Now That Warren Buffett is Crazy About the Loonie, Here are Seven Ways to Profit From a Strong Canadian Dollar

Editor's Note: The Money Morning staff was off enjoying the President's Day holiday yesterday, but our regular publishing schedule will resume tomorrow. In the meantime, here's a brand-new investment research report we thought that you would find both interesting and profitable.

By William Patalon III
Executive Editor
Money Morning/The Money Map Report

According to a recent research study, investors who mimic the investment moves of stock-market guru Warren Buffett will earn profits that are double those of the broader market - even if you wait months to follow his lead.

Although surprisingly few individual investors use this strategy, we realize that it's not exactly a big secret, either.

But here's some brand-new Warren Buffett insight that's not widely known - and that investors can profit from right now.

During an interview in Toronto earlier this month, Buffett - the so-called "Oracle of Omaha," and the founder of Berkshire Hathaway Inc. (BRK.A, BRK.B) - said he'd made "several hundred million dollars" on the Canadian dollar. And now he wishes now that he'd kept the position because he believes the currency [known as the "Loonie"] will keep getting stronger, especially against the U.S. greenback.

He favors some of the other investment opportunities available north of the U.S. border. And he says that Canada's economy has substantial long-term promise. In this new Money Morning report, we're going to review Buffett's insights, and detail several profit plays for your consideration.

"We owned the Canadian dollar," Buffett told Canada's Financial Post newspaper in a Feb. 6 interview. "We made several hundred million dollars ...  I wish I kept them."

Buffett, Berkshire Hathaway's chairman and chief executive officer, also said that Canada's "oil sands" reserves are a valuable asset - especially in an era where energy prices are destined to escalate - but told his interviewer that he lacked the technical expertise to invest in that sector.

Currently, Buffett owns no outright stakes in Canadian companies, but declined to tell the newspaper whether he was looking any companies over. But several of his more-recent investments have Canadian operations, which he believes will benefit as the Loonie continues to escalate in value against the U.S. greenback.

"I think it is more likely that [the U.S. government] will continue [its] present polices in the U.S. and [that] the Canadian dollar, over time, would strengthen even further," Buffett said in the interview. Buffett was in Toronto to promote the Canadian launch of BusinessWire, a corporate news release company that Berkshire acquired several years ago.

Although Buffett is known mostly as a stock-picker, Berkshire Hathaway did make a big bet against the U.S. dollar several years back. He subsequently unwound the position at a profit, although he believes that this nation's burgeoning budget and trade deficits will continue to push the dollar down against other currencies, including the Canadian dollar.

In the newspaper interview, Buffett said that while Berkshire currently controls no Canada-based companies, many of its U.S.-based holdings have Canadian operations. One of Buffett's most-recent investments - the late-2007 acquisition of a 60% stake in Marmon Holdings Inc. - is just such a play. Marmon Holdings is the kind of easy-to-understand old-line industrial company that for years were Buffett mainstays: The company makes railroad tank cars and intermodal tank containers, specialized metal fasteners, and plumbing pipes and related products. It also operates a crane-leasing subsidiary.

Both the railway-tank-car and crane-leasing businesses do business with the petrochemical industry, including Canadian oil-sands players. The privately held Marmon's yearly revenue is about $7 billion. Berkshire paid about $4.5 billion for the stake.

"I like having earnings [in Canadian dollars.]," Buffett said. "I think those Canadian dollars are very likely, even from this level, to be worth more than the U.S. dollar five or 10 years from now than they are today."

Buffett clearly believes that the Canadian tar sands will help fuel the ongoing advance in the value of the Loonie.

"The world will be using more oil 15 or 20 years from now," Buffett told the newspaper. "We are on a course that cannot be changed. It would surprise me if the world doesn't want to use 100-million barrels a day in 15 or 20 years. [And since there haven't been any major oil-field discoveries in years and] you need some ‘elephant fields,' and we haven't found any elephant fields in the last 15 or 20 years ... the sands are huge."

