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Wednesday, December 24, 2008
Don Coxe Video Interview on BNN - December 23, 2008
BNN speaks to Don Coxe, Global Portfolio Strategist, BMO Financial Group - December 23, 2008
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Tuesday, December 23, 2008
Analysis of the Gold Market - McLean & Partners
The following has been excerpted from the December edition of the McLean & Partners Market Intelligence Report
"... we have assessed our position on gold and remain bullish on this unique commodity. Our rationale includes the following:
1. We believe that gold will increase in value as a hedge against a declining US currency, and as a hedge against future inflation. We remain concerned that US inflation rates will rise in light of the recent US monetary and fiscal stimulus package announcements. Many of these packages are analogous to “printing money”.
2. In addition to being an inflationary hedge, gold also serves as a hedge against political risk such as terrorist attacks.
3. Gold is likely to be underweight in many institutional portfolios, especially when compared to other, more cyclical commodities such as oil.
4. Gold is not perfectly correlated with often more volatile commodities, allowing it to provide additional diversification benefits.
5. Analysis indicates that gold has been oversold in the market, and is likely approaching a price bottom. The sentiment for gold has improved off recently oversold levels. Could the cyclical low for gold already be in place?
To reflect both the current trend in the gold market, and taking into account economic conditions, we believe a successful portfolio should have exposure to gold."
Source: McLean & Partners
"... we have assessed our position on gold and remain bullish on this unique commodity. Our rationale includes the following:
1. We believe that gold will increase in value as a hedge against a declining US currency, and as a hedge against future inflation. We remain concerned that US inflation rates will rise in light of the recent US monetary and fiscal stimulus package announcements. Many of these packages are analogous to “printing money”.
2. In addition to being an inflationary hedge, gold also serves as a hedge against political risk such as terrorist attacks.
3. Gold is likely to be underweight in many institutional portfolios, especially when compared to other, more cyclical commodities such as oil.
4. Gold is not perfectly correlated with often more volatile commodities, allowing it to provide additional diversification benefits.
5. Analysis indicates that gold has been oversold in the market, and is likely approaching a price bottom. The sentiment for gold has improved off recently oversold levels. Could the cyclical low for gold already be in place?
To reflect both the current trend in the gold market, and taking into account economic conditions, we believe a successful portfolio should have exposure to gold."
Source: McLean & Partners
Monday, December 22, 2008
Points of Consideration - Market Internals
The following has been excerpted from the Jory Capital Technical Review – December 22, 2008
"This Bear Market stands with a loss of -45.5% as of this morning. At its maximum depth, the magnitude of the decline was -54.9%.
From the November 20th low the market has gained +20.7%.
The internal Bear Market bottom was definitely made on October 10th.
The price bottom might have been made on November 20th.
The Cumulative Advance/Decline Line is at a new recovery high this morning at
+91,443.
However, two things of note are that the Selling Pressure Index is persistently high and
New Lows keep dominating New Highs. Even last week they were in control 152 to 13."
Now that you have this data, you can decide whether this is a rally within a Bear Market or a rally in a slow-starting Bull Market?
"This Bear Market stands with a loss of -45.5% as of this morning. At its maximum depth, the magnitude of the decline was -54.9%.
From the November 20th low the market has gained +20.7%.
The internal Bear Market bottom was definitely made on October 10th.
The price bottom might have been made on November 20th.
The Cumulative Advance/Decline Line is at a new recovery high this morning at
+91,443.
However, two things of note are that the Selling Pressure Index is persistently high and
New Lows keep dominating New Highs. Even last week they were in control 152 to 13."
Now that you have this data, you can decide whether this is a rally within a Bear Market or a rally in a slow-starting Bull Market?
Winter Outlook For Energy Trust Distributions
The following has been excerpted from a blog post by Steven Ilkay of Caseridge Capital Corporation.
Steven writes:
"The outlook is intended as a guide for announced distributions through to the end of winter, as predicting distributions beyond more than one quarter would prove folly in such turbulent times.
On a positive note, two Energy Trusts likely will not have to cut distributions at all (Daylight and Vermilion) and it is possible Peyto and Paramount may keep distributions at fall 2007 levels as well. Unfortunately, buying a basket of trusts and letting the cash register ring, simply won’t work in this environment. A few trusts are approaching a crossroads, where their viability and potentially, solvency, could be called into question in the not too distant future, should commodity prices stay near current levels. Even more damaging would be if market perception were to be that $25 oil is right around the corner. This fate has befallen a number of trusts since Flaherty’s Halloween massacre, but so far victims have generally been smaller trusts. This time around could look very different.
One caveat with distribution projections is that one needs to consider that most Trusts have a series of options, including selling off assets, joint ventures, reducing Capex, closing out in the money hedges and such actions could easily alter my outlook.
Currently, the financially weakest of the 15 trusts in the coverage universe appears to be Advantage. Historically, payouts have been far too high and cash flows cannot support and payout anywhere near current levels of 12 cents/month would damage an already overleveraged balance sheet. Should the trust remain in its current form and using current energy pricing, a monthly distribution of 2 to 4 cents appears likely.
A handful of trusts appear susceptible to large distribution cuts as well. Canadian Oil Sands Trust, Pengrowth and Penn West are likely candidates to cut distributions one third or more. In the case of COS, the trust’s recent 2009 forecast calls for distributions to remain high to effectively overpay distributions before the 2011 deadline for trust taxability. Unfortunately, the Trust’s assumptions call for WTI to average US $75 in 2009, so it is not hard to see where the Trust may have difficult decisions to make before winter comes to a close.
Pengrowth and Penn West both have significant debt levels and flat to negative drill bit growth. Further, Penn West appears to have far too many exploration-oriented projects to be paying such a high monthly payout, in the current financial climate.
Two trusts that are quite difficult to accurately predict future payouts are Harvest, due to its large asset concentration in refining and Provident, due to its midstream businesses. Both Trusts present an interesting risk/reward scenario. Trusts that appear best positioned to weather the financial storm are Enerplus, ARC, Daylight and Vermilion.
Enerplus has an excellent diversity of assets, ranging from Oil Sands to Bakken Oil to conventional production and a well managed balance sheet. As one of the larger trusts, it also is in a much stronger position than peers such as Penn West or Pengrowth to consolidate the sector, through accretive transactions.
ARC surprised me by slashing its distribution from 24 to 15 cents, but appears to have got its payout down to a manageable level for current energy pricing.
Daylight is a smaller trust that has completed a string of moves that have really strengthened the company’s balance sheet. The company also has excellent hedges in place.
Vermilion has never cut distributions, due to very conservative management. Coupled with an international asset base and large stake in Verenex, which is currently on the block, a distribution at the current level remains likely for the foreseeable future."
Source: Caseridge
Steven writes:
"The outlook is intended as a guide for announced distributions through to the end of winter, as predicting distributions beyond more than one quarter would prove folly in such turbulent times.
On a positive note, two Energy Trusts likely will not have to cut distributions at all (Daylight and Vermilion) and it is possible Peyto and Paramount may keep distributions at fall 2007 levels as well. Unfortunately, buying a basket of trusts and letting the cash register ring, simply won’t work in this environment. A few trusts are approaching a crossroads, where their viability and potentially, solvency, could be called into question in the not too distant future, should commodity prices stay near current levels. Even more damaging would be if market perception were to be that $25 oil is right around the corner. This fate has befallen a number of trusts since Flaherty’s Halloween massacre, but so far victims have generally been smaller trusts. This time around could look very different.
One caveat with distribution projections is that one needs to consider that most Trusts have a series of options, including selling off assets, joint ventures, reducing Capex, closing out in the money hedges and such actions could easily alter my outlook.
Currently, the financially weakest of the 15 trusts in the coverage universe appears to be Advantage. Historically, payouts have been far too high and cash flows cannot support and payout anywhere near current levels of 12 cents/month would damage an already overleveraged balance sheet. Should the trust remain in its current form and using current energy pricing, a monthly distribution of 2 to 4 cents appears likely.
A handful of trusts appear susceptible to large distribution cuts as well. Canadian Oil Sands Trust, Pengrowth and Penn West are likely candidates to cut distributions one third or more. In the case of COS, the trust’s recent 2009 forecast calls for distributions to remain high to effectively overpay distributions before the 2011 deadline for trust taxability. Unfortunately, the Trust’s assumptions call for WTI to average US $75 in 2009, so it is not hard to see where the Trust may have difficult decisions to make before winter comes to a close.
Pengrowth and Penn West both have significant debt levels and flat to negative drill bit growth. Further, Penn West appears to have far too many exploration-oriented projects to be paying such a high monthly payout, in the current financial climate.
Two trusts that are quite difficult to accurately predict future payouts are Harvest, due to its large asset concentration in refining and Provident, due to its midstream businesses. Both Trusts present an interesting risk/reward scenario. Trusts that appear best positioned to weather the financial storm are Enerplus, ARC, Daylight and Vermilion.
Enerplus has an excellent diversity of assets, ranging from Oil Sands to Bakken Oil to conventional production and a well managed balance sheet. As one of the larger trusts, it also is in a much stronger position than peers such as Penn West or Pengrowth to consolidate the sector, through accretive transactions.
ARC surprised me by slashing its distribution from 24 to 15 cents, but appears to have got its payout down to a manageable level for current energy pricing.
Daylight is a smaller trust that has completed a string of moves that have really strengthened the company’s balance sheet. The company also has excellent hedges in place.
Vermilion has never cut distributions, due to very conservative management. Coupled with an international asset base and large stake in Verenex, which is currently on the block, a distribution at the current level remains likely for the foreseeable future."
Source: Caseridge
2009 Outlook & Portfolio Strategy - Global Securities
2009 Outlook & Portfolio Strategy by Elvis Picardo of Global Securities
"Our view is that a return to lower volatility and improved risk appetite which we expect in 2009 may lead to modest upside for global equities from current levels.
