Many global strategists and portfolio managers think resources are entering a new phase in which demand will grow, albeit not at the frenetic pace that kept pushing energy and mining share prices higher in the past decade. That doesn’t mean commodity prices will drop significantly, but it does suggest that we may not see sustained higher price levels.
The theory is that demand for commodities will be less buoyant because China’s growth, which has been the main driver of resources prices, will slow to 7%-8%, down from 9% or more in recent years. That reflects an expected shift to more spending by Chinese consumers and less emphasis on new infrastructure.
Most portfolio managers expect resources prices to stay within predictable ranges this year, with oil at US$85-US$100 a barrel for West Texas intermediate, natural gas at US$3-US$5 per million British thermal units and copper at US$3-US$4 a pound.
Those price ranges are wide enough to make it possible to trade on the ups and downs of prices. But if you’re looking for longer-term holds, you need companies that have an edge. Examples include companies that are increasing production, reducing costs or finding new ways to produce or use the commodity in question. And even then, you need to monitor your choices to make sure the potential for growth is being realized.
Below are some stock picks in the energy and mining sectors recommended by four Toronto-based portfolio managers of resources-based funds: Benoît Gervais, Mackenzie Financial Corp.; Bob Lyon, AGF Management Ltd.; Joe Overdevest, Pyramis Global Advisors LLC, a Fidelity Investments company; and Scott Vali, Signature Global Advisors, a division of CI Financial Corp.:
– ENERGY. Integrated oil companies and North American refiners are popular picks, due to the shortage of refining capacity in the U.S.
@page_break@Among Canadian producers, Lyon likes Encana Corp., which recently announced a joint venture to develop gas deposits in Alberta. He also notes that Painted Pony Petroleum Ltd. has one of the better land positions for shale gas extraction in British Columbia. Lyon also says that the shares of Canadian Natural Resources Ltd. could rise with good operational performance.
Overdevest likes Tourmaline Oil Corp., a company currently focused on shale natural gas in Alberta that he says is a low-cost producer with a management team that has executed well and has a direct stake in the company’s results because the team owns a large chunk of the shares.
Other suggestions include U.S.-based Williams Companies Inc., which Gervais says is processing “ever more gas.”
Vali likes Haliburton Co. in the U.S. and Calfrac Wells Services Ltd. in Canada.
– MINING. In this sector, portfolio managers favour copper, iron ore and metallurgical coal. Copper is necessary for power grids in China and other emerging markets, notes Gervais. And the supply/demand balance is currently positive for both iron ore and coal.
First Quantum Minerals Ltd. is a big favourite. Darren Lekkerkerker, co-manager with Overdevest of Fidelity Global Natural Resources Fund, considers First Quantum’s management team the best in the world at developing assets in a cost-efficient way. Gervais notes that the firm’s production is likely to double in the next three years. And the firm also is on Vali’s list.
Lyon says Rio Tinto Group has the best iron ore reserves, an aggressive cost-improvement program and a solid dividend.
Vali thinks the shares of both Rio Tinto Alcan Inc. and Labrador Iron Mines Holdings Ltd. are heavily discounted and should perform well until supplies increase.
Other picks: Lyon mentions Peabody Energy Inc., noting that it has good thermal coal mines in Australia, as well as metallurgical coal in the U.S. Teck Resources Ltd. also has good metallurgical coal reserves in the U.S.
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