In This Issue

THE PERILS OF MINING

By Gordon Pape

The surprise announcement last Wednesday that Agnico-Eagle (TSX, NYSE: AEM) has shut down operations at its Goldex mine in Val d’Or, Quebec reminds us just how risky the mining business can be – not just for the miners but for investors as well.

The company said the closure was necessitated by weak volcanic rock above the ore deposit which allowed water to flow into the mine. The situation is being investigated further and it is uncertain whether the mine will ever be able to reopen.

The stock plunged by 18.5%, more than $10 a share, after the news came out and took another hit the next day. The deep sell-off may have been something of an over-reaction. Goldex, while an excellent producer, isn’t the only mine in the company’s inventory. The company has three other operating mines in Canada, one in Finland, and one in Mexico. However, the rush to dump AEM shares is indicative of the market’s uneasiness at present.

Goldex had an estimated 1.6 million ounces of proven and probable gold reserves. It was expected to produce 184,000 ounces this year at an estimated cash cost of $349/ounce. That made it one of the lowest-cost underground mines in the industry. Now the company has decided to write off the total value of the mine (US$170 million) in its third-quarter financial report, which is due out on Oct. 26. All the reserves will be reclassified as mineral resources, which are assigned a much lower value when assessing a company’s net worth. The cost to AEM for on-going monitoring and remediation is estimated at C$45 million over the rest of this year and in 2012.

The Goldex mine was Agnico-Eagle’s second-largest producer – the open pit Meadowbank mine in Nunavut is number one. In 2010, Goldex produced 184,386 ounces of gold out of the company’s total of 987,609 ounces. That was 18.7% of the total which coincidentally (or not) was almost the exact amount the stock lost in value after the announcement.

This wasn’t the first blow to Agnico-Eagle’s production this year. A fire at Meadowbank in March destroyed the kitchen facilities, resulting in the need to temporarily cut back the work force and reduce production.

Despite the loss of Goldex, RBC Capital Markets expects AEM to increase year-over-year production in 2011 as well as in 2012 and 2013 thanks to higher contributions from the remaining properties. Output this year is expected to be 1,024,000 ounces according to analyst Haytham Hodaly and associate Jason Billan. That will increase to an estimated 1,093,000 ounces in 2012 and 1,185,000 ounces in 2013. If the numbers pan out, the 2013 production would be almost 20% higher than in 2010 – and this assumes no contribution from Goldex.

RBC has lowered its target price on the stock to $71 (from $94). That is 60% above the current level which suggests AEM is a buy for patient investors who can tolerate risk.

Risk is the critical word when it comes to any mining stock. Even the biggest and brightest can be hammered by unforeseen developments. Consider the case of Cameco (TSX: CCO, NYSE: CCJ), the world’s largest uranium producer. The share price was clobbered in the aftermath of the March nuclear disaster in Japan which led to countries such as Germany declaring a moratorium on new atomic power plants. But Cameco’s troubles began long before that.

The company owns a 50% interest in the Cigar Lake mine in the Athabasca Basin of Saskatchewan. It holds the world’s largest undeveloped uranium reserves – 209.3 million pounds at an average grade of 17%. Unfortunately, the deposit is deep (480 metres down) and is located in a very unstable area which is comprised primarily of highly porous sandstone.

Construction on the mine began in 2005 with the expectation of a start-up in early 2008. But in April and October 2006, the mine was completely flooded after a rock fall, setting back work for years. Cameco has spent millions to drain and seal the mine, clean up the silt and debris, and re-start construction. Initial production is now scheduled for mid-2013 but given the star-crossed history of this venture, nothing should be taken for granted even though the company says Cigar Lake is a key component in its plan to double total production by 2018.

Floods and rock falls aren’t the only problems facing mining companies. Strikes, political unrest, falling commodity prices, currency fluctuations, and environmental issues are only a few of the many other setbacks they can experience. So every mining stock should be seen as high risk, no matter how big the company. If you can’t handle that, stick to utilities.

Follow Gordon Pape’s latest updates on Twitter: http://twitter.com/GPUpdates

WILL THAT BE CHICKEN, PIZZA, OR TACOS?

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Contributing editor Glenn Rogers joins us from his home in sunny southern California with another stock pick that combines defensiveness, cash flow, and growth potential. Glenn is a successful businessman, entrepreneur, and investor who has lived and worked in both Canada and the U.S. Here is his report.

Glenn Rogers writes:

Last month, I recommended McDonald’s (NYSE: MCD) and Starbucks (NDQ: SBUX) as low-risk defensive securities that offer good overseas growth potential. Both have held up well in this lousy market. McDonald’s which was recommended at $88.29, finished last week at $92.32 (figures in U.S. dollars) after reporting strong earnings growth. Starbucks, which was trading at $39.20 at the time I picked it, closed on Friday at $42.09.

Today I’m going to add a third fast food icon to the list. It is Yum Brands (NYSE: YUM). Even if you aren’t familiar with the corporate name, the chances are that you have been one of their millions of customers at some point – maybe you’ll even be eating some of their food today. You’ll certainly recognize Yum’s principal brands: KFC, Pizza Hut, and Taco Bell.

Yum franchises can be found in every city and town in North America but the real story is the company’s expansion into China. The preponderance of Yum’s growth comes from that country and therein lies the opportunity. Most Chinese-related issues have been crushed during the recent market turbulence, based on the theory that China is embroiled with the problems inherent in a massive property bubble along with the potential of runaway inflation. As a result, investors are fearful that the Chinese growth story that has propelled world markets for several years may be coming to an end. It’s possible this could be true but I believe it’s unlikely there will be any protracted downturn in China. So I see this pullback as an opportunity to buy into some issues like Yum Brands that will continue to benefit from the ongoing China story.

Yum Brands got into China early in 1987. They were the first to bring franchising to China in 1992 and they opened the first drive-through restaurant in China in 2002. Currently they have 3,300 KFCs in more than 700 cities and they have plans to open 20,000 restaurants in the upcoming years. Right now, the company is opening one KFC restaurant in China every day.

The Pizza Hut franchise opened in 1990 and they now have over 500 Pizza Huts in over 130 cities in China with plans to open many more. That is a ton of fried chicken and pizzas, but then again there are more than a billion Chinese to eat all that food.

China isn’t the only place that Yum Brands is opening restaurants outside of the U.S. and Canada. They have more than 14,000 restaurants in over 110 countries and they opened over 800 new ones outside of the U.S. and China this past year. That was the tenth year in a row the company has opened more than 700 new restaurants outside the U.S. and China. They even do well in France, home of the food snob, where their KFC units enjoy the highest per unit volume of anywhere in the world. Evidently even the French like their chicken finger lickin’ good.

