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Larry Cyna
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Mr. Cyna is an accomplished investor in the Canadian public markets for over 20 years, and has managed significant portfolios. He is a financing specialist for private and public companies, and has expertise in real estate and debt obligations. He has assisted private companies accessing the... More
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  • Energy Stocks Were Good Investments, But Not Now

    A Mainstay of the Toronto Stock Exchange
    Over the next blogs, we will trace how and why energy stocks were good investments, but how they now pose significant risk to investors. In this first piece we trace a bit of history. In the next we look at oil v natural gas, and then afterwards where these companies are now.

    Investors in Canada often include energy stocks as a key part of their portfolio. After all, Canada is a supplier of energy to the world, whether it be oil, natural gas, or coal, or uranium. (Canada used to even export nuclear technology through Atomic Energy of Canada which was a Canadian owned world class company)

    Recently a new breed of energy company has arisen that is in the green energy business. Some of these companies are having great successes and they are will be the subject of a future article. Some real gems are building their holdings from their Canadian base.

    The Origins of Many Energy Companies
    Canadian companies are continually being created in the energy sector, and a large segment of the junior stock market in Canada (TSX Venture) is comprised of small companies drilling for oil, or natural gas, or exploring for coal or uranium. Some of these companies succeed and a number of the current large energy companies that are listed on the TSX are as a result of these successes. Investors in Canada and elsewhere own the shares of these companies.

    What has been a touch disappointing is that most of these companies trade at lower p/e multiples than industrial companies. Still, this is an accepted part of the investing world, and these companies are well received as conservative stocks for investment portfolios. Usually the life cycle of these companies is:

    · · to be created as juniors,

    · · accomplish degrees of success,

    · · then gobble up smaller competitors to enlarge their resource bases, and

    · · then be taken over by still larger international corporations in similar fields.

    The World Changed When Energy Became Expensive
    After the oil embargo shock which was prompted by the war in the Middle East, the price of oil rose from $12 a barrel to $100 a barrel of oil, and then much higher until it then moderated around the $100 level. This dramatic increase in the cost of energy changed the world. Cheap oil in North America fueled the dynamic North American industrial explosion, which itself created the automotive industry growth, the technology industry growth and so much more that created such a high standard of living for North Americans.

    This started to change as energy became more expensive, and in due course, the US transformed from a center of manufacturing strength to a center of financial strength. Jobs moved to cheaper areas of the world, as did services. All of this culminated in the financial meltdown of 2008. Cheap energy became expensive energy and this changed the world.

    It also changed investing, as when prices increase, the supply/demand equation changes and companies rush in to deal with the new situation. Investors bought the shares of energy companies and rode the train. All of that is about to change and change dramatically.

    When Canada Changed the Rules for Energy Trusts, it Lost its Opportunity
    As a side topic, it is worth noting again how Canada completely missed the boat on this boom. As the energy boom was growing, Canada created a type of company called an Energy Trust whereby investors were able to invest in "units" of these companies. Then these companies used the money raised to buy gas and oil production, and the profits from this production were then not taxed in the hands of the companies, but instead were taxed in the hands of the investors. The advantage to investors was that the level of income tax normally imposed at the corporate level was eliminated. Profits distributed to investors were not subject to two levels of taxation, but only a single level.

    These Energy Trusts enjoyed ever growing popularity and their very success doomed them. The government started worrying about the loss of tax revenue, and changed the rules, resulting in the Energy Trusts going out of business two years ago - eliminated effectively by government decree, all in the name of collecting taxes.

    The energy boom for Canada is now coming to an end, and the riches from exporting gas and oil will soon dramatically diminish. Those Energy Trusts, if they had been allowed to continue growing, would by now be world class and world size, able to compete anywhere in the world. Instead none of these companies now exist; their assets have been dissipated and mostly bought by foreign interests. The irony of course is that the loss of revenue will now become permanent as Canada's energy exports are diminishing and will continue to diminish.

    The opportunity to have a group of world class companies paying taxes in Canada, and Canadians paying tax on the profit of these companies has been permanently lost. Just another example of the utter stupidity of politicians. What politicians don't realize is that the world changes and changes occur more and more rapidly. Letting free enterprise create wealth for our citizens is a good thing.

