McMurtry Investment Report & Model Portfolios

McMurtry Investment Report Newsletter – December 2020

December 2020 – The Materials Sector – Outlook and Recommendations

As of the end of November the Materials sector represented 13.6% of the TSX Composite and 2.7% of the S&P 500 indices. This index consists of stocks in various commodity areas including gold, silver, other precious metals, base metals and steel, fertilizers, chemicals, industrial gases and forest products.


Blackrock has a Canadian materials ETF with the symbol XMA that attempts to emulate the domestic Materials sector. There is a US Basic Materials iShares ETF with the symbol IYM. As you can clearly see from the table below the US IYM has much lower precious and base metals exposure and materially higher chemical and industrial gases weight.


Based on my new 50% Canadian 50% US benchmark North American weight, I have established my specific weight recommendations of this sector summarized below.

Industries Canada XMA US IYM Benchmark 50/50 My Weight
Golds 63.98 8.00 35.99 25.00
Silver 4.64 0.00 2.32 15.00
Other Precious Metals 0.69 0.00 0.345 0.00
Base Metals 10.92 5.75 8.34 20.00
Steel 0.59 4.94 2.765 0.00
Metals and Glass Containers 3.39 0.00 1.695 0.00
Fertilizers 10.73 9.64 10.185 0.00
Chemicals 0.95 43.90 22.425 26.00
Industrial Gases 0.00 27.38 13.69 14.00
Forest Products 3.52 0.00 1.76 0.00
Other 0.59 0.39 0.49 0.00
Total 100% 100% 100% 100%

In order to gain exposure to the US industrial gas industry, I recommended Air Products in both model portfolios several months ago. However, I mistakenly included the company as an Industrial one and will be transferring it over to the Materials Sector.


As you can see from my new weight recommendations, I am reducing my gold exposure, while increasing both the silver and base metal weights. I am maintaining the same group market weight as last month, but have changed the both benchmark North American country weights and my specific industry weights.


Silver is much more of an industrial metal than gold is. Currently 10% of the global silver supply is used to make solar panels, while 30% of the silver supply is used in electrical applications. The gradual switch to a low carbon economy with electric vehicles will see a sharp increase in demand for silver. The metal is also an important component in the new 5G networks that are happening right now. Lastly the demand for silver is also emulating from the medical and sanitary applications for its anti-bacterial properties. Jewelry demand from Emerging Markets continues as a large component of global demand.


Pan American Silver, a Canadian mining company operates silver and gold mines in Canada, Mexico, Peru, Argentina and Bolivia. It is the world’s second largest primary silver producer after last year’s acquisition of Tahoe Resources. Pan American’s focus is on acquiring long life silver reserves while always maintaining a strong balance sheet and positive operating cash flow generation. The company is trading at a 11.4 times Enterprise Value / Forward EBITDA, compared to First Majestic’s 19.9 times and Wheaton Precious Metals 22.6 times. Pan American has a strong balance sheet with a debt / equity ratio of 0.03. The company offers a dividend yield of 0.93% that is well covered by cash flow. The dividend has shown solid growth since 2017. I am adding the company to both portfolios and it will represent my silver exposure.


In terms of the gold exposure, I am making several changes. As mentioned previously, I am reducing the weight and investing the difference with both a new position in silver as well as an increase in the base metal weight. Long term the fundamentals for gold remain intact but the near- term catalysts for copper, silver and other base metals look more promising. I am deleting the Canadian gold stock ETF, XGD as most of the companies included in this ETF are already part of the US GDX ETF. I am also removing the US gold bullion ETF, GLD preferring to have specific company exposure to the gold sector as opposed to the actual bullion.


Currently I have BMO ‘s global Base Metal ETF, ZMT in both portfolios. I also want to add Capstone Mining, to the Growth Portfolio. I compared Capstone to several other Canadian and US base metal producers including First Quantum, Hudbay Minerals, and Freeport- McMoRan. Capstone is trading at a lower valuation using both price / book value and Enterprise Value / Future EBITDA. In addition, the company has a much healthier balance sheet than many of its competitors. Lastly its projected growth in EBITDA over the next several years is better than many of its peers. Capstone has a long-term strategy of 40% copper production growth by 2023 accompanied by 20% lower costs. Capstone operates one silver mine in the US called Pinto and another one in Mexico called Cozamin. In addition, the company owns a 70% intertest in a mine in Chile called Santo Domingo.

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