Update on Orleans Energy (OEX: TSX)

The following is a summary of a BMO Capital Markets research update on Orleans Energy (OEX: TSX), dated September 25, 2008.




- Company remains on track with its exit guidance forecast – which is between 4,500 and 4,600 boe/d. Production for the full year is expected to be more than 4,000 boe/d (averaged 3,902 boe/d for H1/08)

- Orleans plans to drill 18 wells in 2008 and has already drilled 11 of 18 to date

- Capital spending budget of $57 million, but could be a bit higher



- In the Kaybob (Montney) area, management has been able to grow production from 83 boe/d in Jan/07 to a current rate of ~2,800 boe/d with only 12 wells. Orleans has 27.5 sections (25.0 net) in the area but only 6 of these sections were booked in the company’s 2007 reserve report. The company has a 50+ well drilling inventory on spacing of three wells per section. Furthermore, Porteous writes “Other operators have applied for reduced spacing of five wells per sections, which if granted for Orleans would bring its drilling inventory to more than 100 locations.” Total costs of these wells are ~ $3.2 million.



- With regards to the Gordondale light oil play, Porteous opines “Given that Gordondale also presents fairly strong economics at relatively low risk, the area is expected to become a larger part of Orleans’ capital program in 2009.” At Gordondale, Orleans is looking at Boundary Lake light oil (40º API) across 20 sections, with significant infill drilling potential. Presently, there are 9 producing wells in the Boundary Lake oil pool, producing approximately 250 boe/d. Analog oil pools in the area have been developed on 40 acre spacing and have responded well to waterflood. Gordondale is a multi-prospect area (Dunvegan, Gething, Cadomin, Halfway, Doig and Montney). Orleans has a 25 well drilling inventory, under 160 acre spacing. If 40 – 80 acre spacing were instituited, there would be a significant increase in the drilling inventory however, Porteous notes that “downspacing to these levels would require regulatory approval.”

- Orleans currently has about 130–145 primary drilling locations, providing it with a multi year inventory. Moreover, the company has another “130–200 secondary locations, which are generally lower risk, as these are largely infill locations.” Orleans estimates total net un-risked production from primary locations to be ~ 18,000 boe/d.

- Porteous forecasts production of 4,100 boe/d in 2008 and 5,150 boe/d in 2009, resulting in CFPA estimates of $1.08 in 2008 and $1.17 in 2009. That would mean Orleans currently trades at 2.8x multiple of 2009E CFPS and 3.4x EV/EBITDA. While Orleans 2009E CFPA multiple is currently in line with peers its and 3.4x EV/EBITDA multiple is below its peer group. As a result, Porteous writes “We believe current valuations do not fully reflect the company’s strong production growth expectations, or its high-impact plays at Kaybob and Gordondale. Our target price of $6.25 implies 5.3x 2009E P/CFPS. ”

Possible M&A Targets for Kinross, Yamana and Agnico Eagle Mines

The following research is a summary of a Blackmont Capital report entitled ‘The Stage is Set for M&A in the Gold and Silver Sector’ that was published on September 22, 2008.

Kinross Gold (K: TSX)



Rationale: Kinross is needing of production in 2010 to make up for potential shortfalls in production between 2009 and the start up of Fruta Del Norte in 2012. Kinross currently has a strong presence in Russia, USA and South America Chile, Brazil, Ecuador)). Despite the recent Aurelian transaction, Gray “expects(s) Kinross to continue to aggressively pursue acquisitions.”

1. Andina Minerals (ADM: TSX) – by acquiring Andina Minerals, Kinross would come into control of the Volcan project, a low grade 9.4 million ounce resource that is located 23 kilometres from Kinross’ operating Maricunga mine. Additionally, a quite a few members Andina’s management team were part of the management team at TVX Gold, which was acquired by Kinross in 2003.

2. Jaguar Mining (JAG: TSX) – having existing operations in Brazil at Paracatu and Crixas, the acquisition of Jaguar Mining would provide Jaguar with a near term boost in production, an incumbent operating team and a collection of assets in a politically benign region, offsetting the Russian and Ecuadorian risk.

3. Victoria Gold (VIT: TSX) – Victoria’s high quality exploration targets in Nevada would provide a nice counter balance to Kinross’ Russian and Ecuadorian risk and furthermore, Kinross already own 26% of Victoria Gold.

Agnico-Eagle Mines (AEM: TSX)



Rationale: Agnico-Eagle does not really need any acquisitions but the current market might afford it some “tuck-in acquisition using cash in areas in which they are already operating.” Agnico-Eagle currently has a strong presence in Quebec, Nunavut, Mexico and Finland. With a slate of projects coming online in 2009 and 2010, Agnico-Eagle might want to look for assets to augment its impressive growth pipeline beyond 2010 and into 2011.

1. Osisko Exploration (OSK: TSX) - the acquisition of Osisko, would provide Agnico-Eagle with a large 8.4 million ounce deposit in mining friendly Quebec. Something of note, Osisko recently sold 8 million shares to a “strategic investor.”

2. Comaplex Minerals (CMF: TSX-V) - Comaplex’s high grade (7.9 g/t) Meliadine West project in Nunavut has the potential for synergies with Agnico-Eagle’s Meadowbank project. Moreover, Agnico-Eagle already owns 15.6% of Comaplex Minerals.

3. Detour Gold (DGC: TSX) – the acquisition of Detour Gold, would provide Agnico-Eagle with a 13.2 million ounce deposit in politically benign Ontario, Canada. With a possible start up by 2012, the only hindrance in Agnico-Eagle’s path would be Detour’s largest shareholder, PDX Resources (PDX: TSX) that current owns about 40% of Detour.

Yamana Gold (YRI: TSX)



Rationale: Yamana does not really need any acquisitions, in fact it has publicly stated that it focussed on organic growth but the current market might afford it some “tuck-in acquisition using cash in areas in which they are already operating.” The company has a strong presence in Brazil, Argentina, Chile and Mexico.

1. Andean Resources (AND: TSX) – Andean’s Cerro Negro project in Argentina has the grade (15.8g/t) that makes it an attractive target and Yamana is already building the Gualcamayo mine in southern Argentina and still has the Esquel project that remains stalled.

2. Exeter Resource (XRC: TSX-V) – recent drill results from Exeter’s Cerro Moro project in Argentina have demonstrated bonanza type grades that make it an attractive target for many a suitor, much like Andean Resources.