"Buying Like Buffett" Equals Profits

Of course, when you buy your nickel or potash from Canadian mines, or your wheat and beef from that country's Midwest prairie region, you have to pay for the purchase in Canadian dollars. That means you must first sell your U.S. dollars, or British pounds Sterling, or Chinese Yuan, and then buy Loonies - and oft-repeated process that pushes up the Canadian currency's relative value. And with oil, gold, uranium, wheat and most of the other commodities that Canada has to sell fetching near-record prices, the rest of the world has to pay top dollar for the minerals and energy it buys from Canada.

And even the goods that aren't right now trading at record prices are expected to rise steeply in the months and years to come, Canada is well positioned for the long haul, it appears.

With all those things considered, it's no wonder that a currency that was languishing down around $0.62 to the U.S. dollar back in January 2002 finally reached par in mid-September. After trading up from there, the Canadian dollar has since settled back and is again trading just about at par.
But, as Buffett noted, there are plenty of reasons to be crazy about the Loonie.

According to a recent study, buying what Buffett has bought - even a month after his purchases - is a pathway to superior returns. In fact, over the past three years, this strategy has delivered double the return of the Standard & Poor's 500 Index, according to research by professors at both American University and the University of Nevada at Las Vegas.

Even with that one-month lag, an investor who mimicked the moves of this market master would eclipse the S&P 500 returns by 14.26%, the study concluded. [To read Money Morning's research report on that study, please click here. The report is free of charge].

So if Buffett likes the Loonie, and likes Canada's rich oil sector - especially the oil sands - what are the plays to make now?

We're glad you asked.

We're going to look at three sectors - oil, uranium and soft commodities - with one or more profit plays in each.

And since Buffett is clearly smitten with Canada's so-called "tar sands" oil reserves, we'll start there.

The Three Best Ways to Play Canada's Oil Reserves

Fort McMurray was once a sleepy backwater town. Home to just 1,000 or so residents, there wasn't even a road into town until the 1960s - just a railway. And yet today it's home to 70,000 people and the population is expected to hit 100,000 by the end of the decade. Property there is now more expensive than it is in the suburbs of Canada's major cities.

And it's all because of one thing - oil.

It's long been known that Alberta was home to the largest oil deposits outside the Middle East. The oil is located in the "Peace River" and "Cold Lake" deposits. But it's mostly found in Alberta, where the Athabasca Region is home to approximately 30,000 square miles of the stuff - an odd mix of sand, water and clay that's known as the "oil sands" or "tar sands."

Black and sticky, it only takes you a moment to realize that extraction is the real problem.
When the price of crude oil was low - as it was throughout the 1990s - there wasn't much point in spending the money to draw the oil out of the sands.

But with oil becoming much more expensive in recent years - and with prices expected to continue their upward climb - the tar-sands have become economically relevant and a valuable asset.

In fact, back in 2004, Morgan Stanley (MS) calculated that oil sands returned an average of 18% on capital employed, versus only 15% for conventional North American crude oil.

Why the disparity?

Well, for one thing, although the oil-sands petroleum is harder to refine, it is easier to locate. So exploration costs are low. The Athabasca Oil Sands sit close to the surface, meaning they can be extracted quite easily - moved by enormous trucks to a facility where the sands are converted into synthetic crude oil, which is then shipped to a refinery.

And while the price of crude oil is unlikely to keep rising in a straight line, it is expected to keep rising, and it won't likely fall back to a point where tar sands become uneconomical again. Emerging economies now account for just 15% of global oil demand, but at current growth rates that share will rise to 40% in the next five years - if not sooner.

This demand has made Albertans very wealthy. Oil-sands development returned $1.87 billion to the provincial government in the three fiscal years that ended with the 2005-2006 year, the most recent statistics available. Output reached 966,000 barrels per day in 2005, a figure that is expected to grow to 3 million barrels per day by 2020 if forecasts are correct. Now the government wants a bigger share of the pie.

