Canadian Finance, Economics and Fiscal Analysis
The most frustrating experience while trading is setting a limit order for something, having the underlying security trade one penny away from your price, and then have the market move away from you.
On less liquid issues there are usually algorithms that will try front-running your open order for a penny, which is why such orders should be tactically placed. On more liquid orders you can usually keep the orders open and not be prone to sniping.
OPTI Canada owns an equity stake in an oil sands operation. Equity investors in OPTI Canada (TSX: OPC) have not been feeling too good lately – the latest catalyst to their downfall has been them sacking their prior consultants that they employed failed to find “strategic alternatives” (a.k.a. creative financing or an outright sale).
The following is a chart of their recent trading:
Equity investors have lost about 60% of what remains of their investment.
Looking quickly at the financial statements is a company that has a massive amount of debt and little chance of being able to pay it off. They have a total debt of about $2.6 billion. One major maturity will start on December 15, 2012 – approximately $525 million. As there is no chance of internal cash flows being able to pay off this amount in the next 22 months, they will either have to renegotiate some package with their creditors or take their chances in bankruptcy court. Either way, the equity investors in OPTI still look like they are holding an overvalued stock.
Bond traders are not faring much better – OPTI has two issues of senior secured notes, due 2014 and par value of $1.75 billion – they are now trading at 49 cents on the dollar, down from 80 cents back in November 2010. These bonds are effectively junior to $850 million of other debt that is due to mature at an earlier date.
The first geopolitical detonation has happened in the month of January, primarily the overthrowing of the Tunisian government, and the ongoing attempted ousting of the Egyptian government.
My knowledge of that part of the world is very limited, but I do know that part of Northern Africa should affect Europe much more than it would affect Canada or the USA. However, one has to ask themselves what the secondary or tertiary effects of what we are seeing – and right now, I have no idea other than to watch and wait.
I have sufficient idle cash in the portfolio that if the markets decided to crash, I would be relatively well-positioned to start looking for pricing inefficiencies.
First Uranium posted a production report for their last quarter. In the Thursday morning very long release contained the words that all equity investors dread:
The Company’s current cash resources may be insufficient to address its medium-term working capital needs. Accordingly, the Company has retained RBC Capital Markets as its financial advisor to review all funding alternatives.
Nobody appeared to read this paragraph until the opening of trading on Friday when presumably all the analysts released negative reports on the company.
The company’s common stock declined significantly Friday – from about $1.17/share to about $1.05/share presently. What is interesting is that this is purely from the news contained in the Thursday release – so institutional investors and analysts could not interpret the statement until given an evening to doing so.
I sold all the debentures (TSX: FIU.DB) out of my TFSA on Thursday for 80 cents on the dollar, but this was strongly instigated by the report. Most people on Thursday mis-interpreted the report as “steady as she goes” for the company operationally when they likely missed the critical part concerning the future capital requirements.
I also had some debentures in my non-registered account that I jettisoned, but still have some position.
First Uranium will likely have to raise further equity or debt capital to bridge their capital expenditure requirements. After that, presumably their existing Ezulwini mining operation could be cash flow positive. The equity is a high risk, high reward situation that I have not invested in. Depending on how such financing is structured it could be positive for debenture holders (e.g. a straight equity raise), but the company is otherwise restricted in terms of raising secured debt because of an existing agreement with noteholders (of which I own some as well).
The US federal reserve today released a “business as usual” statement, leaving their short term rates between 0 to 0.25%. Most relevantly:
To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.
This QE2 (Quantitative Easing #2) capital will fund the US government’s fiscal deficit. Normally when the federal reserve purchases long-dated treasury securities, you would expect the yields of such bonds to decrease, but ever since the last imminent threat of QE2 last October, long-term bond yields have done nothing but rise. The following are 1-year charts of the 30-year and 10-year US treasury bond yields:
If these yields rise further, it affects valuations of other yield-bearing securities since these bonds are considered to be “risk-free”. In addition, the value of companies with long bonds in their portfolios will decline, and companies will be taking comprehensive losses to account for the market value decline in treasury prices.
Will interest rates rise further? Time will tell. Just be prepared for volatility.
It should also be noted that Canadian equivalents are trading at less yield than US counterparts – e.g. the Canadian 10-year note is trading at 3.27%, while the US 10-year treasury note is at 3.43%.