An earlier article of mine (in Moneysense magazine) stated that 2014 seems to be continuing the upswing in the stockmarket.It also reported that 2015 may be a time to cautiously move out of stocks and into the bond market.But the 10 year bond rate will not be that low.The bond rate has not fallen well below the yield on quality stocks.The bond rate has not "tanked".This time there may not be a huge switch into the bond market to get forthcoming gains.In addition, bond rates will be heading upwards but bond prices will be heading down. There will not be capital gains here but capital losses.Consequently the best strategy may be to stay in the stockmarket but be more selective about the kind of stocks you purchase and stay with.
What kind of business cycle are we in?
Economic textbooks are full of descriptions of business cycles being 5 to 6 years in duration and having a "V" shape.Down for three years and and up for three to four years.The growth rates are 4 to 6% each year thus giving the "V" shape.Recent business cycles are longer in duration and dampened; they have annual growth rates of 2 to 3.5%.They are referred to as having a "U" shape.It is likely that the economic growth rate will be only 2% in 2015.But there is little incentive to jump into the bond market as interest rates move up bond prices will move down and there will be a capital loss not a gain.Interest rates have been kept down as a government incentive to spur on more economic growth.
The key indicators for whether we will still have a diminished bull market or a slight bear market are the economoic growth and the shape of the "U" curve.Since we are expecting there to be a 2.5% growth and a continuation of the "U"curve,there is a high probability that there will be a diminished bull market in 2014 and early2015.These two markets will move together.And since the bond rate is low at 2.5% because of interest rates the bond rate may rise but bond prices will fall.If bond prices fall then there will be capital losses not gains from investing in the stock market.Capital will not move in large volumes to the bond market and the stockmarket will likely continue upwards albeit at a slower pace. At first it will be difficult to tell if the market has turned downwards or not but the downswing will not likely continue. Money will come back into the stockmarket to reap future gains and not switch into the bond market.Dividend yields will remain the same or above yields.Economic growth has not yet turned down and earnings will still rise although not as robustly as before.
Fine tuning
So we have estimated the overall trend of the stockmarket for the rest of 2014 and early 2015 but what will the short term changes be?This can be measured by changes in the interest rate.The indicator that is used here is the 10 year government bond yield.It is presently earning a 2.01% rate of interest.The Governor of the Bank of Canada does not seem ready to change the interest rate and any changes will likely be in the second half of 2015.Changes here will be slow and small.But it is widely expected that the Federal Reserve may make a change before this time.Growth in USA has been solid but a large or fast move may slow their recovery.Some experts are predicting a small change in the fall of 2015.That will certainly depend on what the annual growth is for 2014.But any change here is very likely to influence Canadian interest rates.
The theory is that the 10 year government rate will respond first and move almost in lock-step with the change in the bank rate.The short term rates will follow but not by the same amount and it may take awhile to change.The longer term rates,such as the 20 year and 30 year ,will be affected by macro factors such as American and European rates and will move slower and not by as much.Other factors such as long term earnings forecasts will cause the long term rates to move more or less than the original change.Long term rates are seen as an indicator of future changes in the 10 year government rate and hence stockmarket swings.Long term rates have moved up slowly since the summer and are predicted to move up in advance of the coming raise in the bank rate.
Once this change occurs the stockmarket will take this as an indicator and any upward movement will be forestalled.Gradually the market will move sideways or even downwards. This will depend on the strength of earnings.This will also make dividend yields more attractiveand act as another incentive to switch into the stockmarket.At the minimum this will be a short term bear market within a prolonged bull market.But unexpectedly slow growth in earnings in this quarter will presage sideways movement in the stockmarket until earnings pick up.Forecasts are that earnings will be greater than the 2.5% economic growth.The best forecast for the rest of the year will be for a slight increase in the stockmarket as a whole and better than average increase for select stocks.The best stocks (like always) will be those with an increase in earnings and dividends but a constant dividend payout and above average growth in earnings should also perform well.
