It’s been a big week. The events that took place will have a serious impact on your portfolio – especially if you have been following our newsletter and are invested in resource stocks.
Over the last year, we’ve talked about money pouring into the resource sector in numerous newsletters (see The Breakout) and how it will lead to renewed and continued growth in the resource sector.
This past week, three significant events took place that will add more fuel to that fire.
Let’s start with China.
Story #1: China’s Spending Spree
In our issue, “Action Speak Louder Than Words,” published January 23, 2011, we focused on China’s role in pricing resource stocks. All of China’s actions have a dramatic impact on the sector. If China is expected to slowdown, the sector plummets. If it’s expected to grow, it climbs.
If you haven’t read that issue, go back and read it before you continue (click here for Action Speak Louder Than Words.)
Forget what the reporters and journalists are telling you about China’s need to slow their economy because China doesn’t care. Their actions continue to speak louder than words.
China spent more money than ever last year with investments into Canada’s natural resources. Less than a few months into 2011, China has already begun more spending by making the largest gas deal ever with Canada.
On Wednesday, Chinese oil giant PetroChina said it will invest US$5.42 billion to acquire a 50 percent stake in a shale gas project developed in Canada by Encana (TSX: ECA)(NYSE: ECA), North America’s top gas producer.
With this deal, Chinese investment in Alberta has now topped $20 billion over the past two years.
Despite this being a record-breaking investment by China, I am betting they’re not even close to being finished. As a matter of fact, there’s going to be a lot more buying coming from China.
The Bank of China just announced that it will open its third Canadian location in Calgary.
This means a larger pool of Chinese capital that can fund further resource plays. Having a Calgary office will give the bank a base for intelligence gathering and to network with the business community. This will lead to connections and business spin offs that will lead to further deal making.
All of this leads to one thing: Continued growth in the resource sector.
Story #2: Gold as Good as Cash
While Contrarians argue that gold does nothing but sit there and look pretty (see Smaller Than You Think), gold is as good as cash.
Last November we published the story, “The First Time in History,” where we talked about how gold had become as good as cash:
“As of November 22, 2010, clearing house ICE Europe will begin accepting gold bullion as initial margin for crude oil and natural gas futures trading. This marks the first day in modern financial history that gold will be eligible collateral for energy futures. And this is a big deal. A really big deal.
The only form of collateral allowed by ICE before this was cash, and government securities. But with this announcement, ICE has effectively made gold equivalent to cash and government bonds.
This trend is expected to continue. Using gold to margin on oil marks a new era in making gold a usable and credit worthy currency and we can expect that other firms may soon follow suit.“
On Monday, JP Morgan followed.
JP Morgan Chase (NYSE: JPM), one of the largest banks in the US, said it will accept physical gold as collateral for certain transactions.
For example, a hedge fund wanting to borrow money for a short period can put up gold as collateral and use the borrowings to invest elsewhere. That means gold is as good as cash.
Actually, wait…It’s better.
Gold has appreciated in value over the last decade more than any other asset, including real estate (see The Next Big Boom.) That means it’s not only a better investment, but also an inflation hedge, a safe haven against a falling Dollar, a hard asset, and now it’s also as good as cash.
So while the gold you own is all of the above, you can also use it as leverage to further your return on investment!
Using gold as collateral is a trend that is happening all over the world. According to WSJ:
“Exchanges in New York, Chicago and Europe recently agreed to accept gold as collateral for certain trades. And the World Gold Council also is gaining traction in its push to have the Basel Committee on Banking Supervision accept the precious metal as a Tier-1 asset for banks, along with government bonds and currencies.
In India, many financial-services companies are offering personal loans against physical gold, a market that is expanding.“
So for all of the contrarians that still believe gold does nothing but sit there and look pretty, tell that to the banks.
All of this leads to one thing: Continued growth in precious metals.
Story #3: The Merger of Equals
We’re almost done.
The biggest news to hit our market was the battle to create the world’s largest stock exchanges.
Early Wednesday morning, the London and Toronto stock exchanges confirmed a multi-billion dollar plan to merge, only to be upstaged later in the day by news that the Deutsche Boerse AG was in advanced talks to buy NYSE Euronext to create the world’s biggest exchange operator.