I shouldn’t ignore the U.S. where the business started and continues to do well, although growth is slowing since they already have deep penetration in U.S. markets which limits their ability to add new units.

I should also mention that Yum owns the A&W and Long John Silver brands, although it was announced in September that agreements have been reached to sell them to two separate buyers headed by franchisees. These are relatively small operations compared to the three flagship brands but A&W has been around since 1919 and there are 359 outlets in the U.S. and more than 260 in 11 other countries. No prices have been announced.

Yum, which was owned by PepsiCo before being spun off in 1997, recently reported financial results for their 2011 third quarter (to Sept. 3). Earnings came in at $383 million ($0.80 a share), up from $0.74 a share in the same period a year ago. Excluding write-downs and other charges, earnings rose to $0.83 a share from $0.73, in line with analyst expectations. Revenues were $3.27 billion, ahead of the consensus estimates of $3.1 billion.

The U.S. earnings actually fell 16% in the latest quarter on a 3% same-store sales decline. The decline in domestic sales was expected given the slumping U.S. economy. But the international divisions, which account for the bulk of sales, continue to show strength. China saw a 7% jump in profits (before foreign currency translation) from a 19% gain in same-store sales. With 65% of the company’s business coming from overseas markets, the company is broadly diversified geographically.

The stock pays a decent dividend which will be increased by 14% to $0.285 per quarter ($1.14 per year) effective with the Nov. 4 payment to shareholders of record as of Oct. 14. Based on Friday’s closing price of $53.74, the yield is 2.1%. The company is aiming for an annual dividend payout ratio of as much as 40%. Additionally, Yum has been buying back stock. Year to date they’ve repurchased over $500,000 worth of shares.

The stock seems reasonably priced at current levels. It is trading at 16.35 times forward earnings. With a lot of growth potential in front of them, Yum should be able to produce double-digit expansion for the foreseeable future.

What could go wrong? Like all restaurant chains, the company could be vulnerable to increasing commodity costs but Yum has showed it has some pricing power in the past and commodity increases have slowed as fears of a global recession persist.

I like this company for the same reasons I like McDonald’s and Starbucks. In an increasingly uncertain world, people still have to eat. Admittedly, they don’t necessarily have to eat at these places but history has shown that all these companies have been able to adjust menus and maintain high levels of customer loyalty over the long haul. That should give investors some comfort in what generally is a very uncomfortable market.

The shares have sold off a little based on fears about China and are down about $4 from their 52-week high of $57.75, reached in July.

Action now: Buy with a target of $65. The stock closed Friday at $53.74.

 

GLENN ROGERS’S UPDATES

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Agrium (TSX, NYSE: AGU)

Originally recommended on April 30/07 (IWB #2717) at C$46.41, US$41.40. Closed Friday at C$77, US$76.45.

Monsanto (NYSE: MON)

Originally recommended on April 30/07 (IWB #2717) at US$60.30. Closed Friday at US$74.83.

I recommended both Agrium and Monsanto back in 2007 as part of a basket of agricultural stocks. Generally they have held up very well. Agrium was trading at C$46.41, US$41.40 when I recommended it. The shares went as high as the C$110 range in June 2008, just before the market crash. By December of that year they were trading at around $30 which in retrospect was a tremendous bargain. They gradually clawed their way back, peaking at C$97.10 in February of this year before going into a downward trend which continues to this day. Final closing prices on Friday were C$77, US$76.45. We took profits in September 2010 and again in February 2011 and have been holding the rest since.

Monsanto’s pattern is a little different. It rose very quickly from the original recommended price of US$60.30 to hit the US$140 level in mid-June of 2008. It lost more than half of that value during the crash, dropping as low as US$67.41 in November of the same year. But we never saw the big turnaround that we enjoyed with Agrium. In fact, the stock fell even more, dropping below US$50 a share in September 2010. It has come back since, closing on Friday at US$74.83 after a very nice run this past month which saw the price jump 22% versus a 10% gain for the S&P 500.

We are in the money on both the stocks but if I had to choose just one now, it would be Agrium. It’s trading off its highs and I believe it has the potential to return to its previous levels over the next 12 months. The p/e ratio (trailing 12 months) is 11.2 versus a p/e of 25.5 for Monsanto. They are both great companies, but I would take my profits on Monsanto and buy more Agrium at this point.

Action now: Sell Monsanto for a profit of 24% and Buy Agrium with a target of $95.

Cisco Systems (NDQ: CSCO)

Originally recommended on Oct. 1/07 (IWB #2736) at $33.13. Closed Friday at $17.38. (All figures in U.S. dollars.)

This is the stock where hope goes to die. We originally recommended it at $33.13 four years ago and it is never gotten back there since. It came close earlier this year when it traded up to nearly $25. But since then it’s been all downhill along with Microsoft and Hewlett-Packard. In fact, most of the traditional big tech names have been extraordinarily disappointing over a long period of time.

Cisco has seasoned leadership, a pristine balance sheet, and would appear to be in the sweet spot of the Internet expansion but nothing has really worked to goose the price. Technically the stock looks better than it has in many months. When the company announced better-than-expected earnings and some analyst upgrades followed, the stock started to show a little life. But that was short-lived and the stock mostly traded sideways until very recently when it popped above its technical resistance for the first time in a while.

I would hate to be tricked by this stock again. But if you still own it, give it a few more weeks to see if it can get back into the $20s again. If it fails to do so by the end of the year I would stop the torture, sell it for good, and claim a capital loss on your tax return.

Action now: Hold.

ProShares Ultra Basic Materials ETF (NYSE: UYM)

Originally recommended on Dec. 15/08 (IWB #2844) at $14.46. Closed Friday at $32.21. (All figures in U.S. dollars.)

I originally recommended this ETF at $14.46 almost three years ago, during the stock market crash of 2008-09. As markets recovered in 2009, it started to climb, rising to a high of about $60 in April of this year.

In my last update in June I recommended taking half profits of 211%. Commodity prices have been falling since and this package of basic materials stocks, which includes DuPont, Dow Chemical, Mosaic, Alcoa, etc., has been hurt as a result and has become increasingly risky in this uncertain market.

These leveraged ETFs have come under fire recently for distorting the market and increasing volatility at a time when the market certainly doesn’t need any more. Since most of our readers tend to be fairly risk-averse and because we have a significant profit, I’m going to recommend selling at this time. However, I personally will be adding to my position once I see the markets have begun to settle down.

Action now: Sell. The profit on this final tranche is 123%.