Thursday 30 October 2014
Wednesday 15 October 2014
Lake Shore Gold -a technical analysis
This is not a usual blog about the price of a stock today and it's expected price in a quarter or two.This blog looks at the operation and the production of Lake Shore and it's likely direction.It(LSG) released a press release on October7, 2014 stating that they had found gold at 144 property and that confirms an earlier deposit near the Thunder Creek deposit.Earlier LSG found low grade ore at the Ogden Zone which is closer to the Timmins West mine.The 144 property is further away from the Timmins mine but is higher grade ore.It includes three properties,144 north,144 south, and 144Gap.The grade is from 5.87 grams per tonne to 21.87 grams per tonne.It can be accessed from the Thunder Creek mine.
It is within 770 metres of the Thunder Creek deposit southwest of the Timmins West mine.LSG calls it a high priority target.Furthermore it believes that this has the same geological structure as the Timmins deposit and the Thunder Creek deposit.This means that LSG could have a mining complex with multiple mining deposits instead of just two deposits.The size of the resource is still unknown but they have three drilling rigs on the 144 property.
Increased production or increased allocation
Lake Shore recently increased their capacity of the processing mill from 2000 tonnes per day to 3550 tonnes per day.This mill serves two mines- the Timmins West mine and the Bell Creek mine.The Bell Creek mine is 20 km. north east of Timmins;it also has lower grade ore than appears to be in the new discovery.In addition,production from the Bell Creek mine has almost doubled from 21,000 ounces to 40,000 ounces for 2014.However the ore has further to go to the mill than the newly discovered orebody.Is LSG going to increase the processing capacity of the mill or reduce the processed production from the Bell Creek mine?It is not a problem yet but it may soon be.Guidance has been raised for the year from 135,000 to 150,000 up to 160,000 to 180,000 ounces.It is likely that the mill capacity will be raised from 3550 tonnes per day to 5000 tonnes per day sometime in 2015.
Comparison to Crocodile Gold
Both are junior producers and both have similar problems.Crocodile Gold has seen it's production rise quickly from two years ago and so has Lake Shore Gold.Both have had to raise milling capacity.Both have raised their guidance from last year.Crocodile Gold has a resource that has been discovered but not yet completely defined in their Maud Creek deposit.Lake Shore has a new resource that has barely been defined.Both will likely have to increase their milling capacity in 2015.However Crocodile Gold has guidance of 200,000 to 215,000 ounces while LSG has guidance of only 160,000 to 180,000 ounces for 2014.Oh yes and the price of LSG is about five times higher than the proficient Crocodile.But LSG has a problem many producers would like to have - soon they will have too much gold for their mill to process.
It is within 770 metres of the Thunder Creek deposit southwest of the Timmins West mine.LSG calls it a high priority target.Furthermore it believes that this has the same geological structure as the Timmins deposit and the Thunder Creek deposit.This means that LSG could have a mining complex with multiple mining deposits instead of just two deposits.The size of the resource is still unknown but they have three drilling rigs on the 144 property.
Increased production or increased allocation
Lake Shore recently increased their capacity of the processing mill from 2000 tonnes per day to 3550 tonnes per day.This mill serves two mines- the Timmins West mine and the Bell Creek mine.The Bell Creek mine is 20 km. north east of Timmins;it also has lower grade ore than appears to be in the new discovery.In addition,production from the Bell Creek mine has almost doubled from 21,000 ounces to 40,000 ounces for 2014.However the ore has further to go to the mill than the newly discovered orebody.Is LSG going to increase the processing capacity of the mill or reduce the processed production from the Bell Creek mine?It is not a problem yet but it may soon be.Guidance has been raised for the year from 135,000 to 150,000 up to 160,000 to 180,000 ounces.It is likely that the mill capacity will be raised from 3550 tonnes per day to 5000 tonnes per day sometime in 2015.
Comparison to Crocodile Gold
Both are junior producers and both have similar problems.Crocodile Gold has seen it's production rise quickly from two years ago and so has Lake Shore Gold.Both have had to raise milling capacity.Both have raised their guidance from last year.Crocodile Gold has a resource that has been discovered but not yet completely defined in their Maud Creek deposit.Lake Shore has a new resource that has barely been defined.Both will likely have to increase their milling capacity in 2015.However Crocodile Gold has guidance of 200,000 to 215,000 ounces while LSG has guidance of only 160,000 to 180,000 ounces for 2014.Oh yes and the price of LSG is about five times higher than the proficient Crocodile.But LSG has a problem many producers would like to have - soon they will have too much gold for their mill to process.
