(sOURCE: Canaccord Genuity, bloomberg, THE GLOBE AND MAIL, REUTERS)
§Equity markets were strong again this week and the S&P 500 finally broke out to a 5-year high. Unfortunately, the 8-10% rally since mid-November lows has created much overbought conditions. The US VIX has fallen to 2007 levels at 13.5% and the AAII percentage of bullish investors is nearing the exuberant level of 50%. Canaccord Genuity Portfolio Strategist Martin Roberge noted that while these indicators suggest some near-term complacency, investors should not substitute complacency for euphoria. Indeed, 1) above-average equity-risk premiums, 2) retail equity funds’ outflows, 3) overvaluation of defensive stocks, and 4) the underperformance of high-beta stocks still point to a relatively high level of investors’ risk aversion despite the strong performance of global equity markets over the past year. As global economic growth improves through the year, a re-normalization in risk aversion should be enough to propel equity markets to higher levels and possibly reclaim 2007 highs. Already, our Chart of the Week shows that the bond equity risk premium as measured by the world CDS index has fallen to 2011 levels. If the CDS index is any guide, the equity risk premium (ERP) should continue to head lower. Thus, the next question mark for investors may not be earnings but market valuation considerations.
§ Back to the Basics. Of the base metals, all but copper and lead are currently trading below Canaccord Genuity’s Base Metals Team long-term price forecasts, with expected surplus and/or large exchange inventories constraining price recovery despite an improving economic growth outlook. Beyond the immediate fiscal issues, the Team expects continued slow economic recovery in the U.S., and that Europe will eventually return to growth. They also expect infrastructure and residential development to continue to drive industrial growth in China, albeit it at a slower pace than that of the past decade, and note that Chinese consumption already accounts for more than 40% of global consumption of most of the industrial commodities they follow. Of the base metals, the Team likes the fundamentals for copper best. Granted, there is potential for a period of relatively small market surplus from 2014 to 2015; however, they also see the potential for very large deficits beyond. Conversely, they like fundamentals for nickel least, and expect zinc to remain in surplus for the next few years before mine closures start to turn the market tighter. Also of note, Chinese steel production drives demand for seaborne iron ore and coking coal, and the Team expects Chinese steel production to continue to rebound in early 2013 driven by increased infrastructure spending. However, they see downside risk potential to currently high iron ore prices, given that current restocking is driven at least partially by the advent of seasonally weak supply during the current Q1. While U.S. thermal coal prices may remain depressed by structurally low natural gas prices, some recovery is expected in internationally traded thermal coal prices globally from the twin pull of coking coal demand at the quality margins, and from China and India to supplement domestic production for electricity generation. For exposure to copper (the preferred base metal), Canaccord Genuity’s top picks include: Augusta Resource (AZC : TSX : $2.34), Copper Mountain Mining (CUM : TSX : $3.91) and Lundin Mining (LUN : TSX : $5.13).
Stocks in the news:
(sOURCE: Canaccord Genuity)
§ Monday is as good a day as any to launch a hostile takeover. Alamos Gold (AGI : TSX : $15.69) has launched a hostile takeover bid for Aurizon Mines (ARZ : TSX : $4.68) worth approximately C$780 million in cash and shares. Under the terms of the offer, AGI proposes to acquire all of the outstanding common shares of ARZ for consideration value of C$4.65 per ARZ share. Each ARZ shareholder can elect to receive consideration per ARZ Share of either C$4.65 in cash or 0.2801 of an AGI Share, subject in each case to pro-ration based on a maximum cash consideration of C$305 million and maximum number of AGI Shares issued of 23.5 million shares. The offer reflects a premium of approximately 40% based on the closing price of C$3.33 for the ARZ Shares on the TSX on January 9, 2013, and a premium of approximately 37% based on the volume-weighted average price of the ARZ Shares on the TSX for the 20 trading days ended January 9, 2013. AGI currently owns ~26.5 million ARZ shares, representing over 16% of the issued and outstanding of the company. From January 10-13, 2013, AGI acquired, in the aggregate, ~23.5 million ARZ shares pursuant to share purchase agreements entered into between AGI and certain shareholders of ARZ. The offer will remain open until 5:00 p.m. EST on February 19, 2013 unless withdrawn or extended. ARZ has a producing gold mine, one development project (Casa Berardi) and several exploration properties. At the end of Q3/12, the company had cash balances of $199 million ($1.21 per share in cash), and no debt.
§ Tensions growing? First Quantum Minerals (FM : TSX : $21.30) has released an open letter to the holders of common shares of Inmet Mining (IMN : TSX : $71.20), addressing certain statements made in Inmet's news release dated January 12, 2013. In the letter, First Quantum stated that “it’s not the time” for Inmet to sell a stake in its Cobre Panama copper project to thwart First Quantum’s $5.1 billion hostile bid. The letter said several large shareholders of Inmet had approached First Quantum to express concern that the smaller company could be shopping around a minority interest in its Cobre Panama copper project in Central America. Inmet holds an 80%-stake interest in the project, which is one of the world's largest undeveloped copper deposits. The company has already sold a precious metal stream to help fund the $6.2 billion development. First Quantum stated that by selling an additional stake in Cobre Panama, Inmet would make itself less appealing as a takeover target, implying the move was tantamount to sabotage. Inmet's board chairman David Beatty described the letter as "plainly hostile and counterproductive" in a statement. The First Quantum offer requires acceptance by holders of 66% of Inmet shares; Leucadia National (LUK), which owns a 16% stake in Inmet, said on January 10 it plans to tender its shares in support of First Quantum’s takeover proposal. Inmet said its board and advisers are evaluating the offer as well other alternatives, without detailing them. A recommendation will be made to Inmet shareholders on or before January 24.