Brigham Exploration (NDQ: BEXP)

Originally recommended on July 11/11 (IWB #21125) at $31.18. Closed Friday at $36.54. (All figures in U.S. dollars.)

We have good news and bad news here. The good news is that Norway’s state-owned energy company, Statoil ASA, has made a $4.4 billion takeover bid for Brigham, equivalent to $36.50 a share. That’s a 17% premium over the price at the time of my recommendation last July and a 57% premium over the Oct. 3 price of $23.19.

The bad news is that what seems like half the law firms in America have launched “investigations” into the deal on issues ranging from suggestions that the price undervalues the company to “possible breaches of fiduciary duty and other violations of law”. Several of the press releases, which appeal to shareholders to contact the various legal firms, cite one analyst’s estimate that the stock may be worth $45. However, the mean target set by 22 analysts who follow the company is $37.80, as reported by Thomson/First Call. And one estimate is as low as $27.50. So it’s not likely any court would give much credence to the $45 figure as a reason to allow a suit to proceed. There would have to be a lot more evidence of malfeasance than that.

As I mentioned at the time of the original recommendation, Brigham’s main activities are in the Bakken formation, the richest oil find in the U.S. since Alaska’s Prudhoe Bay. The area includes North Dakota and Eastern Montana, and extends into Saskatchewan and Manitoba. Brigham has over 370,000 acres in this zone.

Although production has been increasing, some experts suggest that Brigham does not have the capital needed to expand at fast enough pace to keep up with the competition. The Statoil deal would solve that problem.

You have two choices at this stage. You can take the money and run, with the stock trading at close to the bid price. Or you can hang on and hope that a better deal emerges. However, by doing so you run the risk that all these legal “investigations” floating around may delay or even derail the takeover. I prefer the bird in the hand.

Action now: Sell.

– end Glenn Rogers

 

A WAKE-UP CALL FOR MUTUAL FUNDS

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The latest numbers from the Investment Funds Institute of Canada (IFIC) aren’t pretty. People were bailing out of mutual funds in September, with more than $200 million in net redemptions. By contrast, the ETF industry reported $1.1 billion in net inflows during the month.

The mutual fund industry is still far larger than the Canadian ETF sector. In terms of assets under management, ETFs account for $39.1 billion compared to $748.6 billion for mutual funds. There are only seven ETF providers in Canada compared to several hundred fund companies. So why should the big dog worry?

I’ll tell you why: unless the current trend is reversed, mutual funds may become financial dinosaurs within a generation. That may seem far-fetched now but stranger things have happened. There was a time when Canada Savings Bonds were the go-to investment for many people. Now hardly anyone buys them.

More mutual fund companies are hedging their bets by launching their own line of ETFs. BMO and Invesco have already taken the plunge and last month RBC entered the fray with a suite of target date bond ETFs. You can bet that many other fund companies are discussing the idea in corner offices and board rooms.

The problem with the mutual fund industry is that it has become wedded to a business model that many investors are coming to see as overly rigid and self-serving. Here are some examples.

High fees. There have been many complaints over the years that mutual fund fees in Canada are excessive. Those criticisms were given new impetus when a report issued earlier this year by Morningstar gave Canada an F for its fee structure, saying the average management expense ratio (MER) for equity funds in this country is more than twice as high as in the U.S. The CEO of IFIC immediately denounced the findings as misleading but since Morningstar is the most respected independent fund research company on the continent its report carries a lot of weight. Now Finance Minister Jim Flaherty has added his influential voice to the issue by asking a Senate committee to include mutual fund fees in its inquiry as to why Canadians pay more than Americans for many goods and services even with the two currencies close to parity.

A focus on advisors. Most mutual fund marketing dollars are targeted at the financial advisor community. The companies appear to be obsessed with the idea that Canadians will only buy their products if a broker or dealer recommends them so they make little effort to talk directly to the end user. This flies in the face of the reality that an increasing number of people are using discount brokers and therefore, by definition, making their own investment decisions.

A confusing array of products. The mutual fund industry has gone berserk with its product offerings to the point where even financial professionals can’t keep track any more. Some Dynamic funds offer more than 30 variations of the same product. These units, each of which carries its own code, are broken down on the basis of sales option (front-end, DSC, low load), currency (U.S. and Canadian dollars), dealer compensation (F units for fee-based accounts), tax status (class units), cash flow, etc. A few companies have even created special units for sale in non-HST provinces. For an individual investor, trying to sort through this array of product variations can be a nightmare. Buying an ETF is much simpler.

A self-serving compensation system. The whole mutual fund industry is based on a system that puts its salespeople (financial advisors) in a serious conflict of interest, one which was sharply criticized by Ursula Menke, commissioner of the Financial Consumer Agency of Canada, at a recent financial planning conference. “As a lawyer, I must say I consider this third party model of yours to be the cause of a very real conflict of interest,” she was quoted as saying by Steven Lamb, editor of Advisor.ca. “In my eye, he who pays the piper calls the tune.” In this case, the “piper” is the financial advisor. The tune-caller is the mutual fund company. Here’s how it works.

Most mutual fund companies pay both sales commissions and trailer fees to advisors. The former is triggered whenever a new fund sale is made. The trailer fees continue annually for as long as the investor owns the units. The cost of both types of fees is embedded in a fund’s MER. Moreover, fees are not created equal. An advisor receives a higher sales commission for selling an equity fund than for a money market fund. Trailer fees for fixed-income funds are generally only half of those paid for stock-based funds. Package funds (also known as funds of funds) generate the highest trailers of all.

The potential for conflict is immediately apparent. What may be the best fund for the client is not necessarily the most rewarding one from the advisor’s perspective. Many advisors are able to put their compensation second and focus on a client’s needs, understanding that the larger the portfolio the more they will earn in the long run. But for some, the lure of seeing the cash sooner is highly tempting.

Financial advisors and the mutual fund industry have strongly resisted any attempts to change the system but the pressure is building. ETFs do not pay any trailer fees and as a result are much cheaper to own once the initial brokerage commission has been paid. At some point, the mutual fund industry is going to have to come to grips with this.

There are a few – very few – mutual fund companies that don’t subscribe to this business model. The exceptions include Beutel Goodman, Leith Wheeler, Mawer, Steadyhand, and Phillips, Hager & North, which is now owned by RBC. All the funds offered by these companies have below-average MERs. Some pay no or reduced trailer fees. For the most part, they have avoided the alphabet soup of multiple units although PH&N has been moving in that direction since being taken over by RBC.

