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Commodity 'supercycles' attract manager

Remains bullish on resource stocks despite recent boom

INVESTMENT REPORTER

Fund manager Rohit Sehgal thinks commodity cycles have gone from being two to three years long to as much as 10 years or more, which explains his continuing enthusiasm for resource stocks.

Mr. Sehgal has been managing the Dynamic Power Canadian Growth Fund and several other funds since mid-1998. The $1.23-billion fund is up 25.12 per cent so far this year, continuing a winning streak that saw its return over the past 15 years come in at 15.13-per-cent annualized and over the past 10 years at 11.39 per cent.

"The overall trend for commodity stocks looks very, very good," thanks to the existence of "supercycles," said the chief investment strategist at Toronto-based Dynamic Mutual Funds Ltd. The supercycles that have come about with the increasing integration of the global economy are longer and stronger than has been the case previously.

In the energy sector, he is focusing more these days on natural gas and oil service issues. And he is "very excited" about coal and uranium. Also, he added, "I think what we are seeing in the oil price, we probably will also see to some extent in commodities like copper and nickel, and . . . in zinc to some extent; we could see another phenomenal move in some of these mining stocks."

He also remains very upbeat about the prospects in India. Indian issues account for more than half the approximately 18 per cent of the portfolio that is invested in non-Canadian stocks.

Mr. Sehgal, who also manages the Dynamic Power Hedge Fund, takes a two-pronged approach to stock selection. He starts with a view of the global economy and zeroes in on the most attractive countries and sectors. He then chooses the best ideas in those sectors, using a number of parameters.

Mr. Sehgal's choice of Teck Cominco Ltd. (TEK.SV.B-TSX) is a reflection of his view on commodities. On Tuesday, Teck, which is becoming a world-class diversified mining company, bought a stake in the Fort Hills oil sands project, which will extend its capabilities into oil and gas, he noted. Teck has "huge exposure to copper, they have huge exposure to coal and . . . to zinc; [and] they make lots of money," he said. "If anything, you are going to see more positive [earnings] surprises" because the realized prices for copper, zinc and coal are higher than expected, he added.

He thinks that Teck could generate cash flow of more than $7 a share next year, and given a "reasonable" eight times cash flow multiple on the mining operations plus about $3 or $4 for the net asset value (NAV) of the oil sands investment, he puts a target of $60 on the B shares, which closed yesterday at $49.72 on the Toronto Stock Exchange.

Calgary-based Niko Resources Ltd. (NKO-TSX) and its partner are responsible for one of the world's largest offshore gas discoveries in India, a major consumer of energy with limited supply, he said. Mr. Sehgal noted that the partners recently were awarded another block to explore, which could prove equal to or better than the block that built the company. He also expects that the partnership will likely release positive results from additional deep-water tests in the original block, possibly before year-end.

And "Bangladesh continues to offer great potential upside," he added. Niko's NAV on proved and probable reserves is around $50 to $55, which compares with the current stock price of $52.75, but that doesn't include much of the exploration potential, he said. He thinks that Niko shares are worth $75 a share and "could be significantly more on significant discoveries," he said.

Mr. Sehgal sees uranium as one of the cheapest forms of energy on a comparable energy basis and so he likes Saskatoon-based Cameco Corp. (CCO-TSX), which has 25 per cent of the world's uranium reserves. He thinks a uranium price of near $45 to $50 (U.S.) a pound is not unreasonable over the next few years. The current spot price is $30.50, up from about $15 a year ago.

"More nuclear power plant projects are likely to be announced and built over the coming years and demand for uranium will continue to increase while supply stays relatively fixed," he said. Cameco is currently getting $16.50 a pound but there are major contracts rolling over in the next few years, which could see realized prices double or rise even more, he added.

"If we assume a $50 long-term uranium price, the NAV of Cameco is around the current share price . . . and you would be getting exploration upside and Bruce Power for free," he said. He sees Cameco as a "buy" with a $75 price target. Cameco ended yesterday at $59.10.

Hot commodities

Fund manager Rohit Sehgal thinks commodity cycles have gone from being two to three years to as long as 10 years or more, which explains his continuing enthusiasm for resource stocks.

Dynamic Power Canadian Growth Fund

CategoryCanadian Equity
Lead manager Rohit Sehgal
Load status Open ended
Total assets$1.25 billion
Management expense rate 2.87%
Globefund rating (out of 5)5
Returns to July 31, 2005
1- year simple rate or return 44.84%
3 - year compound annual24.39
5 year compound annual 8.38
Top 10 holdings as of Sept. 6, 2005
1. Trican Well Service 4.7%
2. Calfrac Well Service 4.1
3. FNX Mining 3.4
4. Vostok Nafta3.3
5. Inco 3.3
6. Camoco3.2
7. Kereco Energy3.0
8. Teck Cominco 3.0
9. Paladin Resources 3.0
10. Rogers Communications 3.0

© 2007 The Globe and Mail. All rights reserved.

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