LIBERTY'S OUTLOOK
300 Frandor, Lansing, MI 48912.
Monthly, 1 year, $79.
Patrick Heller: "In my judgment, we are nowhere close to the top of the gold and silver market. Both metals are still suffering from long-term physical supply shortages that will continue for at least several years, even if gold and silver prices double from current levels.
In addition to favorable supply/demand fundamentals, the gold and silver markets also look severely underpriced today compared to competing assets like the U.S. dollar and paper assets like stocks and bonds that are denominated in U.S. dollars.
There is a lot of pressure for the U.S. dollar to fall significantly from current levels. Just last year, former Federal Reserve Chairman Paul Volcker said he thought that there was a 75% chance of a U.S. dollar currency crisis within five years - an admission almost never made by an insider.
The largest pressures on the U.S. dollar are the huge budget deficits and trade deficits.
These deficits have to be covered, by either higher taxes, borrowing, or by reducing the value of the dollar through inflation. President Bush and his administration are primarily using the latter two strategies with minor impact on the American economy - so far.
China and Japan are adding hundreds of billions of dollars of U.S. Treasury debt to their foreign exchange reserves. Including Taiwan, South Korea, and Singapore, the U.S. government now owes over $700 billion on which it has to pay interest!
Both China and Japan have been aggressively supporting the value of the U.S. dollar by taking this debt off the market at a record pace. In the process, they are trying to prop up their own exports to America.
For Americans, this is a great deal - receiving manufactured goods in return for printed pieces of paper.
The U.S. trade deficit is now up to 6% of Gross Domestic Product (GDP), a higher imbalance than any other major nation has ever sustained for long. Argentina was able to handle a 5% deficit a few years ago before its currency crashed.
The day will come when America's trading partners will not be satisfied with more paper and promises. As the U.S. government's outstanding debt in foreign hands mushrooms, holders of U.S. government debt get more nervous. At some point, they would like to convert this debt out of U.S. dollars into something less risky - like tangible merchandise, services, other currencies, or gold.
Even nations such as Singapore or South Korea have enough U.S. government debt in their reserves that either could cause a U.S. dollar panic. What is holding such nations back is the economic chaos that their nation's domestic economy would suffer if exports to the U.S. were sharply curtailed.
Although it may take a few years before it happens, there will be a time where one or more major foreign governments no longer want to stockpile any more U.S. dollars.
When that time comes to pass, I expect the U.S. dollar may fall sharply. A recently released scholarly study figures that the U.S. dollar has to decline a minimum of 20-40% against an average of all other currencies in order to just to stabilize the current deficits, much less cure the problem.
A lower value of the U.S. dollar will help American manufacturers compete globally, by making their goods and services less expensive. We just might see a surge in U.S. manufacturing, with companies reporting higher profits. While that might look like good news on the surface, a U.S. manufacturer's 10% profit increase reported in a U.S. dollar that has lost 20% of it's value means that owners of that company's stock are losing wealth!
Domestic and foreign investors will not be taken fully by surprise. They will see that dollar-denominated paper assets are high risk investments. Some will cash out, investing in paper assets in other currencies. And some will buy commodities - like gold and silver.
In recent weeks, investors have seen the U.S. dollar reaching all-time lows against the Euro. Gold and silver prices have surged in response. But what we have seen in the recent past is nothing compared to what I foresee coming in the next year or two.
Last month, I gave a 50-75% probability of gold reaching $500 and silver $10 by the end of February 2005. I am much more optimistic than that now.
Not only do I think that we will see $500 gold and $10 silver by the end of February, I expect to see far higher prices in the next year or so.
How High for Gold and Silver?
Forecasters are all over the map on what they see as the target peak for precious metals. Some didn't think silver had much chance to rise over than $8.00, for instance, while others tout a silver price over $100. The truth is that no one knows.
After looking at fundamental supply and demand factors for physical gold and silver for the past few decades, I think I can conservatively project long-term equilibrium prices. Gold is more difficult to assess because of all the official holdings. So, I think a sensible range for gold to reach a long-term balance is somewhere between $750 and $2,000 (in 2004 dollars). For silver, I think it is destined to end up around $15.
Before a market reaches equilibrium, however, it is usually quite volatile, with prices swinging too high and too low. We could see prices significantly higher than the foregoing in the interim. The longer that gold and silver is significantly underpriced, the greater the tendency to blast way above the long-term target.
If the U.S. dollar does not go through a crisis, I think gold could conservatively reach at least $750 while silver tops $20 within two years.
However, I agree with Paul Volcker, former Federal Reserve Chairman, that the U.S. dollar is in danger of a collapse or other crisis. Even if a crash might not occur on its own merits, investors who fear that possibility may cause the dollar to collapse as they get rid of their dollar-denominated paper assets.
In such a scenario, gold and silver prices in U.S. dollars will be meaningless. What will matter is what gold and silver can be traded for. Right now, an ounce of silver or eight U.S. dollars will pay for lunch in most restaurants. If the dollar crashes, you will still be able to buy lunch for an ounce of silver, and it won't matter if the price of the meal in U.S. dollars is $100 or $1,000.
Don't consider owning precious metals and rare coins as ways to try to make a huge profit. Instead, think of them as insurance against the loss of value of your paper assets.
To get the most gold for your money, the recommended low premium issues remain the Austria 100 Corona (3.5%), South Africa Krugerrand (3.7%), and U.S. American Arts Medallions (3.7%). Of the smaller coins, the British Sovereign (7.6%), French 20 Franc Rooster (8.8%), and Swiss 20 Francs (8.8%) are some of the best buys.