The problem is that they all have a high initial investment requirement (at least $5,000) which means that many people can’t afford to take advantage of them. Also, when the option is available it appears that some discount brokers are trying to force their clients into “advisor” class units which pay trailer fees and have a higher MER. One reader recently wrote to complain that his discount broker would not sell him more of the low-cost D units of a PH&N fund he already owned but insisted he had to buy the more expensive C units instead.

Based on outward appearances, it would seem the mutual fund industry is prepared to ignore the rise of ETFs as nothing more than a minor irritation. I suggest this could be a serious strategic mistake. Mutual funds are an important and useful type of security but if the industry doesn’t catch up with the 21st century it risks becoming marginalized over time. – G.P.

 

MORE UPDATES

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Daylight Energy Corp. (TSX: DAY, OTC: DAYYF)

Originally recommended by Irwin Michael on Oct. 5/09 (IWB #2936) at C$8.28, US$7.68. Closed Friday at C$9.84, US$9.76.

On Oct. 8, Daylight Energy announced that it had agreed to be acquired by Sinopec International Petroleum – a major petroleum company in China – for $10.08 per share in cash. The take-over values Daylight at approximately $2.9 billion and represents a 120% premium to DAY’s previous closing price and a 44% premium over the 60-day weighted average price. Shareholders are scheduled to vote on the transaction in December and closing is expected about year-end.

The Daylight transaction is quite intriguing for Canada’s oil and gas sector. While Chinese companies had previously focused primarily on oil sands investments, the acquisition of Daylight extends their interest to shale gas reserves. In addition, the acquisition highlights the level of foreign interest in Canada’s energy sector and the potential for increased merger and acquisition activity in light of current discounted valuations for oil and gas companies.

At the time of the announcement, our ABC Funds held a total of 4.4 million common shares of Daylight. In light of the recent stock market pullback, this acquisition raises us a substantial amount of cash that we can use to purchase other undervalued common stocks. Moreover, we believe the premium paid by Sinopec emphasizes how important it is for ABC Funds to “stick to our style” despite the overwhelming pessimism that has plagued the market over the past six months.

Action now: Sell into the market or wait and tender your shares commission-free. The only risk in waiting is that the deal may fall through (it has to be approved by Ottawa). – I.M.

Shaw Communications (TSX: SJR.B, NYSE: SJR)

Originally recommended by Gordon Pape on Feb. 4/08 (IWB #2805) at C$20.53 US$20.64. Closed Friday at C$20.04, US$20.19.

Shaw released fourth-quarter and fiscal 2011 year-end results (to Aug. 31) on Thursday. Fourth-quarter revenue came in at just under $1.2 billion, up 25.8% from the same period in 2010. For the full year, revenue was $4.7 billion, an improvement of 27.5% over 2010.

Net income from continuing operations was $166.2 million in the fourth quarter, up from $122.6 million in the same period last year. For the fiscal year, net income was $562.1 million compared to $533.8 million in 2010. However, after allowing for a loss of $89.3 million from discontinued operations, earnings per share dropped to $1.03 from $1.23 in fiscal 2010.

Intense competition for market share from Telus continues to exert pressure on Shaw’s cable business, with a loss of 16,000 basic subscribers during the period. However, digital TV sales continue to be strong, with 49,000 new subscribers signed up.

CEO Brad Shaw described 2011 as “a year in which we undertook important steps to be more operationally efficient and financially stronger. I am pleased to report we ended the year meeting all of our financial commitments. Our performance in the fourth quarter was highlighted by solid operating income growth in the Cable division and margin improvement.”

The company’s venture into the media business (it bought Global television and several specialty channels) is working out well and Brad Shaw said it has proven to be “a key strategic asset and very attractive acquisition”. Media produced $891 million in revenue between Oct. 27, 2010 (the date Canwest Global was acquired) and the end of the fiscal year.

No change in the dividend was announced. The shares currently pay $0.076667 a month ($0.92 a year) to yield 4.6% at the current price.

There appears to be little growth potential in this company at present, especially since the decision to abandon the idea of entering into the wireless field. In fact, Shaw’s main concern right now will be to maintain its position in the face of the aggressive marketing of Telus. So this is really a stock for income-oriented investors. If you are looking for growth in the telecom sector, BCE or Telus are better bets.

Action now: Hold. – G.P.

 

YOUR QUESTIONS

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Claiming a capital loss

Q – I would like to know what to do with a capital loss. I sold some old shares to clean house and realized a loss of $200. Should I declare this on my 2011 tax return or just bite my lip and go on with my life? – Luigi D.

A – Of course you should claim the capital loss. It isn’t much, only $100 (50% of the total loss). But every little bit counts. – G.P.

ETF bankruptcy

Q – What happens if ETF providers (BlackRock, Claymore, BMO, Horizon, Invesco, etc.) go bankrupt? Would it be wise to spread investments between providers? What is the maximum percentage of a portfolio that should be placed with one ETF company? In Canada we are limited by the number of companies. Most sample portfolios use only one or two companies.

Should I use more than one on-line broker to reduce a similar risk? – George T.

A – For starters, there is very little probability of an ETF distributor going bankrupt. Most are very wealthy international companies (e.g. Blackrock, Claymore, Invesco) or operated by a Canadian bank (BMO, RBC). But in the unlikely event it did happen, your assets would be safe. ETFs, like mutual funds, invest in a portfolio of securities. Those portfolios do not belong to the sponsoring company but are held in trust on behalf of the investors. If a company went belly-up, the ETFs would not form part of the corporate assets and would not be subject to creditor claims. This differentiates ETFs from stocks, which represent equity in a company and therefore could potentially lose all their value if that firm goes under.

Brokerage accounts are protected against bankruptcy by the Canadian Investor Protection Fund (CIPF). For details go to www.cipf.ca. – G.P.

 

That’s it for now. We’ll be back on Oct. 31 – Halloween! Let’s hope the markets don’t make it too scary.

Best regards,

Gordon Pape
gordon.pape@buildingwealth.ca
Circulation matters: customer.service@buildingwealth.ca

All material in the Internet Wealth Builder is copyright Gordon Pape Enterprises Ltd. and may not be reproduced in whole or in part in any form without written consent. None of the content in this newsletter is intended to be, nor should be interpreted as, an invitation to buy or sell securities. All recommendations are based on information that is believed to be reliable. However, results are not guaranteed and the publishers, contributors, and distributors of the Internet Wealth Builder assume no liability whatsoever for any material losses that may occur. Readers are advised to consult a professional financial advisor before making any investment decisions. The staff of and contributors to the Internet Wealth Builder may hold positions in securities mentioned in this newsletter, either personally or through managed accounts. No compensation for recommending particular securities, services, or financial advisors is solicited or accepted.

