2014 the year of Canadian Technology and Services Stocks CAE Inc, Constellation Software, CSU, OTEX, TSX (aviation training, software, growing companies, acquisitions)

CAE Inc (nyse:CAE) - aviation stocks, aviation training services, aerospace industry, healthcare sector

This year CAE Inc of Montreal became one of the world's largest simulation technology companies.  Its business is arguably the most diversified in the training services sector - at just under 200 locations in over 30 countries the company offers training services for pilots (civil aviation, defence), and manufactures key simulation technology for healthcare and security agencies.  50% of revenue comes from the sale of products (simulators and related technology) with the rest coming from services (aircraft operations training - over 100,000 civil and military personnel).

 

why this stock ?  it's low risk !

Among industry observers CAE enjoys a rock solid reputation.  It's extremely diversified (does not rely on a single market sector or customer), owns unique technology that has quickly become a mainstay in global aerospace training.  Business from healthcare is strong (hospitals and universities).

• a global leader
• the leading provider of commercial and helicopter aviation training services worldwide - second leading provider of business aviation services - market leader in key regions of China, India, South America
• highly exposed to the growing defence and security sector (6% increase in revenue quarter ended September 30, 2014 - thanks to more activity in north amerca, europe and asia).
• secured new contract to train the US Air Force
• four consecutive years of revenue growth (2,114.90 2,035.20 1,821.20 1,630.80)
• four consecutive years of dividend growth (0.22 0.19 0.16 0.15)
• earnings up 38% last fiscal year (March to March) to $190 million.

nyse:CAE

1-year  6-months  3-months  1-month

1.2%  (1.4)%  6.8%  (1.2)%

Constellation Software Inc

2014 was a great year for Constellation Software Inc of Toronto (tsx:CSU).  The stock is up 60% for the year, bringing the market capitalization of the company to just under $8 billion and for good reason - in the latest quarter

- revenue is up a hefty 33% to $419 million (acquisitions accounted for all but 4%).

- earnings up 44% to $32 million vs $22m (per share $1.51 vs $1.05).

- adjusted ebitda up 73% to $100 million.

it's not just that last quarter either that has investors gleaming - over the last nine months adjusted ebitda is up 55% to $244 million.  net income up 26% -> $64 million.

what I like about the company 

it manufactures market leading software and has exposure to a number of industries (public and private).  the software it provides is critical making its products invaluable (meaning there are few if any alternatives - makes for more reliable customers).  Annual revenue recently surpassed $1 billion ! and quarterly growth is light years ahead of the competition (over 50%).  For a company with a market value over $7.3 billion it's an amazing feat to record 60% growth in stock price in just one year.

tsx:CSU    stock price change

1-year   6-months 3-months 1-month

 59.48%  27.02%       21.35%    4.19%

Open Text Corporation of Waterloo, Ontario  (b2b services, yahoo) - nasdaq:OTEX

2014 was a wonderful year for Open Text Corporation - It's New Year's Eve and year-to-date the stock up 28% to $58.26 (market cap at $7.2 billion on the nasdaq).  Like other Canadian success stories

Rio Tinto (RIO) Production up only for Aluminum, Bauxite, Iron, Salt, Borate & Titanium; Copper Will get a boost from Ivanhoe Mines (IVN), Pilbara, Escondida

Rio Tinto's largest projects as of January 2012 (indepth look here)

Project												New Annual Output												Metals												Year												Total cost
Pilbara 283												53 Mt												iron ore												2014												$9.7 bil
Oyu Tolgoi												1.2b lb 650th oz 3m oz												copper gold silver												mid 2013												$6.0 bil
Kitimat												400th tonnes												aluminum												3Q 2014												$3.3 bil
Yurwun 2												2 Mt												alumina												3Q 2012												$2.3 bil
Argyle												20 mil carats capacity												diamonds												2Q 2013												$2.1 bil
Hope Downs 4												15 Mt (30 yr life)												iron ore												mid 2013												$2.1 bil
Kestrel												1.3 Mt												coal												mid 2013												$2.0 bil
AP 60 Quebec												60 kt												aluminum												2Q 2013												$1.1 bil
Marandoo Aus												15 Mt												iron ore												early 2015												$1.1 bil
Iron Ore Company Canada 1 2												5.3 Mt (Rio owns 59%)												iron ore												early 2013												$763 mil
ISAL Iceland												40th tonnes												aluminum												mid 2012												$487 mil

