Energy and Natural Resources Market Radar (June 11, 2012)

Sunday, June 10th, 2012

Energy and Natural Resources Market Radar (June 11, 2012)

Strengths

• A bounce in stocks over the last week set the Global Resources Fund in a positive direction. For another consecutive week, the fund exceeded its benchmark and the median return of its peer group due to contribution from mergers and acquisitions (M&A) in junior oil and gas stocks and a rally in gold and silver mining stocks.
• The Wall Street Journal highlighted this week that China’s overseas investment surged in the first quarter to $21.4 billion as state-owned companies snapped up resource-related assets around the globe, according to a report by a private investment firm that counts China’s sovereign-wealth fund among its partners.
• In a sign of relative strength in the agricultural commodities area, Monsanto Co., the world’s largest seed company, will repurchase as much as $1 billion of shares as rising profit boosts the company’s cash hoard to a record. The buyback program is authorized for a three-year period beginning July 1, St. Louis-based Monsanto said this week in a statement. Profit in the three months through May is expected to rise to $1.57 to $1.62 a share, topping analysts’ estimates, as farmers in the U.S., Latin America and Eastern Europe bought more genetically modified crop seeds, Monsanto said.

Weaknesses

• Caterpillar said demand from the U.S. coal-mining industry is slowing after a mild winter, Steve Wunning, Caterpillar’s group president for resource industries said. “Global demand for our equipment will offset any slowdown in the U.S. as it relates to mining,” Wunning said. “We don’t see as much growth in the U.S. in coal as we do in other regions like China and like India,” Wunning said. “The longer-term growth in the U.S. is questionable because the government is not permitting many new coal mine operations and not permitting coal-fired power plants,” he added.
• According to a Reuters news report, coal’s contribution to March U.S. power generation at 34 percent was at the lowest level since 1973. Low natural gas prices and record warm March weather led to coal’s share in generation falling again to 34 percent and the natural gas share rising to 30 percent.

Opportunities

• Chevron said it expects global energy demand to rise by 40 percent by 2030. It also stated that world gas consumption will increase by 60 trillion cubic feet a year.
• Macquarie Capital noted that the seaborne coking coal market is looking fundamentally better, with spot and contract prices rising as ex-China buyers return to the market.
• The People’s Daily reported that the Chinese steel industry is gearing up for an expected surge in demand in the wake of a speedup in the approval of major infrastructure and industrial projects, experts said. As the State Council announced a series of policies to stimulate the economy by accelerating the approval of many important projects, including railway, energy and infrastructure construction in rural region and western China, steel industry analysts said the pipeline of new work will increase demand for steel in the long term. They expected steel prices to rebound as early as the end of this month as a result.
• Pipeline company Trans-Canada is planning a new gas pipeline to the port terminal at Kitimat. Canada’s federal government is encouraging the gas developments. This builds on a decision by Shell last month to ship 1.6 billion cubic feet a day from the Kitimat terminal. The pipeline project does face a permitting process in British Columbia, but assuming it can be completed, it should reduce pressure on U.S. gas prices from Canadian imports, according to the Wall Street Journal.

Threats

• China is seeing its steel inventory accumulate as capacity expands despite weak domestic demand and falling foreign orders and exports, partly caused by the anti-dumping investigations launched by other countries, according to the 21st Century Business Herald. The China Iron and Steel Association’s data showed that as of June 1, total inventory of deformed steel bars, steel wire rods and steel plates in the country’s 26 main markets was 15.62 million tons, up 1.19 million tons from last year.
• As of Wednesday, coal stockpiles stood at 8.7 million metric tons at Qinhuangdao port, China’s biggest coal port in Hebei province, up 40 percent year-over-year, statistics from Wind Information show. “The inventory level is the highest so far this year,” said Xiao Xinjian, industry analyst at the Energy Research Institute. “But destocking will begin as electricity demand peaks,” Xiao said. Also, iron ore inventories at China’s major ports have surpassed 100 million tons, compared with 90 million tons last year, according to umetal.com. “Iron ore inventories at major ports have been building up since the Lunar New Year, which is quite unusual,” said Wei Hongbing, president of Tianjin Harvest International Shipping Co. These ports are almost out of space for storage, Wei added.

Tags: agricultural, Agricultural commodities, Buyback Program, China, Coal Fired Power, Coal Fired Power Plants, Coal Mine, Coal Mining Industry, Crop Seeds, Gas Stocks, India, Junior Oil, Market Radar, Mergers Acquisitions, Mergers And Acquisitions, Mild Winter, Monsanto Co, Positive Direction, Private Investment Firm, Resources Fund, Reuters News, Silver Mining, Wall Street Journal
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Berkshire Hathaway: Buffett’s rules

Wednesday, May 9th, 2012

by Geoffrey Seiler, editor BullMarket.com

Recommended List selection Berkshire Hathaway B (BRK.B) released its first-quarter results last Friday night and then held its annual meeting in Omaha on Saturday.

