Pape's Pair

01/27/2006 12:00 am EST


Gordon Pape

Editor and Publisher, The Income Investor and the Internet Wealth Builder

In line with his role as a leading authority on Canada, both top picks from Gordon Pape have a "Canadian twist." His speculative favorite, Goldcorp, is based in British Columbia, while his conservative play, Kinder Morgan, has "acquired" a role in the Alberta tar sands.

"My aggressive pick for 2006 is Goldcorp (GG NYSE). Let’s be clear from the start: the shares are not cheap. But we’re not shopping in the bargain basement here. And there’s good reason for investor interest. Goldcorp is the world’s lowest-cost gold producer. Final 2005 numbers should show total production of more than 1.1 million ounces. To add to the attraction, in early December Goldcorp reported that it was sitting on $400 million in cash. It has no debt and has not hedged any forward sales, so it benefits fully from every upward move in the price of gold.

"While, that’s reason enough to like the stock, this is not a company that’s resting on its laurels. In late November, it announced it was acquiring 10% of Wolfden Resources, an exploration company in northern Ontario. In December, it announced a deal to buy Quebec-based Virginia Gold, which controls the Eleonore property in Northern Quebec, which is regarded as one of the most promising new discoveries in North America. Goldcorp is also paying about $1.5 billion to acquire several properties in such areas as Chile and the Dominican Republic.

"Goldcorp said in a statement that acquisitions will increase its 2006 production by about 50% to more than two million ounces and will add about 83% to reserves, taking them to about 23 million ounces. Average production expenses will also rise but Goldcorp says it will maintain its position as the lowest cost producer at about $150 an ounce. Very aggressive investors may buy at the current price. More cautious readers should watch for a pull-back and look to enter around $20."

"Our conservative pick for the year ahead is Kinder Morgan (KMI NYSE), a major player in the US pipeline sector, operating more than 35,000 miles of gas and products pipelines. It is also involved in natural gas retail distribution and, to a limited extent, in natural gas fired electrical generation. Its acquisition of Canada’s Terasen (formerly British Columbia Gas) will place KMI in a position to be able to supply output from the Alberta oil sands to the US market, which is expected to dramatically increase its reliance on Canadian oil in the company years.

"In announcing the Terasen acquisition, KMI’s chairman and CEO Richard Kinder indicated the company is prepared to invest heavily in expanding this capacity going forward. There is another potential bonus for shareholders in KMI’s entry into Canada. The company is the leading supplier of carbon dioxide for use in oil recovery in the US. The gas is gaining favor as a way to increase yields from the Alberta oil sands and KMI will now be well positioned to grab a share of that business.

"This is a company with long-term growth potential. For fiscal 2006, earnings are expected to come in at $5 per share, which would represent an 18% increase. Analysts generally like the stock although they aren’t expecting any big move in the near future, with a median target price of $100 according to Thomson/First Call. However, while we’re waiting we are collecting a decent dividend of $3 a share for a yield of 3.2% based on the original recommended price and we could see that increase in 2006. Buy."

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