3. Carpathian Gold (CPN: TSX) – Carpathian’s Riacho dos Machados project, which is located in brazil and has a historic resource of 560,000 oz has the potential to be put into production within 2 years, while the company’s Romanian assets can be sold or optioned. Furthermore, Dino Titaro, the CEO of Carpathian Gold sits on Yamana’s board of directors.

Possible M&A Candidates for Barrick Gold, Newmont Mining and Goldcorp

The following research is a summary of a Blackmont Capital report entitled ‘The Stage is Set for M&A in the Gold and Silver Sector’ that was published on September 22, 2008.

Barrick Gold (ABX: TSX)



Rationale: Barrick requires large near term projects that might aid it in maintaining its current levels of production, which total 7.83 million ounces in 2008. Barrick currently has a strong presence in Nevada, Australia, Peru, Chile and Argentina. The company has the “balance sheet, cash flow and multiple to buy virtually anything they want. Kinross makes the most sense as it allows them to wait until Ecuador mining law is passed.”

1. Kinross Gold (K: TSX) – by acquiring Kinross Gold, which itself is currently in the process of acquiring Aurelian Resources (ARU: TSX) Barrick could increase its growth profile through large projects such as Kupol in Russia, Paracatu in Brazil and now Aurelian’s Fruta Del Norte (FDN) project in Ecuador. Barrick is already familiar with workings in Russia though its 34% ownership stake in Highland Gold Mining, which is Russia’s fourth largest gold producer. Additionally, Barrick could further consolidate ownership of the Round Mountain and Cerro Casale projects, both of which are currently joint ventures with Kinross Gold. Lastly, acquiring Kinross would allow Kinross CEO Tye Burt to take over the empty CEO spot at Barrick.

2. Detour Gold (DGC: TSX) – the acquisition of Detour Gold, would provide Barrick with a 13.2 million ounce deposit in politically benign Ontario, Canada. With a possible start up by 2012, the only hindrance in Barrick’s path would be Detour’s largest shareholder, PDX Resources (PDX: TSX) that current owns about 40% of Detour.

3. Silver Standard Resources (SSO: TSX) – the interest in Silver Standard Resources would stem from the company’s world class Pitarrilla project in Mexico, the potentially large Snowfield gold project in British Columbia and the high grade San Luis project in Peru. A suitable strategy for Barrick would be to keep the gold projects while divesting the silver projects together with Pascua Lama.

Newmont Mining (NEM: NYSE)



Rationale: Newmont requires large near term projects that might aid it in maintaining its current levels of production, which total 5.15 million ounces in 2008. Newmont currently has a strong presence in Nevada, Australia, Peru, West Africa and Canadian North. Since some of Newmont’s “largest projects carry high political risk so the acquisition of Yamana or Osisko is likely the safer bet.”

1. Yamana Gold (YRI: TSX) - the acquisition of Yamana would add growth with low political risk through large, low cost projects such as El Penon, which is located in Chile and Chapada, which is located in Brazil. The difference in multiples, according to analyst Richard Gray, “(NEM at 1.5x NAV and 15x CF; YRI at 0.8x NAV and 7x CF) would make this a highly accretive acquisition for Newmont.”

2. Osisko Exploration (OSK: TSX) - the acquisition of Osisko, would provide Newmont with a large 8.4 million ounce deposit in mining friendly Quebec. Something of note, Osisko recently sold 8 million shares to a “strategic investor.”

3. Gabriel Resources (GBU: TSX) – with the upcoming national elections in Romania, victory for the right candidate might provide the green light for the development of the Rosia Montana project, that boasts 14.6 million ounces of gold. Not only does Newmont already own 19.9% of Gabriel but on a valuation basis, this acquisition would be “massively accretive on EV/oz basis.”

Goldcorp (G: TSX)

Rationale: Goldorp is in the need of longer term production to add to its current growth profile. The company has a strong presence in Canada and Mexico.



1. Agnico Eagle Mines (AEM: TSX) – a Barrick-Kinross or Newmont-Yamana combination might necessitate Goldcorp to become large as well. Agnico-Eagle is a logical candidate as both companies have primarily North American asset bases, similar management styles and a marriage between the two, would result in a “top quality, blue chip senior producer.”

2. Terrane Metals (TRX: TSX-V) – Goldcorp has provided Terrane with a $40 million loan that can be converted to a 58% interest in the Mt. Milligan copper-gold project in central British Columbia. Mt. Milligan has a measured and indicated mineral resource of 590.8 million tonnes averaging 0.193% Cu and 0.352 g/t Au containing 2.52 billion lb copper and 6.70 million oz gold. The proven and probable mineral reserve totals 333.7 million tonnes averaging 0.217% Cu and 0.428 g/t Au containing 1.60 billion lb copper and 4.59 million oz gold. Gray calculates that the massive cap-ex requirements of the Mt. Milligan being approximately $917 million works out to only 7 months of cash flow for Goldcorp.

3. Canplats Resources (CPQ: TSX) – with recent drill results suggesting that Canplats’ Camino Rojo project in Mexico (which incidentally is located 50 km from Goldcorp’s Penasquito project) is “shaping up to be at least comparable to Penasquito in terms of foot print and grade,” it would make sense for Goldcorp to acquire Canplats.

Macro Market Comment

Video Market Comment from the team at Marquest Asset Management - Gerry Brockelsby and Andrew Cook - dating September 18, 2008






"The conclusion of our comments on this video, are that we are in need of a comprehensive global solution to the financial crisis. This process is now underway. As a result, equity markets began rallying late Thursday and continued to rally strongly today. While the details of this rescue package are yet to be defined, the concept of a Resolution Trust Corp., to buy all of the illiquid assets from the financial industry, is a key ingredient to instill confidence in the capital markets. As witnessed by the strong rally in the equity markets today there is a huge amount of liquidity sitting on the sidelines that will return to the equity markets once confidence has been restored. As a result of these actions by the U.S. monetary authorities, we began to reinvest some of our large cash reserves in the belief that this is precisely the type of policy actions that are required. We expect that it will alleviate the pressures that the equity markets have been under for several weeks and return investors’ focus back to the fundamentals." - September 19, 2008

Oil - International Explorers and Producers

The following summary is from an RBC Capital Markets report dated September 16, 2008



RBC Capital Markets analysts Al Stanton and Nathan Piper have cut their 2008 WTI price forecast from US$120/bbl to US$105/bbl, however, they maintain their 2009 and 2010 oil price forecasts of US$90/bbl and US$85/bbl, respectively. Both analysts also expect UK gas prices to remain high through the winter, before falling back with the oil price. They note that the rapidly escalating US dollar – “the rapid swing from US$2.00/£ and parity with the Canadian dollar” has markedly increased the valuations of a number of international producers and explorers.

