Fears make resources sparkle

Date: Wednesday, December 5, 2007
Author: Shirley Won, The Globe and Mail

Hedge fund manager Otto Spork believes the pummelling taken by resource stocks because of fears that the U.S. subprime mortgage mess would slow down the North American economy has created buying opportunities.

"We are looking to buy on this weakness," the portfolio manager with Toronto's Sextant Capital Management Inc. said an interview.

"We feel that certainly the junior gold and other resource stocks are nowhere reflecting their true value."

Mr. Spork runs the $20-million resource-oriented Sextant Strategic Opportunities Hedge Fund LP that was 85 per cent in cash by June before markets headed south last summer. "We saw that the markets were very high, and felt there was a correction coming," he said.

Resource stocks, especially smaller company names, have been hit badly by the "negative sentiment" stemming from a belief the subprime mortgage woes would get worse, he said. "People were going to more liquid [names], taking a flight to safety."

Mr. Spork's buying spree in the past couple of months, however, has taken his fund down to 10 per cent in cash.

He is "very bullish" on the gold sector, saying he believes the price of the yellow metal is en route to $1,500 (U.S.) an ounce within the next two years. While gold has traded over $800 recently, it closed yesterday at $794.70.

But silver has "better upside potential" because much of its production has disappeared through industrial uses while gold still exists in jewellery or bank vaults, he added.

"We could easily see $35 or $40 per troy ounce for silver [over the next couple of years], and it's about $14 now."

Mr. Spork is also upbeat on molybdenum - a metal with industrial uses like strengthening steel and removing sulphur from crude oil.

Molybdenum prices sat at around $3 or $4 a pound for many years, but in recent years have ramped up to the $32-$33 level, he said. "We think there is going to be more upside, but ... there is a lot of profit to the mining companies at these prices so that's how you have to look at it."

He also considers water to be a resource, and water companies now make up 35 per cent of his fund. "It's still off everyone's radar screen so it's still very inexpensive," he added.

The growing scarcity of fresh water globally will drive up the price of this commodity, he argued. While he owns listed water companies, he also invests in private European companies that own water rights.

The Sextant Strategic Opportunities Hedge Fund's A series fund has gained 60.15 per cent over the year ended Oct. 31. The fund will invest in gold or silver certificates and publicly traded or private companies.

It may also sell short commodities - as opposed to stocks - in which the fund has an exposure. "In the junior mining, it is very hard to borrow stocks to go short," Mr. Spork said.

where He is long:

Adanac Molybdenum Corp. (AUA-TSX-VEN)

The junior miner is closer to getting final permits to bring its molybdenum project at Ruby Creek, B.C., to production, he said. He likes management, including its executive chairman Larry Reaugh, who has successfully taken mining companies public. "We think its [stock] could go to $3 (Canadian) very quickly over the next 12 months," he said. Adanac closed at $1.22.

Goldrea Resources Corp. (GOR-TSX-VEN)

The junior mining company has an exploration property in Shandong province in China and, while the property is undeveloped, they have had some preliminary drill results from it, he said. The stock could go to 75 cents in about 12 months, he said. It closed yesterday at 29 cents.

where He is short:

West Texas Intermediate crude oil

(For January delivery at $98.35 [U.S.] on the New York Mercantile Exchange.)

When he took this short position, he said he believed the price of crude oil was heading south in the short term to between $85 and $88 (U.S.) per barrel. He took some profits yesterday before oil closed at $89.31. Longer term, he expects crude oil to rise beyond $100 a barrel.