      Rio Tinto (RIO) had a lot going for it and against it in 2011. Copper grades and low exit-year prices affected earnings in the second half. Fiscal year results were buoyed by iron ore which saw prices peak mid year and output grow to record levels (ended the year at $140/tonne vs high of $180/tonne mid year). Rio Tinto is Australia's biggest iron ore exporter and also a major producer of its coal (coal is Australia's single largest export earner). A $7 billion share buy back plan is nearing completion.

Of the $33 billion capital projects underway the largest one, Pilbara 283 ($9.7B) won't be ready until the end of 2013. The second largest, Oyu Tolgoi phase 1 ($6B) will be ready midyear 2013. Nine of the eighteen projects will be completed in 2012. 2015 is on track to be a big year for Rio with 167.7 million tonnes/yr of new iron-ore production coming online.

Notes:
-Grasberg, Indonesia has been a joint venture with Freeport-McMoran since 1998.
-Sold 100% interest in Colowyo on Dec 1, 2011
-Rio is no longer in the business of talc as of August 1, 2011. That's why talc output is down; No attributable production from there since the 3Q 2011 when output fell to below 100 mil tonnes for the first time ever.  The talc unit, Luzenac which is the world's leader in talc production, was sold to a French company for $340 million.
-2012 will see new copper production from Coal & Allied in which Rio Tinto now has an 80.0% interest up from 75.7% (effective December 16, 2011).
-Spun off US coal operations in Dec 2010. That transaction netted the company $2 billion however it cut off nearly three quarters of Rio Tinto's coal production going back to 2009. The new company formed in the spinoff is Cloud Peak Energy which trades on the New York Stock Exchange as CLD.
-On Feb 20, 2012 announced a $518M investment in autonomous Iron Ore rail cars that will operate in Pilbara, Australia beginning in 2014 (at present Pilbara is the site of a major expansion project underway that will boost copper output significantly over the coming years beginning in 2013).
-all of the company's molybdenum comes from Kennecott Utah
-February 3, 2012: Rio Tinto Alcan begins restarting aluminum smelters in Shawinigan, Quebec
-Doubled interest in Richards Bay Minerals to 74% from 37%. RBM is a South African titanium dioxide company. That will lead to an inevitable increase in titanium production.
-Hecla Mining, the US's largest primary producer of silver gets 68% of its silver from a mine that Rio Tinto owned up until April 2008 (Green's Creek).

Financial Highlights quoted in US Dollars
Higher commodity prices led to a record in underlying earnings (+11% to $15.5 billion), record in ebitda (+10% to $28.5 billion) and record in cash flow from operations (+16% to $27.4 billion). Capex was 2.67X higher at $12.3 billion. Surprisingly all of this didn't translate into higher net earnings which were down 59% to $5.8 billion on account of impairment costs amounting to $8.9 billion, associated with the aluminum business. Don't be too concerned about the fall in EPS to $3.035 from $7.31 in 2010; dividend per share was $1.45 +34% vs 2010. Here's some background on what Rio Tinto excludes when determining underlying earnings.

In 2011 Rio Tinto spent $6.1 billion on acquisitions, $2.2 billion on dividend payouts and $6.2 billion on taxes. Cash flows from operations have nearly doubled since 2009. Targeted 2012 capex is $16 billion or over 30% higher than 2011 with about 3/4 of it going to Australia (over half) and Canada (less than a quarter).

Iron Ore
This continues to be Rio Tinto's backbone. It is the largest source of EBITDA contributing 73.4% of the group's product total of earnings before taxes ($20.93b/$29.491b) which is up from 62.4% in 2010 (was as low as 43% in 2008). Iron ore contributed 78.0% of group earnings in 2011 up from 67.6%.

Iron ore output from the 6 of 8 Hamersley iron ore mines that Rio owns outright, was 7.8% higher on the year (121.525M tonnes). The other two Hamersley mines are 60% owned and produced 15.994M tonnes (up 1.13% from 15,816 in 2010).

