INVESTOR'S DIGEST of Canada,
133 Richmond St., W, Toronto, ON M5H 3M8.
1 year, 24 issues, $137.
Analysts take a shine to
mining giant Barrick Gold
Michael Popovich: "If the mining magnate Peter Munk is walking with a spring in his step these days, he's more than justified in doing so.
That's because Barrick Gold Corp. (TSX ABX, $31.24, 800-720-7415, www.barrick.com), the company he built up to become the world's third largest- gold producer, is now poised to become the biggest.
A month-and-a-half ago, Barrick launched a US$9.2-billion hostile takeover bid for Place Dome, its Vancouver-based rival.
And although Placer has spurned Barrick's offer, terming it inadequate, Mr. Munk has hardly gone gently into the night.
He believes Canada could lose its leadership in metals, should Placer reject Barrick for Newmont Mining, a Denver-based gold producer - and one that's now mulling its own bid for the Vancouver company.
Specifically, Mr. Munk says, Canada could see an exodus of those companies - consulting outfits, investment banks and law firms - that depend on the mining industry for their bread and butter.
And although Mr. Munk's comments may seem self-serving, they're entirely understandable, given a company of Barrick's size, says Charles Oliver, a portfolio manager for Toronto-based AGF funds.
"In any industry, as you get larger, it's very hard to grow," Mr. Oliver says. "And Barrick has taken this as a time to try and get some assets."
Indeed, Placer's properties in the Dominican Republic and South Africa are good growth plays, Mr. Oliver notes.
Meanwhile, Mr. Munk can take pleasure in gold's upward spiral. In late November, the metal came within striking distance of US$500 an ounce - a level it hadn't hit since December 1987.
He can also take pride in Barrick's strong earnings, given that its third-quarter income came in at US$113 million, or $0.21 a share - more than triple what it racked up for the similar period in 2004.
Gold sales were also higher, climbing 25.4 per cent to $627 million, while operating cash flow zoomed 52.7 per cent to $232 million.
Moreover, Barrick continues to boast one of the lowest cash costs of all the senior gold producers.
It's also continuing to develop a new generation of mines worldwide, having recently brought on stream a property, Lagunas Norte, in Peru. Not only did that site come in ahead of schedule, it also achieved a start-up with its $340 million budget.
Given Barrick's seemingly shiny future, it's not surprising it did well with our market mavens this month.
Of the 14 analysts we surveyed, seven rated the company a buy; four, a buy/hold and just three, a hold, propelling Barrick onto our list of top-10 buys for the first time since October."
Editor's Note: In a late announcement on December 21, Barrick Gold and Placer Dome have agreed to combine in a $12.1 billion deal that creates the world's biggest gold miner.
EMERGING INVESTMENTS
P.O. Box 97, Williamsport, PA 17703.
Monthly, 1 year, $287.
Is another golden age approaching?
Steven Lord: "Gold's run up through $500 per ounce had paused somewhat, but the fact remains the yellow metal reached levels not seen since 1987. At current levels, even marginal mines with cash production cost well over $350 per ounce are viable, and mining firms are dusting off surveys in search of properties they had disregarded as uneconomical. It is a classic asset scramble.
So what to make of gold's surge? Is it discounting massive inflation in 2006, surging jewelry demand in Asia, or being used as a hedge against economic uncertainty? Probably a little of all three. Gold is hitting new highs in all currencies - the dollar, the euro, the Swiss franc, the Australian dollar, the yen, etc. - and doing so even in the face of falling U.S. bond rates. Both things that have traditionally held inverse relationships to gold, making the upswing all the more notable.
Our Beat Inflation Portfolio has benefited from the commodities upswing, driving the prices of our three mining companies strongly higher. Newmont Mining (NEM), the world's largest gold miner, is likely to stay that way now that Placer Dome (PDG) has rebuffed Barrick Gold's (ABX) takeover offer as "inadequate." Many market observers think NEM will make a bid for Placer in the next couple of months, but I'm not sure it makes sense - the assets of the two companies are not terribly complementary, and NEM would have to pay a premium for PDG when it could just as easily (and more cheaply) devote those assets to its own production. Newmont reached $48 as gold surged, and a break over $49 would put NEM at nearly 10-year highs.
Our other metals plays, Phelps Dodge (PD) and Rio Tinto (RTP) have gone just gangbusters since our last issue. On the back of rumors of massive Chinese short-covering that pushed copper up to all-time record levels, Phelps Dodge reached all-time record highs over $135 as we went to press, some 9% above its entry into our portfolio last month. PD also announced that it would return $1.5 billion to shareholders by the end of 2006, including a $500 million special $5/share dividend payable in December. I think this is smart; I'd much rather see PD return some of its sizeable cash than to make an ill-timed acquisition at peak prices. Meanwhile, RTP, being in engaged in a variety of base metal & industrial mining sectors, has also risen roughly 9%. I don't expect either firm to continue rising at such a torrid pace, but the equity side of our group has already returned roughly three times the CPI.
