2011 Q1 Newsletter March 31, 2011
After a positive start to first quarter (Q1) in equity markets, two major regional events negatively affected markets. The rise of resistance to dictators in the Middle East and Northern Africa manifested itself in Tunisia, Egypt, Libya and other nations. Higher oil prices were the immediate consequence.
The earthquake and resultant tsunami in Japan caused the largest economic losses in world history for a single disaster. The damages are estimated to be over $300 billion USD. The severe damage to four nuclear reactors has cast a radioactive cloud over the future growth of nuclear generation.
Despite these calamitous events, equity markets moved higher propelled by the recovering United States economy and increasing evidence of American job creation. The rebuilding effort in Japan will also contribute to global growth. Despite higher interest rates in China strong growth continues. Higher oil prices pose the greatest risk to growth if they are sustained.
LDIC’s performance was +5.9% in the first quarter, exceeding the TSX Index. The TSX added +5.0% in Q1 which was slightly less than the +5.4% S&P 500 in New York. The DEX Universal Bond Index declined -0.3% in Q1.
Top Ten Holdings
Eight of our top ten holdings gained during Q1. The top performers were Canfor Pulp with a gain of +26.5% and Inter Pipeline with a gain of +14.5%. The only two positions in negative territory were Hudbay with a loss of 12.1% and Brookfield Properties with a loss of 2.3%, the overall average gain was +6.8%.
Major Portfolio Exits
We exited three major equity positions in Q1, these were.
Consolidated Thompson (CLM)
An iron are producer in Labrador, Consolidated Thompson represented a significant gain for our clients. We redeployed the investment to other positions after. Consolidated Thompson was the object of successful takeover bid by Cliffs. We sold our position on January 12th between $17.35 and $17.8988
Cameco is the largest Canadian uranium mining company. The events in Japan caused us to sell our entire Cameco position. Our view is that the resurgence of nuclear energy will be significantly slowed by these tragic events. Older reactors will be taken out of service. Eight reactors in Germany have been closed for safety inspections. Extended operating permits for reactors near the end of their planned operation may be withheld by regulators in a number of countries. As well citizen reaction and fears, founded or unfounded, will delay new reactor construction in many locations. For all of these reasons we exited Cameco, selling our position on March 14th between $29.71 and $29.54
Alliance Grain Traders (AGT)
We sold our position in Alliance Grain Traders prior to very disappointing Q4 results as we felt lower lentil prices would have a negative impact on Alliance’s earnings. Q4 earnings came in less than expected and the fourth quarter was the third disappointing quarter in a row. Due to last year’s wet weather and a delayed harvest Alliance continues to be hurt by low quality Canadian lentils. Given their efforts to diversify Alliance still continues to be highly leveraged to Canadian lentils. With lower quality lentil inventory still to be worked through and the possibility of lower processing volumes in the upcoming quarters we feel there is still risk of further margin compression in 2011. We decided to move our capital elsewhere until these issues can be resolved. We sold between March 21st and 22nd between $27.00 and $29.00
Major Portfolio Additions
We added five major new positions during Q1. These were Goldcorp, Enerplus, Cline Mining, Pembina and Churchill.
During the Q1 of 2011 we started accumulated a position in Goldcorp. We wanted to increase our gold weighting and believed Goldcorp offered the best upside given it was trading at a significant discount on a P/NAV basis (1.6x versus peers at 2.6x) with the best growth profile of its peers. Goldcorp will be growing production from 2.3 million ounces in 2010 to 3.7 million ounces by 2014, almost 60% production growth. Cash costs also declining over that time by about 30% to $200/oz which will give real cash flow growth in any gold price environment. Goldcorp also offers great near-term upside with exploration results at Cerro Negro from the Andean acquisition last year.
Enerplus Corporation (ERF)
Enerplus Corporation is an intermediate oil and gas producer with operations in both western Canada and the United States. The past 18 months has seen ERF increase its asset base in the Bakken and Marcellus while divesting its oil sands position in Kirby and other non-core assets. The company now has a large inventory of opportunities in two of North America's most active resource plays, the Bakken and Marcellus. These two plays are likely to receive the majority of the drilling capex in the next few years. The production in the Bakken is expected to grow from 4M bbl/d to 20–25M bbl/d by 2014. In the Marcellus, production is expected to grow from 20MM cfe/d to 42–48MM cfe/d by year-end. To date the well performance in both the Marcellus and Bakken has surpassed expectations. We like ERF because it has a solid growth profile, no Canadian cash taxes expected for 3 – 5 years, a sustainable distribution and an attractive yield of approximately 7%.
Pembina Pipeline Corporation (PPL)
Pembina Pipeline is a transporter of natural gas liquids and crude oil in western Canada. It also participates in mid stream processing. Pembina also produced strong revenues and profit growth in 2010.
Pembina Pipeline converted to a corporation from an income trust in 2010. With a sustainable yield of 6.8% we believe Pembina to be well positioned for future growth in the pipeline and related businesses.
We decided to add to our holdings in Churchill Corp after they reported a strong fourth quarter to end 2010. Earnings came in better than expected and they were able to successfully integrate their acquisition of Seacliff Construction. We continue to like Churchill’s prospects as their pipeline of future projects remains strong. Renewed interest in the oilsands due to a high oil price and the recent geopolitical instability in other regions should bode well for Churchill going forward. The Churchill Corporation operates as a construction and maintenance services company in western Canada. It operates in three segments: Industrial Services, General Contracting, and Commercial Systems.
Cline Mining (CMK)
Cline Mining is a metallurgical coal development company in Colorado. The company is fully permitted and financed to get to first production by the end of this year. The stock has come off from a high of $5 in early January and is now consolidating in the $3-4 range. The stock is off for two reasons 1) it has appreciated too fast to soon & 2) it is in the quiet build phase where stocks have little news to offer to investors. We continue to hold Cline Mining and are very positive on both coal pricing and the company’s prospects. The net asset value of the company at much lower coal prices then are currently being quoted is $5.25-5.50 therefore we continue to believe it is significantly undervalued.
Our outlook for the balance of 2011 remains positive. Despite the turmoil in the Middle East and North Africa and the aftermath of the Japanese earthquake and tsunami, growth in the world economy will continue. We believe that a steady increase in United States employment will provide support for stronger equity markets.
United States recovery will also lead to increased interest rates later in 2011 and in 2012. This will adversely affect fixed income holdings such as bonds and preferred shares.
Overall we anticipate a solid year for the performance of the investments we manage.
LDIC Inc. – New Location
We have recently moved our offices to the Exchange Tower at the corner of King Street West and York Street, one block north of our previous location. Our telephone, email and fax numbers remain unchanged. Our new mailing address is:
130 King Street West, Suite 2130
PO Box 399
Toronto, Ontario M5X 1E2
We look forward to welcoming you to Suite 2130 of the Exchange Tower, our new home.
President and CEO