Ubika Research Lead Analysts Discuss their Economic Outlook for 2013 in a Wide Ranging Interview
January 25, 2013
Today we are pleased to feature an exclusive interview with the lead analysts from Ubika Research, Mr. Vishy Karamadam and Mr. Vikas Ranjan.
SmallCapPower: What is your outlook for the year 2013? Do you think this be a better or worse year for markets than 2012?
Ubika Research: We remain positive in our outlook for 2013. We believe that there are several positive catalysts, especially in the US economy, that will carry over in 2013. We believe the US economy will likely surprise us on the upside and that will be good for the Canadian economy and hence for North American capital markets. It is hard to predict if investors will see better returns than 2012 as we are coming off a relatively strong year, and we do expect positive return for most indices. Latest data seems to suggest that China has managed a soft landing and is now reaccelerating. This, coupled with reforms and efforts to increase the growth rate in India, should help the commodities sector. Even in Europe one sees bond yields starting to come down and the prediction of a break-up of the Euro and severe disruption is now viewed as less likely to happen.
SmallCapPower: What do you believe are some of the challenges to be overcome in order for the Canadian economy to grow? How can these challenges be overcome?
Ubika Research: We believe that the Canadian economy is on a fairly strong footing compared to the rest of the advanced countries. It certainly has a much better outlook due to a relatively strong fiscal situation, a manageable debt level and a strong banking system. There are several challenges however. Ontario, the largest province in Canada, is dealing with huge deficits that need to be addressed. This could result in government spending cutbacks in that province which can impact growth. Canada’s close proximity to the US and its resource heavy economy pose some challenges. If the US economy continues to sag, it will have an adverse impact on the Canadian economy. Similarly, if China (the largest consumer of commodities) slows down, it will present a serious headwind for the Canadian economy. We are also concerned about the continued sluggishness in the manufacturing sector, which impacts the larger central provinces such as Ontario disproportionately. The price discount for Canadian Oil Sands crude and the challenge to export oil out of Alberta is a significant risk as the Oil Sands projects are very capital intensive with ripple effects for employment and businesses across the country. Any slowdown in oil sands projects and the continued discount to oil sands crude will have some negative effect on the economy. A positive decision on the Keystone pipeline would help in this regard.
SmallCapPower: What are your viewpoints on the US economy? What are some growth areas and challenges to watch out for?
Ubika Research: We believe that the US economy is picking up strength and it is showing up in manufacturing data and more recently in the housing sector where things seem to have bottomed out. Recently Apple announced it is moving some of its manufacturing back to US. While this is a small move it gives some evidence that cost competitiveness is returning to the US. As housing picks up a little, it will provide a big boost to the economy and several ancillary areas that support housing will start to pick up as well. Consumer demand driven sectors will also do well as the economy picks up. Think of consumer discretionary, auto, and healthcare services to name a few. Another major positive (and often overlooked) is the energy revolution currently underway in the US due to the rapid increase in oil and gas production. This has significant spin-off benefits with energy intensive industries shifting to the US particularly from Europe where the energy costs are much higher. The challenges coming from political gridlock around possible debt ceiling negotiations and/or a debt downgrade is a cause of concern as was witnessed in the previous round of debt ceiling fights. We need to see the response of the economy as the Federal Reserve starts to withdraw its liquidity support. We need to see if the US economy is strong enough to sustain on its own without the Fed’s easy money stance.
SmallCapPower: What do you believe investors can expect from the recent Fiscal Cliff deal? What are areas to be careful with, and where can investors benefit?
Ubika Research: Well, at least the US managed to get out of a hole that it unnecessarily dug for itself and the so-called fiscal cliff was avoided. It has provided some assurance to the markets that there won’t be an immediate drag to the economy resulting from automatic tax increases and spending cuts, which at its fullest could have been a negative burden on the economy of as high as 5% of the GDP. Nonetheless, there is still considerable risk in the markets. The US has a huge debt problem and a political system that seems unable to resolve long-term problems. Investors should be wary of committing too much and too soon to the markets. A gradual approach to investing in companies with good assets and cash flow should be pursued.
