by Zubin Driver
January 20, 2010
Since the bottom was reached last March, earnings for the last three quarters have exceeded expectations, sending stocks higher. Expectations have been low, and comparisons to recent quarters have been easy to beat. After this quarter, however, year on year comparisons will no longer be to numbers from the crash, but rather to those since the bottom was made. Interestingly, last week both JP Morgan and Intel beat analysts' forecasts, yet both stocks nonetheless declined on heavy volume. Have they set the tone for the next two weeks of earnings? Or will companies deliver strong numbers that propel the markets to continue their relentless climb? (This morning, Morgan Stanley and Bank of America have disappointed on their numbers and markets have fallen about 1%.)
Excellent market action took place in the first week of January almost across the board. Last Monday, the rally appeared to continue as China announced robust trade numbers; the TSX actually spiked above 12,000 points in the first hour or two of trading before reversing downwards, and continuing the slide for the rest of the week.
Last week, The Economist issued a "Bubble Warning," suggesting that assets have become overvalued thanks to low interest rates and an overall dependence that the private sector has developed towards government stimulus. Clearly this notion has validity, and will grow in importance as the year progresses and stimulus programs get closer to their scheduled conclusions. North American markets are up 50% or so from their bottom, but still remain 25% from their high, occupying a sort of no man's land in between. Particularly towards large capitalisation equities, the prudent investor may feel justified here in questioning how much upside remains in the near term, and feel inclined to patiently wait for a correction to present a buying opportunity. And if the large markets remain stable but move sideways for a time, then more significant opportunities may 'trickle down' to smaller capitalisation areas of the market.
The ‘Trickle Down Effect’
In the venture world, one often hears about a 'trickle down effect.' Once the larger companies have appreciated, hot money starts moving down to the mid and small sized companies. In the resource sector this means smaller producers, advanced stage explorers who become acquisition targets, and grassroots explorers looking to make the next brand new discovery.
Now that the world’s major indexes have enjoyed such a comeback, the perception is growing that the upside in blue chip companies has shrunk. Expected returns in blue chip companies have returned to more normal levels, in the 5 to 10% range for those who see upside this year; nothing like the 50% that was enjoyed from the bottom last year.
As the investment community is once again seeing profitability and opportunity, liquidity on the small cap index, the TSX Venture Exchange, has dramatically improved. Volumes in the first week of January were impressively high; aggressive buying of the sort that used to occur before the crash is again upon us, and should it continue, the greatest gains in 2010 will belong to venture companies.
Big Team, Big exploration Play
One of the hottest areas to emerge post-crash has been our continent's Great North, particularly Alaska and the Yukon, which have always been known to host large mineralised deposits. Discoveries made by companies such as Atac and Underworld Resources, have attracted significant interest back to the Arctic Circle. Other companies with known deposits that were severely depreciated during the downturn have also enjoyed dramatic comebacks, an example of which is a company called International Tower Hill Mines (ITH-T), who hosts a bulk tonnage, low grade gold deposit in Alaska called Livengood.
When metal prices are low, as they were for a time during the crash and, prior to that, in the late '90s and early 2000s, low grade deposits are not economic as low grade ore is expensive to process. However, low grade deposits can host massive amounts of metal. When prices surge as they have since March '09, the economics of such deposits become significantly more attractive. Compare, for instance, International Tower Hill's move from a low last December of $1 when metals prices were tanking, to its current high of over $8 in recent months.
A new company, Ocean Park Ventures (OCP.H-V) , has just optioned a large land package from ITH called the Chisna Project that has never been previously drilled (with all the attendant risk and excitement that grassroots exploration entails). Chisna covers 385 square kilometres, and is on the same geological belt as the Pebble Deposit, one of the world's largest low grade mineral systems. Ocean Park is just in the process of completing a significant financing of $7 million* which, once closed, will enable the company to undertake a comprehensive exploration program this year. Over the next few months Ocean Park will conduct preliminary work to prepare for a summer drill program.
The caliber of people surrounding Ocean Park and the Chisna project are also intriguing. Firstly, there is the fact that Chisna came from the highly successful junior already discussed above, International Tower Hill. Next, Axemen Resource Capital, a force in the world of venture mining finance, has assisted in the fundraising process, and in bringing the Chisna deal to Ocean Park. Finally, OCP.H has just appointed new directors who bring decades of mining experience and expertise to the board, strengthening the company for the major exploration work that lies ahead.
International Tower Hill has previously spent roughly $2 million on ground work for the project, collecting samples that have identified both gold and copper at surface. Ocean Park will be well funded to follow up on these efforts this summer, and given ITH's established track record, the market will certainly follow OCP's drill program, and hopeful success in discovering a significant deposit, with interest.
* Disclosure: Some Canaccord clients have participated in Ocean Park's recent non-brokered private placement.
Best regards,
Zubin
Zubin Driver
Investment Advisor
(W) 604 643-7608 / (F) 604 643-7606
Email: zubin_driver@canaccord.com
Canaccord Wealth Management
Attention: Zubin Driver
P.O. Box 10337 Pacific Centre
2200 - 609 Granville St.
Vancouver, B.C. V7Y 1H2
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