Ken Coleman's INVESTMENT TRACKER
4805 Courageous Ln., Carlsbad, CA 92008.
Monthly, 1 year, $139.
Dr. Douglas Anderson, Jr: "My strategy for working or investing in gold mining stocks always involves purchasing when prices are low and selling some as prices rise. One of my favorite trading stocks is DRDGold Ltd. (Nasdaq SC: DROOY), of which I wrote last month. I have selected this because it is low priced and has been in a nice trading range of about $0.88 to $1.05 for a time. It was great to purchase thousands of shares at the lower end of the range and sell at the higher end. One can make very profitable trades with the number of shares purchased.
I advocate selling some as the prices rise. However, when DROOY broke into the $1.20-$1.30 range, I goofed. I sold all of it. This is a violation of my strategy which requires that I always keep a core holding which I never want to sell until gold gets to the $700-$800 range. Maybe I would not sell all then, but that will be a real decision point. I violated this principle a few years back when I was trading Anglogold Ashanti Ltd. (AU/NYSE) over a period of several months. My last trade with it made good profit, but AU shot up and stayed high after I sold. I felt that I was locked out by the high price and have never purchased it again.
Thankfully, I am easing back into DROOY at about $1.38. However, these shares cost more than the ones I sold. Nevertheless, I am in with a few trading shares beyond the core holding. Note that the new trading range is yet to be established. This was written to reveal to all of us, the danger of getting emotional with stock holdings. When we get emotional and either "marry" our stocks or sell core holdings for immediate profit, we are very often punished. We will lose in the long run. By the way, even when DROOY was missing from my core holdings, there were other mining stocks in the portfolio.
Look at gold these days. It hit above $472 on September 29. This seems to confirm the long-term bull trend of the metal, even silver made a nice showing at $7.42. More importantly, gold was up against all currencies. Thus, it is not dependent solely on the decline of our paper dollar.
The increase was not limited to the precious metals. But extended to base metals and other natural resources, particularly, the energy resources. Some of the higher prices of oil and natural gas are a result of hurricanes Katrina and Rita. Added to these disasters is the burgeoning growth of demand from India and China upon energy and other natural resources. It seems that one would be wise to hold some of the natural resource mutual funds.
Richard Russell, Dow Theory Letters, (www.dowtheoryletters.com), recently recommended exchange-traded funds (ETFs) in the energy area. He suggested Vanguard Energy Ix VPR (VDE), Xcel Energy Inc. (XEL/NYSE), and Petroleum and Resources Corp. (PEO/NYSE). Russell also mentioned IGE (Goldman Sachs Natural Resource ETF) and IYE (DJ Energy Sector).
These are all traded in the same manner as stocks in the markets. For open-ended mutual funds, U.S. Global Investors has a Global Resources Fund which may fit the investment needs of some. Check it out at www.usfunds.com. Some of my grandchildren have invested in this fund."
INVESTOR'S DIGEST of Canada
133 Richmond St. W, Toronto, ON M5H 3M8.
1 year, 24 issues, $137.
Crystallex likes the gas factor in Venezuela
A regular feature in Investor's Digest of Canada is what the brokers say about Canadian listed stocks. Here is an excerpt from a recent report on Crystallex International Corp. by analyst Catherine Gignac of Wellington West Capital.
"We are maintaining our 12-monh target of $7 a share as well as our "strong buy" recommendation for Crystallex International Corp. (TSX: KRY, $2.97 800-738-1577, www.crystallex.com).
Although the release of the final permit at the company's Las-Cristinas gold project in Venezuela is two months behind schedule, the timetable to mill commissioning in fourth-quarter 2006 and production startup in first-quarter 2007 is still on track as long as the final permit is received by the end of September, according to management.
The first challenge is starting construction and the second is financing. We believe the project could be financed for higher mill throughput (at least 40,000 tonnes per day), increased annual production, and a rate of return at higher near-term gold prices.
The updated figures reported by the company in early September only address the initial 20,000 tonnes per day (tpd) development scenario.
Incorporating proportionately higher capital and operating costs while maintaining the same timetable and using a higher average grade results in a four per cent decrease in our discounted cash flow net present value to about US$670 million, or US$3.19 a share.
To this added the resources not included in the mine plan at an average of US$50 per ounce market multiple to give a total value of $5 per share.
Two additional market multiple valuation methods (production and reserves) provide a potential value range of US$3.15 to US $11.46 per share.
Averaging the three valuation methods for a 40,000-tpd plan indicates a net asset value range of US$814 million to US$1.38 billion, or $6.55 per share.
Venezuelan government representatives and Crystallex management have publicly stated that a final permit to allow the commencement of construction is imminent. However, the permit is now over two months late and costs are increasing.
Sixteen months of construction are required prior to commissioning the mill in late 2006 and starting commercial production in early 2007.
Virtually every gold producer is experiencing higher operating costs caused mostly by higher consumable costs, labor, fuel per ounce and power. Global cash costs per ounce could reach US$260 in 2005, compared to US$253 in 2004 and US$229 in 2003.
