Friday, March 30, 2012

PetroChina (PTR), Sinopec (600688-SH) Chinese Energy Companies Stand Out; RIM Maintaining Shareholder Value; Canada Records Budget Surplus In January

For the month of January 2012 Canada recorded a monthly surplus ($1.7 billion), the first since February 2009. Canada's fiscal year ends in March; Thus far (March 2011 to January 2012) the federal deficit is $16 billion down from $27.7 billion in the previous period. Canada's annual deficits aren't expected to end until 2015 at the earliest (when it may be +$3.4 billion). For the 2010 ten month period ending Jan 2012, the reduction in deficit is attributable to higher revenues ($189b --> $197b) being met with lower program spending (-1.7%; $194.1b --> $190.8b). Canada's public debt spending is up +$300 million.

China sets sights on Mongolia

China already does a lot of business in Mongolia with state-owned Batou Steel Rre-Earth operating Inner Mongolia's large Bayan Obo mine. Now, coal company Shenhua Energy (China's biggest coal producer) is aiming to secure a 40% interest in the world's largest deposit of steelmaking coking coal, Tavan Tolgoi (home to six billion tonnes of coal), by mid 2012 just after Mongolia's next general election. Mongolia hasn't been an easy place for companies to do business; Last July, Mongolia promised Shenhua 40% of the project but that deal was revoked after other countries deemed the process unfair. Other bidders come from the US (Peabody Energy) and Russia (Russian Railways). The other major coal deposit in the south Gobi region Ovuut Tolgoi, was recently invested in by Chinese coal company Chalco (subsidiary of Chinalco); Chalco boughtout Ivanhoe Mine's 57% stake for $889 million. The largest resource in the South Gobi region is copper mine Oyu Tolgoi. At its peak Oyu Tolgoi will be the source of one third of Mongolia's gross domestic product. China is the world's leading consumer of coal.

China's largest oil company by production, Petro China (86% state-owned) produced more oil in 2011 than ExxonMobil after Exxon posted a reduction in total volumes. Exxon production -5% to 2.3M bpd while Petro China production +3.3% to 2.4M bpd. Petro China is a growing company that's for sure, but does that make it a great investment stock? I'm not so sure about that. Petro China was created with one objective: To feed China's increasing energy appetite. China's demand for petroleum products will grow by 100% over the next 25 years. The company is probably not overly concerned with shareholder value but who can blame them? China needs to secure oil in order to support the 8 and 9% gdp growth rates and state-owned enterprises like PetroChina and Sinopec are getting the job done.

Sinopec petro output was up +1.6% to 407.9M boe in 2011 (1.1M bpd) HOWEVER the increase came only from natural gas (73.6M boe --> 89.2M boe), crude oil production was down -1.9% to 321.7M boe). The higher output didn't add to profits; Fourth quarter earnings at Sinopec were down -23% attributed to a number of factors including higher tariffs in China (+7.1%) and the lower price of natural gas. In the first quarter of 2010 PetroChina bought a 9% interest in Canadian oil company Syncrude. In January 2012 a major Athabasca oil sands project came under complete control of PetroChina after the company paid $673 million for the 40% of shares that it didn't already own.
Warren Buffet was a PetroChina shareholder until September 2007. A lot of PetroChina's oil comes from Daquing and Changquing.

Sinopec, China's number two oil and gas company is China's largest oil refiner providing the country with 80% of its fuel. Due to increasing profits, in 2010 the company made Fortune 500 top ten list which is a feat considering the prices it receives for its produces is less than it would have in the free market due to governmental restrictions on pricing.

Research In Motion

The device marker is currently undergoing changes as evidenced by the resignation of key board members and an explicit desire to refocus business away from the consumer market. I'd interpret the company's recent statements this way: In countries such as the United States and South Korea where BlackBerry overall market share is low, the company will not have app using-typical users as the primary target for marketing however, in other countries such as the Canada, Argentina, South Africa and Indonesia (and maybe even the UK) RIM's existing consumer market will continue to be supported in a positive way (this is assumed given that the company stated it will cede only selected markets) - This is a wise decision for Research In Motion considering asset writedowns associated with the company's market value, reduced net income by more than $300 million in the latest quarter (ended March 2012).