Our analysis of bottom-up earnings estimates for the TSX Composite and the S&P 500 indicates that earnings forecasts may still be too optimistic, against the backdrop of an accelerating economic slowdown.
Our end-2009 estimate for the TSX, based on an 11x multiple applied to our 2009 earnings estimate of $885, is 10,000. For the S&P 500, based on a 12.5x multiple applied to our 2009 earnings estimate of $75.50, our end-2009 estimate is 950.
Equity valuations are attractive at current levels, relative to historical norms and also in relation to other asset classes such as bonds (especially US government paper). The 3.25% dividend yield on the S&P 500 exceeds the current yield of 2.36% on US 10-year Treasuries for the first time in decades.
We expect financial markets to remain unsettled in the near term, and begin recovering in the second half of 2009. Accordingly, our recommended asset allocation is as follows – Stocks 45%, Bonds 30% and Cash 25%."
Source: Global Securities
"Our view is that a return to lower volatility and improved risk appetite which we expect in 2009 may lead to modest upside for global equities from current levels.
Our analysis of bottom-up earnings estimates for the TSX Composite and the S&P 500 indicates that earnings forecasts may still be too optimistic, against the backdrop of an accelerating economic slowdown.
Our end-2009 estimate for the TSX, based on an 11x multiple applied to our 2009 earnings estimate of $885, is 10,000. For the S&P 500, based on a 12.5x multiple applied to our 2009 earnings estimate of $75.50, our end-2009 estimate is 950.
Equity valuations are attractive at current levels, relative to historical norms and also in relation to other asset classes such as bonds (especially US government paper). The 3.25% dividend yield on the S&P 500 exceeds the current yield of 2.36% on US 10-year Treasuries for the first time in decades.
We expect financial markets to remain unsettled in the near term, and begin recovering in the second half of 2009. Accordingly, our recommended asset allocation is as follows – Stocks 45%, Bonds 30% and Cash 25%."
Source: Global Securities
Friday, December 19, 2008
Buy, Sell or Hold Franco-Nevada (FNV: TSX)
Franco-Nevada (FNV: TSX)
In the last 4 years, Franco-Nevada has grown its EBITDA by 24%, marginally lower than the senior gold mining company average of 25%. According to CIBC World Markets analyst Cosmos Chiu, “since its IPO, FNV has realized an up beta-to-bullion of 1.7x and a down beta-to bullion of 1.4x, both were more favorable than the up beta-to-bullion of 1.4x and a down beta-to bullion of 1.9x for the TSX Gold Index.”
With Barrick’s Goldstrike scheduled to see an increase in production from Q4/08, the upcoming expansion of Red Back Mining’s Tasiast project, a ramp-up at Great Basin Gold’s Hollister project, possible development of Detour Gold’s Detour Lake project, Augusta Resource’s Rosemont project and Eldorado Gold’s Perama Hill project, Franco-Nevada has exposure to a number of exciting growth opportunities at no additional cost. Additionally, with 148 properties in its exploration portfolio, Franco-Nevada has the potential to provide growth opportunities on a number of different fronts.
Using the old Franco-Nevada as a proxy for valuation, Chiu calculates that “the EV (enterprise value) of the new FNV could be undervalued by as much as $2 billion.” However, he expects a “portion of this missing valuation to be realized within the next 12-18 month period. FNV is currently trading at a cash adjusted NAV multiple of 0.9x, lower than the historical average of 1.6x and current mining company average of 1.2x. FNV is currently trading at a P/CF multiple of 12x, lower than the historical average of 29x. On a cash-adjusted P/CF multiple, FNV is currently trading at 9x, below the current mining company average of 14x.”
Chiu further finds that when applying a “~25x multiple (current precious metals mining company average) to FNV’s free cash flow from its gold stream of $0.55/share gives an implied share price near the current trading level of FNV (which was around C$14.50 at the timet his note was published on December 7, 2008). Based on this measure, at the current share price investors would not be paying for: 1) oil assets that are expected to generate approximately $30 million in free cash flow in 2009; 2) royalty at development assets including Detour Lake, Rosemont, and Perama Hill; 3) potential development of Arctic Gas; and 4) cash of $3.18/share.”
With the company holding $318 million in cash and equivalents, having no debt, expected to “generate $100 million in cash flow in 2009 and an EBITDA margin of 85% based on CIBC World Markets commodity price assumptions,” Franco-Nevada appears to be an undervalued royalty company with a number of growth opportunities arising from asset growth and commodity price movements. On a cautious note, Chiu writes “Even at spot prices which are lower than our current commodity price forecasts, FNV would still be expected to generate close to $90 million in cash flow.”
Chiu derives a target of C$23/sh by applying a 15x multiple his 2009 CFPS estimate of $0.98/sh; to that he adds the NPV of development assets of $1.85/sh and cash of $3.18/sh.
In the last 4 years, Franco-Nevada has grown its EBITDA by 24%, marginally lower than the senior gold mining company average of 25%. According to CIBC World Markets analyst Cosmos Chiu, “since its IPO, FNV has realized an up beta-to-bullion of 1.7x and a down beta-to bullion of 1.4x, both were more favorable than the up beta-to-bullion of 1.4x and a down beta-to bullion of 1.9x for the TSX Gold Index.”
With Barrick’s Goldstrike scheduled to see an increase in production from Q4/08, the upcoming expansion of Red Back Mining’s Tasiast project, a ramp-up at Great Basin Gold’s Hollister project, possible development of Detour Gold’s Detour Lake project, Augusta Resource’s Rosemont project and Eldorado Gold’s Perama Hill project, Franco-Nevada has exposure to a number of exciting growth opportunities at no additional cost. Additionally, with 148 properties in its exploration portfolio, Franco-Nevada has the potential to provide growth opportunities on a number of different fronts.
Using the old Franco-Nevada as a proxy for valuation, Chiu calculates that “the EV (enterprise value) of the new FNV could be undervalued by as much as $2 billion.” However, he expects a “portion of this missing valuation to be realized within the next 12-18 month period. FNV is currently trading at a cash adjusted NAV multiple of 0.9x, lower than the historical average of 1.6x and current mining company average of 1.2x. FNV is currently trading at a P/CF multiple of 12x, lower than the historical average of 29x. On a cash-adjusted P/CF multiple, FNV is currently trading at 9x, below the current mining company average of 14x.”
Chiu further finds that when applying a “~25x multiple (current precious metals mining company average) to FNV’s free cash flow from its gold stream of $0.55/share gives an implied share price near the current trading level of FNV (which was around C$14.50 at the timet his note was published on December 7, 2008). Based on this measure, at the current share price investors would not be paying for: 1) oil assets that are expected to generate approximately $30 million in free cash flow in 2009; 2) royalty at development assets including Detour Lake, Rosemont, and Perama Hill; 3) potential development of Arctic Gas; and 4) cash of $3.18/share.”
With the company holding $318 million in cash and equivalents, having no debt, expected to “generate $100 million in cash flow in 2009 and an EBITDA margin of 85% based on CIBC World Markets commodity price assumptions,” Franco-Nevada appears to be an undervalued royalty company with a number of growth opportunities arising from asset growth and commodity price movements. On a cautious note, Chiu writes “Even at spot prices which are lower than our current commodity price forecasts, FNV would still be expected to generate close to $90 million in cash flow.”
Chiu derives a target of C$23/sh by applying a 15x multiple his 2009 CFPS estimate of $0.98/sh; to that he adds the NPV of development assets of $1.85/sh and cash of $3.18/sh.
Notes on Lake Shore Gold (LSG: TSX) and Corridor Resources (CDH: TSX)
Lake Shore Gold (LSG: TSX)
Recently Lake Shore Gold announced the results of the first nine holes of its 22,000 metre diamond drill program on the Company’s 60% owned Thunder Creek property, which is located immediately adjacent to Lake Shore Gold's 100%-owned Timmins project (formerly the Timmins West project). According to Haywood Securities analyst Andrew Kaip, the “results are beginning to highlight the extension of mineralization down dip and up plunge from existing mineralization previously intercepted at the Rusk Zone within an approximate 100 metre wide by 300m down plunge area.” Highlights from the results include an intercept of 11.20 gold (Au) grams per tonne (g/t) over 10.40 metres in drill hole TC08-54 at a depth of 575 metres, the deepest intercept to date. Included within this intercept are a high-grade zone of 25.99 Au g/t over 3.00 metres and another interval averaging 7.79 Au g/t over 4.55 metres, all of which are in a broader zone averaging 5.90 Au g/t over 26.35 metres.These results indicate that the Rusk Zone has been extended at least 160 metres down-plunge, 100 metres up-plunge. Results from an additional 6 holes are pending.
With regards to the activities at Timmins West, Kaip writes “Lake Shore remains on track for sinking the shaft and advancing the decline at Timmins West. The shaft is now approximately 50% complete at a depth of 330 metres (out of 710 metres) and the decline has advanced 300 metres. Production from the Timmins project is on track to commence during the first quarter of 2009.”
As of September 30, 2008, Lake Shore had cash of $102M and working capital of $96M. Kaip writes “With operations expected to generate cash flow in 2009 and a solid balance sheet, Lake Shore is in a strong position to fund the remaining development and exploration expenditures through to the end of 2009.”
Kaip has a C$2.30/sh target price based on a 1.0x multiple of his “after-tax project NAV3% of US$341 million or US$1.85 per share plus corporate adjustments totalling $0.39 per share. Lake Shore trades at a project NAV3% of 0.4x, while peers trade between 0.1x and 1.7x (average 0.5x).”
Corridor Resources (CDH: TSX)
Recently, Corridor announced that the South Branch G-36 well which was drilled to a depth of ~2,650 meters into the Frederick Brook Shale formation, tested at ~60 bbl/d of 45°API (light) oil. According to RBC Capital Markets analyst Jason Bouvier “The sands are 38 meters thick and an additional 31 meters of potential oil pay (previously reported as potential gas pay) in the upper Hiram Brook formation has not yet been completed. 3D seismic is being completed (by y/e 08) with a step-out well to be drilled in early 2009. It is early days in the discovery with additional information (3D and offset well results) expected in the Spring/09.”
