risk: Significantly lower zinc prices.
Polaris Minerals Corp. (PLS/TSX)
The position: Recently added to existing position
Why do you like it? This Vancouver-based company produces aggregates (sand and gravel) used to build highways, new homes and office towers, and primarily exports to California. Michael notes it is debt free, boasts long-life mineral resources and has some good long-term shipping arrangements into San Francisco. Moreover, the company recently took on a Long Beach terminal site that will give it a portal into Southern California.
“Management has done all the heavy lifting to get the company back on track, so it’s ripe for significant earnings improvement,” Michael said. “It is the only publicly-listed aggregates company in Canada, so people may have more difficulty valuing it. We believe it may eventually be a takeover candidate.”
Biggest risk: A slowdown in California economy and housing market.
SELL
Canam Group Inc. (CAM/TSX)
The position: Sold in November
Why don’t you like it? Michael has only positive things to say about the performance of this manufacturer of construction products, which has essentially doubled so far in 2013. But he believes the stock, now trading at 1.5x tangible book value, is ahead of itself.
“This is a very important metric for us,” Merber said. “So although they’ve done an excellent job turning the company around, we now view it as more of a growth stock, as opposed to deep value at this level.”
Potential positive: Recent dividend may attract new investors.