Crystallex's Las Cristinas project will benefit from continued low energy costs in Venezuela, but it faces other issues.
Crystallex reports that capital expenditures projected to develop the Las Cristinas project rose 10 percent to US$293 million from US$265.5 million in the 20,000-tpd capital control budget.
The reasons for the increase are higher overhead costs due to permit delays (US$12.3 million) as well as an increase in escalation charges and other raw material costs.
Total commitments to date are US$208.9 million, or 71.3 per cent of budget. An additional US$284 million in sustaining capital is budgeted for the 41-year mine life of the project.
Crystallex estimates the after tax payback at 8.5 years, returning an internal rate of return of 8.4 per cent using a US$350/oz long-term gold price. Project economics will improve by shortening the mine life to take advantage of higher near-term gold prices.
Crystallex reported an update to its reserves and resources estimate for its Las Cristinas project. The drilling program increased M&I Resources to 17.7 million ounces - a nine per cent increase from 16.2 million ounces previously estimated.
The M&I increased is a result of the 14-hole drilling program that was completed in the first half of the year and reported previously."
FREEMARKET GOLD & MONEY REPORT
P.O. Box 5002, North Conway, NH 03860.
1 year, 20 issues, $260. www.fgmr.com.
James Turk: "Both of the precious metals have rallied. While gold is in new ground, silver is still lagging somewhat.
Gold remains the safer play of the two, but don't count silver out.
I remain long-term bullish on silver. However, I have been concerned over the past couple of months about silver's short-term potential because it was lagging gold.
I have been suggesting that we need to let silver prove itself, and to give silver time to tell its own story. That approach still makes sense, but silver's performance recently means I am less cautious than before.
Consequently, I suggest we need to watch silver closely. We should be prepared to add to our trading positions if silver continues to show strength, particularly if it begins to outperform gold. Therefore watch the gold/silver ratio closely here.
If the gold/silver ratio falls further and breaks below 62 (it's at 62.3 now), then it may be safe to conclude that this period of underperformance by silver has ended. That result would be bullish for both silver and gold because silver leads (i.e., their ratio falls) in precious metals bull markets.
The gold mining stocks have rallied sharply.
Crystallex (KRY), it remains one of my recommended stocks. The rhetoric coming out of Venezuela does not change the fact that KRY has 12.6 million ounces of gold in the ground.
In fact last letter when commenting on which of my recommended stocks to buy, I said: "My recommendation is to buy all of them in order to get a portfolio of mining stocks that are diversified." That advice was timely. We can see the importance of that diversification as the overall portfolio has appreciated since the last letter, notwithstanding the 'haircut' given to KRY. Also, the importance of diversification will be clear if the Venezuelan rhetoric turns out to be more serious, and KRY's haircut turns instead into a beheading."
INSIIDE TRACK
P.O. Box 2252, Naperville, IL 60567.
Monthly, 1 year, $279.
Long-term trends consolidating
Eric Hadik: "Stock Indices - Stock indices are at a crossroads. They have fulfilled analysis for a high in mid-2005 and possess their next important cycles in January 2006.
Interest Rates (opposite of Bond direction) - Long-term neutral-to-down trend bottoming. However, a final low in long-term rates would stretch into January 2006.
Gold & Silver - Long-term uptrends in Gold & Silver consolidating. A spike high in November 2005 is likely.
Dollar - Long-term trend down and projected to continue into 2006 or later. A 6-12 month rebound is intact.
Crude Oil - Long-term trend up with important cycles peaking between September-November 2005.
WALL STREET STOCK FORECASTER
250 Liston Rd., Ste. 700, Buffalo, NY 14223.
Monthly, 1 year, $99. 1-888-292-0296. E-mail: mckeough@idirect.com.
These resource stocks cut your risk
Patrick McKeough: "Many resource stocks have soared in the past few years, as economic expansion in North America has spurred demand for energy, metals and other natural resources. These stocks are cyclical, which means they tend to move up and down with the overall economy. That makes them more volatile than investments in other industries.
You should limit your exposure to this sector to no more than, say, 25% of your total holdings. Here are four high-quality resource stocks. Only three are buys right now.
EnCana Corp. (NYSE ECA $57; WSSF Rating: Average) is a leading Canadian energy company.
In the past two years, it has sold most of its conventional oil and gas properties, as well as its overseas holdings. The company used the proceeds to buy large, early-stage natural gas properties, mainly in the Rocky Mountains. These reserves are more shallow and harder to get at than regular gas pools, but should last much longer.
EnCana is currently working on new drilling technology that should help it extract more gas, and cut its long-term costs. Focusing on North America also cuts its risk.
The company is also increasing its presence in Canada's vast oil sands region. The oil from these projects is a heavy, tar-like substance that does not flow as easily as regular oil. The crude from these wells also takes longer to refine than regular oil, which ads to EnCana's costs. But the company feels that the same technology it's developing for its new gas fields will help it keep its oil sands costs under control.
