Maple Leaf Memo
The Canadian Needle in the Global Haystack
The Canadian economy is struggling to overcome the slowdown afflicting the US and other developed nations. More than 70 percent of its exports come south, and it’s not as productive as other members of the Group of Eight (G-8). But in broader fundamental terms, Canada is in good health—its relative strength rooted in its ample resources—and it may be able to avoid the worst a prolonged US downturn would offer.
Rising demand from Asia for energy and other commodities pushed Canada’s trade surplus to CAD5.4 billion in May, up from CAD4.8 billion in April. That demand, from developed Asia but more so from emerging economies in the region, is the source of relative relief.
Canada’s exports to countries other than the US reached their highest level ever, surpassing the CAD10 billion mark for the first time. Exports of energy products such as oil and gas were up for the seventh consecutive month, rising 8.1 percent to CAD11.6 billion in May. The increase was broad based but largely reflects rising prices and increased shipments of coal to Asia (to Japan and South Korea for steelmaking) and crude petroleum.
Industrial goods and materials shipments, most significantly metal ores, increased 9 percent to CAD9.6 billion. Iron ores nearly doubled in value on rising volumes and prices; a gain in volume of copper ores shipped to Asia was also a big factor. Overseas shipments of sulphur and potash to China also rose significantly. Robust demand for wheat, from overseas and the US, pushed agricultural products exports up 2.6 percent to CAD3.5 billion.
Canada’s ample resources, along with political stability, relatively benign inflation (see below) and a healthy balance sheet, make it unique among the G-8. It will never decouple from the US, but Canada is better able to withstand its ongoing deterioration.
The Bank of Canada (BoC) identified three factors impacting the Canadian economy—ongoing US weakness, rocky global financial markets and rising commodity prices—in its statement this morning announcing its decision to hold its key overnight interest rate at 3 percent. The first two remain in line with expectations articulated in its April Monetary Policy Report, but prices for raw goods continue to “outstrip earlier expectations.”
Those factors “pose significant upside and downside risks to the bank’s base-case projection,” the BoC said. “Weighing the implications of these, the bank views the risks to its base-case projection for inflation as balanced. Against this backdrop, the bank judges that the current level of the target for the overnight rate remains appropriate.”
The statement said the central bank will continue to monitor the Canadian and global economies “and set monetary policy consistent with achieving the inflation target over the medium term.”
Rising commodity prices, however, have led to further increases in Canada’s terms of trade and have boosted real national income. GDP growth has slowed, but domestic demand is still rising. Although unemployment for June crept up to 6.2 percent, it’s still at a historically low level, and employment in Canada has grown by 1.7 percent during the trailing 12 months.
Those rising energy prices could boost headline inflation above 4 percent in the next few months. But core inflation, which factors out fuel, is projected to “remain well contained and broadly in line with earlier expectations, averaging close to 1.5 percent through the third quarter of this year and then rising to 2 percent in the second half of 2009.” The BoC’s tone on inflation is as hawkish as it was in its June rate announcement, reflecting public expressions of concern from Gov. Mark Carney as well as the results of the BoC’s June Business Outlook Survey.
The BoC aims to keep inflation within a range of 1 percent to 3 percent, targeting the 2 percent midpoint for the 12-month rate. Its short-term projection could be double the midpoint. Although the BoC’s inflation forecast has ramped up, a still-stumbling US economy and a still-crunching credit market mean rates are likely to remain frozen until 2009, when Canada’s economy is forecast to resume growing above potential.
The BoC is engaged in a balancing act, teetering over the twin horrors “slowing growth” and “inflation.” Growth in the first quarter of 2008 was weaker than expected, and GDP is expected to expand by just 1 percent this year, down from a June estimate of 1.4 percent. The BoC now forecasts 2.3 percent growth in 2009, down from the previous forecast of 2.4 percent, before rebounding to an above-capacity rate of growth of 3.3 percent.
Speaking Engagements
“The coldest winter I ever spent was a summer in San Francisco,” a saying that’s almost a San Francisco cliche, turns out to be an invention of unknown origin, the coolest thing Mark Twain never said.
The natural setting is, however, among the most exciting in the US. Venture west for the San Francisco Money Show Aug. 7-10, 2008, and conduct your own field study.