Stock exchanges around the world have already been consolidating including the announced $8.35-billion takeover of ASX Ltd. by the Singapore Exchange last year.
South of the border, South America’s largest equity market is also working its way through the lawmakers. Chile, Colombia and Peru announced in September that they would be integrating their stock markets in a trilateral agreement.
There’s no denying that competition amongst the world exchanges are brewing. It’s the eat or be eaten mentality, where the only way to stay alive is to get bigger. But at the end of the day, what does it mean for us?
For now, let’s focus on the TMX- London Stock Exchange merger.
The Toronto Stock Exchange and TSX Venture Exchange are the world’s leading mining exchanges with over 1,500 mining and exploration companies that represent 55 per cent of the world’s public mining companies.
Issuers have access to broad capital pools on the TSX and TSX Venture Exchange, where over 80 per cent of the total global mining finance transactions and 36 per cent of the total global value of mining financing have been completed in the past 10 years.
If the two exchanges merge, it will create the world’s largest mining and exploration exchange in the world.
That means investors in Canada will have access to tremendous amounts of capital that they didn’t have before. It will give us more investment choices and make it easier for companies to get dual-listed on the TSX and LSE. But more importantly, and to our benefit, it will give European investors more choices for investing in resource-based stocks.
This merger could spell big rewards for Canadian-listed resource companies. The staggering amount of interest from Europe in our junior resource stocks will help lift the sector much further by inducing new capital into the market. Allowing the European market to gain easier access to our market will prove to be extremely bullish for the sector.
TSX-listed companies, known to have liquidity issues, will gain new access to millions of new investors, infusing companies with some much needed capital.
If the TMX-LSE deal gets approved, you can bet the junior resource companies will be spending lots of money on European promotion. That means more buyers and more interest into the stocks we already own. More buyers and interest leads to higher share prices.
We already talked about the growing amount of money being poured into the resource sector. Now imagine if our TSX and TSX Venture investments markets opened up to the world.
All of this leads to one thing: Continued growth in the resource sector.
It’s Not Too Late
While the resource sector has surged over the last few years, it is far from over. The juniors still have a lot of catching up to do and the three stories we just told you will undoubtedly add more growth to the sector.
We meet with the management teams of numerous resource plays on a daily basis and we can see the large amount of interest they are generating. Big banks and funds are approaching these companies everyday to offer large cash financings.
For companies with strong projects, they no longer have to look for money…the money is looking for them.
Just last week, one of our past Special Report Edition companies, Minco Silver (TSX: MSV), announced a $45 million bought deal financing with BMO Capital Markets (see news release).
Minco Silver currently has well over $20 million in the bank, as of their last financial statement. Combine that with the $45 million, Minco Silver now has almost all of the money they need to build their mine in cash! Let’s not forget they also have a RMB$300 million credit line from the Industrial and Commercial Bank of China which is equivalent to over CDN$45 million.
This recent financing for Minco Silver is great news for our latest Special Report Edition company, Minco Gold (TSX: MMM)(AMEX: MGH).
If BMO Capital Markets is willing to pay $45 million at $5.95 per share of Minco Silver, that means Minco Gold has $77,350,000 dollars worth of stock in Minco Silver based on BMO’s latest valuation (Minco Gold owns 13 million shares of Minco Silver.)
It’s no secret that BMO invested $45 million to make a healthy profit. If their predictions are correct, that will spell big rewards for Minco Gold’s shareholders.
Money continues to pour into the junior resource sector and we’re witnessing the feeding frenzy first hand by the big banks and funds. They all want a piece of the action…do you?
Minco Gold is an advertiser. I am also friends with their management team and play golf with them. They are a great group of people and as such, I believe in their projects which means I am biased. We own both shares and options in Minco Gold and as such we are biased. Our reputation is built upon on the companies we feature. It doesn’t make sense for us to feature a company but not know their management team. It also doesn’t make sense if we didn’t invest in them ourselves. That is why we invest in every company we feature in our Special Report Editions, including Minco Gold.
Until next week,
Ivan Lo
Equedia Weekly
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