At the McCully Field, Operations to clean up the N-66 horizontal well and turn it into production are progressing, resulting in an increasing test rate of 2.9 mmscf/day at a wellhead pressure of approximately 500 psi. The well has been temporarily shut in to clean out a sand plug at the base of the production tubing. Operations to install a casing patch in the I-47 horizontal well are planned to be completed by mid-month followed by a planned four-stage frac of the “E” sand later in the month. Production from the J-47 well appears to be stabilizing at a rate of approximately 3 mmscf/day at a flowing wellhead pressure of 600 psi 34 days after coming on-stream at an initial rate of 7.1 mmscf/day. Corridor expects to have all of the 2008 completions tied in and on production later this month and to achieve a gross field year-end exit production rate of between 35 and 40 mmscf/day, depending upon the results of current well clean-up activities and the success of the multi-stage frac in the I-47 horizontal well.
Drilling activities at two shale gas appraisal wells in the Elgin area (located approximately 20 kilometers to the east of the McCully Field) are progressing. Corridor has drilled two vertical wells (Green Road G-41 and Mapleton N-11) in the play and plans to drill its first Horizontal well into the formation in early 2009.
Corridor has over 50% of its winter gas production hedged at US$14+/mcf, is situated in New Brunswick where royalty rates are low and realized prices are high due to close proximity to markets. Even though it has a strong balance sheet, Bouvier writes Corridor is “trading at 50% of our blow-down NAVPS (futures) which is modestly below the peer group of 60%. On an EV/DACF (2009) basis CDH trades at 3.4x versus the peer group at 4.4x. The major risk is the company's allocation of capital towards its Frederick Brook Shale play (~$8mm/well). Although the play offers significant potential it also represents a material capital outlay and a high degree of risk.”
Bouvier has a $5.00/sh target price which is the “result of his bottom-up NAV plus risked upside approach and implies a 1.1x P/NAVPS multiple, which compares to a multiple of 1.1x for the peer group.”
Recently Lake Shore Gold announced the results of the first nine holes of its 22,000 metre diamond drill program on the Company’s 60% owned Thunder Creek property, which is located immediately adjacent to Lake Shore Gold's 100%-owned Timmins project (formerly the Timmins West project). According to Haywood Securities analyst Andrew Kaip, the “results are beginning to highlight the extension of mineralization down dip and up plunge from existing mineralization previously intercepted at the Rusk Zone within an approximate 100 metre wide by 300m down plunge area.” Highlights from the results include an intercept of 11.20 gold (Au) grams per tonne (g/t) over 10.40 metres in drill hole TC08-54 at a depth of 575 metres, the deepest intercept to date. Included within this intercept are a high-grade zone of 25.99 Au g/t over 3.00 metres and another interval averaging 7.79 Au g/t over 4.55 metres, all of which are in a broader zone averaging 5.90 Au g/t over 26.35 metres.These results indicate that the Rusk Zone has been extended at least 160 metres down-plunge, 100 metres up-plunge. Results from an additional 6 holes are pending.
With regards to the activities at Timmins West, Kaip writes “Lake Shore remains on track for sinking the shaft and advancing the decline at Timmins West. The shaft is now approximately 50% complete at a depth of 330 metres (out of 710 metres) and the decline has advanced 300 metres. Production from the Timmins project is on track to commence during the first quarter of 2009.”
As of September 30, 2008, Lake Shore had cash of $102M and working capital of $96M. Kaip writes “With operations expected to generate cash flow in 2009 and a solid balance sheet, Lake Shore is in a strong position to fund the remaining development and exploration expenditures through to the end of 2009.”
Kaip has a C$2.30/sh target price based on a 1.0x multiple of his “after-tax project NAV3% of US$341 million or US$1.85 per share plus corporate adjustments totalling $0.39 per share. Lake Shore trades at a project NAV3% of 0.4x, while peers trade between 0.1x and 1.7x (average 0.5x).”
Corridor Resources (CDH: TSX)
Recently, Corridor announced that the South Branch G-36 well which was drilled to a depth of ~2,650 meters into the Frederick Brook Shale formation, tested at ~60 bbl/d of 45°API (light) oil. According to RBC Capital Markets analyst Jason Bouvier “The sands are 38 meters thick and an additional 31 meters of potential oil pay (previously reported as potential gas pay) in the upper Hiram Brook formation has not yet been completed. 3D seismic is being completed (by y/e 08) with a step-out well to be drilled in early 2009. It is early days in the discovery with additional information (3D and offset well results) expected in the Spring/09.”
At the McCully Field, Operations to clean up the N-66 horizontal well and turn it into production are progressing, resulting in an increasing test rate of 2.9 mmscf/day at a wellhead pressure of approximately 500 psi. The well has been temporarily shut in to clean out a sand plug at the base of the production tubing. Operations to install a casing patch in the I-47 horizontal well are planned to be completed by mid-month followed by a planned four-stage frac of the “E” sand later in the month. Production from the J-47 well appears to be stabilizing at a rate of approximately 3 mmscf/day at a flowing wellhead pressure of 600 psi 34 days after coming on-stream at an initial rate of 7.1 mmscf/day. Corridor expects to have all of the 2008 completions tied in and on production later this month and to achieve a gross field year-end exit production rate of between 35 and 40 mmscf/day, depending upon the results of current well clean-up activities and the success of the multi-stage frac in the I-47 horizontal well.
Drilling activities at two shale gas appraisal wells in the Elgin area (located approximately 20 kilometers to the east of the McCully Field) are progressing. Corridor has drilled two vertical wells (Green Road G-41 and Mapleton N-11) in the play and plans to drill its first Horizontal well into the formation in early 2009.
Corridor has over 50% of its winter gas production hedged at US$14+/mcf, is situated in New Brunswick where royalty rates are low and realized prices are high due to close proximity to markets. Even though it has a strong balance sheet, Bouvier writes Corridor is “trading at 50% of our blow-down NAVPS (futures) which is modestly below the peer group of 60%. On an EV/DACF (2009) basis CDH trades at 3.4x versus the peer group at 4.4x. The major risk is the company's allocation of capital towards its Frederick Brook Shale play (~$8mm/well). Although the play offers significant potential it also represents a material capital outlay and a high degree of risk.”
Bouvier has a $5.00/sh target price which is the “result of his bottom-up NAV plus risked upside approach and implies a 1.1x P/NAVPS multiple, which compares to a multiple of 1.1x for the peer group.”
Thursday, December 18, 2008
Notes on Transglobe Energy (TGL: TSX) and Corriente Resources (CTQ: TSX)
Transglobe Energy (TGL: TSX)
On December 16, 2008 Transglobe Energy announced the discovery of a new multi-zone oil pool to the west of the already producing Hana field in West Gharib, Egypt. The discovery well has five zones, two of which have been tested at a combined rate of 1,280 bbls/d. Testing of the other three zones is expected to take the combined test rate up to 2,900 bbls/d. The well is expected to be on production by year-end at a pump restricted rate of at least 830 bbls/d from only one zone. Two initial appraisal wells are planned, with the first already drilling and the second to follow the East Hoshia #2 exploration well. A further two appraisal/development wells will be drilled in January for a total of five wells. More wells could follow depending on the results from the first five. Due to pumping equipment restrictions, production per well will be limited to approx. 800 bbls/d initially.
In response to the news release by Transglobe, analyst Alexander Klein of Blackmont Capital increased his NAVPS for the company to $5.20 and thus upped his target price to reflect a 1.0 times multiple of NAVPS. Klein highlights that Transglobe’s Egyptian assets are 100% WI and operated, the company’s assets have a good balance of exploration and development upside and its 2009 capex can be internally funded from cash flow.
Corriente Resources (CTQ: TSX)
In January 2008, Corriente initiated the process to sell or joint venture its Panantza/San Carlos copper projects in southeastern Ecuador in order to use the proceeds to dvelop the more advanced Mirador project. Recently, Corriente announced that it is in talks with one potential partner and a corporate takeover or partnership may occur by the end of March 2009. Corriente has a market capitalization value of $265 million, US$86.8 million or US$1.15 per share in working capital (Sep 30), and no debt.
With regards to the Mirador project, its April 2008 feasibility study incorporates a 30,000 tonne per day (tpd) plant design with potential for future expansion to 60,000 tpd. Initial capital was projected at $418 million and the study utilized 41% (181 million tonnes grading 0.62% copper, 0.20 g/t gold) of the 5.9 billion lb of copper outlined in the measured and indicated resource category and none of the 2.7 billion lb in inferred resources. The feasibility indicated a greater than 40 year mine life and thus has substantial room for upside expansion. The net present value was projected at US$265 million with an after-tax IRR of 17.7% (assuming US$1.75/lb copper and US$550/oz gold). Average annual production over the first 10 years is expected to be approximately 137 million lbs. copper, 34,000 oz. gold, and 394,000 oz. silver; with average net costs of US$0.84/lb copper (net of by-product credits). Separately, a preliminary November 2007 study of the northern projects – Panantza and San Carlos suggest a potential 90,000 tpd mine with a US$676 million NPV and IRR of 15.1%. Capital costs were assumed then at US$1.3 billion to produce 400 million lb/yr copper at average net costs of US$0.73/lb.
According to Wellington West Capital analyst Catherine Gignac “Chilean companies such as Codelco or Antofagasta (ANTO-A) may be interested, as would a Chinese acquirer such as base metal producer Jinchuan Group. We do not believe major copper producers such as Freeport McMoRan Copper & Gold (FCX-N) or Teck Cominco (TCK.B-T) would be interested at this time due to other commitments and priorities. Three other companies have significant assets in Ecuador including: International Minerals (IMZ-T) with the Rio Blanco gold/silver and Gaby gold projects; Kinross Gold (K-T) which acquired the Fruta del Norte gold/silver project adjacent to Corriente, hosting 13.7 million oz earlier this year; and IAMGOLD (IMG-T) with the 3.7 million ounce Quimsacocha gold project. Despite proximity, we believe Kinross is unlikely to consider Corriente due to the deposit’s substantial metal diversification from gold.”