Saturday 11 October 2014
Crocodile Gold farms out assets
Crocodile Gold released it's second quarter results about a month ago and it had solid results.It's production was ahead of the same quarter in 2013.While production expenses were reduced.Consequently it showed a net income of $4 million.The first in several quarters.It says that it is on track for guidance for 2014 that was given previously(200,000 to 210,000 ounces).It also spent $15 million on resource definition at their Cosmo mine and their Fosterville mine.Both have large deposits but they need to know how large in order to plan capital expenditures,drilling equipment and processing capacity at their mill.
Gold production has levelled off in 2014.That is because
(a) production at the Cosmo mine has stabilized
(b) the Fosterville deposit seems huge but has not been developed, and
(c) production at the Stawell mine has slowed until the Big Hill project comes onstream
New Agreements
On August 28 Crocodile announced three new agreements with Phoenix Copper.The first agreement is for the Iron Blow and Mount Bonnie property.There is a 2% royalty on any gold and silver production.Also there is a buy-back agreement if gold or silver is found.Lastly there will be cash compensation if a bankable feasibility study is produced for base metals.
There is a similar agreement for their Maud Creek property.There is a buy-back agreement for properties around Maud Creek while Crocodile Gold retains 100% ownership of the Maud Creek property itself. Crocodile Gold states that there are 900,000 ounces of Indicated Resource and 350,000 ounces of gold of Inferred Resource here .The gold is low to medium grade of ore.There is no mention of Proved and Probable Resources.But this blog believes it to be significant .Also Phoenix Copper may enter into agreements with third parties such as BHP or Freeport-McNamara.The Maud Creek deposit looks sizeable and this should speed up development.But there will not likely be any production before 2016.
The rest of 2014
Crocodile expects to meet it's guidance of 200,000 to 210,000 ounces of gold.But it also expects the Stawell mine to drop in production before their Big Hill project comes onstream.They have a tremenduous resource in their Fosterville mine that is not being exploited.Possibly there is not enough equipment in place but it seems that drilling could be taking place in both the Upper and Lower Phoenix deposits and then a more likely target would be 250,000 to 275,000 ounces of total annual production.In addition, they have just ended their milling agreement with Thor mining so they can increase their own processing at the mill.
Their agreement with Phoenix Cooper is a good one and will speed up development of the sizeable Maud Creek deposit but no production will be coming onstream in 2014.Crocdile must buy extra equipment and even increase milling capacity to produce another 50,000 to 60,000 ounces from their Fosterville mine.
Gold production has levelled off in 2014.That is because
(a) production at the Cosmo mine has stabilized
(b) the Fosterville deposit seems huge but has not been developed, and
(c) production at the Stawell mine has slowed until the Big Hill project comes onstream
New Agreements
On August 28 Crocodile announced three new agreements with Phoenix Copper.The first agreement is for the Iron Blow and Mount Bonnie property.There is a 2% royalty on any gold and silver production.Also there is a buy-back agreement if gold or silver is found.Lastly there will be cash compensation if a bankable feasibility study is produced for base metals.
There is a similar agreement for their Maud Creek property.There is a buy-back agreement for properties around Maud Creek while Crocodile Gold retains 100% ownership of the Maud Creek property itself. Crocodile Gold states that there are 900,000 ounces of Indicated Resource and 350,000 ounces of gold of Inferred Resource here .The gold is low to medium grade of ore.There is no mention of Proved and Probable Resources.But this blog believes it to be significant .Also Phoenix Copper may enter into agreements with third parties such as BHP or Freeport-McNamara.The Maud Creek deposit looks sizeable and this should speed up development.But there will not likely be any production before 2016.
The rest of 2014
Crocodile expects to meet it's guidance of 200,000 to 210,000 ounces of gold.But it also expects the Stawell mine to drop in production before their Big Hill project comes onstream.They have a tremenduous resource in their Fosterville mine that is not being exploited.Possibly there is not enough equipment in place but it seems that drilling could be taking place in both the Upper and Lower Phoenix deposits and then a more likely target would be 250,000 to 275,000 ounces of total annual production.In addition, they have just ended their milling agreement with Thor mining so they can increase their own processing at the mill.
