A mining portfolio that may just have weathered last year's storm

Barry Sergeant reviews a 27-member global resources stock portfolio, assembled 365 days ago.

Author: Barry Sergeant
Posted: Tuesday , 12 Jan 2010

JOHANNESBURG -

Compilation of a global resources stock portfolio a year ago seemed, most of the time, like an insanity waltz in the ballroom of a deserted seaside hotel in the middle of a bad winter, when even the rats have gone into hibernation. It was two months ahead of the turn in global stock markets, and still dangerously close to the demise of Wall Street investment bank Lehman Bros., which had declared bankruptcy on 15 September 2008.

Even before that, bright sparks everywhere had proclaimed the onset of the world's worst economic depression; numerous self-confessed rational voices predicted, quite seriously, that the world was ending. It was only a question of when and where and how.

But it was clear then, and is clearer now, that spin from some of the world's most deranged and degenerated minds, mainly on Wall Street and in London, had conspired to create the Con of a Century, one that would force the hands of their governments, and further disembowel taxpayers in jurisdictions that billboard "freedoms", but thrive on depraved and increasingly unfashionable depredations.

On the constructive side, it was clear a year ago that the developing world would largely thunder on, with China effortlessly retaining its status at the epicenter of the global economy. Failed Hollywood junkies on both sides of the Atlantic would be dragged back into the global economy, whether they liked it or not; George W. Bush would be seen as a disguised junkyard dog, and Gordon Brown would confirm the perception that he was on the way out from the day in June 2007 that he was sworn in as prime minister.

Both sides of the equation pointed to a global economy that - even under the heavy weight of marketing trash from the world's leading Western spin doctors - would continue as a net user of raw materials. The difficulty in building a raw materials portfolio, as such, was in trying to bet on the right commodities, and then trying to bet on the right companies. These are all tough nuts to crack.

The world wouldn't be worth a damn without spooks; in the past 12 months, the chief spook in a mining stock portfolio came courtesy of Canada-listed Colombia gold explorer Ventana Gold. During the past 365 days, Ventana's market value increased from a modest USD 29m to USD 1.2bn, an unimaginable increase in percentage terms. Since then the stock price has retreated to around CAD 8.00 a share, for a market value of USD 747m, sounding helpfully like the model number of a Big Boeing.

Ventana aside, your humble correspondent a year ago ended up with 27 global resources stock portfolio picks. Over the year, prices for these stocks increased by an average of 93%, measured on an unweighted basis. As a rough and ready benchmark, the MSCI world equities USD index, one of the broadest stock gauges in the world, bottomed out on 9 March 2009, and has since risen by 77%.

The portfolio's chosen four anchor stocks - BHP Billiton, PotashCorp, Exxon Mobil, and CNOOC, turned in highly mixed results, with the biggest gain (86%) coming from an oil & gas stock (CNOOC), and the only loss, a modest decline of 9%, coming from the other oil & gas stock. The China connection paid off there, all right.

Among the 14 stocks in the main portfolio, positive stock price gains were recorded across the board; the best number was turned in by First Quantum, with an increase of 344% to just under CAD 100 a share. This African copper-gold miner is now expanding outside the continent, which is rare, and is also diversifying into other metals, which seems to be an excellent idea, given the weaknesses shown up by specialist mining stocks after commodity price collapses across 2007 and 2008.

In the speculative area of the portfolio, La Mancha Resources turned in the top gain, with a stock price that increased by more than 500%. The stock, with interests in Australia, Ivory Coast, Sudan and Argentina, remains speculative. Three stocks recorded price declines. First, Starfield, an advanced developer, with a flagship project in the Ferguson Lake nickel-copper-cobalt-platinum-palladium property in Nunavut, Canada.

Second, Hathor Exploration, which fell a hefty 42% despite ongoing successes at its projects in the Athabasca basin, with accounts for nearly a quarter of global uranium production. And then First Uranium, which has seemingly created one headwind after another for itself at and around its South African assets.

Seen more broadly, uranium and also gold stocks have turned in pretty miserable stock price performances over the past year. In uranium's case, a lackluster commodity price can be mentioned; one that is currently trading at USD 44.00/lb, lower than a year ago. For gold stocks, the gold bullion price has - apparently - been anything but an impediment.

Dollar gold bullion, at least, has been in a longer run bull market since early 2002; the issue with listed gold stocks appears to be mispricing associated with occasional bouts of lurching bubble behaviour. Newmont, one of the world's benchmark big gold diggers, is currently priced around USD 49.00 a share, a level it first breached in November 2004. To paraphrase one well known investor, sooner or later, price catches up with value.