    Back to the issue at hand. There is a new reality. Energy is becoming cheaper.

    Be Aware - Energy Companies Are Now to be Avoided
    There is a monumental change occurring around us. If you ignore this change, it will be at your peril.

    While worldwide demand for oil continues to increase, the cost of producing this oil also continues to increase both in monetary terms and in greenhouse emission terms. Recognition of the damage to the environment from the production and use of oil is growing, and the environmental lobby is growing in size and power. It is inevitable that oil will lose its allure as the place to invest. Compare this to the production of natural gas, where demand is rapidly rising and costs are rapidly falling to new fracing techniques and ever greater sources of supply. Energy will become cheaper and the migration by users from oil to natural gas will continue.

    Companies Producing and Selling Natural Gas
    Let's start with companies that rely on the production of natural gas, including the companies with primarily natural gas production that used to be Energy Trusts. At one time, there was a repeating pattern that advisors relied upon. At certain times if the year, natural gas was lower priced and at other times higher priced. Then there was an accepted relationship that gas was priced at a specific ratio to the price of oil and could be traded based on the current price relationship and temporary distortions in that comparison. The two energy sources (natural gas and oil) tended to trade in a narrow range to each other. There were also patterns that repeated, whereby the price of natural gas fell at times, only to recover at other times.

    Traders used these known occurrences to buy and sell natural gas. It was sort of like this almost guaranteed source of income for the traders. All of this is history now. None of these old trading strategies are now of value, although most haven't yet realized this.

    What we have instead is "fracing". Natural gas has become so plentiful and so easily available that the price of natural gas is very low, and will not rise in the foreseeable future. By now, investors should be aware of this sea-change in older investing maxims, but what investors should also consider are some other effects.

    Firstly there are enormous fields of natural gas in the south central USA. It used to be too expensive to find and extract this natural gas, but that is no longer the case. Now this gas is discoverable and extractable at reasonable cost. More and more of these fields are becoming known and are coming into production. At this locally produced natural gas grows in volume, imports reduce in volume. All of this is good for the American economy, and bad for companies that own assets producing oil and gas elsewhere.

    Next we will discuss troubling events that are unfolding as a result of this change in the availability and price of energy. Including:

    · · the declining ability of natural gas companies to maintain their profits, dividends and share value,

    · · the reality of the Canadian Oil Sands,

    · · the futility of the new pipelines, and

    · · the short term thinkers who are promoting natural gas liquefaction.

    The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds.

    Mar 01 11:32 PM | Link | Comment!
  • Dealing WIth The Debt In Europe – Understanding The EU

    The Current Dilemma

    Greece continues its attempts at restructuring with civil unrest, Spain's unemployment continues to rise to unprecedented levels, and France is straining under labor unrest. An example of the struggle to squeeze every source for more revenue is a proposal in Hungary late last year

    Hungary solicits the Chinese?
    European Union member Hungary's legislators proposed the introduction of a passport aimed at well-heeled foreign investors. Proposed legislation listed on parliament's web site would grant permanent residency and in due course Hungarian citizenship to foreigners who buy at least 250,000 euros worth of government bonds.

    Hungary's billions of euros worth of foreign currency debt maturing in the next few years has resulted in novel approaches by lawmakers to raise currency and deal with the problem. The move to grant citizenship based on investing in Hungarian bonds, is backed by the ruling government party, and is designed to attract new investors.

    The proposed legislation calls for the debt management office to issue special "residency bonds" to foreigners. Holders of at least a quarter of a million euros' worth of the paper would get preferential immigration treatment. One of the authors of the proposal said Chinese investors were specifically targeted.

    Some Pundits Forecast European Disaster
    Most commentators forecast that at a minimum, Greece and possibly other members will leave the EU, and what is more likely is that the European Union itself will self-destruct because of the debt levels. Some say the only solution is a true economic union, which was the eventual goal in any case when the EU was first conceptualized.

    Most commentators feel that the outcome of any of the choices will be that the people of Europe face a serious recession, if not a depression, impacting global growth, and could plunge the world into the next fiscal crisis.

