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Farms and Oil Wells and Mines, Oh My!

February 8, 2008 at 17:20 by Mario

As unnerving as the markets’ latest roller-coaster ride has been for investors, commodities remain a good bet for respectable gains in a portfolio, experts say. From corn and wheat to oil, iron ore, coal and precious metals, prices are likely to be driven higher by worldwide supply shortages and growing demand.
“Commodities have a bright future, but investors should recognize that these stocks are cyclical,” says Ari Levy, vice-president and director, TD Asset Management Inc., who is portfolio manager for TD Resource Fund and TD Energy Fund.
For the most part, Mr. Levy and other investment experts are bullish on commodities because whether or not the U.S. economy falters, demand is huge in other much larger markets such as China and India, where there have been few signs of an economic downturn.
“In the 1990s, when commodity prices were low, companies stopped looking for mines and building refineries. As a result, supply has not kept up with demand. Investors are starting to see this and the supply side is driving the markets,” says Craig Porter, vice-president and portfolio manager for Front Street Capital in Toronto. His company manages a handful of funds for the Canadian Imperial Bank of Commerce, including CIBC Precious Metals Fund and CIBC Canadian Resources Fund.
Investors looking for a piece of the commodities action have a long list of options, including individual shares, mutual funds and exchange traded funds.

ENERGY
Mr. Levy suggests investors take a hard look at oil, in particular shares in companies with large-scale, ongoing growth projects that will enable them to capitalize on rising demand.
He is high on firms working in Alberta’s oil sands, including TSX-listed Suncor Energy Inc. and EnCana Corp., both of which showed double-digit gains at the end of 2007. He suggests buying individual stocks or purchasing them through mutual funds.
Mr. Levy also likes the prospects for natural gas, and again recommends EnCana.

METALS
Mr. Levy is also bullish on aluminum because the material’s tensile strength and lightness are desirable for many manufacturers. A company he likes is Pittsburgh-based Alcoa Inc., which trades on the New York Stock Exchange.
He says another good bet is zinc (used in construction, transportation, consumer goods and electrical appliances), which appears to be lacking in supply as global demand for the metal continues to rise, particularly in China.
Investors interested in adding zinc to their portfolios should consider TSX- listed Teck Cominco Ltd., of Vancouver, which Mr. Levy notes is involved in exploration for and mining of zinc, as well as copper, lead, gold and metallurgical coal.
“I do not see huge increases in supply growth to match global demand, in particular China’s need for plating,” he says.
Mr. Porter thinks there’s good money to be made in iron ore and coal. He recommends investors take a hard look at Companhia Vale do Rio Doce, the Brazilian iron ore company that took over Inco last year and is the world’s largest iron ore producer.
As 25 million Chinese people annually move from the countryside to cities, that country will need hospitals, schools, roads and new housing, all of which will require steel, Mr. Porter says. “Both the iron ore and coal needed to make steel are in very short supply. There are deposits out there but a lot of mines have yet to be built or the existing ones have capacity constraints,” he says.

DIAMONDS
Diamonds are also high on Mr. Porter’s commodities list. He reasons that as economies strengthen in the world’s poorer countries, their citizens will have more disposable income for luxury purchases. This, combined with shutdowns of mines at the end of their economic life by huge companies like De Beers, could produce a diamond shortage within five years, he says.
Mr. Porter’s diamond picks are Harry Winston Diamond Corp., a high-end jewellery retailer that owns the Diavik diamond mine in the Northwest Territories; and junior mining company Rockwell Diamonds Inc. of Vancouver, which operates in South Africa and has a history of mining high-grade diamonds.

AGRICULTURE
Mr. Porter also sees solid growth potential in agricultural commodities, as Asian countries add more meat to their diet in place of vegetables and rice. He sees prices rising as the demand for animal feed such as grain and corn rises; he expects prices to get a further boost as demand for ethanol rises and producers clamour for more of the corn used to make the fuel.
His recommendations are Saskatoon-based Potash Corp. of Saskatchewan Inc., which produces and markets potash, nitrogen and phosphate products to fertilizer, industrial and animal feed customers around the world; and Agrium Inc. of Calgary, a major supplier of agricultural products and services in North and South America and supplier of specialty fertilizers in North America. Both trade on the TSX and the NYSE and can be purchased in various mutual funds.
Mr. Porter also likes the ETFS Grains Fund, listed on the London Stock Exchange, which tracks the price of corn, soybeans and wheat.
“No matter what the commodity, there are bound to be hiccups,” he cautions. “Over the past five years, there has always been something that has sent the sector in a correction — SARS, bird flu, fears that China would slow down — but things always bounce back,” he says.

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