MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING FRIDAY, DECEMBER 5, 1997 (2)
Saturday, December 6, 1997
Howson Tattersall Investment Counsel's Buy & Sell
Market Pullback Creates Opportunities
By SONITA HORVITCH - The Financial Post
Richard Howson, executive vice-president at Toronto-based Howson Tattersall Investment Counsel Ltd., is finding some good value in the Canadian equity market in the wake of the recent pullback.
"The problems in Asia and the consequent decline in Canadian stock prices have eliminated some of the complacency evident in the market, which is a positive development," he said.
Howson Tattersall manages the Saxon Group of mutual funds. Saxon recently launched a high-income fund to hold income trusts.
Howson specializes in smaller cap stocks and is a value manager looking for candidates that are statistically cheap. His top picks are:
Alliance Forest Products Inc. (ALP/TSE), which closed recently at $24.05 and has a 52-week trading range of $37.10 to $22.75. The Montreal-based company is a well-managed, low-cost forest products producer with operations in Eastern Canada and the southeastern U.S. The company has limited exposure to Canada-U.S. exchange rate fluctuations because about 50% of its operations are in the U.S. Management is focused on reducing the costs at its most recent acquisition, Coosa Pines mill and timberlands in Alabama. The company's book value per share is $23.65. Howson's earnings per share estimates are 95› for 1997 and $3 for 1998. Cash flow per share estimates are $2 for 1997 and $5 for 1998. "It is a cheap stock and there is no controlling shareholder."
Silcorp Ltd. (SIL/TSE) $32 ($37.25-$17.55). The Toronto-based company is the largest convenience store chain in Canada, since its acquisition of the convenience stores and dairy operations of Becker Milk Co. Ltd. at the end of last year. "Strong profit growth will stem from the integration of this purchase," Howson said. Silcorp could make further small acquisitions. Howson's earnings per share estimates are $2.75 for 1997 and $3.50 for 1998. Cash flow per share estimates are $4.50 for 1997 and $6 for 1998. Howson's two income trust selections are:
PRT Forest Regeneration Income Fund (PRTir/TSE) $6.40 ($7.20-$5.90). The fund closed an offering of instalment receipts on June 26. The first payment of $6 was due as closing, with the final instalment of $4 payable by July 10, 1998. PRT, which is based in Victoria, produces container-grown seed-lings in nurseries in British Columbia, Alberta and Saskat-chewan. It supplies major forest products companies with seedlings for the mandated reforestation, said Howson. "PRT is a major player in this fragmented industry and has built a reputation for innovation." The trust has stable, predictable cash flows with good growth prospects. Howson estimates the trust's 1998 distribution will be $1.15 a unit for an 11% yield on fully priced units.
Halterm Income Fund (HALir/TSE) $6.45 ($7.75-$6). Launched late April, the first instalment of the receipts was $6 and the final payment of $4 is due May 13, 1998.
The Dartmouth, N.S.-based trust indirectly owns the Halterm Container Terminal in Halifax, which handles international container shipping. "The flow of traffic through this terminal provides stable and growing cash flow," said Howson. He estimates the trust's 1998 distribution at $1.05 a unit for a 10% yield on a fully paid-up basis.
The money manager continues to like Toronto-based Sherritt International Corp. (S/TSE) $5.85 ($8.75-$5.60), which has operations in Alberta and Cuba, refining and marketing cobalt and nickel. Howson estimates the company has a book value per share of $7.90, including $5.05 per share in cash.
Another favorite is Woodstock, Ont.-based Nu-Gro Corp. (NU/TSE) $2.55 ($3.25-$1.90), which packages and distributes horticultural products such as potting soil and fertilizer and also markets cat litter. "It will use its low-cost position to increase its market share of the North American fertilizer market," Howson said.
His earnings per share estimate for the fiscal year to September 1998 is 32›, compared with 23› for the year to September 1997.
Howson has sold holdings of Four Seasons Hotels Inc. (FSH/TSE) $44.85 ($59.25-$24.50), which operates luxury hotels. "The stock has risen dramatically and it is no longer inexpensive."
Saturday, December 6, 1997
Seeking Diamonds In The Rough
The N.W.T. has become one of the world's most promising exploration areas By PAUL BAGNELL - Mining Reporter The Financial Post
Since 1983, Mike Senn has spent a lot of his time hunting for diamonds in the Northwest Territories. This year, he's backagain.
The veteran prospector is working for a small Vancouver-based mining junior, GMD Resource Corp., that has jumped into the diamond exploration play in the territories.
Like other diamond explorers in the N.W.T., Senn and GMD will spend the coming winter months drilling in what has become one of the world's most promising diamond exploration areas.
Each is hoping to become the next Dia Met Minerals Ltd. or Aber Resources Ltd. -- companies developing large N.W.T. diamond finds that will soon push Canada into the front ranks of world producers.
GMD holds rights to a large block of exploration claims about 250 kilometres southwest of Lac de Gras and, after completing a series of airborne surveys and samples of surface minerals, is getting ready to drill holes for the first time.
