THE MORGAN REPORT
21307 Buckeye Lake Ln., Colbert WA 99005.
Monthly, 1 year, $129.99, E-mail only.
The trend remains up,
but it's a weak uptrend.
David Morgan: "Right now, the consensus seems to be that the precious metals are at a buying point, and relative to where we believe they are going, that would be true. However, we want to take a step back and look at the big picture.
First, both gold and silver are moving higher in what appears to be a small rally after a sharp decline that validates completion of a long advance for the metals from the October low, when we last suggested an intermediate low and a buy point for our subscribers. We did expect a rally into the first quarter and we did see one that was weaker than expected. Silver failed to take out the $15 level and we were worried, based upon the Commitment of Traders reports, that the first-quarter rally was nearing the end and our forecast of $18 silver was in jeopardy.
Coming back to the market as it now exists, the COT does look much more favorable for a new rally. But from our very studied view, silver still looks as if the funds could suffer some more pain, meaning the silver market may break the $12.50 level we wrote about in our update last month. Additionally, the Commitment of Traders report in gold is not indicating a low, presently. We need to reemphasize that the COT is only a tool and the amount of open interest in the precious metals markets continually grows, so our analysis must account for this fact. Bottom line: the most important confirmation of an intermediate high is still needed! For an intermediate trend high to have been established, both gold and silver must reverse their weekly trends to down. How will we know? If gold closes below $634 and silver below $12.50, that would be a strong signal that a decline is taking place and more room to the downside exists. For now, the trend does remain up, but it's a weak uptrend."
GROWTH STOCK OUTLOOK
P.O. Box 15381, Chevy Chase, MD 20825.
1 year, 24 issues, $235.
Charles Allmon: "Hang on to your hats. It's anyone's guess where a new oil rumpus will lead as China joins Cuba in drilling for oil and gas in a juicy, big field less than 60 miles from Florida. This is a particularly bitter pill to swallow as the Gulf states for decades denied drilling rights to any U.S. company. So China soon may be sucking oil and gas from fields lying in U.S. coastal waters. By the time the U.S. wakes up, the cupboard may be bare, sucked dry.
Maybe there is a solution if U.S. companies join Japan in drilling in the East China Sea which China claims as territorial waters. Without question this will be an interesting decade."
LOOKING FORWARD
Published for clients of Friess Associates and Brandywine Funds shareholders
115 E. Snow King Ave., Jackson, WY 83001.
Refining activities help make Lyondell Chemical an attractive buy
"The declining availability of light sweet crude combined with increasingly stringent fuel specifications has propped up its market price versus heavy grades that are more difficult to refine. This puts Lyondell's refinery business, which is customized to process heavy crude, in the sweet spot.
With $22 billion in annual sales, Lyondell Chemical Company (NYSE: LYO) is a leading global manufacturer of chemicals and plastics for diverse end markets, including packaging, construction materials and sports equipment.
Last summer's purchase of Citgo's 41 percent interest in Houston Refining made the heavy-crude refinery a wholly-owned subsidiary of Lyondell. Eight-five percent of the world's crude reserves are heavy or light-medium sour, while only 65 percent of refining capacity is configured to run those types of crude. Refineries able to handle heavy crude are reaping large profits.
Climbing output at the Houston oil refinery during its first complete quarter under full ownership helped Lyondell grow December-quarter earnings 50 percent, exceeding estimates by 21 percent. Sales rose 25 percent to $6.25 billion. Production of gasoline, heating oil and other petroleum products grew 50 percent from a year ago. The price differential between light and heavy crude is expected to widen further as summer driving season commences, expanding Lyondell's profit margin further.
The Friess Associates team spoke with Chief Executive Dan Smith regarding the outlook for ethylene and other ingredients used to make plastics. Lyondell maintains enviable raw material flexibility due to its ability to adjust between natural gas and oil-based feedstock to maximize profitability. Plus, certain byproducts from refining can be recaptured for use in chemical manufacturing.
The Friess Associates team bought Lyondell earlier this year at 7 times analysts' current 2007 estimates for 7 percent earnings growth. Our internal growth estimates are substantially higher given the strong prospects related to refining activities."
DOW THEORY FORECASTS
7412 Calumet Ave., Hammond, IN 46324.
1 year, 52 issues, $279.
Exxon counts on rise in global oil demand
Richard Moroney: "With the industry's largest inventory of discovered oil and gas reserves and an extensive portfolio of drilling projects, Exxon Mobil (NYSE: XOM; $72) is well-positioned to benefit from rising energy demand. Exxon is the world's largest publicly-traded oil company, with a market value of $412 billion, operations in about 200 countries, and daily production exceeding 4 million barrels of oil and equivalents.
In addition, Exxon is the industry's largest refiner and marketer, the largest manufacturer of oil-based lubricants, and among the world's largest petrochemical companies. In 2006 Exxon earned the largest annual profit ever recorded by a U.S. company - $39.09 billion excluding special charges, up 15% from 2005 levels. Record 2006 earnings reflect a year of unusually high energy prices.
Exxon, a Long-Term Buy, is the quintessential buy-and-hold stock, generating a positive return in 22 of the last 25 years.
Exploration and production accounted for 67% of 2006 profits. Exxon controls exploration rights to 109 million undeveloped acres in 37 countries and has more than 100 major new development projects underway. The company replaced 122% of production in 2006, with Asia and the Middle East contributing the majority of 2006 additions to reserves. At year-end 2006, the Company had 22.7 billion barrels of proved oil and gas reserves and 73.9 billion barrels of total reserves. At current production rates, proved reserves represent 14.2 years of production.
Exxon's refining-and-marketing business (22% of profits) is one of the world's largest, consisting of interests in 45 refineries, 25,000 miles of pipeline, and more than 37,000 retail sites in more than 100 countries.
Exxon has spent at least $3 billion on technology since 2002. The company plans an average of $20 billion a year in total capital investment through 2011, most of which will fund exploration and production. A combination of size and superior manufacturing processes create a low cost structure, representing competitive advantages for both the production unit and downstream businesses.
The result? Industry-leading return on investment (ROI). Exxon's 2006 ROI of 32.6% is the second-highest among all integrated oil companies and nine percentage points higher than that of the next-most-profitable oil major.