I'm not really disappointed by RIM's latest results. PlayBook sales are up to 500,000 units from 200,000 units in the previous quarter. In the same quarter, adjusted net income was just over $400 million which is comparable to the previous quarter when revenue was significantly higher. PlayBook now holds 15% of the Canadian tablet market, up from 5% in late 2011. RIMM's stock was up +7.06% the day following the news (Friday March 30, 2012). Also note that 90% of Fortune 500 companies use the BlackBerry phone.

Monday, March 19, 2012

HSBC and JP Morgan record strong results in 2011 but stock market valuation still waning

Interesting Facts

- The China-Brazil trade corridoor had a compound annual growth rate of 30% during the last decade.
- China accounts for 18% of Brazil's total trade, up from 4% in 2000.
- HSBC has only been in Brazil since 1997 but it is already a significant contributor to the country's economy. HSBC now finances 6% of the Latin American country's foreign trade.
- Using current dollars, median household income in British Columbia, Canada is $68,000 today, down from $72,000 in 1971. (source: CBC) What's alarming about that is the fact that the average home price was only $272,000 which is a lot lower than today's $806,000.
- On November 29, 2011 JP Morgan sold 198.143 million shares of HSBC Holdings stock (1.11% interest in the company) for HK$58.83 a share.  That reduced JP Morgan's interest in HSBC to 6.35% down from 7.46%

JP Morgan

       In 2011, the bank ranked first in terms of global investment banking fees. Though profit was down -22.9% over the last quarter of 2011, total annual profit for the year reached a record high of $19 billion +9.2% vs 2010;  Net income per share improved even more, +13.1% to $4.48. During the fourth quarter, non-performing assets fell -33%.  Also in the fourth, the bank repurchased $950 million worth of common stock, bringing the total repurchased on the year to $2.9 billion.  It's important to remember that, even though JP Morgan has the highest market cap among the top banks (outside China) it remains smaller than Bank of America in terms of employees (260,000 vs 300,000) and revenue ($97.234b vs $115.0b).

What tells me the bank's business is a lot healthier today than last year is the charge-off's vs credit loans;  Credit sales volume +10% on the year while consequently net-charge off's happened at the lower rate of 3.93% (down from 4.34%).  Deposits are now at $1.1 trillion, +21%.  JPMorgan's Investment Bank's provision for credit card losses was up to $272 million at the end of last quarter which compares nicely to the loss of $271 million last year and +54 million in the previous quarter (3Q2011).  However it must be noted that, the increased provisions for credit card losses on the year caused net income for the investment bank division to fall by 52% to $726 million.

The commercial banking unit experienced a 21% increase in profit (to $643 million) on record net revenue. Net charge offs down from $286 million to $99 million.


Market capitalization down significantly to $136 billion from $180 billion (end 2010) and $199 billion (end 2009).  In fact, by the end of the the 2011 calendar year, Wells Fargo pulled ahead of HSBC in terms of market cap (Wells Fargo finished 26 overall, in front of HSBC at 28).  Since the financial crisis of 2006-2007, over the last four years HSBC paid out more dividends than any other FTSE100 listed bank except one (US$27.2 billion/ $7.3b in 2011 alone).  Dividends were up +14% in 2011. HSBC's costs +10% in 2011 due to, among other things, wage inflation (a new bank fee charged to it by the UK government in the amount of $570m.  Underlying costs now account for 61% of revenue up from 55% in 2010). North American operations accounted for only 0.5% ($100m) of HSBC's profit before tax (compared to 2.4% = $454m in 2010).

North American business has become a bit more risky as it now accounts for 22.8% of the company's risk-weighted assets ($337.3m, up from $330.7m in 2010) even though the region represents only 19.7% of total assets ($504m out of $2555.6m). Many of the bank's key financial metrics were up on the year, however there were a couple that weren't; Down were: Underlying profit before taxation: -6% to $17.696 billion, total loans and advancements -2% to $940 million. Good decreases: Ratio of loan impairment chargest to total operating income down to 13.8% from 16.9% in 2010 and 31.7% in 2009.

