Michael Giordano, Portfolio Manager and Vice President of Investments at Stone & Co., recently spoke with SmallCapPower regarding his outlook for the resource sector. He also provided some tips as to how he would construct a resource-weighted investment portfolio, and revealed some of his top stocks to watch at this time.
Video transcription
Voiceover: The SmallCapPower Expert Interview, featuring Michael Giordano.
Mark Thorburn: Michael Giordano, Portfolio Manager and Vice President of Investments at Stone & Co., recently spoke with SmallCapPower regarding his outlook for the resource sector, as well as his capitalization preference when choosing a resource stock to buy. He also offers up some tips as to how he would construct a resource-weighted investment portfolio, and reveals some of his top stocks to watch at this time.
Michael Giordano: Stone Asset Management is a mutual fund company that’s been around for 19 years. We basically have multiple funds that we manage. I’ve been with the company for 10 years, and focusing on the resource sector, so I manage both the resource fund and a flow-through fund as well as helping with the resource components of some of our other funds.
Mark Thorburn: What’s your investment track record been like since you joined your firm? Is there one stock in particular that stands out in terms of performance?
Michael Giordano: Our investment track record’s actually been quite good. For example, in 2013, when the gold markets were down 49%, I managed to gain 0.5%, so I was happy for that. And year to date this year I’m up about 16%, and over five years I’m up about 9.5%. So one of the stocks that I like to hang my coat on is a company called Pason Systems Inc. (TSX: PSI). They’re basically an instrumentation company that is the link between the oil and gas drillers and the head office of the company, so they create products that will help the drillers analyze the data that’s in the ground. So when I invested in this company approximately two and a half years ago, it was under $1 billion in market cap. I still consider that small cap, and it has since tripled in value. So companies like Pason are growing. They’re selling their services not only to North America, but they manage to break ground in the Middle East, so I’m looking at companies like that, that will grow both intrinsically and by acquisitions.
Mark Thorburn: Can you tell us your outlook for the resource sector during the next one to two years?
Michael Giordano: The outlook for the resource sector continues to be positive. I think short term there’s some challenges both in the energy space and the material space. Energy is over-supplied right now, with both oil at record highs in the U.S., as well as natural gas also being very high. That coupled with the milder than normal summer has really cut back on the energy prices, and the base metal prices are challenged with fears of a China slow down and whatnot. However, mid to long term, I think the outlook is quite positive. China continues to grow. Its 7.5% returns of GDP is still quite high compared to the high base that they’re starting with, so China is growing, the U.S. economy is also growing, so that bodes well for energy demand. The IEA recently came out, even though they lowered their short term outlook for oil demand, the oil demand is still growing by 1.5-2% per year. So energy continues to be healthy, the nat gas base is also looking good, because Mexico is in the process of building pipelines from the U.S. to Mexico in order to consume our nat gas, as well as the energy terminals which are being built in the Gulf of Mexico as well as the west coast of Canada will bode well for shipping that gas to Asia, where prices are triple what they are here. On the base metals and precious metals front, continue to be positive. The China growth scenario, where 25-30 million people per year are migrating form the country to the city, will require massive infrastructure build, and this bodes well for base metals. Precious metals: we always need an alternative currency, and gold seems to serve that purpose, especially during times of geo-political uncertainty, which is what we’re seeing now, so we want some exposure to gold. So overall the commodity outlook continues to be positive.
Mark Thorburn: If you were to put together a portfolio of resource stocks today, what would it look like?
Michael Giordano: I think it’s wise to have a diversified portfolio of resource stocks, which means large cap, mid cap and small cap, as well as some sort of geographic diversification. So in terms of the large cap, I like the large cap space, because these are companies that have the cash flows and have dividends to support that cash flow, so we want to be able to have the benefits from the companies with the cash flow which are able to grow and make acquisitions, for example. The mid cap space, there’s also a lot more growth here than the large cap space, so they have the ability to grow via acquisitions. And in the small cap space are smaller, more nimble companies that have the torque in terms of finding the next new discovery. So I think a diversified basket of resource stocks is very important in building a resource portfolio.
Mark Thorburn: Can you tell our viewers which resource stocks you like at this time, and why?
Michael Giordano: On the energy space I like two companies. One of them is Whitecap Resources Inc. (TSX: WCP), and this is a Viking/Cardium player in Alberta, and this company has grown both by the drill bit and by acquisitions, run by a guy named Grant Fagerheim. So that’s WCP on Toronto. I do own the name, so this company has grown. They have some of the best operating metrics, low costs, and continue to grow via acquisitions. So Whitecap is one of our mid cap holdings. It also has a nice dividend that pays while we wait. On the small cap front like a company called Yangarra Resources Ltd. (TSXV: YGR), YGR. We also own it. They’re also in the Cardium space, west-central Alberta. They’re about a 2,900 barrel per day producer, and they’ve just released some results this morning, a bit light on the production numbers, but we think that was because of facility constraints, and we think that moving forward they can look at 3,000 or 3,500 barrels per day. They did a major joint venture with TAQA, where they’re drilling into their lands. That’s a good sign for Yangarra, that TAQA selected Yangarra to drill those lands. So those are two companies on the energy space.
On the base metal space, there’s two companies I like. On the larger caps is a company called First Quantum Minerals Ltd. (TSX: FM).They’re a large copper producer, not only in Africa but also in Australia and North America. Symbol is FM. These guys are also growing quite aggressively. They bought the Cobre Panama asset from Inmet Minerals, and that’s a big asset in Panama. They continue with all that. They’re expanding in Africa, and they also bought the Ravensthorpe Nickel project in Australia. So there’s a company that’s growing by acquisition and it’s growing internally. We like the copper space, and First Quantum is a name to be in the mid to large cap space. On the small cap space there’s a company called Talon Metals Corp. (TSX: TLO). We also own this one. Here is a company that recently signed a joint venture agreement with Rio Tinto, a property in Minnesota. So right in the U.S. This is a project that is close to infrastructure, both power, rail and port facilities, and they have a $30 million budget to drill up this property. We’re looking for an early resource assay early September, and we think this one could be potentially the next Eagle Mine, that got sold by Rio to Lundin Mining. So that’s the one I like on the small cap space.
On the previous metals side, I like a company called Goldcorp Inc. (TSX: G). Goldcorp is one of the largest gold producers in the world, producing 2.5 million ounces of gold. They are focused in the Americas, both North and South America, and some of their mines are some of the lowest cost, highest net back mines that are out there. They also have deep pockets, with a strong balance sheet of about $2.5 billion in cash. They recently made an acquisition for Osisko, but lost out to Yamana and Agnico Eagle. This shows the deep pockets they have. They were disciplined enough not to enter into a bad bidding war, so I’m happy with their discipline with those monies. And now, with the gold price dropping from 1,900 to the current 1,300 levels, they’re able to continue to be profitable at these levels. On the small caps base, I like a company called Lake Shore Gold Corp. (TSX: LSG), LSG. Both Goldcorp and Lake Shore I own. Lake Shore is a small gold producer in the Timmins Gold Camp. They are able to run three mines in the Timmins camp, producing approximately 180,000 ounces of gold per year. Gold costs are about $800 per ounce, so this is a nice, nimble gold producer, also profitable at these gold levels, and able to grow production from not only their three existing mines, but some of the satellite deposits that are located close to those mines.
Mark Thorburn: Thanks for taking the time for the interview today.
Michael Giordano: You’re welcome. Thank you.
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