Sunday, September 23, 2012

The Labrador Trough, Canada’s Iron Ore Rush

The Labrador Trough and Canada’s Iron Rush Infographic

 [ Added near the end of February 2015: I broke my rule and invested in a company referred to as "unprofitable." My investment, very small, disappeared completely. Oh well, it was more fun owning LIM than buying a lottery ticket but no more profitable.]

[Add: Feb. 19/2014. LIM may be going down for the count. Iron ore prices are down, the quality of the iron ore from LIM has not lived up to expectations and I have lost so much of my original investment that it may be too late to get out with enough money to even make the trade worth the effort. Oh well, at least my gold mining stock has performed nicely.]

 [Add: Sept. 27, 2012, I bought some LIM. But be aware, this is a dicey play. With iron ore dipping well below $100/t and LIM's break-even point estimated at US$111/t delivered to China, LIM may need an infusion of new funds. I've made my move. Now, to sit tight and wait.]

[Another add: I'm not feeling lucky. Read why: LIM.] 

The following post updated Oct. 3/2012.

I'm always looking for a new investment. My first encounter with LIM (Labrador Iron Mines) immediately peaked my interest. A Canadian company shipping very high iron content ore. Worth investigating, I thought.

Click on map to enlarge.
But, along with peaking my interest, LIM set off lots of personal investment alarms. A ScotiaBank investment report places the LIM investment risk at the "caution warranted" level.

But the promise of a nice return and maybe much more is holding my interest. LIM can be picked up for about 97-cents today. The price fell to under a buck after the October 1 announcement that underwriter Canaccord Genuity Corp. agreed to purchase 30 million common shares at a dollar a share, with an option to buy a further 4.5 million shares.

Analysts I follow are posting a target price in the $1.50 to $3.00 range. The ScotiaBank report, mentioned earlier, has lowered its target value a couple of times since I started following LIM. The ScotiaBank is now predicting $3 based partially on the recent sale of 30 million shares and the resulting share value dilution. Here is a link to a Financial Post article on the recent share sale.

The bottom has literally fallen out of the iron ore market. LIM has been forced to try and stem the financial bleeding. Quoting Mining Business Media:

Just over a week after it put a hold on $60M of capital works programs, the Canadian iron ore producer has ceased the mining of direct rail ore, which was selling at a discount, to focus exclusively on process lump and sinter ore.

The company has also shut down its higher cost wet processing plant in favour of the lower-cost dry processing system, which it says is suitable for the ore from the James mine.

In response to the market conditions and weaker spot iron ore prices, LIM has scaled back production for the remainder of the 2012 season, reducing its target to 1.7Mt.

Depending upon the forecast you believe, the iron ore market could be down on its luck for months. It may not recover until the second, or even third quarter, of 2013. A prolonged drop in iron ore prices will be hard on the junior mining companies located in the Labrador trough. These producers are at a serious disadvantage to their Australian competition who have much lower shipping costs when it comes to Asia.

With time to decide whether or not to put a little skin in the game, I began to wonder what other potential investment-grade companies are to be found in the Labrador Trough. I found a number and settled on three:

LIM: Labrador Iron Mines Holdings Ltd.
CHM: Champion Iron Mines Ltd.
ADI: Adriana Resources Inc.

Adriana Resources is an exploration-stage company. I read on their website:

"In May 2012, the Company commenced diamond drilling and to date has drilled 48 holes totaling 5,333 metres. Drilling is currently focused on definition drilling to better define the limits of the potential early stage mine pit for mine planing purposes.

"Additional drilling for hydrogeology monitoring wells and further delineation drilling to update inferred mineral resources are planed."

ADI shares closed at 55-cents Friday. The range for the year has been from a low of 49-cents to a high of  $1.38. With iron ore prices as depressed as they are at the moment, it is not surprising that ADI is sitting just above its low for the last 12 months.

Sweetening my interest in ADI was this fact: The Lac Otelnuk property controlled by ADI has the potential to be the largest operating mine in Canada exploiting one of the richest iron deposits in the world.

I also found this of interest, Adriana has secured a joint venture with WISCO (Wuhan Iron and Steel Corporation) giving the important Chinese steel giant a 60% share of the project.

Champion Iron Mines is another exploration and development company focused on developing the iron ore resources in the Labrador Trough running down the border between the provinces of Quebec and Newfoundland / Labrador.

Then there is LIM (Labrador Iron Mines). This company is shipping ore and plans expansion.

So, am I jumping in? Soon. But read what Bloomberg reported Sept. 19, 2012:

Iron ore demand slowed more than half

BHP Billiton Ltd. (BHP), the world’s biggest mining company, said the pace of iron ore demand from China, the biggest importer, has slowed by more than half.

"What we have seen in the past ten years is not only a function of massive demand coming from China but the industry not being prepared," said Alberto Calderon, the Melbourne-based company’s chief commercial officer and manager of its aluminum and nickel business. "This won’t be repeated. Margins will still be good but that scarcity pricing we won’t see again, on average.

"Demand will grow less, although still quite impressively and the producers, in general, are more prepared," said Calderon. "This doesn’t mean that the boom has ended, but it does mean to expect that prices will grow or even stay at very high levels, you would do it at your own peril."

By the middle of the decade the demand for iron ore could even contract as more and more scrap steel is recycled for use in new Chinese construction.

This investment may be a crap shoot.

Monday, September 17, 2012

A sugar high?

Fed Chairman Ben Bernanke ushered in another round of quantitative easing and the stock markets in Canada and the States made a nice jump. Still, the reasons for the announced QE are not in themselves positive economic indictors and the market may soon sour. I'm sitting tight and letting my dividends puddle.

