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GLOBAL INVESTING
1040 First Ave., Ste. 305, New York, NY 10022.
Monthly, 1 year, $365. www.Global-Investing.com
Vivian Lewis: "My way to buy Chinese growth is by buying a Brazilian firm, a leading producer of iron ore. The stock is Companhia Vale do Rio Doce, trading on the Big Board as RIO.
RIO will probably be the beneficiary of the largest overseas investment ever made by a Chinese company. Shanghai's Baosteel, with RIO, is studying a project to build a steel plant in Brazil which will help Bao lock in supplies. The plant will cost $2.5 bn, which the Chinese would rather spend on insuring themselves raw materials (and exports to the U.S.) than on sterilizing reserves as they buy dollars to try to keep the RMB from rising too far and too fast.
RIO is a miner and exporter of iron ore but it also has interests in non-ferrous metals and energy. Apart from producing iron ore and pellets, RIO also is in exploration, mining and processing of bauxite, gold, kaolin, potash, manganese, and other minerals. It is in pulp and paper via Celulose Nipo Brasileira (Cenibra), competitor with our Aracruz. It is a large logistics player in Brazil, owning and operating railroads, marine terminals, and a shipping company. Its portfolio includes companies making aluminum, alumina, ferro-alloys, fertilizers, and steel.
In the 9 mos ended last Sept., revenues rose 21% to $3.71bn. Net income in U.S. GAAP before accounting changes totaled $1.29bn more than 12x prior year levels, because of higher iron ore and pellets sales and prices, plus exchange gain.
This year, RIO 's announced capex budget (sin Baosteel) tops $1.815 bn, of which 2/3 is for growth and the rest is to sustain existing business. Given the expected cash flow for 2004, RIO can afford this. It has a healthy balance sheet (debt is only 90% of equity), high interest coverage, and modest leveraging. It pays a 60¢ dividend/ADR which will not break the bank either.
The stock is at a pe of 12,not very aggressive. It has a book value/sh of $9.34 and a cash level/sh of $3.50. There are 169 mn shares out. Its enterprise value to EBITDA ratio is 10.9, a bit less modest than the pe.
Cleveland-Cliffs Inc., RIO's major U.S. competitor, adopted under its sales contracts (which allow this) the RIO iron ore price increases. It is a peculiarity of the seaborne pellet market that companies negotiate an annual price in advance and publish it. RIO prices for blast furnace pellets FOB Tubarão and FOB Ponta da Madeira increased 19% and 20.1% respectively the price of their seaborne iron ore products. Then eastern Canadian producers of blast furnace pellets adopted similar increases. U.S. producers under anti-trust rules do not publish their prices but Cliffs stated that if the increases hold it will improve its revenues and earnings.
RIO signed multiyear contracts for supplying pellets with European steelmakers after the increases were announced: with Corus for 10 yrs to provide 10 mn tons and with Arcelor for 5 yrs to provide 20 mn tons. It also signed a 1 yr contract with Thyssen including the 19-20. 1% hikes of Jan.
As if higher prices and the Chinese deal were not enough, RIO is also said to be a takeover target, but I take that idea with a grain of salt. The buyer is supposed to be Anglo-American of South Africa. I have reasons for believing this is unlikely.
1) Anglo and Rio did not get along as jv partners in the Salobo project to produce 200,000 tons/yr of copper cathode later this decade. After a dispute over a test of metal recovery using the TeckCominco process, RIO bought out the South Africans for $51 mn. Metal industry experts say that RIO achieved recoveries of over 90% and they scorn the technical competence of Anglo, and plan to go ahead full stream.
2) RIO's Benjamin Steinbruch (president of Companhia Siderúrgica Nacional) nabbed RIO with partners during the privatization. As a result of this and a sales of CSN's stake, he has tough partners: Bradespar (BSRPF-OTC), the investment spinoff of Banco Bradesco; Mitsui of Japan, both with 20% of Rio; and a Banco do Brasil pension fund and the State-owned BNDES which together control close to another 60%. They have right of first refusal but they are not the only potential blockage to Anglo. BHP Billiton (not be allowed to bid on competitive grounds) owns a further 2.1% of RIO.
3) More significantly, the Brasilia govt. has a golden share in RIO, a preferred share dating back to the privatization. The Federative Republic of Brazil can block any change in where RIO is headquartered or any liquidation of the company or disposal of mines, mineral and ore deposits, railways, or ports. The political impact of any Anglo attempts to capture the biggest Brazilian multinational co. is beyond imagination. That means the price would be horrific. Anglo might face a bill north of $2.5 bn, beyond even the fabled wealth of the Oppenheimers. Mitsui is more likely to want more RIO than to sell.
4) The price action since the Chinese deal and the pellet price increase were announced also does not support a takeover saga. Blocks of the stock have been sold by institutions, and this has lowered the share price.
RIO pays a 4.4% dividend.
Apart from RIO and Baosteel, the project for a steel plant (in Maranhão) is being advised by German and Chinese engineering services firms. They will be involved with the preparation of a bankable feasibility study. The world's largest steelmaker, Arcelor, also intends to be involved with the project.
The proposed plant will produce 3.7 mn tons/yr of steel slab, with future expansion to 7.5 mn tons. Should the project go ahead, it will also mean that there will be increased demand of iron ore from RIO.
The project is the largest investment in Brazilian steel for many years and has the support of Brazilian and Chinese governments.
VALE Q4 profit fell 48.6% from a year earlier, hurt by smaller gains tied to swings in the currency. This has cut the share price to a very attractive level.
For the year, orders from Chinese steel mills fueled record earnings producing a net profit of $1.548 bn, an alltime record, equal to $4.03/sh. In 2002 it earned net of $680 mn and in 2001 a prior record of $1.287 bn.
Return on equity (ROE) last year was 31.7%, compared with 20.7% in 2002. Cash flow, measured as Adjusted EBITDA, was also a record, reaching US$2.130 bn, 19.7% higher than in 2002.
CVRD also achieved numerous other records in 2003: Gross revenue exceeded $5 bn for the 1st time (at $5.545 bn, up 29.5% from 2002 levels. Consolidated exports under generally accepted accounting principles in Brazil were $3.952 bn, 24.6% higher. VALE accounted for 13.8%of Brazil 's entire trade surplus in 2003.
RIO is in a sweet spot what with the secular trend toward huge increases in Chinese demand for its ores, plus global recovery and a weak dollar. In the next 3 yrs, it plans to invest up to $1 bn in upping its iron ore output to 100 mn metric tonnes. This is 55% over current levels. The information came in the RIO conference call Mar. 25 with CEO Roger Agnelli.
Last year, the increase in RIO sales was 63% from higher volumes and 37% from higher prices. China's impact on the market will keep both frothing. And you get a 3.4% dividend to boot. Buy at $50."
THE PERSONAL CAPITALIST
6911 South 66th East Ave., Ste. 301, Tulsa, OK 74133.
1 year, 24 issues, $195.
A hedge against world turmoil
Sean Christian: "We continue to believe that the next major move will be down, with a target of 9,500 for the DJIA and 1,800 for the Nasdaq. It now appears that inflation fears, combined with concerns of coming rate hikes, may well be the trigger(s) for the next drop. A decline of plus or minus 10%, top to bottom, will likely scare most investors. It should create some excellent buying opportunities in selected shares.
