|
Interinvest REVIEW & OUTLOOK
P.O. Box 1585, Boston, MA 02104.
Monthly, 1 year, $125.
Dr. Hans Black: "The price of bullion remained firm last month. At the risk of being accused of abandoning our long-term bullish stance - nothing could be further from the truth - our experience of financial markets over the last 30 years nevertheless convinces us the gold market is in dire need of a rest and consolidation prior to a move to higher levels. Traditional measures of sentiment, such as the positions on commodity exchanges, as well as other measures of bullish participation, remain at troubling decade-long highs. Along the path of any bull market there are inevitable setbacks, and these setbacks are usually painful enough to persuade participants to abandon their positions. This has clearly not yet occurred in this market, and we believe it should some time in the next twelve months.
For the moment, we are advocating retaining core positions, particularly Newmont and Placer Dome, although we have been tempted in recent sessions to liquidate partial positions in Eldorado, as the price is simply quite rich in our book. The better performances clearly come from mid-cap gold companies and we retain our positive opinion on Orvana and Cambior."
THE RICHLAND REPORT
P.O. Box 222, La Jolla, CA 92038.
1 year, 24 issues, $197.
Precious metals bull will
run for many years
Kennedy Gammage: "Longer-term, we're convinced that after 13 - 20 years of bear markets, gold, silver and their mining stocks have embarked on a new bull market that will run for many years, nourished by ever-debauched fiat currencies both here and abroad, and excruciating and unsustainable debt levels at all levels of government, in the public sector, as well as personal, in the private sector.
The roughly 20-year swing in investor preference, which we lectured on some time ago for several years - prematurely, as it turned out - out of the asset class perceived as overvalued - intangibles, such as paper, financial instruments, stocks and bonds - and into the asset class perceived as undervalued - tangibles, "things", like commodities, collectibles, and (in some cases) real estate - is really just in its infancy.
Investors are still enamored of stocks and bonds, and speculative fevers and overvaluations still compel their interest and belief. Until these subside, and disillusion sets in - which takes time and bear market erosion - the shift will not begin to get under way in earnest. But it will come, inevitably and inexorably. You want to be positioned accordingly, with a certain percentage of your portfolio in the physical metals themselves - not for trading, but accumulated on dips - and in the precious metal mining stocks, traded, because they are quite volatile, and with stops judiciously applied and monitored with stern discipline."
Current precious metals Buys include Central Fund of Canada (AMEX CEF), Kenor (OTC BB: KNRF). Gammage also believes that both Newmont Mining (NYSE NEM) and GoldCorp (GG NYSE) should be in every mining stock portfolio.
We still believe a further correction in the gold and silver mining stocks is possible, as well as in the metals themselves, due to potential disappointment is expectations of $400+ gold are not met."
INFORMATION LINE
published for clients of Asset Strategies International, Inc.
1700 Rockville Pike, Suite 400, Rockville, MD 20852.
1 year, $24 for non clients.
Bullish on Canada and Palladium
Eric Roseman: "Some of the best values for commodities now are in Toronto. With a strong Canadian dollar emerging since earlier this year, combined with a surge in raw materials, Canada is home to some great investments.
There's a stealth bull market going on in the metals, but don't tell Wall Street!
Want proof? Check this out...
Over the last 12 months, platinum has surged 25%; copper has risen 17%; aluminum prices are up 11%; nickel has soared 40%; tin is up 28%; lead up 14%; silver has gained 10% and my overall favorite, gold, has climbed 20% since October 2002.
Anyone still thinking that commodities are stuck in a bear market are not looking at the facts and figures. What's developing is a massive bull market, already underway and just in its infancy. Several key commodity indexes continue to hit new all-time highs or multi-year highs, including the Rogers Commodity Index, the CRB Index and the Goldman Sachs Commodity Index.
Rising inflation is also in the cards. It might not be the kind of inflation we saw in the 1970s, but it will resurface very soon. The Federal Reserve has staked its existence to fighting the new battle: Killing deflation.
And when central banks worldwide want to create inflation, things like gold and other raw materials are sensitive to escalating price pressures. That's exactly why gold is rising along with most other hard assets today. What's also key to note is that gold is now outpacing the Euro and the yen vis-à-vis the U.S. dollar. Over the last 12 months, gold has gained 20% while the Euro is up 18%.
But from the above list of precious and base metals, only one metal has actually declined year-over-year - palladium. Over the last 12 months, the spot palladium price has tanked 34% to $211 per ounce from $320 last October 1st. That's a crash in my books.
The key questions to ask are: "Why has palladium plunged?" and "What catalyst will turn the price around for big gains?"
First of all, Russia and South Africa, two of the world's largest palladium producers, have been dumping excess production like mad onto global markets since 2002. When you have too much supply and not enough demand, boom, it's lights out for that trend. Unlike other base metals and precious metals, there is a supply-glut right now for palladium.
Palladium is heavily used in the auto industry to control car emissions in catalytic converters. Every car has one. It is also consumed by the dental industry, electronics, jewelry and chemicals. It is perhaps the least used of all base and precious metals. That's the case because many auto manufacturers are switching to alternative by-products for catalytic converters.