 

In This Issue

THE PERILS OF MINING

By Gordon Pape

The surprise announcement last Wednesday that Agnico-Eagle (TSX, NYSE: AEM) has shut down operations at its Goldex mine in Val d’Or, Quebec reminds us just how risky the mining business can be – not just for the miners but for investors as well.

The company said the closure was necessitated by weak volcanic rock above the ore deposit which allowed water to flow into the mine. The situation is being investigated further and it is uncertain whether the mine will ever be able to reopen.

The stock plunged by 18.5%, more than $10 a share, after the news came out and took another hit the next day. The deep sell-off may have been something of an over-reaction. Goldex, while an excellent producer, isn’t the only mine in the company’s inventory. The company has three other operating mines in Canada, one in Finland, and one in Mexico. However, the rush to dump AEM shares is indicative of the market’s uneasiness at present.

Goldex had an estimated 1.6 million ounces of proven and probable gold reserves. It was expected to produce 184,000 ounces this year at an estimated cash cost of $349/ounce. That made it one of the lowest-cost underground mines in the industry. Now the company has decided to write off the total value of the mine (US$170 million) in its third-quarter financial report, which is due out on Oct. 26. All the reserves will be reclassified as mineral resources, which are assigned a much lower value when assessing a company’s net worth. The cost to AEM for on-going monitoring and remediation is estimated at C$45 million over the rest of this year and in 2012.

The Goldex mine was Agnico-Eagle’s second-largest producer – the open pit Meadowbank mine in Nunavut is number one. In 2010, Goldex produced 184,386 ounces of gold out of the company’s total of 987,609 ounces. That was 18.7% of the total which coincidentally (or not) was almost the exact amount the stock lost in value after the announcement.

This wasn’t the first blow to Agnico-Eagle’s production this year. A fire at Meadowbank in March destroyed the kitchen facilities, resulting in the need to temporarily cut back the work force and reduce production.

Despite the loss of Goldex, RBC Capital Markets expects AEM to increase year-over-year production in 2011 as well as in 2012 and 2013 thanks to higher contributions from the remaining properties. Output this year is expected to be 1,024,000 ounces according to analyst Haytham Hodaly and associate Jason Billan. That will increase to an estimated 1,093,000 ounces in 2012 and 1,185,000 ounces in 2013. If the numbers pan out, the 2013 production would be almost 20% higher than in 2010 – and this assumes no contribution from Goldex.

RBC has lowered its target price on the stock to $71 (from $94). That is 60% above the current level which suggests AEM is a buy for patient investors who can tolerate risk.

Risk is the critical word when it comes to any mining stock. Even the biggest and brightest can be hammered by unforeseen developments. Consider the case of Cameco (TSX: CCO, NYSE: CCJ), the world’s largest uranium producer. The share price was clobbered in the aftermath of the March nuclear disaster in Japan which led to countries such as Germany declaring a moratorium on new atomic power plants. But Cameco’s troubles began long before that.

The company owns a 50% interest in the Cigar Lake mine in the Athabasca Basin of Saskatchewan. It holds the world’s largest undeveloped uranium reserves – 209.3 million pounds at an average grade of 17%. Unfortunately, the deposit is deep (480 metres down) and is located in a very unstable area which is comprised primarily of highly porous sandstone.

Construction on the mine began in 2005 with the expectation of a start-up in early 2008. But in April and October 2006, the mine was completely flooded after a rock fall, setting back work for years. Cameco has spent millions to drain and seal the mine, clean up the silt and debris, and re-start construction. Initial production is now scheduled for mid-2013 but given the star-crossed history of this venture, nothing should be taken for granted even though the company says Cigar Lake is a key component in its plan to double total production by 2018.

Floods and rock falls aren’t the only problems facing mining companies. Strikes, political unrest, falling commodity prices, currency fluctuations, and environmental issues are only a few of the many other setbacks they can experience. So every mining stock should be seen as high risk, no matter how big the company. If you can’t handle that, stick to utilities.

Follow Gordon Pape’s latest updates on Twitter: http://twitter.com/GPUpdates

WILL THAT BE CHICKEN, PIZZA, OR TACOS?

Contributing editor Glenn Rogers joins us from his home in sunny southern California with another stock pick that combines defensiveness, cash flow, and growth potential. Glenn is a successful businessman, entrepreneur, and investor who has lived and worked in both Canada and the U.S. Here is his report.

Glenn Rogers writes:

Last month, I recommended McDonald’s (NYSE: MCD) and Starbucks (NDQ: SBUX) as low-risk defensive securities that offer good overseas growth potential. Both have held up well in this lousy market. McDonald’s which was recommended at $88.29, finished last week at $92.32 (figures in U.S. dollars) after reporting strong earnings growth. Starbucks, which was trading at $39.20 at the time I picked it, closed on Friday at $42.09.

Today I’m going to add a third fast food icon to the list. It is Yum Brands (NYSE: YUM). Even if you aren’t familiar with the corporate name, the chances are that you have been one of their millions of customers at some point – maybe you’ll even be eating some of their food today. You’ll certainly recognize Yum’s principal brands: KFC, Pizza Hut, and Taco Bell.

Yum franchises can be found in every city and town in North America but the real story is the company’s expansion into China. The preponderance of Yum’s growth comes from that country and therein lies the opportunity. Most Chinese-related issues have been crushed during the recent market turbulence, based on the theory that China is embroiled with the problems inherent in a massive property bubble along with the potential of runaway inflation. As a result, investors are fearful that the Chinese growth story that has propelled world markets for several years may be coming to an end. It’s possible this could be true but I believe it’s unlikely there will be any protracted downturn in China. So I see this pullback as an opportunity to buy into some issues like Yum Brands that will continue to benefit from the ongoing China story.

Yum Brands got into China early in 1987. They were the first to bring franchising to China in 1992 and they opened the first drive-through restaurant in China in 2002. Currently they have 3,300 KFCs in more than 700 cities and they have plans to open 20,000 restaurants in the upcoming years. Right now, the company is opening one KFC restaurant in China every day.

The Pizza Hut franchise opened in 1990 and they now have over 500 Pizza Huts in over 130 cities in China with plans to open many more. That is a ton of fried chicken and pizzas, but then again there are more than a billion Chinese to eat all that food.

China isn’t the only place that Yum Brands is opening restaurants outside of the U.S. and Canada. They have more than 14,000 restaurants in over 110 countries and they opened over 800 new ones outside of the U.S. and China this past year. That was the tenth year in a row the company has opened more than 700 new restaurants outside the U.S. and China. They even do well in France, home of the food snob, where their KFC units enjoy the highest per unit volume of anywhere in the world. Evidently even the French like their chicken finger lickin’ good.