We now hold about 40% cash. That's the highest level in quite some time and reflective of our continuing belief that we're overdue for a serious correction.
We added Coeur d'Alene Mines, a silver play, to our portfolio giving us an 8.34% position in the sector. CDE's three leading mines produced over 14,000,000 ounces of silver in 2002. CDE is the world's largest primary silver producer, as well as a significant low-cost producer of gold. CEO Dennis Wheeler is looking for a robust year if silver prices continue to rise. The world may be entering a "new era" for base metals as robust economic growth in India and China spur consumption. Industrial expansion in China is very metals-intensive. FCX is one of the world's largest players in the copper market. Newmont is the world's largest gold mining company. The weak dollar and new violence in Iraq draw investors to what is to be considered a safe-haven, gold. We continue to like this sector as a hedge against world turmoil. We will hold our shares."
COMMON CENTS
P.O. Box 126354, Benbrook, TX 76126.
1 year, 6 issues, $48.
Tread very carefully in the metals
Roland Carter: "Commodity pricing remains high-profile in the news. Oil has pulled back a couple of bucks/bbl from its recent high of $38+. Silver plunged 10% in one day this week. All of the metals have eased. Tread very carefully in this volatile area. I follow gold somewhat and a couple of brave clients are exposed to Newmont Mining (NEM). The chart of NEM (40+) has broken down big-time from its strong advance. Technically, a pullback to 30-32 area seems likely. It seems logical that the base metals (copper, zinc, nickel, etc.), which have surged this past year, will stay strong so long as the world's economics continue to strengthen. China will use a lot of these materials in their "building." These high commodity prices will surely bring an uptick in inflation figures, which should make gold prices (hovering near $400/oz.) stay strong, too."
MONEY SHOW DIGEST
published by InterShow, 1258 N Palm Ave., Sarasota, FL 34236.
www.moneyshowdigest.com.
The right "Day" for gold
Special Report: Energy Gains
Steve Halpern: "Gold's dramatic decline from over $420 calls for an update," notes Adrian Day, one of the advisory world's leading authorities on natural resources. "Is this the correction we have been patiently waiting for? And most important, is it time to buy now?"
"We are now seeing the correction we have been waiting for, and I believe it represents an opportunity for late-comers and procrastinators to buy. But equally, we are not convinced we've seen the lows and would not use all one's powder quite yet. Why has gold collapsed so sharply? Certainly, the dollar's continued recovery, along with the improved outlook for the US economy and accompanying expectation of a sooner-rather-than-later hike in interest rates, all combined to make the short-term outlook for gold negative. Moreover, the technical backdrop was negative, with gold having tested and failed to move above the early January $430 high. This fall in gold should also be viewed in the context of a sharp correction in most commodity prices, on the back of a strong dollar and a tightening in China, dampening some demand for resources. And once the decline started, it was aggravated by stop losses and margin liquidation among recent speculators.
"The long-term fundamentals remain intact, both the macro economic outlook and the industry-specific fundamentals. The dollar will fall; the current account deficit is at crisis levels (5% of GDP) and in both the US and globally, reflation efforts are underway. Though published inflation rates in the US remain low, even these have turned up, and, behind the headline numbers, prices for frequently purchased goods and services are rising more rapidly. Even given these official levels, short-term rates in the US are negative, and would remain negative even if the Fed were to hike rates 50 basis points. Negative rates are very positive for gold.
"So though the longer-term fundamentals are clear, and this correction is precisely what we - and others - have been anticipating for some time, one must display patience; such counter-trend corrections often take longer than one would expect. Having said that, we do not expect significant further downside; on price declines, there is strong physical buying from Japan, China, and India, as well as speculatively, it would appear, on the Comex. Gold will turn around and the resistance at $430 will be taken out eventually, probably by some new development (such as a geopolitical incident of a rising perception of inflation). It has been argued that the length of gold's move from the 1999 low exceeds recent gold bull moves. We think the 1970s would be a more fitting parallel to the brief flurries since, and we firmly believe this market has a lot further to go, in terms of both time and price.
"For now, gold may continue to trade in a range around $400. So, though we would be buyers at this time - and if you are starting an investment program, you should step up to the plate now, but would pick spots carefully, as well as focus on the best of the companies. Among the stocks on our list, take an initial position in Newmont (NYSE NEM) if you don't already own it, though it could sell off more if gold's period of weakness is extended. Much the same goes for Harmony (NYSE HMY), which is leveraged to the rand price of gold. Among the seniors not on our list of open positions, we would also buy another South African, Gold Fields (NYSE GFI). We would also buy again Meridian (NYSE MDG), on the basis of confidence in management and a strong balance sheet, with continued performance at El Penon mine; at this price there is little premium for the halted Esquel project in Argentina. And, among the juniors, we continue to favor Virginia Gold (CA: VIA Toronto), a low-risk explorer with great management and a strong balance sheet."
Editor's Note: Adrian Day is President, Global Strategic Management, P.O. Box 6643, Annapolis, MD 21401.
Special Report: Energy Gains
Energy stocks remain among the favorite sectors of our advisors. Here we offer a look at the latest favorites from five of the best: Price Headley, Schaeffer's Investment Research's Joe Sunderman, Dennis Slothower, Marketocracy's Ken Kam, and Prudential's Ralph Acampora.
"Our latest new swing trade recommendation is Energy Conversion Devices (NYSE ENER)," says Price Headley in his Aggressive Stock Trader service. "The company is a developer and manufacturer of technology and devices used in alternative energy production). The stock had been trending higher, but met some resistance around 11.35 early last week. It recently broke through that resistance, and once again moved higher on stronger volume. We recommend you buy, with a trading target of 14.04 with a closing stop under 10.49." In his BigTrends NetLetter, (230 Northland Blvd., Ste 215, Cincinnati, OH 45246. www.bigtrends.com) he adds, "Our sector fund recommendations are designed to be longer-term holdings. Fidelity Select Energy Portfolio (FSENX) is made up of oil and gas stocks that continue to make slow and steady progress, and we expect the same to continue through the middle of the year, With OPEC's slowed production, oil supplies are getting smaller and smaller. That, coupled with the fact that we're entering the heaviest auto fuel consumption period of the year, and the oil companies are in an enviable position. Despite temporary down days, the general momentum of these stocks remains bullish."
Joe Sunderman, analyst with Schaeffer's Investment Research, (1259 Kemper Meadow Dr., Cincinnati, OH 45240, www.SchaeffersResearch.com) also likes an "alternative energy" play. He says, "Our latest featured stock is FuelCell Energy (Nasdaq FCEL). The stock has been a relative-strength leader, moving from 13.50 to 18.50 since the beginning of April. We believe that there is fuel left in this issue to charge it higher. Pessimism continues to grow. Short interest stands at 6.3 million shares, which represents 10% of the stock's float. What's more, it would take more than six days to cover these shorted positions at FCEL's average daily trading volume. This greatly increases the chances of the security benefiting from a short-covering rally. Options speculators are also not expecting much from the stock. And Wall Street is largely ignoring FCEL, as only five analysts currently rate the shares. Of those five, only one rates the equity a 'buy', with the remaining four handing out 'holds'. Any upgrades or additional coverage could boost FCEL sharply higher. Traders should target a move to 21 with a stop-loss on a trade below 16.50."
