SUNDAY REVIEW / Korner's Review Of Canadian Markets & O&G Related (2)
Despite Warnings Of Oracles, Bread-And-Circuses Prevail
Stocks To Watch
Saturday, January 9, 1999
GUY DIXON Investment Reporter - The Globe & Mail
One year before the millennium, with stock prices soaring, The Wall Street Journal has come out with a new ad campaign, which shows a mock front page from Jan. 1, 1000.
The stories, in the Journal's familiar format, chronicle such late-breaking stories as the Viking slave trade, the commodity market in Asian spices and Roman Empire interest rates.
The joke, of course, is how much this has in common with today's markets.
The stock market in 1999 has entered a bread-and-circuses phase.
The mutual-funded populace remain happy and content, pouring money into stocks, which continue to rise on Bay and Wall streets, despite many of the warnings from financial oracles.
U.S. Federal Reserve Board vice-chairwoman Alice Rivlin returned to her understated comments about the stock market's high valuations, the same type of subtle warnings she gave back in May about the sustained bull-market run.
Perennial stock market bull, Goldman Sachs & Co. strategist Abby Cohen, even seemed to join the disbelievers with her recommendation to clients that they lower their stock exposure to 70 per cent of their portfolios from 72 per cent.
But stocks kept rising, albeit after a brief respite Thursday.
Commodity prices continued to edge off their debilitating lows this week, easing many investors' phobia for resource stocks and the Canadian dollar.
Major gainers included nickel miners Inco Ltd. and Falconbridge Ltd., profiting from some production cuts in the nickel industry, and numerous gold companies from Barrick Gold Corp. to Euro-Nevada Mining Corp. Ltd., benefiting from the week's 1.1-per-cent increase in the price of gold.
On the Toronto Stock Exchange, the sub-index for metals and minerals was the week's biggest gainer with a rise of more than 13 per cent, while the sub-index for gold and precious minerals posted a respectable rise of just over 7 per cent.
Oil and gas stocks benefited from the winter mayhem across much of Canada this week. While U.S. investors were a little unsure how long the snow would keep falling and oil stocks would keep rising, Canadians seemed to recognize a good storm when they saw it.
News that Kuwait is calling for a February meeting of the Organization of Petroleum Exporting Countries to discuss production cuts was also good news for oil stocks, as was the American Petroleum Institute's report Tuesday of a large drop in U.S. crude inventories. Toronto's oil and gas sub-index rose nearly 8 per cent during the week.
Meanwhile, the market was also fuelled by widespread speculation of mergers just around the corner, particularly among auto makers. Rumours ran rampant of Ford Motor Co.'s potential interest in Honda Motor Co. Ltd. or Bayerische Motoren Werke AG (BMW), and Volvo AB's rumoured search for a suitor.
The stocks of major auto makers, General Motors Corp. included, also surged on high expectations for 1999, despite a mess of new models rolling out of factories, filling dealers' lots.
Many of the marriage partners are European. The new euro, now one week old, is likely to induce more price competition and consolidation for the foreseeable future. Stock pickers across the pond see the first wave of mergers heavily affecting auto makers, banks and business-service companies.
But many market watchers still caution that this spate of good news may only be temporary, the week's gains a product of the masses' short attention span. Even with news that Canada's jobless rate hit a nine-year low in December and U.S. unemployment touched its 28-year low, economists still see the economy slowing significantly this year.
The oracles have spoken.
Wireless communications are once again getting a positive reception from investors, as Clearnet Communications Inc. and other wireless-network companies in Canada gained on merger expectations. Rogers Communications Inc. reported good subscriber numbers in its mobile-phone business, and the company could team up again with AT&T Canada Corp., which is entering the local telephone market. In addition, the wireless market continues to grow and consolidate worldwide, adding speculation about Canada. Stay tuned.
Surging Nickel Prices Boost Base Metal Miners
TSE index jumps 7.4% as investors bet on rebound
Saturday, January 9, 1999
ALLAN ROBINSON - Mining Reporter - The Globe & Mail
The shares of base metal mining companies took off like a bullet yesterday, triggered by a surge in nickel prices.
The Toronto Stock Exchange's metals and minerals index jumped 7.4 per cent or 240.19 points to close at 3,483.50.
The shares of nickel producer Inco Ltd. rose $2.55 (Canadian) to $19.85 on the Toronto Stock Exchange. The shares of rival Falconbridge Ltd. gained $1.40 to $19.10.
Other base metals such as copper, lead, zinc and aluminum also rose yesterday on the London Metal Exchange.