Neil George, Elliott Gue and I will discuss infrastructure, partnerships, utilities, resources and energy, and tell you what to buy and what to sell in 2008.
Click here or call 800-970-4355 and refer to priority code 011362 to attend as our guest.
I also have a special invitation for readers to join me and my colleagues Elliott Gue, Gregg Early and Neil George aboard an exciting 11-day investment cruise Dec. 1-12 through the Caribbean and Panama Canal.
This will be a unique opportunity to step away from your daily routines, relax in one of the most beautiful parts of the world and share analysts’ knowledge and passion for the markets. During the sail, you’ll not only explore the cerulean splendor of the Caribbean, but you’ll also delve deep into current markets in search of the most profitable opportunities for your portfolios. You’ll also have the rare chance to sail through one of the world’s engineering marvels, the Panama Canal.
It’s always a special treat to meet and talk with subscribers in person, and we couldn’t have picked a better setting than aboard the six-star Crystal Serenity. This is sure to be an especially memorable experience. We hope you’ll join us.
For more information, please call 877-238-1270.
The Roundup
Among the most eagerly awaited second quarter earnings announcements will be that of Conservative Portfolio holding and July High Yield of the Month Atlantic Power Corp (TSX: ATP.UN, OTC: ATPWF). The market price of Atlantic’s income participating security (IPS), which combines one common equity share and CAD5.767 aggregate principal amount of 11 percent subordinated notes, has declined steeply since mid-June.
Atlantic has come under fire because of questions about its ability to handle rising natural gas prices; most of the power plants in which it owns interests rely on the fuel to operate. There are also questions about the disposition of the debt portion of its IPS amid a troubled credit market. But, as was discussed in the July CE’s High Yield of the Month, Atlantic is basically immune from the effects of rising commodity prices, and purchasers of the power generated by its projects are all investment-grade credits.
As for the debt portion of the IPS, Atlantic has the right to call it beginning in November 2009. It would have to pay 105 percent of the note’s face value of CAD5.767 in cash, roughly CAD6.0554 per IPS.
Early redemption is entirely optional until November 2016. Atlantic has seven years to refinance or pay off, at about CAD390 million, that obligation. Management will act if such a move is in the best interests of shareholders, a group that includes, in large representation, the CEO and the CFO of the company.
The equity portion of the IPS is valued as of today’s close at around CAD1; it’s priced to yield more than 20 percent. As long as Atlantic’s projects keep generating cash, that means no downside risk to IPS holders from an early redemption.
Atlantic announced today its regular monthly distribution of 8.84 cents Canadian per IPS. Although recent action is certainly troubling, we’ve uncovered—through examination of both its first quarter earnings report and company management—no fundamental explanation for it.
We’ll re-evaluate based on its second quarter numbers, which will be reported Aug. 13.
Here are second quarter earnings reporting dates for CE Portfolio recommendations.
Conservative Portfolio
Algonquin Power Income Fund (TSX: APF.UN, OTC: AGQNF) Aug. 14
AltaGas Income Trust (TSX: ALA.UN, OTC: ATGFF) Aug. 8
Artis REIT (TSX: AX.UN, OTC: ARESF) Aug. 13
Atlantic Power Corp (TSX: ATP.UN, OTC: ATPWF) Aug. 13
Bell Aliant Regional Communications Income Fund (TSX: BA.UN, OTC: BLIAF) Aug. 5
Canadian Apartment REIT (TSX: CAR.UN, OTC: CDPYF) Aug. 13
Energy Savings Income Fund (TSX: SIF.UN, OTC: ESIUF) Aug. 8
GMP Capital Trust (TSX: GMP.UN, OTC: GMCPF) Aug. 7