In his Stealth Stocks (517 Mountainville Dr., Alpine, UT 84004, www.onthemoney.com) newsletter, editor Dennis Slothower offers a trio of natural gas buys. He says, "Houston Exploration (NYSE THX) is an independent natural gas and oil company. Its operations are primarily focused in south Texas, offshore in the Gulf of Mexico, and in Oklahoma and Arkansas. For the fiscal year ended 12/31/03, revenues rose 43%, while net income before accounting change increased 90%. Edge Petroleum Corporation (Nasdaq EPEX) is an oil and natural gas company engaged in the exploration and development in the US. For the fiscal year ended 12/31/03, revenues rose 62% and net income before accounting charges totaled $4.7 million, up from $750 thousand. Hugoton Royalty Trust (NYSE HGT) is an express trust that relies on the net profits interest of predominantly natural gas producing leases located in the states of Kansas, Oklahoma, and Wyoming. For the fiscal year ended 12/31/03, revenues rose from $30 million to $80.7 million, while distributable income rose from $29.6 million to $80.4 million."
"To determine our strong buy recommendations, we examine the trading activity of the 50,000+ advisors monitored by Marketocracy (PO Box BC, Los Altos, CA 94023, www.marketocracy.com) and look for stocks where the best-performing investors are buying, while the underperformers are selling," says Ken Kam. "Two energy-related firms fit that criteria. Petro-Canada (NYSE PCZ) is an integrated oil and gas company that both explores for and produces crude oil and natural gas, as well as distributes petroleum-based products. The 'best' have been increasing their position in PCZ for the last 4 weeks, first adding 50% to their position in the last two weeks of March, before adding an additional 11% over the last 14 days. Their purchases have largely been made at prices between $43-$45 per share. Meanwhile, Peabody Energy (NYSE BTU) is a private-sector coal company with majority interests in 33 coal operations located throughout all major United States coal-producing regions. Since mid-March, the best have been steadily buying into BTU, increasing their position by 26% in the last two weeks alone. The best were adding to this position as recently as today, and have been buyers at prices ranging from $43-$48 per share. By comparison, the rest have lightened their holdings."
"We continue to see many constructive technical patterns within the energy sector and see potential for further outperformance in the months ahead," says technical expert Ralph Acampora of Prudential Securities, 1 New York Plaza 17th flr., New York, NY 10292. "We continue to find names that we believe offer substantial upside potential. Top technical picks within the AMEX Oil index are Total S.A. (NYSE TOT) and Occidental Petroleum (NYSE OXY). In the oil service area, we remain somewhat selective near term, but continue to expect superior relative and absolute price performance from BJ Services (NYSE BJS) and Smith International (NYSE SII). And in the small cap arena, we cannot overlook what we view as continued strong long-term potential for St. Mary Land & Exploration (NYSE SM) and Houston Exploration (NYSE THX). In the natural gas area, we remain very impressed with technical prospects for Burlington Resources (NYSE BR). We also have very favorable technical outlooks for Anadarko Petroleum (NYSE APC), Stone Energy (NYSE SGY) and Pioneer Natural Resources (NYSE PXD). In the same group, we also like Apache Corp. (NYSE APA). The stock has just completed an intermediate-term consolidation pattern with a recent upside breakout."
Editor's Note: Bull & Bear readers can receive The Money Show Digest - FREE of charge. Log on to www.moneyshow.com to sign up for your free weekly digest of newsletters by Steve Halpern, former editor of The Dick Davis Digest. Bull & Bear readers and their guests are invited to attend The Atlantic City Money Show, August 5-7th - FREE of charge. To register call 1-800-970-4355 or visit www.MoneyShow.com.
INVESTOR'S EDGE
774 Mays Blvd., Ste. 10, Incline Village, NV 89451.
Monthly, 1 year, $149. E-subscription, $99.
The math behind energy partnerships
Joseph Shaefer: "I've received a number of questions from subscribers about the wasting asset that energy income partnerships represent. "Why buy them if I know they will decline in value" is the general theme of the questions. The answer is two-fold: (1) The amount of the decline is typically known in advance, and (2) I believe the rate of decline will be less severe (because I believe energy prices will remain high) than most investors believe. Let me give you an example. A company I have not recommended in a long time - but have been buying again for myself and a number of my managed accounts is Santa Fe Energy Trust (SFF).
I've been buying it right here around $28, at which price it yields about 10%. My absolute downside risk is that every single producing well that SFF owns will suddenly dry up overnight and the company won't be able to pay any dividends. SFF shares consist of two pieces - a share of undivided interests in the Santa Fe Energy Trust plus a $20 per Unit portion of a $1,000 face amount zero coupon United States Treasury Obligation (bond) maturing on February 15, 2008. So if SFF goes bone-dry before you read this, I know that my US Treasury will pay me $20 when the partnership winds down in February of 2008. So much for worst case. I'm willing to live with that level of risk because SFF is a grantor trust that holds a 90% net profits interest in certain oil and gas producing properties owned by Devon Energy (DVN) with a specific number of production barrels to be produced by two significant oil and gas properties, the Wasson ODC unit and the Wasson Willard unit. SFF holds interests in approximately 2,300 oil and gas wells.
As long as they produce, SFF gets its 90%. As these fields reach the end of their useful life, they will be less profitable. It costs more to push oil out as a field nears the end of its useful life. No getting around that. But if oil prices received are $25 a barrel, SFF gets 90% of that. If oil prices are $40 a barrel, well, they get 90% of that instead. That's where I think I'm valuing their properties wisely and the bulk of investors aren't. I believe SFF will pay out another $11-12 or so over the next four years and still have a couple bucks in the ground as a residual value. Even though we know the number of barrels will be less in the next four years, a high oil price means a higher payout.
The math is straightforward, if not simple. While there are no guarantees, I expect to buy something for $28 that pays me something like $35-$40 over the next 3 years and 9 months. 25-35% may not sound like much but, adding the $20 guaranteed by the US Treasury to my certainty that oil prices are headed higher and I believe this is a great investment for income buyers."
FINANCIAL INSIGHTS
P.O. Box 793-Z, Oakhurst, NJ 07755.
Monthly, 1 year, $175.
We remain in secular bull markets
In gold, silver, gold and silver shares
Dr. Richard Appel: "Gold's recent, sharp decline from above $430 to slightly below $390 was partially in sympathy with the virtual collapse in the price of silver. Silver, after posting a high at near $8.50 an ounce, suffered severe selling pressure which drove its price back to $6.00. A gap exists from about $5.81 to the high $580's. This may have to be closed before silver posts its final low. For this reason I would not view silver moving to the $5.81 area as a negative. Further, this also represents silver's current 200 day moving average, and as such should offer significant support for the white metal. Gold on the other hand fell to an important area of support which is generated by its own 200 day moving average. This currently stands at $391.
Nothing has materially changed for either gold or silver that would negate their secular Bull Markets! Both metals are well above their long-term trend lines that extend back to the inception of their Bull Markets. For this reason even if they fall significantly further, which I feel is unlikely, their Bull Markets will remain in force. The U.S. is continuing to run unsustainable budget and balance of payments deficits. The Fed continuing to create excessive liquidity by inflating the monetary aggregates in order to stimulate the economy. Our nation is fighting wars in Afghanistan and Iraq that are not only destroying the lives of our brave soldiers and their families but are extraordinarily costly. Additionally, the dollar is experiencing a temporary secondary correction in its ongoing Bear Market. This, I believe, is fated to end within the next several months.