Concerns about a slowdown in global economic growth and possible declines in energy prices have pressured shares of Exxon and other oil companies in recent months. Exxon has historically commanded a premium valuation relative to the other oil majors because of its consistent growth, pristine balance sheet, and leading industry position. Exxon's P/E ratio of 11 times trailing earnings, while above the average of nine for oil majors, remains near its lowest valuation in at least 10 years.
Exxon sees blue skies ahead, expecting global energy demand to average 1.6% annual growth through 2030. To capitalize on that growth, Exxon plans to launch 25 new exploration projects over the next three years, with seven slated to commence in 2007. An annual report is available at 5959 Las Colinas Blvd., Irving, TX 75039; (972) 444-1000."
WALL STREET STOCK FORECASTER
250 Liston St., Ste. 700, Buffalo, NY 14223.
Monthly, 1 year, $99. 888-292-0296. E-mail: mckeough@idirect.com.
How to profit in volatile resources
Patrick McKeough: "The Resources and Commodities sector of the economy has gone through a once-in-a-generation price boom in the past few years. Investors generally expect booming demand from India and China to keep prices high. However, this sector has always been highly volatile and subject to sudden downdrafts. We feel the best way to cut your resource risk is to stick with high-quality companies such as these three.
They all have a broad range of income streams, which helps them stay profitable, even if prices fall. Hidden or little appreciated assets should fuel their growth for decades. They also have the flexibility to adjust production in the face of lower prices, which conserves cash or dividends and stock repurchases.
Chevron Corp. (NYSE: CVX; $70, Conservative Growth Portfolio, Resources sector; Shares outstanding: 2.2 billion; Market cap: $154.0 billion; WSSF Rating: Above average) is the second-largest integrated oil company in the United States, after ExxonMobil Corp.
The company produces oil and natural gas in 35 countries, and refines oil into gasoline and petro-chemical products. It also operates 26,500 gas stations. The U.S. accounts for 30% of Chevron's total production.
In the three months ended December 31, 2006, Chevron's earnings fell 6.5% to $1.74 a share (total $3.8 billion) from $1.86 a share ($4.1 billion) a year earlier. Revenue fell 11.3%, to $47.7 billion from $53.8 billion.
Although oil prices and production rose, natural gas prices in the U.S. fell 42% as production returned to normal levels following the disruption caused by Hurricane Katrina in 2005.
Chevron is doing a good job replacing its production with new reserves. The company spent $16.6 billion on capital expenditures and exploration in 2006, up 49.5% from $11.1 billion in 2005. Part of that stems from Chevron's acquisition of Unocal in 2005.
Chevron will probably offset these costs by selling between $1 billion to $3 billion of older assets.
About 30% of Chevron's new reserves come from its oil sands operation in Canada. The tar-like oil sands require much more energy to extract and refine than regular crude. But these fields are the second-largest oil deposits in the world after Saudi Arabia, and should last for decades.
Chevron also owns half of the big Jack 2 offshore oilfield in the Gulf of Mexico. However, a lack of deep-water drilling rigs has slowed development.
The company's strong balance sheet will help it fund these projects. It has $11.4 billion ($5.20 a share) in cash and $9.8 billion in debt (14% of stockholders' equity).
Chevron spent $5 billion on share buybacks in 2006, but it may cut future repurchases as its exploration costs grow.
However, it will probably raise its $2.08 dividend, which yields 3.0%. The stock now trades at just 9.5 times its forecast 2007 profit of $7.36 a share, and at 6.4 times cash flow of $10.95 a share.
Chevron is a buy.
EnCana Corp. (NYSE: ECA; $48; Conservative Growth Portfolio, Resources sector; Shares outstanding: 772.0 million; Market cap: $37.1 billion; WSSF Rating: Average) is a leading Canadian energy company. Natural gas accounts for 80% of its production, while oil supplies the remaining 20%.
In the three months ended December 31, 2006, lower gas prices cut EnCana's profit 42.5%, to $0.84 a share from $1.46 a year earlier. These figures exclude unusual items such as gains on the sale of assets and hedging gains. Cash flow per share fell 24.3%, to $2.18 from $2.88, while revenue fell 37.3%, to $3.7 billion from $5.9 billion.
In the past few years, EnCana has sold its overseas assets to focus on unconventional properties in North America, such as early-stage gas fields and the oil sands in Alberta.
These assets cost more to develop, at least initially, but should last longer than regular properties. Focusing on North America also cuts EnCana's political risk.
Extracting oil from the oil sands is much more costly than from regular oil wells. EnCana aims to increase its oil sands production 10-fold over the next decade. Two new joint ventures with ConocoPhillips - one in Canada and one in the United States - will help cut its costs. The Canadian operation will operate the oil sands, while the American venture will operate refineries in Illinois and Texas that will convert heavy oil into gasoline.
The two ventures will operate independently; the Canadian operation will sell its production at the highest price it can get, and the U.S. refineries will buy heavy oil as cheaply as possible.
Despite the cost savings from these ventures, shortages of materials and labor have hindered EnCana's expansion plans.
Consequently, EnCana will cut capital spending in 2007 by 6.5%. It is using the savings to double its quarterly dividend to $0.20 a share. The new annual rate of $0.80 yields 1.7%.
The company should earn $4.30 a share in 2007, and it trades at just 11.2 times that figure. It's also cheap at just 4.0 times its projected cash flow of $11.93 a share.
EnCana is a buy.
Weyerhaeuser Co. (NYSE: WY; $84, Conservative Growth Portfolio, Resources sector; Shares outstanding: 236.5 million; Market cap: $19.9 billion; WSSF Rating: Average) is a leading forest products company, with 6.4 million acres of timberland in the United States, and 30 million acres of leased timberland in Canada. It makes a wide variety of wood products for the construction industry, as well as cardboard packaging.
In August 2006, Weyerhaeuser agreed to merge its fine-paper operations with Canadian forest products company Domtar Inc. Weyerhaeuser will own 55% of the new company, which will be North America's largest producer of uncoated paper. Domtar will also pay Weyerhaeuser $1.35 billion.
Weyerhaeuser is giving its investors the choice of keeping their Weyerhaeuser shares, or exchanging them for stock in the new company.