Chairman and CEO Warren Buffett and Vice Chairman Charlie Munger held court before roughly 35,000 shareholders and a panel of three Wall Street analysts to fire questions at the two octogenarian leaders of the company.

One topic that did come up repeatedly was the underperformance of Berkshire’s own stock and whether Buffett should free up more of the company’s unused cash for share repurchases. Berkshire’s shares have underperformed the S&P 500 for the past three years.

Berkshire does have a buyback program for the Class B shares but Buffett set strict rules that the shares would only be retired when they are trading for less than 1.1x book value or are “dramatically undervalued.”

So far, the company has spent only $67 million on repurchases; Berkshire has more than $38 billion in the bank. As for a dividend, he repeated what he has always said, which is that shareholder would benefit more from Berkshire investing its cash in acquiring new businesses.

Buffet did disclose after some prodding from the analyst panel how he values the operating businesses that are under the Berkshire umbrella. He said that overall he’d pay eight or nine times pre-tax earnings for the operating business.

Turning to the company’s results, Berkshire Hathaway delivered a 67% increase in its first-quarter operating profits to $2.66 billion, compared with $1.59 billion in Q1 2011.

The increase was driven by a strong underwriting performance by its insurance businesses and increased contributions from its non-insurance businesses.

The company reported net income of $3.25 billion, or $1,966 per Class A share, which was up from $1.51 billion last year, or $917 per Class A share. Class B shares are worth 1/1,500th of the Class A, so EPS for the Class B was $1.31 per share.

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Net income was aided by $351 per Class A share in non-cash gains in the value of Berkshires investments, which reversed a year-earlier loss of -$49 per Class A shares. Book value per share at quarter-end equaled $106,603.86 for the Class A shares, or $71.07 for the Class B.

Berkshire’s non-insurance business, which cover everything from candies and milkshakes to utilities and railroads, chipped in nearly $2.0 billion in operating profit, up from $1.56 billion last year.

Looking at the major components of the non-insurance businesses, Burlington Northern reported a 10% increase in revenue to $5.0 billion from $4.5 billion in Q1 2011. Net income increased to $701 million from $607 million.

Mid-American Energy reported a modest increase in revenue to $2.89 billion from $2.88 billion. Net income attributable to Berkshire’s nearly 90% ownership interest in the international energy firm grew to $338 million from $301 million in Q1 2011.

In the manufacturing, service and retailing segment, Berkshire’s interest in Chicago’s Marmon Industries generated $1.78 billion in revenue and $269 million in pre-tax profit, up from $1.67 billion and $222 million, respectively, last year. Marmon operates roughly 150 manufacturing and service businesses in 11 diverse sectors.

The McLane wholesale distribution business saw its profit grow to $102 million from $82 million last year as revenue increased to $8.07 billion from $7.77 billion.

With the exception of bricks, all of its building products businesses and several of its other diverse manufacturing businesses generated higher earnings in 2012 over 2011, somewhat offset by decreased earnings from its apparel businesses like Fruit of the Loom and Russell.

Operationally, Berkshire reported a solid first quarter, but as is normally the case this time of year, the Buffett and Munger Q&A session generated most of the headlines.

Interestingly, Buffett said he’s been buying U.S. equities and that we would continue to do so as opportunities come up. He also defended the “Buffett Rule.” (We’ll have to wait for its quarterly report on portfolio moves for the details on what stocks Buffett has been buying.)

On the operating front, the broad improvement across a variety of industries could be viewed as a good omen for the U.S. economy if the gains can be sustained because Berkshire owns such a wide variety of business.

That’s especially true of the businesses tied to housing. In addition, while we normally applaud companies that return cash to shareholders in the form of dividends or buybacks, there are exceptions.

Buffett has never been a proponent of either approach as he likes keep dry powder for big deals, which we think investors understand when they own this stock.

Burlington Northern has certainly been a good acquisition for the company, and the Lubrizol deal looks like a good one as well.

Buffett said the company would continue to grow in the years to come and that a deal larger than its $30 billion acquisition of the Burlington Northern Santa Fe railroad was likely at some point in the future.

It is true that Berkshire’s stock has underperformed the market the last couple of years, but Buffett tends to become more popular when the broader market is bearish rather than when it is bullish.

We think the stock is undervalued, trading at just 1.14x book value which is well below the 1.5x it had commanded in the past. We continue to rate the stock a “Buy,” with a target of $95.