It will likely take time to repair the damage that has been recently wrought upon the gold and silver complex. As difficult as it may be to understand, to my mind now is the time to carefully begin adding to positions. The odds favor that the lows have already been posted, and at worst any further declines should be of limited magnitude and duration.
Silver is in a slightly different position. The open interest in the May expiration period is quite high. If many of these open contracts are destined to demand the underlying physical metal we may soon have some real upside fireworks.
Markets are not made to make you and I wealthy. If anything they exist to separate us from our money! I wish that it were easy to recognize the Bull Markets in gold, silver and commodities as we have, and just wait patiently as these markets moved in an upward, unimpeded path to their fated peaks. However, we are trading in markets. And as such we must recognize that as no Bear Market moves to its conclusion without sharp, secondary upturns, no Bull Market rises to its final top without terrifying declines. All that we can do is to objectively review our premises the best that we can. And, if we again arrive at the conclusion that we are correct in our judgement, act accordingly. This is what I constantly strive to do. I hope that you too follow this path. To my mind, this is the only fashion in which one can not only survive, but prosper when dealing in the marketplace."
THE DINES LETTER
P.O. Box, Belvedere, CA 94920.
1 year, 17 issues, $195.
Gold: Selling overdone
Summer rally ahead?
James Dines: "The chart of the ratio between gold and the stock market shows that gold's Major bull market starting in 1999 remains intact. We view all setbacks as temporary Consolidations.
A chart of the XAU suggests that we might be near to or at least a short-term gold and silver rally.
While gold bullion is within 8% of its highest prices in 15 years. Many gold stocks have plunged by half, which seems overdone for us.
Toronto's odd lotters are hitting every bid, usually a sign of an approaching Bottom Formation. Selling in gold-mining shares has been so intense, regardless of value, that we have actually had a group of gold stocks stopped out of our Supervised Lists for the first time since we turned bullish on golds a few years ago! In fact, four of them have been stopped out: Meridian (MDG), Miramar (MNG)(MAE.TO), Novagold (NG)(NG.TO) and Royal Gold (RGLD)(RGL.TO). It disturbs us because at this early a stage of a Major bull market we tend to leave stops well below current prices as explained in our Video Instructional, in a sense speculating with our profits, so they need serious declines to get down to out stop points. Something similar happened in the year 2000 when we got stopped out of the Internets, but that was a crazed bubble whereas golds have yet to become as popular as we expect them to be near their final Tops. Furthermore, some golds are still in bullish Uptrends, and others breaking down, which should not be happening in a commodity-based environment because they all get the same price for their gold and their economic situations are approximately similar.
Our 13 April '04, Interim Warning Bulletin also upgraded our opinion on the US dollar from "Sell" to "Neutral" and we are actively considering upgrading it again. It's not always easy to figure currencies because governments rig them, but we do know that there has been massive liquidation of the so-called "carry trade," in which a speculator borrows money in a currency featuring low interest rates (such as the yen or US dollar) and buy bonds in higher-yielding currencies, pocketing the difference. If the US is about to enter a period of rising interest rates, stronger dollars result in that difference getting squeezed, so the carry trade has been dumping staggering quantities of currencies on the markets while buying US dollars. Following this train of thinking, hedge funds dumped gold stocks because they figured that the US dollar was going higher but we are skeptical of that conclusion, and believe the deeper reason for owning gold is as a hedge against a currency crisis among all paper worldwide. On this Fundamental basis, we believe it is necessary for portfolios to contain precious metals as "fire insurance," hoping that they don't go up. It is not widely recognized yet, but America's greatest financial asset is its huge gold hoard, so jealously guarded that not one ounce has been sold even while virtually all other governments in the world have been dumping theirs. Furthermore, the US prices its gold at $42.50/oz - we couldn't make this stuff up - even while the free market price is around ten times higher, an effort to denigrate gold's importance. (Ah, shucks, you mean that little pile of gold we got? Oh, that's nothing!)
FREEMARKET GOLD & MONEY
P.O. Box 5002, North Conway, NH 03860.
1 year, 20 issues, $260. www.fgmr.com.
Gold stocks headed a lot higher
James Turk: "The correction in the metals has naturally and unavoidably spilled over into a correction of the gold mining stocks. But there has not been any irreparable damage. A chart of the XAU Index shows that the bullish 'head & shoulders' pattern formed by gold from 1996-2003 remains very much in place. It is the driving force that suggests the gold mining stocks will be headed a lot higher in the years ahead."
INVESTOR'S DIGEST OF CANADA
133 Richmond St., W., Toronto, ON M5H 3M8.
1 year, 24 issues, $137.
"Best buys' from leading analysts
Analysts follow as many as 20 stocks, most of which are rated "buys." Of those buys at any one time an analyst has one or two favorites seen as most suitable for new buying. Investor's Digest of Canada devoted a column in their publication to those one or two favorite "best buys."
Michael Popovich: "North Atlantic Nickel Corp. (TSX NAC $2, 416-703-6348, www.northatlanticnickel.com) doesn't mine any nickel. In fact, it prospects for gold - and in Mali, not North America. But this doesn't bother Catherine Gignac, a mining analyst with Toronto's Loewen, Ondaatje, McCutcheon Ltd.
For one thing, she says, "nickel" will probably be dropped soon from the company name.
More important, North America is drilling for gold in areas that look promising. Indeed, the geology of the company's five key exploration sites resembles that of gold mines already up and running in Mali.
And the absence of major gold exploration in the West African country over the past 10 years makes it much more likely the company will be successful, Ms Gignac believes.
Meanwhile, North Atlantic is both well-financed and well-staffed. In fact, because one of the two geologists who run the company helped do an exhaustive geochemical survey of Mali in the early '90s, North Atlantic has the inside dope on which of the country's properties have the best potential for gold exploration.
For Ms. Gignac, North Atlantic Nickel is a "best buy" with a 12-month target price of $6 a share. She does, however, admit that because the company is unlikely to generate any revenue for the foreseeable future, it is a speculative buy.
Based in Toronto, North Atlantic is a junior exploration company with a market capitalization of roughly $40 million.
And although the rainy season that hits Mali in July will make drilling well-nigh impossible, the company plans to drill extensively until then, Ms Gignac says.
Quarterly loss rose more than 12-fold
For the three months ended Sept. 30, North Atlantic's net loss zoomed to approximately $550,000, or $0.04 a share, from $45,000, or $0.01 share, for the similar period in 2002. Total revenue, however, went from nil to $22,475.
For the nine months ended Sept. 30, the net loss widened to approximately $988,000, or $0.08 a share, from $77,000, or $0.01 a share, for the similar period in 2002. Total revenue soared to $44,663 from $601.
Ms. Gignac may have a soft spot for the company like North Atlantic Nickel that actually explores for gold. But she also likes an outfit like Shore Gold Inc. (TSX SGF $1.95, 306-664-2202, www.shoregold.com) that in reality looks for diamonds.
For one thing, Shore's prime exploration focus - the Star Diamond project, approximately 60 kiometres east of Prince Albert, Sask. - is part of the world's largest kimberlite field and, as such, is a promising source of diamonds.