Stockholders can tender all or part of their shares, subject to a limit of 11.1442 shares of Domtar per Weyerhaeuser share. Weyerhaeuser has designed the offer so that its investors will get to acquire Domtar stock at a 10% discount. The IRS will treat the swap as a tax-deferred exchange.
We feel the deal makes sense. Demand for fine paper is falling as more companies use the Internet to distribute annual reports, catalogs and other documents. The merger will give this new company the size it needs to compete with larger paper producers. Domtar is more risky than Weyerhaeuser, and does not pay a dividend, so we recommend only aggressive investors accept the offer.
Meanwhile, Weyerhaeuser earned $1.88 a share (total $450 million) in the fourth quarter of 2006, thanks to a $227 million after-tax refund of duties paid on lumber imported from Canada and a $43 million gain on the sale of an operation. It lost $0.86 a share ($211 million) a year earlier, mostly due to restructuring charges. Revenue slipped to $5.66 billion from $5.7 billion.
The stock has gained 30% since the Domtar announcement, and now trades at 25.8 times the $3.25 a share it will probably earn in 2007. That seems high, but Weyerhaeuser's timberlands could be worth $50 per Weyerhaeuser share if it decides to spin them off. The $2.40 dividend yields 2.9%.
Weyerhaeuser is a buy."
Roger Conrad's UTILITY FORECASTER
P.O. Box 4123, McLean, VA 22103.
Monthly, 1 year, $129.
Rising coal use will benefit
Penn Virginia Resources
Roger Conrad: "From recession fears to global warming concerns, King Coal has taken a beating in the press lately. The result: a solid opportunity to buy coal stocks like new Growth Portfolio Aggressive Holding Penn Virginia Resources (NYSE: PVR).
Penn Virginia's key asset is interest in 765 million tons of proven and probable coal reserves in Appalachia, the Illinois Basin and the San Juan Basin. Its lands are leased out to the third parties that pay royalties on the coal produced. Production rose 9 percent in 2006 on surging demand and management's ability to economically boost reserves.
Contrary to press accounts, coal use is set to rise sharply in the US during the next few years. Carbon capture and other technologies to control CO2 will boost costs. But with oil and gas increasingly scarce, nuclear power stalled and renewables' range limited, coal's cost advantage is likely to rise. That means a higher royalty stream for Penn Virginia.
The limited partnership has two major advantages over other mining plays, First it doesn't actually mine - it has little potential health or safety liability. Second, about 30 percent of income comes from gas processing and pipeline assets that produce steady fee income regardless of coal price swings.
That adds up to a safe dividend that's been raised at an annual rate of more than 5 percent the past five years. Down more than 20 percent from recent highs despite strong results, Penn Virginia is a buy up to 27."
Russ Kaplan's HEARTLAND ADVISER
5002 Dodge St., Ste. 302, Omaha, NE 68132.
Monthly, 1 year, $150.
Petrobras an oil powerhouse
Russ Kaplan: "Petrobras (PBR) is an oil powerhouse in South America and diversifying around the world. The company will be even more powerful after its recent acquisition along with some other companies of Ipiranga, a Brazilian conglomerate.
Two reasons we like this company is that we like the oil industry and nothing beats a foreign stock to diversify your portfolio. Brazil is an emerging country which like China has a commitment to the free market in business and we think it will be successful as Petro China is in our model portfolio.
In addition this is a financial solid company with a high return on capital.
You also will get a good dividend while you wait."
Ian McAvity's DELIBERATIONS On World Markets
P.O. Box 40097, Tucson, AZ 85717.
1 year, 18 issues, $225.
Concern for the Shares vs. Metal Ratio
Ian McAvity: "The Gold Colony Index of 50 Juniors did make a new high recently, and it really drives home the structural problem the industry consolidation is causing...reserve replacement. The seniors are in the box of issuing dilutive shares to acquire reserves or replace what they've mined, and they've also started to pat the price for some high-grading a few years back that likely lowered reserve grades. And the oil price is a huge burden on the large low-grade mines. The other factor may surprise some holders, but their earnings may also get hit this year by lower copper prices, since Goldcorp, Barrick & Newmont are also large copper producers.
I'm much less attracted to the major companies these days, but I would point out the Shares to Metal Ratio on the large cap, global FT Gold Mines Index is down around its lows of the last five years, but not near the bargain levels of the 2000 bottom.
The Market Vane Bulls are up in the low 70% area 71% Gold and 66% Silver this week in line with the lower peaks and downside volatility both metals have shown. I think its prudent to watch for a range of 50% to 80% Gold Bulls to identify extremes in a bull market. (Silver is a lot more emotional and volatile in bullish sentiment.)
The spike surge in Comox Open Interest suggests a buildup of some pretty aggressive short positions, some of which look covered by the subsequent weakness.
Repeating what I've said before, I worry about over-interpreting Open Interest now that the ETF's are out there. Of particular interest is a move by the NYSE to open trading in GLD before the NYSE itself opens, to coincide with the Comox opening. The ETF's pose substantial competition, particularly for smaller players. While the OI charts indicate a recent expansion in the percentage share of open interest held by Large traders, it's come off the recent higher levels a little, but they are quite aggressively net long in gold. They more rapidly shrunk the silver net long.
Silver, Platinum and Palladium have formed triangles that could pop either way. It's hard to envision a substantial spurt, but after watching what the hot money has done for Nickel. Lead and even Tin, I'll bite my tongue and let the markets speak. If silver can sneak through $15, it could get a little irrational. Technically, I think that's the most promising of the three, but I see it as a high-risk position at present. Copper has pulled back to the point of its breakdown, and a downtrend line. It's largely worked off the extreme oversold condition noted last time, but may push a little further if the S&P doesn't crack too soon."
The Peter Dag PORTFOLIO STRATEGY & MANAGEMENT
65 Lakefront Dr., Akron, OH 44319.
1 year, 24 issues, $389.
Inflationary pressures are strong
George Dagnino: "I do not like the following three trends: rising commodities and gold, rising Euro, and rising inflation. They are three different sides of the same issue: inflationary pressures are strong.
Do markets perceive the Fed as too easy? If the Fed does not raise short-term interest rates, will the dollar continue to decline against the Euro and will gold move higher?
The inflationary threat is unusual given that the economy is toying with very slow growth, possibly a recession.
Please note, and this is very important, that as long as US inflation is higher than European inflation, the Euro will strengthen and gold will stay firm.
