CANADIAN MINING NEWS
David Kearnes - Canaccord Capital - Morning Coffee
CANADA
The S&P/TSX Composite fell the first time in three days, led by banks and
insurers, on concern government aid won’t be enough to revive financial
companies’ earnings. Toronto-Dominion (TD) and Bank of Nova Scotia
(BNS) joined a decline in European lenders after Royal Bank of Scotland
Group (RBS) in London forecast a full-year loss of as much as US$41
billion. The U.K. said it may raise its stake in RBS and announced the
second bank rescue in three months.
Losses in the market were limited as Research In Motion (RIM). The
maker of the BlackBerry smart phone, rose for a third day.
Suncor Energy (SU) retreated as crude oil futures fell in electronic trading
on forecasts that faltering global economic growth will drive down fuel
consumption for a second year, as well as signs of a resolution of a gas row
between Russia and Ukraine and after a ceasefire between Israel and
Hamas in Gaza eased supply concerns.
Canada will offer previously announced aid funds to domestic automakers
if they need liquidity and meet conditions, Canadian Industry Minister
Tony Clement said on Monday. Clement, who said more auto-sector
announcements will be made around the time of next week’s federal
budget, also said Canada will make a $350 million capital investment in
the Business Development Bank of Canada.
The Bank of Canada will make its interest rate announcement today.
Economists expect the target for the key overnight rate to be set at 1.0%,
down from 1.5%.
S&P/TSX Composite (TSX : 8841.48), Net Change: -78.92, % Change: -0.88%
We have a dream of matching U.S. holidays. The TSX Composite turned down for the first time in three sessions on low
volume while the U.S. market was closed for Martin Luther King Jr. Day. As all Canadians know, when the U.S. players are
holiday, our market tends to slow right down. So, it is not much surprise that, according to Bloomberg, foreigners decreased
their holdings of Canadian stocks and bonds in November. According to Statistics Canada, International investors sold a net
$4.3 billion worth of Canada's securities, the fourth net sale in five months. A net of $3 billion was removed from stocks. You
will recall that as ugly as the U.S. stock market performed last year, non-U.S. markets performed worse (especially overseas).
Investors, including a lot of hedge funds that were playing the yen carry-trade, dumped their rupee denominated investments in
India, their rubble-denominated investments in Russia, etc. Many of these investors (such as hedge funds) had to sell these
investments against their will to meet margin calls or to pay back the likes of Lehman Brothers, who were no longer solvent or
individual investors who demanded their money back. This massive move of cash moving back to America helped send the U.S.
dollar surprisingly higher. It was less a bet on the U.S. dollar and more a simple function of geography as money was repatriated
home. The fact that Canada's stocks and bonds were sold by foreigners (we presume mostly Americans) partly explains why our
stocks and currency was so battered.
Oil Futures Feb. '09 (OILC : NYMEX : US$34.60), Net Change: -1.91, % Change: -5.23%
Hope floats. Goldman Sachs is back to pounding the oil table, as its commodity analyst Jeffrey Currie said he expects a "swift
and violent rebound" in energy prices in the second half of this year. It is true, Goldman famously called for $200 oil when
prices were well past $100. But this firm's traders are regarded by some as having played a major role in manipulating oil prices
higher and, if it is true, would suggest they could put the upward pressure back on at some point. Goldman is saying it expects
oil to rise to $65 by the end of the year and that a "new bull market" can emerge despite their expectations of world demand
falling by 1.6 million barrels per day this year. The International Energy Agency doesn't even expect that much of a drop,
calling only for 500,000 barrel per day decline (0.6%). Though the market is currently in contango (distant prices are higher
than current prices), the differential should flatten as OPEC cuts near-term production. For the time being, the contango is so
pronounced that Morgan Stanley (MS) and Citigroup (C) each hired an oil tanker to store crude oil in the Gulf of Mexico.
Buy it today and then turn around and short futures contracts at higher prices. Then, store the physical that you bought and
eventually deliver the oil to your futures contract counterparty when the contract's conclusion date arrives.
Canadian Oil Sands* (COS.UN : TSX : $19.09), Net Change: -0.96, % Change: -4.79%, Volume: 1,337,133
Crescent Point Energy * (CPG.UN : TSX : $22.99), Net Change: -0.21, % Change: -0.91%, Volume: 184,934
Harvest Energy Trust* (HTE.UN : TSX : $11.26), Net Change: 0.01, % Change: 0.09%, Volume: 96,837
Got prudence? It’s that time of year again: the time when oil and gas companies start reporting Q4 and full-year results, along
with year-end reserves. Financial prudence will be the name of the game for 2009, and we believe the best positioned trusts will
be those that focus on cost control and minimizing the amount of new debt added by ensuring capital expenditures and
distributions are funded with cash flow. Overall, we believe most of the energy trusts are relatively well positioned to fund their
respective 2009 capital programs while maintaining strong balance sheets. However, we note that this could come at the
expense of distributions should commodity prices remain weak for an extended period of time. While the market typically
responds negatively to distribution cuts, we believe most investors realize the severity of the situation and accept that such
actions are necessary and prudent at this time. As it stands right now and based on Canaccord Adams forward strip analysis,
Canaccord Adams Energy Trust Analyst Kyle Preston believes Enerplus (ERF.UN), NAL (NAE.UN) and Daylight
(DAY.UN) are in the best position to maintain distributions without compromising their balance sheets. Preston says the trusts
at greatest risk of having to cut distributions in the near term are Canadian Oil Sands, Harvest Energy and Crescent Point.