The stock has soared lately due to rising energy prices. But it's still reasonably priced at 16.6 times its projected 2005 earnings of $3.43 a share, and at 9.1 times its cash flow of $6.25 a share. The $0.30 dividend yields 0.5%.
EnCana is a buy.
Apache Corp. (NYSE APA $76; WSSF Rating: Average) explores for and produces oil and natural gas in North America, the UK, Argentina, Australia, China and Egypt.
Hurricane Katrina damaged several of the company's offshore platforms and other facilities in the Gulf of Mexico. By mid-September, Apache had restored over 80% of its Gulf Coast oil production and 65% of gas production.
However, it will probably take a year before these facilities return to full production due to hurricane damage to the area's roads, pipelines and other infrastructure. Disruptions caused by Hurricane Rita also hurt Apache's operations in the Gulf.
Apache's Gulf Coast assets account for roughly 30% of its total oil production, and 40% of its gas output. However, higher energy prices should help offset any temporary production shortfalls.
Apache has moved up from the low $50s in the past few months. It now trades at just 9.6 times the $7.94 a share it should earn in 2005, and at 6.7 times its forecasted cash flow of $11.30. The $0.40 dividend yields 0.5%.
Apache is a buy.
Newmont Mining Corp. (NYSE NEM $48; WSSF Rating: Average) is the world's largest gold producer, accounting for about 10% of global production.
Fears that higher energy prices will spark higher inflation recently pushed gold up to over $470 an ounce, a 17-year high. Many investors view gold as a hedge against inflation.
Newmont prefers to sell its gold at the spot price, instead of locking itself into long-term contracts at fixed prices. The company feels that its flexibility to raise or cut production helps offset this risk.
The company plans to open three mines in the next 18 months. Production at Newmont's gold and copper mine in Indonesia should pick up now that the company has fixed some operational problems at the site.
Newmont will probably earn $0.79 a share in 2005, and the stock now trades at 60.8 times that figure. It also trades at 18.1 times its projected cash flow of $2.65 a share. The $0.40 dividend yields 0.8%.
Newmont is a buy, but only for aggressive investors.
Weyerhaeuser Co. (NYSE WY $68; WSSF Rating: Average) is a major producer of lumber and paper products. It owns or leases roughly 37 million acres of timberland in the United States and Canada, and builds residential housing.
Following its acquisition of rival Willamette Industries in 2002, Weyerhaeuser has been steadily selling its surplus assets to cut debt.
Thanks to these sales, the company has cut its long-term debt, from 1.8 times equity in 2002 to 1.0 times. It aims to cut this to around 0.8 times by the end of 2005.
Rising lumber and housing prices helped push Weyerhaeuser's earnings in the second quarter of 2005 to $1.71 a share, up 8.9% from $1.57 a year earlier. But, if your disregard unusual items, per-share income fell 19.8%, to $1.34 from $1.67. Revenue improved to $5.8 billion from $5.7 billion.
Although profits have improved at Weyerhaeuser's struggling paper products business, lower selling prices and rising costs for fuel and other raw materials could hurt its growth in the second half of 2005. Rising interest rates could also hurt housing demand. However, lumber prices should stay high in the wake of Hurricanes Katrina and Rita.
The stock now trades at 16.5 times its estimated 2005 profits of $4.13 a share, and at 6.6 times its forecasted cash flow of $10.35 a share. The $2.00 dividend yields 2.9%.
Weyerhaeuser is still worth holding."
Roger Conrad's UTILITY FORECASTER
1750 Old Meadow Rd., Ste. 301, McLean, VA 22102.
Monthly, 1 year, $129.
Duke Energy: 180-degree turnaround
Roger Conrad: "Two years ago, Duke Energy (NYSE DUK) was sinking in a sea of debt, weighted by the anchor of floundering power production unit Duke Energy North America (DENA). Few imagined a 180-degree turnaround in less than three years. But that's where Duke is headed.
Last month, the ute announced it was shutting down DENA at the cost of a $1.3 billion third quarter writeoff and $1.6 billion reduction of equity. Important, however, the move generates $500 million in cash, while sharply reducing operating risk.
S&P has now removed the utility from creditwatch with a stable outlook. The company also retains 3,600 megawatts in Midwest power capacity, which it will roll into Cinergy's (CIN) unregulated business when the merger is consummated.
Cinergy and Duke have now filed for all needed state and federal regulatory approvals. The official repeal of the Public Utility Holding Company Act clears that hurdle. The deal is still expected to close by early next summer.
Duke shares have come back a long way. But with at least $2 a share profit expected the first year of the merger - and upper single-digit growth there after - there's a lot more to come.
My next target is the mid-30s. The partial spinoff of Duke Energy Field Services into a limited partnership is another way management is unlocking value for shareholders. Buy Duke whenever it trades at 30 or lower."
THE ADEN FORECAST
P.O. Box 790260, St Louis, MO 63179.
Monthly, 1 year, $195.