Gignac has a target price of $6.75/sh and opines that Corriente “offers high cash flow sensitivity to copper and gold prices and has a good probability of being taken over. Cost escalation has been incorporated into our 30,000 tpd model for potential development of the Mirador Project, giving a 12% NPV of US$346.9 million or US$4.60/sh. Resources beyond the ten-year model (25.6 billion lb), including the large inferred resource (14.5 billion lb) outlined in the northern properties Panantza and San Carlos, are valued at US$408 million or US$5.41/sh. Our target is derived with a 0.55x P/NAV multiple, as the market will likely be hesitant to assign a higher multiple until evidence of a future joint venture partner or takeover offer is secured.”
On December 16, 2008 Transglobe Energy announced the discovery of a new multi-zone oil pool to the west of the already producing Hana field in West Gharib, Egypt. The discovery well has five zones, two of which have been tested at a combined rate of 1,280 bbls/d. Testing of the other three zones is expected to take the combined test rate up to 2,900 bbls/d. The well is expected to be on production by year-end at a pump restricted rate of at least 830 bbls/d from only one zone. Two initial appraisal wells are planned, with the first already drilling and the second to follow the East Hoshia #2 exploration well. A further two appraisal/development wells will be drilled in January for a total of five wells. More wells could follow depending on the results from the first five. Due to pumping equipment restrictions, production per well will be limited to approx. 800 bbls/d initially.
In response to the news release by Transglobe, analyst Alexander Klein of Blackmont Capital increased his NAVPS for the company to $5.20 and thus upped his target price to reflect a 1.0 times multiple of NAVPS. Klein highlights that Transglobe’s Egyptian assets are 100% WI and operated, the company’s assets have a good balance of exploration and development upside and its 2009 capex can be internally funded from cash flow.
Corriente Resources (CTQ: TSX)
In January 2008, Corriente initiated the process to sell or joint venture its Panantza/San Carlos copper projects in southeastern Ecuador in order to use the proceeds to dvelop the more advanced Mirador project. Recently, Corriente announced that it is in talks with one potential partner and a corporate takeover or partnership may occur by the end of March 2009. Corriente has a market capitalization value of $265 million, US$86.8 million or US$1.15 per share in working capital (Sep 30), and no debt.
With regards to the Mirador project, its April 2008 feasibility study incorporates a 30,000 tonne per day (tpd) plant design with potential for future expansion to 60,000 tpd. Initial capital was projected at $418 million and the study utilized 41% (181 million tonnes grading 0.62% copper, 0.20 g/t gold) of the 5.9 billion lb of copper outlined in the measured and indicated resource category and none of the 2.7 billion lb in inferred resources. The feasibility indicated a greater than 40 year mine life and thus has substantial room for upside expansion. The net present value was projected at US$265 million with an after-tax IRR of 17.7% (assuming US$1.75/lb copper and US$550/oz gold). Average annual production over the first 10 years is expected to be approximately 137 million lbs. copper, 34,000 oz. gold, and 394,000 oz. silver; with average net costs of US$0.84/lb copper (net of by-product credits). Separately, a preliminary November 2007 study of the northern projects – Panantza and San Carlos suggest a potential 90,000 tpd mine with a US$676 million NPV and IRR of 15.1%. Capital costs were assumed then at US$1.3 billion to produce 400 million lb/yr copper at average net costs of US$0.73/lb.
According to Wellington West Capital analyst Catherine Gignac “Chilean companies such as Codelco or Antofagasta (ANTO-A) may be interested, as would a Chinese acquirer such as base metal producer Jinchuan Group. We do not believe major copper producers such as Freeport McMoRan Copper & Gold (FCX-N) or Teck Cominco (TCK.B-T) would be interested at this time due to other commitments and priorities. Three other companies have significant assets in Ecuador including: International Minerals (IMZ-T) with the Rio Blanco gold/silver and Gaby gold projects; Kinross Gold (K-T) which acquired the Fruta del Norte gold/silver project adjacent to Corriente, hosting 13.7 million oz earlier this year; and IAMGOLD (IMG-T) with the 3.7 million ounce Quimsacocha gold project. Despite proximity, we believe Kinross is unlikely to consider Corriente due to the deposit’s substantial metal diversification from gold.”
Gignac has a target price of $6.75/sh and opines that Corriente “offers high cash flow sensitivity to copper and gold prices and has a good probability of being taken over. Cost escalation has been incorporated into our 30,000 tpd model for potential development of the Mirador Project, giving a 12% NPV of US$346.9 million or US$4.60/sh. Resources beyond the ten-year model (25.6 billion lb), including the large inferred resource (14.5 billion lb) outlined in the northern properties Panantza and San Carlos, are valued at US$408 million or US$5.41/sh. Our target is derived with a 0.55x P/NAV multiple, as the market will likely be hesitant to assign a higher multiple until evidence of a future joint venture partner or takeover offer is secured.”
Tuesday, December 16, 2008
Stock Thoughts - Niko Resources and Vendtek Systems
Niko Resources (NKO: TSX) & Vendtek Systems (VSI: TSX-V)
“Niko Resources (NKO: TSX) is a stock that has been unfairly penalized alongside the broader commodity sector, despite having relatively fixed pricing for much of their production. Niko is an international exploration and production company, with its primary assets in India. It is a fully funded position with exceptional exploration acreage, world class development assets and a fixed price gas contract. Niko’s nearest term developments have to do with its world class D6 block offshore India. As of November, Niko was already producing 10,000 barrels per day from D6 and this should climb to 40,000 barrels per day by the middle of 2009. Its massive natural gas field in D6 should come on-stream early in 2009 with a targeted production rate of 2.8 bcf per day. This is just the tip of the iceberg of the potential from the D6 block that we see, and the D6 is just one of the many attractive concessions Niko has. The company has a great balance sheet with net positive cash and a wall of positive cash flow facing it in coming years. We believe this holding will reward unitholders well in years to come.”
Comments made by Alex Ruus in his monthly letter to investors dated December 10, 2008. Alex is the portfolio manager of the Northern Rivers Global Energy Fund LP and the Northern Rivers Conservative Growth Fund LP, both of which have declined -48.78% and -45.50% year to date, respectively.
Source: Alex Ruus Monthly Letter For November 2008
Vendtek Systems (VSI: TSX-V): can Vendtek become a billion-plus revenue company within 3-5 years?
"This may seem rather pie-in-the-sky, given that they are working from a current revenue base of about $120 million. But if you ask Privinvest (one of Vendtek’s business partners and now their largest shareholder), the answer is yes. With expanding penetration in North America and China, and Privinvest as a powerful business and capital markets partner in the Middle East, North Africa and Europe, I tend to agree with Privinvest.
First, some background on the company. Vendtek has a great business model (essentially transaction processing) in a great industry: wireless prepaid and gift cards. Vendtek’s software and systems enable the distribution and sale of prepaid goods and services (so far, primarily gift cards and prepaid wireless time) at retail points of sale. Vendtek is Canada’s largest prepaid distribution network, with almost 15,000 points of presence (POPs). In the United States, Vendtek is currently partnered with companies that have over 130,000 points of retail presence, and is expanding into those POPs from a very small current installed base. Vendtek has approached markets outside of North America by licensing its software to partners (such as Privinvest)—as opposed to operating its own network—although it still gets paid on a per transaction basis in those markets.
One of Vendtek’s critical competitive advantages is that the company both:
1) supports the sale of card-based and pin-based prepaid goods and services, and simultaneously,
2) is device agnostic (i.e., most software for point-of-sale hardware is device specific).
Along those lines, I was encouraged to see Vendtek mentioned positively in a “Seeking Alpha” summary of a recent Gartner Group report on the wireless business. Specifically, the quotation was: “Look for electronic prepaid network providers such as Euronet and Safeway’s Blackhawk Network to benefit from the need for more transaction security, along with Canadian-listed Vendtek Systems.”
One of Vendtek’s other critical competitive advantages is that its business model allows it to partner with groups like United Bank Card in the United States (which has over 100,000 POPs for Vendtek to expand into in the United States), and Privinvest in the UAE. This brings us back to Privinvest, and Vendtek’s increasingly close relationship with them.
Privinvest and Vendtek started working together about three years ago when Privinvest was first establishing their prepaid wireless distribution network in the UAE. Vendtek provides the technology platform and transaction processing for Privinvest’s business there. Privinvest has grown this business from 0% to 40% market penetration in the UAE over the past three years, growing the top-line for this business into the hundreds of millions of dollars. As has been discussed during several of Vendtek’s quarterly conference calls and in their MD+A, Vendtek expects this relationship to expand to include numerous other countries in the Middle East, North Africa, and potentially Europe.
Thus, when Privinvest showed up as a buyer of Vendtek’s stock (first press releasing a 9% stake on September 15, 2008), I was very encouraged, as was Vendtek’s CEO who said in the press release: “Privinvest has witnessed the opportunities for our business firsthand in the MENA (Middle East and North Africa) region and their recent share purchases display their confidence in our prospects for those markets. I am very proud to say that one of our largest customers is now also one of our largest shareholders.” Between September 15 and December 8, Privinvest moved from about 9% of the company to over 19%.
When a business partner starts accumulating shares aggressively, you can deduce any number of things, including the following two possibilities:
They intend to acquire the company
They foresee future business success which should make the shares they are acquiring substantially more valuable than the price at which they are being acquired.
So, when I got a call from Privinvest inviting me to fly to Abu Dhabi to discuss Vendtek and other investment opportunities, I jumped at the chance.