Let's assume inflation is going to be hard to tame. How can you hedge your portfolio against the possibility? The answer is simple. You have to own an asset that appreciates when the dollar falls. This asset is gold.
For this reason I recommend a small position in Kinross Gold Corporation (NYSE: KGC). KGC engages in mining and processing gold and silver ore; and the exploration and acquisition of gold bearing properties primarily in the Americas and Russia. Recent price: $13.82 on 3/27/07 @ 4:00 pm ET; PE 29.47; Yield n/a.
The REITs are beginning to show weakness. You should continue to reduce your exposure to this sector.
For this reason you should sell 2% of your portfolio from ASN, and 1% from AVB.
Because of the financial risk posed by the subprime lending debacle, PHK, a high-yield bond fund, should be sold.
5% of your capital should be invested in iShares Lehman 1-3 Year Treasury Bond Fund (NYSE: SHY). SHY seeks investment results that correspond generally to the price and yield performance of the short-term sector of the United States Treasury market as defined by the Lehman Brothers 1-3 Year U.S. Treasury Index (the Index). The Index measures the performance of public obligations of the United States Treasury securities that have a remaining maturity of greater than or equal to 1 year and less than 3 years."
THE COMPLETE INVESTOR
P.O. Box 248, Williamsport, PA 17703.
Monthly, 1 year, $129.
Ethanol is manna to
farmers and their suppliers
Ari Jahja: "Agriculture - in the U.S. and globally - is in a clear growth mode. One big reason, of course, is that crops today aren't just feeding people, they're feedstocks for alternative energies such as ethanol, demand for which is surging both because of higher fossil fuel prices and environmental concerns. The push to produce ethanol will continue, keeping corn prices high and rising and encouraging farmers to plant more. According to the U.S. Department of Agriculture, farmers are expected to grow a record 12.2 billion bushel of corn in 2007, of which an estimated 3.2 billion bushel swill go into ethanol, up from 2.15 billion in 2006. Meanwhile, corn experts are expected to rise to record levels as support for biofuels expands elsewhere around the globe. The European Commission, for instance, has proposed new standards for transport fuels to reduce their contribution to climate change and air pollution; the standards include greater use of biofuels.
In Asia, too, biofuels are gaining traction. And in addition, rising incomes and population growth are increasing the demand for meat and dairy products, which are crop-intensive sources of protein.
We're going somewhat against the grain in that we don't see ethanol as long-term energy solution. But we have no doubt that it will continue to be produced in ever larger quantities for the foreseeable future, resulting in a razor-thin margin of supply and demand for crops such as corn. Based on these compelling fundamentals, we're bullish on the agricultural industry, which encompasses a diverse range of companies. Following are reviews of some of our favorites.
Higher commodity prices typically translate directly into higher cash receipts for farmers, which go hand in hand with rising sales of farm machinery. This environment will favor John Deere, the world's largest agricultural equipment maker. Sales growth should be strong not just in the U.S. but in foreign markets as well. Of note in this regard was a recent article in The New York Times (March 11), which spotlighted U.S.-Manufactured products sold abroad. It pointed out that John Deere manufactures its most technologically sophisticated tractors, equipped with satellite-tracking capabilities, at a factory in Iowa, and then exports many of them to Asia, Latin America, and former Soviet Union countries. Foreign sales of these tractors have doubled in the last years. Overall, Deere & Co. (DE) delivered stellar results in the first quarter of fiscal 2007, with earnings per share of $1.04 beating analysts' expectations by 27 percent. The company now projects full-year sales will rise about 8 percent, up from its previous forecast of a 4 percent gain. In addition, Deere is committed to buying back its shares, boosting shareholder value. While its share price has risen nicely since we first recommended the company in this space last October, we're reiterating our buy and raising our target price to 128 over the next 12 months.
Another segment that should benefit from rising agricultural prices is corn seeds. Monsanto (MON), the world's largest developer of genetically modified seeds, has the potential to gain market share from rival DuPont. The increased demand for ethanol is prompting farmers to buy seeds with more genetic modifications to protect and boost yield. For the current growing season, Monsanto's greater availability of seeds - with the national brands DEKALB and Asgrow - gives it an edge over DuPont, which is experiencing supply constraints. Monsanto's best-in-class "triple stack" offers farmers weed control and two forms of insect protection in one seed. According to management, Monsanto has enough corn seed to meet demand up to 85 million acres in the U.S. Monsanto's sales of corn seeds and genetics jumped 35 percent in the quarter ended November 30 vs. the year-earlier period as U.S. farmers placed unusually early orders for 2007. Monsanto is a long-term buy with a target of 60.
Corn is a fertilizer-intensive crop, and therefore all the forces pushing farmers to grow more corn should boost demand for fertilizers. While this will cause fertilizer prices to rise, farmers, thanks to higher corn prices, will be able to afford the fertilizers, which will help them to maximize yields. We think that the agricultural boom will support the world's appetite for potash, nitrogen, and phosphates, key ingredients in fertilizers. This surging demand will be evident not only in the U.S. but in international markets including China, India, and Brazil. Last year, India surpassed the U.S. as the second-largest consumer of fertilizer nutrients, closing in on China. A company primed to benefit is Potash Corporation of Saskatchewan (POT), the world's largest fertilizer company by capacity. It is the world's largest potash producer, the third-largest phosphate producer, and the fourth-largest nitrogen producer. Most notable is that the company controls more than 75 percent of the world's excess potash production capacity, enabling it to keep pace with demand growth. We rate Potash a buy, with a 12-month target of 165.
We would be cautious, however, on smaller players such as CF Industries and Terra Industries. While their share prices have been strong lately, their earnings per share are too leveraged to natural gas prices, which are a primary input for nitrogen products."
THE LYKE REPORT
P.O. Box 290, Glenview, IL 60025.
Monthly, 1 year, $89.
Ban on melting US pennies and nickels
John Lyke: "Due to the increasing price of copper and zinc, the Treasury Dept. has issued a rule to ban melting U.S. pennies and nickels for the value of metal! The production costs for a penny is now about 75& higher than the face value. The nickel costs about 70% higher than the face value."
THE MONEYPAPER
555 Theodore Fremd Ave., Ste. B-103, Rye, NY 10580.
Monthly, 1 year, $135.