Gold Shares: On the rise
Mary Anne Aden and Pamela Aden: "Gold shares have been rising since May and they still have room to rise further. Some gold shares are very strong and are at or near new highs. Gold shares have also been outperforming gold during the last three months but the almost two year trend favors gold. The major trend, however, still favors gold shares.
The resource and energy sectors are bullish but overbought."
Forbes/Lehmann INCOME SECURITIES INVESTOR
6175 NW 153 St., Ste. 201, Miami Lakes, FL 33014.
Monthly, 1 year, $195.
Canadian Trusts:
The good times roll on
Richard Lehmann first recommended Canadian oil & gas trusts, Provident Energy (PVX), in his August 2004 issue. He added Petrofund (PTF) in September, Enerplus Resources (ERF) in November and PrimeWest Energy (PWI) in March 2005. For most of his subscribers this was their first exposure to these securities. But, their double digit yields and 15% tax treatment made them suspicious that this was too much of a good think. For this reason, Lehmann has devoted a significant amount of space in his newsletter extolling their virtues. He has gone so far as to recommend investors allocate up to 20% of their fixed income investments to this category.
"With the prices of these securities rising as much as 50% in the last year, many readers may now find themselves with significant capital gains and more than 20% of their portfolios in these securities. Given that we are now past the one year mark since my original recommendation, many of you are in the position to take long term capital gains. This would seem to be a reasonable time to take some money off the table given that prices are at or near their peak for the year, but this decision has several aspects.
Before deciding to take some profits, investors should first review what other gains or losses they could realize in 2005 to offset any tax bite. They should also decided how much they want to allocate to these trusts going forward.
Given the price volatility of oil, selling when oil and natural gas are at record levels seems logical. You can decide to wait a while before reinvesting, if that is your goal, since price breaks have happened twice this year and may well come again. Keep in mind, however, that in order to maintain your 15% tax treatment of dividends, you cannot buy and sell without holding for at least 60 days in between. Hence, these stocks are not good for day trading.
If you have so far missed out on these Canadian trusts, there is still opportunity. They yield 9% or better even at current elevated prices. A 9% yield at a 15% tax rate is hard to match in today's fixed income market. Add to this the fact that all the trusts I recommend set their current dividend rates when oil was $35 or below. Hence, not only are current payout levels safe from foreseeable price declines, I would expect dividend payouts to be increased within the next twelve months. Yes these trusts are vulnerable to price swings in oil and gas, but sometimes what looks like a vulnerability turns out to be a long term opportunity.
The recent history of oil prices is one of manipulation of supply by OPEC, the key supplier nations who had most of the industry's excess capacity and could turn production on and off to suit their long term or short term goals. That situation is at an end. Demand is now the driving force in oil as developing nations such as China and India have reached the point where a rapidly growing middle class can afford cars, and not necessarily fuel efficient ones. Canada represents one of the few regions of the world where production can increase. The oil and gas trusts are the best vehicle for individual investors to participate. For income investors, they are unequaled for current income and provide an attractive diversification away from credit risk or interest rate risk. Yes, take your long term gains if it works for your tax planning, but don't take them for fear the good times are over."
DOW THEORY FORECASTS
7412 Calumet Ave., Hammond, IN 46324.
1 year, 52 issues, $279.
Gas production powers profit growth
Richard Moroney: "While natural-gas prices do not seem likely to fall substantially in the next few months, investors should not expect them to remain in the stratosphere through the end of 2006.
The average natural-gas price at the wellhead reached a record-high $7.68 per thousand cubic feet in August, up 15% from July and up 43% from year-earlier levels. Despite a September pullback from hurricane-driven gains, both consensus estimates and futures prices call for gas prices to continue rising at least through the end of 2005.
In 2006, however, the story changes. Consensus estimates project natural-gas prices will jump to $7.82 per thousand cubic feet by the end of 2005, then decline nearly 14% by the end of 2006. Futures markets project an even sharper decline.
Katrina may have knocked out as much as 88% of natural-gas production in the Gulf of Mexico, or about 18% of total U.S. production. However, more than half of that lost capacity was back on line by Sept. 13. Federal regulators expect most of the damaged offshore facilities to resume operation within days or weeks, rather than months.
The inventory of natural gas currently in storage remains slightly above five-year average level, as mild temperatures nationwide have helped curb demand. With production likely to continue rising in the near term, inventories seem sufficient heading into the peak winter months.
While high energy prices roil the overall stock market, they certainly benefit gas utilities. Over the last three years, the 22 gas utilities followed in our Utility Update supplement averaged annualized per-share-profit growth of 10%, versus a 2% decline for the average electric utility. Despite the likely decline of natural-gas prices in 2006, consensus estimates project average profit growth of 10% in the next fiscal year.
Most utilities trade at a premium to their five-year median P/E ratio, but gas utilities appear more attractively valued than electrics or water utilities. On average, the gas utilities we follow trade at a 17% premium to their five-year medians, while other utilities average a premium of at least 29%.