SmallCapPower: What is happening in Europe now, and what are some catalysts to watch out for?
Ubika Research: Europe is muddling through its problems. We do not believe that there is any imminent risk to the survival of Euro or the Euro Zone in 2013. Even the risk of Greece leaving the Euro has come down quite significantly. If you look at the yield on government bonds issued by problem countries such as Spain and Italy, you can see that the risk premium has backed off from previous high levels. Investors need to watch for political developments in Italy, which will hold an election soon. Germany will also have an election shortly. A real risk is the potential rise of populist parties in several European countries that can come to power and try to derail any progress main in getting the fiscal house in order.
SmallCapPower: As gold closed off 2012 at about $1675, where do you think the precious metal will go to this year and why?
Ubika Research: Gold will have some headwind in the first few months of 2013 as the Fed signals the unwinding of quantitative easing program. As the liquidity starts to get drained from the markets the threat of future inflation lessens and gold does badly when people think that there is less likelihood of inflation. However, we believe that globally, there is still too much uncertainty and unknowns and gold generally does well in such situations. It has a unique place in the minds of investors as a store of value. We think that gold will continue to rise higher although the rate of growth might slow down. A price range of $1600 to $1900 is more likely for gold during 2013 but we will not be surprised if it breaks a $2000 barrier if the situation in Europe worsens or US debt ceiling negotiations get ugly and leads to increased risk in the markets.
SmallCapPower: How about oil?
Ubika Research: Oil will have better year during 2013. The world economy should pick up pace, especially the emerging countries such as China and India where growth slowed down in 2012. We don’t see a big run in oil prices however, unless there is a security situation owing to a conflict with Iran in the Middle East.
SmallCapPower: What commodities or minerals do you think investors should watch out for this year? Where are the investment opportunities?
Ubika Research: We continue to like precious metals, especially gold. We also like specialized material such as graphite and some basic commodities such as coal and copper. We believe that the resource needs of the fast growing and big emerging economies still has room to grow and that should benefit basic materials. We also are bullish on those specialized materials that are used in multiple applications and hence could have a large derived demand. Graphite is a good case in point. Its demand is growing due to rising sales of a myriad of electronic products such as laptops and smart phones that use lithium-ion batteries, which in turn use graphite.
SmallCapPower: Aside from resource opportunities, can you mention any non-resources opportunities and discuss potential catalysts for 2013?
Ubika Research: We think that investors should certainly try to have a diversified approach and should look at investment opportunities in different sectors. We believe that there are always opportunities to find interesting companies to invest in the technology sector, alternative energy and diversified spaces such as education and training etc. We like technology companies that have reached an inflection point where their revenue is starting to stabilize and they are making money. We also like niche but non-complex businesses with predictable and recurring cash flows.
SmallCapPower: Many junior stocks have been hit in 2012. What type of catalysts (positive or negative) do you expect to see in 2013 for the junior company arena this year?
Ubika Research: Junior stocks had a terrible year in 2012. Although the large caps and indices representing large cap stocks did well during 2012, junior stocks continued to languish. We believe that 2013 will still be a challenging year for junior stocks. Generally junior stocks do well when the capital starts to flow more easily into the riskier assets. We don’t believe that we are at the stage where investors have developed a risk-on approach. We see that a rotation out of bonds into stocks is starting to take place but it will likely take longer than 1 year for the new capital to get to flow to junior stocks. On a positive note, we believe that the bear market in junior stocks has been running for way too long now and it does seem that things have finally bottomed out for the broader junior markets. If the economies in the key emerging markets pick up this year, it will bode well for commodities and in turn for junior resource stocks. Another positive catalyst could be increased M&A activity and joint venture plays related to juniors with attractive assets and businesses.
SmallCapPower: Considering the economic environment, what type of junior resource companies should investors look at? Early stage / late stage exploration / producers?
Ubika Research: As we said earlier, we believe that investors still are quite wary of investing in risky assets. So it makes sense to look for companies that are at a more advanced stage with respect to their assets and projects. Investors should also look at other factors that can make a project or asset more appealing. For example, a junior could be a proximity play if it has a resource next door to a major or intermediate producer. If a junior resource company is already in a joint venture with a major and is successfully in proving a resource, it could be an interesting play. Another key factor is management, cash position and management’s ability to raise capital. Having a prospective asset with no money doesn’t help either.