In fact, every hole the company drilled at Star during the late '90s managed to intersect kimberlite-laden diamonds. And because diamond miner DeBeers, which owns a site next to Star, managed to dig up a 10.2 carat diamond in 2002, it's a safe bet that Shore's property could yield stones of similar size, Ms. Gignac believes.
In the meantime, because Magma Diamond owns five per cent of Shore, the latter can draw on Magma's world-renowned expertise in diamond cutting, diamond marketing and the building of diamond processing plants.
And because Shore is now sifting a large sample from the site, it has a better chance, than if it had taken a smaller sample, of knowing the value of its entire ore body, Ms. Gignac notes.
For Ms. Gignac, Shore Gold is also a "best buy," albeit a speculative one, given its unlikelihood of generating revenue for some time.
Originally a gold miner in Saskatchewan, Shore switched to diamonds in 1996 after its mine played out. Largely self-sufficient, the company has managed to build facilities both below and above ground without the help of substantial outside financing.
For the three months ended Sept. 30, Shore's net loss widened to approximately $275,000, or $0.01 a share, from $175,000, or $0.01 a share, for the similar period in 2002. Interest income, however, rose 41.9 per cent to $22,000.
For the nine months ended Sept. 30, the company's net loss widened to $735,000, or $0.02 a share, from $520,000, or $0.02 a share, for the similar period in 2002. Interest income, meanwhile, more than tripled to $85,000 from $23,000."
GROWTH STOCK OUTLOOK
P.O. Box 15381, Chevy Chase, MD 20825.
1 year, 24 issues, $235.
Barrick posts record profits and
revenues, reduces gold hedging
Charles Allmon: "Barrick Gold (NYSE ABX $20.64) is among the world's largest gold producers. They operate a low-cost portfolio of 12 mines and four major development projects on four continents. In 2003 Barrick produced 5.51 million ounces of gold at an average total cash cost of $189 per ounce - the lowest cash cost among senior gold producers. The company's development plan is expected to add four major new mines - Valadero, Alto Chicama, Cowal, and Pascua-Lama - between 2005 and 2008. Together, these mines are projected to produce approximately 2 million-plus ounces of gold annually.
When Barrick management reported on a good year in 2003, they provided some salient information on what investors might expect in the future: "We are encouraged by the strong gold environment we experienced in 2003, and are poised to benefit in 2004 and beyond from the transformation of our Company that is well underway."
"With continued pressure on the US dollar and the war in Iraq, gold played its historic role as a safe haven and store of value in difficult times, reaching an almost 14-year high of $415. Based on our reading of the fundamentals, we see the rally as sustainable, with significant upside potential. When you couple gold's strengths with those of Barrick, you can see why we believe strongly that this is a great time to be building new mines and bringing new ounces into production."
"If 2003 was the year to execute - we did. We met our targets, producing 5.51 million ounces at $189 an ounce, making Barrick the lowest-cost senior producer in the industry. We earned $200 million, 37 cents per share, with operating cash flow of $521 million."
"For over a decade after its founding, Barrick was essentially a one-mine company, with no operations outside North America. Over time, we expanded through acquisition and exploration - first in South America, then to Africa and Australia and more recently to Russia, giving us a truly global presence. Yet our organizational structure did not evolve with our operational reach. In response, in 2003 we reorganized the Company into three regions - North America, South America and Australia/Africa to better fit our growing global footprint, and we're supporting those regional operations with financial management and technical expertise from our corporate center."
"Of our 12 mines, eight met or exceeded our expectations in 2003. Goldstrike in Nevada led with another 2-million-ounce year - its eight straight - while Pierina in Peru continued to outperform expectations, producing over 900,000 ounces. Our Australian operations, led by Kalgoorlie, delivered a record year in terms of production and were on target for costs. At the two properties that presented our principal challenges, Meikle in Nevada and Bulyanhulu at Tanzania, we worked diligently to overcome our operating issues, ending the year with Meikle stabilized and Bulyanhulu ready to improve its performance this year.
"Equally important, during 2003 we made a significant advances on all properties in Barrick's development pipeline, as we prepare to bring four major new mines into production over the next four years. Valadero in Argentina began construction in the fourth quarter of 2003. At the adjacent Pascua project on the Chile/Argentina border, we are near finalizing our optimization study, scheduled for completion in mid-2004. At alto Chicama in Peru, we submitted our Environmental Impact Statement and completed all public hearings, while at Cowal in Australia, we largely completed the permitting and engineering phases."
"When fully operational, our four new mines represent a combined 2 million-plus ounces of new production annually - the best pipeline of new projects in the gold mining industry. In addition, as 2003 closed, we added a fifth project to our pipeline: Tulawaka - a small, high-return property in Tanzania, which we expect will commence production within a year."
"We also continued our aggressive exploration efforts in 2003, maintaining one of the industry's largest exploration budgets. We've sustained our exploration program through the tough times in the gold business, and we've seen that investment pay off - for example, with Alto Chicama, the industry's biggest grassroots discovery in the past decade. Our strategy is to have projects at all stages of the exploration continuum, from grassroots to predevelopment, to continually feed our pipeline of projects and replace mines that mature. In 2003 we also forged new strategic partnerships in Russia and Mongolia, opening a window onto some of the world's most prospective land positions.
"In recent years, our large gold reserve base has given us the option of drilling when and where it proves most efficient and economic for the Company. During 2003 Barrick virtually replaced its production, remaining at 86 million ounces at year-end. In addition, we had 25 million ounces of resources at year-end. In 2004 our focus will be on moving resources to reserve status while we bring additional reserves into production."
"By year's end, we had repurchased 8.8 million common shares at an average price of $17.56 per share."
"For most of Barrick's history, forward sales were a significant element in providing the Company the predictable revenue that helped fuel our growth. Barrick has a solid portfolio of assets and a very strong financial position, so as times changed and market sentiment imposed a penalty on derivatives of all types, we took a major step in late 2003, adopting a no-hedge gold policy. This means that we will not add any new ounces to the program, and will pursue opportunities to reduce our position to zero over time."
"At year-end the Company's hedge position was just 14% of reserves and measured and indicated resources."
"Through 2004, you'll continue to see reductions in our gold hedge book in keeping with our new no-hedge policy."
On 12-31-03 total assets were $5,362,000,000, current assets $1,365,000,000, current liabilities $350,000,000, cash and short term investment $970,000,000, long-term debt $719,000,000, other long term obligations $569,000,000, deferred income taxes $230,000,000, shares outstanding 535,250,000, shareholder equity $3,494,000,000 ($6.53 per share), return on shareholder equity 5.7%, positive cash flow. (Address: BCE Place, Canada Trust Tower, 161 Bay St., Ste 3700, PO Box 212, Toronto, ON M5J 2S1. (416) 861-9911.)"
Allmon's Comment: Assuming management's hopes and dreams come to fruition, ABX revenues could expand to $2.1 - $2.3 billion in 2004, throwing off earnings in the $.45 - $.50 range. Profit growth would depend to a large degree on the price of gold. At $440, ABX could do well.
While gold hedging has not been eliminated, it will make ABX a more profitable company as the gold price rises and hedging eventually disappears. The ideal would be no hedging. At some point in the future, I would hope to buy ABX for managed accounts. Balance sheet is a sparkler. Rumor persists that ABX may be acquired by NEM.