Bottom line: Gas utilities remain our favorite way to play the sector. Consensus estimate project natural-gas prices will remain above $6.50 per thousand cubic feet through the end of 2006, high relative to historical norms. Among gas utilities, the Forecasts prefers companies that produce as well as distribute natural gas.
Exploration-and-production operations offer better growth potential than regulated utilities, but utility operations tend to generate a steadier stream of profits and revenues. Utilities with production arms also tend to hedge much of their production, limiting exposure to energy-price fluctuations.
Our top gas-utility picks are Questar (NYSE STR $79), Equitable Resources (NYSE EQT $38), and Energen (NYSE EGN $40). All three companies generate between 60% and 75% of profits from natural-gas and oil production, but still control regulated utilities.
These hybrids trade at a significant premium to the average for both utilities and independent exploration companies. Such valuations make sense, considering that Questar, Equitable, and Energen offer the best of both worlds - solid production growth and profit growth superior to that of traditional utilities yet steadier than that of pure-play energy companies.
Questar's (NYSE STR $79) production has risen at an annualized rate of more than 8% over the last 10 years, while proved reserves have increased at nearly double that pace. With one of the most attractive production portfolios in the industry, production growth is likely to increase over the next few years. In August, regulators gave Questar permission to drill many more wells at its Pinedale natural-gas field, boosting the amount of gas Questar expects to extract by 592 billion cubic feet. Other businesses are also performing well. The utility's customer growth rate of 3% is considerably higher than the national average, and the pipeline business is benefiting from increased demand for Rocky Mountain natural gas. Questar is a Long-Term Buy.
Equitable Resources (NYSE EQT $38) generates solid cash flow from its production and utility operations. In the June quarter, the company also collected about $590 million from the sale of production assets and portions of its holdings in Kerr-McGee (NYSE KMG $92). Natural-gas fields currently command high prices, and more asset sales are likely. Equitable owns the largest portfolio of proved natural-gas reserves in the Appalachian Basin, far more than it can efficiently develop.
Equitable is investing heavily in its production operations, with plans to drill 440 wells this year and 600 in 2006, versus 314 in 2004. Through a combination of production gains, share buybacks, and ongoing cost cuts at the utility operations, Equitable may be capable of annualized per-share-profit growth of 10% over the next five years. The stock is a Long-Term Buy.
Energen (NYSE EGN $40) has raised its 2006 profit projection three times since June, each time citing increased hedging of natural-gas production at attractive prices. Because of that hedging. Energen's 2006 profits appear less sensitive to changes in natural-gas or oil prices than those of most rivals. Consensus estimates now project per-share-profit growth of 34% to $2.34 in 2005 and 39% to $3.26 in 2006. Energen could generate free cash flow of more than $250 million next year, allowing for aggressive investment in production assets through acquisitions. From 2005 through 2008, Energen plans to make $800 million in acquisitions. Energen is a Long-Term Buy."
THE SPEAR REPORT
45 Wintonbury Ave., Ste. 301, Bloomfield, CT 06002.
1 year, 50 issues, $279. www.spearreport.com.
Newmont is the way to play
inflation fears and falling dollar
Gregory Spear: "Newmont Mining (NEM), the world's largest gold outfit in terms of production, market capitalization, and reserves, is one of the few investment-grade gold mining companies with the size and share liquidity to attract large institutional investors. The company has mining operations on 5 continents with 60,000 square miles of land. Newmont is producing 8+ million ounces of gold annually; or about 9% of the world's production. Two-thirds of its assets are in North America and Australia, relatively safe from political conflict but the company does face a pollution lawsuit in Indonesia.
In July, Newmont reported that second quarter 2005 earnings jumped 35% to $50 Million or 11 cents per share, on a modest increase in revenues to $1 billion. The company sold about 2 million ounces of gold at an average realized price of $421 per ounce, vs $395 a year ago. At the end of the second quarter, cash, short-term marketable securities and investments totaled $2.4 billion. Outstanding debt totaled $2.1 billion.
When we last featured Newmont back in July of 2004, the stock was trading just a few dollars below its current price of $45. Because gold shares are often used as a hedge against inflation, this sideways consolidation reflects the benign inflationary environment we have enjoyed for the last year. Despite higher oil prices and a series of Fed rate increases, core inflation has remained subdued. The recent rise in its share price is due to concerns about inflation from sustained high oil prices and from a rapidly rising national deficit due to expenses from Hurricane Katrina.
Gold and gold shares also trade inversely to the US dollar. A higher dollar, which we have had during 2005, depresses gold prices, yet the yellow metal has managed to hold its own. This relative strength in the face of a rising dollar is significant. Gold jewelry demand is one of the drivers of gold prices, and it is at record levels, rising by 24% in value terms and by 13% in tonnage terms in the second quarter of 2005. We believe this is due to the global wealth effect we have discussed recently in these pages that is being driven by 3rd world industrialization and by the global real estate boom.
While we don't expect a huge surge in inflation, gold also acts as a hedge against a falling dollar and therefore has a part to play in hedging against the possibility of a catastrophic domestic terrorist attack. In other words, we believe gold has a place in the prudent investor's portfolio and Newmont is the way to play it."
