One Canadian resource stock for an improving economy
Despite all the bad news-good news frenzy in the markets, this Canadian analyst likes a Canadian resource stock for a brighter future.
The news is good this morning, but so what?
A report on rising Chinese exports has been pushing the world’s stock markets up today.
Yet a piece of bad news could just as easily send them in the other direction. So let’s get off the good news-bad news teeter-totter for a while.
Let’s take another tack. Let’s assume that the economy is getting better (as the figures in Canada say it is). What should investors buy?
For many Canadians, the answer is resource stocks. That’s certainly true for Mr. Robert Floyd, who runs his own capital management firm. He writes frequently on commodity stocks for Investor's Digest of Canada.
And the recent upheaval in the markets hasn’t changed his mind. In the latest issue, he explains why he likes the prospects of Grande Cache Coal (TSX-GCE).
The real economy is improving, Mr. Floyd insists, and this company has every intention of improving along with it.
Deciding on the recovery
The fear in the markets will feed on almost anything. But at bottom it’s based on a possible replay of the credit crisis, with governments cutting back in the face of massive debt and the global economy paying the price.
It’s not easy to resist all the bad news flying around out there, Mr. Floyd admits. “Recent action in the marketplace would suggest that the bears have assumed a position of superiority.”
Yet the decision is still yours, he states. “As an investor, you must now decide whether the recovery is still in place.”
His decision clearly comes down on the side of recovery. In Canada, the economy has already been growing at a surprising rate. But of course, Canada alone can’t fuel a worldwide recovery.
Other nations must be in on the game, and especially those growing titans, China and India. They need steel to build. And steel makers need metallurgical coal to crank out their product.
This is where Grande Cache comes in.
Good results
Grande Cache has its working headquarters in the town of Grande Cache, Alberta (the head office is in Calgary). Its surface and underground coalmines are about 20 kilometres from the town and 360 kilometres west of Edmonton.
The surface mine was opened in 2003 and the pit operations, upgraded to modern mining standards, started producing in 2004. The surface and pit mines each contribute 50 per cent of production.
Equally important, the company is directly served by a CN line, which in turn connects to the main line, which in its turn connects to the three major coal export terminals in British Columbia and the Great Lakes.
Grande Cache’s share price has been under pressure lately (whose hasn’t?), but its results have been good.
2 million tonne barrier
The company sold a record 1.77 million tonnes of coal in fiscal 2010, which ended March 31. The year before, the figure amounted to 1.07 million tonnes — that’s a 67 per cent difference.
Contract prices for the first quarter of 2011 are expected to be US$150 to $160 a tonne. For the entire year, sales are expected to break the 2 million tonne barrier, possibly rising as high as 2.2 million.
Many of these sales have already been accounted for and are subject to quarterly pricing arrangements that are standard for the industry. Not exactly the clockwork payments you find with electrical utilities, but a source of stability nonetheless.
By 2013, Grande Cache expects to be selling up to 3.5 million tonnes of coal. This won’t come free, of course. It will cost an additional $225 million, mostly for new equipment. The company will pay this out of existing cash, new cash flow and capital leases.
In the meantime, the World Steel Association forecasts growth of 9.2 per cent in the demand for steel this year.
All of this seems to bode very well for Grande Cache Coal. But where have the markets left the share price?
Running on resources
At the height of the market turmoil of 2008 and early 2009, the shares of Grande Cache fell as low as $0.48 (there is no dividend).
When Mr. Floyd reported on this stock in Investor's Digest of Canada back in July 2009, the shares had risen to $1.96. As the market moved upward, the stock hit a high of $8.75 in mid-April.
It trades today at $5.22. This analyst is convinced it is going up. “Contracted prices for metallurgical coal are improving and support higher revenues and valuations for the stock,” he states.
All you have to do is believe in the economic recovery. If you do, this is just one of many Canadian resource stocks that will rise with it.
Bad news is all around us. The good news is that when things pick up, Canada is one of the first places the world turns to.
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