Assessing the current environment, Stanton and Piper see a trend emerging where “Undervalued and under-financed companies” fall victim to larger, well financed companies.

Among the developers, many of which have been plagued by development delays and funding shortfalls, the following stocks look primed to benefit from an increase in production and cash flow: “Niko Resources (D6 oil and fields offshore eastern India), Ithaca Energy (Jacky in the UK), Coastal Energy (Songkhla offshore Thailand) and JKX (Souyz pipeline tie-in in Ukraine).”

Among the explorers, Stanton and Piper highlight the following stocks “Tullow Oil is undertaking drilling campaigns in Uganda and Ghana that have the potential to transform the company's valuation. In the UK, Sterling Resources is drilling the Breagh East structure, which has the potential to be the largest gas discovery to made in the UK for a number of years, and Oilexco will appraise its high-profile Huntington oil field.”

Stanton and Piper find that international midcap oils are being valued at “an average discount to NAV of 33% and the small cap oils are trading at a 50% discount.” Following the sector’s slump, Stanton and Piper believe that M&A should pick up and “focused, deeply discounted, stocks such as Ithaca Energy, SOCO International, DNO International, Antrim Energy and Gulf Keystone, could be vulnerable to unsolicited approaches.”

Moving along, Stanton and Piper outline 3 ‘what next’ scenarios –

Base Case: "Keep the Faith for 12 months" (60% probability) Not unlike 2005/2006, the analysts foresee the sector to decline with the oil price over the remainder of 2008 and perhaps into Q1/09, while the oil price recovers through 2009, Stanton and Piper anticipate the E&P sector to remain weak at the outset but eventually recover with the commodity price. While the price of oil is down well from its peak but above historic norms, in contrast to 1998, cash flows and balance sheets are predominantly robust. This scenario assumes oil bottoms around US$85/bbl.

Scenario 2: "Short term (3 month) pain for near term gain (within 12 months)” (35% probability) The sector continues to follow the oil price and investors keep the faith that oil prices will remain above historic norms like in 2006/2007. With the international E&P sector having undergone a severe correction and hovering nears its lows, a year end rally should carry it into 2009. This scenario assumes that the worst of the correction is over and oil bottoms at around US$100/bbl.

Scenario 3: "Unloved, disconnect with any oil price recovery for over 12 months" (5% probability) Between 1999 and 2001, the oil price was low in absolute and relative terms, causing investors to desert the sector. While interest was slow to return, it was “Cairn Energy's (CNE.L) billion barrel success in 2004 that really ignited the sector again. Industry replaces equity investors and M&A activity increases materially.” This scenario assumes a prolonged global slowdown with oil prices sub-US$70/bbl.

So How Should Investors Position Themselves?

In the near term, Stanton and Piper believe that investors should focus on companies that are actively drilling, able to deliver material news flow and potentially outperform. Stanton and Piper pinpoint these companies to be “Tullow Oil, Coastal Energy, Oilexco and Niko Resources.”

As the oil price stabilizes, Stanton and Piper would look to “cashflow/production focused stocks like Addax Petroleum, Oilexco, Gulfsands Petroleum, JKX Oil & Gas, which should lead the rally when the macro environment improves.”

In the intermediate term (in scenario 3), Stanton and Piper are interested in smaller companies that might get taken out but larger players. Stanton and Piper focus on companies that have significant takes in significant projects, such as “Ithaca Energy, SOCO International, Oilexco, Antrim Energy and Coastal Energy.”

Macro Market Comment

"The point is that—whether we bottom in the next month, three months or longer—this far into a bear market is NOT the time to be pulling capital out of the market; rather, it is the time to be committing more capital (in stages) to the market.

The key point being that bear market bottoms cannot be put in while the majority of central banks are in a tightening stance. Recent developments with oil and the financial system should allow most central banks around the world to move rapidly to an easing stance, and probably to embark on dramatic easing campaigns by the end of the year (and hopefully sooner!)

One point to make is that sentiment and many contrary indicators are at extreme levels, which should be supportive of the ability to put in a bottom. For example, the Investor’s Intelligence Sentiment survey hit an 18-year low in bullishness last week, giving it an even lower number of bulls than in October of 2002 (which was the scary bottom of that horrendous bear market.) Also, the Put-Call Ratio hit 1.40 on September 15th, the same level it hit at the bottom in March. The VIX (a measure of fear in the markets) also hit levels only seen three times since the second half of 2002.

There is certainly a possibility that the conditions are already in place for a market bottom within a few percent of where we are today. But my best guess is that there is another 10% downside in the overall indices before we finally get a lasting bottom. The thing is, the way things are unfolding, it looks like that 10% will be viciously swift, probably being over by the end of October, further reinforcing my belief that we are too far into this bear market to be pulling money out of the market; it is the time to (as we gasp and cringe in horror) to be staging more money IN."


- Comments by Hugh Cleland, Portfolio Manager of the Northern Rivers Innovation Fund LP and Northern Rivers Innovation RSP Fund in his most recent letter to investors dated September 17, 2008. The Northern Rivers Innovation Fund LP was down 8.17% in August 2008, and the Northern Rivers Innovation RSP Fund was down 10.25%. However, the Northern Rivers Innovation Fund LP has averaged annual returns of 22.04% since inception on May 8, 2001 and average annual returns of 18.70% over a 5 year period.

Agricultural Commodities - Potash

The following slides and captions are excerpted from a PotashCorp Market Analysis Report that was released on August 29, 2008. The entire report can be found at this link



Global grain production is expected to increase by 4.3% this year, compared to a growth rate of around 1% since the beginning of the decade.



In August, USDA estimated world grains ending stocks-to-use ratio for the 2008/09 crop year at 16.1%, less than two months of supply and the second lowest level on record. This is up marginally from the record-low 15.6% in 2007/08, but down from the 30% stocks-to-use ratio estimated at the beginning of the decade.