The most valuable facts I got over there were simply what I learned about the strength of Privinvest: it is a holding company for a group of investors that have interests in real estate, construction, shipbuilding and telecommunications. The most important aspect of their operations (at least for times like these) is that they are virtually debt free, and are sitting on lots and lots of cash. Their past investments (such as buying distressed assets during the past two recessions and paying off their debt during the good times) points to their business acumen and sense of investment timing. As such, I was very happy to learn that Privinvest’s principals are as optimistic about Vendtek’s future as I am, and see Vendtek in much the same way I do: as a company that can grow strongly, even in recessionary times. Indeed, Privinvest’s principals contend (based on their experience) that Vendtek’s business model is such that the velocity of transactions that Vendtek processes actually increases during recessions (as people move from buying, for example, one $50 prepaid wireless card per month to buying two $10 cards per month).
The possibilities I picked up about Vendtek’s future were also very exciting. Looping back to the bold-faced question from the top of this section: Privinvest laid out a possible path by which Vendtek could become a billion-plus revenue company within 3-5 years. Is this assured? Absolutely not. But is it credible? Given Privinvest’s strengths, I believe it is.
The bottom-line is that Vendtek is currently i) a free-cash-flow positive company, ii) with $120 million (or thereabouts) in revenue and a debt-free balance sheet, iii) already operating in over 5 countries (including the US, Canada, China and the UAE). The two strongest aspects of Vendtek’s future growth prospects are:
Vendtek is expanding from a base of negligible penetration in countries like China and the Unites States, working with partners that control tens of thousands of POPs into which Vendtek will proliferate its software platform. (The implication of this is that it is almost impossible NOT to grow strongly in those countries over the coming years.)
Vendtek has credible potential to rapidly develop into a multi-billion dollar company within five years, simply through the opportunities that Privinvest believes it can bring to the table.”
Comments made by Hugh Cleland in his monthly letter to investors dated December 10, 2008. Hugh is the portfolio manager of the Northern Rivers Innovation Fund LP and the Northern Rivers Innovation RSP Fund LP, both of which have declined -59.73% and -59.72% year to date, respectively.
Source: Hugh Cleland Monthly Letter For November 2008
“Niko Resources (NKO: TSX) is a stock that has been unfairly penalized alongside the broader commodity sector, despite having relatively fixed pricing for much of their production. Niko is an international exploration and production company, with its primary assets in India. It is a fully funded position with exceptional exploration acreage, world class development assets and a fixed price gas contract. Niko’s nearest term developments have to do with its world class D6 block offshore India. As of November, Niko was already producing 10,000 barrels per day from D6 and this should climb to 40,000 barrels per day by the middle of 2009. Its massive natural gas field in D6 should come on-stream early in 2009 with a targeted production rate of 2.8 bcf per day. This is just the tip of the iceberg of the potential from the D6 block that we see, and the D6 is just one of the many attractive concessions Niko has. The company has a great balance sheet with net positive cash and a wall of positive cash flow facing it in coming years. We believe this holding will reward unitholders well in years to come.”
Comments made by Alex Ruus in his monthly letter to investors dated December 10, 2008. Alex is the portfolio manager of the Northern Rivers Global Energy Fund LP and the Northern Rivers Conservative Growth Fund LP, both of which have declined -48.78% and -45.50% year to date, respectively.
Source: Alex Ruus Monthly Letter For November 2008
Vendtek Systems (VSI: TSX-V): can Vendtek become a billion-plus revenue company within 3-5 years?
"This may seem rather pie-in-the-sky, given that they are working from a current revenue base of about $120 million. But if you ask Privinvest (one of Vendtek’s business partners and now their largest shareholder), the answer is yes. With expanding penetration in North America and China, and Privinvest as a powerful business and capital markets partner in the Middle East, North Africa and Europe, I tend to agree with Privinvest.
First, some background on the company. Vendtek has a great business model (essentially transaction processing) in a great industry: wireless prepaid and gift cards. Vendtek’s software and systems enable the distribution and sale of prepaid goods and services (so far, primarily gift cards and prepaid wireless time) at retail points of sale. Vendtek is Canada’s largest prepaid distribution network, with almost 15,000 points of presence (POPs). In the United States, Vendtek is currently partnered with companies that have over 130,000 points of retail presence, and is expanding into those POPs from a very small current installed base. Vendtek has approached markets outside of North America by licensing its software to partners (such as Privinvest)—as opposed to operating its own network—although it still gets paid on a per transaction basis in those markets.
One of Vendtek’s critical competitive advantages is that the company both:
1) supports the sale of card-based and pin-based prepaid goods and services, and simultaneously,
2) is device agnostic (i.e., most software for point-of-sale hardware is device specific).
Along those lines, I was encouraged to see Vendtek mentioned positively in a “Seeking Alpha” summary of a recent Gartner Group report on the wireless business. Specifically, the quotation was: “Look for electronic prepaid network providers such as Euronet and Safeway’s Blackhawk Network to benefit from the need for more transaction security, along with Canadian-listed Vendtek Systems.”
One of Vendtek’s other critical competitive advantages is that its business model allows it to partner with groups like United Bank Card in the United States (which has over 100,000 POPs for Vendtek to expand into in the United States), and Privinvest in the UAE. This brings us back to Privinvest, and Vendtek’s increasingly close relationship with them.
Privinvest and Vendtek started working together about three years ago when Privinvest was first establishing their prepaid wireless distribution network in the UAE. Vendtek provides the technology platform and transaction processing for Privinvest’s business there. Privinvest has grown this business from 0% to 40% market penetration in the UAE over the past three years, growing the top-line for this business into the hundreds of millions of dollars. As has been discussed during several of Vendtek’s quarterly conference calls and in their MD+A, Vendtek expects this relationship to expand to include numerous other countries in the Middle East, North Africa, and potentially Europe.
Thus, when Privinvest showed up as a buyer of Vendtek’s stock (first press releasing a 9% stake on September 15, 2008), I was very encouraged, as was Vendtek’s CEO who said in the press release: “Privinvest has witnessed the opportunities for our business firsthand in the MENA (Middle East and North Africa) region and their recent share purchases display their confidence in our prospects for those markets. I am very proud to say that one of our largest customers is now also one of our largest shareholders.” Between September 15 and December 8, Privinvest moved from about 9% of the company to over 19%.
When a business partner starts accumulating shares aggressively, you can deduce any number of things, including the following two possibilities:
They intend to acquire the company
They foresee future business success which should make the shares they are acquiring substantially more valuable than the price at which they are being acquired.
So, when I got a call from Privinvest inviting me to fly to Abu Dhabi to discuss Vendtek and other investment opportunities, I jumped at the chance.
The most valuable facts I got over there were simply what I learned about the strength of Privinvest: it is a holding company for a group of investors that have interests in real estate, construction, shipbuilding and telecommunications. The most important aspect of their operations (at least for times like these) is that they are virtually debt free, and are sitting on lots and lots of cash. Their past investments (such as buying distressed assets during the past two recessions and paying off their debt during the good times) points to their business acumen and sense of investment timing. As such, I was very happy to learn that Privinvest’s principals are as optimistic about Vendtek’s future as I am, and see Vendtek in much the same way I do: as a company that can grow strongly, even in recessionary times. Indeed, Privinvest’s principals contend (based on their experience) that Vendtek’s business model is such that the velocity of transactions that Vendtek processes actually increases during recessions (as people move from buying, for example, one $50 prepaid wireless card per month to buying two $10 cards per month).
The possibilities I picked up about Vendtek’s future were also very exciting. Looping back to the bold-faced question from the top of this section: Privinvest laid out a possible path by which Vendtek could become a billion-plus revenue company within 3-5 years. Is this assured? Absolutely not. But is it credible? Given Privinvest’s strengths, I believe it is.
The bottom-line is that Vendtek is currently i) a free-cash-flow positive company, ii) with $120 million (or thereabouts) in revenue and a debt-free balance sheet, iii) already operating in over 5 countries (including the US, Canada, China and the UAE). The two strongest aspects of Vendtek’s future growth prospects are:
Vendtek is expanding from a base of negligible penetration in countries like China and the Unites States, working with partners that control tens of thousands of POPs into which Vendtek will proliferate its software platform. (The implication of this is that it is almost impossible NOT to grow strongly in those countries over the coming years.)
Vendtek has credible potential to rapidly develop into a multi-billion dollar company within five years, simply through the opportunities that Privinvest believes it can bring to the table.”
Comments made by Hugh Cleland in his monthly letter to investors dated December 10, 2008. Hugh is the portfolio manager of the Northern Rivers Innovation Fund LP and the Northern Rivers Innovation RSP Fund LP, both of which have declined -59.73% and -59.72% year to date, respectively.
Source: Hugh Cleland Monthly Letter For November 2008
China - Exports Decline First Time Since 2002
For the first time since February 2002, China's Customs Office reported that exports fell 2.2% year over year. On a comparative basis, China reported export growth of 19.1% in October.
[click on graphic to enlarge]
[Note: the PMI New Exports Orders Index depicted in the chart is compiled by Markit and recorded a level below the critical no-change mark of 50.0 for the fourth month in succession for November, with new export orders received by Chinese manufacturers declining at the steepest rate since the survey began in April 2004, with the index falling 16.1 index points]
According to economist Alex Hamilton of Markit Research, "PMI data have so far indicated the pace of export contraction accelerating in the months ahead, painting a bleak outlook for the sustainability of exports moving into the new calendar year. Dwindling demand for Chinese exports underscores the magnitude of the global downturn and suggests that the world’s fastest growing economy is no longer insulated from current global economic headwinds."