While I like many of the Common-Date U.S. Gold Coins, I am even more excited by the potential with Better-Date U.S. Gold Coins. You can obtain many of these rarities (if you can find them, that is) at close to the prices of common issues but pay little more.
There is some evidence of tightening silver supplies. The premium at which silver trades in the London market (the world's largest silver market) above New York market is up to five cents after being almost exactly the same price for most of the past year.
As I have explained in the past, silver traded in London must be refined to .9999 purity, while that in New York must only be refined to .999 purity. Thus, silver traded on the American exchanges cannot be sold for delivery on the London exchange until after it is refined and transported to London. When a physical silver supply squeeze is on, the London silver price often rises against the New York price until it is profitable to pay the cost of refining and transportation, somewhere around ten cents per ounce.
A rising London/New York premium is the most important of my two most telling indicators of a coming sharp rise in the price of silver. The majority of silver consumed by the world's industrial fabricators is purchased in London. When supplies become tight, its price not only tends to rise, but it also rises even further above New York levels. If the London premium holds at five cents or higher over the next month, I would take that as a clear sign of an impending surge in silver prices, even if my other indicator does not concur.
When the premium on U.S. 90% Silver Coin (1.3%) is above 2%, it is not profitable for refiners to increase the supply of physical silver by melting the coins. The 90% Coin premium was at or above 2% for much of the past month, falling below that just as silver rose sharply. If there is a genuine shortage of physical silver on the market, the 90% Coin premium will likely go back above 2%.
If the London premium stays at least five cents for the next couple of weeks and the 90% Coin premium goes back to 2%, the more adventurous investors may wish to jump into a larger silver position for a possible short-term play.
Common-date Mint State Morgan and Peace Dollars continue their steady rise, along with other numismatic silver coins. Almost everything in Choice Mint State-63 and higher quality is up in the past month. We got a special buy on Mint State 1921 Morgan Dollar Rolls and pass the savings on to you.
Better-Date Morgan and Peace Dollars are rising even faster. Good news - we acquired the largest stock of Superb Gem Mint State-66 1901-O Morgan Dollars in our history!
Platinum, Palladium Markets in Surplus
Platinum hit a 24-year high price of $927 on April 12 this year. The surge was almost entirely caused by paper trading rather than physical demand. Paper traders anticipated that the economic recovery in the U.S. along with generally strong markets for all metals would push platinum even higher.
Then reality set in. Higher platinum prices led to a sharp decrease in platinum demand for jewelry purposes. While jewelry manufacturing accounted for 38% of all physical platinum in 2003, analysts forecast that it will only use 34% of platinum in 2004 and fall further next year.
Higher prices are having an impact on increasing supplies, expected to be up 3.7% this year over 2003 levels. In contrast, physical demand is projected to increase only 0.8%. With this shift, platinum supplies now almost exactly match demand, following five years of significant supply shortages.
In 2005, look for the platinum market to again return to a surplus of supply. Anticipating this, analysts at Johnson Matthey forecast that platinum prices in the next six months will not appreciate and could fall as low as $760.
The higher prices of palladium encouraged much higher levels of production. This market has been in a surplus since 2000. For 2004, look for supply to total 7.16 million ounces, up 10% form 2003. Demand is up 13.5% in 2004 compared to last year, but that still leaves physical demand at only 6.14 million ounces.
Total palladium demand is still down more than one-third since 1999, with automotive usage down 45% (from 5.685 million ounces down to only 3.125 million ounces), electronics usage down 54% (from 1.99 million ounces to only 915,000 ounces), and even dental demand fell 24% (from 1.11 million ounces to 840,000).
In the 1990s, Russia accounted for about 2/3 of all palladium supplies, creating a politically treacherous market. Higher prices have spurred production elsewhere, with Russia now accounting for just 46% of worldwide supplies.
With the continuing surplus of supplies, Johnson Matthey projects that palladium prices through mid-2005 will be within the $160-250 range.
As the gold and silver markets both have more than a decade-long huge shortage of supply, it seems to me a lot more sensible to hold those metals in your hard asset portfolio than platinum or palladium. If you wish to speculate with either of the latter two metals, I recommend conservatively that they be just a small amount of your hard asset holding."
Editor's Note: Patrick Heller is editor of Liberty's Outlook, a publication of Liberty Coins Service, a dealer in rare coins and precious metals since 1971. For more information on how to purchase the coins mentioned please call 1-800-527-2375 or visit the web site at www.libertycoinservice.com.
WALL STREET STOCK FORECASTER
250 Liston Rd., Ste. 700, Buffalo, NY 14223.
Monthly, 1 year, $99.
Newmont using investments
to cut energy costs
Patrick McKeough: "Newmont Mining Corp. (NYSE NEM $48) recently acquired a 6.8% stake in Canadian Oil Sands Trust, which produces oil from Alberta's oil sand deposits, partly as a hedge against Newmont's own rising oil costs.
In fact, the value of this investment has jumped by $75 million in the last three months. To put that in context, Newmont earned $128.7 million in the third quarter of 2004, up 12.5% from $114.4 million a year earlier. However, per-share profits grew just 3.6%, to $0.29 from $0.28, due to more shares outstanding. Revenue rose 32.8%, to $1.17 billion from $881.2 million.
The company also aims to cut electricity costs at its Nevada gold mining operations by building its own power plant. This could cut the operation's cost per ounce by $20. Newmont can expand profits by selling any surplus power to other utilities.
Newmont is a buy for aggressive investors."