China’s corn yields are roughly half of those in the US, while its soybean yields are at 60%. These are crops essential for feeding livestock for the pork, beef and poultry industries. Yields of rice in India – where it is a staple crop – are half of US levels, while corn and soybean yields are even lower. Brazil’s soybean yields are closer to those in the US, thanks largely to a focus on this key crop and an excellent climate.



The higher cost of crop nutrients has had little impact on demand for those nutrients. Since 2005, US crop revenues are up two-to-threefold, with record farm prices forecast in 2008 for corn ($5.50), soybeans ($12.50) and wheat ($7.50). With higher crop prices, farmers are investing in fertilizer to maximize yields.



Recognizing that without sufficient potash they cannot raise their yields – no matter how much N and P they apply – farmers have raised their potash consumption an average 5.6% per year for the past five years. This compares to 2.7% for N fertilizer and 3.8% for P.Over the past five-year period cumulative world fertilizer growth has been greater than adding a market the size of the US or India, the second and third largest fertilizer markets.



Potash is used on a diverse group of agricultural commodities. Wheat, rice, corn, soybeans and sugar cane consume roughly 50% of the world’s potash. This diversity means that global potash demand is not highly dependent on the market fundamentals for any single crop or growing region. US use of corn for ethanol has grown in recent years but this segment of market accounts for only 2% of world potash consumption.



Since the beginning of 2000, global potash demand has grown by 40%, or almost 16 million tonnes. About 90% of that growth has come from Asia and Latin America. Over the same period, new capacity has increased by only 7 million tonnes, eroding excess capacity within the industry by 2007. While prices have risen sharply, so have project and infrastructure costs. Long production lead times and shortages of both industry expertise and specialized equipment make a timely supply response difficult.



The global potash industry is operating at historically high rates to meet the significant growth in potash demand. With the industry running at or near full capability, world production in 2008 is expected to be limited to an increase of only 2.0-2.5%. This is well below the 5.6% demand growth rate of the past 5 years, and the 4.6% demand growth rate estimated for the first half of 2008.



North American potash producer inventories "fell to 825,000 tonnes as at the end of August 2008, which is the lowest ever on record. Ending potash inventories were 40% below the 5-year average, 33% below August 2007 levels and 21% below July 2008 levels." (RBC Capital Markets Comment dated September 16, 2008) RBC Capital Markets analyst Fai Lee further notes that recent visitors to the Port of Vancouver and the Belarusian Potash Company have reportedly "empty" warehouses. Hence, given teh tight supplies and strong demand, Lee expects "potash prices to remain at elevated levels". Lee has an Outperform rating on PotashCorp (POT: TSX, POT: NYSE) and Agrium (AGU: TSX, AGU: NYSE).

Don Coxe - The Fallout From the Fall of Fan & Fred

Don Coxe - The Fallout From the Fall of Fan & Fred

An epilogue to Don Coxe's Basic Points



Click here to download the 2 page commentary entitled The Fallout From the Fall of Fan & Fred

Ceres Global Ag Corp. (CRP: TSX)

Quoteworthy

"China accounted for 30% of global expansion in 2007, while India accounted for 11%. A blip in these growth stories is enough to correct the theory of a commodity super cycle, but a few facts need to be assessed. The world is adding 73 million mouths each year, yet arable land is running short. The U.S. - the superpower of grain production - aims to divert 20% of its output to biofuels. China is paving over its most fertile acres in the East, and appears set to adopt wide adaption GMOs in their quest for yield enhancement from their arable lands. The Russians have put an embargo on grain exports, and Brazil has quashed any private investment in its potash reserves. Asian countries with a combined population of over 2.5 billion people are rapidly moving up the food ladder, switching to an animal-protein diet like the Japanese before them. It takes 8.3 grams of animal feed to produce a 1g weight gain in cattle. Deeply alarmed, the United Nations has contemplated rationing food aid to poor countries giving credence to the fact that a crop failure would lead to famine. There is no question that fuel technology has now made oil and grains interchangeable for the first time, but this cuts both ways for investors. As things stand, if oil slides, so will the Agriculture commodities, and they in turn may take down the rest through the indexing effect. In the final analysis, it is a trade and fundamentals take a back step in such times."

In their monthly commentary for September 2008, Prakash Hariharan/Jason Gould of Ceres Global Ag Corp. (CRP: TSX) reflect on the roughly 30% decline in Potash Corp, Mosaic, Monsanto and Yara in the month of August (2008), resulting in the benchmark Agriculture Indices (MOO) to fall by 12% in a single month. In contrast, the financial sector posted gains that summarized a re-pricing of idiosyncratic risk. Merrill Lynch was up 20%, and financial stocks like Wachovia, HSBC and their ilk posted similar gains. This dynamic may have changed in the last few days, expecially with respect to the financial stocks but Hariharan and Jason Gould remain affixed to their conviction in the Agriculture story.

Ceres Global Ag Corp. (CRP: TSX) is a publicly listed investment company that represents an opportunity to invest in global public and non public agricultural related equities, farmland, biofuels, carbon emission credits, agriculture commodities and other agriculture investments .

Buy, Sell or Hold Silver Wheaton (SLW: TSX, SLW: NYSE)

The following is a summary of a BMO Capital Markets initiation report on Silver Wheaton dated September 18, 2008



Overview

Silver Wheaton is the largest public mining company with 100% of its operating revenue from silver production. The company has entered into purchase agreements for all or part of silver production from 9 operating mines and development projects. These agreements usually entail an upfront payment and a notional silver price per ounce “(generally US$3.90/oz with provisions for inflationary adjustments).” This strategy provides investors with exposure to the price of the metal without the capital and operating costs associated with mining companies.

Growth Prospects

BMO analyst David Haughton estimates Silver Wheaton to approximately double its silver sales by 2011. As per the Silver Wheaton website, the company expects “based upon its current contracts, to have silver sales of between 13 million and 15 million ounces in 2008, increasing to 19 million ounces in 2009 and 25 million ounces in 2010, without any capital expenditures being required to generate that growth.” Haughton expects Silver Wheaton’s near term grow to come from “Penasquito, the expansion at Luismin, the ramp up of Campo Morado, La Negra and Rosemont.”

Valuation and Target Price

Haughton initiated coverage on Silver Wheaton with an Outperform and a US$12.00/sh target price. Haughton US$12.00/sh target price is based on “1.0x to the 0% NPV, 2.7x
using an 8% discount rate and 22x to the three year average EV/EBITDA at spot silver prices of US$10.70/oz.” He also writes that Silver Wheaton trades at a premium to other precious metal stocks as a result of its lower risk and strong growth profile.