The way I look at it, palladium prices should double over the next 3 - 5 years as the bull market in gold, silver and other base metals really takes off. And the way to play that trend is through Canada's largest palladium company North American Palladium (PDL).
North American Palladium is Canada's only primary producer of palladium through its mega Lac des Iles mine. There is a huge source of mineral wealth in Lac des Illes, including mostly palladium, platinum, gold, copper and nickel. When you buy PDL, you're buying mostly a palladium producer, but with a little kick in other metals, too.
PDL is making money. Second quarter earnings per share were C$0.37 versus C$0.27 cents per share a year earlier. And that's at a time when palladium has crashed! Why? Because PDL has correctly sold some of its palladium production forward at over $300 an ounce versus $200 today.
As palladium eventually turns around, forward selling will draw to a conclusion. Most companies operate this way, including Canada's largest gold company, Barrick Gold. As gold started to turn around last year, Barrick lifted its forward sales.
North American Palladium has a good stock chart. The stock is up 10% in 2003 in Canadian dollars, or 24% when converted back into U.S. dollars as the Loonie rallies. PDL should be a $15 - $20 stock over the next 24 - 36 months as palladium and other base metals in its inventory accelerate their bull market momentum. This is a great small company with superb upside, offering a basket of base metals and some gold. Buy PDL up to C$7."
Editor's Note: Eric Roseman contributes to Information Line on a regular basis. Mr. Roseman publishes Global Mutual Find Investor which provides detailed asset allocation strategies and ranks the world's top fund managers. Mr. Roseman is President of ENR Asset Management, Inc., 1-877-989-8027, www.eas.ca.
FREEMONT GOLD & MONEY REPORT
P.O. Box 5002, North Conway, NH 03860.
1 year, 20 issues, $260.
A new leg up for Gold and Silver
could begin at anytime soon
James Turk: "Yet again the bears have refused to die, to 'throw in the towel'. I had thought that a rush to cover short positions would have made it "possible that gold might clear $147 by the end" of October, but as we all know now, that didn't happen. Nevertheless, I remain very bullish here and continue to expect that $400 will be hurdled at any time. Let me repeat that point - at any time.
As I noted in my previous letter that we had seen some panic buying and that the market was unbalanced with a lot of options having been written above $400 per ounce. The panic buying subsided, but the market remains unbalanced. So I still expect a very sharp, short covering rally that will result in "a $50 move in just a few (i.e. 2-to-3) trading days, like it did back in 1999 after the Washington Gold Agreement was announced."
The long-term chart is painting a very bullish picture. The long-term downtrend line has been broken. What's more we can see all the support under the market formed by the steady buying over the past several years. But we can also see why the $390 - $400 area is offering such tough resistance.
For most of the years stretching from around late-1993 until well into 1996, gold traded just below $400 per ounce. There was some frothy buying back then, and probably by people who no doubt regretted their decision after gold's subsequent fall. Those buyers are probably using the current jumps in the gold price toward $400 to bailout of their old positions. This selling in turn helps the option writers and other shorts to defend their positions.
So for now, gold has had difficulty in breaking through the $400 barrier. Here are some numbers to explain this result.
In its 1993 rally, gold first closed above $380 on May 27th. The last time it closed above $380 was November 15, 1996, after which gold began its deep bear market. This period of time covers a massive 873 trading days in total, so this huge length of time represents a potentially formidable trading barrier.
However, this barrier will, I think, soon be hurdled. Here's how we can measure when the tide is turning in our favor.
In this '93 - '96 period, gold traded at $380 or above on 660 days, or 75.6% of the time. Remarkably though, the average New York closing price during this period was only $387.79, which attests to how tight the trading range was. What's more remarkable, during this entire period, gold only traded at or above $390 on 193 days, or just 22.1% of the time, which includes only a scant 27 days, or 3.1%, at or above $400.
Thus, it was indeed a remarkably tight trading range for such a long period of time, but the average closing price of $387.79 is the key point for this analysis. Once the average price of our current foray above $380 exceeds this $387.79 average, then we know that the resistance level is giving way and, more importantly, that the odds are moving in our favor. And we are not too far away from that achievement.
In the 44 trading days since gold first hurdled $380 on September 9th, the closing price has traded at or above $380 for 54.6% of the time, and during these forays above $380 has averaged $384.18. This average is just a few dollars shy of the level achieved in the tight '93 - 96 trading range.
It will not take a lot of trading in the high $380's and low $390's to raise today's average closing price above the '93 - 96 average of $387.79, and once the current trading average exceeds that old level, the momentum will gain speed with frantic buying by the shorts in a panic to cover their positions - similar to what happened in 1999 after the Washington Agreement.
Silver also had a setback here with gold, stopping us out of our trading position. However, silver held support at $4.92, and has snapped back. Thus, silver again looks ready to begin moving higher, so I recommend rebuilding our trading position in anticipation of higher prices.