SmallCapPower: In your coverage portfolio, can you offer some companies to look at that are sufficiently liquid and have sizable market caps by junior companies’ standards?
Ubika Research: Sure. Based on some companies that have a fair amount of institutional attention, have a large retail following and also trade a fair amount on a daily basis, some options we can recommend to you include:
RYE PATCH GOLD (TSX-V: RPM) (OTCQX: RPMGF)
The company's Nevada focus arose from management's considerable knowledge of the region and Nevada's key position in world gold output. RPM has 7 projects on two trends near Elko, Nevada: The Oreana trend has 5 properties with 2.4 Mn Oz of Au and Au equivalent in the Measured and Indicated categories, and has 1.05 Mn Oz in the Inferred Category. The Cortez trend features 2 properties where RPM is actively exploring near recent Barrick Gold (TSX/NYSE: ABX) discoveries (Pipeline, Goldrush and Cortez Hills). RPM has also recently entered into a joint venture with Barrick Gold and McEwen Mining (NYSE/TSX: MUX) for the Patty Project on the Cortez Trend. RPM is well financed and we believe positive exploration results results will be a catalyst for this stock.
RPM is also engaged in a court case with C’oeur D’alene Minerals (NYSE: CDE) (TSX: CDM) for parts of their Rochester property that RPM staked in Q4 2011. While RPM is confident they have rightfully staked the claims since CDM did not pay the claim fees on time, CDM disputes these claims and a court date has been set for September 2013. Any favourable verdict for RPM in this case can also be a positive development for RPM.
ARGEX TITANIUM INC. (TSX-V: RGX)
Argex Titanium Inc. is aiming to be a near-term producer of high purity Titanium Dioxide (TiO2), which is a whitish pigment used in various industrial products such as paint, cosmetics, and food colouring. The company has a proprietary technology which allows RGX to utilize Ilmenite, which is a titanium-iron ore oxide to be converted to 99.8% TiO2. This allows them to capture the value added profit by maximizing their margins when selling the final products to TiO2 end users. A pilot plant is running continuously and is delivering favourable results.
Argex has started a bankable feasibility study for the creation of a TiO2 production plant. Argex has also signed an agreement with PPG (NYSE: PPG), the second largest global paint company for Titanium Dioxide collaboration. A formal agreement is highly anticipated over the next few months. The company is well financed to execute on its plans.
Allana Potash (TSX: AAA) (OTCQX: ALLRF)
Allana Potash is an advanced stage exploration company that is focused on developing their flagship Dallol Potash project in Ethiopia. Ethiopia has a stable and business friendly government. The country is is close to the Asian continent a big importer of Potash.
The project has a NI 43-101 resource estimate of Measured and Indicated: 1,298 M tonnes @ 19.3% KCl, and an Inferred amount of 588 M tonnes @ 18.6% KCl. The company is also actively working on a feasibility study and is expected to be completed in Q1, 2013. If the company releases a positive feasibility study we believe this project will garner the attention of serious players, particularly Potash buyers in China or India and the stock will attract attention.
Allana Potash also has two notable shareholders: International Finance Corp (World Bank Group member) and Liberty Metals and Mining (an affiliate of Liberty Mutual Group). The company is well financed to execute their plan.
About Ubika Research: Ubika Research is an investment research and capital market services firm based in Toronto and Vancouver with a proven track record of identifying and launching coverage of high potential small cap stocks (<$5 billion) at an early stage.
Disclosure: Ubika Research has received compensation from Allana Potash, Argex Titanium and Rye Patch Gold to provide analyst research coverage. Except for the historical information presented herein, matters discussed in this document contain forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from any future results, performance or achievements expressed or implied by such statements. Ubika Research and www.smallcappower.com (are both divisions of Ubika Corporation), and are not registered with any financial or securities regulatory authority, and does not provide nor claims to provide investment advice or recommendations to readers of this report. For making specific investment decisions, readers should seek their own advice. For full disclosure please visit: HERE