A recent report recommended a boost in royalties by 20%, or about $2.08 billion a year. That's led to some short-term weakness in tar-sands stocks. But this is a good buying opportunity, says one Calgary-based analyst, who declined to be named.

"I don't think it's going to be that onerous on the companies," the analyst said. "What I think we will see is some short-term weakness. All these companies are still attractively valued."

Firms to look at include Suncor Energy Inc. (SU), which was the first company to commercially develop the oil sands back in 1967. In 2006, production at the oil-sands facility averaged 260,000 barrels per day, but the company expects production of 500,000 to 550,000 barrels per day by 2012.

That makes the forward P/E of 19 seem much more reasonable.

Syncrude Canada Ltd., is the world's biggest producer of crude oil from oil sands. In a joint venture between several firms - including ConocoPhillips (COP) and Imperial Oil Ltd. (IMO) - the largest shareholder is the Canada-listed Canada Oil Sands Trust (COS), with a 36.74% stake.

You could invest in any of the three, although we favor the Canada-listed Oil Sands Trust. The stock closed Friday at $36.90, down 29 cents, or 0.78%.

Syncrude increased output by 40% in July to about 350,000 barrels per day. An upgrade will boost capacity by 50,000 barrels per day in five years, and a final planned expansion will bring production to 500,000 barrels per day in about 10 years, according to securities-researcher Seeking Alpha. The group's bitumen deposits are located close to the surface, meaning they can be mined rather than liquefied, and then pumped up from the ground, a capability that slashes production costs.

Also interesting is Canada-listed Husky Energy Inc. (HSE), Canada's No. 3 oil producer, which last year cut three deals that expanded its business and positioned the firm as a major refiner in the United States' steady Midwest market. Husky also has offshore operations on the East Coast near Newfoundland, where it expects daily output to rise to from the current 110,000 barrels per day to 125,000 barrels per day.

Husky has holdings in the Alberta oil sands, but is much more diversified than its peer companies. Its P/E ratio on current earnings is 10.6.

Earlier this month, Husky announced fourth-quarter net earnings of $1.1 billion, or $1.26 per share, nearly double the profits of $542 million, or 64 cents per share, for the comparable quarter the year before. For all of 2007, Husky said it earned $3.2 billion, or $3.79 per share, up 18% from net earnings of $2.7 billion, or $3.21 a share, for all of 2006.

Given that Buffett mentioned oil sands several times, that's where we've focused our oil-sector plays on that area.

To summarize our Canadian-energy sector investments, here are the profit plays on the oil-sand reserves, plus the two solid alternatives we cited for you in ConocoPhillips (COP) and Imperial Oil Ltd. (IMO). The Top Three picks are:

  • Suncor Energy Inc. (SU).
  • Canada Oil Sands Trust (COS).
  • Husky Energy Inc. (HSE).

Although the Oil Sands Trust and Husky are both Canadian-listed shares, Suncor is a New York Stock Exchange-listed company.

Let's stay in the energy mode and next turn our attention to uranium.

Supply Shortages Make Outlook Bright for Uranium

Of all the commodities to ride the volatile global roller coaster in 2007, uranium had the wildest journey. Overall, it gained 28% for the year.

But that seemingly simple statistic masks a much-more-volatile story: At one point in June, uranium was up 84% for the year. But then a mass sell-off - fueled by a U.S. Department of Energy decision to auction off "surplus" uranium from its inventory - drove prices from the all-time record of $138 a pound down to $75 a pound in just three months.

Uranium prices subsequently rebounded, but have since drifted back a bit. Don't let that deter you. Indeed, view it as a buying opportunity. Uranium's long-term outlook is extremely upbeat. Global energy demands are soaring. Fossil fuels such as coal pose serious pollution problems - and now costs are expected to double. Crude-oil supplies are more limited than most consumers realize.