This month we're adding a silver mine, Coeur D' Alene (CDE). We don't have a great deal of silver exposure from the other mines in the group, and like gold the white metal has pushed up against 18-year highs. Unlike gold or copper, silver is attractive as an anti-inflation investment and as an industrial metal, which with economies around the globe still expanding at a rapid pace, should keep demand well ahead of inventories and production.
Coeur D' Alene is the world's largest primary silver producer. In 2004, it mined 14.1 million ounces of silver from two of the largest silver mines in the U.S. and two expanding low-cost mines in southern Chile and Argentina. It has 196 million ounces in reserve, and internal growth projects in place could increase silver production by 56% over 2004 levels.
CDE's cash cost is $3.65 per ounce, versus going rates of $8.28 per ounce, meaning CDE's leverage to higher prices is both large and direct. Finances are strong (for a mine), with $180 million in debt, $257 million in cash and a current ratio of 12-to-1. Yet, in spite of such fundamentals and a 41% increase in third-quarter revenue, CDE is 40% below its 2004 peak. While not paying a dividend and clearly at risk if the global economy slows down, CDE adds an additional measure of inflation protection to our portfolio."
EMERGING GROWTH STOCKS
102 - 2020 Comex St., Vancouver, BC V6G 1R9.
1 year, 8-10 issues, $119.
Amera to explore Peruvian opportunity
Louis Paquette: "Amera Resources (TSX-V: AMS) is managed by The Grosso Group, the same folks who run IMA Exploration, Golden Arrow and Gold Point Energy. AMS went public in December 2003 and has accumulated a portfolio of high potential properties with the main focus being the prolific gold - copper district of Southern Peru. Examples of high profile projects that are in close proximity to Amera's projects include:
- Constancia copper discovery (Norsemont Mining)
- Liam gold-silver discovery (Newmont/Southwestern Resources)
- Poracota gold deposit of 1.5 million ounces of gold (Buenaventura/Teck Cominco/Southwestern)
- Orcopampa gold-silver mine (Buenaventura; in production since 1960; currently producing 200,000 ounces of gold per year).
Esperanza and Cruz de Mayo gold projects are the company's current focus. Esperanza is a grassroots property with seven anomalous surface zones. Cruz de Mayo has produced successful surface sampling and the company is preparing to define drill targets.
I would hold AMS with its current suite of holdings and personnel. However, I bring it to your attention at this time for a couple of other reasons. For one, the price hasn't moved too much yet.
While most high quality juniors have already moved 100% or more since the lows in May, AMS is still trading in the lower half of its two-year trading range. Quality companies that haven't already appreciated a lot are getting very difficult to find. I consider AMS high quality but without the premium price. At the same time, a look at a chart of AMS also appears to be completing a long consolidation period stretching back to April, 2004.
The other reason I like AMS at this juncture, has to do with Anglo Gold leaving Peru this year in order to focus on their African operations. This has created an ownership vacuum and a unique opportunity to pick up some good people and properties. As a result, Amera's staff are made up entirely by Anglo personnel giving the company access to some potentially hot prospects. So while AMS's current projects may bring shareholders some joy over the next year, there may also be some additional upside potential if some interesting new projects from Anglo were to be acquired. For more information: 1-800-901-0058 or 604-687-1828, or www.ameraresources.com."
Ian McAvity's DELIBERATIONS on World Markets
P.O. Box 40097, Tucson, AZ 85717.
1 year, 18 issues, $225.
Calls for a fast run are premature
Ian McAvity: "At the San Francisco Gold Show, I concluded that: Yes, gold is running and likely to make a higher high near term, but I expect to see $450 before $550, and perhaps $420 before $580, to try and put the current rush in perspective.
Important tops at this time of year in 2003 & 2004 were followed by important lows the following April/May. We could be on the verge of a "three-peat" given the extreme bullishness of commodity traders at this year-end.
Calls for a fast run to $600/ $700 are very premature in my view."
SILVER VALLEY MINING JOURNAL
414 Sixth Street Wallace, ID 83873.
Visit www.SilverMiners.com
Last-Minute Stocking Stuffers
David Bond: "Looking to get that someone special a unique holiday gift. Say, a silver stock.
There are silver stocks of all shape and size, priced to fit Beamer- and bicycle-sized budgets alike. And they'll never be cheaper. Oh, there'll be a few after-Christmas bargains as tax-selling season looms, and a few January white (metal) sales during the inevitable corrections ahead, but by Easter, we're guessing, your loved ones will love you more than ever.
We have several last-minute gift recommendations for that thoughtful holiday giver. For under the tree:
Pan-American Silver (PAAS) is poised to become the world's top-producing, low-cost primary silver miners. In 11 short years its annual silver output has risen from zip to 13 million ounces, and will grow to 23 million ounces in 2008. Its operations are in (relatively) politically stable, mining friendly countries in North and South America, mainly Peru and Mexico. CEO Ross Beaty is one smart cookie.