Archer-Daniels-Midland
in a high-growth phase
Robert Briechle: "Archer-Daniels-Midland Co. (ADM): The world leader in bioenergy, ADM, also enjoys a premier position in agricultural processing. It is one of the largest processors of soybeans, corn, wheat, and cocoa, and is, as well, a leading manufacturer of biodiesel, ethanol, soybean oil and meal, corn sweeteners, flour, and other value-added food and feed ingredients. In fact, the company uses about a third of all the corn, wheat and soybeans processed in the United States to make a variety of feed and food additives, including vitamins E and C and lysine. It has a growing position in Europe and Brazil, and joint ventures throughout Asia. Headquartered in Decatur, IL., ADM has over 26,000 employees, more than 240 processing plants, and net sales for the fiscal year ended June 30, 2006, of $37 billion.
With the potential for significant growth in profits, ADM expects improvements in that area at its largest businesses - the processing of ethanol, high-fructose corn syrup, and oilseed. Given ADM's diversity of agricultural products, it appears likely that the company will benefit from this overall theme, seeing substantial improvements in profit margins and volume growth. On the financial side, ADM has considerable liquidity, with $823 million in cash, $1.1 billion in long-term marketable securities, and $4.4 billion of readily marketable inventories as of the end of last year.
ADM is currently in a high-growth phase and plans $2.4 billion worth of capital expenditure projects over the next two to three years. Most of the spending will be to expand the firms' ethanol-processing capacity by 550 million gallons, to about 1.6 billion gallons annually. Although the processing of ethanol and other biofuels is a strategic growth area for the firm, investors should expect some volatility, such as occasional supply/demand imbalances. Note that the shares currently trade well off their recent high of $46.70, and are now at $33.50, owing to those factors. Long-term debt is a reasonable 31% of total capitalization and the earnings-growth prospect is for around 13% per year for the next five years.
Editor's Note: Robert Briechle is Senior Vice President, AFA Financial, Inc., North Royalton, Ohio.
THE SPEAR REPORT
45 Wintonbury Ave., Ste. 301, Bloomfield, CT 06002.
1 year, 50 issues, $297.
Schlumberger to far
outperform the market in 2007
Gregory Spear: "Select energy names have been outstanding performers, taking three of the four top spots. Below we profile another energy company that we expect to far outperform the market in 2007, Schlumberger (SLB). We also update our profile on PetroBras (PBR), the national oil company of Brazil.
Schlumberger, founded 81 years ago, is the world's largest oilfield services company by market cap, employing 70,000 people of over 140 nationalities, with operations in 80 countries around the world. SLB has two business segments, Schlumberger Oilfield Services and WesternGeco, the world's largest seismic data acquisition company. Schlumberger Oilfield Services operates globally, providing assessment, testing, drilling, pumping and other critical services that cover the entire life cycle of the oil and/or gas reservoir.
Because the easy-to-find oil has already been found, Schlumberger's services are in high demand, as its advanced technology improves oilfield efficiency and productivity, lowers finding and producing costs and maximizes reserve recovery. Moreover, a large proportion of Schlumberger's services are non-rig related, which means that revenue is not directly correlated with rig count fluctuations. This is a bonus in an industry where the availability of drilling rigs is still lagging behind demand.
As you may already know, however, the seismic segment of the oil services market is the fastest growing portion of that business. Back in mid-December, we profiled Bolt Technologies (BTJ), a small-cap play on undersea seismic exploration, BTJ is up 63% since that time. Due to the law of large numbers, SLB will never be able to match the type of momentum-driven performance, but the company has the seismic advantage over other large oil services names that sets it apart as an investment vehicle. WesternGeco's services include standard 3D and new time-lapse ("4D") seismic surveys on land and undersea, which locate and define prospects and enhance existing reservoir management. The WesternGeco order backlog at the end of 2006 was $1.1 billion, up 39% from 2005 levels.
Operating revenue for 2006 grew 34% to $19.2 billion, driven by significant price increases, demand for new technology and stronger activity in almost all regions. Income from continuing operations was up 85%, producing 2006 diluted earnings per share of $3.01, versus $1.81 in 2005. In the fourth quarter of 2006, Oilfield Services revenue 30% year over year, whereas, WesternGeco revenue soared 55% year over year, with pretax operating income up 149%.
Technically, SLB is in the process of breaking out of a year-long consolidation. This is a good time to buy and then add to positions on dips. We expect SLB to approach $100/share by the end of the year.
PetroBras is Brazil's national oil company, which means it is an integrated oil and gas operation with exploration, production, refining, transportation and marketing divisions. Brazil is the fifth largest country in the world by geographic area and the fifth largest in population, spanning four time zones and sporting the world's eighth largest economy. The only South American countries with which Brazil does not share borders are Chile and Ecuador. Urbanization has been rapid in Brazil, with 81% of the total population now living in and around cities.
Currently, PBR shows about 11.4 billion barrels in proven reserves, mostly heavy oil, which is about half the size of the US reserves. Most reserves lie in very deep water offshore, however, which makes for slow and expensive development. PetroBras has made two significant discoveries in this area in the last seven months, unofficially estimated at 10 billion barrels. If confirmed by the National Petroleum Agency, this would be a huge deepwater find. PetroBras has a refining capacity around 1.8 million barrels a day, which accounts for 97% of refining in the country.
The future of PetroBras is, of course, correlated with the economic development of Brazil, an economy that is expected to expand 3.5% to 4.5% in 2007, after 2.8% growth in 2006. The government put on the brakes last year to bring inflation under control and eliminate the country's boom-bust cycles. Interest rates are still high, around 13%, but the trend is down, which should help infrastructure development.
PBR is not content to dominate Brazil's oil and gas industry, and has operations in Angola, Argentina, Bolivia, Colombia, Nigeria and the US. PBR is drilling for oil and gas in the Gulf of Mexico and expects to produce 100,000 barrels of oil a day in the United States by 2011. PetroBras recently signed an accord with Italian energy company Eni to study strategic alliances in the production of biofuels and petroleum refining. PBR also signed a memorandum of understanding with Russia's Gazprom to identify possible areas of cooperation on liquefied natural gas projects. Meanwhile, the transportation unit of PetroBras is planning to build 42 new oil tankers by 2015.
