• Log in
• Register free
• Subscribe
• Help
• Tour & Trial IC Advantage

• Share Tips
  • Buys
  • Sells
  • Recommendation changes
  • Tip performance
• Trading
• Companies
• Markets Data
• Columnists
• Funds Data
• Covered Warrants
• Research Tools
• Investment guides
• Q and A
• Blog
• Video

Subscribe today

Celebrate our 150th anniversary with fantastic savings on a joint magazine and IC Advantage subscription.

Subscribe today and save £150

Jim Slater's top resource picks

Created:

30 May 2008

Written by:

Jim Slater

My main feature showed, I hope, why I believe the current resources boom still has a long way to run. Here, I outline the shares and funds that I think are the best instruments to play it. In keeping with the Star Wars theme, they are my Jedi knights. You'll see that I have put my own money into many of them.

Let's start with oil. If I had to own only one UK oil company it would be Dana Petroleum, in which I have a substantial shareholding. There are 10 reasons for my choice:

1. It operates in relatively safe political territories - the UK, Norway, the Netherlands and Egypt.

2. It's completely unhedged so it will benefit more than most from increased oil prices.

3. A very active exploration programme with 17 exploration wells scheduled in 2008. Fourteen rigs have already been secured.

4. Three new field developments already sanctioned in 2008 and preparing for forthcoming licensing rounds in the UK, Norway and Egypt.

5. Production increasing rapidly. Targeted for 40,000-45,000 barrels per day in 2008 representing 30 per cent growth over 2007.

6. The fluid produced by Dana's recent substantial discovery in the North Sea is 100 per cent clean oil of good quality - low-sulphur light crude which is in demand.

7. Dana is on a prospective 2010 multiple of under eight, assuming an oil price well below $100. If, as I expect, the oil price rises substantially, the effect on future earnings will be dramatic.

8. Low gearing of only 17 per cent with excellent cash generation from operating activities.

9. If Dana's share price reaches the UBS target of £25 it will place the company among the top 15 candidates for promotion to the FTSE 100 index. This is more likely than may appear at first sight. Some of the other contenders' capitalisations may have shrunk by then if they are on the dark side and do not have the force with them.

10. For an enlightened major, Dana is an obvious takeover target.

OIL SERVICES

For investors in oil shares who prefer a spread, I continue to recommend the Junior Oils Trus t (JOT), which is administered by Capital Financial Managers and managed by my son-in-law, Angelos Damaskos. I own 24 per cent of the management company and also have a substantial holding in the fund. JOT is one of the top five best-performing unit trusts in the UK on a 12 months trailing basis out of the 2,305 unit trusts and OEICs tracked by Trustnet. It invests in smaller oil companies such as Dana Petroleum, concentrating on those with reserves and production operating in relatively safe political territories. JOT also favours companies that are unhedged and have strong exploration programmes. Smaller companies are at their most attractive when they find new oil and gas deposits as the effect on their share prices can be disproportionate, compared with, say, BP, whose shares might only rise a few pence even after a big find.

Further advantages of a spread of well-chosen junior oil stocks are that risk is reduced and there is excellent chance of benefiting from takeover bids. During the last four years, six of JOT's core holdings have been taken over. The majors like BP and Shell have been remiss in failing to acquire more sound smaller companies with strong exploration programmes. Hopefully, they will soon realise that this would be a superb use of their surplus cash.

The force is also strong for oil services. My family has a shareholding in James Fisher, which is doing well, and I also like the look of John Wood Group, which has just joined the FTSE 100 index, and Cape which is on an appealingly low multiple.

BASE AND PRECIOUS METALS

For the metals I can think of no better share than BHP at 2,116p. Even after its dramatic rise, it is still on a relatively attractive prospective multiple of only 15 with very strong cash flow. In addition to copper, aluminium, manganese, nickel and iron ore, BHP is well-covered to benefit from increasing fuel demand with its very substantial interests in uranium, steaming coal, oil and gas.

FOOD AND AGRICULTURE

In agriculture, I have invested substantially in Agrifirma and Agrifirma Brazil which Ian Watson and I recently founded. We intend to focus on Brazil, investing in transformational farmland. Most of this will be Cerrado, which is savanna, usually covered by grass and a few bushes. Once cleared and fed with nutrients, it can be developed into prime agricultural land with a consequent rise in value. We have recruited a top team to buy the land for Agrifirma Brazil, to develop it in an environmentally friendly way and then manage the farms. We hope to obtain an Aim quotation later in the year.

The key agricultural play that I recommend to investors generally is US company Monsanto, the world's largest bio-tech seed producer. It is on a very high prospective multiple but the PEG is only 1 and the rating is likely to be maintained as it is a high growth, very high quality company that could become the Microsoft of the agricultural services business and the darling of the market. Syngenta, the Ango-Swiss seeds and crop protection group, is a less exciting leading agricultural player on a prospective 2009 multiple of just over 20 but with a much lower growth rate than Monsanto.

GEOGRAPHIC DIVERSIFICATION

Another way to benefit from the force is to think in terms of countries in which to invest. If you were an alien who had just landed on earth and you wanted to invest, you might say to yourself "What do these earthlings need to live on? What do they have to have?" You would quickly come to the conclusion that water, food and fuel were top of the list. You would then try to find out which countries had most of these essentials. Your answer would be Brazil, which has the best water table in the world – 90 per cent more than its nearest rival. Brazil also has the most undeveloped agricultural land, it is the world's largest agricultural exporter and with its existing oil, massive new discoveries and its ethanol production, it will soon become a major oil exporter.

Brazil is also one of the world's largest iron ore producers and has an abundance of other metals and minerals. It seems to me that the force is undoubtedly with Brazil and that is why I wrote about it for Investors Chronicle on 1 February 2008 and recommended iShares in MSCI Brazil when they were 2,905p. It is also why Agrifirma decided to focus on Brazil.

THE DARK SIDE

You may be wondering why I have not mentioned retailers, housebuilders, banks, property, insurance and building companies. They are all in the doldrums because of the credit crunch, which has affected both their recent results and future prospects. Some investors argue that it could be a good time to buy their shares in the hope of a substantial rebound. This is a matter of investment style. I never try to catch a falling knife. I prefer to try to identify the sectors that clearly have the force behind them and then to search for relatively good value within them.

If you believe, as I do, that long-term the prices of metals and minerals, oil and gas and food will continue to rise, you can readily see that consumers will have reduced spending power. With property values falling due to the credit crunch, they will also have reduced borrowing power and no feel-good factor. As a result, 2009 could be a very tough year for most sectors in the stock market. That is the dark side. But there is no need to despair - if you are a true Jedi, there is still time to rejig your portfolio to make sure that the force is with you.