Hecla Mining Company (HL) is trading at K-Mart prices relative to its reserves, production, and reputation as the world's most professional narrow-vein precious metals miner. Their stock is getting whacked right now because of commie Hugo Chavez' probably meaningless saber-rattling in Venezuela, whence comes most of Hecla's gold production, but consider where their silver comes from: Mexico, Idaho, and Alaska, and they've just exposed some great new silver values in Mexico. But the most important thing you need to know about Hecla is that they're lucky.
Coeur d'Alene Mines (CDE) is currently the top dog in primary silver production, with about 14 million ounces this year. Most importantly, Coeur over the last several years has completely de-hedged its silver production, thus exposing them, like the others in any list we'd make, fully to the silver market. With gold and silver production winding down at Rochester in Nevada, Coeur wisely purchased about 30 million ounces of silver production in Australia this year for a few dimes on the buck. Like Hecla, they're invested heavily in the Silver Valley, producing, developing and exploring at the Coeur and Galena mines, and they've got a "new" shaft, the Caladay, to access additional reserves.
Silver Standard Resources (SSRI) isn't yet a producer, but is the largest call-option silver play around and the option never expires: it just goes up and down with silver. They've acquired in-the-ground silver reserves and resources up and down the Western Hemisphere and Australia, and are partnered-up with Minco in China. CEO Robert Quartermain literally rocked the mining world in 2004 when the company bought nearly 2 million ounces of physical silver bullion on an April dip for what was then about the total cost of just mining it - precisely when the bigger bozos were shorting (or more politely, "hedging"), for the same reason!
Gifts for the hearth come a little cheaper than the under-the-tree variety presents. They're the saplings in the forest, if you will. Here are the ones we think are being well-nurtured, of good stock, and could develop big payoffs in the near future for that lucky gift recipient:
Silvercorp Metals' (SVM) Henan-Found (Ying) mine in central China has to be seen to be believed. It would be a highly productive and profitable free-standing lead-zinc mine, were it not for the outstanding silver values (40 ounces/ton is almost boring at Ying). The management is top-drawer and aggressive, and SVM moved from the TSX-V to the TSX in October. Final permitting of Ying is expected next year as is completion of their 600-tpd concentrator. If China wants to encourage North American investment in mining ventures there, SVM will be a huge silver play, with 6 million annual ounces of silver production at rock-bottom cost. Meantime, that development muck is paying for all mine construction with a little left over for payday.
Fortuna Silver (FVI) is 100 percent owner-operator of the Caylloma silver mine high in the Peruvian Andes. Caylloma has been in more or less continuous silver production since the 17th Century, with some 250 million ounces on the books. The legendary Hochschild Group, the mine's previous owners, have taken a position in Fortuna, leaving behind a fully operational 600 tpd concentrator. Fortuna plans to up the mill's throughput to around 900 tpd with the addition of a zinc circuit, which will greatly enhance production values and get a lot more use out of the ore in the Animas vein. FVI's management is sharp, aggressive, and 4th generation Peru-savvy. Caylloma's a clean deal.
New Jersey Mining Company (NJMC) gets the red-headed stepchild treatment in the market from time to time, and for no good reason we can see except that Fred and Grant Brackebusch are better miners than they are promoters. Astute management, lean operation, and they're producing GOLD (yes, we had to have one gold stock in here) from the legendary Golden Chest Mine in Murray, Idaho. Drilling on the main vein structures at the Golden Chest , which is owned by Metaline Contact (MTLI) continues to open up new possibilities. This could be a 1,000 tpd operation very soon.
Sterling Mining (SRLM) finally, Finally, FINALLY got their SEC Form 10 act together on the 15th, they're producing silver in the Zacatecas region of Mexico from old tailings, and they control the legendary Sunshine silver mine. They've been all over the map in the past 18 months, from $2 to $13 and back, now at an affordable $3.30. Sterling has one goal in mind, and that's to reopen Sunshine on a sustainable basis - an admirable objective in context of the quick-buck artists who've run Sunshine in the past and are after it now on the cheap. SRLM will be underground diamond-drilling next year after two years of surface geochem and tying up surrounding properties to avoid trespass issues that plagued previous operators. Their rehab work on the hoists and underground workings has been top-notch. Stay tuned.
Lastly there are the stocking stuffers, the 30-odd survivors and successors of the late, great Spokane Stock Exchange, that still hold silver patents in around the Coeur d'Alene District. They range from Timberline (TBLC), which has a man-bites-dog deal to explore and develop Hecla's Snowstorm and Snowshoe areas on the valley's east end; Revett (REVM), which is mining silver and copper over in Troy, Montana; and Mines Management (MGN), the region's most popular call-option play with its Montanore copper-silver deposit in the Montana copper-sulfide belt; to what we call here in Wallace the kitty-cats: Silver Buckle (SBUM), Vindicator (VINS), Metropolitan (MEMLA), Merger (MERG), Mineral Mountain (MMMM), Shoshone Silver (SHSH) and many others.
