I really liked James Hymas‘ discussion that was generated when he was quoted by the media as stating that capital units of split shares are for “suckers”.
You can find his detailed analysis here.
Places to park US dollars
If you have US cash collecting dust in your brokerage accounts, you are probably wondering if you can scrape a percent or two from them in relatively safe instruments instead of surrendering that money to your brokerage firm. After doing some exhaustive research on the matter, I believe there are three relatively low-risk ETFs to park them into, all of them offered by Vanguard and ranked from most risky to least:
- Vanguard Short-Term Corporate Bond Fund (Nasdaq: VCSH) – MER of 0.15%, duration of 2.8, yield to maturity 2.2%, invested in relatively safe corporate securities;
- Vanguard Short-Term Bond Fund (NYSE: BSV) – MER of 0.12%, duration of 2.6, yield to maturity 1.2%, invested in mostly government/treasury securities;
- Vanguard Short-Term Government Bond Fund (Nasdaq: VGSH) – MER of 0.15%, duration of 1.8, yield to maturity 0.6%, invested completely in government/treasury securities.
There is still interest rate risk embedded in these securities and you never know if there will be a 2008-style meltdown in the financial markets that would only render BSV and VGSH as cash-like instruments.
Want more yield? You have to invest in junk bonds, a much more dangerous ballgame – and potentially more expensive for investors!
As readers know, I have been in a bunkering down mentality with respect to the markets. I am very defensively positioned and do not expect much returns in my portfolio in 2011.
Bank of Canada leaves rates at 1%
As predicted, the Bank of Canada leaves rates at 1%, citing:
The recovery in Canada is proceeding slightly faster than expected, and there is more evidence of the anticipated rebalancing of demand. While consumption growth remains strong, there are signs that household spending is moving more in line with the growth in household incomes. Business investment continues to expand rapidly as companies take advantage of stimulative financial conditions and respond to competitive imperatives. There is early evidence of a recovery in net exports, supported by stronger U.S. activity and global demand for commodities. However, the export sector continues to face considerable challenges from the cumulative effects of the persistent strength in the Canadian dollar and Canada’s poor relative productivity performance.
While global inflationary pressures are rising, inflation in Canada has been consistent with the Bank’s expectations. Underlying pressures affecting prices remain subdued, reflecting the considerable slack in the economy.
This language is similar to the previous release, and suggests that at the April 12th release that the Bank of Canada, barring any major events between now and then, will be keeping rates steady at 1% for that meeting.
BAX Futures are a shade higher, although it should be noted that the June future is at 98.545, implying a coin toss for a 0.25% rate hike at the May 31, 2011 announcement.
First Uranium – Raising equity financing
First Uranium (TSX: FIU) announced they closed a $52 million equity financing at $1/share. They had originally had $46 million subscribed with a $6M greenshoe embedded.
This is about a 22% dilution of equity interests in the company, but they need this money to bridge their future operations and implement their capital plan:
---------------------------------------------------------------------------- FIU CONSOLIDATED end end end end end (000's) Mar '11 June '11 Sept '11 Dec '11 Mar '12 ---------------------------------------------------------------------------- MWS: Cash generated from operations 12,032 16,295 7,444 8,619 13,873 MWS capital expenditures (17,816) (12,649) (7,093) (337) (143) Ezulwini: Cash (utilized in) generated from operations(1) (9,449) (3,823) (411) 4,964 10,098 Ezulwini capital expenditures (5,236) (6,580) (6,677) (5,938) (4,927) FIU corporate expenditures (2,875) (2,726) (3,726) (2,726) (2,726) Interest on convertible debentures (7,301) (3,156) (7,301) (3,156) (7,147) ---------------------------------------------------------------------------- Cash movement for the quarter (30,646) (12,639) (17,765) 1,427 9,027 Minimum proceeds from financing raise(2) 46,000 Less: estimated financing transaction costs (2,675) Opening balance 29,979 42,658 30,019 12,254 13,681 ---------------------------------------------------------------------------- Closing Balance 42,658 30,019 12,254 13,681 22,708 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- COMMODITY AND EXCHANGE RATE ASSUMPTIONS ---------------------------------------------------------------------------- Gold price US$/oz 1380 1390 1390 1390 1390 Uranium price US$/lb 65 65 65 65 65 Gold price ZAR/kg 301,703 303,889 303,889 303,889 303,889 ZAR/US$ exchange rate 6.80 6.80 6.80 6.80 6.80 ----------------------------------------------------------------------------
What this means is that if the company did not raise money by the end of the month, they would be out of cash – but they need about $42M in capital expenditures in order to buy themselves enough time to build the Ezulwini mine to the point where it can start generating free cash flow.
Assuming they have the operational side covered (which is never a given considering the sketchy history of the company), their next looming financial issue is how to pay off the subordinated convertible debentures, of which $150M is outstanding and due to mature on June 30, 2012. It is low cost debt (4.25% coupon), but if the company is generating free cash flow at this time, it is likely they will be able to rollover the debt at a higher coupon and extend the term out another five years. This will not happen until the first half of 2012.
If the company gets to this point of being free cash flow positive, the equity will be worth well more than a dollar a share. But this is a very risky play – if it works, investors will likely get a very handsome return on investment over a two year period. If it blows up, the common shares will go to zero.
The other embedded risk is commodity pricing – both currency and gold pricing.
The subordinated debt has traded at around 82-83 cents today, which is the highest it has been since early 2008. Disclosure: I do have a position in First Uranium’s notes.
The easy trade is the dangerous trade
The easy trade these days appears to be in crude oil, and to a lesser degree, commodities.
My trading gut instinct says that the crude market may be a tad overextended at the moment, presumably due to geopolitical instability.
Modern historians should note that Iran and Iraq went through a decade-long war, yet the Persian Gulf still managed to export billions of dollars of crude.
The big shoe to drop is the answer to the question of “What happens in Saudi Arabia?” since they control a significant source of supply globally. That said, it is highly likely that the oil will still flow since whoever is left to control government will still want the cash cow – what will be significantly more disruptive is that the incumbent administration knows it will be kicked out, but has plenty of notice of its pending demise. In this scenario, they will likely use the “scorched earth” option, similar to what Saddam Hussein did in Kuwait prior to the first Iraq invasion.
Readers will likely note that their holdings in Canadian oil sands related companies have received a significant amount of appreciation over the past 6 months – partly related due to the market conditions and improving economy. Here is a chart of Cenovus (TSX: CVE), but you can pretty much fill this in with the usual suspects (Suncor, Canadian Natural, etc.):
The last spike up over the past month is a function of higher crude prices and geopolitical instability – I’d estimate of the $6 that it has gone up from $32 to $38, half of that is due to crude, and half of it is implied instability.
That said, it seems like an easy trade to pile in at the moment, so be very cautious – when others think alike, your risk/reward ratio becomes more adverse.