Those moves helped send the shares of copper producer Rio Algom Ltd. up $1.20 to $17.65, Alcan Aluminium Ltd. $2.85 to $46, Cominco Ltd. $1.20 to $19 and Noranda Inc. $1.20 to $18.15.
Investors are betting that low interest rates and government economic stimulus packages around the world will eventually allow depressed commodity prices to reflate, analysts say.
There is also bargain hunting going on. The base metal shares look cheap compared with many other sectors, having languished for about two years. Only recently some metal prices touched their lowest levels in more than a decade.
"Where are you going to get a return in 1999?" said Catherine Gignac, a mining analyst with Dundee Securities Corp. Investors are looking ahead 18 months to two years in anticipation of a recovery. "This [market action] is not looking for an immediate turnaround in the metal markets."
But the shares were helped yesterday by a sharp rally in nickel despite fears of industry overcapacity. On the LME, nickel jumped 14 cents (U.S.) a pound to $1.98, adding to Thursday's 8-cent-a-pound increase. Analysts attributed the move to short covering by metals traders.
That two-day, 12.5-per-cent surge, to its highest price in five months, was in reaction to production cutbacks at a smelter in Australia for maintenance and the closing of a facility in Greece because of low nickel prices.
WMC Ltd., the largest nickel producer in Australia, said it has shut its Kalgoorlie smelter for 70 days of maintenance, after having closed three of its seven mines because of low nickel prices.
The slumping industry has been hurt by reduced demand for stainless steel in Japan and Asia. The stainless steel industry accounts for about 70 per cent of nickel consumption.
"The market looks in much better shape than it did at the end of last year," Jim Lennon, an analyst at Macquarie Equities Ltd. in London, told Bloomberg News. "People were looking at a surplus of 30,000 tons to 40,000 tons. We're down to 10,000 tons now."
But worries remain. "The world is still awash in commodities, particularly base metals and gold," said Alastair McIntyre, director of precious and base metals trading for ScotiaMocatta, the metals trading arm of Bank of Nova Scotia. "Any signs of nervousness out of Brazil and Japan could cause commodities to retreat."
It was a "mini-euphoria," Mr. McIntyre said of yesterday's commodity price moves. "It would be nice to see the commodity price moves sustained," said Dundee Securities' Ms. Gignac.
More from The Financial Post
Metal Stocks Make Giant Stride On TSE
Demand remains weak: Sustained rally not likely, given sector fundamentals
Metals and minerals on the Toronto Stock Exchange soared yesterday in their biggest one-day rise in more than a decade, but analysts caution that a sustained rally is unlikely in light of the sector's current fundamentals.
Alcan Aluminium Ltd. and Inco Ltd. were the two largest components of the rally, sending the TSE metals & minerals subindex up 240.19 points, or 7.4%, to 3483.5.
This is the second largest one-day rise in the index's history, with the biggest being a 7.9% gain on Oct. 21, 1987. In the other direction the subindex dropped 6.7% exactly 11 years ago yesterday.
News that the world's largest aluminum producer, Alcoa Inc. (AA/NYSE), reported a 23% rise in fourth-quarter earnings helped Alcan's stock (AL/TSE) gain $2.85, or 6.6%, to $46. Alcoa is splitting its stock two for one on Feb. 25. Also, Merrill Lynch & Co. metals analyst Daniel Roling upgraded his intermediate term rating on the shares to "accumulate" from "neutral".
However, the price of aluminum for three-month delivery on the London Metal Exchange ticked up a mere 0.4c (US) a pound to 56.1c (US), which is only slightly higher than the metal's 52-week low.
Inco (N/TSE) rose $2.55, or 14.7%, to $19.85 as the spot price for nickel jumped 6% to $1.97 (US) a pound because of expectations production cutbacks at WMC Ltd.'s smelter in Australia and Larco in Greece will reduce a surplus of the metal this year. WMC is the world's largest nickel producer.
Patricia Mohr, vice-president economics at Bank of Nova Scotia, said although these cutback announcements led to some covering of short positions in nickel markets, they are "only temporary, especially in the case of WMC, so you can't count on this to boost the price for the remainder of the year."
Nickel prices have been hovering around 11-year lows, but in the past month have rebounded by as much as 16%. Ms. Mohr said the most important factor in the recent rise is that "prices have been so low and they can't go too much lower."
WMC has already been forced by low prices to shut down three of its seven mines, which represents production cutbacks of about 10,000 tonnes a year.
