Natural resources, that mainstay of so many Canadian portfolios, have had a rocky ride over the past year. And with weakness still afflicting many areas of the global economy, it’s unclear whether demand will grow enough to improve prices for key commodities such as oil and base metals, or if the weakness will result in flat or declining prices.
Many experts in this sector say that the outlook for natural resources will change as 2012 progresses, weakening in the first quarter but improving later in the year. This view depends on China avoiding a significant economic downturn and the U.S. posting economic growth of 2%-2.5%. For your clients, that suggests underweighting the sector as the year starts, then moving to neutral or even overweighting later in the year, particularly if U.S. growth is stronger than anticipated.
Resources fund portfolio managers particularly like oil, copper and iron ore. Oil demand had held up remarkably well during the 2008-09 recession. The price is expected to stay in the US$80-US$120-a-barrel range, which would allow oil producers, exploration and production companies, and service providers to continue making solid profits.
However, these price levels are unlikely to lead to significant appreciation in the shares of these companies unless there also is production growth, efficiency gains or new techniques or products, says Benoît Gervais, vice president, investments, with Mackenzie Financial Corp. in Toronto.
That picture is similar for companies that produce base metals.
In the energy sector, most portfolio managers favour oil plays over natural gas. The price of natural gas has dropped and is expected to stay low due to low-cost shale deposits in the U.S. Among Canadian E&P companies, Bob Lyon, senior vice president and portfolio manager with AGF Management Ltd. in Toronto, “really likes” Painted Pony Petroleum Ltd., which has very large “proved and probable reserves.”
Joe Overdevest, co-manager in Toronto of Fidelity Investments Canada ULC’s Fidelity Global Natural Resources Fund, favours Baytex Energy Corp., another Canadian E&P firm.
Among U.S.-based E&P firms, Scott Vali, resources portfolio manager at CI Investments Inc. in Toronto, likes Apache Corp. and Occidental Petroleum Corp.
In the same subsector, Lyon favours Devon Energy Corp. and Occidental Petroleum Corp.
In the oilservice subsector, Chris Holden, portfolio manager with Investors Group Inc. in Winnipeg, has started acquiring shares in U.S.-based Halliburton Co., one of the world’s largest oilservice companies. He also considers Canyon Technical Services Inc., a Canadian firm specializing in well-stimulation services, to be “extremely cheaply priced.”
In the base metals subsector, there are supply constraints for copper, with few new mines on the horizon. In terms of interesting copper producers, Gervais says, production at First Quantam Minerals Ltd. is expected to double in the next five years.
Lyon calls HudBay Minerals Inc. a very good company with a number of projects in the works. He also likes Teck Mining Co. because of its production mix of coal, copper and zinc. Teck recently reinstated its dividend.
Other firms cited that have copper exposure include Freeport McMoran Copper & Gold. Inc., Rio Tinto Group and Xstrata PLC.
The only Canadian company mentioned in the context of iron ore is Champion Minerals Inc., which Holden likes.
Internationally, Rio Tinto Group is favoured by Gervais, who points out that the company is expected to increase its iron ore production by 50% in the next five years. IE