Monday, September 30, 2013

Magna International (MGA) Reaches Record High On Sales, Gold Companies Get Leaner and BlackBerry's Survival (Fairfax FFH)

       A lot has happened since my last post not the least of which is news of BlackBerry's (bbry) disappointing quarter.  Although I'm confident the company will survive as a private entity within Fairfax Financial (aka the Berkshire Hathaway of Canada), as an investor you have to be frustrated with the way things turned out - BlackBerry has already inked a $4.7 billion buyout deal with Fairfax (ffh) which already owns 10% of shares - at $9 a share the offer gives shareholders almost no return for the tech maker's bes, qnx and consumer handset division :  7500 patents alone are estimated to be worth between $1b and $2 billion, then there's the company's $2.82 billion cash on hand (up $800m from a year ago).  In fact BlackBerry's 2500 security-related patents could form the cornerstone of a new secure enterprise company.

As an investor the deal doesn't make sense, but as a Canadian I'm content with it.  You see, Toronto-based Fairfax is headed by Prem Watsa who is a big supporter of Canada's tech industry (1800 technology firms present in Waterloo and Ottawa, Ontario is North America's 3rd largest tech hub after California and Texas).  If there's any company out there that will give BlackBerry a decent chance to survive intact it's Fairfax (taking company private means it won't be broken up).
Personally, I feel as though BlackBerry can still make it the market - the billion dollar quarterly loss-writedown was blamed squarely on unsold z10 phones, the same phone that holds the distinction of being the company's highest priced device (profit from one phone as much as 3X as much as Nokia Lumia).  The corporate market didn't mind paying more (German government and Nato bought it) but many other consumers didn't -  From the reviews I've read and those of my peers, it's obvious the problem with the phone was the high price not the device !  At times last year even Apple blamed slower sales on the price of its phones.
The good news :  BlackBerry has since launched cheaper devices (q5, z30) and a high-end device with touch pad catering to traditional blackberry lovers (q10).  When BlackBerry gets the price right, the phones will sell.  Blackberry Enterprise Server remains in a league of its own, the company's devices continue to receive rave reviews, market share similar to Windows OS which heavyweight Microsoft remains committed to (paid $7b for Nokia handset division).  How much longer can BlackBerry rely on the corporate market ?  by 2016 38% of companies are expected to stop providing mobile devices to staff.

Techstocks continue to shine !   Interbrand just released its annual ranking of the world's most valuable brands and technology companies took four out of the top five spots including, for the first time the top position:  #1 Apple ($98.3b +28%), #2 Google, #4 IBM and #5 Microsoft.  The next highest ranked tech company Samsung also moved up, to #8 from #9 last year.  Microsoft's recent acquisition Nokia was the worst performer, falling to #19 from #57.

Auto parts supplier Magna International is red hot!  

Though last quarter dividends per share didn't change from three months prior, sales (+16%) and earnings (+19%) were up by a healthy margin.  Not unsurprising given that, US auto sales rose at a torrid pace last summer (annualized rate for August was 16 million up 20% the strongest in six years).  Auto sales expected to slow to 1.15 million units this month (at GM only by a couple percentage points; GM is one of Magna's biggest customers); but a big reason for that is fewer selling days.  Ford also one of Magna's most important customers, reported a sales increase of 12% in August.  Last year, Ford awarded one of Magna's car plants in Brazil with a silver award for its 'superior quality, delivery and cost performance".

Since 2009 Magna has also been a key partner of Ford's electric vehicle division, it was in 2011 that Magna began assembling electric and hybrid vehicles for Ford (notable since this year 2013 Ford is on track to break its own sales record for hybrid vehicles of 35,500 reached in 2010).  Ford's August year-to-date auto sales totaled 221,270 +17.5%.

Barrick Gold Gets Leaner

With gold prices testing the $1300 level gold companies are being forced to adjust accordingly - gross production cost which includes expenses associated with exploration must be reduced so that companies can maintain healthy profits (investors have been shown to punish companies when earnings drop - they seem oblivious to the fact that a 20-30% drop in the gold price is going to make it next to impossible to avoid a quarterly earnings drop).  Barrick Gold has responded to this pressue by selling high cost operations;  Last summer it was the 3 Australian mines that comprise Yilgarn South (1h2013 196,000 ounces at a cash cost of $1145/oz), sold for a combined $300 million.  Then this month, the company announced its intention to sell two more mines for $100 million.  This would put Barrick Gold halfway through its ongoing plan to sell or lower output at 12 of its 27 mines.
Though mega project Pascua Lama Chile (800 oz/yr for initial 5 years) is at the center of Barrick's cost problems (construction costs have ballooned to $8b from the original estimate of $3b) the company remains resolute in its commitment to developing the project (1st production delayed from 2014 to 2016).

