Opportunity in U.S. worth risk, says Bain

(Business Edge writer David Hatton profiles the top stock picks of some of Canada's most accomplished investment pros.)

FEATURED PRO: Daniel Bain is president and chief investment officer of Toronto-based Thornmark Asset Management (www.thornmark.com).

Bain has managed both the Thornmark Dividend & Income Fund and the Thornmark Enhanced Equity Fund since their inception in 1998.

Fund Form: As of Sept. 30, 2007, the Thornmark Enhanced Equity Fund has posted one-year returns of 18.41 per cent and a 27.03 per cent average over three years. The Thornmark Dividend & Income Fund has had a one-year return of 7.78 per cent and three-year return of 17.86 per cent, compared with a group average of 9.10 per cent.

Daniel Bain

Management Expense Ratio: Thornmark Enhanced Equity Fund, 3.68 per cent; Thornmark Dividend & Income Fund, 2.43 per cent.

Bain's Strategy: "We had been at zero U.S. equity allocation for the past few years. We had an active or tactical asset allocation mandate that is based on factors like country allocation, asset allocation (and) sector allocation. When we go into the U.S. market, we will only take on risk based on a disciplined, proactive approach. With the recent appreciation of the Canadian dollar and the rate of (its) appreciation, we do not feel it is sustainable, but there is still lots of opportunity there. We will be moving into the U.S. market, which means increasing our currency allocation to about five or ten per cent. It should bring in very strong returns over the next few months."

First Star

* Altius Minerals Corp. (TSX:ALS)

* Recent Price: $30.06

* 52-Week Range: $30.40 (10/15) - $6.75 (10/23)

* Snapshot: Holding and exploration company that looks at mineral properties for possible development.

* CEO: Brian Dalton

* Head Office: St. John's, Nfld

* Vital Stats: Price/Earnings Ratio (trailing 12 months), 10.20; Revenue (last fiscal year), $7.1 million (compared with $538,798 in fiscal '06); Earnings Per Share (ttm), 2.96; Market Cap, $841 million.

* Bain's View: "Over the past 10 years, ALS has evolved from a minerals exploration company into a venture sponsor and holdco. Their investment philosophy has always been to look for opportunities in sectors where years of oversupply have led to a period of underinvestment, culminating in tighter market conditions and thereby expanding the opportunity for new operations. The company holds 37 per cent interest in Newfoundland and Labrador Refining Corp. (NLRC). If permits are granted it is expected that ALS's NLRC stake will be reduced to around 10 per cent, which could provide in excess of $20 per ALS share. NLRC construction is expected to begin at the same time as their IPO in the spring of 2008, with production around 2011. Last January, Irving Oil announced the commencement of the environmental permitting phase of a 300,000 bpd refinery near St. John, N.B. The market can absorb both projects and NLRC has first mover advantage."

* Risk Rating: High

* Web Watch: www.altiusminerals.com

Second Star

* ZCL Composites Inc. (TSX:ZCL)

* Recent Price: $12.60

* 52-Week Range: $15.55 (04/20) - $7.35 (10/23)

* Snapshot: ZCL is a leading provider of liquid containment services in Canada and the U.S. The company specializes in manufacturing fiberglass underground storage tanks and is a leading player in traditional retail petroleum (gas station) markets. This stable channel accounts for the bulk of the company's revenue, but it is also active in developing new markets. Areas of notable interest include above-ground storage tanks in the upstream oil and gas industry, home heating-fuel tanks and tank liners. They also have the ability to retrofit existing tanks with a proprietary tank lining product that meets stringent new U.S. environmental regulations.

* CEO: Ven Coté

* Head Office: Edmonton

* Vital Stats: Price/Earnings Ratio (ttm), 54.80; Revenue (last fiscal year), $46.16 million; Earnings Per Share (ttm), 0.23; Market Cap, $335 million.

* Bain's View: "The only reason they are not considered low (risk) is because they are subject to any sort of a lull in activity in the Canadian oil and gas markets. There is, however, immense opportunity. We believe earnings should increase by about 50 per cent in 2008. I think a multiple of 25 times earnings for a company like that is reasonable. There are a number of environmental regulations that call for double-lining of these storage tanks, and if you look at the price of metals there should be a transition from all-steel to fiberglass being used in these tanks. The fiberglass can be injected inside the steel or concrete to create the second lining."

* Risk Rating: Medium

* Web Watch: www.zcl.com

Third Star

* Breakwater Resources Ltd. (TSX:BWR)

* Recent Price: $3.23

* 52-Week Range: $3.69 (07/12) - $1.25 (10/24)

* Snapshot: Breakwater is a profitable, Canadian-based mid-tier zinc producer with four wholly owned mines located in Canada, Honduras and Chile.

Bain calls it one of the few pure-play ways left in Canada to invest in zinc.

* Vital Stats: Price/Earnings Ratio, 7.20 (ttm); Gross Sales Revenue Cdn$452.2 million (last fiscal year); Earnings Per Share, 0.37; Market Cap, $1.1 billion.

* CEO: George Pirie

* Head Office: Toronto

* Bain's View: "It's a great business with regards to its fundamentals. (Breakwater) recently announced a substantial reserve increase at its El Toqui mine in Chile. The company boosted proven and probable reserves by 37 per cent, and assuming the current 500,000 ton per-year output, El Toqui's reserve life has been extended from 4.5 years to almost nine years with future upside. The company has also commenced a pre-feasibility study looking into doubling the size of the mill and increasing production to one million tons per year. There is speculation that Breakwater will be taken out in the near term by perhaps HBM (HudBay Minerals). However, management is eager to string together an acquisition prior to what they think is an imminent takeout. Breakwater has cashflow for an acquisition and will likely look at private companies to build on reserve base."

* Risk Rating: Medium-high

* Web Watch: www.breakwater.ca NOTE: This feature is provided for informational purposes. Investors are advised to do their own research or consult a qualified investment professional before making investment decisions.

(David Hatton can be reached at hatton@businessedge.ca)