Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Bob Catto, investment director at Williams de Broe.
Another resounding wake-up call has been delivered to markets with the effective demise of Merrill Lynch, Lehman Brothers and AIG. My guess is there are more shocks to come. The vast mountain of debt held by Western financial institutions and consumers is still far from being unwound. And despite the powerful dollar rally of recent weeks, the formal assumption of Fannie’s and Freddie’s debts by the US Treasury – not to mention the ‘bad bank’ bail-out fund – leaves open the possibility of the US losing its AAA-credit status. After all, where will this lead? How about General Motors and Ford as the next candidates for ‘conservatorship’? Economic power is moving to the East, where the enormous savings held within the growth economies leave governments with greater flexibility. Despite the cyclical fall in commodity prices within a secular bull market, the theme that dominates my thinking is the demand for resources and energy.
My first choice is the world’s largest miner, BHP Billiton (LSE:BLT), which has a vast spread of interests across the world, providing materials to meet the infrastructure demands of China, India, and the rest. Low gearing, strong dividend cover, and a forward p/e of below six make this a core holding for investors seeking to diversify out of Britain and gain exposure to emerging-market growth.
My second choice reflects the fact that the demand for energy is growing all the time, due to the effects of globalisation and that, post-Georgia, energy security is now top in the minds of governments. Unfortunately, Britain, owing to its reliance on North Sea gas and a lack of foresight, finds itself more exposed than our continental partners and least prepared in terms of gas storage. Portland Gas (LSE:PTG) is developing the world’s second-largest salt cavern capable of storing 35 billion cubic feet (991 million cubic metres) of gas. This facility will supply 5% of UK peak demand because of the ability to withdraw or inject up to 20 million cubic metres a day. The group is set to update the market on 10 October, with progress on funding the capital spending of the Portland project through the introduction of joint venture partners. This will allow analysts to assess its value accurately for the first time, which should lead to a substantial re-rating, given the current market cap of £195m.
My final choice is Medusa Mining (LSE:MML), an existing gold producer in northern Mindanao in the Philippines, which, over the next 18 months, will grow production to 100,000 ounces a year at a cash cost of about US$225 per ounce. We take a positive view of gold in the medium term and the company could well be throwing off free cash flow in excess of US$40m a year versus a current market cap of US$98m. Moreover, Medusa is drilling two copper porphyries at Kamarangan and Lingig, where early results have indicated the possibilities of substantial tonnage together with high grades in copper and gold. The Philippines is well known for this style of deposit and the company operates in an area where there is excellent infrastructure. By way of comparison, the vast low-grade porphyry deposit at Tampakan in the politically difficult southern tip of Mindanao was recently the subject of a bid by Xstrata, which valued the deposit at around US$1.5 bn.