Odds and Ends: Another silver stock that I have been keeping an eye on is Mag Silver (MAG: TSX). It's principal asset is a 44% stake in the Juanicipio project located in Zacatecas State, Mexico, which is a joint venture with Industrias Peñoles S.A. de C.V., the world's largest silver producer. The Valdecañas vein is a low-sulphidation vein which contains a total inferred resource of 237.8 million ounces silver (7.3 million tonnes grading 1,011 grams per tonne silver, 2.06 grams per tonne gold which equates to 480,000 ounces of gold, 2.3% lead and 4% zinc which equates to almost 1 billion pounds of combined lead and zinc (457,700 tonnes).

Buy, Sell or Hold Phoenix Coal Corporation (PHC: TSX)

The following is a summary of a Dundee Securities initiation report on Phoenix Coal dated September 5, 2008



Overview

Phoenix Coal is a coal producer based in the United States. Its assets lie in the Illinois
Basin of Western Kentucky.

Investment Summary

Phoenix is a seller of bituminous coal with sulphur and low chlorine content. Having attained its numerous properties through the purchase of other operators, management service agreements, and by leasing from mineral land companies, Phoenix has come to be the controller of 11 properties, 2 in Henderson and Webster counties and 9 in Muhlenberg County, Kentucky. As of December 31, 2007 Phoenix had reported “43.7 million tons of proven and probable coal reserves and 113.3 million tons of measured and indicated resources.” (Dundee Securities Report)

Here’s the important stuff: Phoenix is expected to triple its production by 2011, from “2.1 million tons of saleable coal last year, to 2.6 million tons in 2008E and over 7.4 million tons by 2011E.” (Dundee Securities Report)

Phoenix is metamorphosing from an operator of several small surface operations with poor economies of scale to a company with 2 major underground operations namely Pratt and Panama South. Pratt and Panama South are very important to Phoenix’s future and Dundee analyst Harish K. Srinivasa assigns approximately 67% of his DCF valuation to these projects. Pratt and Panama South are expected to ramp up as early as mid-2010.

With Phoenix now having the ability to adequately capitalise many of its projects, old equipment is being replaced by new machinery which is expected to reduce downtime, increase productivity and production capacity and should also lower maintenance and decrease cash costs of these surface operations.

As older legacy coal contracts begin to expire, Phoenix should start realizing higher prices for its coal starting in 2010. As Phoenix’s current contracts are lower than spot prices of $72.50/ton, higher prices will positively impact Phoenix’s margins. Dundee analyst Harish K. Srinivasa expects “Phoenix to continue to enjoy readily accessible markets for its coal as more scrubbers are installed at existing power plants making high sulphur Illinois Basin coal increasingly desired.”

Financial Summary

“Phoenix reported cash and cash equivalents of $71.2 million, working capital of $60.8 million and 150 million shares outstanding as of June 30, 2008. In addition, there were 33.25 million common share purchase warrants, and options to purchase up to 13.46 million shares of Phoenix, resulting in 196.71 million shares on a fully diluted basis. Approximately 31.4 million of the warrants are exercisable at C$2.25 by June 30, 2010.”

Valuation and Target Price

Srinivasa of Dundee Securities initiated coverage on Phoenix Coal with a BUY rating, High Risk and a 12 month target price of C$2.20/sh. He pegs Phoenix’s NAV at C$2.23 per share, assigning “C$1.95 for the company’s after-finance cash flow per share discounted at a rate of 10% and C$0.27 per share for cash and cash equivalents at the beginning of the year.”

Do Your Own Due Diligence !

Buy, Sell or Hold Questerre Energy (QEC: TSX)

The following is a summary of a Dundee Securities initiation report on Questerre dated September 12, 2008.




Overview

The management team at Questerre has been active in Quebec since 1989 with their first well and have been extolling the value of the St. Lawrence Lowlands henceforth. With the recent advances in horizontal drilling technology and completion methods, a number of tight reservoirs and shale gas plays have suddenly become potentially economic. Questerre is among a handful of players in the St. Lawrence Lowlands of Quebec testing the commerciality of a giant gas discovery in the Utica shales.

Near Term Catalysts

With drilling underway with Forest Oil, Questerre is expected to release further information on IP rates in October 2008.

Questerre recently announced the results from the recompletion of it's Gentilly shale gas well in the St. Lawrence Lowlands of Quebec. The Gentilly well, where Questerre has a ~25% working interest, flowed more than 800,000 cubic feet per day over an 18 day period while still recovering frac fluid. Commenting on the results on the Gentilly #1 well, Dundee Securities analyst Victor Rodberg writes “When extrapolating out to a horizontal rate it is also reasonable to assume a 2-3x IP rate multiple over a vertical producer suggesting horizontal rates of 1,000 – 1,500 mcf/d or better. At these rates, we calculate the Utica shale play to be economic at natural gas prices ranging from US$8.00/mmbtu at 1,000 mcf/d down to as low as US$5.50/mmbtu at 1,500 mcf/d. This most recent longer term Utica test provides more comfort that indeed we have an economic shale play in Quebec.” These are good initial flow rates from a limited perforation interval in the Utica and have convinced plans call Questerre’s joint venture partner in this play – Talisman Energy to “add another frac to the testing program. This second fracture stimulation is now underway. Following an evaluation of the results of the second fracture stimulation, two additional fracs of the Lorraine shale will be conducted. Results of these Lorraine tests are expected in the fourth quarter.” (Questerre September 3, 2008 news release) The Lorraine shale sits on top of the Utica and can be up to 6,500 feet thick. versus the Utica which from 300 to 1,000 feet thick. “Early indications show that both the Lorraine and Utica rocks are thick, porous and appear brittle and over pressured, all of which are conducive to artificial fracture stimulation.” (Questerre September 3, 2008 news release))

Questerre is currently also drilling a well with Gastem to “test the shallow acreage of the Utica. We still consider this acreage exploratory at this stage and any success would be incremental to our current valuation. We expect to hear news in the fourth quarter.” (Dundee Securities report)
Valuation and Target Price

Victor Rodberg of Dundee Securities initiates coverage on Questerre with a Buy, Speculative Risk recommendation and 12-month target price of $8.25 per share. Rodberg’s target includes “$7.50 for the probabilistic value of the Utica assets in Quebec and $0.75 for the conventional assets in Western Canada using a standard EV/DACF multiple.”