In conclusion, both gold and silver have held important support and climbed right back. Their charts suggest that a new leg up in both metals could begin at any time. As readers already know, I think this next leg will take the metals to my $435 and $6+ targets."
SILVER-INVESTOR.COM
21307 Buckeye Lake Lane, Colbert, WA 99005.
Monthly, 1 year, $112. E-mail, 1 year, $99.
"Stealth" phase of bull market
David Morgan: "The Silver Summit 2003 conference was well attended and obviously only those very interested in the silver market attended. Presentations were made by both the local NYSE companies Hecla Mining and Coeur d'Alene. The CEO of Coeur, Dennis Wheeler, made the presentation and it should be noted that Mr. Wheeler seemed as bullish on silver and silver prices moving forward mainly due to his forecast the overall recessionary environment is behind us, and both the U.S. and world economy should strengthen over the next several quarters.
Hecla gave a very good barometer on the state of silver and silver mining. It was pointed out that in 1979 Hecla Mining was the biggest gainer on the NYSE. The stock went from $5.00 per share to $50.00 per share. In the year 2002 Hecla was again the biggest gainer on the NYSE, and no one knows about it. This is a good indication that we have seen phase one, what many refer to as the "stealth" phase of the bull market in the previous metals."
GROWTH STOCK OUTLOOK
P.O. Box 15381, Chevy Chase, MD 20825.
1 year, 24 issues, $235.
Barrick won't abandon hedging
Newmont updates projects
Charles Allmon: "Barrick Gold (NYSE ABX $19.41). What appears to be a silly suit against Barrick apparently is going into the court process. A New Orleans gold retailer accused Barrick and J.P. Morgan Chase of manipulating the price of gold. How silly. How many gold mining firms are there in the world today? I would guess at least 500. This is one of the nuttiest ideas to come down the pike in a long time. Over the past 45 years, there have been several similar suits, usually after gamblers guessed wrong on the price of gold. So what else is new?
In a press release, the mining company said it's on track to meet its 2003 production goal of 5.4 million - 5.5 million ounces, at an average cost per ounce of $190 - $195. In 2002, the company produced 5.7 million ounces of gold at an average cash cost of $177 per ounce.
The company attributed the rise in costs in 2003 to higher gold prices, increasing royalties, production taxes, and other costs. It ascribed the lower production in 2003 to the closure of five mines in 2002. For 2004, Barrick expects production will be about 10% lower, while costs will run about 10% higher, as several operations, primarily Pierina and Goldstrike, mine lower-grade material.
Barrick sees the first of the new mines currently under development going into production in 2005. For exploration and development, the company budgeted $125 million for 2003 and $100 million for 2004, compared with $104 million in2002.
CEO Greg Wilkins repeated Barrick's stance that it won't abandon hedging, but said the company doesn't want "too much" production pre-sold. It seeks to reduce its hedgebook to no more than two years' worth of gold production or of reserves.
Newmont Mining (NYSE NEM $41.24). Newmont Mining provided updated information on a number of projects that, if developed as currently anticipated, will increase annual gold sales from approximately 7.3 million ounces in 2003 to approximately 7.7 million ounces in 2007. In addition, Newmont announced that gold reserves in Ghana are expected to double to approximately 10 million ounces by year-end.
Commenting on the projects, Wayne W. Murdy, chairman and CEO, said, "The development of thee projects will, on a risk-adjusted basis, significantly enhance the Company's net asset value. These projects are expected to generate double digit rates of return based on a conservative gold price assumption of $325 an ounce. Newmont is well positioned to deliver significant earnings growth going forward as we increase production and, more importantly, the profit margin per ounce as average cash costs reduced over time."
Negotiations concerning long-term taxes, import duties, exportation of production, and other matters have been completed with a government team and need to be analyzed by the full cabinet and then go to the parliament in Ghana, Mr. Murdy told members of the press after his presentation at the Denver Gold Forum 2003 in Denver, sponsored by the Denver Gold Group.
Ghana is seen as an important area of growth for Denver-based Newmont. According to Mr. Murdy's presentation graphs, it appears that the company expects Ghana to account for about 750,000 ounces a year in production in 2007. In that year, Newmont's total gold production is expected to jump to 7.7 million ounces, from about 7 million ounces a year between 2004 and 2006.
Newmont Mining signed a letter of intent with a subsidiary of Placer Dome America Holding Corporation to enter into a joint venture for the Turquoise Ridge property in Nevada. The agreement provides Newmont with a 25% interest in the Turquoise Ridge and Getchell mines, in return for providing up to 1,800 tonnes per day of milling capacity at the company's Twin Creeks mill in Nevada, and the extinguishments of the 2% Net Smelter Return royalty currently payable by Placer Dome."
THE COMPLETE INVESTOR
500 5th Avenue, 57th Floor, New York, NY 10110.Monthly, 1 year, $129.