Ultimately, uranium is going to experience the same upward pricing pressures as petroleum and coal are facing right now. The key reason: Commercial nuclear power is slowly making a comeback as an electricity source of choice in the U.S. market, and will be a key to the ongoing emergence of such economies as China and India.

According to the International Atomic Energy Agency, China has four reactors, but this is expected to grow fivefold by 2020. India has similar expansion plans. Japan wants to increase nuclear power's contribution to its overall electricity supply from 30% now to 40% by 2016.

"Between now and 2011 we have to come up with 100 million pounds of uranium inventory, and it's not clear we have 100 million pounds," Raymond Goldie of Toronto-based Salman Partners told MoneyWeek in August. 

A key provider is the Cigar Lake mine, the world's second-largest uranium depository. Discovered in 1983, it is located about 400 miles north of Saskatoon, Saskatchewan. It had been expected to supply 18 million tons of uranium a year, or 17% of world production, by 2008. However, severe flooding in 2006 put those plans on the back burner, affecting other companies with operations at the mine, including French giant Areva.

The mine is operated by Cameco Corp. (CCJ). Cameco's share price has understandably suffered from the delays, and is currently trading about 35% below its 52-week high of $56. But anyone buying into the uranium rebound should also buy into Cameco - in modest incremental amounts. Despite its problems at the Cigar Lake site, Cameco remains the world's largest - and most-liquid - uranium miner, and is vital to the global supply.

The shares closed Friday at $36.22. On Thursday, RBC Capital Markets lifted its rating on the stock to "Outperform" from "Sector Perform." The stock hit its 12-month high in June and set its 52-week low of $30.78 in January.

RBC Capital Markets analyst H. Fraser Phillips upgraded Cameco's stock because of the drop in the company's share price, the stabilization of uranium prices in the marketplace and a belief that with price of the so-called "yellow cake" still well below its high, the company may be looking to expand through acquisitions.

"Diversification of production sources through an acquisition would be a positive, though shareholder dilution is a risk," Phillips wrote in an investment note to clients.

Phillips said his research shows that uranium supplies remain tight, meaning prices will escalate this year. Cameco also appears to be recovering well from the flood at Cigar Lake, and some other issues. The low stock price already has factored in all the bad news, Phillips says, which is why he now has a target price of $48 on the shares.

From Friday's close, that would represent a gain of 33%.

Analysts at Credit Suisse Group (CS) earlier this month reiterated their "Outperform" rating on Cameco's shares, but reduced the target price from $59.54 to $54.58. Even that reduced target price would represent a gain of 51% from Friday's close.

  • In summary, the one profit play to make on Canada's strength in the global uranium market is Cameco Corp. (CCJ).

Canada's not just a world player in the energy realm - it also has a strong presence in base metals and commodities. And if there's one sector that's certain to see significant growth in the decade to come as such overseas markets as mainland China continue to make the shift from emerging economy to capitalist powerhouse, that sector would be agriculture.

Let's take a look.

Agricultural Commodities

Times were that the prices paid for such grains as wheat and corn were reasonably stable. One year there'd be a bumper crop, and then the next year there would be a ruinous drought.  But farmers discovered how to smooth out that gut-wrenching ebb-and-flow: They would prepare for the bad years by storing the excess harvest from the good years. And that would smooth out prices.

Unfortunately, the "China Factor," as well as the surging demand for such eco-friendly fuels as ethanol, has blown that theory apart.

Three years ago, it cost $23 a ton to ship canola edible oil - from Vancouver to Shanghai. By the end of last year, the price tag for that service was $103. Demand for grains has soared, in large part, because of the expanding appetites of the also-expanding Asian middle class - with a major assist from the biofuels craze.

Consider this rundown on the commodities markets from a Money Morning story from Friday.

  • Wheat futures hit a record of $11.53 a bushel on Feb. 11, but have since fallen below $9.80. However, analysts are saying this is just a pullback, as wheat's price doubled last year.
  • Soybean futures hit a record of $13.745 a bushel on Feb. 8. Overall, they gained 72% last year.
  • The average January 2008 price for cotton (74.33 cents a pound) was the crop's highest in 46 months.
  • Corn futures are at $5.07 a bushel as of Thursday, their highest levels since 1996. 

