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Media Co-op Investor: December #2

We Dig Deep on First Quantum and Manulife Financial

by Gwalgen Geordie Dent

First Quantum Minerals
First Quantum Minerals

Welcome to Media Co-op Investor!

The Media Co-op Investor Series aims to help the general public understand the stock market, how it works and the major companies which benefit from it.

Every two weeks we examine an element or term in the stock market, how the Toronto Media Co-op has done fake-investing in companies on the Toronto Stock Exchange as well as highlighting specific large Canadian Companies, why their price has gone up and down and what they are all about.

To learn more go here.

This Weeks Term:  Municipal Bond

Municipal bonds are a pretty simple financial instrument which we touched upon back in September.

Remember that a bond is just an IOU that you can buy which states that money you have loaned to to governments or corporations will be paid back at a later date, plus interest.  A municipal bond is what you get when you loan money to city.

Really, municipal bonds can be bought off of more than cities.  The municipal bond market also includes counties, school districts, public utility districts, publicly owned airports and a few other special entities.  But the general rule is that the 'entities' are smaller than a state or provincial level. 

Municipal bonds are almost always used by cities to finance infrastructure projects and meet short-term payment deadlines.  They have historically been boring beyond belief.  This is because like most bonds, they are fairly straight-forward and safe.  They have a much, much, much lower rate of default than corporate bonds.

Unfortunately, that may soon change.

The financial crisis has hit some of the major municipal bond insurers (Ambac and MBIA) hard because many of them also insured subprime financial instruments.   Because of this both these companies (and whatever they were insuring) got rated less-safe by the rating agencies.

A lower rating for municipal bonds means all of a sudden, many companies can't lend money to cities.   This is because a) many of those loans can't get insurance and b) a lot of investors (like pension funds) can only hold or lend bonds that have a safe-rating.

With less access to credit, many municipal governments had to pay through the nose to get financing.  According to the World Socialist Web Site in 2008 the “Port Authority of New York and New Jersey saw the interest rate it pays jump from 4.3 per cent to 20 per cent.”

Meanwhile, this problem is about to get a whole lot worse.

A recent article in the Guardian highlighted that 100 US cities could be bankrupt next year and many cities in Europe could follow suit.

Many of them have have borrowed more than they are collecting in taxes.  The rating-agencies are cutting (or threatening to cut) the ratings of many cities in Europe while Detroit is cutting like mad just to be able to pay for basic services. 

Sadly, though an increase in taxes or federal bailout would probably do the trick for these cities (think Canada's New Deal for Cities under the Martin Government), the right-wing economics chorus is singing the same tune it has sung for the public: austerity cuts.

New Jersey governor Chris Christie tells it like it is in the Guardian: "We spent too much on everything. We spent money we didn't have. We borrowed money just crazily. The credit card's maxed out, and it's over. We now have to get to the business of climbing out of the hole. We've been digging it for a decade or more. We've got to climb now, and a climb is harder."

What we invested in this week

Municipal bonds!  Just Kidding.

This week we tracked our largest Canadian financial stocks.  We theoretically-bought about $1000 worth of each company on September 15th.

How we did this week

Pretty good actually!  Our financial stocks have done the worst out of all our portfolios but we've still turned a 4.3% profit.  In three months!

Most of the losses have come from 3 of Canada's 6 big banks and mostly due to poorer-than-expected quarterly reports. 

Compare these stocks to the S/P 500 and we're doing about half as good.  That is, if you discount September which saw the biggest gains for the S/P 500 in 70 years. 

Around the world, the health of the economy looks like it's being diagnosed with a coin-toss.  Everyday conflicting reports abound. This week:

US house prices are falling (bad)
Xmas spending is the highest on record (good)
US consumer confidence is down (bad)
Bank bonus rules are being batted around (good)
Canadian growth is expected to slow (bad)
Many US economic factors are improving (good)

That said, I saw the documentary "Inside Job" this week which thoroughly reaffirmed my belief that the economic crisis will continue full-steam as the people that caused it are still in power making the polices.

Todays Companies: Manulife Financial Corporation and First Quantum Minerals LTD

One of the media co-op's most fake-profitable stocks, Manulife Financial Corp has been growing like mad these last three months.  It's main focus is insurance but it also offers other 'financial services' while operating around the world with 24,000 employees.  In the US it's known by the brand name John Hancock.