Their agreement with Phoenix Cooper is a good one and will speed up development of the sizeable Maud Creek deposit but no production will be coming onstream in 2014.Crocdile must buy extra equipment and even increase milling capacity to produce another 50,000 to 60,000 ounces from their Fosterville mine.
Thursday 9 October 2014
Western Forest - the Brookfield factor
Recently Western forest announced a secondary offering to buy 92 million shares that Brookfield Special Situations owned.Shares were sold at $2.50 a share.This offering went so well that they sold another 22 million shares.This removes all of the equity that Brookfield had in Western Forest.Brookfield had a 49% interest in Western and now it has no equity at all.This increases the float of shares and gives their shares more liquidity.It also gives Western more control over it's own operations.This is seen as a very positive factor in Western (WEF) moving higher in the coming quarters.
Results in 2014
Western already reported good results for the first half of 2014.Revenue is up 25 to 30% from Q2,2013.Operating expenses increased only 10% over Q2 in 2013.Consequently net income has almost doubled since the same quarter in 2013.This helped to bring the price of WEF shares up to the $2.50 per share area.The price of the shares allowed Western to make this offer look acceptable to Brookfield.Without good operating metrics WEF could not have sold enough shares at $2.50.But in fact,their offering was so successful that they sold another 22 million shares.This also eliminates any management fees that WEF had to pay to Brookfield.Western decided to pay a dividend and this makes their stock look more attractive to investors also.
Management changes
Western has already started to make changes to their operation.They closed down their Nanaimo saw mill and invested $10 million in their Duke Point and Saltair operations.Employees will be shifted over to the expanded operation in Duke Point.This will reduce their operational costs and increase overall production.Additionally this will allow more flexibility to produce different grades of lumber.If one of their markets changes so that their is more demand for one product and less for another Western will have little trouble adapting to the market.Western will likely in the future have to increase their log production especially to the Chinese market. Lastly it is not clear whether they have continued and ramped up their chip mill or closed it down.It is likely that they will need this in the future as well as increased log production.But now they have much more flexibility to make these changes.Look for slightly better earnings in the third quarter and down a little in the fourth quarter.Nevertheless earnings per share and net income will likely be double that of 2013.
Results in 2014
Western already reported good results for the first half of 2014.Revenue is up 25 to 30% from Q2,2013.Operating expenses increased only 10% over Q2 in 2013.Consequently net income has almost doubled since the same quarter in 2013.This helped to bring the price of WEF shares up to the $2.50 per share area.The price of the shares allowed Western to make this offer look acceptable to Brookfield.Without good operating metrics WEF could not have sold enough shares at $2.50.But in fact,their offering was so successful that they sold another 22 million shares.This also eliminates any management fees that WEF had to pay to Brookfield.Western decided to pay a dividend and this makes their stock look more attractive to investors also.
Management changes
Western has already started to make changes to their operation.They closed down their Nanaimo saw mill and invested $10 million in their Duke Point and Saltair operations.Employees will be shifted over to the expanded operation in Duke Point.This will reduce their operational costs and increase overall production.Additionally this will allow more flexibility to produce different grades of lumber.If one of their markets changes so that their is more demand for one product and less for another Western will have little trouble adapting to the market.Western will likely in the future have to increase their log production especially to the Chinese market. Lastly it is not clear whether they have continued and ramped up their chip mill or closed it down.It is likely that they will need this in the future as well as increased log production.But now they have much more flexibility to make these changes.Look for slightly better earnings in the third quarter and down a little in the fourth quarter.Nevertheless earnings per share and net income will likely be double that of 2013.
Friday 3 October 2014
Southern Pacific finshes Strategic Review
On September 25 Southern Pacific released a press release giving their year end results.First they announced that their Strategic Review process was finished and they are not selling the company nor merging with another company.They instead decided to maximize shareholder value and production rates.They obtained a new $150 million lien credit facility to replace their old $100 million revolving line of credit.They also sold off a $19 million non-core asset called the Leismer property.Their proved plus probable reserves barely changed since last year.In addition, STP booked a loss of $424 million with $395 million being a non-cash impairment charge.In other words, they had an operating loss of $29 million.