Keyera Facilities (TSX: KEY.UN, OTC: KEYUF) Aug. 8
Macquarie Power & Infrastructure Income Fund (TSX: MPT.UN, OTC: MCQPF) Aug. 8
Northern Property REIT (TSX: NPR.UN, OTC: NPRUF) Aug. 7
Pembina Pipeline Income Fund (TSX: PIF.UN, OTC: PMBIF) Aug. 1
RioCan REIT (TSX: REI.UN, OTC: ROICF) July 28
TransForce (TSX: TFI, OTC: TFIFF) Aug. 8
Yellow Pages Income Fund (TSX: YLO.UN, OTC: YLWPF) Aug. 8
Aggressive Portfolio
Advantage Energy Income Fund (NYSE: AAV, TSX: AVN.UN) Aug. 14
Ag Growth Income Fund (TSX: AFN.UN, OTC: AGGRF) Aug. 8
ARC Energy Trust (TSX: AET.UN, OTC: AETUF) Aug. 1
Arctic Glacier Income Fund (TSX: AG.UN, OTC: AGUNF) Aug. 14
Boralex Power Income Fund (TSX: BPT.UN, OTC: BLXJF) Aug. 4
Daylight Resources Trust (TSX: DAY.UN, OTC: DAYYF) Aug. 7
Enerplus Resources (NYSE: ERF, TSX: ERF.UN) Aug. 1
Newalta Income Fund (TSX: NAL.UN, OTC: NALUF) Aug. 8
Paramount Energy Trust (TSX: PMT.UN, OTC: PMGYF) Aug. 8
Penn West Energy Trust (NYSE: PWE, TSX: PWT.UN) Aug. 7
Peyto Energy Trust (TSX: PEY.UN, OTC: PEYUF) Aug. 28
Provident Energy Trust (NYSE: PVX, TSX: PVE.UN) Aug. 8
Trinidad Drilling (TSX: TDG, OTC: TDGCF) Aug. 7
Vermilion Energy Trust (TSX: VET.UN, OTC: VETMF) Aug. 7
Oil & Gas
Daylight Resources Trust (TSX: DAY.UN, OTC: DAYYF) announced a 30 percent increase in its monthly distribution to 13 cents Canadian per unit. Rising commodity prices and successful drilling operations mean rising funds flow from operations.
Daylight also agreed to take over Athlone Energy (TSX-V: ATH) in a cash deal valued at CAD32.8 million, including the assumption of CAD2.6 million in debt. Athlone produces about 650 barrels of oil equivalent per day (boe/d) and reported proved plus probable reserves of 1.9 million barrels of oil equivalent. Its core Wildmere heavy oil project is adjacent to Daylight operations in east-central Alberta.
Meanwhile, the trust’s CAD301 million offer to acquire Cadence Energy (TSX: CDS, OTC: CDSFF) has been trumped by a CAD350 million bid from Barrick Gold (NYSE: ABX, TSX: ABX). Barrick faces rising fuel costs; Cadence would give it about 3,600 boe/d and allow it to hedge about 25 percent of its oil use. Daylight hoped to consolidate ownership of the Sturgeon Lake South Leduc oil field in northwestern Alberta, an effort designed to control costs. Daylight Resources Trust is a buy up to USD12.
Gas/Propane
Precision Drilling’s (NYSE: PDS, TSX: PD.UN) goal to acquire US-based contract land driller Grey Wolf (AMEX: GW) has new life: Grey Wolf shareholders today voted down a proposed merger Basic Energy Services (NYSE: BAS). Grey Wolf rejected several overtures from Precision in favor of the deal with Basic, saying Precision Drilling’s proposal undervalued the company and didn’t offer a significant premium to shareholders.
Precision made its first bid to buy Grey Wolf for USD9 per share and later raised the price to USD9.30 per share. Precision plans to resubmit its latest offer of USD10 per share, which values the buyout at USD1.79 billion. Buy Precision Drilling up to USD30.
Trinidad Drilling (TSX: TDG, OTC: TDGCF) sold a barge drilling rig it was building in Indonesia to an unnamed buyer for USD53.5 million. Trinidad expects to receive USD54 million all told, after including a handling fee; it will use the cash to cut debt and pay for future expansion opportunities.
Trinidad plans expand its US land drilling and Gulf of Mexico barge drilling operations. Trinidad Drilling is a buy up to USD15.
Real Estate Trusts
Lanesborough REIT (TSX: LRT.UN, OTC: LRTEF) completed the acquisition of Siena Apartments in Fort McMurray, Alberta. The property consists of a four-story, 66-suite luxury apartment building, with a 93-stall underground parking garage. The CAD30 million purchase was funded by a new first mortgage loan in the amount of CAD21 million, a vendor takeback mortgage loan of CAD4 million and the balance in cash. Hold Lanesborough REIT.