Those tankers are also likely to carry ethanol, as PetroBras already expects that commodity to Nigeria and Japan and will be exporting to the U.S. later this year. Brazil is the world's largest producer of biofuels, particularly ethanol from sugar cane. Most of Brazil's ethanol production is for domestic consumption, however, as gasoline in Brazil contains 25% ethanol and 70% of all new cars sold in Brazil have engines that can run on either fuel, or a mixture of the two.
2006 was not a banner year for PBR in terms of growth, which is the main reason shares are currently trading slightly below peak 2006 levels reached in early May. Profits in 2006 hit a new record, but rose just 9% from the previous year on a 5% increase in net revenue. We expect the company to begin to improve margins and production growth over the next year and its improving prospects will be reflected in the stock ahead of the actual drill bit results."
THE ADEN FORECAST
P.O. Box 790260, St. Louis, MO 63179.
Monthly, 1 year, $195. Includes weekly updates.
Metals, natural resources
and energy a bullish arena
Mary Anne and Pamela Aden: "The metals and energy universe is doing very well. Gold is rising in an intermediate rise since January and silver is stronger than gold. Crude oil and copper are both rising in a renewed rise while the base metals, namely nickel and tin reached new highs and have been strong all along. Our shares are rising with them. We continue to recommend keeping a balance between gold, silver, their shares and the resource and energy shares. Keep more in silver and gold itself or their ETFs as well as in the silver, resource and energy shares. Several gold shares like Gammon Lake (GRS) and Kinross Gold (KGC) are doing well and while this sector is lagging, we'll keep our gold shares until the end of the C rise. At that point we'll likely sell the weaker ones.
This month we're adding two new positions: Cameco Corp. (CCJ) and Denison Mines (DML).
We added more energy stocks to our portfolio this month and they look good. Tidewater (TDW), Schlumberger (SLB) and Petrobank Energy (PBG) are the new additions.
We are currenlt 60% in Gold and Silver physical and ETFs, as well as gold, silver, natural resource and energy shares and 30% in Cash."
ECONOMIC ADVICE
3910 N.E. 26TH AVE., Lighthouse Point, FL 33064.
Monthly, 1 year, $99. Includes Updates.
Northern Dynasty meets criteria
James Rapholz: "Rio Tinto (NYSE: RPT; $36.82) once owned 9% of North Dynasty (AMEX: NAK $10). They just purchased an additional 9.4 million inside shares from the company for $10.00 per share, upping their stake from 9% to 19%. I consider this to be a very positive move for both parties.
Northern Dynasty has 18 billion pounds of copper and 15 to 20 million ounces of gold in Alaska. Therefore, it meets my criteria of preferring North American companies because they are not running the risk of expropriation by some whacko dictator.
Northern Dynasty has excellent management and very sound financials. Now that Rio Tinto has increased their holdings, Northern Dynasty has enough cash to really develop their holdings.
NAK will eventually become one of the world's major gold and copper producers or a major acquisition by one of the real big guys. I really like this company.
NAK is just about as close to a one-size-fits-all that you can find and I don't think you'd be doing yourself any harm if you invested a few of your hard-earned-greenbacks into this one!"
FREEMARKET GOLD & MONEY REPORT
P.O. Box 5002, North Conway, NH 03860.
1 year, 20 e-Letters and Interim Bulletins, $220.
Silver will continue to outperform gold
James Turk: "The chart of the gold/silver ratio remains bearish, which means that silver will continue to outperform gold. The ratio is moving lower within its major long-term downtrend, and is below its 200-day moving average. The ratio looks ready to break into the low 40's, so let's consider for a moment what that means.
I mention above my $20 target for silver. Let's assume the ratio falls to 42. Therefore, by this measure the gold price target is $840, which is nearly its all-time high."
LIBERTY'S OUTLOOK
300 Frandor Ave., Lansing, MI 48912.
Monthly, 1 year, $79.
The lull before the storm
now is the time to buy
Patrick Heller: "At the minimum, I expect the dollar to continue to decline slowly over the balance of 2007. I think there are just too many problems to rescue the dollar this year. If we are lucky, it may only fall another 5-10% by year end.
I fear that the risk of the dollar falling by 10-25% further this year is high enough that I urge prudent people to raise the proportion of their total net worth that is in "hard assets" like gold, silver, and rare coins. In normal times, I advocated that 5-10% of one's net worth was suitable as insurance against calamities affecting the value of your paper assets. Last year I raised my allocation to 10-20% of your net worth be devoted to hard assets.
Without trying to sound alarmist, I now think you have to seriously consider holding at least 20% of your net worth in gold, silver and precious metals.
The precious metals markets were fairly quiet in the past few weeks. I think we are in the lull before the storm. Now is the time to buy gold, silver, and rare coins to protect yourself."
Steven Halpern's THESTOCKADVISORS.com
Editor Steven Halpern has developed the first interactive forum for newsletter advisors and individual investors. Here are a few excerpts by leading investment advisors posted on www.The StockAdvisors.com.
Roseman's gold: 'Manic buying' ahead
"The combined market cap of all gold-mining companies in the world is less than Coca-Cola," observes Eric Roseman, editor of Commodity Trend Alert, www.commoditytrendalert.com.
Due to this limited supply, he foresees "manic buying" from money managers and hedge funds." When? He says, "Once gold breaks through $700-$750." Here's his review.
"The bull market for gold remains very firmly intact as supply and demand is about even at this point. Gold has emerged as a surrogate currency in the 2000s as most currencies are bulging at the seams with explosive debt, including the Euro.
"Many central banks, especially in the emerging markets, are aggressively accumulating gold reserves. Inflation is also climbing, with government statistics on consumer prices fabricated and not a reflection of the true price level. We all know better, and so does gold.
"Another reason why I'm extremely bullish on gold and silver is lower short-term interest rates. Over the next several months, the Federal Reserve will have no choice but to cut lending rates in order to save the housing market. It's already falling apart.
"The next major hurdle for gold is the $700 threshold followed by last June's 26-year high of $730 an ounce. I think we're going to break $730 this summer and by next June 2008, we'll trade over $850 an ounce, a new all-time high for gold.
