Bull Run For Hard Assets
forbes.com
Why the focus on natural resources and hard assets?
My core thesis is this: The developing world can't jump from an agrarian society to a laptop society without building infrastructure: roads, schools and the like. That's going to take gravel, cement, lumber, petroleum. These countries that are trying to build themselves up have to go through an industrial revolution, which is fueled by oil, coal, minerals and other resources. So the way I see it, you have surging demands and declining supplies. Think of it: If the Chinese reach their goal by 2010 of having as many cars per capita as the European nations, the world would run out of oil in five years.
You've been proclaiming an imminent resource shortage since the late 1980s. Yet oil prices, for one, have been fairly low.
U.S. oil production peaked in 1970 and has been declining ever since. It's currently 5 million barrels a day; at its height, it was 11-12 million. Right now, oil is still being found in the oil sands of Western Alberta and in the Persian Gulf, where more than two-thirds of the world's reserves sit. According to insiders I regularly talk to in the field--CEOs, geologists--the giant pools are all gone. The last so-called "elephant" (a reserve generating over 1 billion barrels) that was found in North America was Prudhoe Bay, Alaska, in 1967. It's getting harder and harder to find oil; nine out of ten exploration wells turn out to be dry holes. That's why we're seeing the trend of smaller companies getting bought out. It's easier to buy someone else's.
It's the same with mining. According to the metals economics group, total worldwide non-ferrous exploration was $5.2 billion in 1997. By 2000, that had fallen by half, to $2.6 billion. Mining companies have cut back exploration greatly because it's so costly relative to the market price of copper or zinc. Big new veins are not expected to be found.
You're predicting a commodities gold rush similar to that of the 1970s. Why?
First, because of the weakening U.S. dollar and federal debt. Commodity prices worldwide are measured in U.S. dollars. As the greenback slides, as it did in the 1970s, the prices of commodities rise. In recent months, the dollar has been fading. Why? For one reason, the government has been printing money like crazy, making it worth less. Last June the adjusted monetary base was $66 billion. Three months later, it was $87 billion. And a weak dollar is just one of the fundamental factors I see setting the stage for a runup in commodities. There are trillions of dollars jumping out of the stock market, looking for new opportunities, feeding a growing demand for real, hard assets.
The rush has already started. Since January 2000, the TSE index of metals and minerals has risen from 3,300 to 4,600--a gain of 39%. Meanwhile, the TSE oil and gas index climbed from 4,000 in 1999 to its current level of 10,500. Even Canadian paper and forest stocks have almost doubled since 1999. Compare that to the tech sector and you'll see why I'm predicting a huge flow of money into hard assets. The resource sector bull market is just getting underway.
With the recent correction in gold prices, how do you recommend playing it?
First off, I think it is just a correction and that that gold still has a long way to go. We have plenty of mineral stocks in our portfolio, but for people who are nervous about the stock slide also pulling down gold stocks, I really like physical, hold-it-in-your-hands gold. I'd say put 5%-10% of your investment assets into one-ounce coins: either the Canadian Maple Leaf or the American Eagle coin. And be aware: If you buy gold, plan to buy and hold it a while. The huge commissions make frequent trading unadvisable.
Which energy companies are you recommending?
Our portfolio includes companies ranging from blue chips that have an excellent record of finding and developing fields, to smaller Canadian producers that have a track record of building a company up and selling it to one of the bigger guys. Canada still has vast untapped areas being explored.
I like Talisman, a Calgary-based oil and gas company. This one went from being a small company to a major player by expanding overseas in Indonesia and the Sudan. And it's still productive in the North Sea. It has been hurt a bit by its stake in the Sudan, where politics from a 19-year-old civil war at one point brought the stock almost to the threat of delisting. But discounting a one-time charge that just depressed profits in the second quarter, the company has actually been beating analysts' earnings estimates. Overall the growth has been strong and sustainable. I see it probably being sold off to the Chinese national oil company for a better-than-expected price.
My favorite long-term energy play is Suncor Energy. I went out there to Northern Alberta and toured the facility. It's located in the largest oil sand deposit in the world. The company has made great strides in efficiency, bringing the cost of producing a barrel from $30 a barrel in 1982 to $12 a barrel today. North America is running out of oil supplies and Suncor is pipelined all the way through the continent. Production trends are up. The P/E is an attractive 9.7. And the stock just had a 2-for-1 split.
Our most recent addition to the portfolio is Kerr-McGee, which is one of the largest U.S.-based exploration and production companies. It has always been on the frontier of offshore exploration. The stock just had a big correction, but if there's oil to be found, it's going to be another offshore situation like the North Sea. If Kerr-McGee finds it, it's going to be a bonanza. If it doesn't, it's still a good company, with producing fields in the Gulf of Mexico, South China Sea, Ecuador, Indonesia and Kazakhstan. At the end of 2001, Kerr-McGee held an average interest of about 67% in some 82 million gross undeveloped acres worldwide. Production is rising and the price of the product is only going to go higher. The stock is trading at $45, a bargain from its high of $74 last year. And it pays a dividend over 4.1%.
Anything in the forestry and timber area?
We recently added Plum Creek Timber, the second-largest publicly owned timber company in the United States, with 7.8 million acres. It's developing new technologies on cutting and removing, and its long-term land management plan focuses heavily on reforestation. For example, Plum Creek operates nine nurseries to supply their forests with species tailored to the specific sites and soil conditions. It's also claiming to be growing genetically superior seedlings for planting in newly harvested areas. And the company's financials have been on a tear. Q1 2002 saw a jump in revenue from $117 million to $275 million due to higher harvest levels and delivered log sales. Net income rose 51%. And it just announced a quarterly cash dividend of 57 cents per share. If people continue to invest in real estate--and I think they will--then timber will continue to see a high demand.
Which are currently your favorite mining stocks?
Newmont Mining of Canada. This is not the same company as the American Newmont. This one was formerly Franco Nevada. Because it doesn't hedge like other producers have been doing for years, it's not locked into a price, allowing it to take full advantage of the bull market in gold this year.
Atacama Minerals. This company, which is based in Vancouver, has excellent gold and silver mine properties. I am betting that it will be bought in the next year to 18 months. The principal shareholders don't want a big company. We purchased shares for 37 cents, which are now up to 67 cents. I think it may be bought for as much as $2 Canadian. |
