Fundamental Research Corp. Outlook on Commodities and Top Picks


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Fundamental Research Corp. Outlook on Commodities and Top Picks

  1. 1. <ul><li>Fundamental Research Corp. </li></ul><ul><li>Outlook on Commodities and Top Picks </li></ul><ul><li>January 20, 2009 </li></ul>
  2. 2. Disclaimers and Disclosure <ul><li>Fundamental Research Corp. (“FRC”) does not own any shares, or have any investment banking business with the companies mentioned in this presentation. FRC may have fee-based business with companies mentioned in this presentation. In such cases, FRC takes steps to ensure independence including setting fees in advance and utilizing analysts who must abide by the CFA Institute Code of Ethics and Standards of Professional Conduct. Additionally, analysts may not trade in any security under coverage. Forward-looking statements regarding the companies and/or stock’s performance inherently involve risks and uncertainties that could cause actual results to differ from such forward-looking statements. </li></ul>
  3. 3. Agenda <ul><li>About Fundamental Research Corp. </li></ul><ul><li>Outlook on Commodities and Price Forecasts </li></ul><ul><li>Attractive trends/basins in North America </li></ul><ul><li>Identifying juniors with potential </li></ul><ul><li>Top Picks </li></ul><ul><li>Companies to track </li></ul><ul><li>Q&A </li></ul>
  4. 4. About Fundamental Research Corp. <ul><li>Fundamental Research Corp., founded in 2003, is an equity research firm which does not engage in investment banking or brokerage operations. We provide our subscribers with the highest quality fundamental research on smaller cap companies from a value-based perspective.  We are registered as a securities adviser with the British Columbia Securities Commission (registration is in no way an endorsement from the BCSC).  Our performance can be found on Investars. </li></ul><ul><li>All our research, a complete list of companies we cover, and subscription options are available on our website – . </li></ul>
  5. 5. Global GDP Growth Forecasts <ul><li>The global economic slowdown will affect demand for most commodities </li></ul>
  6. 6. Outlook on Oil – Factors Affecting the Price of Oil <ul><li>Global GDP Growth </li></ul><ul><li>Global supply surplus/deficit – Production from OPEC </li></ul>
  7. 7. Factors Affecting the Price of Oil – GDP <ul><li>High correlation between economic growth and oil consumption </li></ul><ul><li>Our research found that during 1970 – 2008, 58% of the changes in oil consumption could be explained by changes in global GDP </li></ul>
  8. 8. Factors Affecting the Price of Oil – OPEC Production <ul><li>How important is OPEC? </li></ul><ul><li>Supply from OPEC is still important </li></ul><ul><li>OPEC currently accounts for over 40% of world crude oil supply </li></ul><ul><li>OPEC adjusts its production to influence price </li></ul><ul><li>We found a much stronger negative correlation between oil prices and OPEC production than oil prices and Non-OPEC suppliers </li></ul>
  9. 9. Factors Affecting the Price of Oil – OPEC Production
  10. 10. Factors Affecting the Price of Oil – OPEC Production <ul><li>OPEC’s Spare Capacity is tight </li></ul><ul><li>Spare capacity averaged 2.8 million bbl/d during 1998-2008 </li></ul><ul><li>Spare capacity forecast at 3.95 million bbl/d in 2009, and 4.56 million bbl/d in 2010 </li></ul>
  11. 11. Short Term Outlook on Oil <ul><li>Consumption is forecast to decline in 2009 in light of the current economic slow down </li></ul><ul><li>However, production cuts are expected to result in a supply deficit in 2009 </li></ul><ul><li>Consensus oil price forecast is US$51/bbl for 2009 </li></ul>
  12. 12. Long Term Outlook on Oil <ul><li>Price is expected to recover in 2010, and stay above US$80/bbl from 2013 to 2018 (consensus forecast) </li></ul><ul><li>We believe oil prices should stay above historical averages in light of increasing finding and development costs </li></ul>
  13. 13. Long Term Outlook on Oil Forecast Historical
  14. 14. Outlook on Copper - Factors affecting the Price of Cu <ul><li>Global GDP growth (consumption) </li></ul><ul><li>Global copper production growth </li></ul><ul><li>Global copper supply surplus/deficit </li></ul><ul><li>The U.S.$ </li></ul>
  15. 15. Outlook on Copper - Short-term Price Forecast <ul><li>The ICSG estimates the global refined copper supply surplus will increase from 0.11 mm tonnes to 0.28 mm tonnes in 2009, an increase of 154% </li></ul><ul><li>Surplus expected to increase further in 2010 </li></ul><ul><li>We expect prices to stay soft in 2009 </li></ul>
  16. 16. Outlook on Copper - Long-term Price Forecast <ul><li>Source: FRC </li></ul><ul><li>Our research shows that supply disruptions, high cash-costs, and long-term demand growth will be the major price drivers in the long-term </li></ul>
  17. 17. Outlook on Gold - Factors affecting the Price of Gold <ul><li>The US$ </li></ul><ul><li>Inflation </li></ul><ul><li>Geopolitical Tensions </li></ul><ul><li>Financial Crisis </li></ul><ul><li>High Oil Prices </li></ul>Our research showed that: * During Jan 1980 – Nov 2008, 15% of the changes in monthly gold prices could be explained by changes in the US$ *Correlation b/w oil and gold increases during high oil prices: During 2005 – 08, 17% of the changes in monthly gold prices was explained by changes in oil prices (historically – 2%) * Correlation b/w inflation and gold prices increases during high inflationary periods (eg; early 1980s)