As of 2011 global iron ore production capacity was announced for 800 Mt annually but by 2011 4Q only 200 Mt was achieved.

Copper
Contributed 6.9% of ebitda down from 16.9% in 2010. Copper earnings were down 23.6% and the reason for that is two-fold: total mined copper down 23% stemming from lower grade ore at Escondida and Kennecott Utah, the same thing that negatively affected results at the end of last year and also the price of copper, down to $3.44/lb in December from $4.24/lb mid year. The lower grades are only temporary given that grades will come in higher in the coming years due to the commencement of operations at new projects/expansion projects

Oyu Tolgoi - Construction is currently 70% complete, by 2013 it should be producing 1.2 billion pounds of copper per year then working its way up to 1.7 billion pounds by year seven in 2019-2020. Ivanhoe Mines has a direct, controlling stake in the project (66%, ownership is not through South Gobi) and Rio Tinto has a 49% interest in Ivanhoe Mines and strong board representation (7/13 Ivanhoe board members represent the interests of Rio Tinto). Just recently Bank of America said that Ivanhoe Mines will be a leading position for copper in 2018 when it will be "one of the world's 10 leading copper producers".
Escondida - the site of major project expansions underway in Chile where just last week Rio Tinto and its partners (30/70 interest) approved a $1.4B expansion.
Pilbara - Output expands to 283M tonnes/yr by 2013, 353Mt by 1H2015. The company just announced yesterday its US$518 million autonomous rail network which will the first of its kind. Rio Tinto's rail network is currently 1,500 km long and has 148 trains. Copper production from Pilbara was down 7% in 2011 due to lower recoveries key equipment being unavailable.

Rio Tinto is probably not complaining about the temporary decline in copper production considering that copper prices ended the year at a low point (3.44/lb Dec 31 vs $4.24/lb June 30).

Northparkes was only one of five major copper operations that recorded a year on year increase in output. Mined copper was +29% on the year, +34% in the 4Q as a result of optimization projects being implemented & higher grades from section E48.

Gold and Silver
Lower grades caused gold (-12.3%) and silver (-27.0%) output to decline from 2010 levels however that is expected to change in 2hlf 2012 and 2013 when grades will get a boost from new mining activity in Mongolia and elsewhere. Oyu Tolgoi possibly beginning in 2013, will produce silver at a rate of 3 million ounces a year (59 year mine life) and 650,000 ounces of gold.

33.2% of the decline in silver output (605/1823) was due lower production from Grasberg, the smallest of Rio's four silver mines; Grasberg is a joint venture. Silver production from the largest of its operating mines, the 100% owned Bingham Canyon mine was 20% lower to 2.976 mil ounces. The second largest source of silver, Escondida is only 30% owned (prod there down 29.5%).

Though mined silver production fell on the year, refined silver output (all of it occurring at Kennecott Utah) was +32.61% to 4.732 million ounces.

Primary Aluminum
13 of the 21 mines are 100% owned. Those 13 produced 2442 thousand tonnes of aluminum in 2011 up 30.73% from 2010 when output was 1868.

Diamonds
The largest of Rio's three diamond mines is Argyle in Western Australia. Argyle produced 7.441m carats in 2011 which is down 24.1% from 2010. In contrast, the 60% owned Diavik mine in NWT increased its output by 2.72% to 6.677m carats while 77.8% owned Murrowam Zimbabwe produced 2.06X more at 367,000 carats.

Diversified Investments Hon Hai Precision Industry, Seabridge Gold -sorry Motley Fool, Royal Gold

     With all the market turbulence it's imperative that investors not only diversify their stock portfolio but choose companies that are already diversified within themselves. Here are a few companies that fit the bill.

Hon Hai Precision Industry better known as Foxconn - This is the company that manufactures everything from the xbox game console for Microsoft to the iPhone4S for Apple as well as laptops for Hewlett Packard; Its HP laptop plant in Chong-qing that produces upwards of 20 million laptops annually, was built in 2009/2010 and made Hon Hai into one of the leading employers in China's 23rd largest mainland economy (where the electronics industry ranks first ahead of vehicle manufacturing). Keep in mind that each plant can have anywhere from a couple to 15 or even 20 factories, in fact Hon Hai's largest in Shenzhen is home to some 300,000 workers. In total Foxconn has factories in nine Chinese cities.