THE PERSONAL CAPITALIST
6911 S 66th E Ave., Ste. 301, Tulsa, OK 74133.
1 year, 24 issues, $195.
Major trend in gold
and silver price is up
Sean Christian: "The major trend in gold and silver prices is up. On a short-term basis, however, we may see some correction due to macro and cyclical crosscurrents. It is our policy to hold on to our shares regardless of short-term fluctuations. We like our precious metals portfolio (NEM, ABX, FCX, CDE) and will continue to hold our shares. Note that Joe Granville, legendary market technician, right now is a big bull on precious metal stocks.
We hold almost 15% of our portfolio in energy stocks (XOM, PKD, XTO, CRT, WMB). Hurricane Katrina focused attention on energy with its devastation to oil facilities in and around the Gulf. The U.S. is lacking refining capacity, but it will take time to build new refineries or add to present ones. We are now beginning to see oil prices slipping somewhat. We have seen significant gains in these shares this year and are looking for a time to lighten up. We have noticed that some "smart" big money is beginning to switch from energy to technology. Long term however, we fell subscribers should continue to own energy shares, keeping a sharp eye on supply and demand factors. Looking at our fuel cell stocks (PLUG and HYGS) we have seen investor interest developing. Tax credits available in the recently passed national energy bill could help drive down the cost of fuel cells as a replacement for batteries in substations used by the telecommunications and utilities industries. Fuel cells with a 5-kilowatt power output using new technologies are already cost-competitive. The market is anticipating that fuel cells should be able to price batteries out of the market, once mass production gets underway. We continue to like PLUG and HYGS and feel they are well positioned to profit from these changes. Every subscriber should own shares of both of these companies.
We are bullish on the semiconductor equipment group as a whole, based on the rising capacity utilization and strong memory underpinnings.
We continue to like defense stocks, as we are spending worldwide on the war on terror to be going on for some time to come."
Ian McAvity's DELIBERATIONS on World Markets
P.O. Box 40097, Tucson, AZ 85717.
1 year, 18 issues, $225.
'Skunk at the garden party'
Ian McAvity: "Gold has made another stab at its highs of last December, with an increasing chorus suggesting $500 by year-end. At the recent Las Vegas Gold Show, I'm afraid I retained my 'skunk at the garden party' status by urging caution. On the closing panel, a question was asked with respect to gold being in a cyclical or secular trend.
My response was that a secular trend is composed of several cycles. In my view, the secular downtrend from the 1980 bubble top put in a large base between 1998 & 2001, and the secular downtrend was broken and reversed by the bull cycle that ran up from 2001 to 2003 for the shares, and 2004 for the metal.
It is the excesses of 2003/04 that have yet to be worked off that concern me. The more speculative Amex Gold Bugs Index (HUI) had four distinct surges relative to the metal, and may be competing a fifth if they don't follow-through on the upside in the very short term. The senior gold shares in the FT Gold Index enjoyed a more subdued, but none-the-less spectacular bull run in 2001/03. But they have been lagging the metal since Dec '03, which troubles me. Call it shades of the 1974/76 correction in the last secular uptrend... when gold dipped from $198 to $103 before running on to $850, and the Toronto Gold Mines Index fell more than 60% before soaring nine-fold from their 1976 lows to the 1980 peak.
The world is on a Dollar standard now, and gold competes with many alternatives these days. I believe gold will win and rise against the other major currencies, but it won't be a short-term war."
THE DINES LETTER
P.O. BOX 22, Belvedere, CA 94920.
1 year, 17 issues, $195.
Uranium: Let your profits run
James Dines: "We almost never comment on other newsletters, as everyone is entitled to her/his opinion and nobody knows the future for sure every time. However, a number of you have specifically requested our comment on a newsletter that has come out with a negative forecast for uranium.
First of all, we have sloughed off bearish views all the way up (the public will never allow nuclear energy, too dangerous, windmills are better, price is too high, P/E Ratios too high, etc) as uranium has climbed the traditional "wall of worry."
Second, while the newsletter in question seems convincingly-reasoned superficially, it contains fatal flaws in our view. The newsletter bases its pessimism on the uranium remaining in the fuel after it is used ("tails), that is extra supply nuclear facilities could later rework. Presumably this extra uranium, left behind when uranium was used the first time, would increase the uranium supply by 15%, poof, no shortage and Canada's Uranium Participation Company (UPC) would dump their uranium on the market causing a uranium crash that would cause all owners of uranium shares to commit suicide and the world to end.
Third, the newsletter in question makes its calculations like an accountant looking backward, rather than a visionary venture capitalist looking forward. Specifically, he bases everything on "about 30 new reactors in twelve different countries with announced plans for 15 to 20 more," a total of around 45 to 50 nuclear plants. What a howler! This doesn't even count plans for plants in the US, or every other nation in the world suddenly seeking (a new phase) "energy security." That newsletter completely ignored Mass Psychology and speculative hoarding bringing sharply accelerating demand. Looking backward, as does an accountant, can get a Security Analyst blindsided by new conditions; $70 oil, $12 natural gas, and fear of global warming (see Katrina) all make this an entirely new game. The whole world will switch from fossil to mineral fuels in this century, a historic change, and TDL has already predicted China would need hundreds of nuclear reactors in the next 20 years, not to mention India and nearly every other country in the world determined to replace oil.