Like all early-stage mineral exploration, it's a long shot. But Senn believes the presence of several "indicator minerals" on the surface points to at least two nearby kimberlite pipes, the volcanic rock formations that can host diamonds.
GMD is pinning its hopes on Senn's belief that the mineral fragments' large size, jagged edges and the presence of coating on their surface are signs they were not carried far by glaciers that passed over the kimberlites they came from. "These characteristics are found within 10 kilometres of the primary source."
The company can also take inspiration from the experience of other diamond players this year. Shares in another exploraton junior, Winspear Resources Ltd., shot up to more than $4 from 80› last fall and winter. Its shares have since declined to $1.
And BHP Diamonds Inc. is developing the Ekati mine to exploit the now-famous Dia Met discovery of 1991. Geologist Chuck Fipke, after years of following trails of indicator minerals for 600 km across the N.W.T. found a spectacular diamond-laden kimberlite pipe near Lac de Gras, about 300 km northeast of Yellowknife.
Aber grabbed a large property immediately to the southeast of the Dia Met lands and began exploring.
In 1994 and 1995, it found four kimberlite pipes, discoveries that most experts say trump the Dia Met find. Two of those pipes are considered the richest diamond deposits in the world, measured in terms of the per-tonne value of kimberlite rock. A third pipe ranks 13th in the world, the company says.
At the time, GMD's Senn was working on the project on behalf of Kennicot Exploration Co., Aber's partner in the venture.
Aber, in a joint venture with Rio Tinto PLC of London -- Kennicot's parent -- is expected to develop the N.W.T.'s second diamond mine.
The Dia Met-BHP mine is to begin production in October next year, but the timetable of the Aber-Rio Tinto mine is less clear. Aber says it is aiming for production in 2001, but the project must gain environmental approvals, a process that took two years in the case of the Ekati mine.
Aber's pipes are beneath Lac de Gras, making mine development -- and perhaps environmental approval -- a tougher task.
"These two mines would put Canada in sixth place in world diamond production and account for about 10% of production," says John Hainey, an analyst at Yorkton Securities Inc. in Toronto who has followed the N.W.T.'s diamond play closely.
Ekati and Diavik will generate about US$1 billion a year in total revenue, he estimates. "These are very rich mines by any standard."
The stock market, however, has been decidedly cool to both companies of late. Shares of Dia Met (DMMb/TSE) closed Friday at $24.20, down 5›, after reaching a two-year high of $32.15 in mid-October.
Aber's stock (ABZ/TSE) has fared worse, falling from a high of $28 in March to $12.50 Friday, unchanged.
Hainey says the low share prices offer value to investors and has "buy" recommendations on both stocks.
He characterizes Dia Met as a fairly low-risk investment, now that mine production is on the horizon.
"The levels of earnings and cash flows we're projecting would suggest a share price above $35 as it gets closer to production," he says.
Aber's stock price has fallen, he says, largely because investors have realized there is still a long wait ahead before production at Diavik actually begins.
John Kaiser, a California-based analyst, agrees. "Aber has great pipes, but they're in Lac de Gras. It's going to be a permitting nightmare. I would say we are looking at a permitting cycle of three to four years. So it could be five or six years before this mine is in production."
Michael Jones, Aber's vice-president of corporate development, says the firm believes it can start production by 2001. It will submit a formal project proposal, marking the start of the approval process, in the first quarter of 1998.
Shares of Dia Met, Kaiser notes, took a sharp dive during the period its project was being scrutinized by environmental panels.
In the shorter term, Hainey says, diamond stocks are likely to move up during the winter months, simply because of a seasonal bounce they experience when exploration activity increases. That trend has made itself clear during each of the past five years, he says.
Since lake beds are common sites for diamond exploration, many drilling projects are scheduled for months when lakes are frozen.
Hainey is recommending investors buy a basket of diamond exploration stocks soon, in the expectation of gains between now and the end of the first quarter of 1998.
"By then, interest wanes and the stocks go back down again."
Among juniors exploring in the N.W.T., most attention is focused on Mountain Province Mining Inc., a Vancouver-based company that has found four rich kimberlite pipes on its property near Lac de Gras, and is planning bulk sampling programs on each. Mountain Province is partnered with a subsidiary of De Beers Consolidated Mines Ltd.
Both Hainey and Kaiser are keen on this junior. "Mountain Province shares have the potential to double over the next year as we get bulk sample results," Kaiser says.
As for the rest of the exploration juniors -- companies like GMD, for instance -- Hainey and Kaiser say there is little to distinguish one from another.
"The rest are pretty well exploration situations that are purely speculative -- only for the high-risk, high-reward investor," Hainey says.
Investors buying these stocks should select more than one to dilute their risk, he says.
OIL & GAS
December 5, 1997
Oil Prices Edge Higher After Iraq Halts Oil Shipments
Oil futures prices edged higher Friday after Iraq halted oil exports until the United Nations approves a new distribution plan for its oil-for-food program.
Light sweet crude oil for delivery in January settled at $18.71 per barrel, up 11 cents on the New York Mercantile Exchange.