I shouldn’t ignore the U.S. where the business started and continues to do well, although growth is slowing since they already have deep penetration in U.S. markets which limits their ability to add new units.

I should also mention that Yum owns the A&W and Long John Silver brands, although it was announced in September that agreements have been reached to sell them to two separate buyers headed by franchisees. These are relatively small operations compared to the three flagship brands but A&W has been around since 1919 and there are 359 outlets in the U.S. and more than 260 in 11 other countries. No prices have been announced.

Yum, which was owned by PepsiCo before being spun off in 1997, recently reported financial results for their 2011 third quarter (to Sept. 3). Earnings came in at $383 million ($0.80 a share), up from $0.74 a share in the same period a year ago. Excluding write-downs and other charges, earnings rose to $0.83 a share from $0.73, in line with analyst expectations. Revenues were $3.27 billion, ahead of the consensus estimates of $3.1 billion.

The U.S. earnings actually fell 16% in the latest quarter on a 3% same-store sales decline. The decline in domestic sales was expected given the slumping U.S. economy. But the international divisions, which account for the bulk of sales, continue to show strength. China saw a 7% jump in profits (before foreign currency translation) from a 19% gain in same-store sales. With 65% of the company’s business coming from overseas markets, the company is broadly diversified geographically.

The stock pays a decent dividend which will be increased by 14% to $0.285 per quarter ($1.14 per year) effective with the Nov. 4 payment to shareholders of record as of Oct. 14. Based on Friday’s closing price of $53.74, the yield is 2.1%. The company is aiming for an annual dividend payout ratio of as much as 40%. Additionally, Yum has been buying back stock. Year to date they’ve repurchased over $500,000 worth of shares.

The stock seems reasonably priced at current levels. It is trading at 16.35 times forward earnings. With a lot of growth potential in front of them, Yum should be able to produce double-digit expansion for the foreseeable future.

What could go wrong? Like all restaurant chains, the company could be vulnerable to increasing commodity costs but Yum has showed it has some pricing power in the past and commodity increases have slowed as fears of a global recession persist.

I like this company for the same reasons I like McDonald’s and Starbucks. In an increasingly uncertain world, people still have to eat. Admittedly, they don’t necessarily have to eat at these places but history has shown that all these companies have been able to adjust menus and maintain high levels of customer loyalty over the long haul. That should give investors some comfort in what generally is a very uncomfortable market.

The shares have sold off a little based on fears about China and are down about $4 from their 52-week high of $57.75, reached in July.

Action now: Buy with a target of $65. The stock closed Friday at $53.74.

 

GLENN ROGERS’S UPDATES

Agrium (TSX, NYSE: AGU)

Originally recommended on April 30/07 (IWB #2717) at C$46.41, US$41.40. Closed Friday at C$77, US$76.45.

Monsanto (NYSE: MON)

Originally recommended on April 30/07 (IWB #2717) at US$60.30. Closed Friday at US$74.83.

I recommended both Agrium and Monsanto back in 2007 as part of a basket of agricultural stocks. Generally they have held up very well. Agrium was trading at C$46.41, US$41.40 when I recommended it. The shares went as high as the C$110 range in June 2008, just before the market crash. By December of that year they were trading at around $30 which in retrospect was a tremendous bargain. They gradually clawed their way back, peaking at C$97.10 in February of this year before going into a downward trend which continues to this day. Final closing prices on Friday were C$77, US$76.45. We took profits in September 2010 and again in February 2011 and have been holding the rest since.

Monsanto’s pattern is a little different. It rose very quickly from the original recommended price of US$60.30 to hit the US$140 level in mid-June of 2008. It lost more than half of that value during the crash, dropping as low as US$67.41 in November of the same year. But we never saw the big turnaround that we enjoyed with Agrium. In fact, the stock fell even more, dropping below US$50 a share in September 2010. It has come back since, closing on Friday at US$74.83 after a very nice run this past month which saw the price jump 22% versus a 10% gain for the S&P 500.

We are in the money on both the stocks but if I had to choose just one now, it would be Agrium. It’s trading off its highs and I believe it has the potential to return to its previous levels over the next 12 months. The p/e ratio (trailing 12 months) is 11.2 versus a p/e of 25.5 for Monsanto. They are both great companies, but I would take my profits on Monsanto and buy more Agrium at this point.

Action now: Sell Monsanto for a profit of 24% and Buy Agrium with a target of $95.

Cisco Systems (NDQ: CSCO)

Originally recommended on Oct. 1/07 (IWB #2736) at $33.13. Closed Friday at $17.38. (All figures in U.S. dollars.)

This is the stock where hope goes to die. We originally recommended it at $33.13 four years ago and it is never gotten back there since. It came close earlier this year when it traded up to nearly $25. But since then it’s been all downhill along with Microsoft and Hewlett-Packard. In fact, most of the traditional big tech names have been extraordinarily disappointing over a long period of time.

Cisco has seasoned leadership, a pristine balance sheet, and would appear to be in the sweet spot of the Internet expansion but nothing has really worked to goose the price. Technically the stock looks better than it has in many months. When the company announced better-than-expected earnings and some analyst upgrades followed, the stock started to show a little life. But that was short-lived and the stock mostly traded sideways until very recently when it popped above its technical resistance for the first time in a while.

I would hate to be tricked by this stock again. But if you still own it, give it a few more weeks to see if it can get back into the $20s again. If it fails to do so by the end of the year I would stop the torture, sell it for good, and claim a capital loss on your tax return.

Action now: Hold.

ProShares Ultra Basic Materials ETF (NYSE: UYM)

Originally recommended on Dec. 15/08 (IWB #2844) at $14.46. Closed Friday at $32.21. (All figures in U.S. dollars.)

I originally recommended this ETF at $14.46 almost three years ago, during the stock market crash of 2008-09. As markets recovered in 2009, it started to climb, rising to a high of about $60 in April of this year.

In my last update in June I recommended taking half profits of 211%. Commodity prices have been falling since and this package of basic materials stocks, which includes DuPont, Dow Chemical, Mosaic, Alcoa, etc., has been hurt as a result and has become increasingly risky in this uncertain market.

These leveraged ETFs have come under fire recently for distorting the market and increasing volatility at a time when the market certainly doesn’t need any more. Since most of our readers tend to be fairly risk-averse and because we have a significant profit, I’m going to recommend selling at this time. However, I personally will be adding to my position once I see the markets have begun to settle down.

Action now: Sell. The profit on this final tranche is 123%.