The average Western World production cost, including smelting and refining, is a "little above $1.75 (US) a pound," said the economist.
And she added that depressed prices are more a result of weak demand than a glut in supply.
"A big recovery in nickel prices is waiting for a recovery in stainless steel [demand] in the Far East market," said Ms. Mohr.
Analysts say stainless steel producers account for upward of 60% of world nickel consumption.
In 1998 Western World nickel consumption sagged 4.5%, whereas mine production dropped, but not to the same degree, said Ms. Mohr.
Fraser Phillips, a metals analyst at Deutsche Bank Securities Inc., said investors should "expect a very modest improvement in nickel prices, at best, over the next couple of years."
Total inventories at the LME and elsewhere are about 180,000 tonnes, said Mr. Phillips. "This is 25% above what would have been historically critical levels, levels that supported high prices."
But higher prices are unlikely, because he's not expecting to see a "sharp consumption recovery" any time soon.
Canadian 1998 Merger Pace Slows, Value Hits Record
The torrid pace of Canadian mergers cooled in 1998 although several huge deals pushed the dollar value of activity to a new record.
According to a report by investment bank Crosbie & Co. Inc., released on Friday, the number of announced deals in 1998 slipped 9 percent to 1,162 from 1,276 the year before. But their hefty C$148.1 billion value was 47 percent ahead of 1997's record-breaking C$100.9 billion because of a number of large transactions.
Seagram Co. Ltd.'s (VO.TO) C$15 billion buyout of Philips Electronics NV (PHG.AS) unit PolyGram led the mega-merger parade, followed closely by NOVA Corp's union with TransCanada PipeLines and its subsequent C$3 billion spinoff of NOVA Chemicals (NCX.TO). Crosbie said most of the big deals highlighted the trend toward industry consolidation or extension.
"The deals of 1998 send a message that bigger is better and clarity of focus is more and more important," Joe Wright, managing partner of Crosbie & Co., said in the report.
He said that the reshaping of companies acquired in the recent large-scale mergers of related companies should generate follow-on activity.
"Nova's sale of NOVA Chemicals and Loblaw (Cos Ltd.'s) <L.TO> sales and purchases around their Provigo (Inc.) (PGV.TO) acquisition are certainly examples here," Wright said.
Canada's largest grocer, Loblaw, acquired Quebec-based supermarket chain Provigo last year for C$1.78 billion. It agreed to grant another Quebec grocer, Metro-Richelieu Inc. (MRUa.TO), an option to buy the Ontario supermarkets of Provigo's Loeb division and certain smaller retail stores.
The industrial products group spawned the greatest number of transactions. There were 299 deals, up 22 percent from the year-ago period, worth a total C$26 billion, an increase of 259 percent over 1997's C$7.2 billion.
The second most active group was consumer products, where there were 129 mergers or acquisitions announced, a 3 percent rise from 1997. The value of consumer products deals was a close third behind utilities, with a total of C$25 billion, a 159 percent increase over the C$9.6 billion of 1997.
The second-largest dollar volume of deals was in the utilities group with C$25.3 billion, a huge jump from the C$1.5 billion inked in 1997.
Real estate deals fell 45 percent with 95 announced, compared with 173 the previous 12 months. Dollar value rose 27 percent to C$12 billion from C$9.4 billion.
Canadian Technology Stocks Lag U.S. Peers
Saturday, January 9, 1999
ANGELA BARNES - Investment Reporter The Globe & Mail
Technology stocks were all the rage south of the border last year, but certainly not north of it.
However, market watchers have comforting words for long-suffering Canadian technology stock investors -- that sector should do better this year.
In 1998, the Report on Business/Bloomberg TechDex of 129 companies rose slightly more than 1 per cent, which looks good against the performance of the broader Toronto market. The Toronto Stock Exchange 300-stock composite slipped 3.2 per cent.
But any way you measure it, that performance looks pretty miserly compared with the gains racked up by U.S. technology stocks. The technology-laden Nasdaq Stock Market composite surged almost 40 per cent.
Market watchers say a better measure is the Pacific Exchange Technology Index, which did even better than the Nasdaq, soaring more than 43 per cent and making the TechDex's performance look that much worse.
(The Pacific Exchange index, like the TechDex, does not weigh stocks by market capitalization. The Nasdaq composite is market-cap weighted and so is heavily influenced by a handful of big name stocks.)