The U.N. Security Council on Thursday renewed the oil-for-food program for a third time, allowing Iraq to sell $2.1 billion in oil over six months to buy food and medicine for its people.
The program is an exception to U.N. sanctions that were imposed after Iraq invaded Kuwait in 1990.
But Iraq has repeatedly expressed dissatisfaction about delays in actually being allowed to buy goods, and said it won't ship oil again until those concerns are addressed.
U.N. officials and Arab diplomats said that probably means a delay of about a month - three weeks for Iraq to submit the distribution plan and a week for the United Nations to review it.
The absence of Iraq's oil would reduce the amount of oil arriving on world markets by about one per cent.
In London, North Sea Brent blend crude oil for delivery in January settled at $18.13 a barrel, up 13 cents, at the International Petroleum Exchange.
December 5, 1997
US Foreign Crude - Clutch Of Latam Tenders Awarded
U.S. foreign crude traders digested the results of a handful of Latin American tenders on Friday which should set the pace for next week's spot trading.
Sour markets have been paralyzed in recent days in the run up to the award of three term contracts for Ecuador's high sulfur Oriente grade.
State-owned Petroecuador awarded the one-year, 12,000 barrels per day (bpd) contracts at a premium of 40 to 41 cents to the minimum bid price of $4.88 under WTI at Cushing, traders said.
"It's a very strong price and it will certainly set the tone for other sour trade, but I don't think these levels reflect the fundamentals...there's no shortage of sour at the moment," said one trader.
Tripetrol and its Ecuadorean subsidiary Totisa were heard to have won a contract each, while there was uncertainty in the market over who was awarded the third.
Some traders speculated that Petroecuador had in fact received enough strong bids to award four contracts, but this could not be confirmed with the company.
Tripetrol and Totisa were first awarded contracts last week at a premium of 39 cents, but these were withdrawn by Petroecuador because of a technicality over financial guarantees.
A tender for a January 9-13 cargo of Colombia's sweet Cusiana grade was awarded at a discount of between 45 and 50 cents to February WTI, fairly steady on the last deal done for a cargo loading on the December/January cusp.
The last December Cusiana to find a home, a 29-30 loader was being actively offered on Friday but no deal was heard done.
A cutback in production at the Cao Limn field to 100,000 bpd from normal levels of 175-180,000 bpd was not expected to affect liftings at the Caribbean export terminal at Coveas due to high storage levels.
A rebel attack on two electricity pylons supplying the field caused the cutback, but a spokesman for field operator Occidental Petroleum said normal output should be resumed in two to three days.
No winner was heard in a tender for Colombia's minor South Blend grade, which loads on the Pacific and is usually taken by West coast refiners.
"It's a mystery, I think (state oil firm) Ecopetrol may keep it if they didn't get a high enough bid," one player said.
A buy tender from Chile's ENAP for a 960,000 barrel cargo for mid-January delivery will be supplied by a European oil company with West African crude, an ENAP official said. But he declined to give further details.
Interest in West African grades in the Americas has waned in recent weeks due to a narrow Brent/WTI spread which on Friday was still stuck at a lean 60 cents.
Nevertheless, one trading company was still heard touting cargoes of Nigerian Forcados, Qua Iboe and Brass River.
Also on offer in the Gulf was a cargo of Argentina's Canadon Seco for mid-January delivery at $1.10 under WTI on an fob basis.
December 5, 1997
Late Short Covering Lifts Most NYMEX Gas Contracts
NYMEX Hub natgas futures mostly ended higher Friday in a moderate session, with a late wave of short covering ahead of the weekend lifting most contracts into positive ground though many remained bearish.
January eased 0.3 cent to close at $2.453 per million British thermal units after dipping below support this afternoon to $2.38. February settled 0.2 cent higher at $2.399. Other months ended up by one-half to one cent.
"The rally at the end was just some pre-weekend short covering. I think we'll see more pressure next week. The jet stream goes flat next week which should mean no really cold air down here," said one Midwest trader.
Sources said growing concerns about the year-on-year storage surplus coupled with the lack of sustained Arctic air has helped fuel bearish sentiment.
"People are coming out of the ground real hard and that's what's pressuring us," said one Texas-based trader, referring to reports storage holders were looking to trim stocks early in the season.
Weather Services Corp expects below-normal temperatures for much of the U.S. ove the weekend, but milder weather is forecast by early next week.
Chart traders said the technical picture turned bleak early this week when a January rally attempt stalled and prices subsequently dove through some key support points in the face of fairly mild extended weather forecasts.
They pegged support in January at today's low of $2.38, with next support seen at $2.25, which is the low for January this year. Resistance was seen at the $2.81 double top from early this week and then at $2.84, with better selling expected at $3.03, 3.11 and then at $3.21.
In the cash Friday, weekend Gulf Coast quotes were down a nickel or more to the high-$2.30s. Midcon pipes were little changed in the mid-$2.20s. New York city gate gas slipped almost a dime to the low-$3s.
The NYMEX Henry Hub 12-month strip edged up one-half cent to $2.286. NYMEX said an estimated 41,741 Hub contracts traded,
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