The technology industry has recorded massive growth over the last seven years led by Apple Inc (market capitalization 6X bigger today than it was in 2005 - 390 billion vs 65 billion) which is important to remember since Hon Hai plays an integral role in Apple's success (the iPad is made by Hon Hai at a plant in Chengdu, China, the iPhone4s is manufactured at the world's largest smartphone production facility, the 200,000 unit/yr plant at Science Park, Zhengzhou). In January 2012 it announced a plan to increase its workforce by ten times in a major Chinese manufacturing city, as well Hon Hai recently stated that it will be doubling the size of its flagship smartphone-manufacturing plant in Henan province with a $1.1B investment.
-The company is obviously preparing itseslf for huge jump in size and why not? the iPad holds anywhere from 60-90% of the global tablet market, a market which could grow by 42% in 2012 to 40 million units up from 29 in 2011. As of January 2012 Hon Hai's workforce numbers 1.2 million. On March 11, 2011 Hon Hai Precision Industry (Foxconn) had a market capitalization/valuation of $36.9 billion US dollars. (source: Forbes Global 2000 List 2011 Edition)

Hon Hai recently reported a 19.8% year-on-year jump in revenue to $92 billion over the 2011 calendar year (37% increase in December) boosted by especially strong results in the month of December (revenue in the fourth quarter alone was $30B). That's significant considering that Taiwan's other technology companies Quanta Computer, Compal Electronics and Acer, all reported decreases in revenue (-1% for Quanta to $60b, -21% for Compal to $23b, -23.5% for Acer to $12.4b). Hon Hai profited over $2.5B in 2010 only slightly higher than 2009. The company has $32.0B worth of assets. One thing that could become a problem for Hon Hai is fake Apple products in China. Since the iPhone4s launch was delayed in China, more fake products have been introduced to the market.

Royal Gold (MV 3.77B, 5-day -2.37%, 1 month -4.01%, 3 month +2.77%) Is one of the world's largest and most diversified royalty companies with direct exposure to many of the world's key mining operations through royalty agreements (buys the royalty usually before the mine enters production phase). It then collects royalties (in most cases net smelter return royalties) on the net revenue made from one of five precious or base metals (or all as in the case with Peñasquito). There is little risk considering it is not responsible for mining or exploration costs (like Silver Wheaton). Considering the fact that many of the mines are either not producing or in very early stages of production (Penasquito, Pascua Lama, Malartic) strong growth in revenue (& profit) is likely; unlike other mining stocks, for Royal Gold growth isn't contingent on metal prices (unless of course they collapse which is unlikely given that we're in a commodities bull market). In the 3rd quarter of 2011 Osisko Mining's Malartic gold property reached commercial production producing 73,814 ounces of gold and 40,000 ounces silver (Malartic is home to 10.71 million ounces of gold) - Royal Gold owns a 3% royalty on Malartic.
Diversification: The company remains gold-dominant but that's slowly changing with new base-metal mines coming on tap (like Goldcorp's billion ounce silver Penasquito mine in Mexico). During the 2011 fiscal year 64% of revenue came from gold which is down sharply from 81% in 2010 and 84% in 2009. In 2011 silver contributed 6% to revenue (up from 3% the two previous years), copper steady at 10%, nickel up significantly to 15% from 4% in 2010, 1% in 2009. Other minerals like zinc and potash made up 5% of revenue up from 3% and 1% in 2010 and 2009 respectively. Most of the royalty agreements are for 2-5% however a couple like Andacollo (1.6M oz of gold reserves) which is at 75%.
more on Royal Gold HERE including nickel, lead & zinc production data by mine by year updated to reflect 2011.