Monday, March 5, 2012

Gold Update Seabridge Gold SA, Kinross Gold KGC, World Gold Production Up & Oil; 2012 Will Be A Volatile Year For Stocks Hecla Mining HL, Airline Stocks

     If the first two months are any indication, 2012 will be a very busy year for investors. Just when you think you're ahead of the game some external, unaccounted-for factor changes everything. It can be reassuring though, knowing that everyone has to adjust their portfolios accordingly. Take for example the airline industry;

Over the last month (Feb - Mar) the price of WTI oil shot up 11% from just under $99/bbl to $109/bbl. Consequently, brent crude hit a 43-month high of $128.40/bbl on March 1, 2012.  How did that affect airline stocks? They were BATTERED more than the fish at Red Lobster! Over the last month United Continental Holdings Inc (nyse:UAL) was -16%, Delta Air Lines (DAL) -14%, Lufthansa (DLAKY) -7%, negatives across the board all because of the price of oil. What's more, oil could soar even higher if Iran chooses to close the Strait of Hormuz because the Strait is used to transport 7% of the world's oil; Closure of the Strait of Hormuz is entirely possible now given that Europe has implemented an embargo on Iranian oil (supplied 4% of Europe's demand last year) and that it's already dealing with the toughest sanctions the West can impose on it (Iran is now demanding payment for its oil in gold). sidenote: India is one of a few countries that still imports oil from Iran.

Canadian bank stocks proving their value once again !  The two largest by size, Royal Bank of Canada (RBC) and Toronto-Dominion Bank (TD) raised dividends despite profits being lower.  At RBC the dividend increase was 5.6% bringing it up to 0.57/share in the latest quarter (eps was down 4.7% to $1.21/share).  At TD, the 1Q2012 showed mixed results.  Though TD earnings dropped marginally (-0.01/share to $1.55) revenue grew 3.3% to $5.64B.  Though profits did not grow the bank continued to hand out larger dividends (+4c quarterly to 0.72).

Also making news is SNC-Lavalin.  Partnered with Aecon, SNC won a $600M contract to refurbish Ontario, Canada's Darlington nuclear station.  That pushed the stock up 2.2% in just the last day helping it to climb over the $6B level of capitalization.  Prior to the news, the stock was reeling (lost $1.6B about 1/5th of its market cap in just the last couple days) because of reports of undocumented payments unrelated to company projects eroding away at 2011 profits.

The World is Producing More Gold but also Consuming More (led by China, Germany and Thailand)
     In 2011, 11 of the world's 14 leading gold producing regions raised their output according to the US Geological Survey's 2012 Mineral Commodity Summaries, which isn't surprising considering the 28% jump in gold price (and cash costs, accordingly).  On the year, world primary production was up 5.5% to 2700 tons (86.4M ounces).  The world's 14 major producers accounted for 76.7% of output down from 78.2% in 2010.  Although production in China was higher, the growth was not as great as it had been over the last couple years (+2.9% compared to +22.0% for #8 Ghana, +20.9% for #7 Canada and +16.4% for #11 Mexico).  South Africa is home to 11.8% of the world's gold reserves (2nd overall behind Australia) but was the source of only 7% of production in 2011 bringing its overall rank down to 5 from 1 in 2007.  Why the drop for South Africa?  Because of ridiculously high production costs; South Africa has the unfavorable distinction of being the most expensive country to produce in (among major producing regions).
When investing in gold mining companies be sure to have companies with projects in Australia high on you list (ie BHP Billiton - Olympic Dam).  Australia was the source of only 10% of global production last year but is home to 15% of reserves meaning growth will happen.  Production costs (South Africa) and barriers to entry (China) are also not as problematic in Australia.  In late 2011 China began drafting new standards for the gold industry which could have a significant effect on both investment and production in the country.