Manulife is the very definition of 'politically connected' in Canada.  It was founded in 1887 by John A Macdonald, Canada's first Prime Minister.  Operating as a private company for over 100 years, it became a publicly traded company in 1999 on the TSX.  It then merged with John Hancock in 2003 and became one of the largest insurance companies in the world. 

John Cassaday, President and CEO of Corus Entertainment sits on their board of directors along with Thomas P. d’Aquino, who was head of the Canadian Council of Chief Executives for almost 30 years. 

In 2009, Donald Guloien succeeded Dominic D’Alessandro as President and CEO.  D'Alessandro was named to the Order of Canada in 2003 and had served as President and CEO for 15 years before stepping down amid controversy about his exiting compensation package. He then joined the board of directs at Suncor.  Stephen Harper has appointed him to several committees and councils.

According to Banktrak, they have a small stake in a cluster munitions company.  

In 2009, The Ironworkers Ontario Pension Fund and The Comité Syndical National De Retraite Batirente Inc. filed lawsuits against Manulife claiming money that Manulife was supposed have invested in safe investments was put into riskier investments.

Meanwhile, in 2005 over $235 Million was invested in hedge-fund Portus Alternative Asset Management after investors were steered there by Manulife's financial services wing.  Portus was then put into receivership.

In 2001, Manulife was at the centre of a major foreign investment fraud case in Indonesia over it's purchase of a 40% stake in an extractive company.

Manulife has been hemorrhaging money in the past two years.  It posted it's first loss at the end of 2008 losing $1.87 Billion.  They've endured many losses since then including the latest 3rd quarter loss of close to $1 Billion.  While Manulife was the worst performing financial stock at the time of the report, the results were not as bad as expected.  As such, inestors have had more faith in Manulife and their stock price has ballooned since we bought it making it our best performing financial stock of 2010.

We bought Manulife stock on September 15th for $13.47 a share.  It's now up to $17.15 a share for an increase of 27.3% or $239.

First Quantum Minerals is a much smaller company headquartered in Vancouver.  It's got 1800 employees and is a run-of-the-mill mining company.

Founded in 1996 it has gone on an epic shopping spree starting in 2006 buying up UK based Adastra Minerals, a Toronto-based company developing a project in Finland and the Ravensthorpe Nickel Mine from BHP Biliton in Western Australia.

Although it mines various metals and minerals, it focuses primarily on copper with 3 mines in the Democratic Republic of Congo, 2 in Zambia, 1 in Mauritania and the future mine in Finland.  

It's operations in the DR Congo have come under fire.  It's Kolewzi mining license was taken away from First Quantum in 2009, and the other two had their licenses withdrawn in 2010.  First Quantum has taken the disputes to international arbitration and won a case in October. 

One of the mines is in Katanga province in the DR Congo, an area which has seen many Canadian mining companies come under under heavy scrutiny for their activity during the DR Congolese civil war.   

In 2002, eight Canadian companies were implicated in the UN report entitled “Report on the Illegal Exploitation of Natural Resources and Other Forms of Wealth in the Congo”. In it, the UN panel said that First Quantum had violated OECD guidelines in mining activities during the Congo war. The report recommended investigations by the Canadian government into their actions.  

In August, the DR Congolese government nationalized the Frontier mine in Haut-Katanga province and accused First-Quantum of 'wide-scale misconduct'.  Apparently, First Quantum refused to conform to new rules imposed by the Congolese government that would have renegotiated mining licenses which were granted to companies during the 1998-2003 civil war (flare ups continue to this day).  The Congolese government alleges that First Quantum refused to renegotiate the licenses.

Speaking in the Dominion in 2007, Denis Tougas, a staff member of l'Entraide Missionnaire, an international solidarity organization based in Quebec, stated that First Quantum was trying to secure mining licenses with Congolese players before the war. "One of the people Kabila [the future DR Congo president] was meeting with was Joe Clark, former Canadian Prime Minister", he said. In the mid 1990s, Clark was both leader of the Progressive Conservative Party and a special advisor on Africa for First Quantum.

Even after all this, the win that First Quantum got in October at international arbitration has seen their share price shoot up more than any other the TMC has invested in this year.

We bought shares of First Quantum on September 15th for $65.10.  The stock has shot up to $108 since for a gain of a whopping 66% or $643.


September: Potash Corp

September #2: Suncor and ARC Energy Trust

October: Shoppers Drugmart and Barrick Gold

October #2: Scotiabank and Power Corporation of Canada

November: Cameco Corp and TransCanada Corp

December: Saputo and Bombardier

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