But to learn more about the kitty-cats, you'll have to send me a Christmas present of $20 and buy my book, The Silver Pennies, off Amazon or elsewhere. Whether you do or not, have fun shopping for that perfect last-minute holiday gift. Your loved ones will love you all that much more, come Christmas 2006.
Editor's Note: David Bond covers gold and silver mining equities for a number of national and international publishers.
Roger Conrad's UTILITY FORECASTER
1750 Old Meadow Rd., Ste. 301, McLean, VA 22102.
Monthly, 1 year, $129.
Amerigas Partners head and shoulders above competition
Roger Conrad: "When a sector's hot, almost everyone makes money. But when it comes to weathering the current troubles of the propane distribution sector, Amerigas Partners (NYSE APU) is head and shoulders above the competition.
The LP runs the 46-state US propane distribution assets of utility conglomerate UGI, general partner and owner of 44 percent of its units. For much of its history, UGI has had to guarantee Amerigas' minimum guaranteed distribution (MGD) of $2.20 a year.
In second quarter 2005, thanks to several years of disciplined acquisitions to boost scale and lower costs, the LP increased distributions for the first time. Since then, it's maintained 1.2-1 cash flow coverage of the dividend, best by far of any propane distributor.
Like its rivals, Amerigas faces the twin challenges of hedging fuel cost risk (since propane is essentially made from natural gas) and minimizing loss of sales to customer conservation and bad debt. Thus far it's held its own, actually selling more propane in the fiscal fourth quarter (ended September 30) than the year before.
Winter results will be more telling. But with the units nearly 20 percent off the 52-week high and yielding nearly 8 percent, a lot of bad news is already priced in. If energy prices come down hard, Amerigas' cash flows and share price will benefit, making a nice hedge for the energy stocks in the UF Portfolio.
Amerigas is a buy up to 29."
HENDERSHOT INVESTMENTS
11321 Trenton Ct., Bristow, VA 20136.
1 year, 4 issues, $45.
Seeking an energy boost? Consider ExxonMobil
Ingrid Hendershot: "ExxonMobil (XOM $58.25) operates or markets products in the United States and about 200 other countries and territories. Their principal business is energy, involving exploration for, and production of, crude oil and natural gas, manufacture of petroleum products and transportation and sale of crude oil, natural gas and petroleum products. ExxonMobil is a major manufacturer and marketer of basic petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics and a wide variety of specialty products. ExxonMobil also has interests in electric power generation facilities. Affiliates of ExxonMobil conduct extensive research programs in support of these businesses.
With roots that trace back to the late 19th century, ExxonMobil was formed in 1999 by the combination of two high-caliber organizations, Exxon and Mobil. Today, the company is an industry leader in almost every aspect of the energy and petrochemical business. Leveraging three strong global brands, Mobil, Exxon, and Esso, the company is trusted by customers to deliver superior products in a global market.
As the world's largest, non-government petroleum company, three-quarters of ExxonMobil's business is conducted outside the U.S. On an average day, XOM produces over 4 million oil equivalent barrels, which is about 3% of the world's daily oil and gas appetite.
In just 25 years, global energy demand is expected to increase nearly 50% as developing countries, such as China and India, increase demand for oil. An estimated 100 million barrels of daily oil equivalent in new production will be required during this time period as well as an estimated $17 trillion in new investments.
To help meet this growing demand, ExxonMobil has a development portfolio of over 100 projects around the globe involving more than $80 billion in net investments. Technology is vital to the company's efforts to provide reliable and affordable energy. ExxonMobil invests over $600 million annually on proprietary research which has resulted in more than 10,000 patents over the last decade.
ExxonMobil generates strong cash flow from operations, which topped $40 billion last year. Over the last decade, ExxonMobil has invested an average $14 billion annually in capital expenditures with at least $18 billion in annual capital investments slated though the end of this decade.
Even after these significant capital expenditures, the company still generates substantial free cash flow. The company returns much of this cash to shareholders through dividends and share buybacks. Cumulatively since the merger, XOM has paid more than $38 billion in dividends and distributed about $36 billion through share repurchases, reducing shares outstanding by more than 8 percent. Through its dividends, the company has shared its success with investors for more than 100 years and has increased the annual dividend payment for 23 consecutive years. ExxonMobil's dividend currently yields 2.0%.
Due to strong commodity prices, earnings per share (excluding special items) increased 39% for the first nine months of the year, reflecting improvements in all segments of the business. For the full year, ExxonMobil should generate EPS of about $5.20 with further growth expected next year. The stock appears reasonably valued trading for about 10.5 times estimated 2006 EPS of $5.55.
