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Number Cruncher

Mining for value among small caps Add to ...

What are we looking for?

This is our last look this week at what the pros are buying.

Today, we check out Beutel Goodman Small Cap Fund. The top 25 securities are listed every quarter. Investors, however, can find the top 10 stocks monthly on Globeinvestor.com's fund quote pages.

More about the fund

The $605-million Canadian small- or mid-cap equity fund has been run by Stephen Arpin of Beutel Goodman & Co. Ltd. since 2000. It has gained an annualized 15.1-per-cent return over the 10 years ended Feb. 28 versus 12.5 per cent for the Nesbitt Burns Canadian Small Cap Index.

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"We look for 100-per-cent return in the stocks we buy," said Mr. Arpin, a value investor who runs a concentrated portfolio. "Our hold period is three to four years."

Canadian small-cap stocks have had a powerful rebound from the 2008 market meltdown, but it doesn't mean that outperformance can't continue, he said.

Because small-cap valuations are now only at marginal discounts to their larger peers, more of the upside will come from merger-and-acquisition activity, Mr. Arpin said. Companies in his fund that have been the subject of recent takeovers include Dalsa Corp., Consolidated Thompson Iron Mines Ltd. and Fronteer Gold Inc.

What did we find?

Triple-digit returns over the past year in three resource names, including 177 per cent for Fronteer Gold, which is being acquired by Newmont Mining Corp.

Allied Nevada Gold Corp. has gained 103 per cent over one year, but it has more upside, Mr. Arpin said. The company has reopened the Nevada-based Hycroft gold mine, which uses an industrial process called "heap leaching" to extract the metal from oxide ore. "They are increasing production to 250,000 ounces by 2012, and we think the cash costs are going to be strong at $450 or $475 (U.S.) an ounce," he said. "Given where gold prices are, they are going to be generating excellent margins."

The company, which is run by former Kinross Gold Corp. executives, has no debt, $350-million in cash and is also a future takeover target, he added. There is also large sulphide resource on site, he said, but that will require "some capital" to get it out of ground.

Quebecor Inc., which is dominant in cable television and is building out its wireless business, also has potential, he said. "Primary cable subscribers continue to grow" because Quebec has been "relatively unpenetrated," he said. The wireless business is a "low-risk opportunity" for the well-financed company, he added. "They have all the infrastructure and customer relations so they are just selling another product."

Mr. Arpin is also upbeat on Fairborne Energy Ltd., a mid-sized oil and gas producer in Western Canada. The company trades at five times cash flow and at about 75 per cent of its net asset value, he said. "Not many companies trade at a discount to NAV at this moment in the energy space. They had some trouble a couple of years ago with some of their exploration, and people are excessively discounting what the company has been doing over the past couple of years. So there is some hidden asset value in the company."

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