INTERINVEST REVIEW & OUTLOOK
P.O. Box 51452, Boston, MA 02205.
Monthly, 1 year, $125.
Nervous over gains in gold price
Dr. Hans Black: "Gold bullion has continued to trade higher despite displaying classic overbought symptoms. We continue to be amazed at the almost universal view that since the dollar has only one way to go (down), gold can only go up. In short, markets are displaying an increasing fear of future price inflation accompanied by higher interest rates. While we remain bullish on the long-term prospects for gold bullion, we are increasingly nervous with the gains in price - from approximately $430 to the current $450 per ounce - over the past month, and remain convinced that a near term correction of some magnitude is due. For the moment we are retaining our downside target of $375-$385 in 2005.
We remain positive on a number of gold stocks and would recommend buying them only on pullbacks. These are Newmont Mining, Placer Dome, Eldorado, Cambior, Orvana, and Southwestern Resources."
THE SPEAR REPORT
45 Wintonbury Ave., Ste. 301, Bloomfield, CT 06002.
1 year, 50 issues, $279. www.spearreport.com.
EnCana: One of the
best energy plays in the world
Gregory Spear: "You may be wondering, why on earth are we recommending an energy company when the price of crude oil is crashing? We believe EnCana (ECA) is one of the best energy plays in the world. And it could be a leader for the next 25 years.
EnCana is North America's largest independent natural gas producer and gas storage operator. Ninety percent of the company's assets are located in North America, and that figure will soon be 100%. EnCana is the largest producer and landholder in Western Canada and is a key player in Canada's emerging offshore East Coast basins. Through its U.S. subsidiaries, EnCana is one of the largest gas explorers and producers in the Rocky Mountain states and while it has a strong position in the deep water Gulf of Mexico, that is going to change, soon. Why?
According to EnCana's CEO, Gwyn Morgan, "Conventional North American production has entered into a classical period of increasing costs and accelerating decline rates. We expect that offshore, North America's future will be dominated by unconventional tight gas and oilsands, which we classify as resource plays." Throughout 2004, EnCana has been transitioning its North American operations to reduce mature conventional oil and gas assets in favour of increasing production from long-life, low-cost "resource plays." The term "resource play" is used by EnCana to describe an accumulation of hydrocarbonds known to exist over a large area expanse and/or thick vertical section. "Resource plays represent a paradigm shift - in other words, unconventional thinking. For example, in contrast to conventional reservoirs, typically resource play decline rates and costs decrease, and cumulative booked reserves increase over time," says Morgan. There you have it.
With resource plays, the trick is not in finding the oil or gas, but getting it out of the ground in a commercially viable manner. EnCana specialized in the unconventional methods that are required to get oil out of tar sands and to get out of large regions of "sponge-like" ground that hold gas in billions of small pockets. EnCana has been working on this technology for over a decade and it is so good at this that it is now North America's number one natural gas producer and the low-cost in-situ oilsands producer. The company has accomplished this by developing its own fields, by strategic acquisitions, and by generating cash from the divestment of mature Canadian conventional oil and gas assets as well as operations in the North Sea. As a result, EnCana's proportion of production from resource plays has increased from 60% in 2003 to close to 75% in 2004 and this process will continue.
In 2004, EnCana is on track to produce more than 1 trillion cubic feet of natural gas. EnCana's proved gas reserves exceed 9.4 trillion cubic feet, yielding a reserve life index of approximately nines years. However, beyond that, EnCana has identified approximately 16 trillion cubic feet of hydrocarbons on existing company lands. This is not a pig-in-a-poke; this figure is not dependent upon exploration success, as is the case with conventional plays. The company knows it is there on land they already own. Together, the company's proved reserves and Unbooked Resource Potential for natural gas totals 25 trillion cubic feet, which represents close to 25 years of clearly visible resource life at current production rates.
The other thing you should keep in mind is that the price of natural gas has very little correlation with the price of crude oil. It used to fluctuate quite a bit, and still does during the peak winter usage period if there is a cold snap, but natural gas prices are generally about 100% higher on average than they have been in the preceding five years. This is not yet fully factored into analyst estimates of earnings potential for the gas drillers, so we think estimates will be revised upward throughout 2005.
Technically, the chart of ECA has begun to accelerate upward in slope; it is shifting into 4th or 5th gear. This increases risk, so average in on expected shallow, short pullbacks, and reserve some of your buying for larger corrections. We believe ECA is an ideal buy and hold candidate for the energy part of your portfolio."
The Peter Dag PORTFOLIO STRATEGY AND MANAGEMENT
65 Lakefront Dr., Akron, OH 44319.
1 year, 24 issues, $389.
Yield and energy content
too attractive to ignore
George Dagnino recommends BP Prudhoe Bay Royalty Trust (the Trust) (NYSE BPT $44.52). Its 10%+ yield and energy content are too attractive to be ignored.
BPT is grantor trust that holds royalty interest for The Standard Oil Company, BP exploration (Alaska) Inc. (the Company), The Bank of New York and F. James Hutchinson. The Trust distributes royalties on approximately 16% of the first 90,000 barrels of the average actual daily net production of oil and condensate per quarter from the Company's working interest in the Prudhoe Bay Field on the North Slope of Alaska. As of December 31, 2003, there were about 1,109 active producing oil wells, 33 gas re-injection wells, 80 water injection wells and 137 water and miscible gas injection wells in the Field.
STOCK TRADER'S ALMANAC INVESTOR
184 Central Ave., Old Tappan, NJ 07675.
Monthly, 1 year, $295.