ExxonMobil's disciplined business model is focused on generating value for shareholders as evidenced by the company's superb 21% average return on equity over the last five years. Superior management skills result in projects being completed on time and on budget. Unmatched financial strength provides the company with the flexibility to build upon its broad and diverse product portfolio around the world. Long-term investors seeking an energy boost should consider ExxonMobil, a HI-quality company with strong cash flows and a reasonable valuation."
THE CHARTIST
P.O. Box 758, Seal Beach, CA 90740.
1 year, 17 issues, $175.
Peabody Energy: World's largest private-sector coal company
Dan Sullivan profiles Peabody Energy one of his recommended stocks.
"Peabody Energy (BTU) is the world's largest private-sector coal company. In fact, Peabody's coal products fuel more than 10% of all U.S. electricity and 3% of worldwide electricity. This is quite an accomplishment given the company's humble beginnings more than 100 years ago, when a Yale-graduate-turned-entrepreneur founded a retail coal business with just $100. Today, Peabody Energy provides products and services to more than 300 generating and industrial customer locations in 35 states and 16 countries.
Peabody Energy controls 9.3 billion tons of reserves, more than any other producer, and operates or owns interests in facilities in eight states. Since 1990, tons sold and productivity has tripled, safety has improved 75% and the average cost per ton of coal produced has been reduced by 32%.
With our proprietary models in a positive mode and dozens of emerging high relative strength stocks coming to the fore, we remain steadfast in the bullish camp."
THE SPEAR REPORT
45 Wintonbury Ave., Ste. 301
1 year, 50 issues, $297. www.spearreport.com.
We expect a very good year for the oil service sector
Gregory Spear: "The recent rise in crude prices has been considered a short-term rally in a continuing downtrend by many seasoned observers, and there are forecasts for oil to head back down below $50 in 2006. On Thursday (12/8), however, crude oil managed to exhibit usual strength, rallying past $61. We don't know if this was simply short covering in the trading pits, or whether the downtrend that has been in place since the first of September is now over. If it is over, Thursday was the first day of a new uptrend.
Even though crude oil is not seriously challenging its recent highs, the oil service sector (OSX) is running ahead of the commodity, setting a new all-time high on Thursday. The outperformance of the contract drillers and equipment suppliers reflects the perception that big oil will now start spending more of its capital on exploration. That perception was verified on Thursday when Chevron announced that it would increase capital expenditures by 35% next year. It also reflects pricing power, which is something the service industry has lacked until this year, because nearly every available land rig is spoken for and international demand is surging, as well. We can expect a very good year for the service sector in 2006 and probably beyond. Lufkin (LUFK), profiled on 10/21 will be a major beneficiary of this boom. Below are several other ideas for playing this trend. Shares of LUFK have recently broken out of a 4-month base and any dip is buyable.
National Oilwell Varco (NOV), located in Houston, manufactures equipment and components used in oil and gas drilling and production and has been doing so for 140 years. That's correct: the company was first established in Oil City, PA in 1862, making drill bits, derricks and other basic equipment of the day. Virtually every year in the subsequent decades, the company has marked a milestone of development by adding a new product or service, staying abreast of trends and often leading the way. Persistence pays.
NOV is now the dominant global player in the rig construction and components, commanding over 50% of the global market. Its equipment is used both on land and offshore. The company even manufactures those huge jackup rigs that are used in the Gulf of Mexico. By the way, much of Chevron's capital spending increase will be directed toward offshore development, although we don't know how much will come to NOV.
NOV is likely to benefit from the capital expenditures of companies like Nabors (NBR), the largest land driller, as they order more rigs. The company will also benefit from the global drilling demand, as they have an international footprint and supply many consumables as well as capital goods. Its Distribution Services segment provides maintenance, repair and operating supplies to drilling and production operations around the world, employing a sophisticated web-based platform to provide complete procurement, inventory management and logistics services.
In the most recent quarter, net income ballooned to $88.5 million, or 50 cents per share, from $27.8 million. Sales were $1.24 billion in the latest quarter, up sharply from $618 million a year ago.
It is hard to find an oil services company that is not over-bought but NOV fills the bill. Shares are trading slightly below the September high. We believe this is an excellent time to acquire a position in this company for a long-term investment.
Helmerich & Payne (HP) is contract drilling company that owns 90 U.S. land rigs, 11 U.S. platform rigs located in the Gulf of Mexico and 27 international rigs. Included in the total fleet of 128, are 50 H&P-designed and operated FlexRigs. HP has firm contracts to build 50 more of their brand of rigs. That kind of order flow has not happened for a couple of decades. Why the push for more rigs?
There is a stealth boom in the land-based drilling industry. By some accounts it is the strongest business environment in 20 years, and HP is already benefiting. Sales in the company's most recent quarter were up 42%, as utilization percentages, dayrates and margins all increased. The average day rate has risen 49% in the last year, and margins have doubled, more than offsetting a 10% increase in costs. HP is a builder of land rigs, which are much easier to build than offshore jack up rigs, and the company has many in production. While rig glut has been a problem in the past, it is unlikely to be so in the future as these rigs could be used in other countries if domestic demand slows.