The Canadian economy is struggling to overcome the slowdown afflicting the US and other developed nations. More than 70 percent of its exports come south, and it’s not as productive as other members of the Group of Eight (G-8). But in broader fundamental terms, Canada is in good health—its relative strength rooted in its ample resources—and it may be able to avoid the worst a prolonged US downturn would offer.
Rising demand from Asia for energy and other commodities pushed Canada’s trade surplus to CAD5.4 billion in May, up from CAD4.8 billion in April. That demand, from developed Asia but more so from emerging economies in the region, is the source of relative relief.
Canada’s exports to countries other than the US reached their highest level ever, surpassing the CAD10 billion mark for the first time. Exports of energy products such as oil and gas were up for the seventh consecutive month, rising 8.1 percent to CAD11.6 billion in May. The increase was broad based but largely reflects rising prices and increased shipments of coal to Asia (to Japan and South Korea for steelmaking) and crude petroleum.
Industrial goods and materials shipments, most significantly metal ores, increased 9 percent to CAD9.6 billion. Iron ores nearly doubled in value on rising volumes and prices; a gain in volume of copper ores shipped to Asia was also a big factor. Overseas shipments of sulphur and potash to China also rose significantly. Robust demand for wheat, from overseas and the US, pushed agricultural products exports up 2.6 percent to CAD3.5 billion.
Canada’s ample resources, along with political stability, relatively benign inflation (see below) and a healthy balance sheet, make it unique among the G-8. It will never decouple from the US, but Canada is better able to withstand its ongoing deterioration.
The Bank of Canada (BoC) identified three factors impacting the Canadian economy—ongoing US weakness, rocky global financial markets and rising commodity prices—in its statement this morning announcing its decision to hold its key overnight interest rate at 3 percent. The first two remain in line with expectations articulated in its April Monetary Policy Report, but prices for raw goods continue to “outstrip earlier expectations.”
Those factors “pose significant upside and downside risks to the bank’s base-case projection,” the BoC said. “Weighing the implications of these, the bank views the risks to its base-case projection for inflation as balanced. Against this backdrop, the bank judges that the current level of the target for the overnight rate remains appropriate.”
The statement said the central bank will continue to monitor the Canadian and global economies “and set monetary policy consistent with achieving the inflation target over the medium term.”
Rising commodity prices, however, have led to further increases in Canada’s terms of trade and have boosted real national income. GDP growth has slowed, but domestic demand is still rising. Although unemployment for June crept up to 6.2 percent, it’s still at a historically low level, and employment in Canada has grown by 1.7 percent during the trailing 12 months.
Those rising energy prices could boost headline inflation above 4 percent in the next few months. But core inflation, which factors out fuel, is projected to “remain well contained and broadly in line with earlier expectations, averaging close to 1.5 percent through the third quarter of this year and then rising to 2 percent in the second half of 2009.” The BoC’s tone on inflation is as hawkish as it was in its June rate announcement, reflecting public expressions of concern from Gov. Mark Carney as well as the results of the BoC’s June Business Outlook Survey.
The BoC aims to keep inflation within a range of 1 percent to 3 percent, targeting the 2 percent midpoint for the 12-month rate. Its short-term projection could be double the midpoint. Although the BoC’s inflation forecast has ramped up, a still-stumbling US economy and a still-crunching credit market mean rates are likely to remain frozen until 2009, when Canada’s economy is forecast to resume growing above potential.
The BoC is engaged in a balancing act, teetering over the twin horrors “slowing growth” and “inflation.” Growth in the first quarter of 2008 was weaker than expected, and GDP is expected to expand by just 1 percent this year, down from a June estimate of 1.4 percent. The BoC now forecasts 2.3 percent growth in 2009, down from the previous forecast of 2.4 percent, before rebounding to an above-capacity rate of growth of 3.3 percent.
Speaking Engagements
“The coldest winter I ever spent was a summer in San Francisco,” a saying that’s almost a San Francisco cliche, turns out to be an invention of unknown origin, the coolest thing Mark Twain never said.
The natural setting is, however, among the most exciting in the US. Venture west for the San Francisco Money Show Aug. 7-10, 2008, and conduct your own field study.
