Good afternoon.
In the Market Update that we are sending to our friends and clients, we are including Ed Sterck's comment on Uranium stocks; a link to a YouTube videoof the blast at the Fukushima reactor; the latest BMO Gold & Silver Pages; a link to a piece by Eric Sprott on "Debunking the Gold Bubble Myth" and lastly, an excellent report by RBC on the "Value Trap" in Gold stocks.
Summary ofDon Coxe's most recentConference Call - Key Takeaways:
For our readers who follow Don Coxe...First, in Dons opinion, the impact of the earthquake in Japan on the global economy/market should becontained. There may, however,be implications for individual names andthe following sectors:
- The outlook for nuclear stocks (e.g. uranium, select engineering companies) could take a hit. Note that all the uranium stocks are being pole axed today. The blast at the Fukushima Nuclear Plant may also prove negative for engineering stocks levered to the construction of nuclear plants. Conversely, it may benefit coal and natural gas, as well as engineering names levered to LNG, because Japan is not self-sufficient in natural gas.
- Base metals and steel producers may benefit temporarily as Japan rebuilds. Copper has bounced off Fridays low of $4.08/lb
- Refinery stocks (e.g. TSO-US, VLO-US) may benefit.
It appearsthat a meaningful portion of Japanese refinery capacity is now off-line.
Second, the tension in North Africa and the Middle East continues, but risks are subsiding, with the exception of the recent intervention in Bahrain. The day of rage in Saudi Arabia was a non-event; the recently announced$36bn handout from King Abdullah will temporarily calm tensions.Third,in Don's view, interestrates have nowhere to go but up. Government bond yields should rise in an environment where the central banks no longer buy bonds (i.e. no more quantitative easing). In addition, in Dons opinion, the prospects for meaningful inflation in the western world are real. Bond investors will have to be compensated for higher inflation in the form of higher interest rates. Don believes future inflation will be fuelled by the prolonged period of loose monetary policy coupled with firming aggregate demand. Inflation is already evident in the price of foods and fuels. Finally, if meaningful inflation in the western world were to emerge, investors will begin to buy gold as a hedge against inflation.
Some brief comments on the PDAC:
We attended last week's PDAC in Toronto, where the bullish outlook for metals and mining stocks was approaching euphoric levels. It is therefore not surprising to see some sort of correction and pull-back in the sector, as valuations had become stretched.
Against the backdrop of lofty valuations, it was difficult to get excited about a lot of companies at PDAC, but a few names that we have not discussed recently in our Commentary or our Market Update did pique our interest.
Among the producers, we were impressed by Lake Shore Gold (LSG), Goldcorp's growth profile,
Kinross' relative valuation, and how cheap LGC has become.
In the silver producer space, we believe thatSLW, PAAS, SVM and FR will benefit from what Eric Sprott has called the 'Investment Opportunity of the Decade', as will junior explorers like WS and CMA. Among the copper names, NDM, WRN and LCC remain ourpreferred development stories, while QUX and CSare ourpreferred intermediate producers.
In addition, two new names that will be going public shortly piqued our interest at the show: Northcliff Resources, a Tungsten-Molyplaybacked by Hunter Dickinson; and, Red Eagle Mining, a privately-held company with gold properties in Colombia.
As regards Colombia, we continue to be amazed at how many "Colombia plays" keep popping up; the latest was the successful launch ofCuoro Resources.
With Ventananowsold to Eike Batista, thego-to name in Colombiabecomes CNL, with GCM and MRS close behind, given the fact that the teams of the latter two companies have arguably the strongest operating experience in Colombia.
Stories like CBJ, BAT and SWD alsohave the potential to make significant additional discoveries, and will be re-rated accordingly.
Clearly, the Page One storycoming out of Colombia during and after PDAC has been Greystar Resources (GSL) and how, in our view,they havepoorly handled theirdevelopment planand community relations (one needs to only contrastGSL with how their neighbour in California,VEN, successfully managed community relations on the ground.
We also note that large-scale, open-pit, heap-leach operationsof the type that GSL proposes in their mine planare not common in Colombia; we believe this is likely one reason why we have yet to see other majors (besides Anglo) enter Colombia.
Bottom line: While the sell-off in resource stocks may not be over, our fearsare tempered by the fact that the US Dollar has yet to strengthen materially during this latest sell-off.
If US economic growth remains weak and unemployment remains sticky, we would not be surprised to see QE3 become reality towards Q2/Q3 of this year. Invest accordingly.
As always, your comments, calls, feedback and questions are welcome and encouraged.
Best regards,
David A. Zadak, MA, CIM
Vice President & Investment Advisor
BMO Nesbitt Burns Inc.
Tel.: (604)654-2514
Toll Free: 1-800-663-0242