"Once past $730 an ounce, I believe, that the major large-cap gold stocks will truly break-out of their recent morass. These guys have been 'dead-money' since last May. For the market to get really excited about gold again, we've got to see gold trading above $700 an ounce, and probably, north of $750.
"It's coming; that's why I recommend Goldcorp (NYSE: GG) and Newmont Mining (NYSE: NEM). As for Newmont, I believe it will be purchased by Barrick Gold or another major producer.
"The large-cap gold stocks are very cheap compared to the mid-cap producers at this point. They've lagged badly over the last 18 months and still trade about 30-40% below their May 2006 highs.
"Meanwhile, the market is punishing Goldcorp because it doesn't like the price it paid to acquire Agnico-Eagle. I'm for this merger, despite its massive price-tag, because it will add to Goldcorp's booming reserves. GG is already the world's fifth-largest gold producer.
"This merger will increase its cost base per ounce but over the next few years, I fully expect the company to make a killing as gold prices blast through $1,000 an ounce and beyond. I say give the company time; as gold prices continue to rise, we will break through GG's May 2006 all-time high of $41 and eventually, surpass $100. Yes, that's not a misprint: I said 'surpass $100.'"
A silver lining for Silver Wheaton
"Silver Wheaton (NYSE: SLW) has taken an innovative approach to the mining industry," explains Adrian Day. Rather than operating mines, its acquires "silver streams" from other companies.
With its "low-risk model," the editor of The Global Analyst, www.adriandayglobalanalyst.com, says, "SLW is selling well below net asset value and is a great buy."
"Silver is often a by-product in other mining, and Silver Wheaton buys the silver stream, typically for an upfront payment and a fixed cost-per-ounce. Thus, its costs are fixed and it retains all the upside, all the while remaining a pure silver company.
"So long as the price of silver remains above the fixed cost paid - and there is a very wide cushion now - the company guarantees itself positive cash flow.
"With rapid growth in the past couple of years since it was spun off from Goldcorp, and a strong growth outlook - with attributable ounces rising from 15 million this year to 20 million by 2009, just from current mines - Silver Wheaton has seen tremendous growth in cash flow.
"For this year, it is forecasting $135 million in cash flow; this results in a strong balance sheet, with $60 million in cash today, double the figure of a year ago.
"In addition, the company has substantial investments in other silver companies (including $50 million invested last year alone), also increasing its leverage to the silver market.
"This expected growth outlook is simply from its existing contracts, but Silver Wheaton looks poised to announce more deals.
"Most importantly, it has a right of first refusal, and an exclusive negotiating period, on Goldcorp's huge Penasquito project, which came along with the recent purchase of Glamis.
"Penasquito, which will be Mexico's largest mine when it comes onstream by 2010, is scheduled to produce as much as 20 million ounces of silver a year. There is no guarantee of a deal, but many analysts are betting there will be one.
"This is a low-risk model, where the company has no capital requirements (beyond purchase of the silver stream), and where cash flow is virtually identical with free cash flow. The biggest risk - although unexpected - is if the companies with which it has contracted do not produce and are not able to pay.
"Meanwhile, the stock has risen from the mid-$2 range two years ago to today's $9.51. While it has been very volatile over the past year, the chart pattern looks very positive - with higher and higher lows over the past four dips.
"More importantly, it is selling well below its net asset value of around $12 per share, Silver Wheaton is a great buy, provided the price of silver holds together."
Half-priced play on Chalco?
Despite rising 70% since he first recommended the stock, Nathan Slaughter remains bullish on the long-term prospects for Aluminum Corp. of China (NYSE: ACH), known as Chalco.
"Chalco is China's leading aluminum producer and the world's second largest supplier of alumina - a key raw ingredient used to manufacture aluminum.
"As a rule, we are highly reluctant to tread in frenzied sectors or regions where speculation is still rampant - and ACH is square in the middle of both. Not only is the firm based in China, but it is also heavily tied to volatile commodities prices.
"Even after this rally, though, the shares are still trading below where they were last March - and at a reasonable 18% discount to our $33 fair value estimate.
"And despite the run-up in aluminum prices over the past few years, the long-term story remains compelling. The world's population is rising every day, global trade is expanding, and the rapid industrialization of fast-growing nations like India and China is fueling heavy demand.
"Meanwhile, the company maintains a monopolistic 90% share of the alumina market in China, where consumption is expected to continue racing ahead at a +12% clip over the few years.
"ACH is a volatile stock that is best suited for risk-tolerant investors. Adding to the uncertainty is a lack of timely, accurate financial information. However, the risk is somewhat mitigated by the company's wide economic moat, durable competitive advantages, and hefty 4.6% dividend yield.
"All things considered, we think the risks are outweighed by the potential rewards, and aggressive investors seeking exposure to the sustained economic expansion in China might want to consider ACH."
S.A. ADVISORY
4700 S Holladay Blvd., Salt Lake City, UT 84117.
1 year phone service, $800. For information call 949-922-9986.
Bullish on Russian and Kazakhstan
oils and uranium and gold plays
William Velmer: "We remain very Bullish towards Russian and Kazakhstan Oils and Uranium and Gold plays!
We have issued a Strong Buy rating on BMB Munai (AMEX: KAZ, $5.25); Urals Energy (UEN.L $8.30); Witwatersrand Consolidated (WIWTY.PK, $14.45).
We believe that all three of these investments opportunities have huge upside potential during the next 6 to 18 months.
Urals Energy: This junior Russian emerging oil producer is going to fly as projected oil production increases during the next 12 to 24 months.
The company is a leading independent exploration and production company with operations in Russian, primarily in Eastern Siberia.
The company's IPO was during Aug 2005 and production was around 5000 bopd. At the end of Sept 2006 production was ramped up to 10,000 bopd - at present Jan 2007 production was 11,600 bopd. According to the company production by the 3rd Q of 2007 will equal 15,000 bopd and 19,000 bopd by Dec 2007. During the 2nd half of 2006 UEN.L completed 9 producing wells.
The company believes that by end of 2011 production will reach 50,000 bopd.
During early 2007 the company completed a $130 million funding provided by Goldman Sachs International. This funding will be used to develop the Dulisma field.
The Russian Government has also granted the company a $300 million tax credit.
We anticipate year-end results for 2006 during the next few weeks and assume very positive results and updated guidance from the company for 2007 and beyond.