Neil George, Elliott Gue and I will discuss infrastructure, partnerships, utilities, resources and energy, and tell you what to buy and what to sell in 2008.
Click here or call 800-970-4355 and refer to priority code 011362 to attend as our guest.
I also have a special invitation for readers to join me and my colleagues Elliott Gue, Gregg Early and Neil George aboard an exciting 11-day investment cruise Dec. 1-12 through the Caribbean and Panama Canal.
This will be a unique opportunity to step away from your daily routines, relax in one of the most beautiful parts of the world and share analysts’ knowledge and passion for the markets. During the sail, you’ll not only explore the cerulean splendor of the Caribbean, but you’ll also delve deep into current markets in search of the most profitable opportunities for your portfolios. You’ll also have the rare chance to sail through one of the world’s engineering marvels, the Panama Canal.
It’s always a special treat to meet and talk with subscribers in person, and we couldn’t have picked a better setting than aboard the six-star Crystal Serenity. This is sure to be an especially memorable experience. We hope you’ll join us.
For more information, please call 877-238-1270.
The Roundup
Among the most eagerly awaited second quarter earnings announcements will be that of Conservative Portfolio holding and July High Yield of the Month Atlantic Power Corp (TSX: ATP.UN, OTC: ATPWF). The market price of Atlantic’s income participating security (IPS), which combines one common equity share and CAD5.767 aggregate principal amount of 11 percent subordinated notes, has declined steeply since mid-June.
Atlantic has come under fire because of questions about its ability to handle rising natural gas prices; most of the power plants in which it owns interests rely on the fuel to operate. There are also questions about the disposition of the debt portion of its IPS amid a troubled credit market. But, as was discussed in the July CE’s High Yield of the Month, Atlantic is basically immune from the effects of rising commodity prices, and purchasers of the power generated by its projects are all investment-grade credits.
As for the debt portion of the IPS, Atlantic has the right to call it beginning in November 2009. It would have to pay 105 percent of the note’s face value of CAD5.767 in cash, roughly CAD6.0554 per IPS.
Early redemption is entirely optional until November 2016. Atlantic has seven years to refinance or pay off, at about CAD390 million, that obligation. Management will act if such a move is in the best interests of shareholders, a group that includes, in large representation, the CEO and the CFO of the company.
The equity portion of the IPS is valued as of today’s close at around CAD1; it’s priced to yield more than 20 percent. As long as Atlantic’s projects keep generating cash, that means no downside risk to IPS holders from an early redemption.
Atlantic announced today its regular monthly distribution of 8.84 cents Canadian per IPS. Although recent action is certainly troubling, we’ve uncovered—through examination of both its first quarter earnings report and company management—no fundamental explanation for it.
We’ll re-evaluate based on its second quarter numbers, which will be reported Aug. 13.
Here are second quarter earnings reporting dates for CE Portfolio recommendations.
Conservative Portfolio
Algonquin Power Income Fund (TSX: APF.UN, OTC: AGQNF) Aug. 14
AltaGas Income Trust (TSX: ALA.UN, OTC: ATGFF) Aug. 8
Artis REIT (TSX: AX.UN, OTC: ARESF) Aug. 13
Atlantic Power Corp (TSX: ATP.UN, OTC: ATPWF) Aug. 13
Bell Aliant Regional Communications Income Fund (TSX: BA.UN, OTC: BLIAF) Aug. 5
Canadian Apartment REIT (TSX: CAR.UN, OTC: CDPYF) Aug. 13
Energy Savings Income Fund (TSX: SIF.UN, OTC: ESIUF) Aug. 8
GMP Capital Trust (TSX: GMP.UN, OTC: GMCPF) Aug. 7
Keyera Facilities (TSX: KEY.UN, OTC: KEYUF) Aug. 8