The stock has been recovering from the dip that hit all of the energy stocks in October and has just notched a new all-time high from a solid 4-month base. This breakout was on significant volume, suggesting that HP will perform well into 2006.
Patterson-UTI Energy (PTEN) operates a contract drilling business principally in the Southwestern U.S. and Western Canada, and engages in its own exploration projects in these areas on a small-time basis, as well. But PTEN is not a small-time player in the rig business. The company has the second largest fleet of land-based drilling rigs in the U.S. (after Nabors), approximately 400, and interestingly, only about 290 of them are active. One of the reasons to take a look at PTEN as an investment is that its inventory of inactive rigs is likely to be refurbished and brought back into service over the next two years as major oil companies begin to invest more aggressively in domestic drilling projects. The company can do this rather quickly, compared to the longer lead times required to build rigs from scratch. PTEN is also highly leveraged to spot day rates in the drilling market, as 90% of its rigs are not under long-term contracts. This allows them to benefit from the uptrend in rates in an efficient, incremental manner.
The company's shares were tainted recently by the disclosure that the CFO had embezzled between $29-69 million. This is the only serious scandal we are aware of in regard to a major player in this industry since Enron. The stock suffered short-term damage but has rallied back to previous levels. While the possibility of other negative disclosures remains. Including financial restatements, we believe the company will weather this storm and the issue will soon be behind them. We would not put all our eggs in this particular basket, but at least a token position in this undervalued driller seems warranted to us."
Forbes/Lehmann INCOME SECURITIES
6175 NW 153 ST., Ste. 201, Miami Lakes, FL 33014.
Monthly, 1 year, $195.
Chesapeake Energy a capital gains as well as an energy play
Richard Lehmann: "Investors who are trying to maintain a balanced portfolio should always be looking for perpetual convertible preferred candidates to provide them with reasonable income as well as good appreciation potential. Last month I recommended Chesapeake Energy's (CHK D $91.25) new convertible preferred. This company is the number three gas producer in the USA and is totally land based, i.e. no hurricane exposure. They have reserves measured in decades and a cost structure that allows them to highly leverage their operations for enhanced results. This is a capital gains as well as an energy play. With a 4.8% payout on this preferred, you can hold it until the common yield, currently only .6%, catches up. Earliest call is not until 2010.
Canadian Trusts: Uncertainty resolved
A cloud has been lifted from the Canadian Trusts. The Canadian government has been looking at various proposals to change the tax status of the trusts, which currently allow the trust to avoid taxes by paying out most of their cash flow in the form of dividends. The finance minister proposing the changes bowed to political pressure and instead of tinkering with the trusts, decided to tinker with the dividends of conventional companies, making their dividends more tax advantaged. According to some analysts the uncertainty caused by the tax deliberations knocked $20 billion off the capitalization of Canadian income trusts. Now that the uncertainty has been resolved we should see a resumption of growth in this sector. While we didn't see much damage in the Canadian oil trusts, Fording Coal seemed to react negatively when the finance minister would not issue an advance tax ruling on the formation of the royalty trust. Expect the Canadian sector to resume its upward price momentum."
THE PERSONAL CAPITALIST
6911 S. 66th E. Ave., Ste. 301, Tulsa, OK 74133.
1 year, 24 issues, $195.
Sean Christian: "We continue to believe that the market trend is bullish. Our target remains for the DJIA to reach 12,000 in 2006. Our immediate target is 11,000 on the DJIA, a level we would like to see bested before the year is out.
This has been our target during the long trading range with the desire of a full portfolio by the time that the next bull market leg started. It appears that this time is now.
Here is a brief update on some of the portfolio holdings:
We continue to own XTO, WMB, and CRT. With what looks like a colder winter coming on, we feel all three of these stocks will continue to do well. XTO and WMB are both being mentioned as possible takeover candidates following the acquisition of Burlington Resources by ConocoPhillips. We pared back some of our energy holdings in November opting to hold onto these three. PLUG and HYGS (our fuel cell stocks) look good for the long-term. PLUG in particular is picking up analyst attention. Thomas Wiesel started PLUG at "Outperform" on December 8th. David Smith of Smith Barney continues to recommend both PLUG and HYGS as "Buys." HYGS now has four analysts recommending to "Buy" or "Buy/Hold." It is interesting to observe British Petroleum's efforts to work in the alternative fuel area. BP expects to invest from $8-$16 billion in alternative energy projects, including solar, wind, hydrogen and carbon-abatement technology over a 10-year period. There is a lot of research going on at the present with other oil companies such as Shell and Chevron. We are patient and will hold both stocks, looking forward to the coming hydrogen economy.