Brigham Exploration (NDQ: BEXP)

Originally recommended on July 11/11 (IWB #21125) at $31.18. Closed Friday at $36.54. (All figures in U.S. dollars.)

We have good news and bad news here. The good news is that Norway’s state-owned energy company, Statoil ASA, has made a $4.4 billion takeover bid for Brigham, equivalent to $36.50 a share. That’s a 17% premium over the price at the time of my recommendation last July and a 57% premium over the Oct. 3 price of $23.19.

The bad news is that what seems like half the law firms in America have launched “investigations” into the deal on issues ranging from suggestions that the price undervalues the company to “possible breaches of fiduciary duty and other violations of law”. Several of the press releases, which appeal to shareholders to contact the various legal firms, cite one analyst’s estimate that the stock may be worth $45. However, the mean target set by 22 analysts who follow the company is $37.80, as reported by Thomson/First Call. And one estimate is as low as $27.50. So it’s not likely any court would give much credence to the $45 figure as a reason to allow a suit to proceed. There would have to be a lot more evidence of malfeasance than that.

As I mentioned at the time of the original recommendation, Brigham’s main activities are in the Bakken formation, the richest oil find in the U.S. since Alaska’s Prudhoe Bay. The area includes North Dakota and Eastern Montana, and extends into Saskatchewan and Manitoba. Brigham has over 370,000 acres in this zone.

Although production has been increasing, some experts suggest that Brigham does not have the capital needed to expand at fast enough pace to keep up with the competition. The Statoil deal would solve that problem.

You have two choices at this stage. You can take the money and run, with the stock trading at close to the bid price. Or you can hang on and hope that a better deal emerges. However, by doing so you run the risk that all these legal “investigations” floating around may delay or even derail the takeover. I prefer the bird in the hand.

Action now: Sell.

– end Glenn Rogers

 

A WAKE-UP CALL FOR MUTUAL FUNDS

The latest numbers from the Investment Funds Institute of Canada (IFIC) aren’t pretty. People were bailing out of mutual funds in September, with more than $200 million in net redemptions. By contrast, the ETF industry reported $1.1 billion in net inflows during the month.

The mutual fund industry is still far larger than the Canadian ETF sector. In terms of assets under management, ETFs account for $39.1 billion compared to $748.6 billion for mutual funds. There are only seven ETF providers in Canada compared to several hundred fund companies. So why should the big dog worry?

I’ll tell you why: unless the current trend is reversed, mutual funds may become financial dinosaurs within a generation. That may seem far-fetched now but stranger things have happened. There was a time when Canada Savings Bonds were the go-to investment for many people. Now hardly anyone buys them.

More mutual fund companies are hedging their bets by launching their own line of ETFs. BMO and Invesco have already taken the plunge and last month RBC entered the fray with a suite of target date bond ETFs. You can bet that many other fund companies are discussing the idea in corner offices and board rooms.

The problem with the mutual fund industry is that it has become wedded to a business model that many investors are coming to see as overly rigid and self-serving. Here are some examples.

High fees. There have been many complaints over the years that mutual fund fees in Canada are excessive. Those criticisms were given new impetus when a report issued earlier this year by Morningstar gave Canada an F for its fee structure, saying the average management expense ratio (MER) for equity funds in this country is more than twice as high as in the U.S. The CEO of IFIC immediately denounced the findings as misleading but since Morningstar is the most respected independent fund research company on the continent its report carries a lot of weight. Now Finance Minister Jim Flaherty has added his influential voice to the issue by asking a Senate committee to include mutual fund fees in its inquiry as to why Canadians pay more than Americans for many goods and services even with the two currencies close to parity.

A focus on advisors. Most mutual fund marketing dollars are targeted at the financial advisor community. The companies appear to be obsessed with the idea that Canadians will only buy their products if a broker or dealer recommends them so they make little effort to talk directly to the end user. This flies in the face of the reality that an increasing number of people are using discount brokers and therefore, by definition, making their own investment decisions.

A confusing array of products. The mutual fund industry has gone berserk with its product offerings to the point where even financial professionals can’t keep track any more. Some Dynamic funds offer more than 30 variations of the same product. These units, each of which carries its own code, are broken down on the basis of sales option (front-end, DSC, low load), currency (U.S. and Canadian dollars), dealer compensation (F units for fee-based accounts), tax status (class units), cash flow, etc. A few companies have even created special units for sale in non-HST provinces. For an individual investor, trying to sort through this array of product variations can be a nightmare. Buying an ETF is much simpler.

A self-serving compensation system. The whole mutual fund industry is based on a system that puts its salespeople (financial advisors) in a serious conflict of interest, one which was sharply criticized by Ursula Menke, commissioner of the Financial Consumer Agency of Canada, at a recent financial planning conference. “As a lawyer, I must say I consider this third party model of yours to be the cause of a very real conflict of interest,” she was quoted as saying by Steven Lamb, editor of Advisor.ca. “In my eye, he who pays the piper calls the tune.” In this case, the “piper” is the financial advisor. The tune-caller is the mutual fund company. Here’s how it works.

Most mutual fund companies pay both sales commissions and trailer fees to advisors. The former is triggered whenever a new fund sale is made. The trailer fees continue annually for as long as the investor owns the units. The cost of both types of fees is embedded in a fund’s MER. Moreover, fees are not created equal. An advisor receives a higher sales commission for selling an equity fund than for a money market fund. Trailer fees for fixed-income funds are generally only half of those paid for stock-based funds. Package funds (also known as funds of funds) generate the highest trailers of all.

The potential for conflict is immediately apparent. What may be the best fund for the client is not necessarily the most rewarding one from the advisor’s perspective. Many advisors are able to put their compensation second and focus on a client’s needs, understanding that the larger the portfolio the more they will earn in the long run. But for some, the lure of seeing the cash sooner is highly tempting.

Financial advisors and the mutual fund industry have strongly resisted any attempts to change the system but the pressure is building. ETFs do not pay any trailer fees and as a result are much cheaper to own once the initial brokerage commission has been paid. At some point, the mutual fund industry is going to have to come to grips with this.

There are a few – very few – mutual fund companies that don’t subscribe to this business model. The exceptions include Beutel Goodman, Leith Wheeler, Mawer, Steadyhand, and Phillips, Hager & North, which is now owned by RBC. All the funds offered by these companies have below-average MERs. Some pay no or reduced trailer fees. For the most part, they have avoided the alphabet soup of multiple units although PH&N has been moving in that direction since being taken over by RBC.