Energy and Gold/Silver
sectors remain attractive
J. Taylor Brown: "The bullish sectors this month are Energy and Gold/Silver. Both groups have already seen some nice gains, with precious metals particularly strong recently. Historical precedent argues that these moves should continue well into next year at least.
Gold/Silver has enjoyed an average gain 6.6% from December to May. As a reminder, our strategy is to pick up corresponding ETFs for the bullish periods of sectors a few weeks before the historical bullish move and sell them a few weeks before the end of the period.
Last time around for Gold and Silver, we tried something new. The Central Fund of Canada (CEF) is a stock that trades on the Amex. While not a traditional ETF, this stock reflects the true nature of the strategy, eliminating the volatility and uncertainty that the other ETFs have by eliminating the miners and producers. 90% of the assets of the Central Fund of Canada are a 50:50 split between gold and silver bullion. In a nutshell, buying this stock is akin to buying a share of a vault filled with bars of silver and gold. Last time around, the CEF went up 6.1% from August-September; exactly what the historical trend predicted it would do. Due to the lofty price of gold right now, we are setting the buy limit under the market. Buy Limit: 5.65 Stop Loss: 4.80 Target Price: 6.02 Automatic Sell Point: 6.62.
The second option for Gold and Silver is a pure gold play that also factors in the producers and miners, the iUnits S&P/TSX Capped Gold Index Fund (XGD.T). There are 20 securities in the fund. The top five holdings are Barrick (23.8%), Placer Dome (23.5%), Goldcorp (7.3%), Kinross (7.1%) and Glamis (7.0%). We are setting this buy limit under the market level for the same reason stated above. Buy Limit: 54.50 Stop Loss: 46.33 Target Price: 58.10 Automatic Sell Point: 63.91.
Oil has a bullish seasonality from December to May with an average return of 11.5%. There is a bevy of oil ETFs available, but two stand out. The first is the Dow Jones U.S. Energy Sector Index Fund (IYE). Although it is technically an energy fund, it is dominated by oil and oil service companies. The top five holdings are ExxonMobil (23.7%), ChevronTexaco (21.9%), ConocoPhillips (5.0%), Occidental Petroleum (4.6%) and Schlumberger (4.2%). We are picking this ETF up at the current market prices. Buy Limit: 62.24 Stop Loss: 53.24 Target Price: 69.40 Automatic Sell Point: 76.34.
The second Oil ETF, Select Sector SPDR Energy (XLE) has an interesting array of oil, and oil services stocks, as well as straight energy plays. The fund has 27 holdings. The top five holdings are identical to the IYE: ExxonMobil (20.8%), ChevronTexaco (15.4%), ConocoPhillips (8.2%), Schlumberger (3.9%) and Occidental Petroleum (3.9%). Buy Limit: 35.20 Stop Loss: 29.92 Target Price 39.25 Automatic Sell Point: 43.18."
INVESTOR'S DIGEST of Canada
133 Richmond St. W., Toronto, ON M5H 3M8.
1 year, 24 issues, $137
Cameco's contracts in transition stage
From a recent report by analyst Greg Barnes from Canaccord Capital.
"Over the past year, there has been much discussion about Cameco Corp.'s (TSX CCO $107.96, 306-956-6200, www.cameco.com) position with respect to its uranium sales contracts and the fact that the company has limited exposure to spot prices and, therefore, has not participated to the full extent possible in the recent sharp increases in spot prices.
Cameco has long held the position that it does not and will not sell its uranium on a spot basis.
Management has stated numerous times that its long-term sales contracts are structured such that 60 per cent are referenced to the spot market price near the time of delivery, while the balance, or 40 per cent of annual sales, is at fixed prices or base prices escalated by an inflation index (the U.S. GDP implicit price deflator).
In its most recently quarterly news release, Cameco indicated that in 2005, 91 per cent of its sales target is price insensitive (at least to upside price changes). In 2006, the price insensitive sales levels drops to 65 per cent.
Much of Cameco's current contract portfolio was entered into over the past three to five years, and the company has continued to write new contracts as spot and long-term uranium prices have moved higher.
We understand that, on an annual basis, roughly 25 to 30 per cent of the company's contract portfolio comes up for renewal.
Following conversations with a number of participants in the uranium market, we believe that the long-term contracting market has changed significantly, even within the past six months.
The changes are occurring as uranium suppliers are gaining more pricing power and negotiating leverage over uranium consumers. . The consumers (nuclear utilities) have become less price sensitive and more security-of-supply conscious, as prices have risen and availability of material has become a more pressing issue, particularly over the period from 2006 to 2010.
We understand that Cameco, for one, intends to change its contracts to longer durations, with hard price floors and no price ceilings and little in the way of volume flexibility.
In addition, the long-term market appears to be moving away from spot market-related pricing mechanisms and towards using the quoted long-term market price indicators, a logical move, given that these are long-term contracts.
If Cameco is successful in transitioning its contract portfolio towards longer-term contracts with base prices in the US$25 per pound range, and can capture a significant portion of price upside beyond this level, we would have to view this positively.
We have reviewed our estimates for Cameco's realized uranium prices over the next few years. We suspect that our earlier estimates were too high, particularly for 2005.
Although Cameco has not provided any specific guidance with respect to its realized uranium price for 2005, we did outline above what management has said regarding the quantity of sales that it expects will be insensitive to upward price moves above the US$20 -per-pound level.
We have decided that it is best to err on the side of caution with respect to 2005 realized prices. As a result, we are assuming that 91 per cent of the company's deliveries in 2005 are capped at a price of US$15 per pound, while the balance is open to spot prices.
