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Small-caps said to be 'doing surprisingly well'

Canadian energy, mining companies lead in strong performances, analyst says


Contrary to expectations, small-capitalization stocks are continuing to do very well and fund manager Peter Hodson isn't about to complain.

After all, the CI Signature Canadian Small Class fund, which he has managed since its inception at the beginning of 1998, is already up an impressive 12.26 per cent so far in 2005, continuing a strong longer-term performance.

The fund, which has more than $50-million in assets, had a return of 23.8 per cent in the 12 months ended Jan. 31, far ahead of the BMO Nesbitt Burns Small Cap index's 10.6-per-cent return over the same period.

The fund's three-year return was 23.4 per cent annualized and 8.1 per cent over five years. Mr. Hodson also runs a number of other funds, including the Waterfall Vanilla hedge fund launched in May, 2004.

"Small caps are doing surprisingly well in this environment," said the vice-president of investments for Toronto-based Waterfall Investments Inc. He had expected that small-cap stocks would take "a bit of breather vis-à-vis the large caps," given the fact they have outshone their big-cap counterparts over the last four years. That hasn't happened yet, but he thinks it could come later this year.

Niko Resources Ltd. (NKO-TSX) is one of Mr. Hodson's current favourites.

The Calgary-based energy exploration and development company is involved in projects in India and Bangladesh. About a year ago, Niko received an exploration and development licence from Bangladesh, a "very, very material" event for Niko, he said, adding that has not diminished the importance of the Indian project.

The company has just completed a 3-D seismic program on another portion of its offshore India block. The new area, which Niko plans to drill in the next year and a half, could hold as much as 40 trillion cubic feet of gas, he said. As such, it "looks to be massive compared to the old area, which itself turned out to be massive." The reserve estimates for that area are about 15 trillion cubic feet. Niko shares closed yesterday at $68.75 on the Toronto Stock Exchange.

Despite its name, Saskatoon-based Shore Gold Inc. (SGF-TSX) is a diamond exploration play. It recently had a bulk sample from its Star Diamond Project in Saskatchewan analyzed by an independent valuator and "it came in at very, very commercial valuations," he said. Shore Gold was in the news last week when it announced a $100-million bought deal. Newmont Mining Corp. of Canada Ltd. will subscribe for 8.95 million of the 18.2 million shares being offered at $5.50 a share and could take another 297,000 as well.

Proceeds will be used for the exploration and development of the Star project and for general corporate purposes. Shore Gold shares have been on a tear, soaring from just over $1 in June to a high of $7 on March 4, but that is just the beginning as far as Mr. Hodson is concerned.

Shares of HudBay Minerals Inc. (HBM-TSX) have also been soaring. HudBay is the new name of OntZinc Corp., which in December completed the takeover of Hudson Bay Mining and Smelting Co. Ltd. HudBay, which operates mines and concentrators in northern Manitoba and Saskatchewan, is a zinc and copper producer, and as such is a play on those metals, he said. At current prices for zinc and copper, HudBay could generate cash flow of approximately $1.60 to $1.70 a share this year, which stacks up very well against the current stock price of $4. "It is an extremely attractive valuation, which becomes more so, obviously, if copper and zinc prices actually move up more from here," he said, adding that he sees commodity prices staying high for at least the next 18 months or so.

© 2007 The Globe and Mail. All rights reserved.

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