A dozen for the Christmas stocking

A selection of some of the world’s top resources stocks, from a sector that’s leading markets across the world.

JOHANNESBURG - 

With Exxon Mobil (XOM, US$90.65 a share) valued at US$506bn, leading global oil stocks, and BHP Billiton (BLT.L, £16.99), valued at US$214bn, and leading global diversified resources stocks, the resources sector currently exerts an influence over stock markets not seen in generations. Since the onset of the global commodities and metals boom in early 2002, the capitalization of the global resources sector has increased by hundreds of billions of dollars, now increasingly leaving investors with questions over whether valuations have stretched and filled out.

Such questions arose before the sharp correction seen in markets during August, on the back of fears over the U.S. subprime market. It was on July 12 that Rio Tinto (RPT.L, £41.88) announced its mega, friendly white knight US$38bn bid for Alcan (AL, US$100.40), suggesting that Rio Tinto was happier to buy than to build. The Rio Tinto offer, when made, was at a huge 33% premium to the value of the bid announced by Alcoa (AA, $38.37) on May 7.

Perhaps the most interesting part of the bid is that analysts reckon that the break-even price for Rio Tinto to make the Alcan bid neutral on net asset value (NAV) is around a $1.25/pound aluminum price. The analytical community is currently assuming a long-term aluminum price of around $0.85/pound; current spot prices are hovering around $1.06/lb. Models show that a $1.25/pound aluminum price puts Alcoa's value at $73 a share, getting close to double its current quote, rating the stock as an entry for the 2007 Christmas stocking.

Beyond aluminum, the International Iron and Steel Institute (IISI) on Monday upgraded its global forecasts for apparent steel consumption, for both 2007 and 2008. Apparent steel use is expected to increase 6.8% in both 2007 and 2008, easily outpacing the rate of global economic growth. The world's biggest iron ore digger, CVRD (RIO, $32.54), is likely looking forward to a sector-wide +30% iron ore price increase going into 2008 negotiations. CVRD also offers significant nickel exposure, which benefits from stainless steel.

Among copper stocks, Equinox Minerals (EQN, C$4.47) appears to stand out with the successful development of its Lumwana Project in Zambia, on track to produce around 170 000 tons of copper a year from April 2008, ranking it as Africa's biggest copper producer. The stock offers significant asset leverage to the again-buoyant copper price, plus potential production of up to 2 million pounds of uranium a year.

In a more specialist vein, Global Alumina Corporation (GLA-U.T, C$1.91) continues to steer its one-third share of its world class, BHP Billiton- managed alumina project in Guinea towards production for 2010. Based on the $1.25/pound aluminum price in the Alcoa discussion, Global Alumina Corporation is worth nearly three times its current value. By the same token, Alumina (AWC.AX, A$7.07) has a value of some A$10 a share; on the same basis, Century Aluminum (CENX, $56.94) would be worth some $140 a share.

Among diversified base metals miners, HudBay Minerals (HBM, C$26.51) stands out on a valuation basis, with its significant, fully integrated First World zinc, copper and gold production and a billion dollars of cash on its balance sheet (by the end of 2007). There has been continued accumulation of this stock by Monaco-based hedge fund SRM, now at around 16% of HudBay.

Kinross (KGC, US$14.98) remains a top gold stock pick, with an outstanding growth profile, plus exotic Russian risk. Kinross, the high cost, mature gold proxy of yesteryear has indeed become a lower cost growth stock, following the Bema Gold acquisition in late 2006. Among gold stocks, Barrick (ABX, US$40.24), the sector leader, is another one for the Christmas stocking, for overall quality, momentum, sheer size, and a clearer strategy on hedging.

Among platinum stocks, Platmin (PPN, C$7.91) continues to stand out. Lonmin (LMI.L, £35.29) increased its stake in this junior platinum stock to 22%, during July, at +C$9.00 a share. Platmin owns the asset base and uncommitted concentrate to graduate to a 500 000 ounce a year fully integrated PGM (platinum group metal) producer by 2012. Mineral Securities (MXX.L, £0.77) may be the preferred (but illiquid) entry to Platmin.

Staying in precious metals, Silver Wheaton (SLW, C$13.81) remains in many senses the equity market's silver proxy, with significant growth from it 25% share of the Penasquito asset, within the Goldcorp (GG, US$30.24) stable. Penasquito remains headed towards being Mexico's largest mine. For some specialist investors, silver is the "high beta" "Viagra" way to play gold.

Among oil stocks, Oilexco (OIL, C$16.75) remains a favourite, with current production of 25 000 barrels a day, and $600m a year cash flow from the Brenda Nicol project in the North Sea, plus fully-funded organic growth to double current production from the "Shelley" project, plus material near term upside to the Huntingdon oil discovery. The latter continues to emerge as the biggest find in the North Sea since Buzzard was discovered by Nexen (NXY, $31.15) five years ago.

Among smaller oil stocks, Petro Rubiales (PEG.V, C$1.23) ranks high with its ambitions to become a major Latin American exploration and production company with 20 000 barrels a day heavy oil production (6000 net to Petro Rubiales), growing to 170 000 barrels a day in 2010, with the addition of a 215km pipeline to the Cuisiana terminal, in the BP (NYSE: BP, $70.21) stable.

Last, but not least, BHP Billiton should be in every Christmas stocking, for its comprehensive and fortuitous exposure to the right commodities and metals at the right time, its significant project pipeline, along with its buoyant and value-added capital management programmes.

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