  18. 18. Short-term Outlook on Gold <ul><ul><li>1. The US$ is expected to depreciate - </li></ul></ul><ul><ul><li>Slowdown in the U.S. economy </li></ul></ul><ul><ul><li>Negative real interest rates </li></ul></ul><ul><ul><li>Inflation </li></ul></ul><ul><ul><li>2. Increasing investment demand amidst decreasing physical demand (GFMS estimates 89% YOY increase in investment demand, and 11% YOY drop in jewellery demand, in 2009) </li></ul></ul><ul><ul><li>3. High cash costs (cash costs rose by 22% YOY to an average of $472/ounce for the nine months of 2008) and relatively flat supply </li></ul></ul>
  19. 19. Outlook on Gold - Long-term Price Forecast <ul><li>Source: FRC </li></ul><ul><li>In the long-term, as the global economy recovers and the US$ improves, we expect the investment demand for gold will decrease; resulting in softer prices </li></ul>
  20. 20. Outlook on Uranium <ul><ul><li>Long-term outlook remains strong </li></ul></ul><ul><ul><li>- Concerns about global warming and strong long-term energy price forecasts will lead to increased demand for nuclear power plants </li></ul></ul><ul><ul><li>- Global uranium requirements are estimated to grow at 2% per annum through 2030 (WNA) </li></ul></ul><ul><ul><li>- About 35 new reactors are under construction, over 100 power reactors are planned and over 250 are proposed </li></ul></ul><ul><ul><li>- Global annual consumption of uranium is about 180 million lbs versus production of about 100 million pounds; the deficit is filled up by stockpiles. </li></ul></ul><ul><ul><li>- In the short-term, the uranium market is expected to be in balance </li></ul></ul>
  21. 21. Carlin Trend <ul><li>Sediment-Hosted gold deposits in Northern Nevada </li></ul><ul><li>Future Potential </li></ul><ul><ul><li>Cortez Hills </li></ul></ul><ul><li>Simple one metal mineralization </li></ul><ul><li>Low grade but can be massive in size </li></ul><ul><li>Barrick Gold Corporation (NYSE/TSX: ABX) is active in the area with its Turquoise Ridge joint venture project </li></ul>
  22. 22. Greenstone-hosted Vein Deposits <ul><li>Grades generally range from 5 to 15 g/t Au with highly variable tonnage </li></ul><ul><li>Red Lake District </li></ul><ul><ul><li>Mature deposits can maintain expansion potential </li></ul></ul><ul><ul><li>Predominantly underground operations </li></ul></ul><ul><ul><li>Hosts Goldcorp’s (NYSE: GG; TSX: G) high grade Red Lake Mine </li></ul></ul>
  23. 23. Athabasca Basin <ul><li>Premium site for uranium exploration since the 1970’s </li></ul><ul><li>Mineralized ore is formed in small pockets and veins of very high grade </li></ul><ul><ul><li>Cameco’s (NYSE: CCJ; TSX: CCO) McArthur River commenced production in 1999 with an average ore grade of 20.7% U 3 O 8 </li></ul></ul><ul><li>Major discovery by Hathor Exploration (TSXV: HAT) and joint venture partner Terra Ventures (TSXV: TAS) in early 2008 </li></ul>
  24. 24. Western Canada Sedimentary Basin <ul><li>Bakken oil play, located in the south eastern region of the Western Canada Sedimentary Basin, is quickly becoming the most important oil discovery since the 1950’s </li></ul><ul><li>Hosts light sweet crude oil </li></ul><ul><ul><li>Very economic to transport and refine </li></ul></ul><ul><li>Encana (NYSE/TSX; ECA) is an active player in the WCSB </li></ul>
  25. 25. Identifying Juniors With Potential <ul><li>Projects are analysed based on: </li></ul><ul><ul><li>Deposit Type </li></ul></ul><ul><ul><li>Stage </li></ul></ul><ul><ul><li>Infrastructure </li></ul></ul><ul><ul><li>Location </li></ul></ul>
  26. 26. Identifying Juniors With Potential <ul><li>Company itself is analysed based on: </li></ul><ul><ul><li>Management </li></ul></ul><ul><ul><ul><li>Technical Experience </li></ul></ul></ul><ul><ul><ul><li>Experience in putting mines to production/generating prospects </li></ul></ul></ul><ul><ul><ul><li>Track record in raising capital/working for public companies </li></ul></ul></ul><ul><ul><ul><li>Experience in projects similar to the current project </li></ul></ul></ul><ul><ul><ul><li>Team’s focus on the company </li></ul></ul></ul><ul><ul><ul><li>Any unusual insider trading in the past 12 months </li></ul></ul></ul><ul><ul><li>Financial Position </li></ul></ul>
  27. 27. Top Picks * FRC does not own any shares, and have any investment banking business with the companies. Fees of less than $30,000 have been paid by the companies to FRC for research coverage.
  28. 28. Great Plains Exploration (TSX: GPX)
  29. 29. Silvercrest Mines Inc. (TSXV: SVL) <ul><li>Holds silver-gold properties in Mexico and El Salvador </li></ul><ul><li>Recently completed pre-feasibility study on the Santa Elena project in Mexico indicated positive results </li></ul><ul><li>Expects to commence production in Q3 2009 </li></ul><ul><li>Working Capital – LT Debt (at the end of September 2008) - $4.9 mm, or $0.11 per share </li></ul><ul><li>EV/Resources - $0.25/oz; Average (Comparables) – $2.08/oz </li></ul><ul><li>Stock Price – C$0.45; Fair Value Estimate: C$1.98 </li></ul>
  30. 30. Companies to track
  31. 31. <ul><li>Thank You </li></ul><ul><li>To view reports, visit us at </li></ul><ul><li>For more information, contact us at: </li></ul><ul><li>Email: [email_address] </li></ul><ul><li>Tel: 604-682-7050 </li></ul>