Stephen Leeb: "The dollar is down, gold is up. Cause and effect? Actually, no. Suggestions that the current bull market in gold merely reflects the falling dollar are way off base. Lets look at how gold has performed following those four instances in which the dollar dropped by 16 percent or more over 18 months. In contrast to stocks, there is no unwavering pattern. In two of the periods, (November 1990 -3% and June 1995 1% gain; the S&P 500 gained 20% and 26% respectively) gold was down or flat. In a third instance, (February 1986 gold gained 10 percent, about a third as much as stocks rose (31%). In one of the periods, though, December 1978 to December 1979, gold took off, rising by 130 percent versus an S&P gain of 18%.
So what's going on? Knowing that gold is the quintessential inflation hedge you might guess the answer has to do with inflation, but while you'd be getting warmer, you're still not quite there. For, while inflation was high in the late 1970s, the recent move in gold, which dates back to the late 1990s, has occurred in the context of very little inflation.
The true answer has to do with interest rates in relation to inflation - i.e., with real interest rates. During the period when gold was super strong, real rates (specifically the difference between T-bill yields and the CPI) were negative. During the other three instances, real rates were positive. And when it comes to inflation plays, whether precious metals or real estate, real rates are key.
When real rates fall into minus territory - meaning inflation is higher than nominal interest rates - it pays to borrow money to buy assets that keep pace with or appreciate faster than inflation. The reason is that you'll make more money on your investments than you have to pay back on the money you borrowed. That's exactly the situation today. And when you're looking for an asset assured, over the long haul, of keeping pace with inflation, you can't do better than gold.
Message to investors: when it comes to investing in gold, ignore fluctuations in the dollar and other economic variables - hold onto your gold-related investments until real rates turn positive. Moreover, be aware that if inflation picks up in conjunction with negative real rates, we could be looking at the kind of rip-roaring bull market in gold that could dwarf the late 1970s. Our favorite gold plays are those in our Growth Portfolio: American Barrick and Newmont."
INVESTOR'S DIGEST of Canada
133 Richmond Street West, Toronto, Canada M5H 3M8.
1 year, 24 issues, $137.
Two candidates
in the window-dressing game
Peter Hodson: "Every year around this time, investors and fund managers start to evaluate their year's performance. Many managers, if they have had a good year so far, now start to lock in those gains so that nothing too bad can go wrong in the last few weeks of the year.
Managers with a bad year so far, though often start "pressing their bets" in a desperate effort to catch up before the year turns. This "window dressing" can cause small-cap stocks to have huge price swings in the last two months of the year.
Some of the stocks that could be volatile in the remainder of the year.
Southernera Resources (SUF-TSX, $5.75, www.southernera.com) is a resource company whose stock is down so far this year. How can that be, you ask, considering how well resources stocks have performed?
Well, the answer is that Southernera has this bad habit of raising money on an all-too-regular basis. Every issue adds more shares, and makes it harder for Southernera to make money on a per-share basis.
Southernera raised $93 million at $7.75 per share in February, and then raised $64 million at $6.40 per unit in October. How do you think investors in the February issue feel, knowing that eight months later the company was willing to sell more stock much cheaper than what they paid in February?
The stock of Southernera tells you how they feel. SUF is down 12 per cent on the year so far, even as resources stocks in general surged. My bet is that a lot of investment managers won't want to show this loser in their portfolios at year-end.
Wireless Matrix (WRX-TSX, $1.50, www.wirelessmatrix.com), like Southernera, also had to raise money this year, in what was likely the most disastrous stock issue of the year.
Wireless raised $20 million at $2.50 per share in September, and then had to pay back investors $0.25 per share after the CEO was accused of "questionable" conduct in relation to a share sale involved in a matrimonial dispute. The CEO, unbelievably, remains in charge of the company.
This year's disastrous stock issue for Wireless came only 13 months after its last issue, $10 million in August 2002. Wireless stock is down 16 per cent this year, in a year of surging tech stocks, and my guess is that investors will really want this one out of their portfolios by the end of the year."
Editor's Note: Peter Hodson is a portfolio manager at C.I. Mutual Funds.
THE MONEY SHOW DIGEST
published weekly by Intershow, 1258 N. Palm Ave., Sarasota, FL 34236. www.MoneyShowDigest.com.
Steve Halpern: "Two of the smartest guys in this business have turned bullish on palladium. Jim Dines, the "original gold bug", offers a play on palladium in a recent interview with with Paul Kangas on The Nightly Business Report. The same mining firm is also a new buy from Eric Naimer-Roseman, an expert in hedge funds and commodities.
Paul Kangas: My guest this week is James Dines, editor and publisher of the popular The Dines Letter. Jim, in your last three visits with us, going back 18 months, you have been strongly recommending the gold stocks and they have been stellar performers. What would have to happen to turn you bearish on gold?
Dines: Well, for one, for the US government to balance its budget, and to have a serious monetary system where they don't just print all the paper they want. I`ve been a pioneer crusading for an honest currency for a long time, and we don`t have one. You need to defend yourself against that by having some gold in your portfolio in case the dollar caves in, which has already begun.
Kangas: So you believe that gold and silver, for that matter, are both in long-term bull markets?
Dines: Correct. And in fact the 'Dines Wolf Pack' theory says that silver and gold also move with platinum and palladium.