We believe that UEN.L is going to be a huge winner short and longer term. During the next few years UEN.L has the potential to increase to $40.00/sh in our opinion if management continues to deliver. It is also possible that a much larger company will take them out sooner than later.
Regardless, UEN.L must be bought at current prices! We rate UEN.L with the most Bullish Recommendation that one can place upon an investment!!!
Please visit the company's website and review all filings and presentations! www.uralsenergy.com.
Cheap International Oils must be bought! BMB Munai (AMEX: KAZ)
The company's purpose is to acquire and develop oil and gas fields in the Republic of Kazakhstan. KAZ is a developmental stage company. Website: www.bmbmunai.com.
Note: Recent presentation should be read! Shares outstanding- 43 million cash on hand Dec 31, 2006- $21.5 million assets- $139 million- debt- $17 million-net asset value $122 million- bk around $2.84.
As of Dec 06 KAZ has spent $77 million on exploration and development
At present KAZ still drilling wells in area of Kazakhstan in order to secure large parcel of oil rich acreage. Reserves from Emir, Dolinne and Aksaz which includes P1,P2 &P3 types of reserves total 189,696,000 BOE.
Reserves Growth Potential from Triassic and Jurassic formations from extended territory including gas- total 199,000,000 BOE.
The quality of Oil is extremely high--Density 799.5 vs 832.3 for Brent- API Degrees 48* vs 38* for Brent- Sulfur .031 vs .39 for Brent.
Netback- based upon $55 oil price/barrel=$39.03- under export Quota.
We believe that KAZ is a very cheap developmental oil and gas company doing biz in the hottest area in the word for drilling and hitting large wells with high quality oil!
This company has management, huge reserve potential, little debt, ample cash and growing production. As this company expands upon its developing fields rev and earnings will grow rapidly. We also believe that KAZ will most likely be taken out once the company is more well defined!
Buying KAZ at current levels is almost like buying a call on energy for the future. When one considers the market cap and comparing it to the reserves.
Current Uranium Plays: We are now recommending First Uranium (TSX: FIU, C$12.45) and Witwatersrand Consolidated (WIWTY.PK, $14.45). These two uranium plays have a gold kicker.
WIWTY controls property in the world's premier gold province. The Witwatersrand Basin has produced 35% of the world's gold production and 9% of world's uranium production. The Company holds 160 million oz of gold (inferred) and 136 million pounds of uranium (inferred).
According to management, the Company plans to list on major exchange within months. We also assume that Secondary funding will occur, which will allow the company to improve resource definition. We would not be surprised if the company gets bought out sooner than later!
When you consider that each share is worth 6 oz's of gold and 5 lbs of Uranium (inferred resource) and the current price of the common is only $14.45 - smart investors should take a serious look-see! Buying WIWTY is like buying a long term call on the metals! In our opinion, risk is limited to the price of the metals. We don't see much downside on gold. Maybe $100 either way, but we see continued upside potential on uranium.
According to management, WIWTY has the sixth largest gold resource in the world and the cheapest gold in the ground by comparison with gold resource-only companies.
Please visit the website and review all materials at the Website www.witsgold.com
For a Gold/Uranium play that has gotten limited notice we are very Bullish towards its growth potential during the next few years - if, of course, someone has not gobbled it up!
First Uranium (TSX: FIU) plans on developing Uranium and Gold projects in South Africa. The Company recently raised around $210 million cdn.
Please visit the website www.firsturanium.com and review the IPO. If you believe that the Uranium market has a long way to go during the next few years you will want to own some of this issue!"
THE CHARTIST
P.O. Box 758, Seal Beach, CA 90740.
Monthly, 1 year, $175.
U.S. Steel in a strong uptrend
Dan Sullivan: "U.S. Steel (X) - For more than 100 years, making steel has been the company's core focus. Headquartered in Pittsburgh, PA, U.S., Steel is the second largest integrated steel producer in the United States. In 2006 it produced 16.4 million tons in the U.S. and 7.1 million tons in Europe.
The company manufactures a wide range of steel sheet, tubular and tin products, coke and Taconite pellets. It has a worldwide annual raw steel capability of 26.8 million net tons. It has five principal operating segments: Flat-rolled products, U.S. Steel Europe, Tubular Products, Real Estate and Straightline.
On March 29th, U.S. steel announced a definitive agreement to acquire Lone Star Technologies, maker of oilfield tubing products, for $2.1 billion. The proposed merger, which is subject to shareholder and regulatory approvals, is expected to close by the second or third quarter of 2007.
Fourth quarter earnings, ended Dec. 31st, jumped 172% to $297 million, or $2.50 a share compared to $109 million or 85 cents a share, a year ago. Sales climbed 8.8% to $3.77 billion from $3.47 billion. The results were much better than Wall Street's estimate of $2.21 per share.
U.S. Steel has been in a strong uptrend. Up 40% for the year, it currently trades at all-time highs around the 102 level. It has jumped from the #13 position in our relative strength ratings to the #6 spot. In addition, it trades well-above its uptrending 50 and 200 day lines."
INTERINVEST REVIEW & OUTLOOK
P.O. Box 51462, Boston, MA 02205.
Monthly, 1 year, $125.
Gold: Long-term bullish,
but cautious near-term
Dr. Hans Black: "Despite the barrage of news on mortgage scandals in North America and the tense environment in the Middle East, gold and other precious metals continue to be largely dormant. At this time of writing, bullion is trading at $660 spot, up slightly from one month ago. Silver, however, is down slightly over the period and appears to be trading heavier on a day-to-day basis. While we continue to be positive on gold over the longer term, we are maintaining our cautious near-term approach, believing that pullbacks are entirely possible. Perhaps we are being overly optimistic but we continue to favor pullbacks in the mid-$500 range, where we would like to accumulate both bullion and some of our favorite gold-related stocks.
It is interesting to note that many senior gold stocks are acting quite poorly, and would seem to be signaling that we may indeed be correct in anticipating a move down for the price of bullion in the next several months. We continue to believe that Newmont Mining (TSX: NMC) offers excellent value in the upper $30s or low $40s, and that companies like Iamgold (TSX: IMG) show superb medium-term potential. In addition, as before, we would emphasize Orvana Minerals (TSX: ORV) and Southwestern Resources (TSX: SWG) in the small- or mid-cap area."
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