Most of China's gold output comes from small companies but the new standards will eliminate some of them while at the same time, making it more difficult for new companies to enter the industry.
With regards to the United States, the gold supply and demand situation there is not as dire as one would expect.  In 2011 GOLD CONSUMPTION ACTUALLY FELL -17% to 194.9 tonnes (2nd consecutive year that US gold demand dropped).  That's in stark contrast to China (+22% to 811.2 tonnes) and Germany (+26% to 159.3 tonnes). Global consumption of gold in 2011 was 4067.1 tonnes, highest since 1997. Interestingly in Thailand (#7 consumer) where total consumption grew +57% to 108.9 tonnes, jewelry only accounted for 3.8% of the total (fell 34% on the year) but bar and coin demand +66% to 104.8 tonnes. The top six consumers remained the same,

Investing in gold: Mining Companies
Did you know? Mining companies are actually LOSING CAPITAL TO ETF'S !  According to Bank of Montreal analyst Peter Miller ETF's are a "hoover of capital and competition for the gold companies".  To regain investor confidence (and capital) many producers are hiking up dividends.  I think that mining stocks present a unique opportunity for investors at the moment.  Yamana is raising quarterly dividends by 10%.

With regards to gold producers, 2011 wasn't as profitable as one would expect.  At Newmont Mining and Goldcorp, 2 of the 4 largest by market cap, net earnings were lower despite record breaking revenue.  Part of the reason has to do with rising cash costs; +12.5% to $460 at Barrick Gold, +20.5% to $591/oz at Goldcorp (though lower from $270 to $223 when by products are taken into account), +40% at Australia's Newcrest, since 2009 +29.7% at Yamana Gold.  Higher mining costs are atributable to increasing equipment, labor and raw material costs. Higher gold and silver prices buffered the effects of higher costs however companies need to do more to translate sales growth into earnings growth. The higher gold price allowed even AngloGold Ashanti to add to reserves; Anglogold's reserves went up 4.4M ounces bringing the total to 75.6M ounces; 3.7M of the 4.4M oz added came due to higher prices making extraction from ore at Vaal River economically viable (3.2M oz) and 0.5M oz attributable to improved ore reserve price at Geita.

South America increasingly important to major gold miners - Gold Fields will get 20% of its 2015 gold production from that region, up from 10% in 2011, 2% in 2008.  In 2011 Gold Fields produced 3.697m ounces of gold which is 4.0% less than in 2010 (3.851m ounces) but it did receive 28.6% more for each ounce of gold ($1569 vs $1220).  Barrick Gold's huge project Pascua Lama is in Argentina.  Goldcorp's largest venture is the Penasquito mine in Mexico.

Undervalued Mining Companies

Seabridge Gold (tsx: SEA) - In February released its 2012 Operations Overview and the new data is impressive to say the least (maybe that's why the stock is UP +8% since February 13, still down though over 20% last 6 months because of increased volatility in metal prices (even Barrick Gold is down 10% over six months).  Its flagship project, KSM has 2P reserves of 38.5M ounces for gold, 9.985B pounds for copper, 214M ounces of silver and 257M pounds of molybdenum;  That means it has more gold than world renown projects Pueblo Viego, Penasquito and possibly even Ivanhoe Mine's mega project Oyu Tolgoi (46.4M ounces of gold) if KSM reserves are increased in April which is likely given the successful M&I drilling results reported by the company on February 8, 2012.  Reserves in situ value is about 15% greater than Goldcorp's Penasquito and Seabridge's enterprise value per ounce of reserves is only $21 ! which is ridiculously low considering it's $1200 at Canada's other major gold junior-mid cap company AuRico.  At Detour Gold and Osisko Mining enterprise value/oz is around $400.  Don't forget that KSM isn't the only major Seabridge project, there's also Courageous Lake (8M oz M&I 16 year mine life). Because reserve grade is relatively low the company will benefit from rising metal prices moreso than say Yamana Gold.
The same month, on February 8, 2012 measured and indicated resources at KSM improved by 3.7 million ounces for gold (to 49.0 million ounces) meaning that drill results continue to be successful.  What it also means is that the company's next report on proven and probable reserves (April 2012) will likely indicate further increases in 2P reserves, past the current estimate.  In the February report, Seabridge Gold estimates annual production at KSM will be 854,000 ounces (gold), 166 million pounds (copper), 2.9 million ounces (silver), 1.1 million pounds (molybdenum) for the first seven years (the mine has a 52 year mine life, molybdenum production will actually grow after the first seven years).  Base cash cost will be $231/oz which is even lower than Goldcorp ($300).
This company screams undervalued.  How does a company with 40M ounces of 2P gold reserves (more than Yamana Gold, Agnico-Eagle Mines) at just one of its projects have a market cap under $1 billion ?  Royal Gold has shown confidence in the company's numbers (invested $100m in Seabridge last year).  The construction costs remain quite high but I think that $2000 gold (when it happens) will open up more financing options (like Eldorado Gold recently got from Qatar Holdings).  Consider this:  2 years ago when gold prices were a lot lower, Barrick Gold paid Kinross Gold $475m ($455m cash) for 25% interest in the Cerro Casale gold copper project which has only 60% as much gold as KSM.  That would value KSM at over 3X Seabridge Gold's market cap at present.