Source: Markit Economics Research
[click on graphic to enlarge][Note: the PMI New Exports Orders Index depicted in the chart is compiled by Markit and recorded a level below the critical no-change mark of 50.0 for the fourth month in succession for November, with new export orders received by Chinese manufacturers declining at the steepest rate since the survey began in April 2004, with the index falling 16.1 index points]
According to economist Alex Hamilton of Markit Research, "PMI data have so far indicated the pace of export contraction accelerating in the months ahead, painting a bleak outlook for the sustainability of exports moving into the new calendar year. Dwindling demand for Chinese exports underscores the magnitude of the global downturn and suggests that the world’s fastest growing economy is no longer insulated from current global economic headwinds."
Source: Markit Economics Research
Chart of the Day - S&P/TSX Composite Price to Book Ratio
The following chart and excerpt were extracted from the Marquest Market Comment dated December 8, 2008
[click graphic to enlarge]
"The current Price to Book ratio for the S&P/TSX Index is 1.4 Times. This is the lowest level in 14 years. The only period when the Price to Book Ratio was significantly lower than today’s was in the high inflation period between 1974 and 1982. This fundamentally stable valuation measure is clearly showing us that the equity market has discounted a significant retrenchment in the economy. Should the initiatives by policy makers prove successful in reinflating economic activity the upside for the equity markets would be significant."
Source: Marquest Asset Management
[click graphic to enlarge]"The current Price to Book ratio for the S&P/TSX Index is 1.4 Times. This is the lowest level in 14 years. The only period when the Price to Book Ratio was significantly lower than today’s was in the high inflation period between 1974 and 1982. This fundamentally stable valuation measure is clearly showing us that the equity market has discounted a significant retrenchment in the economy. Should the initiatives by policy makers prove successful in reinflating economic activity the upside for the equity markets would be significant."
Source: Marquest Asset Management
Monday, December 15, 2008
North American Gold Stocks – Playing the Beta Game
What is Beta?
Beta is:
“a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.” - Investopedia
A gold stock’s beta to the spot gold price represents the measure of volatility in comparison to the spot gold price. For example, if a stock’s beta to the spot gold price is 2.0, and the gold price increased by 10% over a given period, in theory we would expect the stock price to increase by 20% (all else remaining equal); and if the gold price dropped by 10% we would expect the stock price to drop by 20% (all else remaining equal).
A recent RBC Capital Markets research report dated December 2, 2008 and entitled “North American Gold Stocks – Playing the Beta Game” highlighted a bullish and bearish means of taking advantage of the ‘beta’ in gold stocks. The report also stated that the RBC analysts were looking for a “a year-end rally into 2009 and the Chinese New Year period beginning January 26.”
[click on graphic to enlarge]
[click on graphic to enlarge]
Bullish View
“Investors should focus on names that demonstrate above average beta-to-bullion, with a view that continued rising prices should be reflected better in the share prices of these high leverage names. We would recommend names that feature both a high beta as well as a high quality asset mix. Among the Tier I's, we would recommend Goldcorp, Kinross and Barrick. Among the Tier II's, we would recommend Eldorado and Red Back Mining.”
Bearish View
“Investors should reduce their exposure to names that have shown the highest beta-to-bullion with lower quality assets, as these names should decline harder/faster on a commodity price pull-back. Names we would recommend with a more defensive beta would include Franco-Nevada, Newmont, and IAMGOLD.”
Beta is:
“a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.” - Investopedia
A gold stock’s beta to the spot gold price represents the measure of volatility in comparison to the spot gold price. For example, if a stock’s beta to the spot gold price is 2.0, and the gold price increased by 10% over a given period, in theory we would expect the stock price to increase by 20% (all else remaining equal); and if the gold price dropped by 10% we would expect the stock price to drop by 20% (all else remaining equal).
A recent RBC Capital Markets research report dated December 2, 2008 and entitled “North American Gold Stocks – Playing the Beta Game” highlighted a bullish and bearish means of taking advantage of the ‘beta’ in gold stocks. The report also stated that the RBC analysts were looking for a “a year-end rally into 2009 and the Chinese New Year period beginning January 26.”
[click on graphic to enlarge]
[click on graphic to enlarge]
Bullish View
“Investors should focus on names that demonstrate above average beta-to-bullion, with a view that continued rising prices should be reflected better in the share prices of these high leverage names. We would recommend names that feature both a high beta as well as a high quality asset mix. Among the Tier I's, we would recommend Goldcorp, Kinross and Barrick. Among the Tier II's, we would recommend Eldorado and Red Back Mining.”
Bearish View
“Investors should reduce their exposure to names that have shown the highest beta-to-bullion with lower quality assets, as these names should decline harder/faster on a commodity price pull-back. Names we would recommend with a more defensive beta would include Franco-Nevada, Newmont, and IAMGOLD.”
Chart of the Day - Gold
$2000/oz Gold ?
[click graphic to enlarge]
Source: CitiFX Technicals - dated November 26. 2008
[click graphic to enlarge]
Source: CitiFX Technicals - dated November 26. 2008
Tuesday, December 09, 2008
Gold - A Hypothetical Scenario
The following charts have been excerpted from The Gold Monitor which is authored by Martin Murenbeeld, Chief Economist - Dundee Group of Companies
What might the gold price be were the world to return to a “gold standard” monetary system?
PRICE OF GOLD FOR FIXED M1 RATIO
[click on graphic to enlarge]
PRICE OF GOLD FOR FIXED M2 RATIO
[click on graphic to enlarge]
PRICE OF GOLD: US GOLD STOCKS = FX RESERVES
[click on graphic to enlarge]
FOREIGN EXCHANGE RESERVES
[click on graphic to enlarge]
Source: : The Gold Monitor – Martin Murenbeeld
What might the gold price be were the world to return to a “gold standard” monetary system?
PRICE OF GOLD FOR FIXED M1 RATIO
[click on graphic to enlarge]PRICE OF GOLD FOR FIXED M2 RATIO
[click on graphic to enlarge]PRICE OF GOLD: US GOLD STOCKS = FX RESERVES
[click on graphic to enlarge]FOREIGN EXCHANGE RESERVES
[click on graphic to enlarge]Source: : The Gold Monitor – Martin Murenbeeld
Market Musings
The following is excerpted from J. Zechner Associates’ Market Commentary for November 2008
“In the energy market, we continue to believe that oil prices will work their way back into the US$70-100 range as the global economy stabilizes and the commodity liquidation winds down. The big oil producers within the Organization of Petroleum Exporting Countries -- Saudi Arabia above all -- are also poised to rein in output if prices slide. Slumping demand in the U.S. , the world's largest oil consumer, has helped to loosen the global oil market in recent months. But Saudi Arabia has already begun to trim its oil shipments in recent weeks after boosting output by more than 500,000 barrels a day this summer. Some analysts say the Saudis, with Iran and Venezuela , could move to trim OPEC's overall production by as much as one million barrels a day in coming months if prices fall much below $90 a barrel or if inventories grow too large. The world now consumes around 86.5 million barrels a day. OPEC provides nearly 40% of that. Even with diminished demand in the U.S. and Europe, many analysts still forecast China and the Mideast will help drive up global oil demand next year by as much as 800,000 barrels a day.
The World Gold Council announced that gold demand rose by 18% in the third quarter of 2008 on safe-haven buying and Indian jewelry purchases (which were up 29% on the quarter). The fact that gold prices fell during the quarter was blamed on the mass selling of commodity indices, which include a gold component. Conversely, aggregate Gold ETF additions, which represent retail buying of gold in the financial markets, increased 7.5% in the quarter. In fact, gold prices have been quite strong recently in currencies besides the US dollar and has recently moved to new highs against the Euro. Also, China's central bank is considering hiking increasing gold reserves nearly seven-fold to spread risks in its huge foreign exchange holdings. Beijing is mulling a move to increase its reserves to 4,000 tonnes from the current 600 tonnes. China has emerged as the world's largest and fastest-growing holder of foreign exchange reserves, which totaled more than 1.9 trillion dollars at the end of September, according to the central bank. Clearly these are more indicators that the sharp sell-off in commodity prices has been driven by panicked asset liquidators and that, as this selling subsides, prices will resume their upward move. We see the same situation in the oil market as well, another point that argues in favour of buying Canadian resource stocks now.
The bottom line from our point of view is that stock market valuations are at extremely low levels (even assuming a lengthy recession), prices have fallen at a faster pace than any point since the 1930s, stocks are more under-valued relative to bonds than they have been in over 20 years, expectations for future growth have come down, deflationary fears have risen, there is a tremendous amount of excess cash on the sidelines now and corporations are ‘flush with cash,' investor sentiment is at bearish lows and volatility is at record highs; all of these are conditions present at significant market lows. "
Strategy
“We continue to view current price levels in the stock market and corporate bond market as a substantial longer-term buying opportunity . Also, yields have now risen to such a degree that investors are being well paid to sit in stocks and wait for the turnaround; the yield on the Canadian stock market is well above the yield on 10-year bonds for one of the few times on record. We are comfortable owning resource stocks (which have been decimated in the current downturn but selling is starting to abate) as well as foreign, particularly US, multinational firms which have great earnings resilience, strong cash balances and will continue to benefit from a growing global economy. We remain underweight in the financial service industry but will watch the stocks as they fall back to within a potential buy area.”
Source: : J. Zechner Associates Inc.
“In the energy market, we continue to believe that oil prices will work their way back into the US$70-100 range as the global economy stabilizes and the commodity liquidation winds down. The big oil producers within the Organization of Petroleum Exporting Countries -- Saudi Arabia above all -- are also poised to rein in output if prices slide. Slumping demand in the U.S. , the world's largest oil consumer, has helped to loosen the global oil market in recent months. But Saudi Arabia has already begun to trim its oil shipments in recent weeks after boosting output by more than 500,000 barrels a day this summer. Some analysts say the Saudis, with Iran and Venezuela , could move to trim OPEC's overall production by as much as one million barrels a day in coming months if prices fall much below $90 a barrel or if inventories grow too large. The world now consumes around 86.5 million barrels a day. OPEC provides nearly 40% of that. Even with diminished demand in the U.S. and Europe, many analysts still forecast China and the Mideast will help drive up global oil demand next year by as much as 800,000 barrels a day.