Like a startup
Southern Pacific trades at $.04 to $.06 a share right now.It has a market capitalization of about $20 million.But it is no ordinary penny stock.It has assets of about $650 million.It has two heavy oil plants-one at Fort Mackay,Alberta and one at Senlac, Sakatchewan.It produced 4173 barrels per day in the last quarter which is up 2% from the previous quarter.The production is split almost evenly between the two plants.
STP produces bitumen at it's Fort Mackay facility, near Fort Mcmurray, Alberta.However it experienced well bore conformance problems.So it had to install interflow control devices(ICDs) to stabilize the flow over the length of the well and reduce the risk of steam short circuits.Production is stabilizing and gradually increasing.More ICDs will be used at Mackay.Also(during the strategic review process)they got approval for downspacing well pairs,that is, putting new wells between existing well pairs.The cost here would be $51 million and money is in place to do it.First steaming of the new wells would be in mid 2015.It seems that STP does not count on significant production increases in the next quarter from Mackay.
Senlac. Saskatchewan
Production of heavy oil is about the same as in the previous quarter.But STP has gotten approval to start work on a new well pad;this will be called Phase L.It will have three well pairs in the pad at a cost of $19 million.Money is in place to start construction.They will watch how well the ICDs work in Fort Mackay and see if some or all must be installed at Senlac. STP thinks that production could commence in the next quarter but it will take some time to get to full production.This blog does not expect significant increases in production in the next quarter.
The rest of 2014
Southern Pacific still has negative funds flow. But other higher priced stocks do as well.It is not likely that Southern Pacific will have positive funds flow in 2014 even with Phase L coming onstream at Senlac.STP expects that it will have 7000 barrels per day from the original 12 well pairs; that does not count production from Phase L.There is no doubt that the Strategic Review process has slowed down their targets but 5000 barrels seems likely by the end of the year .And positive funds flow by the early part of the second half of 2015.If true, then shareholders should see $.20 to $.25 per share by next March.The next quarter will tell us how STP has done with the ICDs at Fort Mackay and whether they will have 4300 to 4400 barrels per day in total production.
Like a startup
Southern Pacific trades at $.04 to $.06 a share right now.It has a market capitalization of about $20 million.But it is no ordinary penny stock.It has assets of about $650 million.It has two heavy oil plants-one at Fort Mackay,Alberta and one at Senlac, Sakatchewan.It produced 4173 barrels per day in the last quarter which is up 2% from the previous quarter.The production is split almost evenly between the two plants.
STP produces bitumen at it's Fort Mackay facility, near Fort Mcmurray, Alberta.However it experienced well bore conformance problems.So it had to install interflow control devices(ICDs) to stabilize the flow over the length of the well and reduce the risk of steam short circuits.Production is stabilizing and gradually increasing.More ICDs will be used at Mackay.Also(during the strategic review process)they got approval for downspacing well pairs,that is, putting new wells between existing well pairs.The cost here would be $51 million and money is in place to do it.First steaming of the new wells would be in mid 2015.It seems that STP does not count on significant production increases in the next quarter from Mackay.
Senlac. Saskatchewan
Production of heavy oil is about the same as in the previous quarter.But STP has gotten approval to start work on a new well pad;this will be called Phase L.It will have three well pairs in the pad at a cost of $19 million.Money is in place to start construction.They will watch how well the ICDs work in Fort Mackay and see if some or all must be installed at Senlac. STP thinks that production could commence in the next quarter but it will take some time to get to full production.This blog does not expect significant increases in production in the next quarter.
The rest of 2014
Southern Pacific still has negative funds flow. But other higher priced stocks do as well.It is not likely that Southern Pacific will have positive funds flow in 2014 even with Phase L coming onstream at Senlac.STP expects that it will have 7000 barrels per day from the original 12 well pairs; that does not count production from Phase L.There is no doubt that the Strategic Review process has slowed down their targets but 5000 barrels seems likely by the end of the year .And positive funds flow by the early part of the second half of 2015.If true, then shareholders should see $.20 to $.25 per share by next March.The next quarter will tell us how STP has done with the ICDs at Fort Mackay and whether they will have 4300 to 4400 barrels per day in total production.
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