Kangas:How about some new recommendations, Jim?
Dines: Well, one is North American Palladium (NYSE PAL). The company is reviving again. Platinum is so far above palladium in price that the automotive companies must right now be considering switching their automotive catalytic converters from platinum back to palladium - and that will send the price up much higher. Plus, PAL is the only independent palladium mine in the entire Western hemisphere. It is a very rare deposit and the metal is in an uptrend."
We would note that the company also trades on the Toronto exchange, and the Canadian shares are the latest addition to the "Canada Corner" portfolio maintained by Eric Naimer-Roseman, editor of the Global Mutual Fund Investor. Here's his review: "I am adding a palladium play to the portfolio. North American Palladium (Toronto: PDL) is a small-cap producer with a market cap of $313 million dollars. The company mines mainly palladium but also digs for platinum, copper, gold, and nickel. Earnings are on an uptrend since 2000 and the stock bottomed earlier this year in the mid-$3 area. Palladium, which is in a bear market right now, might see a big reversal one day. I view it as a contrarian metal whereas virtually every other precious and base metal has gone through the roof over the last 12 months. PDL is a good long-term speculation on palladium's price revival."
Editor's Note: Bull & Bear readers can receive The MoneyShow Digest free of charge. Register for this free newsletter at www.MoneyShow.com. Bull & Bear readers and their guests are invited to attend the World Money Show, February 2-5, 2004 to be held at the Gaylord Palms Resort in Orlando, Florida. To register call 1-800-970-4355 or register at www.WorldMoneyShow.com.
OIL/ENERGY STATISTICS BULLETIN and Canadian Oil Reports
P.O. Box 189, Whitman, MA 02382.
1 year, 24 issues, $185.
Oil markets performing as expected
John McGilvray: "With the price of oil hovering at around $30 a barrel and expected to weaken only slightly in the next several weeks, conditions are still excellent for a fine fourth quarter for oil and gas producers.
News from the exploratory front continues to be positive for ChevronTexaco (NYSE CVX 73.73) both at home and abroad. So far this month the company has come through with significant deepwater finds both in the Gulf of Mexico and offshore Nigeria. Here at home, ChevronTexaco logged an oil discovery in the Sturgis Prospect located 150 miles southeast of New Orleans. The well, drilled to a depth of 25,005 feet in 3,700 feet of water in Atwater Valley Block 183, encountered more than 100 feet of pay sands. Further drilling is planned on the tract, which is 50% owned by CVX, the operator, and in which Devon Energy and EnCana Corp. each has a 25% stake.
Offshore Nigeria, meanwhile, ChevronTexaco turned in another successful well in its deepwater program, resulting in a sizable extension of the Usan oil field. The Usan No. 4 was completed in 2,460 feet of water and two zones tested oil at rates of 4,400 barrels a day and 6,300 b/d. The well also confirmed the presence of additional potential reserves in previously untested reservoirs. ChevronTexaco, which is the leading deepwater acreage holder in Nigeria, has a 30% interest in the discovery, as does Exxon Mobil. We continue to regard ChevronTexaco as an excellent high quality long-term growth investment.
Among the first companies to release third quarter results was Pogo Producing (NYSE PPP 44.88) and, as expected, they were excellent. With overall production rising and oil and gas markets firm, the company came through with net income of $1.07 a share for the three months that ended with September, better than double the year earlier result of $0.52. That brought the firm's earnings through nine months to $3.79 a share, better than three times the $1.22 a share netted for the first nine months of 2002. For the third quarter, oil and liquids production averaged 62,299 barrels a day, up nicely from the year ago average of 55,242 b/d. Third quarter gas production was flat at slightly over 284 million cubic feet a day. Nine month average production rates were 67,334 b/d and 297 MMcf/d, for oil and gas, up from year earlier levels of 51,302 b/d and 278 MMcf/d.
Looking ahead, Pogo's production should continue to benefit from the ongoing success of its drilling efforts both in the Gulf of Mexico and offshore Thailand. In the latter play, the company completed ten wells during the third quarter, all of them successful. Seven of these were development wells in the Benchamas field with average pay thickness of a hefty 240 feet. In the Gulf of Mexico, four wildcat wells were nearing completion as the third quarter ended. Pogo remains a solid buy with the potential to reach 52 in the short run.
More oil and gas producers are reporting third quarter results and, if these early returns are any indication, the quarter is going to prove even better than anticipated. Burlington Resources (NYSE BR 48.40) rode a combination of higher oil and gas prices and better production to a third quarter profit of $1.33 a share - beating the average Street estimate of $1.04 a share by a wide margin. In the same 2002 quarter, the company netted $0.39 a share. For this year's September quarter, Burlington saw its production advance by 3% to an average of 2.55 billion cubic feet of natural gas per day, right in line with its projected full year average of 2.5 to 2.6 Bcfe/d. Even more important, Burlington is looking for annual production growth of between 3% and 8% for rapidly approaching 2004 and beyond. Burlington Resources remains a solid long-term growth buy.