ECONOMIC ADVICE
3910 NE 26th Ave., Lighthouse Point, FL 33064.
Monthly, 1 year, $99. www.economicadviceinc.com.
Gold will break its record high of $860
James Rapholz: "We are in a bear market rally that has topped out because the prices were driven too high. Gold isn't going to move up very much until the dollar starts falling against the Euro again. As long as our stock market refuses to fall, the dollar is, more or less, priced fairly to the Euro.
You don't have to have a Doctor's degree in economics to figure out the future for the stock market. Wall street has our economy growing at a 4.7% to 6% rate in 2004. The personal income for the past year has grown at only a 1.6% rate as of the end of February, 2004. The difference between income and spending has been taken care of by huge tax cuts and the tremendous amount of money from home refinancing. As long as interest rates continue to fall, home refinancing will continue, but it looks as if Mr. Bush's tax cuts are about to drop dead. The stock market (except for gold and energy stocks) will begin a new two year bear market, just before or just after the November elections. Between now and then, it's going to be a very bumpy ride. In the big picture, I see gold breaking its old record high of $860 per ounce. We are in the same type of economy that Japan has been in for the past twelve years. In order for our country to stay together, our leaders will have to continue printing money out-of-thin-air which will drive the value of the dollar down and the value of gold up."
EMERGING GROWTH STOCKS
102-2020 Comox St., Vancouver, BC V6G 1R9.
1 year, 8 to 10 issues, US$99.
Louis Paquette: "The metals index on the TSX rose by 79% in 2003. Only the gold stocks put on a better performance. So far this year, the worst performing stocks are the golds and the base metal stocks.
Within secular bull markets, there are cyclical reversals, to shake out the hot money, the latecomers to the party and to let fundamentals catch up with the charts. That's exactly what we have going here. This has been a futures market-driven, long overdue shake out and price retracement. And because the ride on the way up was extended, we shouldn't be at all surprised at the extent and volatility of the corresponding correction.
The charts for Gold, Silver, and the HUI are now at or below their respective 200-dma's and down around the bottom of their long-term lower channels. Which is where we want to move into them. As opposed to when prices are extended and sentiment is feverish.
Our $380 target was recently reached. Given that the prices for gold, the HUI and the U.S. Dollar Index have all hit our targets, I am making our first gold stock pick of the year in the midst of all this fear and loathing about China slowing down. In long term secular bull markets, you buy the dips. I think this qualifies as a good dip.
Consolidated Norsemont Ventures (TSX ILN.H $0.175) was a high flyer back during the mid-1990's junior mining stock boom, fuelled by speculation over an Indonesian property. But those dreams were dashed along with the collapse of Bre-X and the company never managed to capitalize on the new gold bull market since late-2000. In December 2002 the company was designated an "Inactive Issuer" by the stock exchange. Tired of waiting for a turnaround, a dissident shareholder group took control of the company earlier this year, shoving out old management and hand picking a new president, Marc Levy (announced on April 5th). I have met and interviewed Mr. Levy whose background is in the technology fields. What he lacks in mining background however, I believe he will more than make up for in his organizational, communication skills and ambition and I also believe he is capable of attracting the right people from the mining field to build shareholder value.
Scan the titles of the last few news releases and you can see a "clean-up" operation has been in place this year - clearing of debts and other skeletons in the closet. The operation is about over and it appears the company is now in a position to move forward. As it sits today, the company has three projects on the books; the right to earn a 75% interest in IMA Exploration's Corcovado Property in Chubut Province, Argentina, and a 40% interest in the Nome property near Cassiar, BC and they are also assessing properties in Peru at this time.
While ILN.H largely sat out the bull market the past few years, over the past month or so it has firmed up while most gold stocks have been falling like rocks (excuse the pun) - impressive relative strength that suggests better performance going forward."
Ian McAvity's DELIBERATIONS
PO Box 40097, Tucson, AZ 85717.
1 year, 18 issues, $225.
Ian McAvity: "What a difference a year makes... a year ago the All Items Index was finally kicking in with its breakout, but couldn't attract a lot of attention, despite having climbed from 62 to 79 (27%) in the prior 15 months. A further surge of 33%, from 75 to 100 from Jul'03 to Apr'04 has turned commodities into a red-hot class.
Given that most major global commodities are quoted in US Dollars, a significant component in the rise was the decline of the Dollar, but the commodity price surges across the board have now quite significantly out-stripped that contribution as aggressive trading funds have clearly joined the chase. There can be little doubt that raw materials are starting to impact inflation, and will continue to do so as they filter through, despite all the fudging mechanisms built into the various official price indexes. The recent upturn in US bond market yields makes that very clear.
Commodity price runs are like fireworks. Quick surge to great heights, big flash of light and sound, then the ashes fall back down to earth quickly, When they spiral up, they don't stay up there long. I'm always dubious of 'TTID' (this time is different) stories...
WTI Crude prices continue to show a huge triangle that may result in significant economic shock waves IF it is resolved on the upside. Higher peaks and valleys ratify the ongoing uptrend, while marginally higher highs on the three peaks are a tease in my mind. To resolve, the range of $38/$40 should be penetrated by a sustained power move.
I remain skeptical of Iraq, and increasingly worry that civil unrest will compound between the religious factions. I don't see how it avoids spilling into Saudi Arabia, to spark regional unrest of scary proportions. A handover date blatantly focused on a US political schedule just invites further strife.
vIt's increasingly clear from the 9-11 hearings there was an Iraq pre-occupation in the White House that had little to do with 9-11; deceived voters may cost Bush 2 his re-election."
SILVER-INVESTOR.COM
21307 Buckeye Lake Ln., Colbert, WA 99005.
Monthly, 1 year, $99.
David Morgan has increased his allocation in Scorpio Mining rate the Company a Strong Buy. The following is a review of some of the companies in his Model Portfolio.
"Scorpio Mining (OTCBB SMNPF) offers a unique opportunity for investors. First, the company is not well followed; in fact this report was the first to discover this situation. The company had original plans to begin mining this year and to utilize a custom mill located in the nearby town Cosala. However, the company has raised a great deal of cash recently and is now going to build a mill. The initial mill capacity will start at 650 tons per day and increase in a short period of time to 1000 tons per day and will be capable of eventually upgrading to 2000 tons per day.
The resource category holds at present approximately 10 million ounces silver, but the project is open at depth and it is typical with this type of deposit that the total resource is far greater, in effect it could be multiples of the number meaning for example 40 to 50 million ounces of silver. When the company was first evaluated by us metals prices used to project the cash flow were under five dollar silver and base metal prices were lower. After, looking at projected base metals prices and a silver price near six dollars U.S. the project becomes extremely profitable. The project internal rate of return is over 300% and the net cash flow could reach $1 million per month net.
This potential net profit works out to thirty cents per share and using a P/E ratio of over thirty which is typical in the mining industry; this indicates a price objective of 9 dollars U.S. This is without factoring in any exploration potential on the other properties and without factoring in any further increases in metals prices or an increase in production. Bear in mind this is projected objectives by us and not guaranteed, mining is a very tough business and things do not always go as planned.
Another factor that makes us excited about Scorpio, is that major share positions have been taken recently by a US based mining mutual fund, and one by a Canadian Brokerage firm, and a very strong backing by the European Financial Institutions. Therefore because the company will become a producer, we are increasing the allocation to 4% from the normal 2% allocation normally allotted to a speculation. At this time we think this is a Strong Buy!!