"We're in something like a gold boom [but it's a] a wool boom" - a boom in agricultural commodities, Brett Stevenson, a forecaster for AgRisk, told Australia's ABC News. "We're in extraordinary territory."

But Canadians aren't in any danger of going hungry. Canada is the world's second-largest wheat exporter, and is expected to harvest 20.64 million metric tons this year, 1.6% more than the 20.32 million metric tons estimated in July, a survey of farmers by Statistics Canada recently showed.

That's good news for the Canadian-listed Saskatchewan Wheat Pool (VT). It's now the biggest grain handler in the Canadian West, with a 42% market share after the purchase of Agricore United in June.

Saskatchewan Wheat's business stretches across the country, from a livestock business in Manitoba to retail outlets in British Columbia. The valuation has become a bit frothy of late, with a forward P/E ratio of 19. But if the Canadian Wheat Board monopoly is dismantled, as is currently being discussed in Ottawa, the grain-handling volumes of Saskatchewan Wheat could jump as a consequence.

Saskatchewan Wheat also has an agri-products arm, selling fertilizer, feed and other products to more than 50,000 farmers. With the boom in soft commodities leaving farmers flush with the cash to invest in their farms, that side of the business is performing well right now, analysts say. And while the ethanol story might only be sustainable for as long as the U.S. government feels like propping it up with subsidies, Asian consumers won't be excusing themselves from the global dining-room table anytime soon, meaning that boom likely has quite a long way to run.
Famed commodities guru Jim Rogers - who predicted the global commodities boom we're experiencing more than a decade ago - recently conveyed his views to Yahoo! Finance.
The bottom line: Rogers is backing away from precious metals right now, mainly because he fears the U.S. economy is headed for a recession.

"If the largest economy in the world goes into a recession, that's going to affect people. That's going to affect the demand of everything. So I'm not sure I would buy metals right now."
However, he's "buying agriculture as we speak."

"Buying agriculture" is trading-floor parlance for investing in farming commodities.

"As other parts of the world grow, they like to eat more," Rogers said. "There are 3 billion people in Asia. That's billion with a ‘B.' In America, we have 300 million. There are 10 times as many people over there, so I see good things happening in agriculture." [To see how you can obtain a free copy of Jim Rogers' just-released bestseller, "A Bull in China: Investing Profitably in the World's Greatest Market," please click here.]

But how does one invest in agriculture? With gold, you can buy coins, or bullion. But the typical individual investor can't buy a bushel of corn or soybeans, and then find a nice dry and safe place to store the grains and wait as they appreciate. After all, that bushel basket would probably clash with the latest Longaberger gift set that adorns the Ethan Allen coffee table - though it might do well with the authentic Colonial desk that sits against the wall.

Fret not, however.

Deutsche Bank's PowerShares Agriculture Fund (DBA) is intended to reflect the performance of four commodities in the agriculture sector - soybeans (31.13%), wheat (28.87%), corn (23.43%) and sugar (16.58%). These include some of the key commodity plays that Rogers advocates.

Another is Van Eck's recently launched Market Vectors Agribusiness ETF (MOO). Like the PowerShares Fund, this reflects the agriculture industry, albeit in a different way. Instead, the ETF's holdings reflect returns seen from agriculture chemicals (34%), agriproduct operations (33.5%), agriculture equipment (24.3%), livestock operations (5.6%) and ethanol/biodiesel (2.3%).

    • To summarize, to profit from Canada's farming-commodity boom, the three plays to make are:

There's a clear double-barrel benefit here - not only would Warren Buffett approve, "Adventure Capitalist" Jim Rogers would clearly do so, too.

    • Money Morning editors Martin Hutchinson, Mike Caggeso and Jason Simpkins contributed to this article.


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About the Author

Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.

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