The World Gold Council announced that gold demand rose by 18% in the third quarter of 2008 on safe-haven buying and Indian jewelry purchases (which were up 29% on the quarter). The fact that gold prices fell during the quarter was blamed on the mass selling of commodity indices, which include a gold component. Conversely, aggregate Gold ETF additions, which represent retail buying of gold in the financial markets, increased 7.5% in the quarter. In fact, gold prices have been quite strong recently in currencies besides the US dollar and has recently moved to new highs against the Euro. Also, China's central bank is considering hiking increasing gold reserves nearly seven-fold to spread risks in its huge foreign exchange holdings. Beijing is mulling a move to increase its reserves to 4,000 tonnes from the current 600 tonnes. China has emerged as the world's largest and fastest-growing holder of foreign exchange reserves, which totaled more than 1.9 trillion dollars at the end of September, according to the central bank. Clearly these are more indicators that the sharp sell-off in commodity prices has been driven by panicked asset liquidators and that, as this selling subsides, prices will resume their upward move. We see the same situation in the oil market as well, another point that argues in favour of buying Canadian resource stocks now.
The bottom line from our point of view is that stock market valuations are at extremely low levels (even assuming a lengthy recession), prices have fallen at a faster pace than any point since the 1930s, stocks are more under-valued relative to bonds than they have been in over 20 years, expectations for future growth have come down, deflationary fears have risen, there is a tremendous amount of excess cash on the sidelines now and corporations are ‘flush with cash,' investor sentiment is at bearish lows and volatility is at record highs; all of these are conditions present at significant market lows. "
Strategy
“We continue to view current price levels in the stock market and corporate bond market as a substantial longer-term buying opportunity . Also, yields have now risen to such a degree that investors are being well paid to sit in stocks and wait for the turnaround; the yield on the Canadian stock market is well above the yield on 10-year bonds for one of the few times on record. We are comfortable owning resource stocks (which have been decimated in the current downturn but selling is starting to abate) as well as foreign, particularly US, multinational firms which have great earnings resilience, strong cash balances and will continue to benefit from a growing global economy. We remain underweight in the financial service industry but will watch the stocks as they fall back to within a potential buy area.”
Source: : J. Zechner Associates Inc.
Canadian Housing Trends and Affordability
Canadian Housing Trends and Affordability
For the better part of two years, Canadians have witnessed a meltdown in the US housing markets, followed by similar outcomes in the United Kingdom and other countries whilst remaining relatively unscathed. However, Canada’s own weaknesses began to appear in late 2007, when the once booming oil-sands rich province of Alberta began registering declines in its housing sector, followed earlier this year by British Columbia’s markets. Then it was Saskatchewan’s turn and now regions in Ontario are also demonstrating a declining trend. In a research note entitled “Housing trends and Affordability” released on December 8, 2008 by RBC Economics summarises Canada’s plight as follows:
“As a sluggish economy threatens income growth and makes households much more skittish about major financial commitments, issues of affordability are coming to the fore. Much of the market correction taking place in British Columbia, Alberta and, now, parts of Saskatchewan can be traced to very poor affordability levels in those provinces.”
In terms regional analysis, the research note has the following to say about the province of British Columbia:
“Prices began to decline in the spring, a trend that gathered speed through the early fall. This has helped improve affordability modestly in the second and third quarters, but levels in British Columbia still suggest that further price correction should be expected in the near term.”
In terms regional analysis, the research note has the following to say about the province of Alberta:
“After spending much of the past 10 years in very tight territory, market conditions have loosened considerably since the summer of 2007 with new sellers rushing in and would-be buyers moving to the sidelines. Nonetheless, still-poor affordability levels suggest that Alberta markets likely continue to be overvalued, at least relative to household income. As stiff headwinds blow on the provincial economy and erode consumer confidence in the year ahead, would-be buyers will be hard-pressed to step into play until affordability improves more significantly.”
In terms regional analysis, the research note has the following to say about the province of Saskatchewan:
“RBC’s provincial affordability measures spiked in all housing segments last year, reaching the poorest levels on records dating back to the mid-1980s. As is often the case, a wild party ends with a hangover and Saskatchewan’s fête last year will be no different. Housing resales and prices are already showing clear signs of weakening. More is likely to occur.”
In terms regional analysis, the research note has the following to say about the province of Manitoba:
“RBC’s affordability measures in Manitoba stood between 6% and 13% above long-term averages in the third quarter, suggesting only a modest risk of markets being overextended. Still-elevated sales-to-new listings ratios are also consistent with reasonably firm support for pricing. Nonetheless, given mounting economic uncertainty, housing market activity is expected to cool in the province in the period ahead with prices giving up some ground.”
In terms regional analysis, the research note has the following to say about the province of Ontario:
“Overall, markets in Ontario appear to have peaked during the first half of 2008 and are likely to sustain a weakening tone until the economy shakes off its blues. However, the market correction is unlikely to be as devastating as the early 1990s downturn. Ontario markets are entering this part of the cycle with much less threatening imbalances compared to those that had built during the late 1980s. In particular, the erosion in affordability in the province during the past few years has been much more restrained, so that current measures are not as far off long-run averages as they were at the onset of the early 1990s meltdown.”
In terms regional analysis, the research note has the following to say about the province of Quebec:
“While affordability in the province followed the general trend and slipped in the past three to four years, it has done so rather benignly. Following slight improvements in the third quarter, RBC’s affordability measures most recently stood just 6% to 9% above long-run averages, which could hardly be construed as posing a significant risk. Nonetheless, storm clouds are gathering and are expected to rain on activity and prices in the period ahead. Relatively solid fundamentals heading into the storm should limit damages.”
In terms regional analysis, the research note has the following to say about the Atlantic Provinces:
“Forget the west! The new housing hotspots are out east. In particular, St. John’s housing market is firing on all cylinders, trailing only Regina among Canada’s major urban areas in terms of year-over-year price increases. Saint John is not far behind and Halifax is also showing solid price momentum. Market conditions in all three eastern cities are still much more favourable to sellers. With such meaningful price gains, affordability has deteriorated overall in Atlantic Canada in the past two years. Yet affordability measures have not degraded excessively relative to long-term averages — they stood 5% to 13% above average in the third quarter, depending on home segments. Market momentum in the region is expected to wane in the year ahead as economic uncertainty takes the wind out of its sail.”
In conclusion, while the housing sector in Canada might undoubtedly be headed into a cyclical downturn, the RBC report finds that “the risk of experiencing a U.S.-style meltdown is remote.”
Source: RBC Economics
For the better part of two years, Canadians have witnessed a meltdown in the US housing markets, followed by similar outcomes in the United Kingdom and other countries whilst remaining relatively unscathed. However, Canada’s own weaknesses began to appear in late 2007, when the once booming oil-sands rich province of Alberta began registering declines in its housing sector, followed earlier this year by British Columbia’s markets. Then it was Saskatchewan’s turn and now regions in Ontario are also demonstrating a declining trend. In a research note entitled “Housing trends and Affordability” released on December 8, 2008 by RBC Economics summarises Canada’s plight as follows:
“As a sluggish economy threatens income growth and makes households much more skittish about major financial commitments, issues of affordability are coming to the fore. Much of the market correction taking place in British Columbia, Alberta and, now, parts of Saskatchewan can be traced to very poor affordability levels in those provinces.”
In terms regional analysis, the research note has the following to say about the province of British Columbia:
“Prices began to decline in the spring, a trend that gathered speed through the early fall. This has helped improve affordability modestly in the second and third quarters, but levels in British Columbia still suggest that further price correction should be expected in the near term.”
In terms regional analysis, the research note has the following to say about the province of Alberta:
“After spending much of the past 10 years in very tight territory, market conditions have loosened considerably since the summer of 2007 with new sellers rushing in and would-be buyers moving to the sidelines. Nonetheless, still-poor affordability levels suggest that Alberta markets likely continue to be overvalued, at least relative to household income. As stiff headwinds blow on the provincial economy and erode consumer confidence in the year ahead, would-be buyers will be hard-pressed to step into play until affordability improves more significantly.”
In terms regional analysis, the research note has the following to say about the province of Saskatchewan:
“RBC’s provincial affordability measures spiked in all housing segments last year, reaching the poorest levels on records dating back to the mid-1980s. As is often the case, a wild party ends with a hangover and Saskatchewan’s fête last year will be no different. Housing resales and prices are already showing clear signs of weakening. More is likely to occur.”
In terms regional analysis, the research note has the following to say about the province of Manitoba:
“RBC’s affordability measures in Manitoba stood between 6% and 13% above long-term averages in the third quarter, suggesting only a modest risk of markets being overextended. Still-elevated sales-to-new listings ratios are also consistent with reasonably firm support for pricing. Nonetheless, given mounting economic uncertainty, housing market activity is expected to cool in the province in the period ahead with prices giving up some ground.”
In terms regional analysis, the research note has the following to say about the province of Ontario:
“Overall, markets in Ontario appear to have peaked during the first half of 2008 and are likely to sustain a weakening tone until the economy shakes off its blues. However, the market correction is unlikely to be as devastating as the early 1990s downturn. Ontario markets are entering this part of the cycle with much less threatening imbalances compared to those that had built during the late 1980s. In particular, the erosion in affordability in the province during the past few years has been much more restrained, so that current measures are not as far off long-run averages as they were at the onset of the early 1990s meltdown.”
In terms regional analysis, the research note has the following to say about the province of Quebec:
“While affordability in the province followed the general trend and slipped in the past three to four years, it has done so rather benignly. Following slight improvements in the third quarter, RBC’s affordability measures most recently stood just 6% to 9% above long-run averages, which could hardly be construed as posing a significant risk. Nonetheless, storm clouds are gathering and are expected to rain on activity and prices in the period ahead. Relatively solid fundamentals heading into the storm should limit damages.”