Another company that came through with better than expected profits this week is XTO Energy (NYSE XTO 22.42). Here, too, the thrust behind the unexpectedly good gain in earnings was improved production - in XTO's case natural gas production. For the third quarter, the company's gas output rose by a strong 33% from 536 million cubic feet a day a year ago to 711 MMcf/d. As a result of this fine performance, XTO has increased its target for this year's gas production increase from a range of 10% - 12% to between 13% and 15%. For the September quarter, XTO posted net income, excluding special items, which boosted it even higher, of $0.49 a share. That was considerably better than the $0.29 a share the company earned a year ago and was comfortably ahead of the average Street projection of $0.44 a share. XTO Energy is nearing our 2003 price target of 24 but the shares are still an attractive growth buy.
Profit-Taking in Canadian Oils
Has Been Followed By A Rally
Any time there has been a period of profit-taking in the Canadian oil group this year it has been a brief one. And it has been followed by a move to new high ground. There has again been a round of profit-taking this past fortnight, and we believe that this, too, will be followed by another rally. The fundamentals and the long-range outlook for the group are, after all, to good for shares to stay in the doldrums for anything but short periods.
A case in point is one of the group's leaders, Petro-Canada (TSE PCA 53.13), which recently reported solid results for the quarter that ended with September. For that period, Petro-Canada had positive results from both upstream and downstream activities. Despite a power blackout in Eastern Canada that resulted in an unplanned shutdown of a major lubricants plant, downstream operations had a very strong quarter. Looking ahead, the company feels that its decision to consolidate its Eastern Canada refining system will have very positive profit results. As a producer, Petro-Canada also continued to grow, with third quarter total production reaching an average of 449,000 barrels of oil equivalent a day, up from an average of 446,1000 boe/d in the same period a year ago. For the quarter, the company's net income came to C$1.52 a share, before special items, well up from the C$1.10 earned a year ago and also much better than the average "Street" projection of C$1.36. Petro-Canada remains a good high quality buy for intermediate and long-term growth potential."
FULLER MONEY
Suite 1.21 Plaza 535 Kings Road London SW10 0SZ UK.
Monthly, single issue, £35. www.fullermoney.com.
Oil traders dare not be caught short of supply
David Fuller: "Oil traders dare not be caught short of supply. OPEC's latest production cuts, disruptions to supplies from Iraq due to sabotage, and lingering concerns over strikes in Nigeria and Venezuela have firmed prices once again. However, prices over $30 a barrel (NYME) should remain difficult to maintain. Nigeria, Venezuela and Iraq need oil revenues, and will overcome obstacles to production sooner or later. Meanwhile, supplies from Russia and other non-OPEC producers will increase while prices remain historically high. Additionally, OPEC cannot afford to lose much more of its current share of the market. I maintain that a price of crude oil in the low to possibly mid-$30 region is top of the range."
Roger Conrad's UTILITY FORECASTER
1750 Old Meadow Road, Ste 301, McLean, VA 22102.
Monthly, 1 year, $129.
Roger Conrad: "It's been months since the invasion of Iraq and an American-picked delegation now represents that country at the Organization of Petroleum Exporting Countries (OPEC). But even with a lackluster economy and mild summer, oil and natural gas prices haven't retreated.
The reason is tight supply. U.S. gas production continues to stagnate, particularly in the Gulf of Mexico where developers hope to go five miles below the continental shelf to reverse years of rapidly falling output. Rising inventories appeared to put downward pressure on oil prices until OPEC - meeting the first time since the fall of Saddam Hussein - announced a surprise 3.5 percent cut in output just as the U.S. and Europe are heading into a period of winter peak demand.
Electric power still remains in a surplus situation. But with Centerpoint Energy, Mission Energy, Reliant Resources and others shutting in higher-cost plants and very little new capacity planned for 2004, that situation could tighten quickly.
Ironically, measured by valuations, expectations have rarely been lower for energy stocks. That means, except for certain bid-up royalty trusts, there's relatively little risk to buying energy shares like the big oils BP and ChevronTexaco, pure producers Devon Energy and EOG Resources, or utility/producers like Dominion Resources and National Fuel Gas. Energen and MDU Resources would be buys at slightly lower levels. All are great low-risk bets on what should be long-lived volatility in energy prices."
Russ Kaplan's HEARTHLAND ADVISER
1016 North 47th Avenue, Suite 11, Omaha, NE 68132.
Monthly, 1 year, $150.
Devon Energy: Bright future
Russ Kaplan: "After three consecutive down years, we are now entering a bull market. An unfortunate side effect of the rise is that for a time there will be companies trading at unworthy prices. The high tech sector, for one, is heading for a crash that will be similar to the Internet crash that began in the year 2000.
Russ Kaplan's recommendation for this month is Devon Energy (DVN), a stock with a bright future.
"Devon Energy is a major player in the natural gas sector. Please don't panic and think "Enron". The natural gas industry has been viewed in a positive light since the Enron scandal, but with its good earnings this perception will change.