We have assumed an average uranium spot price for 2005 of US$22.25 a pound. Based upon Cameco selling about 32 million pounds of uranium in 2005, we arrive at a realized price of US$15.75 per pound of uranium.
This compares to our previous estimate of US$16.86 per pound, in which we were probably giving the company too much credit for uranium prices above the US$14.50-per-pound level.
Similarly for 2006, we have adjusted our expected price realizations, only now we expect that Cameco could realize a higher price than we had been forecasting previously, based upon the company's guidance that 35 per cent of its sales volume will be sensitive to higher uranium prices.
Based upon our revised 2005 realized price forecast, we have revised our 2005 earnings and cash flow per-share estimates. Our 2005 EPS estimate has declined from $4.76 to $4.44, and our CFPS estimate has been reduced to $6.64 (previously $6.84).
We are maintaining our "buy" recommendation and $116.50 target price for Cameco.
We are using a sum-of-the-parts methodology to derive our Cameco target price.
This is comprised of a 1.25 times multiple to our net asset value for the company's uranium mining and conversion assets ($54 a share) plus Bruce Power valued at 15 times 2005 EPS ($2.41 a share) and the market value of Cameco's equity interest in Centerra Gold ($21 a share)."
THE KONLIN LETTER
5 Water Rd., Rocky Point, NY 11778.
Monthly, 1 year, $95.
Lexington Resources increasing
domestic natural gas reserves
Konrad Kuhn: "There is a "historic" shortage of natural gas supplies in North America. It's been some time since the U.S. has been this low on natural gas reserves and needs to dramatically increase our reserves with low cost production.
Founded in late-'03, Lexington Resources, Inc. (LXRS) is a natural resource exploration company engaged in the acquisition and development of oil and natural gas properties in the U.S. LXRS was built on a strategy of growing assets through aggressive exploration and development of low-cost/low-risk gas and oil properties. Its current operational focus is on gas development initiatives in the Arkoma Basin, Oklahoma, an energy rich, mid-continent area that has produced years of traditional oil and gas reserves. In its first 9 months Of operations, LXRS acquired its 1st target properties, which total approx. 9,450 acres in six separate gas plays in the Arkoma Basin. This acreage can support an estimated 70-100 wells, depending on spacing. The Arkoma Basin harbors one of the largest Coal Bed Methane (CBM) program undertakings in the state of Oklahoma. CBM gas is an abundant promising new source for U.S. natural gas. The first three exploration CBM wells (Wagnon lease) were successfully completed and brought on line early this year reaching in excess of approx. 120 mil. Cubic ft. of gas to Sept. 30, '04.
LXRS will obtain a 53.2% working interest in net proceeds from production on the three wells and has acquired four additional nearby prime leases offering as good or better geology and pay potential as the Wagnon lease. The company has committed to immediately drilling from three to five successive wells, consisting of both horizontal and vertical drilling in the CBM coal bed, shallow Caney Shale and other productive zones. Current economies would allow LXRS to continue this pace of development for the foreseeable future.
Oil and gas revenue for this start-up developer during the 6 months ended Sept.30, '04 were $305,756, with a loss per share of (.35). The company recently completed a successful $2.5 mil. equity placement, and of the 16,999,038 shares outstanding, approx. 53% are held by insiders. The stock has pulled back to support where we would purchase for a 1st target of 3, especially since LXRS has initially been 100% successful in developing gas supplies in a hot CBM area. Using state-of-the-art horizontal drilling in the shallow Arkoma CBM basin, gas can be produced fast (in 2-3 wks.) A single well is projected to produce up to 800,000 cubic feet of gas per day. At $5 mcf value for gas, that's approx. $3,400 per day from a single well.
LXRS' astute management team has initiated a strategy to bring multiple gas wells on-stream in quick succession, in order to create strong cash flow. LXRS also recently reached an agreement which assures the continuous availability of a dedicated drilling rig and crew to drill a 10 well program on its Wagnon, Coal Creek, and South Lamar leases. Using this approach, LXRS can increase its asset base and leverage a growing portfolio of prime land prospects in the gas-rich, mid-continent of the U.S. LXRS is a low-cost producer increasing domestic gas reserves that is badly needed now. Ultimate target 5."
THE ALEXANDER PARIS REPORT
161 N. Clark St., Suite 2950, Chicago, IL 60621.
Monthly, 1 year, $195.
A breather for oil prices
Alexander Paris: "Investors were treated to a correction in crude oil prices from the peak of over $55/barrel to a low of $41.40 at this writing. This is good news, at least in the short term, since rising oil prices have been blamed for a number of current or expected ills - from weak stock prices and lower corporate growth to weak retail sales and inflation. The recent decline has undoubtedly been a factor in positive stock market trends lately. Whether it is a temporary breather or not remains to be seen.
We had recently written that, although there are good reasons to believe that the long-term direction in oil prices is upward, both on the supply and demand side, the recent oil prices were too high in the near-term to be sustained without some kind of correction. We called it a perfect storm on the supply side, where everything that could go wrong was going wrong including supply disruptions, or feared disruptions, in Iraq, Russia, Nigeria, the North Sea, the Gulf of Mexico, Venezuela, Saudi Arabia and elsewhere. At the same time, analysts were warning that we would have a particularly severe winter that would raise heating oil demand. The extent of the impact of speculators on oil prices was also a big unknown. Well, even perfect storms eventually abate, at least for a while, and the storm may be breaking up.
