Copper's sheen seen brightest
ANGELA BARNES
00:00 EDT Wednesday, April 11, 2007
globeinvestor.com
Uranium stocks may be at the top of many investors' buy list but not that of resource fund manager David Whetham. He is steering clear of them for now.
"Uranium stocks are so expensive . . . I think the uranium market is going to be great but I am not sure that uranium stocks are going to do great" because a lot of good news is already priced into the stocks, said the Scotia Resource Fund manager.
"I would rather buy, say, a copper stock that is at six times earnings than a uranium stock that is at 30 times earnings because even if they go up, I am not going to fall too far behind if I own the copper stock instead of the uranium stock because of the valuation difference," added the portfolio manager with Scotia Cassels Investment Counsel Ltd.
Mr. Whetham is more positive on copper stocks than some other metals such as nickel or zinc. The copper market is "pretty tight and the price is still pretty high," he said. Yet "copper stocks are pretty cheap because everybody likes nickel and zinc better," he added. If the copper market tightens further, and investors become more interested, then he expects copper stocks will probably produce superior returns.
But he is shifting away from materials and more into the energy sector because "materials have done so well and energy has sort of been flat for a year and a half."
Within the energy sector, he favours natural gas over oil on a nine- to 12-month basis. "I think the gas market is going to tighten up, especially because we are seeing drilling activity starting to fall off," he said.
But he warns that both the materials and energy sector will find it very hard to duplicate the spectacular returns of the past few years.
The $124-million (Canadian) fund has started the year off in impressive style, up 5.97 per cent so far, continuing a streak that saw it return 20.26 per cent in the 12 months ended Feb. 28, 26.71 per cent annualized over the past three years and 25.78 per cent over the past five.
European Minerals
European Minerals Corp. (EPM-TSX), a British company that is listed on the Toronto Stock Exchange, is developing a gold-copper deposit in Kazakhstan. The mine is scheduled to go into production in October and will be producing almost 150,000 ounces of gold a year for the first few years, Mr. Whetham said. The shares are currently cheap, but he expects that once the mine starts operations, investors will likely begin to pay more attention, which would then probably revalue the stock upwards. The mine has reserves of nearly four million ounces of gold, he noted. It will also produce copper and the revenue from that will lower the cost of producing the gold to just $9 (U.S.) an ounce, he said. The shares are currently trading at $1.24 on the TSX.
Freeport-McMoRan
Another pick is Freeport-McMoRan Copper & Gold Inc. (FCX-NYSE), which last month completed the $25.9-billion (U.S.) takeover of Phelps Dodge Corp. Mr. Whetham applauds the deal, noting that it will cut the firm's reliance on Indonesia for its revenue from 100 per cent to just under half. Freeport-McMoRan took on a considerable amount of debt to finance the acquisition, but he expects that copper prices will stay high and that will provide the company with high levels of cash flow, which it can use over the next few years to pay down the debt. He noted that Freeport-McMoRan has a history of running up debt, then using cash flow to pay it down and when that is done, starting to pay dividends and returning money to shareholders. Freeport-McMoRan shares closed yesterday at $70.46 on the New York Stock Exchange.
OPTI/Petrobank
Mr. Whetham also likes OPTI Canada Inc. (OPC-TSX) and Petrobank Energy and Resources Ltd. (PBG-TSX), both of which have developed processes to extract heavy oil from the oil sands without using natural gas. OPTI is ramping up production and should be in full production in 2008, he said. It will produce about 37,000 barrels a day initially, but by 2010 it anticipates it could get up to 180,000 barrels a day.
OPTI "is a good growth story that has got a technology that eliminates one of the issues, which is where do you get the gas for the next 30 years," he said.
Petrobank uses a different process to extract the heavy oil. It doesn't use water, which has become another issue in the oil sands, he noted. Initial results from the first couple of wells are encouraging, he said. OPTI shares closed at $21.35 (Canadian) on the TSX while Petrobank's finished at $25. |