Denison Mines* (DML : TSX : $1.69), Net Change: 0.15, % Change: 9.74%, Volume: 3,762,655
Paladin Energy* (PDN : TSX : $2.68), Net Change: 0.21, % Change: 8.50%, Volume: 2,482,853
Uranium One* (UUU : TSX : $2.32), Net Change: 0.24, % Change: 11.54%, Volume: 11,432,418
Is it gimchi or kimchee? According to a Chosun Ilbo (The Korean Daily News) article as reported by Bloomberg, Korea
Resources Corp. (KORES), is in talks to buy a stake in Uranium One for as much as $1 billion. While the Bloomberg report
mentioned Uranium One directly, other reports only said KORES was looking to acquire a "small to mid-sized uranium
company" and this may have lead to strength in other uranium names like Denison and Paladin. KORES President Kim Shin
Jong vowed last weekend to bring the state-run company into the ranks of the world's top 20 mining and resource development
companies by investing heavily in uranium and copper mines in Africa and South America. Kim said it was embarrassing for
Korea to be entirely dependent on imports of uranium, even though it is among the world's top six atomic power generating
countries. He said KORES was in talks to acquire a small to mid-sized uranium company for around $1 billion. Canaccord
Adams Metals & Mining Analyst Orest Wowkodaw says Uranium One is a growing, undervalued, low-cost producer with a
healthy balance sheet. With the recent closure of its troubled Dominion operation in South Africa, the company is focused on its
Kazakh assets. Wowkodaw believes the company has effectively "cleaned house" and reset market expectations at an
achievable level. The company is currently trading at 45% discount to Canaccord Adams' 10% NPV of $3.70 per share, which
compares with our uranium coverage universe average of a 33.3% discount to NPV. The uranium market has experienced an
extraordinary boom/bust cycle during the past three years, driven largely by speculators in a relatively illiquid market on the
way up, and subsequently depressed by the distressed selling of physical material by hedge funds on the way down. In our
opinion, the uranium market has now come full circle. Going forward we anticipate that market supply/demand fundamentals
will once again become the largest influence on pricing. Longer term, uranium fundamentals appear extremely encouraging.
HudBay Minerals* (HBM : TSX : $3.59), Net Change: -0.01, % Change: -0.28%, Volume: 869,489
Lundin Mining* (LUN : TSX : $1.23), Net Change: -0.08, % Change: -6.11%, Volume: 3,982,509
Double, double? According to the Globe & Mail, Ontario Teachers' Pension Plan (OTPP) is lobbying the TSX, to change
regulations that will allow HudBay to double its share count for the $500 million Lundin Mining acquisition without the
approval of shareholders. Teachers' says that such a dilutive share issue would need majority support from HudBay's
shareholders if the company's primary listing were on the NYSE, LSE or in almost any other jurisdiction. TSX does not allow a
company to issue more than 25% of its stock to buy a privately held company without shareholder approval. However, the TSX
does allow such dilution for the purchase of a publicly traded company. The NYSE requires companies to hold a shareholder
vote for transactions requiring a company to issue more than 20% of its stock. The LSE requires shareholder approval for a
transaction exceeding 25% dilution. Moreover, HudBay is facing two separate legal challenges this week: 1) HudBay's largest
shareholder, Monaco-based hedge fund SRM Global Master Fund LP, which owns 11% of HudBay's shares, has joined forces
with Texas-based, Corriente Master Fund LP to challenge the Lundin deal in Ontario court, the case is slated to be heard this
Friday to determine whether HudBay has "oppressed" its shareholders by conducting the Lundin takeover without their
approval; and 2) Jaguar Financial (JFC), has appealed to the Ontario Securities Commission (OSC) to force HudBay to give
shareholders a vote on the deal. The OSC hearing was scheduled for yesterday and at the time of this writing, no judgement had
been delivered.
Osisko Mining (OSK : TSX : $3.50), Net Change: 0.25, % Change: 7.69%, Volume: 180,059
The Osisko Kid Returns. Osisko, the Quebec-focused gold explorer, announced the results from the definition drill program
currently under way at South Barnat, a separate gold mineralized zone located northeast of the Canadian Malartic deposit.
Significant drill intersections include 2.00 g/t Au over 182.4 metres (BA08-3233), 2.76 g/t Au over 108.7 metres (BA08-3219)
and 2.17 g/t Au over 158.5 metres (BA08-3242). Higher grade intersections include 4.13 g/t Au over 37.5 metres (BA08-3221),
3.68 g/t Au over 37.0 metres (BA08-3231H) and 3.87 g/t Au over 51.3 metres (BA08-3243). Drilling to date suggests that the
minimum strike length of the South Barnat Zone is 850 metres with an average true width between 30 and 120 metres. The
mineralized zone is open along strike to the east, where it merges with the old East Malartic Mine and where recent drilling has
indicated a possible extension over an additional 360 metres. South Barnat extends to depths of 250 to 400 metres in the
southeastern portion, where the system is still open at depth. Estimated depth in the northwestern third of the deposit is 130 to
200 metres. Osisko released a NI 43-101 compliant, 6.3 million ounce gold Reserve estimate and Feasibility Study on the main
Canadian Malartic gold deposit on November 25, 2008. The company noted that this estimate does not include the South Barnat
Zone or any other mineralized zone located outside the main deposit that is currently being evaluated by Osisko.
THE LAST DROP: Not to blow my own horn, but I recognized the dangers inherent with Fannie Mae and Freddie Mac and
asked Congress to regulate them.
– Former President George W. Bush
1stSearchRanking.com."
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