The start of winter looks anything but severe. The Energy Department recently lowered its forecast for oil demand for the rest of 2004 and for 2005. U.S. crude inventories have increased for 10 straight weeks at this writing, with another increase expected. Instead of OPEC worrying about how it can squeeze out more production, there is now considerable speculation and pressure from some members to reduce production. As for the demand-side perfect storm, there has not been much respite. Interestingly, however, on December 6 OPEC indicated that it would consider a cut in production at its upcoming meeting, Islamic militants stormed the U.S. consulate in Saudi Arabia, protestors in Nigeria laid siege to two oil platforms shutting down nearly 100,000 barrels per day production, and two Norwegian oil fields with 205,000 production capacity were shut down due to gas leaks. It wasn't that long ago that such a confluence of events would have driven oil prices substantially higher. Instead, crude oil prices slipped by $0.44 to $42.98 and the next day fell to a three-month low at $41.40.
Things have certainly changed, especially market psychology. We suspect that previously aggressive oil speculators have been driven to the sidelines with a much lower certainty level of higher oil prices than a few weeks ago. Perhaps they are shifting to greener pastures by betting against the U.S. dollar, which might be a mistake in the near term. Even temporarily lower oil prices will reduce imports and help the trade deficit, possibly the dollar as well, in the near term. We would guess that the dollar will stabilize for much of the rest of the year as players even out their positions and lay plans for the new year.
We don't know how long this respite in oil prices will last. OPEC will be meeting shortly and, although it has denied it, the group may raise oil prices and rally oil once again. We suspect that any move would be modest to begin with and we would also guess that the back of speculators has been broken for now. Consequently, oil prices may simply stabilize for a while well below the previous peak, maybe even longer than expected. Investors will then have time to more carefully assess the long-term picture for energy prices, which is probably going to be an uptrend.
With the combination of lower oil prices and good economic reports, the stock market has continued its long advance from the mid-August lows and appears assured to meet our expectations of a good seasonal fourth quarter rally that should carry over into early 2005."
Ian Wyatt's GROWTH REPORT
611 Pennsylvania Ave. SE., #417, Washington, DC 20003.
Monthly, 1 year, $195.
Northern Orion: Promising play
Ian Wyatt: "One of Growth Report's most promising natural resource plays, Northern Orion Resources (AMEX NTO) recently announced third quarter financial results.
For third quarter 2004, Northern Orion earned $5.72 million, or $0.05 cents per share, compared with net income of $1.3 million, or $0.02 per share for the year ago quarter. For the nine months ended September 30, Northern Orion realized net income of $17.7 million, or $0.16 per share, compared with a net loss of $1.09 million, or $0.03 per share for the same period of 2003.
The company has cash and cash equivalents totaling $41.76 million, which grew due to significant cash distribution from its share in the Alumbrera mine in Q4 2004.
Management believes a similar return on investment might be realized in the coming years from their Agua Rica Property. The company has announced plans to take this project into bankable feasibility in lieu commencing development operations in 2005. The company plans to use cash from Alumbrera operations to fund almost all of the development of Agua Rica.
We are pleased with these results, and we look forward to the consistent and improving developments that are contributing to Northern Orion's compelling investment story.
We rate shares of Northern Orion Resources a Buy with a twelve-month price target of $5.00 per share."
EMERGING GROWTH STOCKS
102 - 2020 Comox St., Vancouver, B.C. V6G 1R9.
1 year, 8 to 10 issues, $119. www.EmergingGrowthStocks.ca.
Even with some positive indicators for gold in place, the top of the seasonal cycle is so close that Louis Paquette remains cautious at this time.
One of his best bets for 2005 is Silver Wheaton Warrants (TSX SLW.WT $0.30).
"How do you like those wild swings in the price of silver lately? Maybe this is a leveraged way to play them. SLW is of course the silver assets spun off and now separately trading (but still 75% owned) from Wheaton River Minerals. My understanding is there are 87.5 million warrants good until Aug. 5, 2009 at an exercise price of $0.80. There is also a 1 for 5 reverse split is planned and approved, so post consolidation these should be reduced to 17.5 million, with an exercise price of $4.00. SLW stock, well down from its high of $1.05 in October ($0.75) is the purest way to play silver, a well managed, profitable company with a highly liquid stock. I would try to time to buy the warrants on sharp downdrafts in the silver price as a leveraged play on the metal price and SLW."
ECONOMIC ADVICE
3910 NE 26th Ave., Lighthouse Point, FL 33064.
Monthly, 1 year, $89.
Digging in on Northgate Minerals
James Rapholz: "My very first stock pick of 2005 is Northgate Minerals Corp. (TSX NGX; AMEX NXG, www.northgateminerals.com).
Northgate is the business of mining and exploring for gold and copper, with a focus on opportunities in North and South America. Its principal assets are the Kemess South Mine and the Kemess Centre and Kemess East in British Columbia.
Market Value, $K: 344,535 - Shares Outstanding, K: 200,311 - Number of Institutions Shareholders: 79 - Percentage of Institutional Shareholders: 34.9% - Last Quarter Sales, $M: 50.0 - Last Quarter Net Income, $M: 9.0 - Last Quarter Earnings Per Share: $.04 - Price/Earnings Ratio: 13.2 - Earnings Per Share, $.13.
Northgate, has a very high rating by BarchartX - Realtime Equities Services so, I'm going to dig into this one to see if it fits my investment criteria. First of all - I like the price, I try to buy stocks that are trading for under $5.00. My rational here is that you can turn a $5 stock into $10 stock, a zillion times faster than it takes to turn a fifty dollar stock into a hundred dollar issue - yet - the profit percentage is exactly the same.