In terms regional analysis, the research note has the following to say about the Atlantic Provinces:
“Forget the west! The new housing hotspots are out east. In particular, St. John’s housing market is firing on all cylinders, trailing only Regina among Canada’s major urban areas in terms of year-over-year price increases. Saint John is not far behind and Halifax is also showing solid price momentum. Market conditions in all three eastern cities are still much more favourable to sellers. With such meaningful price gains, affordability has deteriorated overall in Atlantic Canada in the past two years. Yet affordability measures have not degraded excessively relative to long-term averages — they stood 5% to 13% above average in the third quarter, depending on home segments. Market momentum in the region is expected to wane in the year ahead as economic uncertainty takes the wind out of its sail.”
In conclusion, while the housing sector in Canada might undoubtedly be headed into a cyclical downturn, the RBC report finds that “the risk of experiencing a U.S.-style meltdown is remote.”
Source: RBC Economics
Monday, December 08, 2008
Don Coxe Video Interview - December 5, 2008
BNN interviews Don Coxe, global portfolio strategist, BMO Financial Group – December 5, 2008
[click on graphic for link to video]
[click on graphic for link to video]
Friday, December 05, 2008
Metals Outlook - Aluminium
"Prices fell an average of 9.6% across the base metals complex this month (November 2008) in tandem with collapsing demand, an appreciating dollar and slumping world equity markets. Aluminium declined 11% to reach $1748/t on the 25th November. The LME primary aluminium cash price averaged $1875/t to the 25th November, down $245/t or 12% from October. This price level puts severe pressure on producers in the upper half of the aluminium cost curve. The cash to three-month contango averaged $53/t.
Inventories year to date have risen 982kt to 3.5Mt a level not seen since February 1995. Stocks in LME warehouses soared to 1.75Mt in November with Detroit alone receiving 64kt. Asian LME warehouses also recorded very high deliveries. November saw stocks at the Shanghai futures exchange fall slightly to 202kt. Producer stocks also fell by 27kt.
In the physical market, the European duty paid in-warehouse Rotterdam ingot premium fell from $35-$50/t to $10-$35/t, closing the gap between duty paid and duty unpaid premia. The Japanese spot premium languished this month at $60-$70/t with little spot activity reported. US ingot premia fell to $93/t ($4.2c/lb) through October.
We have lowered our demand forecasts since last months report, primarily to reflect the slowdown in demand from China. Global consumption has been revised downwards by 0.6Mt for 2008, 1.3Mt for 2009 and 1.5Mt for 2010 taking growth rates to 2.6%, 1.7% and 4.8% respectively. This compares with growth forecasts of 4.1%, 3.7% and 5.1% in our last monthly report.
Smelter curtailments and start up deferrals throughout 2008 has resulted in a reduction in our near term forecast for alumina demand by about 3Mt since the start of 2008. Refinery curtailments have also been forthcoming but this has not been enough to offset the reduction in demand. The collapse in the metal price has also had a massive influence. Recent Chinese reports indicate a spot alumina price of RMB2000/t ($293/t) down from RMB4500/t ($658/t) in January 2008. The international spot alumina price has dropped similarly from $425/t in January to $200/t in November."
Source: Aluminium Monthly Report by Metals & Mining Research Firm Brook Hunt - A Wood Mackenzie Company
Buy, Sell or Hold Thompson Creek Metals (TCM: TSX)
On November 24, 2008 CIBC World Markets analyst Ian Parkinson, formerly of Versant Partners, initiated coverage on Thompson Creek Metals.
Highlights
After having raised $223.4 (after transaction costs) million in June 2008 by means of a private placement, Thompson Creek Metals repaid $220 million in long term debt, which left the company with only $18.7 million in equipment loans.
Parkinson sees no need for the company to raise money at this time as cash from ongoing operations is enough to finance current debt obligations.
With regards to Molybdenum, Parkinson believes the price will “remain healthy, above historical US$4/lb. – US$5/lb. levels” despite the recent weakness in the overall commodity complex. Recent announcements of project deferrals/halts and financing constraints in other mining companies should create “greater support for the price of molybdenum moving forward.” Given that Thompson Creek Metals is fully leveraged to the price of molybdenum, which Parkinson “views as a positive during this time of poor price performance from other metals,” only serves to reinforce his strong view for the outlook of the commodity and the company is particular.
Starting in the latter half of 2009, molybdenum contracts will begin trading on the London Metals Exchange. Parkinson sees this as a positive for Thompson Creek Metals as this will create “avenues for fixed forward pricing or mitigation of working capital price risk.” The company currently processes third party material and holds significant amounts of working capital. With minimal processes for price risk management, the company is exposed to gyrations in the price of molybdenum as the metal is held as inventories and work in process.
Thompson Creek Metals has a strong pipeline of growth projects, which include the Endako mill expansion, the Davidson project, and Mt. Emmons which Parkinson believes offer significant sources of upside potential.
Parkinson calculates that the company will earn an estimated US$0.84/share in earnings in 2009 and US$1.41/share in earnings in 2010 (using an average life-of-mine molybdenum price of $12.52/lb).
He initiates coverage with a Sector Outperformer rating and a 12- to 18-month price target of $8.65 per share based on 0.5x his NAV10% calculation of the current operating assets and 7x 2009 earnings per share estimate. He does not assign any value to the Davidson or Mt. Emmons assets in his price target calculations.
Highlights
After having raised $223.4 (after transaction costs) million in June 2008 by means of a private placement, Thompson Creek Metals repaid $220 million in long term debt, which left the company with only $18.7 million in equipment loans.
Parkinson sees no need for the company to raise money at this time as cash from ongoing operations is enough to finance current debt obligations.
With regards to Molybdenum, Parkinson believes the price will “remain healthy, above historical US$4/lb. – US$5/lb. levels” despite the recent weakness in the overall commodity complex. Recent announcements of project deferrals/halts and financing constraints in other mining companies should create “greater support for the price of molybdenum moving forward.” Given that Thompson Creek Metals is fully leveraged to the price of molybdenum, which Parkinson “views as a positive during this time of poor price performance from other metals,” only serves to reinforce his strong view for the outlook of the commodity and the company is particular.
Starting in the latter half of 2009, molybdenum contracts will begin trading on the London Metals Exchange. Parkinson sees this as a positive for Thompson Creek Metals as this will create “avenues for fixed forward pricing or mitigation of working capital price risk.” The company currently processes third party material and holds significant amounts of working capital. With minimal processes for price risk management, the company is exposed to gyrations in the price of molybdenum as the metal is held as inventories and work in process.
Thompson Creek Metals has a strong pipeline of growth projects, which include the Endako mill expansion, the Davidson project, and Mt. Emmons which Parkinson believes offer significant sources of upside potential.
Parkinson calculates that the company will earn an estimated US$0.84/share in earnings in 2009 and US$1.41/share in earnings in 2010 (using an average life-of-mine molybdenum price of $12.52/lb).
He initiates coverage with a Sector Outperformer rating and a 12- to 18-month price target of $8.65 per share based on 0.5x his NAV10% calculation of the current operating assets and 7x 2009 earnings per share estimate. He does not assign any value to the Davidson or Mt. Emmons assets in his price target calculations.
Wednesday, December 03, 2008
Chart of the Day - S&P/TSX Composite
S&P/TSX Composite
[click chart to enlarge]
The chart above depicts a falling trend in the 10, 50 and 200 day moving averages of the S&P/TSX Composite
S&P/TSX Composite
[click chart to enlarge]
The chart above depicts a falling trend in the 39 day exponential envelope and a neutral trend in the on balance volume indicator for the S&P/TSX Composite
Source: Courtesy - Technical Analyst Ron Meisels' bi-monthly Market Snapshot Report dated December 2, 2008
[click chart to enlarge]
The chart above depicts a falling trend in the 10, 50 and 200 day moving averages of the S&P/TSX Composite
S&P/TSX Composite
[click chart to enlarge]
The chart above depicts a falling trend in the 39 day exponential envelope and a neutral trend in the on balance volume indicator for the S&P/TSX Composite
Source: Courtesy - Technical Analyst Ron Meisels' bi-monthly Market Snapshot Report dated December 2, 2008
Macro Market Comment
"Global recession is finally the unanimous forecast, and deflation is the short-term majority view, as reflected in TIPs, US Treasuries and the strong US$. All reflect a severe level of risk aversion when compared to equities, IG and HY corporate debt, convertibles and merger arbitrage markets. These discounted valuations have declined significantly below fundamental levels for virtually all classes due to the severity and breadth of global de-leveraging and lack of available credit. Although there is severe volatility during what may be a prolonged basing period, this is developing into a very rare buying opportunity for long term investors.
Large fiscal stimulus has been indicated, notably by China (RMB 4 trillion) and the US (expectations of US$500bln+ in January, on top of multiple bailouts). The start of
"quantitative easing" (read: purchase assets and print money) has begun with the Feds US$600bln program to support mortgage markets. We expect "ZIRP" or zero interest rate policies from several Central Banks in 2009, including the Fed, as another pillar of massive coordinated stimulus that will lead to inflation in the medium and longer term, letting the inflation genie out of the bottle. While economic growth will be depressed for some time, we believe that late 2009 will see a change from deflation concerns to future inflation becoming the concern. This reflation of the system will be the tailwind for hard assets to fuel a bubble in commodities and equities, first with gold, followed by energy and base metals not dissimilar to 2002 to 2007, albeit off of higher bases.
With the US recession now almost one year old, we still anticipate high volatility including violent bear market rallies, late 2009 economic stabilization, and equities to move sideways within a wide range for the next several quarters but becoming more constructive than the last 4 to 6 months."
- The aforementioned comments were excerpted from the Salida Multi Strategy Hedge Fund monthly performance update for November 2008. Year to date, the hedge fund is down by 67.60% and currently has $64,000,000 in assets.
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