Lundin Mining (TSX: LUN, OTC: LUNMF)
Originally recommended by Yola Edwards on May 17/07 (IWB #2719) at C$14.18. Closed Friday at C$7.63, US$7.73. Updated by Gordon Pape.
The Lundin saga took two new turns last week and, based on the reaction of the markets, investors seemed to be happy with both.
First, the company's board of directors rejected the hostile takeover offer from Equinox Minerals and advised shareholders not to tender to the bid, which is worth $8.10 a share. In a statement released on March 20, company chairman Lukas Lundin said the offer contained too many conditions and was "financially inadequate". He added: "The Board would not recommend that shareholders accept the offer because we have no confidence that it would ever close."
CEO Phil Wright expressed concern about the amount of debt financing involved in the deal, commenting: "Taking on US$3.2 billion in debt on partially undisclosed terms, and the basis of their production forecasts are two things in particular to reflect on. Equinox is essentially asking shareholders to grant them an option to acquire Lundin Mining, at their discretion, and their lenders discretion, at a price that is inadequate and containing substantial risks if implemented".
After rejecting the Equinox bid, Lundin announced that a special meeting of shareholders to approve a merger with Inmet Mining has been rescheduled for April 4. But now there are serious concerns that the Inmet arrangement may also collapse. The government of Panama surprised the company by rejecting its bid to use coal to generate power for the rich Cobre Panama copper project and insisting on natural gas instead. That immediately raised concerns that construction of the mine would be delayed. Mr. Wright described it as "a pretty material departure" from the terms of the merger. Lundin is now reported to be reviewing its options.
Investors responded to these dramatic developments by driving Lundin's share price sharply higher. The shares, which traded as low as $6.70 on March 15, finished on Friday at $7.63, a gain of 14%.
There is no way to predict what will happen next but the market seems to feel that the Inmet merger will fall through and that there is a higher and better takeover bid out there somewhere. We'll see.
Action now: Hold. - G.P.
Franco-Nevada Corp. (TSX: FNV, OTC: FNNVF)
Originally recommended by Gavin Graham on July 28/10 (IWB #20127) at C$31.69, US$30.35. Closed Friday at C$36.03, US$37.17.
Franco-Nevada reported strong fourth-quarter and year-end results on March 24 and rewarded shareholders by raising its dividend by 60% to $0.04 per month ($0.48 per year) starting in July (currency figures in U.S. dollars).
The company reported a 49% increase in free cash flow in 2010 to $184.8 million and an 84% increase in adjusted net income to $58.9 million ($0.52 a share). Royalty revenue came in at $205.4 million, up 44% year-over-year.
Looking ahead, the company estimates revenue for 2011 will be between $325 million and $350 million using consensus commodity price assumptions of $1,400 gold, $1,750 platinum, $575 palladium and $80 oil. Approximately 85%-90% will come from precious metal assets.
The stock is a Buy at these levels. The growth in royalty income from new mines in which FNV has an interest will continue regardless of what the gold price does for the next two years, as I pointed out in the original recommendation. It has also only slightly outperformed the TSX Global Gold Index, although FNV's growth in cash flow and earnings has been much stronger.
Action now: Buy. - G.G.
Cameco Corp. (TSX: CCO, NYSE: CCJ)
Originally recommended by Gordon Pape on July 21/08 (IWB #2826) at C$38.77, US$38.73. Closed Friday at C$30.56, US$31.17.
The outlook for the world's number one uranium produced changed dramatically in the space of a few hours when a tsunami swept over Japan's Fukushima nuclear plant, knocking out all the fail-safe mechanisms and creating a major crisis which is still unfolding.
Several governments immediately reacted by suspending construction of new reactors and ordering exhaustive safety inspections of existing ones. The price of uranium plummeted from about US$74 a pound to US$60 a pound and the shares of uranium producers followed suit.
Cameco stock was among the hardest hit. As recently as Feb. 14, the shares were trading at $44.28, close to a three-year high. After the disaster in Japan, they fell as low as $27.70 in intra-day trading on March 17, a drop of 38%, before rallying a little.
Although the company issued a statement saying in effect that it was business as usual, there seems little doubt that the Japanese crisis will have at least a short-term impact on Cameco's finances. Almost certainly, investors will be reluctant to put money into uranium stocks until the situation stabilizes and that could take months. So don't look for any significant rebound in the share price in the near future.
RBC Capital Markets issued an updated analysis of the stock on March 24 in which the brokerage firm revised its 2011 earnings per share (EPS) estimate down to $1.11 from $1.25. RBC expects an even bigger hit in fiscal 2012, with EPS coming in at $1.52 compared to the previous estimate of $2.24. These figures are based on the assumption that the spot price for uranium this year will average US$69 a pound, increasing to US$77.50 a pound in 2012 (the previous forecast had been for uranium to average US$100 a pound in 2012).
I would not advise selling Cameco at this point as I expect the stock will gradually move higher over time. But this is not a good place for new money at present.
Action now: Hold. - G.P.
Brookfield Asset Management (TSX: BAM.A, NYSE: BAM)
Originally recommended by Gordon Pape on April 7/97 (IWB #9713) at C$6.23 (split-adjusted). Closed Friday at C$30.88, US$31.48.
Brookfield recently reported its final results for fiscal 2010. Cash flow from operations for the year increased marginally to just under $1.5 billion ($2.37 per share) from $1.4 billion ($2.34 per share) in 2009. (Note that Brookfield reports in U.S. currency.)
The company switched to International Financial Reporting Standards (IFRS) in 2010. On that basis, net income for 2010 was $3.2 billion in total, of which $1.45 billion ($2.33 per share) was attributable to Brookfield's common shareholders and the balance of $1.74 billion accrued to co-investors in the company's consolidated operations.
In 2009, the company said its net income was $454 million ($0.71 per share) under Canadian Generally Accepted Accounting Principles (CGAAP). In the financial report, Brookfield said that net income for 2009, restated to conform to IFRS, included downward adjustments to the appraisal values of its commercial office portfolios, resulting in a net loss for the year on a comparable basis.
The company said that the intrinsic value of its common equity was $37.45 per share at year-end. This includes net tangible asset value of $30.96 per share and $6.49 per share related to the company's asset management franchise. Intrinsic value increased by $3.77 per share, or 12% during 2010, prior to dividends.
The stock pays a quarterly dividend of $0.13 a share.
Action now: Buy. - G.P.