Financials: Stock is up 2.77% between Oct 17 and Jan 13 2012, up 7.98% during the six month period ended Jan 13 but down 9% in the month of December. Key royalty claims; 2% NSR claim on Canada's biggest gold/silver/copper/molybdenum project (KSM) purchased in 2011 for $160m; 2% claim on Goldcorp's only major silver mine Penasquito; Barrick Gold's Pascua Lama mine in Chile. In fiscal 2011 (ends in June) revenue was up 58.5% to US$ 216m which is great considering total operating expense was virtually unchanged at $97m pushing gross profit up 190.0%. The company profited 232% more ($71.39m) however dividends were up only 23.5% to 42 cents/share. Update second quarter 2012 fiscal year (ends December 2011): profit/earnings were a record for a quarter at $23.4M up 28% yoy or 42 cents a share on royalty revenues of $68.4M, up 22% qoq. For the 2012 half, net income was $45.9M (up 52.5%) or 83 cents a share (up from 55c) on revenue of $133.3M (up 31.07%). adjEBITDA was 90% of revenue in the second quarter or $62.1M up from $48.9M in 2Q2010. For the September-December 2011 period (2Q of the company's 2012 fiscal year) the price of gold increased 23% from $1367 to $1688 an ounce. The company recently paid $170 million on its debt (credit facility) expanding available credit under the facility to $225 million. $268.3 million was raised in an equity offering held in January 2012.

Royal Gold production update for 2012 Second Quarter
According to Goldcorp/operator of Penasquito (one of Royal Gold's most lucrative interests) gold production will be 425,000 ounces and silver production 26 million ounces for the 2012 calendar year. Malartic (1.0-1.5% nr) will produce between 610,000 and 670,000 ounces of gold in 2012. Barrick Gold's Pascua-Lama mine will bein producing during mid 2013 at 800,000 to 850,000 ounces a year in the first five years. Thompson Creek's Mt. Milligan (31% complete end of 2011) will begin producing 4th quarter 2013. Lac Cruces (produces copper cathode) will operate a 90% of design capacity in 2012, total production estimated to increase by 55% versus 2011 (calendar year). In the second quarter of 2012 Andacollo contributed $16.18 million of the comany's $68.84 million in royalty revenue which is 23.50% of the total up from 20.12%. The only other mine that contributed over 10% of RG's revenue is Voisey's Bay (2.7% net smelter return royalty) which gave the company 17.49% ($12.04M) of its second quarter 2012 revenue (up from $8.06M in the corresponding period of 2011). Royal Gold's four largest sources of revenue contribute 56% of revenue (second quarter 2012); total gold production by them was approximately 92,358 ounces of gold (up from 65,862 ounces) 27.4 million pounds of nickel (all from Voisey's Bay) in addition to Penasquito's output of 5.0m oz silver, 40.2m pounds lead, 78.4m pounds zinc. Quarter on quarter increases at Penasquito were mostly from zinc which was up 35.0%, silver was down 100,000 ounces but gold was up 23.8% or 13,052 ounces.


Seabridge Gold - Unlike Motley Fool I take a bullish position on the company. Since January 6 when Motley Fool considered a plunge in the stock Seabridge Gold is up 10% after being down more than 27% over the three months prior. Why has the stock underperformed in the long term? a couple reasons stand out. The spot price for gold is down 11.0% since early September, also down is silver (-29.1%), copper (-27.5% to $3.63/lb from $4.2 in September) and molybdenum. But unlike other metal companies Seabridge's long term valuation is predicated upon development of key mines Kerr-Sulphurets-Mitchell (capital cost is $4.7B) and Courageous Lake (capital cost is $1.26B).

When those projects do reach production-stage the company could become the next Ivanhoe Mines (keep in mind that royalty company Royal Gold has already committed $160m for a 2% nsr royalty on KSM). KSM is 100% owned by Seabridge and has a 52 year mine life (adjusted up in May 2011 from 37 yrs due to reserves increasing by 27% for gold and a whopping 61% for silver) and very low cash costs ($105/yr in the first seven years). Also of note: about half of the world's molybdenum production comes from China and China has at times threatened to limit production by labeling it a "national mining resource," which limits the export of the metal in the same fashion as rare earth elements and China can do that through its control of the China Molybdenum, the country's leading molybdenum producer. Seabridge is also exposed to Molybdenum having 257 million pounds of molybdenum in reserves.

Why have investors suddenly shown more interest over the last week? On January 10, 2012 the Courageous Lake property in the NWT added approximately 1.2 million ounces of gold to measured and