Hecla Mining Company (nyse: HL) - On January 11, 2012 Hecla announced that the Lucky Friday Mine in Idaho which produced 31.5% of the company's 9,498,337 ounces of silver in 2011, will be shut down for the entire 2012 year.  The day of the announcement the stock fell 18.7% from $5.67 --> $4.61.  All this because of a December 2011 accident at Lucky Friday in which a number of employees were injured when the mine collapsed (including a couple fatalities).  You can be sure that whatever structural problems caused the collapse will be dealt with quickly (only two months was needed to fix the problem, the 12 month closure is due to new inspections and safety procedures required by federal regulators;  A group of shareholders even tried to sue the government over the closure).  Hecla wasn't the only miner that suffered fatalaties last quarter, 6 people died in accidents at three AngloGold Ashanti mines.

Though Lucky Friday is the source of only 31% of silver output (0% for gold) and 30% of 2P silver reserves, it's Hecla's only source of proven silver reserves (~21 million ounces);  In 2011 it was the source of all of Hecla's total increase in 2P silver reserves (+7 million ounces), so it remains a significant growth project for the company.  Lucky Friday also makes the company more diversified, being home to three-quarters of its 1.5 million ton lead resource.  The other operating mine, Green's Creek was purchased from Rio Tinto in 2008.

There are many reasons to like Hecla Mining
* The price of silver jumped 74.2% in 2011, single handedly causing Helca's profit to grow 286% to $150.6M.  Revenue reached a record high of $477M even though it sold 13.3% less silver; in fact sales of all four metal types were down (-17.5% for gold, -16.6% for lead, -12.4% for zinc).  The company's stock value is down -50% from a year ago even though revenue and profit is up significantly;  Even considering the 30% drop in silver production, next year company profits probably won't be less than they were in 2010 with high commodity prices a mainstay.
* The company has no debt and nearly $290M in cash and cash equivalents.
* Lucky Friday structural damage only needs two months to fix.
* Hecla Mining has three other significant projects at San Sebastien, San Juan and Noonday.  Company's valuation at present definitely isn't giving any of those projects respect.
Thompson Creek Metals (tsx: TCM) - The stock has been in selloff mode for the better part of a week after the company reported that the Mt. Milligan project will cost more than previously thought.  That prompted TD Bank to downgrade it.

Barrick Gold - Pueblo Viejo (60%) and Pascua Lama mines will begin producing in 2012/2013.  When fully operational (2016) the mines will add 1.5 million ounces of annual output to Barrick Gold's current production of 7.68 million ounces.  Pueblo Viejo is 90% complete.  Barrick profited 25% more in 2011 than it did last year ($4.48 billion, $$4.67 billion adjusted).  In February Barrick exited Russia when it sold off its last remaining asset there (25% interest in Highland Gold).

Goldcorp - 2011 production was 2.5147 million ounces.  By 2016 production will rise to 4.2 million ounces.  Revenue grew by 43% in 2011 more than any other top 10 gold miner.  El Morro in Chile ($3.9b project) is one of the reasons for the higher output projection.