My next item of interest is whether or not the company in question is making any money. And, what's so important about this? First of all, the chances of it going broke on you are far slimmer than it would be in a stock that is showing no profit. And, secondly, the so called "smart money" places a far greater investment value on a company that's making money than they do on one that has high hopes! As a rule of thumb - unless there is a special situation involved - I won't pay over a dollar for a stock issue that isn't showing a profit. As far as I'm concerned - investing in a stock that isn't showing a profit is only speculation.
How much should I pay for Northgate? Wall street's quick and dirty answer to that one is to check out the P/E or price earnings ratio. You get this number by dividing the price of the stock by the earnings the company is making. Northgate is trading for about 14 times earnings. This issue is priced on the cheap side. Precious metal stocks, that are fairly priced generally trade in the 30 P/E ratio area. And, after gold begins trading in the $500 per ounce area, you'll probably see that number move up to 50 or 60 in very short order!
The percentage of institutional shareholders of Northgate is 34.9% and that is of great interest to me and it should be to you. Institutions are made up of mutual funds, hedge funds, trust companies, universities and so on. Institutions are inclined to be part of the "smart money" crowd. They do a lot of investigating before they spend their money and are inclined to be long term holders. This is a plus for the stock.
About the only draw-back in this investment is the low volume it has been trading. Northgate has been trading well under a million shares per day for the last one hundred days. This indicates that the stock isn't well represented by market-makers and therefore isn't getting all the attention from the investment community that it deserves. However, this will probably change as the price of gold rises. It is of interest to note that the 100 Day Average Volume was only 720,566 shares per day while the 50 Day Average moved up to 909,808 shares per day. Gold has risen in value over the last two months and the interest in Northgate has moved up in lock-step. As soon as it reaches about 1.25 million shares per day, the day traders will jump all over it and this action should drive the price up considerably.
I believe that you won't go wrong by investing a few bucks into Northgate Minerals Corp. If gold reaches the $500 per ounce level (and this looks like a sure thing, at the present time) - I expect Northgate to easily reach $3.00 and if gold eventually crosses the $1000 per ounce gate, Northgate should become a $6.00 stock!"
Editor's Note: James Rapholz's stock picks on gold, silver, natural gas, oil and coal were up 173.41 for 2004. Visit the web site at www.economicadviceinc.com.
STOCK TRADER'S ALMANAC INVESTOR
184 Central Ave, Old Tappan, 07675.
Monthly, 1 year, $295.
J. Taylor Brown: "Sometimes you have to forget where a stock has been and concentrate on what it's worth now. Orezone Resources (OZN) has been one of our best performers during the almost two years that we've been in it. But during that time the company has continued to prove up more ounces of gold and to acquire more prospective ground. Recently Orezone acquired exploration rights on no less than an additional 2,000 square kilometers - thought to be on trend with its most advanced project. The company has chalked up measured and indicated reserves of 1.91 million ounces plus an inferred 2 million ounces. We'd ordinarily view inferred resources with skepticism, but with the company announcing rich new holes every few weeks, we have little trouble thinking that total and more will be added to the proved category soon enough. If we accept the figures and calculate on a fully-diluted share basis, the market is valuing Orezone's gold at a conservative $35 per ounce, which happens to be the level at which the New Deal fixed gold's price more than 70 years ago as they tried to consign the metal to the status of "barbarous relic." We're happy to do new buying on dips and we expect OZN at least to double again next year.
Pacific Northwest Capital (PFN.T) is also making steady progress, but the stock gets very little respect. Maybe that's because it is an old story, maybe because its ore grades are not spectacular. Still, the company is defining an economic body of platinum-palladium ore - well located in Ontario - which the market will recognize sooner or later. PFN is near multi-year lows that should provide support. At current prices it's a rather safe candidate to double or better.
We think most of the stock we list as Buys (or evens as Holds) have the potential to double or better. It's just that in some cases we're less confident about the timeframe, we see more risk, or we prefer to buy them lower.
Datatrak (DATA) is up a lot, but the market cap is still low and we see a bright future. This remains one of our favorites for the long term, but we can't say how long it will remain in a trading range, working off the big advance. Steadily rising earnings will kick start DATA again sooner or later.
European Minerals (EPM.T) is one of the cheapest mining stocks based on assets. It has the potential to do as well as OZN and PFN, and in fact should get a big boost as soon as it announces that it has financing for its mine. But the risk is higher since the potential mine is in Kazakhstan. The stock now trades in Canadian dollars in Toronto rather than U.S. dollars. The symbol is now EPM.T (rather than EPMu.T).
We still like Northern Orion (NTO) as well, but the stock is up and it's not exciting since it is a value rather than an exploration play. NTO is one to accumulate on weakness for the longer term.
Once again, energy stocks held up very well as crude oil underwent a sharp correction. That's great for holders but not for bargain hunters. Our oil and gas issues actually are all ahead in the last month. Parallel Petroleum (PLLL) remains a long-term growth candidate that should do well almost regardless of fluctuations in oil prices. The same goes for American Oil & Gas (AOGI), but it's more dependent on exploration and hence more speculative.
Bankers Petroleum (BNK.V) is also speculative, having acquired major assets but not having yet fully evaluated them. The stock is way down from the highs and a good bet for the venturesome."
INVESTOR'S DIGEST of Canada
133 Richmond St. W., Toronto, ON M5H 3M8.
1 year, 24 issues, $137.
Four mining stocks that
should do well in 2005
George Werniuk: "To say 2004 was a good year for mining stocks is a gross understatement. Commodity prices were up as the soaring demand for raw materials was driven by the booming Chinese economy and, in the case of nickel, limited supplies.
