Hudbay Minerals (HBM.TO)

This is all about Constancia, their copper project in Peru. It is going to add very meaningfully to their copper production growth over the next 2-3 years. Together with Lalor in Manitoba, we should see copper production triple by 2017. The CapX phase is done. Now, as it goes through this very sensitive start-up period in 2015, the other side of the rainbow is if they can do it smoothly enough. Free cash flow at the end of the rainbow is the scenario. He sees good free cash flow going into 2016. In this kind of market that is very crucial.

Over the last few years, they have been putting a lot of money into developing Constancia in Peru, a major copper, molybdenum, gold project, which started to come on stream in the last quarter and will ramp up this year into production. As they do, their production profile goes up quite sharply. Cash flow should increase with this. Last quarter was a little bit affected with some unscheduled shutdowns in one of their mines. Yield of 0.19%.

This is being overlooked. It gets no respect and nobody cares. There are 55 components to the TSX Energy Index but in the TSX Metals & Mining, there are only 9. In another year or 2, a couple of those are going to disappear. These stocks are trading like nobody is ever going to want copper or zinc ever again. When investors have got that attitude, they are going to be wrong, and when this breaks out it is going to be chased. He would want this to break above $11.50.

Materials tend to do well between now and May, and mining stocks tend to be a bit varied from that. You want to be in mining stocks between the start of the year and about mid-February. After that, they tend to be very volatile and gyrate around. There can be underperformance versus the material sector. Start to think about taking profits here, and rotating more towards the broad material sector, such as your chemical companies.

Hudbay Minerals (HBM-T) or Badger Daylighting (BAD-T)? He is pessimistic on energy services, so would suggest you consider something different such as holding onto this one or reducing it slightly. Maybe even take a larger energy stock such as Suncor (SU-T) or Canadian Natural Resources (CNQ-T). Overall there is nothing wrong with this one. It is a pretty good company.

He’d be tempted to buy if it got to $8.50, but he would not hold it long term.

(A Top Pick Dec 11/13. Up 26.6%.) The sector didn’t do that well, but this has held up extremely well, when looking at a breakdown of the other material stocks. The main reason is that Constancia is coming on stream over the next year. At current prices, this still represents pretty good value, particularly within the sector, and would still be a Buy.

He would think that zinc is the place to be, and because of that this company is okay. He is just not that optimistic on materials. Feels that China’s growth is just not nearly enough. China is trying to transition from being an export led economy to a consumption led economy like the US. This is going to be a very hard slog.

During the past 3 months, this had formed a short-term reverse head and shoulders pattern and it just broke out about 2 weeks ago, and is starting to show some very good positive signs. It’s not just this company. The whole mining/metal sector is starting to show some very interesting technicals, despite the strength in the US$. Seasonal strength is from around the middle of October right through until about April of each year. The technicals are very good. It is in an upward trend and it is outperforming the TSE composite and is currently trading above its 20 day moving average.

Sees this being flat for 1-1.5 years. Doesn’t see any growth. One of your more defensive names because of its cash position, but it is a muddled mixture of zinc, a little bit of copper and gold now. Well run company and a good company, but truthfully the sector that looks the best is copper. He would suggest you buy Lundin (LUN-T), followed by Teck resources (TCK.B-T) and forget about this one.

(A Top Pick Dec 11/13. Up 23.61%.) A lot of people doubted their ability to finance and bring on the constancy of a mine, which will be coming on stream next year. That will provide a further boost to their valuation. In the meantime, they have done some very smart things by selling a royalty stream into Silver Wheaton (SLW-T). Management has done a very good job of manoeuvring this company and putting it in place for future production increases. Should there be any appreciation in commodity prices in the next couple of years that will be an added kick to the valuation.

Lundin (LUN-T) or Hudbay (HBM-T)? Owns both because they have the lowest development risk as a percentage of NAV. As to 1) when are they are at the end of their big capital spending run, 2) when does free cash flow start to get generated and 3) when does free cash flow start, Lundin is slightly better. This company is just finishing off Constantia which goes into production next year. He likes both.

Metals tend to wait a little for the market to pick up a little bit and some conviction in the economy. Also, emerging markets tend to have a seasonal period that starts later on in November, a little bit later than the broad Western markets. So companies like this will actually start performing well at about that time. It might start earlier, but right now there's no sign of that happening.

In the metals business you have to be very specific about what type of company and which metal. He likes to see them all much less expensive. Prefers NSU-T.

His model price is $12.81. If it went above his green line of $9.74, he would take a flyer on it. The material space has been beat up, and he has been picking away at golds.