    The Current Situation
    In spite of continued warnings of impending collapse, somehow the world is continuing and Europe has not disintegrated. What a surprise!

    Each of the EU members continues to struggle ahead, and mini-crisis after mini-crisis comes and goes, without larger consequences. The Europeans are taking a similar approach to the politicians in Washington, and elsewhere. Patience and steadfastness is the order of the day. Rather than taking irreversible actions, and crystallizing some consequence or another, the politicians are taking stopgap measure after stopgap measure. Holding the line, to coin a phrase, is the order of the day.

    This is a reasonable policy and indeed the only possible policy under the circumstances. Each country got into this mess, by listening to special interest groups in that country who demanded benefits for themselves, and as government acquiesced to these demands, the debts of governments grew until they were no longer sustainable. Now the process has to reverse itself, and as the debts were built up over a long period of time, the debts must be reduced over a long period of time. As the economy naturally grows, the debts and deficit will gradually diminish in size and scope in comparison to the GDPs, until in years to come, the current problems will be a only a memory.

    Economic Suffering Begets Politic Strife
    This is a problem that can only be solved as spending abates in a fashion to prevent serious economic disruption, which would itself possibly erupt in forms of fascism, nazism and equally disgusting forms of political strife. Remember that the world endured two World Wars, and numerous lesser wars, because of economic disruption, fiery politicians who gained the support of the population, and attempts to gain military victory at the cost of millions of lives, and all caused by economic difficulties. There are already stirring of this type of fiery rhetoric in many countries. We would do well to heed these warnings.

    Having learned a lesson from previous world wars, the USA assisted both Germany and Japan after the last world war to recover economically, and the results were peace, security, and a rising universal prosperity.

    The Sheer Size of the European Union
    The EU covers over 4 million km² and has 495 million inhabitants - the world's third largest population after China and India. The economy of the European Union generates a GDP of over €12.629 trillion (US$17.578 trillion in 2011) according to the International Monetary Fund (IMF), making it the largest economy in the world. The EU countries represent approximately one fifth share of the entire Gross world product.

    This is not some containable small economic force. This is a major part of the modern world.

    Countries Requesting Entry into the EU
    In North America, there is a misconception that the EU is struggling and withering, but the reality is that countries surrounding the EU, that are not full members of the EU, are requesting entry to the EU. These include Iceland, Croatia, Turkey, Macedonia, Montenegro, Serbia, Albania, Bosnia and others. This is not an organization that is withering and dying. This is a vibrant and growing entity, an entity that has economic troubles as does most of the rest of the world, but regardless the EU is one of the major economic powers in the world.

    The EU does more than than bind countries economically. To be a member of the EU means that an applicant must meet demanding standards of political conduct, monetary conduct, fiscal conduct, rights conduct and much more.

    The Future of the European Economic Union
    There will be strains and disagreements. Countries will struggle and falter, but the EU will continue. Should any country foolishly attempt to leave the EU, the economic consequences of that departure would be far more dramatic than the cost to that country of reining in its profligate spending. There is no military means of forcing a country to maintain membership. This is not a forced political membership or an invasion by one country of another. This is a true economic union, with the elimination of political borders and economic barriers. Leaving the EU would mean an immediate and dramatic reduction of the standard of living within that country. The economic hardship would dwarf any current hardship.

    This union is highly beneficial to all parties, and will continue regardless of the current economic strains and difficulties.

    Investing
    Investors would be best served by realizing the reality of the existence of the EU, and by ignoring the media and pundits who falsely prophecy the disintegration of the EU. The solution to the EU fiscal problem, is not an immediate 'cut off your nose to spite your face'. Rather it is a combination of a fiscal helping hand together with an iron determination to ensure that all members impose fiscal responsibility upon their actions, and this is precisely what is occurring.

    The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds.

    Feb 21 10:08 PM | Link | Comment!
  • Cymor Stock Picks – Scorpio Mining Corporation (SPM-TSX)

    Whats-Hot-or-Not
    Periodically we will publish our picks. Stocks that we like are "Hot" and listed below. Stocks not considered hot are removed.