Macquarie Power & Infrastructure Income Fund (TSX: MPT.UN, OTC: MCQPF) Aug. 8
Northern Property REIT (TSX: NPR.UN, OTC: NPRUF) Aug. 7
Pembina Pipeline Income Fund (TSX: PIF.UN, OTC: PMBIF) Aug. 1
RioCan REIT (TSX: REI.UN, OTC: ROICF) July 28
TransForce (TSX: TFI, OTC: TFIFF) Aug. 8
Yellow Pages Income Fund (TSX: YLO.UN, OTC: YLWPF) Aug. 8
Aggressive Portfolio
Advantage Energy Income Fund (NYSE: AAV, TSX: AVN.UN) Aug. 14
Ag Growth Income Fund (TSX: AFN.UN, OTC: AGGRF) Aug. 8
ARC Energy Trust (TSX: AET.UN, OTC: AETUF) Aug. 1
Arctic Glacier Income Fund (TSX: AG.UN, OTC: AGUNF) Aug. 14
Boralex Power Income Fund (TSX: BPT.UN, OTC: BLXJF) Aug. 4
Daylight Resources Trust (TSX: DAY.UN, OTC: DAYYF) Aug. 7
Enerplus Resources (NYSE: ERF, TSX: ERF.UN) Aug. 1
Newalta Income Fund (TSX: NAL.UN, OTC: NALUF) Aug. 8
Paramount Energy Trust (TSX: PMT.UN, OTC: PMGYF) Aug. 8
Penn West Energy Trust (NYSE: PWE, TSX: PWT.UN) Aug. 7
Peyto Energy Trust (TSX: PEY.UN, OTC: PEYUF) Aug. 28
Provident Energy Trust (NYSE: PVX, TSX: PVE.UN) Aug. 8
Trinidad Drilling (TSX: TDG, OTC: TDGCF) Aug. 7
Vermilion Energy Trust (TSX: VET.UN, OTC: VETMF) Aug. 7
Oil & Gas
Daylight Resources Trust (TSX: DAY.UN, OTC: DAYYF) announced a 30 percent increase in its monthly distribution to 13 cents Canadian per unit. Rising commodity prices and successful drilling operations mean rising funds flow from operations.
Daylight also agreed to take over Athlone Energy (TSX-V: ATH) in a cash deal valued at CAD32.8 million, including the assumption of CAD2.6 million in debt. Athlone produces about 650 barrels of oil equivalent per day (boe/d) and reported proved plus probable reserves of 1.9 million barrels of oil equivalent. Its core Wildmere heavy oil project is adjacent to Daylight operations in east-central Alberta.
Meanwhile, the trust’s CAD301 million offer to acquire Cadence Energy (TSX: CDS, OTC: CDSFF) has been trumped by a CAD350 million bid from Barrick Gold (NYSE: ABX, TSX: ABX). Barrick faces rising fuel costs; Cadence would give it about 3,600 boe/d and allow it to hedge about 25 percent of its oil use. Daylight hoped to consolidate ownership of the Sturgeon Lake South Leduc oil field in northwestern Alberta, an effort designed to control costs. Daylight Resources Trust is a buy up to USD12.
Gas/Propane
Precision Drilling’s (NYSE: PDS, TSX: PD.UN) goal to acquire US-based contract land driller Grey Wolf (AMEX: GW) has new life: Grey Wolf shareholders today voted down a proposed merger Basic Energy Services (NYSE: BAS). Grey Wolf rejected several overtures from Precision in favor of the deal with Basic, saying Precision Drilling’s proposal undervalued the company and didn’t offer a significant premium to shareholders.
Precision made its first bid to buy Grey Wolf for USD9 per share and later raised the price to USD9.30 per share. Precision plans to resubmit its latest offer of USD10 per share, which values the buyout at USD1.79 billion. Buy Precision Drilling up to USD30.
Trinidad Drilling (TSX: TDG, OTC: TDGCF) sold a barge drilling rig it was building in Indonesia to an unnamed buyer for USD53.5 million. Trinidad expects to receive USD54 million all told, after including a handling fee; it will use the cash to cut debt and pay for future expansion opportunities.
Trinidad plans expand its US land drilling and Gulf of Mexico barge drilling operations. Trinidad Drilling is a buy up to USD15.
Real Estate Trusts
Lanesborough REIT (TSX: LRT.UN, OTC: LRTEF) completed the acquisition of Siena Apartments in Fort McMurray, Alberta. The property consists of a four-story, 66-suite luxury apartment building, with a 93-stall underground parking garage. The CAD30 million purchase was funded by a new first mortgage loan in the amount of CAD21 million, a vendor takeback mortgage loan of CAD4 million and the balance in cash. Hold Lanesborough REIT.
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