Silver Standard Resource Inc. (Nasdaq SSRI) announced an option agreement to purchase a 100% interest in silver resources contained in the Berenguela project in Peru. This property has an estimated mineable ore reserve of 56 million ounces silver grading over 3 ounces per ton. This company just keeps on adding value to shareholders and is a must in all portfolios.
Sterling Mining ( OTCBB SRLM) told us that it plans to acquire the Baroness Silver Tailings Project near Zacatecas, Mexico. This project reportedly consists of up to 5 million tons of finely ground tailings with an average grade of 3.0 ounces per ton (oz/t) silver and 0.02 oz/t gold. The due diligence is nearing completion and we expect the company to make the acquisition.
Ray DeMotte is quite adept at finding good people to move the company forward by hiring former Sunshine Mine Manager Mike McLean, the company has saved many hours of work. Since Mr. McLean was at the Sunshine up until the time it closed his value to the company is extremely significant his vast knowledge specific to the Sunshine Mine will prove valuable to Sterling shareholders.
In the final years of Sunshine operations, Mr. McLean was instrumental in designing and leading implementation of the Con Sil Ramp Project, which was intended to significantly increase mine capacity and throughput. The development was never completed due to the financial difficulties of the former operator. Sterling Vice-President of Exploration and Geology Jim Williams has joined the Company's Board of Directors. Mr. Williams leads all exploration and project acquisition matters for Sterling, including ongoing studies at the Sunshine Mine. As a Board member, he will be increasingly involved with corporate issues, including the advancement of strategies for financing, stock exchange listing, and potential joint ventures.
Mines Management (AMEX MGN) moved to an Amex listing with the new symbol MFN and continues diligently to move the property to production. The company completed a private placement of 285,000 units for total gross proceeds of US$1.4 million. Each unit consists of one common share plus 1.4 share purchases warrant exercisable for five years at $7.25 The proceeds from this offering, combined with the previously announced $5 million private placement, bring Mine's Management's cash position to approximately $7.2 million. Company President & CEO, Glenn Dobbs stated, "The series of financings serves as an important milestone for the company as it ensures our ability to aggressively pursue re-permitting of the Montanore project in Montana."
WATER INVESTMENT NEWSLETTER
230 Main St., Halstead, KS 67056.
Monthly, 1 year, $140.
For Watts Water Technologies, Inc.,
water is growth strategy
Katie Winchell: "The name of Watts has been a fixture of U.S. industry for almost 13 decades. But in October of 2003, Watts Industries, Inc. formally became Watts Water Technologies, Inc. (NYSE: WTS), a refinement that better represents the $705-million company's focus on water solutions. "The cost of water is increasing and the demand for clean water is increasing," said William McCartney, chief financial officer and treasurer for Watts. "For companies that are well-positioned with products for water cleanliness, conservation and safety, the water industry is a good place to be. The macroeconomics favor companies in this business." And water has been good business - Watts has completed two major acquisitions in 2004 that will significantly expand the company's market share in Europe and Asia. Watts designs, manufactures and sells the industry's most extensive line of valves and other water-related products for commercial and residential applications within the plumbing, heating and water quality industries. The company has 45 locations, over 5,000 employees, manufacturing facilities in ten countries and sales in over 100 countries.
Watts began in 1874 as Watts Regulator Company, making pressure reducing and relief valves to regulate steam for the water heaters and boilers of New England's textile mills and power plants. Yet much of Watts' present day success can be attributed to three developments that occurred in the last twenty years: acquisitions, the do-it yourself (DIY) market, and a strategic focus on water.
Since 1987 the company has acquired and integrated over 30 companies, expanding product lines and distribution channels throughout North America, Europe and Asia. In the mid-1990s, Watts entered the DIY market, posting 1995 DIY sales of $24 million. By 2002, DIY sales were $124 million. Home Depot currently accounts for 10 percent of total Watts revenues. Finally, in 1999 the company decided to focus exclusively on water and sold off its oil and gas businesses. Since then, operations have produced a robust cash flow - nearly $50 million for fiscal year 2003. The result of all these strategic decisions, in a word, is growth. "We've had an 11 percent compounded annual growth rate since 1995, six percent in acquisitions and 5 percent organic," said McCartney, "and now we have the capability to grow even faster on the acquisitions side because of our strong balance sheet."
Watts sells a broad range of valve and drain products, and its core product lines are market leaders. In a 2003 Contractor Magazine survey, Watts' products accounted for 85 percent of backflow prevention devices, 91 per-cent of regulators, 70 percent of hot water tempering and mixing valves, and 88 percent of plumbing and heating products used by contractors. Noteworthy new products include the patented ZRO-4 point-of-use re-verse osmosis system, which is the first reverse osmosis system with zero water waste. Most reverse osmosis systems loose at least one gallons for every four gallons produced. The ZRO-4's membrane filters down to 1/10,000 of a micron and produces up to 25 gallons of treated water per day. Another product debut is the series PVS-1000 pre-engineered valve stations, which are available to schools, restaurants and other commercial or industrial customers. The 10,000-gallons per minute custom valve stations pro-vide safe and efficient water systems for such uses as fire protection, potable water and irrigation services. The systems are factory pre-assembled and tested, can be installed in hours, and operate quietly. Watts recently adopted an initiative to strengthen its customer service, and the results have been strong. Full-service product lines and custom design services keep customers within the Watts fold. The company websites feature downloadable engineering specification sheets and installation instructions. Manufacturing and distribution channels throughout North America, Europe and Asia mean that customers worldwide can be served efficiently. And by opening manufacturing facilities in low-cost countries such as Tunisia, Bulgaria and China, Watts reduces manufacturing and product costs while reaching new customer bases.
Acquisitions are a regular occurrence at the company. In March of 2004, Watts acquired 100 percent of Taizhou Shida Plumbing Manufacturing Company (Shida) in China. Formerly, Watts had owned a 60 percent controlling interest in the company. The acquisition of Shida signifies that Watts is ready to do business in China without the support of a local partner. "We have a good management team in place there," said McCartney.
In April 2004, Watts acquired 90 percent of TEAM Precision Pipe Work, Ltd., located in the United Kingdom. TEAM custom designs and manufactures pipe and hose tubing assemblies for the heating ventilation and air conditioning markets, and supplies original equipment manufacturers of air conditioning systems. Watts is also a forceful advocate for the development and adoption of industry safety codes. As a result, many codes are based on the company's product specifications for solutions such as scald protection, and the company estimates that 50 percent of total revenues are from code-approved product sales.
Sales for fiscal year 2003 were $705,651,000, a 15 percent increase over the $615,526,000 generated in fiscal year 2002. Net income for fiscal year 2003 was $33,362,000, or $1.21 per share (including a net loss from discontinued operations of $3,111,000, or $0.11 per share). Income from continuing operations increased 12 percent to $36,473,000 for fiscal year 2003, compared to $32,622,000 for 2002. Excluding the costs of the company's manufacturing restructuring plan, income from continuing operations increased $2,383,000, or 7 percent, to $37,557,000, or $1.36 per share, for fiscal year 2003 compared to $35,174,000, or $1.30 per share, for fiscal year 2002. As of December 31, 2003, the company had cash and equivalents of over $149 million.