Gold hit a 25-year high recently. The metal is now hovering in the $509/ ounce range. We hear analyst estimates of the metal going higher. Inflation worries seem to be making their way into the marketplace. Others factors in the gold price include: demand by jewelers, investors, central banks worldwide, and a limited mine supply. We feel comfortable with our precious metals stocks: NEM, FCX, ABX, and CDE. NEM and ABX (with PDG) are the two largest mining companies. FCX offers quality gold exposure at reasonable valuation. However, due to a likely correction in copper (which accounts for 60% of revenues), we will continue to hold all our precious metals shares (9% of our portfolio)."
PERSPECTIVES
www.cavelti.com.
Peter Cavelti: "How to invest in uranium, readers want to know after my report on escalating demand? It's not an easy question to answer. Yes, I can tell you who produces uranium and who controls the largest reserves. But the problem is that the large-cap uranium proxies are either too expensive (Cameco Corporation) or that uranium production is only a peripheral part of the company's activities (BHP Billiton). Which is why a new vehicle, developed by Canada's Denison Mines may fit the bill. In May this year, Denison launched the Uranium Participation Company (Toronto, Symbol: U), whose sole mandate is to buy and hold physical uranium oxide in concentrate form. In an initial wave of excitement, the stock quickly vaulted to C$7.25, but a recent patch of softness has seen it fall back to around C$6.10, where it trades at a roughly 12.5% premium to the value of the underlying uranium. Given that uranium storage is difficult and that there are no comparable products with similar liquidity, I think that's reasonable. You should know that uranium prices can be volatile, but if you're as excited about the fundamentals for the commodity as I am and are looking for a practical investment alternative, U fits the bill.
Editor's Note: Peter Cavelti's background as a financial analyst and author spans 35 years and four continents. Cavelti's web-based Perspectives service provides access to his views on geopolitical, social policy and the economy. Perspectives is free. Visit www.cavelti to sign up.
Kenneth Coleman's INVESTMENT TRACKER
4805 Courageous Ln., Carlsbad CA 92008.
Monthly, 1 year, $139.
Gold mining buyout movement
Kenneth Coleman: "Currently, inflation-hedged investments are mixed; gold/silver and industrial metals are soaring while real estate is slowing and energy is rapidly falling. Both the 10-year and 30-year notes may climb slower than expected due to the dollar's recent 14 percent gain against other G7 currencies.
A higher dollar value portends lower prices for Chinese imports sold in U.S. markets. It goes without saying that the low priced Chinese goods in American markets translates to greater sales and bigger profits for the Chinese economy. Thus, China's domination in the U.S. domestic market has drastically improved China's trade surplus and grossly advanced America's trade deficit. Therefore, Chinese corporations take home more U.S. notes and bonds, thus keeping long-term interest rates down and the trade deficit from mushrooming. At some point, this scenario will prove to be a negative attribute to the value of the dollar (which could happen as early as 2006).
In nominal terms, gold is at an 18-year high. In real terms (inflation adjusted), gold would have to move above $593 to reach an 18-year high. I once stated during a radio interview that the fair price of gold was $686. The reason for the disparity between the two values is the manipulation of its current price and fair value.
Many of you may wonder why the price of gold is bucking insurmountable odds (higher dollar value and central bank management of gold's price) if the price of gold is manipulated. My Gold Money Flow Index reveals that dollar value and higher interest rates should have put pressure on the price of gold. Nevertheless, gold recently broke out above $500. The reason for this is the potential for the price of gold mining shares to move up. Past gold value manipulation rendered mining stocks grossly undervalued. This has encouraged other mining companies to phase into a buyout mode.
It has proven to be more cost efficient to invest in someone else's under priced gold mine than to develop your own. Hence, the recent start of the gold mining buyout movement. The buyout began with Barrick's hostile bid for Placer Dome. However, there are many ripe gold mining companies other than Placer Dome. The prospect of hostile takeovers will not only pressure the price of gold mining shares to the upside, but the price of gold as well.
It is no wonder gold and silver mining shares are in the top six categories of the money flow sectors. The following list includes the top ten stock sectors out of the total money flow sectors: 10) Telecom/Services/Domestic, 9) Financial Services/Diversified Investments, 8) Personal Computers/Peripherals, 7) Information and Delivery/Computer Software and Services, 6) Metals and Mining/Gold, 5) Semi Conductors/Integrated, 4) Aluminum, 3) Electronic Stores/Retail, 2) Silver and 1) Copper."
THE DINES LETTER
P.O. Box 22, Belvedere, CA 94920.
1 year, 17 issues, $195.
James Dines: "The Greek word for "ostrich" is strouthion and when the noun is preceded by the Latin word avis (meaning "bird") avis struthio got slurred into the modern English word struthious, which is the adjectival form of the noun ostrich. One could say, "He struthiously hid his head in the sand." The Spanish language left it almost as they found it, avestruz, but the Germans denuded the poor fowl down to the almost-unrecognizable Strauss.
We turned bullish on gold again in 2001, near its proverbial rock bottom, followed by a tremendous advance by gold stocks, after which they engaged in a frustrating Consolidation for the next 28 months.