LIM jumped but I didn't. I wish I had. I'd have taken my profits and returned to the sidelines a little richer. Today LIM gave back some of its gains. It closed today at $1.53. I have a gut feeling it could still test some new lows. I could be wrong but I'm patient. If it gets down into the $1.25 range, I will reconsider its purchase. I'd buy about 2800 shares and then sit tight. Someday, iron ore will be a darling of the resource crowd again and it would be nice to be dressed and ready to party.

CET closed today at $6.84. I'm really happy with its recent purchase. It can take a heck of a dip and not get close to the price at which I got into the game. I'm feeling fairly safe. I'm going to wait patiently for CET to get to $10. While I wait I'm going to enjoy a yield of almost six percent on my investment.

PWT also closed down a couple of cents but it is still pushing $16. I've still got some distance to travel before I get all my money back but my wife's investment in PWT is doing just fine. I advised her to buy when PWT was trading just above $13. She sold half in order to help pay for our kitchen reno. I will sell all my PWT when it gets above $19 and my wife will get rid of most of her holdings, too. Since she got into this stock at such a low point, she feels safe holding onto a small amount of this dividend cash cow.

Has REM changed it's name? I noticed an article about the "awkwardly named" ETF in the Globe and Mail and today I noticed the name is no longer awkward. It seems to be going by the moniker of "iShares Mortgage Plus E.T.F." I mentioned REM some months back and have been delighted with its performance ever since. Nice appreciation in value plus a nice double digit dividend. I got the best of both worlds. I believe the article I saw was by Rob Carrick. I wish I could say I was surprised that he took so long to discover REM, but Carrick seems pretty slow off the mark at the best of times.

Forgive me for any typos but I'm knocking this off in hurry before rushing out the door with my wife. Cheers and good investing!

Saturday, September 15, 2012

Quantitative easing

According to Reuters, "the U.S. Federal Reserve's third round of bond-buying could ultimately rival the size of its first huge quantitative easing, which was widely seen as boosting growth."

A lot of investors were betting Fed Chairman Ben Bernanke would usher in another round of QE and they were right. It delivered the much anticipated solid kick to the stock market keester most anticipated. Nice.

If you bought CET when I first starting taking about this stock, you've done well. If you waited and bought in when CET dipped below $5 you may be ready to lock in some of your profits. I bought in when I first mentioned CET and later I bought more for my TFSA. My second purchase is up almost 30 percent. My initial investment in CET is up about 16 percent. That is still a nice pop. I'm going to hold on for awhile. I like the dividend.

What about SLF? I'm up almost 18 percent. And you? In the same vein, Manulife Financial Corp. may be another smart move. The dividend squeaks by with 4.1 percent. I need 4 percent. I may buy some SLF Monday as it closed at about $12.64 Friday. I've been following MFC for awhile and if it climbs too much it will not meet my needs.

Do you recall my REM tip? Despite being an U.S. ETF, it is up 14 percent since I bought it and it still yields 10.22 percent. If your financial adviser tells you that nothing is delivering a high yield in today's market, ask about REM. (Morningstar is still claiming that REM is a low risk investment.)

Lastly, I bought a lot of PWT when it got down into the $12 and $13 range. I'm averaging down. This is not something that I do with comfort. I only buy when I think a stock should be heading up. When I average down, it means I have misread the stock and paid too much. And with PWT, let me assure you that I paid too much. Oh well, it pays a nice dividend and as the price rises the yield as a percentage based on the stock price drops. It is now down to 6.8 percent. I'm feeling there is some chance that the dividend will NOT by cut. I'm seeing PWT climbing in the coming months and at some point in the near future I hope to be out.

I'm still watching LIM. I find it interesting. If I had bought some when it was at $1.39, I'd be laughing. I didn't buy and I'm not laughing. I hope some of you picked it up and are now enjoying the pop which can be more than 17 percent for those who timed it right.


Thursday, September 6, 2012

Labrador Iron Mines: I'm waiting and watching.

 Added near the end of February 2015: I broke my rule and invested in a company referred to as "unprofitable." My investment, very small, disappeared completely. Oh well, it was more fun owning LIM than buying a lottery ticket but no more profitable.

I've been following Labrador Iron Mines Holdings Ltd. (LIM-T) for the past few weeks. It is an interesting story with lots of potential. It also appeared rather risky. I'm never all that keen to invest in a company referred to as "an unprofitable company . . ."

Some believe LIM will outperform others in its sector and have placed a 12-month target price of $4.50 on the stock. But this is not a forecast without risk. In fact, ScotiaMcLeod rates the risks associated with this stock as "Caution Warranted".

Caution Warranted: Exceptionally high financial and/or operational risk, exceptionally low predictability of financial results, exceptionally high stock volatility.  For risk tolerant investors only.

Today the market is up. LIM is down. Just days ago LIM was above $2. Today LIM is bouncing around the $1.40 mark.

So, why would I buy some LIM. I like resources. I like iron ore. Sadly, it is a resource that may not come roaring back soon. The Chinese economy is slowing. Europe is in recession. The American economy is cruising just above stall speed.

I may like resources but I'm in no hurry to buy LIM. Yet, the price looks inviting. At $1.40 a share, it does not take much to buy a thousand shares and this price may well drop some more before it climbs. This is a stock that can be picked up with spare change. Even if LIM doesn't reach its target price in the coming months, it may well climb enough to deliver a nice return. And, if I must hold on to LIM for a couple of years, so be it. The return may well be worth the wait.

And if it wilts, my investment will be small and the loss will be of little consequence.