Barrick is the largest company by output within the gold mining industry (2q2013 1811m oz versus 1167m oz at Newmont) but not by market capitalization (lost that distinction to Goldcorp in November 2012).  In June 2013 Barrick Gold stock dropped to 21-year low.
#2 gold producer Newmont Mining is also scaling back operations - 1% drop in 2q2013 output to 1167m ounces (versus +6% growth in gold sold) with mines in Mexico (La Herradura -8%) and South America (Yanacocha -25%) reporting significant drops.

Problems at Gold Fields

Last summer, Gold Fields (nyse:GFI) acquried three of Barrick's gold mines but to what end ?  Barrick sold the mines because they are considered high cost operations (cash cost was $1145 in the first six months of 2013) and Gold Fields already has a lot of those (one of the main things about the company that has soured investors).  For the most recent quarter, Gold Fields lost $129m, the first quarterly loss in over a year (in 2q2012 company profited $203.7m).   Another thing that should have investors concerned - At $1360/oz the notional cash expenditure (NCE = capital + operating costs expressed together) guidance for 2013 is higher than the price of gold !
Other reasons for Gold Fields stock freefall (1 month -11%, 6 months -41%) :  cash production costs rank among the highest in the industry and they aren't getting lower ($857/oz last quarter higher than 2013 guidance of $830/oz).  The company is also being investigated by the SEC for its involvment in the deal it made back in 2010 that gave it licensing rights to mine at South Deep (South Africa);  GF transfered 9% interest in the mine to a group of investors solely due to the color of their skin.  On the flip side, if you think gold prices will rebound next year Gold Fields becomes a strong buy (high cost mines which have been temporarily shut down become operational again).
Seabridge Gold (nyse:SA) moving up !  though still lacking the financing needed to develop its flagship project KSM, exploration at KSM recently yielded a nice find :  a borite rich vein below the newest addition to the project (kerr-iron cap) that could push company reserves up again, past the 40m oz gold / 213m oz silver current estimate.
If you're interested in Seabridge Gold, keep an eye on Pretium Resources.  Pretium controls another large gold deposit that neighbors KSM.  The companies could eventually partner on mine construction (2 mines combined would be massive).

Montreal-based Alimentation Couche-Tard starts realizing growth in bottom line

America's largest convenience-store operator (annual proforma revenue over $30 billion) experienced a huge increase in sales (+45%) and earnings (+30%) last quarter.  The increase in profit was much needed as the quarter immediately prior to it revealed disappointing results (unexpected costs associated with expansion into Europe + lower than expected US sales).  This last quarter is a better representation of the company's operations as much of the company's big transactions from last year have been completed (and transaction costs paid for!).  Dividend even went up too, the first quarterly increase in more than a year (+2c -> 9c).  This is a must buy food stock.  more on Couche-Tard

CanElson Drilling 

North American contractor of drilling rigs for the oil industry.  A reason I like this company is because it has one of the highest utilization rates in the industry.  Just two weeks ago (September 18, 2013) CanElson successfully completed a bought-deal financing agreement with a group of investment firms/banks.   The proceeds, which total at least $30 million will give the company additional leverage by enabling it to pay down debt, seek out new acquisitions, construct three additional drilling rigs.   Unusual expenses hit CanElson's bottom line last quarter (2q). the quarter immediately prior to that showed a profit of $13.34 million.

other notes
- China oil imports on track to reach 19m b/d in October 2013 (13% higher than 2011 average) which for the first time will surpass the United States monthly average of 18.7m b/d (10% lower than 2005 average).  Not hard to figure out why :  American policies favoring renewable energy (choosing not to renew licenses for coal, oil run utility plants) combined with China's rapid growth and lack of domestic petroleum resources (stuck at 3 mbpd).
- Today, Interbrand put Apple's brand value above that of the former #1 Coca-Cola (had held the position for 13 years).  In the past two years Apple has gone from #8 to #1.  In dollar terms the brands are valued at $98.3b and $79.2b, respectively.

have twitter ?  follow me @grmike1 for stockmarket updates and @silvermining for mining industry updates.

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