Questerre is also covered by Wellington West analyst Kim Page who has a Speculative Buy rating and $8.75 target.

My Take: Purchase Strategy = Buncha Patience + Stink Bids

Don Coxe Basic Points September 2008

Don Coxe Basic Points September 2008 (edited from the BMO Week In Review) - “Can’t anybody here play this game?”



To download Mr. Don Coxe's September 2008 Edition of Basic Points Click Here (edited from the BMO Week In Review)

**Hearty Thanks: Reader Bill S.**

Denver Gold Forum 2008 - Day 2 Updates

Recapping Day 2 of the Denver Gold Forum, the mining team at TD Securities provided clients with a brief summary of updates from names under their umbrella of coverage.

Agnico-Eagle (BUY; US$82.00 target) – Longer Term Production Target Pushing 2.0 Million Ounces

- Agnico reiterated their ““bite-sized” acquisition strategy rather than a large scale “bet-the company” approach. Elaborating further, the company said that current market conditions present many opportunities for sale but a small number of buyers (i.e. the seniors). Agnico is selectively hunting for opportunities. The company also noted that a few juniors are not amenable to outside review, “including some in Agnico’s “own back yard”.
- Company expects to make available an exploration update for Meadowbank and Pinos Altos in Q4/08.
- Agnico mentions that current development pipeline is expected to be mainly organic via mine expansions and small add-on operations and may well generate an additional 200,000-300,000 ounces of gold per year, with a blue sky target of “1.6 - 1.7 million ounces annually by 2012 with “bite-sized” acquisitions to push gold production towards 2.0 million ounces.”

Centerra Gold (HOLD; C$7.00 target) – Discussions with Kyrgyz Government Ongoing

- Company mentions that talks are ongoing on a ““near-continuous” basis with the Kyrgyz government working group on resolving the outstanding Kumtor Investment Agreement issue. International arbitration process remains on hold while discussions persist. “The next scheduled international arbitration hearing is scheduled for September 29th.”
- Centerra says that repatriation of funds out of Kyrgyzstan is a non issue as the cash from its gold sales are paid to a bank in New York – only enough working capital to sustain operations are kept within the country.
- “Company management have had talks with representatives of the new government including the Prime Minister who have indicated that mining law reform is the top priority of the new government.”
- “Centerra reaffirmed that it is on track to access the high grade SB Zone at Kumtor and also reiterated its 2008 production and cost guidance of 770,000- 830,000 ounces at $409-$449/oz. They anticipate starting underground drilling of the SB Zone in Q4/08 – Q1/09 with results expected early next year.”
- Lastly, the company said that it is on the lookout for growth opportunities outside its asset base and expanding its exploration and business development activities in Central Asia.

Eldorado Gold (BUY; C$10.00 target) – Remains One of the Lowest Cash Cost Producers

- Reiterated 2008 production guidance of 300,000 ozs at cash costs of $255 – 260/oz
- Aiming for production to grow to 700,000 ozs in 2013 with the help of the following projects:
Efemcukuru – presently under construction with expected ramp up in 2010
Perama Hill – company presently going over the old EIA submitted by Frontier as a new EIA will need to be re-filed under new mining law. Eldorado expects Perama and Tocantinzinho projects to append 250,000 ozs of production by 2013
Villa Nova – company’s iron ore project is presently under construction and is expected to be done by the year end 2008 with production start-up in Q1/09. Eldorado expects the project to yield roughly “$20 million of free cash flow per year over a 9 year mine life”

Northgate Minerals (BUY; US$3.50 target) – Heavy Investment in Growth Projects Continues

- Recent reserve increase at Stawell extends mine life by 1.5 years – out to 2011. TD analysts write that if “the company continues to generate positive drilling results there is likely upside here.” The deeper ore at Stawell is higher grade ((closer to 6 g/t up from the current 5 g/t level) which should compensate for the additional cost for ramping deeper.
Northgaet believes that there is significant value Kemess asset once it ceases operations in mid-2011 and is therefore exploring strategic alternatives for it. “The 60,000 tpd operation has large scale mining and processing equipment that in this environment can be very valuable. They are exploring various alternatives.”

Gammon Gold (HOLD; C$11.00 target) – Much Improved Performance in Rainy Season this Year

- Company remains confident about meeting guidance on production and cost fronts. TD analsyst believe “the new management team has stabilized operations, which continue to be cash flow positive.” More rain this season than last year however, in terms of operations Gammon appears to have performed better than last year “(milled tonnes up 47% yoy and stacked tonnes up 65% yoy during those two months). It appears throughput at both heap leach and mill were in-line with our (TD guys) expectations.”
- Company spoke a lot more about Guadalupe y Calvo than in the past – TD analysts think that “they’re obviously putting more of an emphasis on this project now that their cash position has improved.”

Yamana Gold (BUY; US$20.00 target) – Maintains its Stated Focus on Internal Growth

- Company reitereated that integration with Meridian/Northern Orion is now a thing of the past and they are focussed on their extensive growth pipeline.
- When asked about acquisition opportunities – the company was adamant that “acquisitions are not in the cards.” Company remains focussed of internal organic growth.
- Yamana is spending $84 million on exploration and have a target of adding 7 million ounces this year, of which they had already added roughly 4 million ounces midway through the year. Yamana has a finding cost of less than $12/oz.

IAMGOLD (BUY; C$11.00 target) – View Market Meltdown as an “Opportunity”

- Company in good positon to meet or beat 2008 guidance of 950,000 ounces at $485-$495/oz. Guidance was based on “$120/barrel oil costs – with oil now trading below $105/barrel, we believe there is good potential for IMG to beat this estimate.”
- Company expects to release an updated Rosebel scoping study by the fourth quarter of 2008, with significantly improved returns due to further drilling and revised engineering.

Denver Gold Forum 2008 – Day 1 Updates

Recapping Day 1 of the Denver Gold Forum, the mining team at TD Securities provided clients with a brief summary of updates from names under their umbrella of coverage.