The problem is that they all have a high initial investment requirement (at least $5,000) which means that many people can’t afford to take advantage of them. Also, when the option is available it appears that some discount brokers are trying to force their clients into “advisor” class units which pay trailer fees and have a higher MER. One reader recently wrote to complain that his discount broker would not sell him more of the low-cost D units of a PH&N fund he already owned but insisted he had to buy the more expensive C units instead.

Based on outward appearances, it would seem the mutual fund industry is prepared to ignore the rise of ETFs as nothing more than a minor irritation. I suggest this could be a serious strategic mistake. Mutual funds are an important and useful type of security but if the industry doesn’t catch up with the 21st century it risks becoming marginalized over time. – G.P.

 

MORE UPDATES

Daylight Energy Corp. (TSX: DAY, OTC: DAYYF)

Originally recommended by Irwin Michael on Oct. 5/09 (IWB #2936) at C$8.28, US$7.68. Closed Friday at C$9.84, US$9.76.

On Oct. 8, Daylight Energy announced that it had agreed to be acquired by Sinopec International Petroleum – a major petroleum company in China – for $10.08 per share in cash. The take-over values Daylight at approximately $2.9 billion and represents a 120% premium to DAY’s previous closing price and a 44% premium over the 60-day weighted average price. Shareholders are scheduled to vote on the transaction in December and closing is expected about year-end.

The Daylight transaction is quite intriguing for Canada’s oil and gas sector. While Chinese companies had previously focused primarily on oil sands investments, the acquisition of Daylight extends their interest to shale gas reserves. In addition, the acquisition highlights the level of foreign interest in Canada’s energy sector and the potential for increased merger and acquisition activity in light of current discounted valuations for oil and gas companies.

At the time of the announcement, our ABC Funds held a total of 4.4 million common shares of Daylight. In light of the recent stock market pullback, this acquisition raises us a substantial amount of cash that we can use to purchase other undervalued common stocks. Moreover, we believe the premium paid by Sinopec emphasizes how important it is for ABC Funds to “stick to our style” despite the overwhelming pessimism that has plagued the market over the past six months.

Action now: Sell into the market or wait and tender your shares commission-free. The only risk in waiting is that the deal may fall through (it has to be approved by Ottawa). – I.M.

Shaw Communications (TSX: SJR.B, NYSE: SJR)

Originally recommended by Gordon Pape on Feb. 4/08 (IWB #2805) at C$20.53 US$20.64. Closed Friday at C$20.04, US$20.19.

Shaw released fourth-quarter and fiscal 2011 year-end results (to Aug. 31) on Thursday. Fourth-quarter revenue came in at just under $1.2 billion, up 25.8% from the same period in 2010. For the full year, revenue was $4.7 billion, an improvement of 27.5% over 2010.

Net income from continuing operations was $166.2 million in the fourth quarter, up from $122.6 million in the same period last year. For the fiscal year, net income was $562.1 million compared to $533.8 million in 2010. However, after allowing for a loss of $89.3 million from discontinued operations, earnings per share dropped to $1.03 from $1.23 in fiscal 2010.

Intense competition for market share from Telus continues to exert pressure on Shaw’s cable business, with a loss of 16,000 basic subscribers during the period. However, digital TV sales continue to be strong, with 49,000 new subscribers signed up.

CEO Brad Shaw described 2011 as “a year in which we undertook important steps to be more operationally efficient and financially stronger. I am pleased to report we ended the year meeting all of our financial commitments. Our performance in the fourth quarter was highlighted by solid operating income growth in the Cable division and margin improvement.”

The company’s venture into the media business (it bought Global television and several specialty channels) is working out well and Brad Shaw said it has proven to be “a key strategic asset and very attractive acquisition”. Media produced $891 million in revenue between Oct. 27, 2010 (the date Canwest Global was acquired) and the end of the fiscal year.

No change in the dividend was announced. The shares currently pay $0.076667 a month ($0.92 a year) to yield 4.6% at the current price.

There appears to be little growth potential in this company at present, especially since the decision to abandon the idea of entering into the wireless field. In fact, Shaw’s main concern right now will be to maintain its position in the face of the aggressive marketing of Telus. So this is really a stock for income-oriented investors. If you are looking for growth in the telecom sector, BCE or Telus are better bets.

Action now: Hold. – G.P.

 

YOUR QUESTIONS

Claiming a capital loss

Q – I would like to know what to do with a capital loss. I sold some old shares to clean house and realized a loss of $200. Should I declare this on my 2011 tax return or just bite my lip and go on with my life? – Luigi D.

A – Of course you should claim the capital loss. It isn’t much, only $100 (50% of the total loss). But every little bit counts. – G.P.

ETF bankruptcy

Q – What happens if ETF providers (BlackRock, Claymore, BMO, Horizon, Invesco, etc.) go bankrupt? Would it be wise to spread investments between providers? What is the maximum percentage of a portfolio that should be placed with one ETF company? In Canada we are limited by the number of companies. Most sample portfolios use only one or two companies.

Should I use more than one on-line broker to reduce a similar risk? – George T.

A – For starters, there is very little probability of an ETF distributor going bankrupt. Most are very wealthy international companies (e.g. Blackrock, Claymore, Invesco) or operated by a Canadian bank (BMO, RBC). But in the unlikely event it did happen, your assets would be safe. ETFs, like mutual funds, invest in a portfolio of securities. Those portfolios do not belong to the sponsoring company but are held in trust on behalf of the investors. If a company went belly-up, the ETFs would not form part of the corporate assets and would not be subject to creditor claims. This differentiates ETFs from stocks, which represent equity in a company and therefore could potentially lose all their value if that firm goes under.

Brokerage accounts are protected against bankruptcy by the Canadian Investor Protection Fund (CIPF). For details go to www.cipf.ca. – G.P.

 

That’s it for now. We’ll be back on Oct. 31 – Halloween! Let’s hope the markets don’t make it too scary.

Best regards,

Gordon Pape
gordon.pape@buildingwealth.ca
Circulation matters: customer.service@buildingwealth.ca

All material in the Internet Wealth Builder is copyright Gordon Pape Enterprises Ltd. and may not be reproduced in whole or in part in any form without written consent. None of the content in this newsletter is intended to be, nor should be interpreted as, an invitation to buy or sell securities. All recommendations are based on information that is believed to be reliable. However, results are not guaranteed and the publishers, contributors, and distributors of the Internet Wealth Builder assume no liability whatsoever for any material losses that may occur. Readers are advised to consult a professional financial advisor before making any investment decisions. The staff of and contributors to the Internet Wealth Builder may hold positions in securities mentioned in this newsletter, either personally or through managed accounts. No compensation for recommending particular securities, services, or financial advisors is solicited or accepted.