The Vanguard Group, based in Malvern, PA, filed its latest December 2012 quarter on Friday, February 1st. The firm manages approximately $2 trillion in assets, including $800 billion in 13-F assets, per its latest Q4 filing with the SEC last week (access the full summary of its filing here). It is one of the largest institutional investors, and its investment in the basic materials sector alone amounts to over $27 billion, more than the entire 13-F assets of most natural resources focused institutional investors.
Vanguard offers mutual funds and other financial products and services, including ETFs, individual retirement accounts, college savings accounts, variable annuities, and also personal advisory services to its clients. Its assets are well-diversified into over 3,700 positions, with 17% deployed in mega-caps (>$200 billion market-cap), another 55% in large-caps ($10 to $200 billion in market-cap), 20% in mid-caps ($2 to $10 billion in market-cap) and the remaining 7% in small-cap equities (<$2 billion in market-cap). It holds positions in most mid- to large-caps, as well as many small-cap basic materials companies. Hence, we focused our efforts on analyzing the equity holdings in its Q4 2012 13-F to determine its highest conviction bets by sector, selecting the largest buys and sells in size, where the buy/sell is also a significant proportion of its prior quarter position in that company.
Vanguard's top pick in the basic materials sector based on position size as related to its total market-cap, that it also added to in Q4, is Molycorp Inc. (MCP). MCP is engaged in the mining and processing of rare earth ores at the mountain pass facility near the CA/NV border. Going into Q3, Vanguard already held a large 3.8% stake in the company, and in Q4, Vanguard added another 0.82 million shares to its 3.7 million share prior quarter position. It now holds $42.4 million worth, or 4.7% of the outstanding shares.
MCP has had a brutal last year-and-a-half, falling over 90% since its peak near $80 in May of 2011, and down by about three-quarters in the last year alone. The primary culprits have been a general weakening in rare earth prices, and cost over-runs related to Project Phoenix and certain other capital projects at its Mountain Pass facility. While there are definite risks in investing in the volatile rare earth space, especially given that the company is still developing its mine and experimenting with a new processing technology, much of the downside appears priced in and the risk may be to the upside.
At Friday's closing price of $7.43, MCP trades well below its book-value of almost $12 a share, and with the largest rare earth element deposit in the western hemisphere, the company has impressive earnings potential if and when rare earth prices rebound to the upside. Moreover, with stock prices this low, the company is an attractive acquisition target, especially by a largest Asian manufacturer such as Nissan (OTCPK:NSANY) or Hyundai (OTC:HYMLF), to secure the supply of these critical materials. The rare earths are critical inputs in existing and emerging applications, including: clean energy technologies, such as hybrid and electric vehicles and wind power turbines; multiple high-tech uses, including fiber optics, lasers and hard disk drives; numerous defense applications, such as guidance and control systems and global positioning systems; and advanced water treatment technology for use in industrial, military and outdoor recreation applications.
The following are additional high conviction bullish positions by Vanguard in Q4/2012 in the basic materials sector (see Table):
- New Gold Inc. (NYSEMKT:NGD) is a Canadian mining company engaged in the exploration of gold, silver and copper in Brazil, Australia, Mexico, Canada and Chile, in which Vanguard opened a new $3 million position.
- Cameco Corp. (NYSE:CCJ) is a Canadian company that is engaged in the exploration, refining and conversion of uranium in the U.S., Canada and Kazakhstan, in which Vanguard added 0.20 million shares to its 0.26 million share prior quarter position.
- Potash Corporation of Saskatchewan, Inc. (NYSE:POT) is the world's largest integrated fertilizer and related industrial and feed products company by capacity, in which Vanguard added 0.31 million shares to its 0.56 million share prior quarter position.
- Teck Resources Ltd. (TCK), a Canadian miner of coal, copper, zinc, molybdenum, gold and lead, mainly in Canada, the U.S., Chile and Peru, in which Vanguard added 0.20 million shares to its 0.38 million share prior quarter position.
Additional companies in the basic materials sectors Vanguard is bullish on based on its holding of a large position and adding to it in Q4/2012 included:
- Dow Chemical Co. (NYSE:DOW) is a science and technology company that manufactures plastic, chemical and agricultural products for the global food, transportation, health and medicine, personal and home care, and building construction markets, in which Vanguard added 1.49 million shares to its 51.78 million share prior quarter position.
- Freeport McMoran Copper & Gold (NYSE:FCX), engaged in the exploration and development of copper, gold, silver and molybdenum mines in Indonesia, North and South America, in which Vanguard added 1.11 million shares to its 41.12 million share prior quarter position.
- PPG Industries (NYSE:PPG), a manufacturer of coatings, glass and chemicals for the packaging, aerospace, architectural, automotive and other markets, in which Vanguard added 0.29 million shares to its 8.20 million share prior quarter position.
High conviction bearish moves by Vanguard in Q4/2012 in the basic materials sector included:
- Agrium Inc. (NYSE:AGU), which manufactures nitrogen, potash, and phosphate-based fertilizers and other agricultural products for markets worldwide, and is also involved in the retail supply of agricultural products and services in North and South America, in which Vanguard sold completely out of its 0.10 million share prior quarter position.
- Southern Copper Corp. (NYSE:SCCO) is one of the largest integrated copper producers in the world, and is engaged in the mining, exploring, producing, smelting and refining of copper and other minerals in Peru, Mexico and Chile, in which Vanguard cut 1.31 million shares from its 5.02 million share prior quarter position.
- Alpha Natural Resources (ANR), is engaged in the production, sale, and processing of coal from mines and preparation plants in VA, WV, KY and PA, in which Vanguard cut 2.12 million shares from its 13.77 million share prior quarter position.
Credit: Fundamental data in this article and company descriptions are based on SEC filings, Zacks Investment Research, Yahoo, Thomson Reuters and Briefing.com. The information and data are believed to be accurate, but no guarantees or representations are made.
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