With regards to Gold, GFMS expects gold prices to increase in Q4. There has been considerable demand for gold in India, especially in the last 3 weeks since the price of gold fell to the $800/oz level. This demand is likely to serve as support for current prices but unlikely to be the driver for higher prices. Due to sustained economic weakness in the US, GFMS sees weak US dollar fundamentals propelling gold prices back above the $900/z level in Q4/08. In the long term, GFMS continues to see weakness in the price of gold as a result of the metal’s current reliance on investment demand. Lastly, GFMS reports that mine production minus net demand is now positive and this leads them to conclude that continued investment demand is required to propel the gold price higher.

Alamos Gold (BUY; C$9.00 target) – Q3 Looking Solid and New Discovery

- Gave upbeat presentation
- Rainy season (which is just ending) has not been as awful as last year
- Appears measures undertaken by Alamos to reduce production declines during rainy season have been successful. While throughput should still decline to some extent relative to Q2, the decline should be offset by enhanced recoveries.
- Alamos expects to easily beat previously announced production guidance for Q3 of 32,000 ounces
- The recently drilled resource immediately adjacent to the current pit at Puerto del Aire should come into NI 43-101 resources by Q4 and should at least replace mined reserves
- A new exploration discovery was announced yesterday at Cerro Pelon and has very good potential to add significantly to reserves. The dacite dome complex is believed to be equivalent in scale to the current Mulatos resource. Very exciting.
- Alamos currently has cash reserves of over $26 million and has no plans to raise equity for construction of planned mill – which is expected to be funded out of cash flow, cash on hand and through credit lines.

Jaguar Mining (BUY; C$13.00 target) – Paciencia Remains on Track

- Paciencia remains on track to meet production targets for this quarter. Jaguar expects to produce 25,000 to 30,000 ounces at Paciencia in H2.
- Brazilian real has weakened sharply in recent weeks. Company guidance is absed on exchange rate of 1.65 real however since the rate currently sits at approximately 1.73, it should help Jaguar’s cash costs.

Minefinders (HOLD; C$10.00 target) – First Gold Pour Expected in Early October

- Company continues to mine ore and has commenced stacking ore on leach pad
- The company encountered another small delay due to a faulty screen design on their secondary crusher. Manufacturer is presently fixing the problem and crushing should return to normail within days.
- As a result of the delay, first gold pour is expected in early October – Minefinders intends to start leaching in approximately 2 weeks.
- With less than $20 million remaining on their line of credit and just over $3 million in cash, Minefinders maintains that this will be enough to carry them though until achieving positive cash flow. The TD analysts however, believe that the company may need additional financing – potentially through an increased credit line.

Nevsun – (HOLD; C$2.00 target)

- The company remains focussed on securing bank financing for construction of Bisha (Nevsun completed a tour of Bisha for bankers two weeks ago) – which is projected to startup in 2010.

International Minerals (REDUCE; C$4.00 target)

- Silver production at Pallancata continues to increase and company expects production of 4 million ounces this year and 6 million for the next year. Estimated cash flow to International Minerals of $10 million this year and $15-$20 million next year from Pallancata.
- Company’s Ecuador projects remain on standby while political situation irons itself out. TD analysts believe that “new production royalty is likely to be in the 3-8% range which is expected. The 70% windfall revenue tax issue has yet to be clarified.”

Montney Update – Duvernay Oil, Crew Energy, Celtic Exploration and Orleans Energy

The following summary is a continuation of the BMO “Oil and Gas Intermediate/Junior Producers: Q2/08 Review.”

Duvernay Oil was recently acquired by Shell for $83 per share in cash (or $5.9 billion). But before the announced takeover, Duvernay had drilled 5 horizontal Montney wells, since the end of spring 2008. One of the wells tested at an initial rate of 6.4 MMcf/d while completion activities are ongoing on the remaining wells. Duvernay currently has 3 rigs committed to the Montney that will drill 35 additional horizontal wells by spring 2009.



Crew Energy has increased its holdings in the Montney Septimus/Kobes/Monias region from approximately 20 sections to more than 150 sections, including “a 55 section (27.5 net) farm-in with Canada Energy Partners (CE: TSX-V).” Crew has completed 1 horizontal well at Septimus that is currently producing at a rate of “0.6–0.85 MMcf/d versus initial production rates in excess of 2–3 MMcf/d reported by industry.” A second well has been cased and is pending completion while a third well is presently being drilled. Furthermore, Crew has drilled or tested 3 more horizontal wells on its North East BC Montney acreage but results for these wells are not expected until later this year.



Celtic Exploration drilled 4 horizontal Montney wells at Kaybob South in the second quarter of 2008. It also announced recently that it had “entered into a farm-in agreement with a major petroleum company on 5,133 net acres (8 sections), with Montney rights in the Kaybob South/Pine Creek area.” As per the agreement, Celtic has agreed to drilling 2 Montney horizontal wells, earning a 50% interest in 3 sections. The agreement also affords Celtic the option to “drill an additional horizontal well (earning three sections per well) or vertical well (earning two sections per well) on these lands.” Also during the quarter, Celtic purchased “55 boe/d of Montney production, additional facility interests and 12,032 gross (18.8 sections) and 11,859 net acres (18.5 sections) of lands with Montney/Nordegg rights.” The company anticipates beginning drilling its first horizontal well on these lands within the next 30 or 40 days.



Orleans Energy drilled 2 Montney horizontal wells (1.36 net) through spring break-up on its western block at Kaybob. In July 2008, Orleans commissioned a “six-stage, 170-tonne frac on one of the wells (0.68 net),” and recent flow testing revealed a gross raw production rate of 5 MMcf/d. The well is now shut in for a “standard, downhole pressure build-up test.” On its eastern block, the company recently drilled a Montney horizontal well (1.0 net) which it intends to complete with a multi-stage frac. Orleans has a Montney drilling inventory of 30 locations with potential upside of 50 wells which it plans to execute using its recently increased 2008 cap-ex budget (from $46 million to $57 million).

Oil and Gas Intermediate/Junior Producers: Q2/08 Review

Recently BMO Capital Markets came out with a report entitled “Oil and Gas Intermediate/Junior Producers: Q2/08 Review.”

Given that the report is an extensive one, I shall try and highlight their views on natural gas in this post, leaving BMO’s views on crude for another post.

Recapping the first half of 2008, the report highlights that AECO natural gas prices hit a high of $11.80/mcf on July 1 based on a cold winter that brought storage levels in accordance with the 5 year average heading into peak summer cooling season. However, since hitting that high of $11.80/mcf, prices have pulled back approximately 37%, hitting a low of $7.47/mcf.