Although gold appears to have sustained its price above US$400 an ounce, it was a hollow gain for Canadian investors. As the price of gold rose in terms of the greenback, the loonie also rose against the U.S. dollar, negating most of gold's increased value. This same situation has wreaked havoc with South Africa's gold mining industry.
If China's economy continues to burgeon, the demand for commodities will be sustained. That is good news for producers and explorers. Some of the companies that are well positioned to take advantage of the situation are as follows:
Slam Exploration Ltd. (TSX.V SXL, $0.39, 506-627-1353, www.slamresources.com) has a joint venture with Noranda in the mature Bathurst mining camp of New Brunswick. Noranda's major assets in the region are the Brunswick base-metal mine and a lead smelter.
The mine has ore for about five more years of production, so Noranda is naturally anxious that new ore be found in the region. It has teamed up with local junior Slam to take a new exploration approach to the area. The Bathurst camp has been well explored, but the area east of the camp has not. The geology to the east consists of younger sedimentary rocks that thicken eastward. This wedge-shaped younger cap has effectively hidden the underlying rocks that to the west host the mineralization found in the camp.
With advances in technology, particularly geophysics, this underlying favorable rock can now be explored. Using a technologically advanced airborne electromagnetic geophysical system called MegaTEM II, explorers can see deeper and clearer than with previous systems.
The survey carried out over the joint venture's 140,688-hectare land holdings has outlined a number of new geophysical targets that require drill testing.
The 50-50 joint venture has planned expenditures of $5 million ($2.5 million per partner) each year for five years. Slam stock has traded as high as $0.95 in the past 12 months, but the stock price has dropped down to its current level of around $0.39 a share.
It is now a good buy, considering that the program is only part way through the second year of the agreement and that drilling to date (just over 30 holes) has given the geologists and geophysicists a better understanding of how to interpret the geophysical results. More drilling is planned for the new year to test over 30 targets outlined by the MegaTEM survey.
A second company to watch in 2005 is Blackstone Ventures Inc. (TSX.V BLV, $0.36, 604-687-3929, www.blv.ca). Blackstone has a joint venture with Falconbridge on the Espedalen and Vakkerlien nickel properties in central Norway. Both are in geological terrain similar to the Voisey's Bay region in Labrador.
The Espedalen project has been raising eyebrows. It covers about 50 square kilometers and hosted small nickel mines in the mid-1800s. Numerous nickel showings are known.
To earn a 60 per cent interest in the properties, Blackstone must fund $2.5 million in exploration over a four-year period. Ground geophysical surveys identified a number of high-priority electromagnetic conductors. Eleven were chosen for drill testing in a 3,000 metre drill program.
Two holes on targets P2 and P2a intersected significant mineralization. One hole intersected 2.07 per cent nickel, 1.2 per cent copper and 0.07 per cent cobalt over a width of 2.7 metres. Another hole, 200 metres away, intersected 1.73 per cubic nickel, 0.77 per cent copper and 0.06 per cent cobalt over 14.6 metres.
A 2,000-metre drill program is planned to outline the grade and dimension of this new discovery in early 2005. The stock price is near its year-low (from a high of $0.76) and is not expected to move much until the drills start turning and the core is analyzed.
One of the big commodity gainers over the past year has been uranium. Strathmore Minerals Corp. (TSX.V STM, $1.42, 800-647-3303, www.strathmoreminerals.com) has been acquiring and developing properties that have uranium resources. This gives the company leverage to future increases in uranium prices.
Strathmore has been on an acquisition spree for over a year, gathering up properties in the Athabasca Basin of Saskatchewan (Saskatchewan is the world's largest producer of uranium), Quebec, New Mexico, Wyoming and Peru. The company has about $8 million in the bank and is entertaining the idea of starting exploration in 2005.
Its Dieter Lake property in Quebec has had advanced exploration done on it in the past, making it a logical choice for further exploration. With worldwide uranium consumption exceeding production, and uranium prices staying relatively high (US$20.50 per pound on Nov. 29), Strathmore's acquisition strategy may prove to be a winner for its shareholders.
Northgate Minerals Corp. (TSX NGX, $1.94, 604-681-4004, www.northgateminerals.com) is a gold and copper miner that produces about 300,000 ounces of gold and 75 million pounds of copper contained in 145,000 tonnes of concentrate per year from its Kemess mine in north-central British Columbia.
The mine has proven reserves of 91 million tones. About 10 kilometres away, the Kemess North deposit has the potential to increase the productive life of the existing mine infrastructure by over 11 years, to 2020.
On the basis of a revised feasibility study completed in May 2004, Northgate moved four million ounces of gold resources at Kemess North into the proven and probable reserve category.
The Kemess North reserves now stands at 282 million tones proven, representing 2.6 million ounces of gold and one billion pounds of copper. There is also 131 million tones of probable reserves, representing 1.3 million ounces of gold and 0.465 billion pounds of copper.
The recently completed feasibility study indicates that total recoverable metals will be 2.6 million ounces of gold and 1.3 billion pounds of copper at a cash cost of US$180 per ounce of gold. Total initial capital costs for Kemess North are US$190 million.
With its positive cash flow from current operations and its reserves at the Kemess North deposit, Northgate should be a profitable company for years to come.
The above four companies should do well in 2005, assuming that commodity prices do not retreat and the world economy does not falter."
Editor's Note: George Werniuk is a Toronto based geologists and a regular contributor to the Investor's Digest of Canada.
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