We are of course deeply gratified to see that Upside Breakouts are appearing throughout the entire precious metals complex, sufficient to have prompted the press to wonder what is causing it, frequently, centering on "fears of a coming inflation." We disagree entirely; we believe the world has been in a slowly-developing deflation since 1980, with Fedhead Greenspan only superficially appearing to be "controlling inflation," but actually in an elision toward a more-visible deflation. Central bankers must be haunted by a penetrating angst since they collectively sold virtually all of their country's gold backing for their currencies in the last decade, struthiously ignoring what TDL has long called "The Coming Gold Crisis." We reiterate our old predictions that they would repurchase the gold that they sold around $260 at much higher prices - hopefully from some of our loyal TDLrs.
To the contrary, we believe that gold strength is a function of an international flight from paper currencies, especially for newly-rich producers of oil and base metals such as copper.
TDL's Gold and Silver Seasonalities: January
As for the Dines Gold Stock Average (DIGSA) 38 Januarys since 1968 included 22 rises, 15 declines, and one neutral, for a 59% bullish record, confirming the validity of Dinesism #9 (DIRGS), the Dines Rule of Gold Seasonality.
Interestingly, the Dines Silver Stock Average's (DISSA) down Januarys show a remarkable accuracy ratio in terms of having predicted silver's direction for the rest of the year. Specifically, of the 11 Januarys in which DISSA was a downer, no fewer than 9 of them resulted in down years for DISSA. On the other hand, the rising Januarys for DISSA only worked around half the time, with 14 up years out of the 26 Januarys - not statistically helpful.
In conclusion, January is usually a bullish month for gold and silver shares, but if DISSA declines in January that would be a serious negative factor for silver-mining shares for all of 2006. As always, note that there are no stock-market guarantees, only the percentages used in our "educated guesses."
THE GRANVILLE MARKET LETTER
P.O. Drawer 413006, Kansas City, MO 64141.
1 year, 46 issues, $250. www.GranvilleLetter.com.
Gold price objective: $1,000
Joseph Granville: "How about gold? It is being technically read every week. I gave major buy signal on June 23rd. Gold is one of my most important indicators, it was #31 in my list of 55 daily indicators in my 1960s Strategy book, Seeing the soaring price of gold, to me my guess is that it is pointing to worsening inflation. One thing is for certain, the higher price of gold is signaling bad news for the general market.
On the day gold reversed to the downside at $543.00 on December 12th I told subscribers to take some profits in all the largest stock gainers but reminded them that there is no change in my objective of $1000 within 3 years."
THE MORGAN REPORT
21307 Buckeye Lake Ln., Colbert, WA 99005.
Monthly, 1 year, $149. E-mail, $99.
Silver ETF: Pros and cons
David Morgan: "We have continued our investigation into the Silver ETF and decided to give our views both for and against. Originally we stated that we thought the fund would be beneficial for the silver market, and we still hold this view; however, more details are required behind our thinking.
The first and most important fact to address is that the Silver ETF and all ETFs, to our knowledge, are cash settled. This simply means that the underlying asset may be there in various forms, but the investor in the fund can only accept cash as payment. This of course is true of Central Fund of Canada.
What the proposed Silver ETF requires is real silver, but not necessarily new purchased silver. In fact the proposed amount for this issue is about 130 million ounces of silver to begin. This is almost exactly the amount reportedly purchased by Berkshire Hathaway in 1997. We have absolutely no inside knowledge but wish to illustrate a point. Suppose a large holder of real silver were to "pledge" the metal under some type of derivative scenario. The ETF would be up and running, and real metal would be "behind" the transaction.
This would qualify and would not really cause any new silver purchases to take place. So in effect, new money would come into the silver market but it would not necessarily require new silver to be purchased. However, that would just be at the beginning, and if the silver ETF showed the kind of participation of the gold ETF enjoyed, more and more real silver would be demanded and this would be difficult to supply at some point. So, eventually, new metal would be required to back the ETF and at that point, the effect of a tight supply should manifest in price pressure. However, the cash settlement process avoids any settlement problems.
Currently, we think the Silver ETF will not be approved, and the reasons will be that it is too small a market and gold is a unique case. Gold has enough aboveground supplies and fairly wide market breadth, unlike silver, which is a very tiny market. If we are correct and this news becomes widespread, it should still help the silver market, because those paying close attention may view this as confirmation that silver supplies are indeed tight and new silver purchases may take place.
Another key factor is that some enterprising group or individual might start a private fund with characteristics similar to the proposed silver ETF. Barclays Capital could even start a silver ETF outside of the U.S. markets without SEC approval, in England for example.
As the Texas Hedge article by T. Stein and S. McIntyre pointed out, if the silver ETF turned out to be as popular as the gold ETF, it would generate billions in demand. Each billion dollars in new demand is equal to 125 million ounces in demand. Two or three billion in today's world is nothing; each billion-worth of purchases would equal the entire Comex supply. Several questions remain, and we will continue to monitor the situation as it develops."
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