Newcrest Mining - 515,000 oz of gold in 2011 came from the Telfer mine representing about 20% of company total (Telfer is home to 14.9% of its 79.1M oz of reserves, 7.7% of the 8.36M tonnes of copper reserves).  Total company production in the 2Q2012 FY (ending December 2011) was 579,023 oz down 19.9% qoq, the quarter before that 1Q2012 output was down 16% to 587,296 oz.  Over the last two quarters production from Telfer was down 50,000 oz.  2011 calendar year production increase comes entirely from the Lihir Gold acquisition.

Kinross Gold - Yes it was hit with a $2.94 billion impairment charge stemming from an unexpected writedown on its Tasiast mine in Mauritania absorbed during the fourth quarter of 2011.  That effectively more than wiped out any profit the company was on track to make in 2011 (ended up losing just over $2B on the year).  But keep in mind the company's revenue (+31%), gold production (+13.0% to 2.6M oz), and cost of sales (+28% even though production up more than 30%, production cost of sales up 17.7% to $596/oz which is comparable to its peers in the industry).  Another telling statistic: cash margins up 32% to $906/oz ($965 in 4Q +23%), margins were also up 32% at America's largest gold miner Newmont Mining (Newmont's stock is up 16% last 12 months, Kinross is down -32% even though Newmont also suffered from a bad fourth quarter; -$1B losses at Newmont in 4Q2011 brining total profit for the year down to $366m).  Also to consider; Agnico-Eagle Mines took on a $644.9m writedown on its Meadowbank mine in the 4Q giving the company a net loss of $601.4m in the 4Q.  The mine plan had to be changed because of its 'high cost nature'.
Also, annual dividend was up 10% to record high 11 cents a share (though none was paid in the problematic 4th quarter).     The company was valued at $19B as recently as May 2011 which is almost 60% more than it is today.  That brings its market value per ounce of reserve to a near industry low $130/oz (compare that to Goldcorp's $618/oz at, $708/oz at Yamana Gold).  Cash flow from operating activities +40.3% to $1.8093b on the year, convinced yet?  Then consider the possible takeover offers.  European Goldfields which isn't even producing yet and has only a fraction as much gold as Kinross, recently got $2.5B from Eldorado Gold.  Kinross has low cash costs, lucrative projects (Cerro Casale) and a growing revenue stream and that makes it a lot more valuable in a M&A scenario.  CAPEX was +163% to $1.6515.
Don't forget that Kinross's current market cap of about $12B is about the same as it was before it acquired $7B Red Back Mining.

Eldorado Gold (nyse: EGO) - Coming off a record year for gold production (+4% to 658,652 oz), revenue (+33% to $1.042b) and even profit (eps +41.5% to 58c) while dividends more than doubled from 5c a share to 11c. Operating cash flow was also strong, up 40%. AND unlike the other major gold producers total cash costs only went up marginally ($382 --> $405). The European Goldfields acquisition will make it the biggest gold producer in Europe by 2015 (1.5m ounces a year) which couldn't come at a better time; European demand for gold is stronger than ever as is the price of gold.

New Gold (tsx: NGD) - In June 2012 its fourth operating mine will open.  That will push company production over 400,000 ounces for the first time.  Goldcorp's El Morrow (New Gold's interest is 30%) will reach full production in 2018 which should give the company an additional 150,000 ounces annually.

Newmont Mining - Gold reserves grew 9% in 2011 to 99M ounces a third of which is in Nevada, 17% in Africa.  Reserves were 93.5M one year earlier and 91.8M oz December 2009.  Biggest source of attraction at Newmont right now are the dividends, 4Q2011 quarterly dividend up 133% to 0.35 a share.

Also of interest:
-On March 1, 2012 Newcrest Mining, Australia's largest pureplay gold company began trading on the Toronto Stock Exchange.  It will be the 4th largest mining company with a listing in Toronto.
-USA has 3rd highest corporate tax rate in the world.