It appears that the United States is facing a shortage of natural gas, and Devon Energy will be there to fill in the gaps with an estimated proven reserve of 1.61 billion barrels. Findings this on the balance sheet is worth much more to me than any rumor swirling around Wall Street.
On a value basis Devon Energy is sterling. It is one of the few stocks left that trade at a single digit price earnings ratio. On a cash flow basis it is in excellent shape."
INVESTOR'S DIGEST of Canada
133 Richmond Street West, Toronto, M5H 3M8.
1 year, 24 issues, $137.
Long-term opportunity
in oil and gas stocks
David Chapman: "What would a world without oil be like? While posing what seems to be a preposterous question, it is one that we all may have to deal with in our lifetime.
The world currently has over one trillion barrels of reserves. Some two-thirds of that lies in the Mideast in just five countries: Saudi Arabia, Iraq, United Arab Emirates, Kuwait and Iran.
Further, it is estimated that there might be another 500 billion barrels of conventional reserves still to be discovered, but even these prospects are largely located in the Mideast or in Central Asia.
There are also numerous sources of unconventional reserves that will only become economical as oil prices rise. Some, such as the Western Canada oil sands, are already in production, but many others are in environmentally sensitive areas, such as deep in the ocean and the Arctic.
As well, there is potential for more in areas of heavy oil fields in Venezuela and oil shale sources in the U.S., Brazil, Zaire, India and some others. All told, it is estimated that there might be three trillion of reserves from unconventional sources, but environmental sensitivity and cost could lower that substantially if it were ever available.
Current world production and consumption are generally in balance at around 75 million barrels per day. Of this, the U.S. is the world's greediest consumer, using some 20 million barrels per day, or 26 percent of the world's total. Total annual consumption is, therefore, around 27.7 billion barrels.
Current daily consumption slightly exceeds production with the shortfall being made up with inventories. At the current rate of consumption, and using the conventional estimate of reserves of one trillion barrels, the world's oil would be consumed in a mere 36 years. And this is without taking into consideration any increased demand, particularly, from Asia, and China and India.
We might add that there is a similar situation with natural gas, which accounts for roughly 25 percent of world energy supplies.
To complete the contribution of various energy sources, oil supplies 37 percent, coal 26 percent, nuclear six percent and hydroelectric six percent. Alternative energy's contribution is negligible.
But natural gas reserves are more plentiful, and studies have shown that they would last more than 60 years at current rates of consumption. The Mideast has roughly 36 percent of the world's reserves, while Europe and Asia combined have another 39 percent. Unlike oil, gas cannot be shipped safely, making its availability much beyond the local region difficult.
North America, the world's largest consumer of energy, has less than five percent of both the world's natural gas reserves and oil reserves. The U.S. alone consumes over 25 percent of the world's oil, but has only about five percent of the world's population.
Natural gas demand is projected alone to rise 50 percent over the next 20 years alone. But with new discoveries and improved technology used to find natural gas, it is expected that reserves will keep pace.
Not so with oil. It is not only important, but essential that a stable and ongoing low-cost source of oil is available to the western economies or they will go into permanent economic decline. Unless alternative energy sources become bigger to replace oil, particularly in automobiles, a collision of unparalleled proportion appears to be in the works.
For the cynics, it is no wonder there is such an interest in controlling the volatile Mideast, where upwards of 65 percent of the world's oil reserves lie. It does raise the potential for a century of wars for control of oil and other commodities. All wars, after all, are ultimately economic.
Without energy-conservation programs, higher prices and a stronger move to alternative-energy sources, a collision course is guaranteed. And higher prices are guaranteed as well, although in the short-term oil and gas prices can fluctuate depending upon inventories and production increases. Impacts could be seen certainly by the end of this decade, if not sooner.
We feel that the recent softness in oil and natural gas prices is a buying opportunity. Investors should be patient, though, as the current correction in oil and gas prices may have a little more time to run.
But as we move into the winter season, prices tend to rise. If we couple this with any potential for instability in the Mideast, the world's most volatile region, then it could put considerable upward pressure on prices this winter.
Investors should ensure that they have some exposure to the oil and gas sector either directly through oil and gas stocks or the service companies, or through the oil and gas income trusts.
Our man in the Calgary oil patch, Crude Ken, returned from his globetrotting long enough to leave us some of his favorite picks. His list is as follows:
Integrated: Petro Canada (TSX PCA, 403-296-8575, www.petro-canada.ca); Shell Canada Ltd. (TSX SHC, 403-691-3456, www.shell.ca).
Producers Senior and Int.: Canadian Natural (TSX CNQ, 403-517-7345, www.cnrl.com); EnCana Corporation (TSX ECA, 403-645-2000, www.encana.com).
Juniors: NuVista Energy, Ltd. (TSX NVA, 403-213-4300, www.nuvistaenergy.com); Find Energy (TSX FE, 403-232-4809, www.lexxor.com); Ketch Resources Ltd. (TSX KER, 403-213-3111, www.ketch-resources.com).
Oil Services: Pason Systems Inc. (TSX PSI, 403-301-3401, www.pason.com); and Trican Well Service Ltd. (TSX TCW, 403-266-0202, www.trican.com).