BMO attributes the pullback in natural gas prices to a number of factors: First up, analysts Mark Leggett and Kent Porteous argue that the recent success of shale gas plays and ramped up drilling programs for the second half of 2008 have “raised the probability that there is more than enough supply for the winter heating season. As such, the potential for a significant glut of supply has more than offset the previous shortfall in imports from Canada and lower levels of LNG that were previously underpinning the strength in natural gas prices.”

Secondly, Leggett and Porteous argue that moderate summer weather has kept natural gas demand in line. Additionally, early reports have indicated that the impact of hurricane Gustav on energy infrastructure has not been as serious as expected.

In conclusion, Leggett and Porteous are “cautious on natural gas prices given initial indications of ample supply without a foreseeable corresponding increase in demand. As a partial offset, although natural gas prices may come under pressure, we estimate that an average AECO natural gas price of $6.84/Mcf is priced into our natural gas-levered companies at current valuations …”

Leggett and Porteous’s recommendations in the natural gas space include proven natural gas-levered producers such as Anderson, Celtic, Crew, Iteration, NuVista, Orleans, ProEx and Vero.

My Take: On a technical basis (moving averages and relative strength indicators), natural gas prices continue to be in a downturn. Given it's relatively poor near term outlook, look to buy low cost producers, of which Vero and ProEx are 2 of my favorites and for more speculative pizazz, I am looking at some of the Utica shale gas plays.

Gold Stocks: Forecasts and Target Prices

BMO Capital Markets recently came out with a report entitled “Senior and Intermediate Gold Stocks: Revisions to Forecasts and Target Prices.”



Recapping the miserable performance of gold (down 15%) and associated stocks (down an average of 32%) in the current quarter, analysis by BMO revealed that better performing gold stocks exhibit a few similar characteristics: namely relative value, growth and execution on the growth promise.




BMO’s preferred higher risk growth stocks are Red Back Mining (RBI: TSX) and Yamana Gold (AUY: TSX, AUY: NYSE).

Their preferred defensive gold stocks are Barrick (ABX: TSX, ABX: NYSE), Newmont (NMC: TSX, NEM: NYSE) and Franco-Nevada (FNV: TSX).

Do Your Own Due Diligence !

Buy, Sell or Hold Norwood Resources (NRS: TSX-V)

The information presented below was handpicked by me from a Jennings Capital research report done by Gregory Chornoboy to alert and pique your interests. Do not invest or trade based on it and always do you own due diligence.

Click here to download the entire research report by Gregory Chornoboy of Jennings Capital (PDF)

Norwood is the owner of an 805,000 acre concession in western Nicaragua and has a 70% after payout working interest in the project. 3 wells have already been drilled on the concession and shown hydrocarbons on one or more mud logs, electric logs and wells tests but testing to date has been inconclusive due to inadequate equipment and techniques.





With 10 prospects in the Paleocene Brito sandstone and 3 more in the Oligocene Masachapa, the initial estimates indicate that the block boasts recoverable oil ranging from 7 to 127 MMBbl for individual prospects, with a total gross aggregate of 582 MMBbl. However, since the outlined prospects are located in northern third of the concession that leaves the rest of the concession fair game for additional exploration that may result in the delineation of further prospects.

Norwood should have begun testing on Maderas Negras-1 (“MN-1”) and San Bartolo-1 (“SB-1”) in mid-August with results expected in mid to late September. Chornoboy of Jennings Capital writes “Analysis by Schlumberger suggests that just one of the 11 prospective zones originally identified in SB-1 could be capable of 800 Bbl/d. If the remaining zones also prove productive, aggregate test rates could be over 2,000 Bbl/d. Everything being equal, the thicker net pay in MN-1 could produce even more. Allowing for a learning curve on completions and stimulations though, we would be hopeful for aggregate test rates between 500 – 1,000 Bbl/d per well.”

Assuming successful tests at MN-1 and SB-1, Chornoboy believes “a reasonable range may be gross production between 500 and 1,000 Bbl/d, although this estimate is subject to substantial revision once the test rates are available.” The graph below shows Chornoboy’s estimates of after tax cash flow for various gross production rates.



Norwood also has a deep gas prospect in Texas called Bigfoot for which the company is presently considering various strategic options.

Lastly, to sum up Norwood’s potential, Chornoboy writes that Norwood offers “
Exposure to over $65.00/sh of unrisked value in Nicaragua alone. On a risked basis, the exposure is $11.92/sh. The Bigfoot play adds another $33.00/sh (but less than $1.00/sh on a risked basis).” If that doesn’t get your greedy tongues salivating, I don’t know what will.



HOWEVER, keep in mind that there are a number of risks associated with Norwood, some of which include exploration risk, geo-political risk, commodity price risks etc. Carefully read over Chornoboy’s entire report to get a somewhat of a handle on the potential upside and downside on Norwood Resources. Also of note, Norwood's share price has appreciated approximately 24% since Chornoboy released his report (the share price at that time was $1.00)

Click here to download the entire research report by Gregory Chornoboy of Jennings Capital (PDF)

RBC Global Precious Metals Fund

On August 29, 2008, the RBC Global Precious Metals Fund posted its 2008 interim management report of fund performance for the period ending June 30, 2008 on SEDAR.com



The following are a few excerpts from the report:

"In March, the price of gold bullion exceeded its 25-year-old nominal record price of US$850, and the price soared above US$1,000 per ounce at the peak of concern about the credit crisis. Gold bullion prices have since pulled back as credit-cycle concerns recede.

The current credit crunch began in August 2007, and while the severity of the situation has eased somewhat, stock and bond markets are by no means out of the woods. Historically, gold functions as an alternative currency in times of crisis, and the portfolio manager believes that the outlook for precious metals remains strong. While gold has almost quadrupled from its low in 2001, it has generally lagged other commodities. The portfolio manager believes that the outlook is also improving for gold equities, which have underperformed relative to bullion the past two years due to concern about extraction costs as fuel prices rise. However, with sustained gold prices in the US$800 to US$900 per ounce range, the portfolio manager believes more companies will begin to see revenue gains reflected in their bottom lines.

Mergers and acquisitions in the mining sector have been strong over the last few years especially among large-cap companies. The portfolio manager expects to see more acquisitions of small- and mid-cap companies in the Precious Metals sector.”

The RBC Global Precious Metals Fund is managed by Chris Beer and Brahm Spilfogel.