The company's growth plan centers on increasing earnings by expanding into new markets, growing internal sales in current and new markets, making acquisitions and continuing to reduce manufacturing costs. Watts' revenues are derived from the U.S. (63 percent), Europe (29 percent), Canada (5 percent) and China (3 percent). McCartney predicts that short-term growth will occur largely in Europe and North America, and long-term growth will take place in Asia.
"When you look at our strong brand name, low-cost manufacturing, improved customer service and relations and strong balance sheet, we think Watts is well-positioned for near and long-term growth," said McCartney.
DOW THEORY LETTERS
7412 Calumet Ave., Hammond, IN 46324.
1 year, 52 issues, $259.
To play electricity, try gas
Richard Moroney: "Demand for electricity tends to be stronger and steadier than demand for natural gas. So, where should investors turn if they wish to profit from the steady growth of electricity consumption? Natural gas stocks are a good choice.
The power industry's natural gas consumption rose at an annualized rate of 6.4% over the last five years, boosted by widespread demand for cleaner-burning fuels. Gas burns cleaner than coal and doesn't carry the social and political baggage of nuclear power. Nearly 18% of U.S. electricity was generated from gas in 2002, up from 13% in 1992.
In 2002, 25% of all natural gas was used to generate electricity, compared to 17% in 1992. The push for clean fuels is not likely to let up, and gas should continue to gain share in the power-generation market.
Total U.S. energy consumption has increased at a 2.1% annualized rate over the last 53 years, but both natural gas (2.9%) and electricity (5.2%) consumption have increased faster. Over the last five years, however, gas consumption fell slightly while electricity managed a 2.1% annualized gain. Electricity consumption has declined in just three of the last 53 years, and natural gas' increased share of the market should both strengthen and stabilize the gas industry's revenue stream.
Residential and commercial gas usage edged lower over the last five years, and industrial usage declined at a 3.3% annual rate. Residential demand is dependent on the weather. Commercial and industrial gas consumption is likely to recover over the next few quarters, though today's high natural gas prices are causing some industries to migrate overseas.
Compared to electric and water utilities, gas utilities tend to have better Quadrix(r) scores, higher sales and profit growth, and lower valuations relative to expected profit growth. These advantages have not gone unnoticed.
The average gas utility in the Forecasts' research universe trades at 19 times trailing earnings, versus 13 times 10 years ago. The industry's average P/E ratio is not likely to dip to 13 any time soon, partly because stocks face less competition from bonds. Ten years ago, the 10-year Treasury bond yielded 6.5%, versus 3.7% today.
However, the five-year average valuation for all gas-utility stocks is 15 times trailing earnings, and an industrywide correction to an average of 16 or 17 over the next year would not be surprising.
All of the Forecasts' monitored gas utility stocks trade at valuations at least 17% below the industry average and offer superior profit-growth potential to most of their peers.
Prices for natural gas futures imply the market expects gas prices to rise for the rest of this year, then fall. Companies like Energen (NYSE: EGN $41) and Questar (NYSE: STR $34), with both regulated and unregulated gas operations, provide a way for investors to gain exposure to gas prices without betting the house on them.
The prospect of higher natural gas prices this year - and consolidation in 2005 and 2006 around prices rarely seen before 2003 - seems to be supporting utilities' high valuations. Should prices not meet the market's expectations, a sectorwide pullback is possible. But reasonably valued gas utilities remain attractive investments.
Our four favorite gas utilities are reviewed below.
Energen (NYSE: EGN $41) posted a 26% revenue increase in 2003, thanks to a 45% increase in oil and gas operations and a 15% rise in natural gas distribution. Operating profit jumped 62% while per-share earnings rose 53% to $3.10. The company has steadily increased its dividend, growing it at an annualized rate of more than 3% over the past 10 years. Yet dividends represent less than one-fourth of earnings, leaving plenty of flexibility for additional hikes. Major subsidiaries include Alabama Gas Corp., a regulated natural gas utility, and Energen Resources Corp., an unregulated oil-and-gas-drilling division. Alabama Gas (30% of 2003 income) has been a steady earnings contributor, benefiting from favorable regulatory decisions. Energy Resources (70% of income) continues to act as a growth driver for the company. The stock, a Long-Term Buy, trades at 13 times expected 2004 earnings of $3.20.
After a successful turnaround, Equitable Resources (NYSE: EQT $43) is developing into a mature integrated production and utility operation. Per-share earnings have increased for five consecutive years. In 2003, per-share earnings rose 16% to $2.74. The dividend was increased twice in 2003 to an annual rate of $1.20, nearly 80% above 2002 levels. With a payout ratio of about 44%, below that of most peers, the company has room to increase the dividend further. The company has three core divisions: Equitable Utilities (34% of 2003 profits) includes regulated and unregulated natural gas distribution operations. Equitable Supply (61% of profits) is the largest owner of proved natural gas reserves in the Appalachian Basin. NORESCO (5%) provides energy-management solutions. Rated Buy and Long-Term Buy, the stock trades at 14 times expected 2004 earnings of $3.07.
New Jersey Resources (NYSE: NJR $37) operates New Jersey Natural Gas (80% of fiscal 2003 profits), a regulated natural gas utility; NJR Energy Services (16% of profits), an unregulated provider of wholesale natural gas; and a retail division (4%) that provides repair and contract services. Fiscal 2003 ended September was the 12th consecutive year of earnings growth, driven largely by gains at the utility. A strategy of aggressively pursuing conversions from other fuels paid off - about 35% of the 11,000 customers added in 2003 came from residential conversions to natural gas heat. Colder-than-normal temperatures helped returns as well. NJR Energy Services also boosted the bottom line, growing profits by almost 80% in fiscal 2003 to $11.4 million. The company raised its quarterly dividend 5% last year, the ninth increase in the past eight years. The stock, rated Long-Term Buy, trades at a forward price-earnings multiple of 15.
Questar (NYSE: STR $34) increased 2003 revenue 22% to $1.5 billion. Excluding charges, earnings rose 33% to $2.31 a share. The company, with a long history of increasing its dividend, plans to increasing its dividend, plans to increase its payout ratio to around 40%, versus the current 33%. Regulated subsidiaries (36% of 2003 income) include Questar Gas, a natural gas utility in Utah, Wyoming, and Idaho, and Questar Pipeline, an owner of storage facilities and transmission lines serving the Rocky Mountain region. The unregulated division, Questar Market Resources (64% of income), engages in natural gas and oil exploration and production. The company seeks to increase returns by investing in higher return-on-equity projects and developing new services. Questar plans to expand production by 5% to 10% during 2004. The stock, trading at 14 times expected 2004 earnings of $2.45, is a Long-Term Buy.
KeySpan (NYSE: KSE $37) serves 2.5 million customers in New York and New England. In 2003, the company reported net income of $387 million, or $2.40 a share, compared with $378 million, or $2.61 a share, in 2002. Revenue increased 15% to $6.9 billion. KeySpan has an attractive yield of nearly 5%. But the payout ratio is relatively high at 68%, and the company has not raised its dividend in the past four years. KeySpan is mostly a regulated business engaged in the distribution of natural gas and electric power, but nonregulated operations include power generation and gas production. The company hopes to sell its 56% stake in gas and oil producer Houston Exploration (NYSE: THX $41). KeySpan, trading at 14 times expected 2004 earnings of $2.60 per share, is rated Neutral."
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