Editor's Note: David Chapman is a regular contributor to Investor's Digest of Canada and director of the Millennium Bullion Fund, www.bullionfund.com.
SUPERSTOCK INVESTOR
1900 Glades Rd., Ste. 441, Boca Raton, FL 33431.
Monthly, 1 year, $395.
Water utility takeover candidates
Sven Monberg: "The following water utility takeover targets are still recommended, and should be viewed as a "portfolio" of low-risk, high-yield takeover targets: Connecticut Water (CTWS: Buy up to $28); Middlesex Water (MSEX: Buy up to $28); Pennichuck Corp (PNNW: Buy up to $30); Philadelphia Suburban (PSC: Buy up to $25); and Southwest Water (SWWC: Buy up to $12.35)."
THE TURNAROUND LETTER
Suite 801, 225 Friend St., Boston, MA 02114.
Monthly, 1 year, $195.
Strength in industrial metals?
George Putnam: "As the stock market has rebounded over the past six months or so, much of the talk has been about tech stocks. But under the radar, a few important bullish trends are beginning to emerge in more basic industries. The domestic economy has begun to firm, and demand from some large foreign markets, particularly China, has picked up steam.
One segment that is particularly sensitive to this sort of renewed economic activity is the industrial metals area, including steel, aluminum and copper. Copper prices have moved up smartly over the course of the last year or so, and most copper related stocks have already had a good run. Steel and aluminum, on the other hand, appear to be in the earlier stages of price recovery, and so the related stocks may have a lot further to rise.
The steel and aluminum stocks look cheap by several different measures. For example, they trade at a relatively small fraction of sales. Below, we have highlighted several steel and aluminum stocks that may be attractive to different types of investors. We've also included a couple of bonds of metals producers that are currently in bankruptcy. These are both high-risk situations but the bonds could appreciate dramatically if the prices of the respective metals continue to strengthen.
AK Steel (AKS) is a bit behind the turnaround curve, at least in relation to other steel companies. Top management abruptly resigned in September, the company reported a wider third-quarter loss and new management plans to cut jobs quickly. But the stock likely reflects these concerns. From a financial perspective, the ultimate measure of survival, the company appears to have sufficient assets that could be sold to buy additional time. While only suitable for aggressive investors, the stock has the potential to appreciate very sharply if the company can pull through.
Alcan (AL) is taking steps to bolster its position in international markets. Its purchase of France's Pechiney for $4.7 billion will significantly close the gap with Alcoa, the largest aluminum producer. Alcan is also making a $150 million investment in a Chinese smelter that will give it a presence in that fast growing market. The stock, while having traded in a wide range, has made little net progress since 1995. Alcan is well positioned for long-term gains.
Alcoa (AA) has a reputation for sound financial management. Expectations are that the company will have cut nearly $1 billion in annual costs by the end of the year. At the same time, the company has invested in its future, as evidenced by its equity interest in Aluminum Corporation China. In addition, management is considering an investment in one of Russia's largest aluminum companies. Alco recently reported its most profitable quarter in two years. The stock has moved up in 2003, but from a longer-term perspective, it has made little headway in the last four years.
Commonwealth Industries (CMIN) is a bit more leveraged than its competitors in aluminum, but not overly so. It is, however, probably the most dependent on continued economic recovery. That is because the company appears to have less wiggle room for reducing costs. It is implementing a new information system that should help, and the company recently reported that "a resurgence in sales activity" helped it return to profitability in the September quarter. While higher risk, the stock does have appealing potential.
Corus Group Plc. (CGA) is Europe's fourth largest steel producer. The stock traded above $30 in 1995 and then slowly began rolling over until it collapsed in early 2003 to a low of $0.65. The company tacitly admitted in 2002 that it couldn't compete in the aluminum business by seeking to sell its aluminum unit. But regulators rebuffed its attempt. New leadership took over in April of this year, and they've shown an interest in shedding non-core assets to bolster the balance sheet. Corus has more risk than when we first recommended it several years ago, but we like the possible appreciation from its current low level. (We are moving Corus to our Aggressive category and making it a "buy" up to 5.)
U.S. Steel's (X) stock has been in a downtrend since 1993, but it appears that improving fundamentals may reverse that trend. As the leader in the U.S. market, it benefits from the strengthening domestic economy. The company is also pursuing expansion in Europe, which could pay off down the road. U.S. Steel's balance sheet is sound enough to give the company ample time to capitalize on economic recovery both here and abroad.
Kaiser Aluminum (12.75%, 02/01/03 $18) lags well behind the industry leaders in its production efficiency, which is one of the reasons it is currently in Chapter 11. But if the price of aluminum rises high enough, there is a lot of price leverage in the company's bonds.
WCI Steel (10.00%, 12/01/04 $32) was recently forced into bankruptcy by weak demand, a heavy debt load and high labor costs, but further rises in the price of steel would alleviate many of its problems."
Disclosure Note: Accounts managed by an affiliate of the publisher Of The Turnaround Letter hold a number of the securities mentioned in this article.
|