    Whats-Hot-or-Not
    Buy Scorpio Mining Corporation (SPM on the TSX)

    Scorpio Mining Corporation (SPM-TSX)
    This is a company that has had difficulties. Scorpio Mining is an exploration and mining company listed on the Toronto Stock Exchange, with operations in central Mexico. It has a producing mine - the Nuestra Senora Mine - and a number of excellent prospects. It is primarily a silver producer, and the production of the other minerals is considered an offset to the cost of producing silver. At a cut-off of 60 g/t, the 2012 43-101 resource estimate showed an average value (net of equivalents - being the value of other minerals realized in the operations) of 180 g/t silver or roughly $155 of silver in each ton of rock. This is very valuable. The resource showed roughly 2,400,000 tonnes of Silver and Silver Equivalent in Measured and Indicated and an additional almost equal amount in Inferred Resources. This is a major deposit, and proper mining operations should yield a very profitable company.

    Mismanagement
    The company was not managed to its potential after the resource and mine were established, with costs being too high, and silver recovery being too low. Efforts were slow to confirm an expanded resource and other nearby potential resources on lands owned or controlled by the company.

    The disappointing results were reflected in the stock price. In 2010 the stock traded at a range usually over $2.00 in anticipation of a profitable silver mining operation. As results did not live up to expectations, the stock was punished, trading down to a low in the $0.50 range in August of 2012. As operations were corrected, the market moved the stock up slightly and it now trades in a range between $0.90 and $1.20.

    How the Situation Was Corrected
    The company recognized that it had to correct matters. Management of Scorpio Mining went through a number of publicized changes, and most recently changed its CEO yet again, reinstalling one of the founders (Peter Hawley) as "Interim" CEO. Mr. Hawley was a founder of the company and has stepped in until a new CEO is engaged. Upon his re-appointment, changes were implemented, and a significant effort was put into straightening out the mining operations resulting in vastly improved metal recovery and a significant decrease in the cost per ounce of silver produced. Cash flow was also utilized to explore and put into production excellent additional resources already owned by the company. One of those other resources is expected to actually go into production this year, which should result in an substantial increase in metal production.

    Looking at the most recent published financials, Scorpio Mining announced the results of its 3rd quarter operations (3 months) with both a positive cash flow and an EBITDA of approximately $2,800,000. This is a significant improvement over previous periods, and the company boldly states that operations will continue to be improved. On an annualized basis, even at this level, this is a cash cow with an expected annual cash flow exceeding $11,000,000. But the story gets much better.

    A Bargain
    Scorpio Mining is a major land holder in the Cosalá district with holdings of approximately 26,819 hectares spanning an area of approximately 23 km x 19 km. The land position covers numerous exploration targets, advanced deposits and historically producing mines. This is a very significant land position, with exploration potential and previously producing mines, that should yield new resources for many years to come. Mining companies are valued on a mix of their resources and their cash flow. As Scorpio Mining's resources expand, so will their valuation.

    What is more immediately significant, is the commencement of mining at the Company's El Cajón property. This operation is anticipated to commence shortly, resulting in the substantial increase in throughput, and the company expects a corresponding increase in the amount of ore that it processes as a result. The ore will be trucked over a road from the new deposit to the existing mill. The increase in output is expected to be very significant.

    A Caution
    The improvements and changes to this company will not easily be recognized by the market. Once disappointed, investors are sometime slow to return. Yet this company is poised for a major improvement. The stock may not recognize these changes for some months to come, until results are published for a further number of quarters. Yet for patient investors, the value seems to be very evident.

    Whats-Hot-or-Not - Historical Picks
    February 2, 2013 E Mini (ES - CME) June 2013 or, IYY ETF
    February 10, 2013 Scorpio Mining Corporation (SPM-TSX)

    We may or may not have positions in the securities we name under 'Whats-Hot-or-Not'. Whether an investment is made in a particular security depends on many factors, including portfolio balancing, timing, cash and capital reserves, asset allocation and numerous other factors. Readers are advised to do their own research on our picks and decide in light of their own circumstances, whether an investment is appropriate.

    The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds.

    Feb 17 11:20 AM | Link | Comment!
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