Desjardins offers top picks for 2005

In its third annual volume of Strategy Plus, the research department of Montreal-based brokerage house Desjardins Securities weighs in on the year ahead and offers top investment recommendations in all sectors, including mining.

Desjardins sees the broad investment themes of 2004 continuing through 2005, with lower bond yields by late 2005 or early 2006, and earnings growth for the S&P 500 and S&P/TSX companies averaging 8%, but without price/earnings multiples expanding.

In Canada, Desjardins believes it is “very likely that the stock market goes through at least one meaningful correction this year before finishing 2005 with a modest, single-digit return.”

The brokerage house predicts that, by year-end, equities will have edged out bonds (9.5% versus 8%), but states “more importantly, it should still be possible to select the right stocks for a 15% return or better.”

Internationally, the massive government- and consumer-debt levels in the U.S. and the continued devaluation of the U.S. dollar weigh heavily on Desjardins’ decision-making, and the company finds it “very difficult . . . to see U.S. equities outperforming Canadian equities as an asset class.”

Comments Desjardins: “In a sentence, we believe the U.S. Federal Reserve’s goal is to achieve new, stable, low, long-term interest rates by slowing, but not derailing, the U.S. recovery.”

However, Desjardins believes the U.S. cannot achieve these desired low rates without co-operation from China, and without negative consequences of a U.S.-dollar devaluation for Europe.

“The U.S. dollar devaluation is the floating currency version of the U.K. currency devaluation of 1931,” states Desjardins. “It creates lower U.S. rates by causing global weakness, thereby buying time for the U.S.”

Desjardins notes that there is “significant concern” surrounding the possibility that China and Japan will suspend purchases of U.S. treasuries or even sell treasuries and thereby cause a crisis in the U.S., owing to rapidly escalating bond yields. However, Desjardins believes this is unlikely to happen in 2005, as both countries still need access to U.S. import markets.

Other macro-economic factors Desjardins is monitoring include China’s rapid growth, possible U.S. tax-policy changes, and higher oil prices.

The brokerage house is bullish on the Canadian dollar and sees the loonie at US87 and US93 at the end of 2005 and 2006, respectively.

Also bullish on gold, Desjardins predicts the price will close out 2005 at US$500 per oz. and end 2006 at US$570. “Higher gold prices do not reflect an inflation argument,” cautions Desjardins, but rather a lower U.S. dollar.

Desjardins’ Toronto-based gold analyst Michael Fowler has Placer Dome (PDG-T) as his top gold-stock pick, with a US$25 target, based on five factors: some growth potential not recognized by the market; an inexpensive valuation; a reduction in its hedge book; good exploration potential; and a takeover potential.

This year, from its interests in 17 mines worldwide, Placer is expected to produce 3.7 million oz. gold, 430 million lbs. copper and 3 million oz. silver from reserves of 61 million oz. and resources of 59 million oz.

Desjardins says Placer could see its production increase from multiple sources: the Turquoise Ridge operation in Nevada; the South Deep project in South Africa; continued exploration success at Cortez Hills in Nevada; development of Pueblo Viejo in the Dominican Republic; and possible development at higher gold prices of Donlin Creek in Alaska.

Among the more established gold miners, Fowler has “buy” recommendations for Cambior (CBJ-T), Eldorado Gold (ELD-T), Glamis Gold (GLG-T), Iamgold (IMG-T) and Kinross Gold (K-T).

Fowler’s favourite speculative precious-metal stocks are Anooraq Resources (ARQ-V), Fortune Minerals (FT-T), Glencairn Gold (GGG-T), Great Basin Gold (GBG-T) and Wolfden Resources (WLF-T).

The only “sell” recommendation on his list is Goldcorp (G-T).

Desjardins base metals analyst John Redstone fingers Alcan (AL-T) as his top pick, citing three reasons: “the positive outlook for the aluminum market; the company’s strategy; and the stock’s current valuation.” Redstone expects aluminum prices to average US85 per lb. in both 2005 and 2006, compared with US78 per lb. in 2004.

He likes Alcan’s strategy of increasing primary alumina and metal production to 6.5 million tonnes and 3.7 million tonnes, respectively, through 2006 while simultaneously cutting costs throughout its metal and packaging operations.

“In our view,” states Redstone, “Alcan has the best greenfield projects in the industry for smelters, [namely] the Coega smelter in South Africa, which should be on-stream by 2008-09, and the smelter project in Oman, which could also be on-stream by 2008.”

His remaining picks in the base metals sector are Alcoa (AA-N), Falconbridge (FL-T), Inco (N-T), Inmet Mining (IMN-T), Noranda (nrd-t), and Alcan’s recent rolled-products spinoff, Novelis (NVL-T).

Redstone has no “sell” recommendations but has “holds” on Cameco (CCO-T) and Phelps Dodge (PD-N).

John Hughes, Desjardins’ other base metals and steels analyst, has Teck Cominco (TEK-T) as his top pick, noting that “buying Teck Cominco shares today provides an ‘option’ on the zinc market,” as the company is the Western World’s largest zinc producer.

Hughes also describes the environment for metallurgical coal prices as being “explosive on the upside,” which could benefit Teck’s 43.4%-owned Fording Canadian Coal Trust (FDG.UN-T).

Teck could also see its earnings rise from soaring lead and molybdenum prices, reckons Hughes.

His other picks in the mining sector are Aur Resources (AUR-T), First Quantum Minerals (FM-T), Rio Narcea Gold Mines (RNG-T), Sherritt International (S-T), Aber Diamond (ABZ-T), and Fording.

Among steelmakers, Hughes likes Dofasco (DFS-T) and IPSCO (IPS-T), and also fancies the Westshore Terminals Income Fund (WTE.UN-T).