By Fani Kelesdiou
Canada has vast amounts of natural resources yet to be explored. The country is rich in oil and natural gas reserves, as well as precious and essential commodities. The resource rich Canadian economy continues to outperform some of the world's most industrialized economies. While the eurozone is straggling with negative growth rates, Canada is expected to record a positive 2.2 percent growth for 2012. Here, I review five Canadian basic material stocks, which are trading at relatively attractive valuations.
AuRico Gold (AUQ) - Hold
Formerly known as Gammon Gold Inc, Canada-based AuRico engages in the development of gold and silver deposits. AuRico Gold is a leading gold producer. It holds an extensive portfolio of high-quality mines and various projects in North America. AuRico's strong project pipeline also includes advanced development opportunities in Mexico and British Columbia. Recently, the company sold two of its mines and the adjacent exploration projects for a total cash payment of $850 million.
These sales boosted AuRico's performance. The stock has rebounded nicely since the start of September with one-month stock returns of 17.25 percent. Currently, it is trading at around $8.
Fundamentally, AUQ reveals some positive trends. P/E ratio is 14.65, while forward P/E ratio is 10.55. P/B ratio stands at 0.98, which is considerably attractive. EPS for 2013 is expected to rise by 82.93 percent. The stock is trading with a price-to-book value of 5.10 suggesting a substantial premium over the book value. However, the company has sharp profit ratios. Operating margin of 42.9 percent and net margin of 41.7 percent are both above the industry's average of 27.2 and 12.7 percent, respectively.
Over the past five years, AuRico has experienced rapid sales growth of 44.30 percent. The company has a strong financial position with a current ratio of 2.55 and a LT debt-to-equity ratio of 0.13. Overall, I believe that AuRico is worth watching for upside moves.
Canadian Natural Resources, Ltd. (CNQ) - Buy
Established in 1989, Canadian Natural is a leading international independent crude oil and natural gas producer. The company holds a diversified portfolio of assets placed in North America, the North Sea and Africa. It is the largest heavy oil producer and one of the top independent natural gas producers in Canada. Canadian Natural supports around 250,000 barrels of light, sweet, crude oil daily production.
CNQ might seem a risky investment considering the company's current ratio of 0.55. However, cash flow provided from operating activities followed a positive change on a year-over-year basis. In addition, the company is committed to a minimizing risk strategy by lowering its production associated costs.
CNQ has a market cap of $34.25 billion. As of October 18, 2012, the stock traded at $31.74 with a Beta of 1.62. Fundamentally, CNQ has many positives, especially when compared with the industry as a whole. P/E ratio stands at 11.84 and forward P/E at 11.41. P/S and P/B ratios of 2.26 and 1.40, respectively, are both very attractive compared with the industry's same average valuations. For 2013, EPS is estimated to grow by 48.10 percent. The company's ability to generate profits is also evident by the positive ROE figure of 12.60 percent. The industry's average ROE stands at around 6 percent.
Out of 17 analysts tracked by Morningstar, 3 recommend a "hold" rating, 2 an "outperform" rating and 12 a "buy" rating. Analysts' average mean target price of $41.46 suggests about 30 percent upside potential.
Pan American Silver Corp. (PAAS) - Buy
Pan American Silver is the continuing corporation of Pan American Energy Corporation, which was incorporated in 1979. Pan American engages in the exploration of silver properties and development of silver and gold projects. It operates seven mines in Mexico, Peru, Argentina and Bolivia.
In Q2 2012, the company achieved the second-highest silver production in its history. After the acquisition of the Dolores mine, Pan American set a new quarterly record for gold production. Overall, the company shows compelling financial discipline. It has an exceptional current ratio of 6.07, and a long-term debt-to-equity ratio of 0.02. Since 2008, the company's sales increased by an average rate of 27.34 percent.
PAAS is trading about 40 percent below its 52-week high of $31. The company is valued at a market cap of $3.38 billion with strong multiples. Compared with the industry's average valuations, I find the stock cheap. Price-to-earnings ratio is 10.27. Price-to-sales and price-to-book value ratios are 3.8 and 1.2, respectively. The industry's P/S ratio stands at 9.3.
Moreover, the company appears profitable. Over the past five years, earnings per share grew at a rate of 34.97 percent. EPS is expected to grow by 38.13 percent next year. Trailing twelve month ROE is 14.9 versus the industry's average of 8.4. Operating margin and profit margins stand at 34.72 percent and 28.09 percent, respectively.
Precision Drilling Corporation (PDS) - Buy
Precision is one of the largest oilfield services companies in Canada with a growing presence internationally. Founded in 1951, Precision initially served as a private drilling contractor. Through continuing new build drilling rigs additions and various corporate acquisitions, the company achieved a broad North American footprint. Nowadays, it serves as a leading provider of contract drilling and completion services mainly to oil and natural gas exploration companies.
PDS is priced at around $8.50 versus its 52-week high of $12.93. It has upside potential of 40 percent based on the consensus analysts' mean target price of $12.
Overall, the stock is trading at desirable fundamentals combined with a relatively solid financial performance. P/E ratio is 9.5 while forward P/E is 9.55. With a PEG ratio of 0.41, the stock could be considered as undervalued.
PDS is trading with a P/B ratio of 1.01 and a P/S ratio of 1.09. Both ratios are lower than the industry's average same variables, again, suggesting a case of an undervaluation. The company's profit potentials are solid. Gross profit margin stands at 41.96 percent. Throughout 2012, EPS grew by 338.80 percent.
Moreover, Precision has a three-year average revenue growth rate of 20.98 percent. Also, for the past three years cash flow provided by operating activities grew by 46.76 percent on a year-over-year basis. Current ratio is 2.24, and debt-to-equity ratio is 0.55, which is relatively low compared with the industry's average of around 1.6.
Teck Resources Limited (TCK) - Watch for upside moves
With a market cap of $18.80 billion, Teck holds a strong presence among the industrial mining group of companies in Canada. Teck Resources manages a diverse portfolio of mining operations regarding several types of industrial mines. In addition, the company engages in the extraction of silver and gold.
Throughout the year, TCK's performance was weak. However, I suggest that based on fundamental metrics the stock is relatively cheap. Trailing twelve month P/E ratio is 9.60, and forward P/E ratio is 10.87. Currently, the stock is trading below its five-year average P/E ratio of 10.4. Also, TCK is trading 1.03 times book value.
Investors' sentiment is overall positive about the stock's future performance. Analysts estimate a mean target price of $48.46. Out of 16 analysts covering TCK, 10 indicate a "buy" rating. My opinion is that the recent drop in quarterly earnings is a bit concerning. Other than that, I suggest that the stock is worth watching for upside trends. The company shows financial discipline with a current ratio of 3.48, combined with a LT debt-to-equity ratio of 0.37. Next year's annual earnings growth estimations vary between the low rate of -4.7 percent and the high rate of 35.6 percent.