Learn more about this financial newsletter at Geoffrey Seiler’s BullMarket.com.

Tags: Berkshire Hathaway, Brk B, Bullmarket, Buyback Program, Charlie Munger, Insurance Businesses, Last Friday, Net Income, New Businesses, Nine Times, Q1, Quarter Results, Seiler, Share Class, Share Repurchases, Strict Rules, Tax Earnings, Vice Chairman, Wall Street Analysts, Warren Buffett
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Gold Market Cheat Sheet (January 3, 2011)

Monday, January 3rd, 2011

Gold Market Cheat Sheet (January 3, 2011)

For the week, spot gold closed at $1,420.78 per ounce, up $40.68, or 2.95 percent since the pre-Christmas close. Gold equities, as measured by the Philadelphia Gold & Silver Index, gained 2.40 percent. The U.S. Trade-Weighted Dollar Index has tumbled 1.82 percent since the pre-Christmas close.

Strengths

• Gold price closed the year at $1,420.78 per ounce, a 29.52 percent gain for the year. This is the biggest rise in three years and a record tenth consecutive annual gain, based on uncertainty about economic recovery and currencies. This year, bullion has benefited from safe-haven buying on lingering worries about a euro zone debt crisis, a $600 billion U.S. bond buyback program and renewed demand from global central banks, which are expected to become net buyers for the first time in decades.
• The China interest rate hike came after central bank governor Zhou Xiaochuan’s recent warning and hopefulness that would help remove the overhang in the near term. Apparently, the real interest rate is getting increasingly negative, from -1.9% previously to -2.35 percent now, which should be conducive for gold.
• Indonesia is expected to sign new regulations allowing underground mining in its protected forests. President Susilo Bambang Yudhoyono is expected to sign the new regulation within weeks, said forestry minister Zulkifli Hasan. This is likely to kick start projects that have stalled because of tight forestry policy.

Weaknesses

• Production of Peru’s main base and precious metals declined in November, the government said Tuesday. The Ministry of Mines and Energy said that output of gold was down 12 percent, silver fell 13 percent, copper decreased 4 percent, zinc declined 21 percent and lead was down 24 percent, compared to the same month a year earlier.
• A Canadian gold mining junior in the process of ramping up production in Brazil has suffered an armed robbery with some $2 million worth of gold stolen.
• Ghanaian cities have raised concern about the upsurge in illegal mining in the area. This illegal mining has caused many environmental problems and insecurity, as vegetated lands and citizens are perishing as artisanal miners disregard safety rules.

Opportunities

• A theme reiterated by many analysts is that initial public offerings (IPOs) for mining and basic materials companies could hit a record in 2011 as China and India drive demand for metals and attract more investors.
• Tom Kendall, vice president for Commodities Research at Credit Suisse, predicted that gold will reach $1,630 per ounce in 2011. Kendall commented that “We’re still in an era of unusual financial market instability and stress. We’re going to stay with very low to negative interest rates in real terms and that’s also very supportive for gold.” He also pointed to China, where “there’s increasing imports of gold and a real boom in retail investment in physical gold there,” and where “inflation is definitely playing into the market.”
• Gold will rise by 23 percent to $1,700 per ounce and silver will rise by 37 percent to $40 per ounce in 2011, according to a Bloomberg survey of more than 100 investors, traders, and analysts.

Threats

• A monthly poll of economists by Blue Chip Financial forecast that the Federal Reserve will not expand the size of its $600 billion quantitative easing program, according to 85 percent of the respondents.
• Edward Meir, senior commodity analyst at MF Global, says he would not be surprised if there is a price pullback within the next two weeks for gold as governments are trying to rein in inflation, especially in emerging markets such as Asia.
• European debt markets are becoming increasingly concerned over loaning money to Spain while risk levels, as characterized by the VIX Index, point to increasing complacency in U.S. equity markets. If the euro goes into to crisis stage due to the German public balking at the notion of a transfer society, the dollar could see significant strength. Over the past couple of years gold has seen some quick downdrafts from spikes in volatility but has ultimately trended higher.

Tags: Armed Robbery, Brazil, Buyback Program, Canadian Gold, Canadian Market, Central Bank Governor, China Interest Rate Hike, Commodities, Emerging Markets, energy, Forestry Policy, Gold, Gold Equities, Gold Market, Gold Price, India, Interest Rate Hike, Philadelphia Gold, Policy Weaknesses, precious metals, President Susilo Bambang Yudhoyono, Real Interest Rate, Silver, Silver Index, Spot Gold, Susilo Bambang Yudhoyono, Zhou Xiaochuan, Zulkifli
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