Fourth, we were aware of the "tails" issue at much lower prices, and were told uranium had a "ceiling at $30," but judged that it did not merit our cashing out. Indeed, since then, uranium has risen from $20 to $32 (long-term contract price), and even the newsletter in question acknowledged that "I own uranium companies." We have held an iron hand on the uranium tiller all the way up, and see no reason to consider selling out, at least until the Uptrendlines get broken.
Fifth, as we go to press uranium has made a new high at $30.50 (spot). Let your profits run."
FINANCIAL INSIGHTS
P.O. Box 793-Z, Oakhurst, NJ 07755.
Monthly, 1 year, $225.
The ultimate secular Bull Market
Dr. Richard Appel: "Of importance is the fact that gold has moved to yet another Bull Market peak without the public. John Q. Public remains oblivious to what I believe will ultimately evolve into one of the world's greatest Bull Markets. The public remains of the belief that anyone purchasing gold is either out of touch or somewhat deranged. I am confident that history will prove them wrong when they ultimately lust for the yellow metal!
Silver continues to work in about the $6.50 to $7.50 area, while its overhanging supply is being sold into the market and continues to dwindle. It is only a matter of time before it is essentially all but consumed. I continue to believe that when the white metal's time arrives we will be rewarded for our patience. When that occurs, I would not be surprised if its next major stop will be above the $10 mark in preparation for even far higher future prices.
The uranium market continues to exhibit great underlying strength as it works inexorably higher. It's latest spot price was $30.75 a pound. U308 has only experienced a few minor set-backs since its $7 Bull Market inception. This indicates the growing demand for this primary alternative energy source.
A major turning point for the uranium market is at hand. A recent announcement by the consortium NuStart Energy, stated that they were preparing applications to build the first two nuclear reactors in the U.S. since the late 1970's. NuStart plans to build one facility in Alabama and the other in Mississippi. Importantly, the group is reported to be largely funded by the U.S. government. The fact that they are backed by the Energy Department confirms my belief that there will be a major impetus to utilize nuclear energy in the United States. Additionally, an application for a third nuclear reactor is being prepared by Entergy. It is to be built adjacent to its Waterford plant in Louisiana.
The above events strengthen my belief that given the likely permanent high price for oil, the world will be forced to develop and utilize alternate methods for generating energy. I remain of the belief that uranium will be focused upon to greatly meet that demand! Thus, to my mind, the future for uranium continues to brighten as does the height of its ultimate secular Bull Market."
THE LANCZ LETTER
2400 N Reynolds Rd., Toledo, OH 43615.
1 year, 10-15 issues, $250.
Alan Lancz: "SUEZ ADR (SZE $28.60) - this French based utility company made a smart move last month by offering to buy the 49.9% stake in Electrabel it does not already own. Over the past two years management has done an excellent job in focusing on building their core energy and environmental segments, while divesting $16B of non-core operations. The company owns the world's second largest water treatment group and this fits well with its strong presence in Europe on the natural gas and electricity front. Management likes SUEZ's future prospects and has already indicated it plans to increase its dividend 10% this year. We strongly recommend buying the shares, particularly on weakness, for their total return potential over the long term. Our buy limit is $30 and 1-2 year target range should see the stock into the mid-thirties in addition to its growing yield of over 3% annually."
THE PETER DAG PORTFOLIO
65 Lakefront Ave., Akron OH 44319.
1 year, 24 issues, $389.
Enterra provides generous yield
George Dagnino: "The stocks that continue to perform well are those of energy companies providing a generous yield. They can be viewed as bonds with an energy collateral.
For this reason I am recommending Enterra Energy Trust (Nasdaq EENC $24.37).
EENC, through its direct and indirect subsidiaries, operates as an oil and gas income trust in Canada. It acquires, operates, and exploits crude oil and natural gas wells. As of December 31, 2004, the trust's proved and probably reserves were approximately 9.4 thousands of barrels of oil equivalent. Enterra Energy was formed in 1998 and is headquartered in Calgary, Canada."
GROWTH STOCK OUTLOOK
P.O. Box 15381, Chevy Chase, MD 20825.
1 year, 24 issues, $235.
Barrick Gold expands reserves
earnings up, 2005 promising
Charles Allmon: "Barrick Gold (NYSE ABX $25.55) is one of the world's largest gold mining companies, with operations in U.S., Canada, Australia, Peru, Chile, Argentina, and Tanzania. Barrick Shares trade on five world stock markets.
When management reported March 1 on progress in 2004, they spoke optimistically about new mine productions: "In 2004, four of our new development projects moved from the engineering stage to construction, with three of the four expected to contribute to our production in 2005, and the fourth, Cowal, expected to pour gold in the first quarter of 2006. During the year, we also announced positive development decisions for two new projects, Pascua-Lama and East Archimedes."