However, that doesn't mean there wasn't big money to be made in some Canadian tech stocks. Teklogix International Inc., which manufactures wireless data communications systems, captured top spot in the ranking of all TSE-listed stocks by soaring 463 per cent last year. Teklogix, which is a favourite with analysts, soared from $3.25 to $18.30 over the year, helped by strong earnings. That took it within spitting distance of the $22 it traded at in 1997.
Next up in the winners column was Glyko Biomedical Ltd., whose shares soared 440 per cent. That also netted it second place among the TSE's best performers last year. Shares of Glyko, which has developed technologies for analyzing carbohydrates, were changing hands at $1.25 at the end of 1997 and ended 1998 at $6.75.
And then there was Mpact Immedia Corp., an electronic commerce software and service firm, whose shares skyrocketed to $13.85 from $3.20.
But conversely, there were others whose performances would make any investor cringe. Lava Systems Inc., which was in the business of developing document-based application solutions, says it will cease operations now that most of its assets have been sold by a receiver. Lava shares began 1998 at $1.30.
Ibex Technologies Inc., which develops enzymes for therapeutic applications, saw its shares hammered in July after reporting adverse test results for its heart-bypass surgery drug, Neutralase, and they never recovered. The stock closed at 60 cents, down from $3.25 at the beginning of 1998.
Odds are Canadian technology stock investors will have better luck this year, analysts say.
Duncan Stewart, portfolio manager of Tera Capital Corp., says he expects Canadian technology stocks -- whose performances normally track their U.S. counterparts much more closely than they did last year -- will rally quite nicely in 1999.
Moreover, he thinks small-capitalization issues are more likely to lead the way than such big names as Northern Telecom Ltd., Newbridge Networks Corp. and BioChem Pharma Inc.
"The semiconductor stocks should do quite well," he said. So too should the biotechnology issues, he thinks.
Mark Lawrence, director of CML Capital Ventures Inc., is also optimistic on the outlook.
"I think you will see better than 1998 returns for the sector," he said. He suggests investors take a look at the stocks, seeking out situations where a company's strong fundamentals aren't reflected in its stock price.
Many Canadian issues trade at a significant discount in terms of price/earnings multiples to their U.S. companies in the same business, he said. For example, Markham, Ont.-based Geac Computer Corp. Ltd. trades at about a 15 times multiple, while PeopleSoft Inc., which has its headquarters in Pleasanton, Calif., carries a multiple of almost 40 times. Yet Geac has the potential over the long term to show annual earnings growth of about 30 to 40 per cent, Mr. Lawrence said.
"Part of the problem is that Geac does not have a U.S. [stock] listing," he said. But some high-profile Canadian issues do and they still seem to lag U.S. issues.
Last year, Canadian tech stocks had a number of things going against them -- not the least of which is their domicile in this country.
"The Canadian market was underweighted by the rest of the world," Mr. Stewart said. Some offshore investors didn't discriminate between resource stocks, which were suffering because commodity prices were tumbling, and other Canadian issues, which weren't.
The fact that many Canadian technology stocks aren't very liquid also hindered them in a market where large caps were the favourites with money managers who search out liquid stocks they can get in and out of quickly, Mr. Lawrence said.
And there is the simple fact that the Canadian issues didn't have the momentum behind them that their U.S. counterparts did. The momentum was especially noticeable with Internet stocks like America Online Inc. and Amazon.Com Inc., around which there has been what some have called a feeding frenzy. There are only a few Net stocks in Canada.
BEST AND WORST ROB/BLOOMBERG TECHDEX STOCKS
Top 10 stocks in 1998 To Dec. 31, 1998
Teklogix International------------- +463.1%
Glyko Biomedical Ltd------------ +440.0
Mpact Immedia Corp------------ +332.8
Corel Corp----------------------- +165.2
CGI Group Inc------------------- +159.7
Teleglobe Inc--------------------- +152.9
TLC The Laser Center Inc-------- +135.2
QLT Phototherapeutics Inc------- +121.3
ATI Technologies Inc------------- +110.9
Metronet Communications Cp. B- +110.7
Bottom 10 stocks in 1998
PLD Telekom Inc----------------- - 62.6%
Allelix Biopharmaceuticals Inc----- - 63.6
Certicom Corp-------------------- - 65.5
Microforum Inc------------------- - 68.1
Xillix Technologies Corp---------- - 68.3
Spectral Diagnostics Inc----------- - 70.0
Lumonics Inc---------------------- - 71.8
Com Dev International Ltd-------- - 74.4
Ibex Technologies Inc------------- - 81.5
Lava Systems Inc----------------- - 88.5
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