"The gold price was up 6% during 2004 in US dollar terms, which, for the industry as a whole, should have meant significantly higher profits and cash flow. Instead, financial results for the industry failed to meet expectations due to a number of challenges that impeded performance.
"The rise in the gold price over the last two years was tied very closely to the devaluation of the US dollar. As the dollar fell, the gold price appreciated. We not only expect this close inverse correlation between the two to continue, we believe the combination of soaring US deficits and the trend of decreasing mine supply will provide a strong but volatile US-dollar gold price environment over the next three to five years."
"Although gold prices in US dollars were up in the last two years, industry production has been steadily contracting since 2002. Investment in the gold industry has been limited until 2003, when the gold price started to climb. The lack of investment resulted in very few large, new discoveries, and these require a lead time of some 7 to 10 years before coming into production. Existing operating mines are also maturing, which usually results in lower grade, lower production and higher costs.
"The increase in commodity prices has spurred a boom in the mining industry. The number of new projects in the base metals industry has increased as producers expand to meet the new demand. We are all members of the same industry, and compete for the same equipment, manpower and professional staff. Shortages and higher costs are a direct result.
"In today's world, there is also as continuing rise in standards to be met when developing a new mine. Local communities are naturally interested in protecting their environment and sharing in the benefits of new mining developments."
"Although our cash costs per ounce were up approximately 10% over 2003, the increase was within our target range, and below the industry average, because we were able to mitigate some of the inflationary and currency cost pressures through our cost management initiatives... Most of the cost increase was due to a 10% decline in ounces produced, as both the Pierina and Goldstrike mines sequenced through lower grade ore during the year. Production from these two mines is expected to return to better grades in 2005, which will have a beneficial impact on costs. In spite of the cost increases, Barrick emerged as the lowest-cost producer of the senior gold mining companies in 2004 - and we expect to maintain that ranking.
"The inflationary pressure we experienced in 2004 is unlikely to be as severe in the coming year, as energy and commodity prices appear to have stabilized. Our quality portfolio of operating mines are mining at or near reserve grade, which means that cost pressure arising from having mined above reserve grade is not a significant factor for Barrick."
"While the industry was retrenching, Barrick had the financial strength to aggressively invest in exploration and acquisitions. As a result, we are well along in the construction of three new mines, which will require a total investment of about $1.2 billion. The expected average production from these new operations over their first three full years is 1.8 million ounces, with operating costs expected to be much lower than our current cost structure. We made outstanding headway on these new projects in 2004, having invested more than half of the capital required, and we are keen to move from development to production and optimization. Not only are we converting some 25 million ounces of reserves from our new projects into long-lived, cash flow generating assets, we are also delivering them into a sustained period of strong gold prices.
"In addition, and unlike the industry as a whole, during 2004 we increased our proven and probable reserves. At year-end they stood at 89.1 million ounces, an increase of 8.6 million ounces before production depletion of 5.5 million contained ounces. The key to Barrick's reserve growth is its exploration focus on assets in new prospective districts. Assets such as Veladero and Lagunas Norte have a much better chance to grow because of their unexplored potential and the large land packages involved. In 2004, our low-cost suite of development projects increased their reserves by nearly 15%."
"Three of our new mines are expected to make a meaningful contribution to production in 2005, with the fourth coming on stream in first quarter 2006. Barrick will continue to meet the industry's challenges and run counter to industry trends, by delivering strong reserve development, new low cash-cost mines, a rising production profile, and the financial strength needed to execute our strategies and reward our stakeholders.
"We have the strategies, the balance sheet, the social license and above all the people, to plan well and then execute. In 2005, all stakeholders will see a significant return on all the hard work and perseverance of the last few years."
On 12-31-04 total assets were $6,274,000,000, current assets $1,957,000,000, current liabilities $418,000,000, cash and short term investments $1,398,000,000, long term debt $1,655,000,000, other long term obligations $499,000,000, deferred income taxes $139,000,000, shares outstanding 533,000,000, shareholder equity $3,563,000,000 ($6.67 per share), return on shareholder equity 7.0% negative cash flow. [Company address: BCE Place, Canada Trust Tower, 161 Bay St., Ste. 3700, P.O. Box 212, Toronto, ON M5J 2S1. (416) 861-9911.]
Allmon's Comments: 2005 is off to a good start, with profits up sharply. For all of 2005, earnings in the $.60-$.65 per share range may be a reasonable expectation. Revenues could top $2 billion, perhaps hit a new high.
Prospects over the next 3-5 years appear compelling for Barrick. Any upward thrust in the gold price could send earnings soaring. Barrick seems to be well positioned to prosper mightily in event of a world financial crisis, unexpectedly higher inflation in the 5% range. As noted, the trading market for Barrick shares is excellent.
For a gold hedge, investors might consider both Barrick and Newmont, both with strong trading markets."
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